[Federal Register Volume 59, Number 9 (Thursday, January 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-822]


[[Page Unknown]]

[Federal Register: January 13, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33431; File No. SR-PSE-93-32]

 

Self-Regulatory Organizations; Filing of Proposed Rule Change by 
the Pacific Stock Exchange, Inc. Relating to Listing and Trading 
Options on the Interactive Communications Sector Index

January 5, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on November 
30, 1993, the Pacific Stock Exchange (``PSE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PSE proposes to list for trading options on the Interactive 
Communications Sector Index. The text of the proposed rule change is 
available at the Office of the Secretary, PSE, and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The PSE has prepared summaries, set forth in Sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The Exchange proposes to trade options on the Interactive 
Communications Sector Index (``Index''), a new stock index developed by 
the Exchange based on various stocks in the interactive communications 
industry that are traded on either the New York Stock Exchange, Inc. 
(``NYSE''), the American Stock Exchange, Inc. (``Amex''), or are 
national market system (``NMS'') securities traded through the 
facilities of the National Association of Securities Dealers (``NASD'') 
Automated Quotations System (``NASDAQ''). The Exchange also proposes to 
list long-term options on the Index and on a reduced-value Index 
(``Index LEAPS''), which will trade independent of and in addition to 
regular Index options traded on the Exchange.
Composition of the Index
    The Index contains securities of highly-capitalized companies in 
the interactive communications industry. Currently, the Index is 
comprised of 24 stocks from the following three categories: Content 
providers (8 stocks);\1\ distribution networks (8 stocks);\2\ and 
information processors (8 stocks).\3\ More specifically, the Index is 
comprised of individual stocks from the following 15 industry 
subgroups: Transaction services; filmed entertainment; programmers; 
music, games & education; publishing; business information systems; 
cable television operating companies; regional telephone companies; 
long-distance telephone companies; wireless communications; computers; 
consumer electronics; software; semiconductors; and communications 
equipment.
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    \1\These components of the Index are: Time Warner, Inc.; Walt 
Disney Co.; turner Broadcasting System Inc. (Class B); QVC Network, 
Inc.; Viacom, Inc. (Class B); Tribune Company; Electronic Arts, 
Inc.; and Broderbund Software, Inc.
    \2\These components of the Index are: Bell Atlantic Corp.; 
BellSouth Corp.; U.S. West, Inc.; Motorola, Inc.; American Telephone 
& Telegraph Co.; Comcast Corp.; Pacific Telesis Group; and Telephone 
and Data Systems, Inc.
    \3\These components of the Index are: DSC Communications Corp.; 
Northern Telecom Limited; 3DO Co.; Apple Computer, Inc.; Silicon 
Graphics, Inc.; General Instrument Corp.; Scientific-Atlanta, Inc.; 
and Microsoft Corp.
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    The 24 component stocks are listed for trading on the NYSE (13 
stocks), the Amex (3 stocks),\4\ or are traded through NASDAQ (8 
stocks).\5\ As of November 9, 1993, all of the component stocks in the 
Index, with the exception of one component (comprising 4.2% of the 
Index value) meet the Exchange's initial listing standards set forth in 
PSE Rule 3.6.
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    \4\All of the Amex components are listed pursuant to Amex's 
Original Listing Requirements contained in Sections 101-145 of the 
Amex Company Guide. Telephone conversation between Michael Pierson, 
Senior Attorney, Market Regulations, PSE, and Brad Ritter, Attorney, 
Office of Derivatives Regulation, Division of Market Regulation, 
Commission, on January 5, 1994.
    \5\Currently all of the NASDAQ issues included in the Index are 
NMS securities.
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Index Calculation
    The Index value is calculated using an ``equal-dollar weighting'' 
methodology designed to ensure that each of the component securities is 
represented in approximately an ``equal'' dollar amount in the Index. 
The Exchange believes that this method of calculation is important 
since even among the largest companies in the interactive 
communications industry there is a great disparity in market value. For 
example, although the stocks included in the Index represent many of 
the most highly capitalized companies in the interactive communications 
industry, AT&T currently represents over 22% of the aggregate market 
value of the Index. The Exchange believes that options on market-value 
weighted indexes dominated by one component stock are less useful to 
investors, since the index will tend to represent the one component and 
not the target industry that the Index is designed to represent.
    The following is a description of how the equal-dollar weighted 
calculation method works. As of the market close on November 11, 1993, 
a portfolio of interactive communications stocks was established 
representing an investment of $41,667 in the stock (rounded to the 
