[Federal Register Volume 59, Number 121 (Friday, June 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15358]
[[Page Unknown]]
[Federal Register: June 24, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34234; File No. SR-Phlx-93-45]
Self-Regulatory Organizations; Order Approving and Notice of
Filing and Order Granting Accelerated Approval of Amendment Nos. 2, 3,
4, and 5 to a Proposed Rule Change by the Philadelphia Stock Exchange,
Inc., Relating to the Listing and Trading of Quarterly Index Expiration
Options on All Stock Indexes for Which Index Options Are Listed for
Trading by the Phlx
June 17, 1994.
On November 24, 1993, the Philadelphia Stock Exchange, Inc.
(``Phlx'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to provide for the listing and
trading of quarterly index expiration (``QIX'') options on the Gold and
Silver (``XAU''), Utility (``UTY''), National Over-the-Counter
(``XOC''), Value Line (``VLE''), and Bank (``BKK'') indexes. Currently,
all equity and stock index options traded on the Exchange expire on the
Saturday immediately following the third Friday of the expiration
month. the Phlx intends to trade QIXs in addition to the existing
Exchange traded index options expiring at the middle of the month.
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\1\15 U.S.C. Section 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
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On March 21, 1994, the Exchange filed Amendment No. 1 to the
proposed rule change.\3\ Notice of the proposed rule change and
Amendment No. 1 appeared in the Federal Register on March 31, 1994.\4\
No comments were received on the proposed rule change. On April 8,
1994, the Exchange filed Amendment No. 2 to the proposed rule
change.\5\ On April 29, 1994, the Exchange filed Amendment No. 3 to the
proposed rule change.\6\ On May 9, 1994, the Exchange filed Amendment
No. 4 to the proposed rule change.\7\ On May 24, 1994, the Exchange
filed Amendment No. 5 to the proposed rule change.\8\ This order
approved the proposal, as amended.
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\3\In Amendment No. 1, the Phlx: (1) states that the Exchange
presently plans only to list QIXs with 12 months or less to
expiration; and (2) amends several Phlx rules to add references to
QIXs. See Letter from Catherine Humphrey, Law Clerk, Phlx, to Sharon
Lawson, Assistant Director, Office of Derivatives and Equity
Oversight (``ODEO''), Division of Market Regulation (``Division''),
Commission, dated April 7, 1994.
\4\See Securities Exchange Act Release No. 33810 (March 24,
1994), 59 FR 15251 (March 31, 1994).
\5\In Amendment No. 2 the Phlx: (1) amends Rule 1101A(b)(iv) to
state that Phlx rules governing regular index options also apply to
QIX options; (2) agrees to submit a rule filing pursuant to Section
19(b) of the Act if the Exchange intends to list QIX options with a
time to expiration of greater than 12 months; (3) makes certain
other editorial changes to the proposed rule language; and (4)
conforms Exhibit C, which is a draft memorandum to the Phlx Options
Committee, to the proposal as amended. See Letter from Catherine
Humphrey, Law Clerk, Phlx, to Sharon Lawson, Assistant Director,
ODEO, Division, Commission, dated April 7, 1994 (``Amendment No.
2'').
\6\In Amendment No. 3 the Phlx proposes to delete proposed Rule
1001A(d)(ii) which was added by the Phlx in Amendment No. 2 but
which relates to a separate proposal filed by the Phlx pursuant to
Section 19(b) of the Act (see File No. SR-Phlx-94-03). See Letter
from Catherine Humphrey, Law Clerk, Phlx, to Brad Ritter, Attorney,
ODEO, Division, Commission, dated April 26, 1994.
\7\In Amendment No. 4 the Phlx proposes to; (1) add the Big Cap
Index as an index on which QIXs may be listed by the Exchange; (2)
insert in proposed rule 1101A(b)(iv) the specific indexes on which
QIX options may be listed by the Exchange; (3) amend language that
the Phlx altered in Amendment No. 3 to again clarify that except as
otherwise provided, all rules applicable to regular stock index
options are also applicable to QIX options on the same index; and
(4) make conforming changes to Exhibit C to reflect all amendments
to the proposed rule change. See Letter from Catherine Humphrey, Law
Clerk, Phlx, to Brad Ritter, Attorney, ODEO, Division, Commission,
dated May 9, 1994 (``Amendment No. 4'').
\8\In Amendment No. 5, the Phlx proposes that the exercise
settlement values for all QIX options traded on the Exchange will be
based on the closing values of the component securities underlying
each index (``P.M.-Settled''). All QIX options would be P.M.-Settled
regardless of whether the exercise settlement values for regular
index options on the same index are P.M.-Settled or are based on the
opening values of the component securities underlying the index
(``A.M.-Settled''). See Letter from Michelle Weisbaum, Associate
General Counsel, Phlx, to Brad Ritter, Attorney, ODEO, Division,
Commission, dated May 24, 1994 (``Amendment No. 5'').
