[Federal Register Volume 59, Number 111 (Friday, June 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14096]


[[Page Unknown]]

[Federal Register: June 10, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34157; File Nos. SR-Amex-92-35, SR-CBOE-93-59, SR-NYSE-
94-17, SR-PSE-94-07, and SR-Phlx-94-10]

 

Self-Regulatory Organizations; Order Approving Proposed Rule 
Changes and Notice of Filing and Order Granting Accelerated Approval of 
Proposed Rule Changes and Amendments Thereto by the American Stock 
Exchange, Inc., Chicago Board Options Exchange, Inc., New York Stock 
Exchange, Inc., Pacific Stock Exchange, Inc., and Philadelphia Stock 
Exchange, Inc., Relating to Narrow-Based Index Options Listing 
Standards.

June 3, 1994.

I. Introduction

    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ on September 23, 1992, 
December 22, 1993, May 4, 1994, March 3, 1994, and January 31, 1994, 
the American Stock Exchange, Inc. (``Amex''), the Chicago Board Options 
Exchange, Inc. (``CBOE''),\3\ the New York Stock Exchange, Inc. 
(``NYSE''),\4\ the Pacific Stock Exchange, Inc. (``PSE''),\5\ and the 
Philadelphia Stock Exchange, Inc. (``Phlx''),\6\ respectively (each 
individually referred to herein as an ``Exchange'' and two or more 
collectively referred to as ``Exchanges''), submitted to the Securities 
and Exchange Commission (``Commission'') proposed rule changes to 
establish generic listing standards for options on narrow-based 
indexes, and to adopt streamlined procedures for introducing trading in 
options that satisfy these listing standards.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
    \3\On December 14, 1992, the CBOE submitted a filing (SR-CBOE-
92-39) covering the same subject matter of the present filing. The 
CBOE withdrew the filing on April 1, 1994.
    \4\On January 22, 1993, the NYSE submitted a filing (SR-NYSE-93-
05) covering the same subject matter of the present filing. The NYSE 
withdrew SR-NYSE-93-05 on May 4, 1994, upon its submission of the 
present filing.
    \5\On June 15, 1993, the PSE submitted a filing (SR-PSE-93-11) 
covering the same subject matter of the present filing. The PSE 
withdrew SR-PSE-93-11 on April 20, 1994. See Letter from David P. 
Semak, Vice President, Regulation, PSE, to Sharon Lawson, Assistant 
Director, Division of Market Regulation, Commission, dated April 20, 
1994.
    \6\On June 21, 1993, the Phlx submitted a filing (SR-Phlx-93-01) 
covering the same subject matter of the present filing. The Phlx 
withdrew SR-Phlx-93-01 on January 31, 1994, upon its submission of 
the present filing.
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    On January 5, 1994 and May 25, 1994, the Amex filed Amendment Nos. 
1\7\ and 2,\8\ respectively; on April 8, 1994, the CBOE filed Amendment 
No. 1;\9\ on April 19, 1994, the PSE filed Amendment No. 1;\10\ and on 
April 22, 1994, the Phlx filed Amendment No. 1,\11\ to their respective 
proposals (collectively, ``Exchange Amendments'').
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    \7\In Amendment No. 1, the Amex substantially amended the 
substance of its original filing to conform its proposal to the 
CBOE's proposal.
    \8\In Amendment No. 2, the Amex provided the proposed text of 
the rule change, and amended its proposal: (1) To provide that a 
narrow-based index that is calculated using an equal-dollar weighted 
methodology will be rebalanced quarterly; and (2) to provide that if 
a narrow-based index is maintained by a broker-dealer, the index 
will be calculated by a third party that is not a broker-dealer.
    \9\In Amendment No. 1, the CBOE: (1) Clarified in the text of 
the proposed rule change that its proposal would apply to options on 
narrow-based indexes only; and (2) stated that the procedures 
proposed in its filing pertaining to the listing of new narrow-based 
index options would apply to all narrow-based index options 
permitted under the CBOE's rules, including options with terms from 
12 to 36 months (``long-term options'') that satisfy the 
requirements of CBOE Rule 24.9(b). See Letter from Michael L. Meyer, 
Schiff Hardin & Waite, to Michael A. Walinskas, Chief, Options 
Branch, Division of Market Regulation, Commission, dated April 7, 
1994.
    \10\In Amendment No. 1, the PSE stated that the procedures in 
its proposal pertaining to the listing of new, narrow-based index 
options would apply to all narrow-based index options permitted 
under the PSE's rules, including long-term options that satisfy the 
requirements of PSE Rule 7.8. See Letter from Michael D. Pierson, 
Senior Attorney, Market Regulation, PSE, to Thomas N. McManus, 
Division of Market Regulation, Commission, dated April 11, 1994.
    \11\In Amendment No. 1, the Phlx: (1) Amended the proposed rule 
text to clarify that the proposed rule would apply to options on 
narrow-based indexes only; and (2) to state that if the Phlx 
determines to list long-term options or reduced-value long-term 
options on any new indexes filed pursuant to the proposed rule, they 
would be listed in accordance with existing Phlx rules governing 
long-term options. See Letter from Michele R. Weisbaum, Associate 
General Counsel, Phlx, to Michael Walinskas, Branch Chief, Division 
of Market Regulation, Commission, dated April 19, 1994.
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    The Amex and CBOE proposals were published for comment in the 
Federal Register on November 25, 1992 and February 25, 1994, 
respectively.\12\ No comments were received on these proposed rule 
changes. This order approves the Exchanges' proposals and the Exchange 
Amendments.
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    \12\See Securities Exchange Act Release Nos. 31474 (November 17, 
1992), 57 FR 55605 (November 25, 1994) (Amex); and 33636 (February 
17, 1994), 59 FR 9262 (February 25, 1994) (CBOE).
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II. Description of Proposals

