[Federal Register Volume 59, Number 38 (Friday, February 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4253]


[[Page Unknown]]

[Federal Register: February 25, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33634; File No. SR-Phlx-93-07]

 

Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving and Notice of Filing and Order Granting Accelerated 
Approval of Amendment No. 2 to a Proposed Rule Change Relating to an 
Increase in Position and Exercise Limits for Options on the National 
Over-The Counter Index

February 17, 1994.
    On March 2, 1993, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
a proposal (1) to increase the position limits\3\ and exercise 
limits\4\ for individual equity options, narrow-based options, and 
options on the National Over-the-Counter Index (``XOC Index'' or 
``Index''), and (2) to amend Commentaries .03 and .04 to Rule 1001 with 
respect to the procedures applicable to specialists' requests for 
position limit exemptions (``specialists' exemptions''). Notice of the 
proposed rule change appeared in the Federal Register on May 21, 
1993.\5\ No comments were received on the proposed rule change. On 
December 3, 1993, the Commission granted partial approval of the 
proposed rule change. Specifically, the Commission approved the 
Exchange's proposal to increase the three-tiered position and exercise 
limits: (1) For individual equity options to 4,500, 7,500, and 10,500 
contracts depending on certain criteria related to the trading volume 
of the underlying stock or a combination of both the trading volume and 
the number of shares outstanding of the underlying stock; and (2) for 
narrow-based stock index options to 5,500, 7,500, and 10,500 contracts 
depending on the concentration of the stocks included in the index.\6\ 
In that approval order, the Commission deferred a decision on 
increasing position and exercise limits for the XOC Index pending 
further review.\7\ On February 8, 1994, the Exchange filed Amendment 
No. 2 to the proposed rule change requesting that position and exercise 
limits for the XOC Index be increased to 17,000 contracts instead of 
15,000 contracts as originally proposed.\8\ This order approves the 
Exchange's proposal, as amended.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1989).
    \3\Position limits impose a ceiling on the number of options 
contracts relating to an underlying instrument which an investor, or 
group of investors acting in concert, may own or control.
    \4\Exercise limits prohibit the exercise by an investor or group 
of investors acting in concert of more than a specified number of 
option contracts on a particular underlying security within five 
consecutive business days.
    \5\See Securities Exchange Act Release No. 32309 (May 14, 1993), 
58 FR 29653 (May 21, 1993).
    \6\See Securities Exchange Act Release No. 33288 (December 3, 
1993), 58 FR 65221 (December 13, 1993).
    \7\Id. at note 7. In addition, the Commission deferred 
consideration of the Phlx's proposed amendments to Commentaries .03 
and .04 to rule 1000.
    \8\See Letter from William Uchimoto, General Counsel, Phlx, to 
Sharon Lawson, Assistant Director, Office of Derivatives Regulation, 
Division of Market Regulation, Commission, dated February 8, 1994 
(``Amendment No. 2'').
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    On May 17, 1985, the Commission approved an Exchange proposal to 
list and trade options on the XOC Index.\9\ As subsequently amended, 
the position limits and exercise limits for options on the Index are 
currently set at 10,000 contracts on the same side of the market.\10\
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    \9\See Securities Exchange Act Release No. 22044 (May 17, 1985), 
50 FR 21532 (May 24, 1985).
    \10\See Securities Exchange Act Release No. 25644 (May 3, 1988), 
53 FR 16829 (May 11, 1988). See also Phlx Rule 1001A.
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    The proposal would increase the position and exercise limits 
available on the Index to 17,000 contracts on the same side of the 
market.\11\ These proposed position limits are similar in terms of 
aggregate dollar value with those that the Commission recently approved 
for options on the broad-based NASDAQ 100 Index, which are listed for 
trading by the Chicago Board Options Exchange, Inc.\12\
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    \11\See Amendment No. 2, supra note 8.
    \12\See Securities Exchange Act Release No. 33428 (January 5, 
1994), 59 FR 1576 (January 11, 1994) (order approving the listing 
and trading of options on the NASDAQ 100 Index). Specifically, as of 
February 8, 1994, the maximum position limit of 25,000 contracts for 
the NASDAQ 100 corresponded to an aggregate dollar value of $1.0037 
billion, while the maximum proposed position limit for the XOC Index 
corresponded to an aggregate dollar value of $1.0006 billion.
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    The Exchange believes that the characteristics of the XOC Index and 
the NASDAQ 100 Index are sufficiently similar to justify comparable 
position and exercise limits for both indexes. Both indexes are 
capitalization weighted, have a correlation rate of 98.72% (taken on an 
annual basis for 1993), and are primarily comprised of highly 
capitalized common stocks traded in the U.S. over-the-counter market.
    The proposed amendments to Commentaries .03 and .04 to Rule 1001 
would (1) transfer language from Commentary .03 dealing with 
specialists' exemption to Commentary .04 which pertains specifically to 