nearest whole share) of each of the companies in the Index. The value 
of the Index equals the current market value of the sum of the assigned 
number of shares of each of the stocks in the Index portfolio divided 
by the Index divisor. Each quarter, following the close of trading on 
the third Friday of January, April, July, and October, the Index 
portfolio will be adjusted by changing the number of whole shares of 
each component stock so that each company is again represented in 
``equal'' dollar amounts. The Exchange has chosen to rebalance the 
Index following the close of trading on the quarterly expiration cycle 
because it allows an option contract to be held for up to three months 
without a change in the Index portfolio while at the same time, 
maintaining the equal-dollar weighting feature of the Index. If 
necessary, a divisor adjustment is made when the rebalancing occurs to 
ensure continuity of the Index's value. The newly adjusted portfolio 
then becomes the basis for the Index's value on the first trading day 
following the quarterly adjustment.
    The Exchange does not believe that there will be investor confusion 
regarding the adjustments since they will be done on a regular and 
timely basis, with adequate notice given. Specifically, the Exchange 
represents that an information circular will be distributed to all 
Exchange members notifying them of the quarterly changes. This circular 
will also be sent by facsimile to the Exchange's contacts at the major 
options firms, mailed to recipients of the Exchange's options-related 
information circulars, and made available to subscribers of the Options 
News Network. In addition, the Exchange will include in its promotional 
and marketing materials for the Index a description of the equal-dollar 
weighting methodology.
    As noted above, the number of shares of each component stock in the 
Index portfolio remains fixed between quarterly reviews except in the 
event of certain types of corporate actions such as the payment of a 
dividend (other than an ordinary cash dividend), stock distribution, 
stock split, reverse stock split, rights offering, distribution, 
reorganization, recapitalization, or similar event with respect to the 
component stocks. In a merger or consolidation of an issuer of a 
component stock, if the stock remains in the Index, the number of 
shares of that security in the portfolio may be adjusted, to the 
nearest whole share, to maintain the component's relative weight in the 
Index at the level immediately prior to the merger or consolidation. In 
the event of a stock replacement, the average dollar value of the 
remaining portfolio components will be calculated and that amount 
invested in the stock of the new component, to the nearest whole share. 
In all cases, the divisor will be adjusted, if necessary, to ensure 
Index continuity.
    The Exchange or its designee will calculate and maintain the Index, 
and may at any time or from time to time substitute stocks, or adjust 
the number of stocks included in the Index, based on changing 
conditions in the interactive communications industry. However, in the 
event the Exchange determines to increase the number of index component 
stocks to greater than thirty-two or reduce the number of component 
stocks to fewer than sixteen, the Exchange will give prior written 
notice to the Commission.\6\ In selecting securities to be included in 
the Index, the Exchange will be guided by a number of factors including 
market value of outstanding shares and trading activity. The 
eligibility standards for Index components are described below.
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    \6\Such a change in the number of components in the Index may 
warrant the submission of a rule filing pursuant to Section 19 of 
the Act of Rule 19b-4 thereunder.
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    The value of the Index will be calculated every fifteen seconds 
throughout the trading day by Bridge Data Services and will be 
disseminated by the Options Price Reporting Authority to wire services, 
quote vendors and the financial media.
Expiration and Settlement
    The proposed options on the Index will be European-style\7\ and 
cash-settled. The Exchange's standard options trading hours, from 6:30 
a.m. to 1:15 p.m. Eastern Standard Time, will apply. The options on the 
Index will expire on the Saturday (``Expiration Saturday'') following 
the third Friday of the expiration month. The last trading day in an 
expiring series will normally be the second to the last business day 
preceding Expiration Saturday (normally a Thursday), with trading to 
cease at the close of business on such day.
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    \7\European-style options can only be exercised during a 
specified period before the options expire.
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    The Exchange plans to list option series with expirations in the 
three near-term calendar months and in the two additional calendar 
months in the January cycle. In addition, the Exchange proposes to list 
longer term option series having up to thirty-six months to expiration. 
In lieu of such long-term options on a full-value Index level, the 
Exchange also proposes to have the option of listing long-term, 
reduced-value put and call options based on one-tenth (\1/10\th) the 