    The Exchanges have submitted substantively identical proposals to 
the Commission to amend their respective rules\13\ to establish generic 
listing standards for options on narrow-based indexes (also known as 
sector or industry indexes) and procedures designed to expedite the 
approval of trading of such products. Currently, an Exchange must 
submit a proposed rule change to the Commission for review in 
accordance with section 19(b)(2) of the Act (``section 19(b)(2)''), and 
Rule 19b-4 thereunder, in order to list for trading options on a 
particular index. The Exchanges' proposed rule changes would permit an 
Exchange to list classes of options on a particular narrow-based 
index\14\ that satisfy specified generic listing standards, pursuant to 
a filing submitted to the Commission for effectiveness immediately upon 
filing under section 19(b)(3)(A) of the Act (``section 
19(b)(3)(A)'').\15\ Under the streamlined procedures, trading in 
options on the narrow-based index could commence 30 days from the date 
of filing of the proposal to list such options.
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    \13\Amex Rule 901C; CBOE Rule 24.2; NYSE Rule 715; PSE Rule 7.3; 
and Phlx Rule 1009A.
    \14\This order approves generic listing standards and 
streamlined procedures for approval with respect to options on 
narrow-based indexes only. The proposed rule changes approved herein 
do not pertain to the listing of options on broad-based indexes.
    \15\In the event that proposed narrow-based index options do not 
qualify for expedited approval under these new standards, the 
Exchanges will not be foreclosed from filing a proposed rule change 
for Commission review pursuant to section 19(b)(2).
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A. Listing and Maintenance Listing Standards