specialists, and (2) replace the requirement that specialists obtain 
prior approval from the Exchange's Committee on Options for position 
limit exemption with a requirement that specialists obtain approval 
from two floor officials for such an exemption. The Exchange believes 
these amendments are necessary in order to (1) eliminate possible 
confusion by placing together Exchange position limit rules pertaining 
to specialists, and (2) ensure that Phlx specialists are not at a 
competitive disadvantage against specialists at other options 
exchanges. Specifically, the Phlx represents that specialists at the 
American Stock Exchange, Inc. (``Amex'') are able to obtain position 
limits exemptions with the approval of a senior floor official.\13\ The 
Phlx represents that having to obtain approval from the Committee on 
Options for specialists' exemptions imposes a significant burden on 
specialists because not all of the Committee members are present on the 
Exchange floor during the trading day when the need for an exemption 
arises.\14\ As a result, there can be significant delays before a 
specialist exemption can be obtained which, the Exchange believes, 
could result in lost business.\15\ The Phlx believes the proposed 
amendments will eliminate these delays by allowing two floor officials 
to grant a specialist exemption on-the-spot when necessary.The Exchange 
also represents that the proposed procedure is identical to the 
procedure already in place on the Exchange with respect to position 
limit exemption requests by members and member organizations which has 
not resulted in any abuses.\16\
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    \13\See Amex Rule 904, Commentary .05.
    \14\Telephone conversation between Edith Hallahan, Special 
Counsel, Regulatory Services, Phlx, and Brad Ritter, Attorney, 
Office of Derivatives Regulation, Division of Market Regulation, 
Commission, on February 10, 1994.
    \15\Id.
    \16\Telephone conversation between Edith Hallahan, Special 
Counsel, Regulatory Services, Phlx, and Brad Ritter, Attorney, 
Office of Derivatives Regulation, Division of Market Regulation, 
Commission, on February 10, 1994. See also, Phlx Rule, 1001, 
Commentary .03.
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    The Commission believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, the requirements of section 6(b)(5),\17\ in that it should 
help remove impediments to and perfect the mechanism of a free and open 
market, promote just and equitable principles of trade and protect 
investors and the public interest.
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    \17\15 U.S.C. 78f(b)(5) (1988).
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    In analyzing and reviewing specific position and exercise limits 
proposed by the options exchanges, the Commission has attempted to 
balance two competing concerns. First, limits must be sufficiently low 
to prevent investors from disrupting the underlying cash market. 
Second, limits must not be established at levels that are so low as to 
unnecessarily discourage participation in the options markets by 
institutions and other investors with substantial hedging needs or to 
prevent specialists and market makers from adequately meeting their 
obligations to maintain fair and orderly markets.
    The Commission believes that the proposed position limit of 17,000 
contracts on the same side of the market could potentially increase the 
depth and liquidity of the XOC market without significantly increasing 
the concerns regarding intermarket manipulations or disruptions of the 
markets for the options or the underlying securities. As previously 
noted, markets that exhibit active and deep trading, as well as broad 
public ownership, are more difficult to manipulate or disrupt than less 
active markets with smaller public floats.\18\ In this regard, the 
Commission notes that the Index is a broad-based index consisting of 
100 domestic stocks from approximately thirty economic sectors. The 
Exchange's maintenance requirements ensure that the Index will not 
contain a large number of thinly capitalized, low-priced securities 
with small public floats and low trading volume.\19\ Accordingly, given 
the size and breadth of the Index, the Commission does not believe that 
increasing the position limits for the Index as proposed herein will 
substantially increase the Index's susceptibility to manipulation or 
increase the potential for disruption in the markets for the underlying 
securities. In addition, the Exchange's surveillance program will 
continue to be applicable and should detect and deter any trading 
abuses arising from the increased XOC Index position and exercise 
limits. Finally, the Commission notes that the proposed limits are 
similar to those approved by the Commission in terms of aggregate 
dollar value for options on the NASDAQ 100 traded on the CBOE,\20\ 
which is comparable in composition to the XOC Index.\21\
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    \18\See, e.g., Securities Exchange Act Release No. 31330 
(October 16, 1992), 57 FR 48408 (October 23, 1992) (``Exchange Act 
Release No. 31330'').
    \19\See Securities Exchange Act Release No. 22026 (May 8, 1985), 
50 FR 20310 (May 15, 1985).
    \20\See supra note 12.
    \21\As of February 14, 1994, the XOC Index and the NASDAQ 100 
Index contained 66 of the same component stocks.
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Amendments to Commentaries to Rule 1001