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The Exchange proposes to add rules to provide for the listing of up
to eight near-term quarterly expirations for trading on the XAU, VLE,
UTY, BKX, XOC, and the Big Cap (``MKT'')\9\ indexes. The proposed QIX
options would expire on the first business day following the end of
each calendar quarter. All QIX options listed for trading on the
Exchange will be P.M.-Settled.
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\9\The Big Cap Index was not included in the original proposal
because options on that index has not yet been approved for listing
by the Commission. See Securities Exchange Act Release No. 33973
(April 28, 1994) 59 FR 23245 (May 5, 1994); and Amendment No. 4,
supra note 6.
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For each of the above indexes, the Phlx would be permitted at any
one time to have up to eight expiration series of QIX options open for
trading. Presently, index options traded at the Phlx expire on the
Saturday following the third Friday of the expiration month.\10\
Accordingly, QIXs will have expirations approximately two weeks apart
from regular index option expirations in the quarterly month
expiration.
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\10\The Exchange trades index options with expirations of up to
one year in length that expire at three month intervals. The
Exchange allows for up to six expiration months with none further
out than twelve months. In addition, the Phlx also trades long-term
index options that may expire three years from listing named
``LEAPS.'' The Phlx is not now proposing to list or trade QIX
options with more than twelve months to expiration. Any such
proposal would be filed with the Commission for review under Section
19(b) of the Act. See Amendment No. 2, supra note 4.
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The proposed QIX options on each particular index will trade
simultaneously with, and not independent of, currently listed and
traded index option products on the same index. The proposed QIX
options will be subject to the same rules that presently govern the
trading of regular index options contracts, including sales practice
rules, margin requirements, and floor trading procedures.\11\ Contract
terms for the QIX options on a particular index will be similar, for
the most part, to the corresponding index options that presently trade
on that index on the Exchange. For example, as with BKX index options,
QIX options on the BKX Index will have European-style\12\ exercise,
however, QIXs on the BKX will be P.M.-Settled.
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\11\See Amendment No. 4, supra note 6.
\12\A European-style option is one that may be exercised only
during a specified period prior to the expiration of the option.
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With regard to position and exercise limits,\13\ the Phlx is
proposing to provide that QIX options on an index will be aggregated
with existing options contracts on the same index.
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\13\Position limits are the maximum number of option contracts
permitted on the same side of the market with respect to a single
underlying interest that may be held or written by a single investor
or group of investors acting in concert. Exercise limits are the
maximum number of option contracts on the same underlying interest
that a single investor or group of investors acting in concert may
exercise during any five consecutive business days.
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The Commission finds 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).\14\ In particular, the
Commission believes that the proposed rule change is designed to
provide investors with a tailored quarterly portfolio hedge that may be
more suitable to their investment needs. Specifically, by providing
investors with the ability to use QIX options, the Phlx proposal will
allow investors increased flexibility to tailor their portfolio
positions to satisfy their investment objectives. For instance,
according to the Phlx, the performance of portfolio managers and
institutional investors is judged on a quarterly basis.\15\ Therefore,
in the past, these investors have been forced to pursue ``quarterly
hedging strategies'' in the over-the-counter (``OTC'') market employing
forwards, options, and/or swaps. Accordingly, the Commission believes
the Phlx proposal is a reasonable response by the Exchange to meet the
demands of sophisticated portfolio managers and other institutional
investors who are increasingly using the OTC market in order to satisfy
their hedging needs, and will thereby promote competition among these
markets.\16\
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\14\15 U.S.C. Section 78f(b)(5) (1982).
\15\In addition, many investment strategies employed by these
portfolio managers coverage at the calendar quarter. Hence,
traditional exchange-type expirations provide a less than perfect
hedge for many institutions.
\16\Pursuant to Section 6(b)(5) of the Act, the Commission must
predicate approval of any new option proposal upon a finding that
the introduction of such new derivations 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.
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In addition, the Commission believes that the Phlx proposal will
help promote the maintenance of a fair and orderly market because the
purpose of the proposal is to extend the benefits of a listed, exchange
market in Phlx-listed index options to quarterly calendar expirations.
The attributes of the Exchange's index options market versus an OTC
market include, but are not limited to, a centralized market center, an
auction market with posted market quotations and transaction reporting,
standardized contract specifications, parameters and procedures for
clearance and settlement, and the guarantee of the Options Clearing
Corporation (``OCC'') for all contracts traded on the Exchange.\17\
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\17\See Securities Exchange Act Release No. 31898 (February 22,
1993), 58 FR 11878 (March 1, 1993).