    In order to qualify for the streamlined listing procedures, the 
particular narrow-based index underlying the proposed narrow-based 
index options must satisfy all of the following initial listing 
standards, and continue to satisfy the following maintenance listing 
criteria.\16\
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    \16\These standards were established in a coordinated effort 
with representatives of the Exchanges, and are consistent with many 
of the criteria that are currently utilized by the Commission in its 
review of options on narrow-based stock indexes.
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1. Standards Relating to Component Stocks
    The proposed initial listing and maintenance listing standards 
require that all component stocks be deemed ``reported securities,'' as 
that term is defined in Rule 11Aa3-1 under the Act.\17\ Upon the 
initial listing of narrow-based index options approved for trading 
pursuant to the procedures contained in this order, the underlying 
index must include at least ten component stocks. Thereafter, the index 
must contain at least nine component stocks at all times. In addition, 
the number of component stocks may not increase or decrease by a number 
exceeding 33\1/3\ percent of the number of stocks comprising the index 
at the time of its initial listing.
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    \17\See 17 CFR 240.11Aa3-1. A ``reported security'' is defied in 
paragraph (a)(4) of this rule as ``any listed equity security or 
Nasdaq security for which transaction reports are required to be 
made on a real-time basis pursuant to an effective transaction 
reporting plan.'' A ``transaction reporting plan'' is defined in 
paragraph (a)(2) of this rule as ``any plan for collecting, 
processing, making available or disseminating transaction reports 
with respect to transactions in reported securities filed with the 
Commission pursuant to, and meeting the requirements of, this 
section.'' Accordingly, a proposed narrow-based index currently can 
only be comprised of exchange-listed and Nasdaq National Market 
securities.
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    Both initial and maintenance listing standards require that the 
component stocks comprising the top 90 percent of the index, by weight, 
must have a minimum market capitalization of $75 million. In addition, 
the component stocks constituting the bottom 10 percent of the index, 
by weight, must have a minimum market capitalization of $50 million.
    The listing and maintenance listing standards also include trading 
volume requirements. The component stocks comprising the top 90 percent 
of the index, by weight, must have a monthly trading volume of at least 
one million shares per month over the six months preceding the filing 
of the index with the Commission; thereafter, the component stocks must 
maintain monthly trading volume of at least 500,000 shares per month. 
The trading volume for the component stocks constituting the bottom 10 
percent of the index, by weight, must have been at least 500,000 shares 
over the same period; thereafter, they must maintain an average monthly 
trading volume of at least 400,000 shares per month. If the index is 
capitalization-weighted, and it contains 15 or more component stocks, 
the top five weighted component stocks each must have an average 
monthly trading volume over the six months preceding the filing of the 
index with the Commission of at least two million shares; thereafter, 
it must maintain an average monthly trading volume over the prior six 
months of at least one million shares. If a capitalization-weighted 
index contains less than 15 component stocks, those component stocks 
comprising the top 30 percent of the total number of stocks in the 
index each must have an average monthly trading volume over the six 
months preceding the filing of the index with the Commission of at 
least two million shares; thereafter, it must maintain an average 
monthly trading volume over the prior six months of at least one 
million shares.
    Initially and thereafter, no inidividual component stock in the 
index may represent more than 25 percent of the weight of the index. In 
addition, initially and thereafter, where an index is comprised of less 
than 25 stocks, the top five highest weighted stocks may not constitute 
more than 60 percent of the weight of the index; and where an index is 
comprised of 25 stocks or more, the top five highest weighted stocks 
may not represent more than 50 percent of the weight of the index.
    At all times, at least 90 percent of the stocks in the index, by 
weight, and 80 percent of the total number of stocks comprising the 
index, individually must satisfy the particular Exchange's rules 
governing the listing and maintenance of listing of options thereon.
    Both initial and maintenance listing standards require that no more 
than 20 percent of the securities in the index, by weight, may be 
comprised of foreign securities or American depositary receipts 
(``ADRs'') overlying foreign securities that are not subject to 
comprehensive surveillance sharing agreements between the particular 
U.S. options Exchange and the primary exchange on which the foreign 
security underlying the ADR is traded.\18\
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    \18\See e.g., Securities Exchange Act Release No. 31529 
(November 27, 1992), 57 FR 57248 (December 3, 1992) (``Release No. 
34-31529''). To the extent that at least 50 percent of the world-
wide trading volume of the underlying security occurs in the U.S. 
ADR market, the Commission has permitted the Exchanges to list 
options thereon without the existence of such a comprehensive 
surveillance sharing agreement. Following such initial listing, at 
least 30 percent of the world-wide trading volume must continue to 
occur in the U.S. trading market. See, e.g., Securities Exchange Act 
Release No. 33555 (January 31, 1994), 59 FR 5619 (February 7, 1994) 
(``Release No. 33555''). Accordingly, because no comprehensive 
surveillance sharing agreement is required with respect to ADRs 
satisfying the 50 percent volume requirement, and the 30 percent 
maintenance volume requirement, such ADRs may be excluded in 
determining whether the 20 percent restriction has been exceeded. 
See Release No. 33555, to determine how to calculate the 50 percent 
and 30 percent world-wide trading volume requirements.
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2. Standards Relating to the Index and Options Thereon
    A narrow-based index subject to the requirements of this order must 
be cash-settled. The index value may be calculated only pursuant to a 
capitalization, price, or equal-dollar weighted methodology.\19\ The 
index value must be disseminated at least once every 15 seconds during 
the trading hours of the index. The settlement value of expiring index 
options must be based upon the opening prices of the component 
securities on the primary exchange on which they are traded (or on the 
Nasdaq National Market) (otherwise known as ``A.M. settlement'') on the 
applicable expiration date.\20\
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    \19\An index whose value is calculated pursuant to an equal 
dollar weighted methodology must be rebalanced at least once every 
calendar quarter.
    \20\In the event that a component security did not open for 
trading on the expiration date of a series of index options, the 
last sale price for that security shall be used in calculating the 
index value.
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    If a narrow-based index is maintained by a broker-dealer, it shall 
be calculated by a third party that is not a broker-dealer. Further, 
appropriate procedures must be established by the Exchange and the 
broker-dealer to ensure that the broker-dealer will not possess or be 
able to misuse any informational advantages with respect to changes in 
the composition or the level of such index. Such procedures must 
include, for example, the establishment of appropriate informational 
barriers.
    The streamlined procedures described herein pertaining to the 
listing of new narrow-based index options would apply to all narrow-
based index options permitted under the rules of the Exchanges, 
including long-term options and reduced-value long-term options that 
otherwise satisfy the particular Exchange's rules governing long-term 
options and reduced-value long-term options.\21\
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    \21\The CBOE has represented that, if it proposes to list 
reduced-value long-term options on a narrow-based index pursuant to 
section 19(b)(3)(A) in accordance with this order, it would include 
as a part of its rule filing an amendment to the list of indexes on 
which reduced-value long-term options are traded, as set forth in 
CBOE Rule 24.9(b)(2)(A).
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    In the event that a class of narrow-based index options listed on 
an Exchange pursuant to the streamlined listing procedures described 
herein fails to satisfy one or more of the required maintenance 
criteria, the Exchange responsible for that index option must notify 
the Commission staff immediately upon discovery of such failure. 
Further, the Exchange shall not open for trading any additional series 
of options on that class unless the Exchange determines that such 
failure is not significant, and the Commission affirmatively concurs in 
that determination, or unless the Commission specifically approves the 
continued listing of that class of index options pursuant to a proposal 
filed in accordance with Section 19(b)(2).