Index's full value. In either event, the interval between expiration 
months for either a full-value or reduced-value long-term option would 
not be less than six months. The trading of any long-term options would 
be subject to the same rules which govern the trading of all the 
Exchange's index options, including sales practice rules, margin 
requirements and floor trading procedures and all options will have 
European-style exercise. Position limits on reduced-value long-term 
Index options would be ten times the position limits for regular (full 
value) Index options and would be aggregated on a one for one basis 
with such options (for example, if the position limit for full value 
options is 10,500 contracts on the same side of the market, then the 
position limit for the reduced-value options will be 105,000 contracts 
on the same side of the market).
    The Index value for purposes of settling the Index options will be 
calculated based upon the opening prices of the component securities 
pursuant to the normal opening procedures of the primary exchange where 
the securities are traded on the Friday before Expiration Saturday. In 
the case of securities traded through the NASDAQ system, the first 
reported sale price on the Friday before Expiration Saturday will be 
used. As trading begins in each of the Index's component securities, 
its opening sale price is captured for use in the calculation. Once all 
of the component stocks have opened, the Index settlement value is then 
determined. If any of the component stocks do not open for trading on 
the last trading day before Expiration Saturday, then the prior day's 
last sale price is used in the calculation.
Eligibility Standards for Index Components
    In choosing among interactive communications industry stocks for 
inclusion in the Index, the Exchange will focus only on stocks that are 
traded on the NYSE, the Amex,\8\ or are NMS securities traded through 
the NASDAQ. In addition, the Exchange intends to select stocks that:
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    \8\Securities listed on the Amex will only be considered for 
inclusion in the Index if those securities satisfy the Original 
Listing Requirements set forth in Sections 101-145 of the Amex 
Company Guide. Telephone conversation between Michael Pierson, 
Senior Attorney, Market Regulation, PSE, and Brad Ritter, Attorney, 
Office of Derivatives Regulation, Division of Market Regulation, 
Commission, on January 5, 1994.
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    (1) Have a minimum market value (in U.S. dollars of at least $75 
million;\9\ and
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    \9\In the case of ADRs, this represents market value as measured 
by total world-wide shares outstanding.
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    (2) Have an average monthly trading volume in U.S. markets over the 
previous six month period of not less than one million shares (or 
American Depository Receipts (``ADRs''\10\)).
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    \10\An ADR is a negotiable receipt which is issued by a 
depository, generally a bank, representing shares of a foreign 
issuer that have been deposited and are held, on behalf of holders 
of the ADRs, at a custodian bank in the foreign issuer's home 
country.
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    The Index is currently comprised of 24 component securities. Of the 
components, 23 are eligible for, and are the subject of, standardized 
options trading.\11\ However, to address concerns about the possibility 
of manipulation of an index containing a large percentage of stocks 
that do not meet the eligibility standards applicable to stocks 
eligible for standardized options trading, at each quarterly 
rebalancing, stocks that meet the then current criteria for 
standardized options trading set forth in Exchange Rule 3.6 will be 
required to account for at least 90% of the Index's numerical index 
value.
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    \11\3DO Co. is the only component of the Index not currently 
eligible for standardized options trading.
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Exchange Rules Applicable to Stock Index Options
    PSE Rule 7 will apply to the trading of options contracts based on 
the Index. Surveillance procedures currently used to monitor trading in 
the Exchange's other index options will also be used to monitor trading 
in options on the Index. The Exchange proposes to list near-the-money 
(i.e., within ten points above or below the current index value) option 
series on the Index at 2\1/2\ point strike (exercise) price intervals 
when the value of the Index is below 200 points.
Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6 of the Act, in general, and furthers the objectives of 
section 6(b)(5) of the Act, in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices and to promote 
just and equitable principles of trade.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve such proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the PSE. All 
submissions should refer to File No. SR-PSE-93-32 and should be 
submitted by February 3, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-822 Filed 1-12-94; 8:45 am]
BILLING CODE 8010-01-M