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The Commission also notes that the Exchange's existing rules
applicable to stock index options, including among others, strike price
interval, bid/ask differential, price continuity, sales practice rules,
and position and exercise limits will apply to QIX options.\18\ In
particular, positions in QIX options will be aggregated with positions
in other Phlx index option products on the same index.
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\18\See Amendment No. 4, supra note 6.
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The Commission notes that for the most part QIX options will be
treated like regular index options. The only exception is that for
those indexes for which regular index options are A.M.-Settled (i.e.,
the BKX and the MKT), QIXs on those indexes will be P.M.-Settled.
Although the Commission continues to believe that basing the settlement
of index products on opening, as opposed to closing prices on
Expiration Fridays helps alleviate stock market volatility,\19\ these
concerns are reduced in the case of QIXs, because expiration of these
stock index options will not correspond with the normal expiration of
stock index options, stock index futures, and options on stock index
futures. In particular, QIX options will never expire on an
``Expiration Friday,'' thereby diminishing the impact that QIX options
could have on the market. Accordingly, the Commission believes that QIX
options will not compromise the protection of investors or have an
adverse market effect. Of course, the Commission expects the Phlx to
monitor the actual effects of QIXs once trading commences and take
prompt action (including timely communication with marketplace self-
regulatory organizations responsible for oversight of trading in
component stocks) should any unanticipated adverse market effects
develop.\20\
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\19\See Securities Exchange Act Release No. 30944 (July 21,
1992), 57 FR 33376 (July 28, 1992).
\20\The Commission notes that P.M.-Settlement of QIX options on
indexes for which regular index options are A.M.-Settled, as
proposed in Amendment No. 5 to the proposed rule change, is
consistent with prior Commission approval orders. See Securities
Exchange Act Release Nos. 31800 (February 1, 1993), 58 FR 7274
(February 5, 1993) (order approving QIX options on the Standard &
Poor's (``S&P'') 500 Index and the S&P 100 Index); 31844 (February
9, 1993), 58 FR 8796 (February 17, 1993) (order approving QIX
options on the Major Market, S&P MidCap, and Institutional Indexes);
and 32693 (July 29, 1993), 58 FR 41817 (August 5, 1993) (order
approving QIX options on the Russell 2000 Index).
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Additionally, the Commission notes that approval of this proposal
represents the first time that the Commission has approved QIX options
on narrow-based indexes. The Commission believes, however, that the
proposal does not raise any new regulatory concerns that have not been
adequately addressed in Phlx's proposed rules. Specifically, QIXs on
the BKX, XAU, and UTY will be subject to the Exchange's existing rules
applicable to index options based on these indexes, including sales
practice rules, margin requirements, and floor trading procedures.
Secondly, positions in these QIX options will be aggregated with
positions in the related index options. Finally, the Exchange's
existing surveillance procedures and disciplinary rules will apply to
the trading of QIXs based on narrow-based stock indexes. Accordingly,
the Commission believes that the listing and trading of QIX options on
the Exchange's approved narrow-based stock indexes is consistent with
the Act.
Lastly, based on representations from the Phlx, the Commission
believes that the Phlx and the Options Price Reporting Authority
(``OPRA'') will have adequate systems processing capacity to
accommodate the additional options listed in connection with QIX
options.\21\
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\21\See Memorandum from Jack McCarthy, Phlx, to Catherine
Humphrey, Phlx, dated March 11, 1994; and Letter from Joe Corrigan,
Executive Director, OPRA, to Catherine Humphrey, Phlx, dated March
11, 1994.
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The Commission finds good cause for approving Amendments Nos. 2, 3,
4, and 5 to the proposed rule change prior to the thirtieth day after
the date of publication of notice thereof in the Federal Register. The
Commission finds that, with the exception of adding QIXs on the Big Cap
index, these amendments: (1) More closely conform the Exchange's
proposal to those previously approved by the Commission with respect to
the listing and trading of QIX options;\22\ and (2) clarify the
proposed rule change to minimize the potential for investor confusion.
With respect to QIXs on the Big Cap Index, for the reasons stated
herein, the Commission believes that allowing QIXs on the Big Cap Index
may provide investors with an additional hedging instrument and with
increased flexibility to tailor their portfolio positions to satisfy
their investment objectives. Therefore, the Commission believes it is
consistent with the Act to approve Amendments Nos. 2, 3, 4, and 5 to
the proposed rule change on an accelerated basis.
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\22\See supra note 20.
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Interested persons are invited to submit written data, views and
arguments concerning Amendments Nos. 2, 3, 4, and 5 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 Phlx. All written submissions should refer to
File No. SR-Phlx-93-45 and should be submitted by July 15, 1994.
It Is Therefore Ordered, pursuant to section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-Phlx-93-45) is approved.
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\23\15 U.S.C. section 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-15358 Filed 6-23-94; 8:45 am]
BILLING CODE 8010-01-M