B. Review Procedure

    If a particular narrow-based index (and options thereon) proposed 
by an Exchange satisfy the foregoing generic listing standards, then 
such Exchange may vial itself of certain streamlined listing 
procedures. The procedures proposed in the Exchanges' filings are 
designed to allow them to list narrow-based index options without 
undergoing the formal process of review and approval by the Commission 
pursuant to section 19(b)(2). An Exchange would be required to submit 
its proposal in draft form to Commission staff at least one week prior 
to the Exchange's formal filing of the rule change proposal. The 
Exchange would then submit its formal rule change proposal for 
effectiveness immediately upon filing, pursuant to section 19(b)(3)(A). 
However, to allow the Commission adequate opportunity to verify the 
representations made by the Exchange in its proposal and review and 
address any concerns raised by the proposal or by commenters, the 
Exchange would be allowed to establish a trade date for the 
commencement of trading of options on the index no earlier than 30 days 
from the date of the formal filing of the proposal.
    If the Commission determines that the Exchange proposal does not 
satisfy the generic standards, or if the Commission deems it necessary 
or appropriate in the public interest or for the protection of 
investors, the Commission, pursuant to section 19(b)(3)(C) of the Act, 
has 60 days from the date of the filing of the Exchange's proposal to 
abrogate the Exchange's rule change and require that the Exchange 
refile the proposed rule change for formal Commission review pursuant 
to section 19(b) (1) and (2).

