[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