    The Commission believes that the procedures proposed with respect 
to specialists' exemptions are adequate to minimize any potential for 
abuse. Specifically, a specialist exemption may not be granted 
retroactively and an exemption usually will be granted only until the 
nearest expiration. Additionally, the procedures proposed for obtaining 
a specialist exemption are identical to the procedures currently used 
by the Exchange for granting position limit exemptions to members and 
member organizations, which the Exchange represents have not resulted 
in any abuses.\22\ Finally, the Commission finds that the proposed 
amendments to Commentaries .03 and .04 to Rule 1001 would conform the 
Phlx rules with respect to specialists' exemptions to those previously 
approved by the Commission for other options exchanges.\23\
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    \22\See supra note 16.
    \23\See supra, note 13.
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    The Commission finds good cause for approving Amendment No. 2 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 2 provides that the position and exercise limits for 
options on the XOC Index will be 17,000 contracts instead of 15,000 
contracts as originally proposed. The proposed position limits are 
comparable to those that the Commission recently approved for options 
on the NASDAQ 100 Index.\24\ In addition, the Commission received no 
comments on the Exchange's original proposal to increase the position 
limits on the XOC Index to 15,000 contracts. Accordingly, the 
Commission believes it is consistent with section 6(b)(5) of the Act to 
approve Amendment No. 2 to the Phlx's proposal on an accelerated basis.
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    \24\The Commission notes that no comments were received by the 
Commission with respect to the position limits which were approved 
for options on the NASDAQ 100 Index.
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    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2 to the proposed rule change. 
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 Exchange. All submissions should refer to File 
Number SR-Phlx-93-07 and should be submitted by March 18, 1994.
    It is therefore ordered, Pursuant to section 19(b)(2) of the 
Act,\25\ that the portions of the proposed rule change (File No. SR-
Phlx-93-07) proposing to increase the position and exercise limits for 
options on the National Over-the-Counter Index from 10,000 contracts to 
17,000 contracts and to amend the procedures for specialists to obtain 
position limit exemptions, are approved.

    \25\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\17 CFR 200.30-3(a)(12) (1993).
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Margaret M. McFarland,
Deputy Secretary.
[FR Doc. 94-4253 Filed 2-24-94; 8:45 am]
BILLING CODE 8010-01-M