III. Commission Findings and Conclusions

A. Generic Listing Standards

    The Commission finds that the proposed rule changes are consistent 
with the requirements of section 6(b)(5) of the Act and the rules and 
regulations thereunder applicable to a national securities exchange. 
Specifically, the Commission finds that the Exchange's proposals to 
establish generic listing standards for narrow-based index options 
strike a reasonable balance between the Commission's mandates under 
section 6(b)(5) to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, while protecting 
investors and the public interest. Thus, the Commission finds that the 
listing by an Exchange of options on particular narrow-based indexes, 
in accordance with the requirements stated herein, will constitute a 
stated policy, practice, or interpretation with respect to the 
administration of an existing Exchange rule, pursuant to section 
19(b)(3)(A), relieving the Exchange of the former requirement of 
obtaining specific Commission approval of such narrow-based index 
options pursuant to section 19(b)(2).
    The Commission believes that trading options on an index (including 
a narrow-based index) of securities permits investors to participate in 
the price movements of the index's underlying securities, and allows 
investors holding positions in some or all of such securities to hedge 
the risks associated with their portfolios. The Commission further 
believes that trading options on an index provides investors with an 
important trading and hedging mechanism that is designed to reflect 
accurately the overall movement of the component stocks.
    Currently, when an exchange intends to list options on an index of 
securities which the Commission has not specifically approved 
previously for the listing and trading of such index options, the 
Exchange must submit a proposed rule change to the Commission pursuant 
to section 19(b)(1) of the Act and Rule 19b-4 thereunder. Pursuant to 
section 6(b)(5) of the Act, the Commission must find, among other 
things, that trading in options on the particular index will serve to 
protect investors and contribute to the maintenance of fair and orderly 
markets. In this regard, the Commission must predicate approval of any 
new option proposal upon a finding that the introduction of such 
derivative instrument is in the public interest. Such a finding would 
be difficult for a derivative instrument that served no hedging or 
other economic function, because any benefits that might be derived by 
market participants likely would be outweighed by the potential for 
manipulation, diminished public confidence in the integrity of the 
markets, and other valid regulatory concerns.
    Accordingly, before approving an Exchange proposal to list options 
on a particular index, and consistent with its legislative mandate, the 
Commission must conclude that the Exchange has addressed several issues 
pertaining to the particular index, including the design and structure 
of the index, customer protection, surveillance, and market impact. 
Specifically, with respect to index design and structure, the 
Commission takes into account, among other things, the number of 
securities comprising the index, the market capitalizations of the 
component securities, their relative weightings in the index, their 
trading volume, and the extent to which the component securities 
individually, satisfy the Exchange's requirements for the listing of 
equity options thereon. It is with respect to these criteria, among 
others, that this order establishes generic standards which, if 
satisfied, would allow an Exchange to file a proposed rule change, 
effective immediately upon filing, to list and trade options on a 
particular narrow-based index 30 days from the filing date.\22\
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    \22\The Commission reiterates that an Exchange would not be 
foreclosed from pursuing formal Commission review of a proposal to 
list options on a narrow-based index that do not qualify for 
effectiveness upon filing under section 19(b)(3)(A). See supra note 
15.
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    The Commission believes that the listing and maintenance listing 
standards set forth herein are consistent with the criteria currently 
utilized in the Commission's case-by-case consideration of narrow-based 
index option proposals, and are reasonably designed to ensure the 
protection of investors and the public interest. Specifically, the 
Commission finds that the generic standards covering minimum 
capitalization, monthly trading volume, and relative weightings of 
component stocks are designed to ensure that the trading markets for 
component stocks are adequately capitalized and sufficiently liquid, 
and that no one stock or stock group dominates that index. Thus, the 
Commission believes that the satisfaction of these requirements 
significantly minimizes the potential for manipulation of the index.
    Two other important requirements are that at least 90 percent of 
the component stocks, by weight, must be eligible individually for 
options trading, and that no more than 20 percent of the index may be 
comprised of ADRs which are not subject to a comprehensive surveillance 
sharing agreement. The Commission believes that these standards are 
necessary to ensure that index options are not used as surrogate 
instruments to trade options on stocks and/or ADRs that otherwise are 
not eligible for options trading.,
    The Commission also believes that the number of securities required 
to constitute the narrow-based index is large enough to ensure that an 
index is not created for the purpose of obtaining more favorable 
regulatory treatment, e.g., with respect to position and exercise 
limits, as compared with the trading of options in the underlying 
stocks.
    The Commission also finds the requirements that all securities 
comprising the index be ``reported securities,'' as defined in Rule 
11Aa3-1 under the Act, and that the index value be disseminated at 
least once every 15 seconds during trading hours of the index, will 
contribute significantly to the transparency of the market for such 
index options.\23\ The Commission further believes that basing the 
settlement value of expiring index options upon the opening prices of 
the component securities on the primary exchange on which they are 
traded (or on the Nasdaq National Market) may help contain the 
volatility of related markets upon their expiration.
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    \23\Currently, only exchange-traded securities and Nasdaq 
National Market securities qualify as ``reported securities.'' See 
supra note 17.
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    The Commission notes that an Exchange which lists options pursuant 
to this order must notify the Commission immediately upon discovering 
that such options have failed to satisfy the maintenance listing 
standards described herein, and is prohibited from listing any 
additional series of such options unless the Exchange, with the 
affirmative concurrence of the Commission, determines that such failure 
is insignificant. The Commission believes that this requirement helps 
to ensure the continued compliance of such new option products with the 
standards set forth in this order, and confirms the obligation of the 
Exchanges to monitor all series of options listed thereon to ensure 
that they continue to satisfy the maintenance listing standards 
prescribed in their respective rules. On the other hand, this 
requirement will allow the Commission to provide flexibility on the 
issue of continued listing, where the failure to meet a particular 
standard is insignificant and will not hinder the protection of 
investors or cause the index to be susceptible to manipulation.
    The Commission further notes that each of the Exchanges' rules that 
are applicable to narrow-based index options, including provisions 
addressing sales practices, floor trading procedures, position and 
exercise limits,\24\ margin requirements, and trading halts and 
suspensions, will continue to apply to any narrow-based index listed 
pursuant to the streamlined approval procedures described herein.
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    \24\In its section 19(b)(3)(A) filing, an Exchange must specify 
the applicable position limits for options on the narrow-based 
index.
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    Finally, the Commission generally believes that a surveillance 
sharing agreement between an Exchange proposing to list a stock index 
derivative product and the exchange(s) trading the stocks underlying 
the derivative product is an important measure for surveillance of the 
derivative and underlying securities markets. Such agreements ensure 
the availability of information necessary to detect and deter potential 
manipulations and other trading abuses, thereby making the stock index 
product less readily susceptible to manipulation. In this regard, all 
of the Exchanges, as well as the National Association of Securities 
Dealers, Inc. (``NASD''), are members of the Intermarket Surveillance 
Group (``ISG''), which provides for the exchange of all necessary 
surveillance information.\25\ In light of the Exchanges' membership in 
the ISG, and the fact that the generic listing and maintenance listing 
standards ensure that all stocks (and ADRs) comprising a narrow-based 
index being added pursuant to this order would be listed on a U.S. 
exchange (or quoted on and traded through the Nasdaq National Market), 
the Commission is satisfied that the ISG Agreement would cover 
investigations and inquiries regarding trading activity in options on 
narrow-based indexes and their underlying component securities. In 
addition, the Commission finds that the requirement that no more than 
20 percent of the weight of the index may be comprised of ADRs that are 
not subject to a comprehensive surveillance sharing agreement between 
the particular U.S. exchange and the primary market of the underlying 
security will continue to ensure that the Exchanges have the ability to 
adequately surveil trading in the narrow-based index options and the 
ADR components of the index.\26\
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    \25\The ISG was formed on July 14, 1983, among other things, to 
coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets. 
See Intermarket Surveillance Group Agreement, dated July 14, 1983. 
The most recent amendment to the ISG Agreement, which incorporates 
the original agreement and all amendments made thereafter, was 
signed by ISG members on January 29, 1990. See Second Amendment to 
the Intermarket Surveillance Group Agreement, dated January 29, 
1990.
    \26\As noted above, comprehensive surveillance sharing 
agreements must be in place with the markets underlying ADRs 
representing at least 80 percent of the weight of the index unless 
the ADR meets the 50 percent U.S. trading volume test (and the 30 
percent maintenance volume test). See supra note 18. In addition, by 
virtue of the Exchange's and the NASD's membership in the ISG, the 
Exchanges would have the ability to obtain surveillance information 
regarding trading in the ADR. See Release No. 34-31529, supra note 
18.
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B. Commission Review of Exchange Proposals

    The Commission finds that the review procedures provide the 
Commission with sufficient opportunity to examine the representations 
made by an Exchange in connection with its listing of options on a 
narrow-based index pursuant to section 19(b)(3)(A). Specifically, the 
Commission believes that the seven day prefiling requirement gives the 
Commission staff an opportunity to discuss with an Exchange whether its 
proposal to list and trade particular narrow-based index options 
properly qualifies for effectiveness upon filing. In addition, the 
Commission finds that the 30 day delay in the commencement of trading 
of proposed narrow-based index options will provide a meaningful 
opportunity for public comment prior to the commencement of trading, 
while also providing the Exchanges with the opportunity to inform 
market participants in advance of the proposed trade date for a new 
index option. In accordance with section 19(b)(3)(C) of the Act, if the 
Commission determines that the rule change proposal is inconsistent 
with the requirements of the Act and the rules and regulations 
thereunder, the 30 day delay would allow the Commission to abrogate the 
rule change before trading commences, which will minimize disruption on 
market participants. This authority could be utilized if, for example, 
it is determined that the proposed narrow-based index option does not 
satisfy the applicable generic listing standards.
    The Commission notes that its ability to review an Exchange's 
proposal submitted under the procedures outlined herein would not 
necessarily be limited to determining whether proposed narrow-based 
index options satisfy the generic standards. Rather, the Commission 
will have an opportunity to determine whether the proposed index 
options raise other regulatory concerns that should be addressed before 
trading commences. For example, the Commission will have an opportunity 
to determine whether the listing and trading of options on the new 
narrow-based index will have an adverse impact on the underlying 
securities markets.\27\
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    \27\An Exchange, in conjunction with a section 19(b)(3)(A) rule 
filing to list options on a narrow-based index, must provide the 
Commission with written representations that both the Exchange and 
the Options Price Reporting Authority have the necessary systems 
capacity to support those new series of options to be generated by 
the narrow-based index.
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    In summary, if the Commission determines that a proposed index 
option product does not completely satisfy the generic listing 
standards, or if based on the foregoing considerations it generally 
appears to the Commission to be necessary or appropriate in the public 
interest or for the protection of investors, the Commission, within 60 
days of the Exchange's filing, may summarily abrogate the Exchange's 
rule change and require that the rule proposal be filed with the 
Commission pursuant to sections 19(b) (1) and (2) of the Act. Although 
the purpose of streamlining the review of new narrow-based index 
options by creating generic standards is to facilitate the Exchanges' 
ability to list such new products as the demand for them arises, the 
Commission believes nevertheless that its authority to abrogate such a 
rule change proposal supplies a significant regulatory check on the 
Exchanges to ensure that these new standards are implemented properly.

C. Accelerated Approval of Proposed Rule Changes and Exchange 
Amendments

    The Commission finds good cause for approving the proposed rule 
changes filed by the NYSE, PSE, and Phlx, and the Exchange Amendments, 
prior to the thirtieth day after the date of publication on notice of 
filing thereof in the Federal Register. The rule changes proposed by 
the NYSE, PSE, and Phlx, and Amex Amendment Nos. 1 and 2, conform their 
proposals to the CBOE's proposal. Further, the CBOE's proposal was 
published for the full 21-day comment period, and no comments were 
received. With the exception of Amex Amendment Nos. 1 and 2, the 
Exchange Amendments clarify, but do not change, the proposed rule 
changes. The Commission finds, therefore, that no new regulatory issues 
are raised by the foregoing proposed rule changes and the Exchange 
Amendments. Accordingly, the Commission believes it is consistent with 
sections 19(b)(2) and 6(b)(5) of the Act to approve the NYSE, PSE, and 
Phlx proposed rule changes and Exchange Amendments on an accelerated 
basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the NYSE, PSE, and Phlx proposed rule changes and 
Exchange Amendments. 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 
foregoing that are filed with the Commission, and all written 
communications relating to the foregoing 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 filings also will 
be available for inspection and copying at the principal office of the 
above-mentioned self-regulatory organizations. All submissions should 
refer to the appropriate file number(s) in the caption above and should 
be submitted by July 1, 1994.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\28\ that the proposed rule changes (File Nos. SR-Amex-92-35, SR-
CBOE-93-59, SR-NYSE-94-17, SR-PSE-94-07, and SR-Phlx-94-10), as 
amended, are approved.

    \28\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.\29\
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    \29\17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-14096 Filed 6-9-94; 8:45 am]
BILLING CODE 8010-01-M