[Federal Register Volume 59, Number 139 (Thursday, July 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17761]


[[Page Unknown]]

[Federal Register: July 21, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34387; File No. SR-PHLX-94-03]

 

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1 and 2 by the Philadelphia Stock Exchange, Inc., Relating to 
Listing of Reduced-Value Long-Term Options on the National Over-the-
Counter Index

July 15, 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 January 
12, 1994, the Philadelphia Stock Exchange, Inc. (``PHLX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the self-
regulatory organization.\1\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\On March 1, 1994, the PHLX amended PHLX Rule 1001A, 
``Position Limits,'' to add paragraphs (d)(i) and (ii), which 
describe the aggregation procedures for quarterly expiring options, 
reduced-value long-term Value Line Composite Index options, and 
reduced-value long-term National Over-the-Counter Index options. See 
Letter from Edith Hallahan, Special Counsel, PHLX, to Sharon Lawson, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission, dated February 28, 1994 (``Amendment No. 1''). After the 
provisions proposed in paragraph (d)(i) were approved in Securities 
Exchange Act Release No. 34234 (June 17, 1994), the PHLX deleted 
paragraph (d)(i) from the current proposal. See Letter from Edith 
Hallahan, Special Counsel, PHLX, to Mike Walinskas, Branch Chief, 
Options Regulation, Division, Commission, dated July 13, 1994 
(``Amendment No. 2'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PHLX proposes to amend its rules to list long-term reduced-
value options equal to one-tenth the value of the Exchange's current 
National Over-the-Counter Index (``Index'' or ``XOC''). Options on the 
long-term, reduced-value XOC (``reduced-value XOC'') will have 
expirations of up to 36 months. For aggregation purposes, 10 reduced-
value long-term XOC options are the equivalent of one full-value XOC 
contract.
    The text of the proposed rule change is available at the Office of 
the Secretary, PHLX, 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 self-regulatory organization 
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 self-regulatory organization 
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

1. Description of the Proposal
    Since 1985 the PHLX has been trading options on the XOC, a broad-
based, capitalization-weighted index comprised of the 100 largest 
domestic corporations whose stocks are traded over-the-counter 
(``OTC'') by at least four market makers and are not listed on any 
exchange.\2\ All of the XOC's component stocks are traded through the 
National Association of Securities Dealers Automated Quotations 
(``NASDAQ'') system and are National Market Securities (``NMS''). On 
February 26, 1991, the Commission approved a proposed rule change, SR-
PHLX-90-38, allowing the Exchange to list long-term options having up 
to 36 months to expiration on any of the Exchange's broad-based index 
options.\3\
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    \2\See Securities Exchange Act Release No. 22044 (May 17, 1985), 
50 FR 21532 (May 24, 1985).
    \3\See Securities Exchange Act Release No. 28910 (February 26, 
1991), 56 FR 9032 (March 4, 1991).
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    The PHLX proposes to list long-term options on a reduced-value XOC 
index that would be computed at one-tenth the value of the Exchange's 
current XOC index. The proposed options will have expirations of up to 
36 months. The PHLX believes that the listing of long-term, reduced-
value XOC options will provide retail investors with the opportunity to 
obtain long term portfolio protection at an affordable price.
2. Composition of the Index
    The XOC is a capitalization-weighted index comprised of the 100 
most highly capitalized NMS common stock issues traded through the 
NASDAQ system. The XOC, which was developed by the Exchange and is 
computed by Bridge Data, is comprised of stocks from approximately 
thirty industry groups and responds to the general market trends of the 
OTC market. The Index is updated every 15 seconds during the trading 
day. Pursuant to PHLX Rule 1100A, ``Dissemination of Information,'' 
updated Index values are disseminated and displayed by means of the 
Consolidated Last Sale Reporting System and the facilities of the 
Options Price Reporting Authority (``OPRA''). The closing Index value 
is published in The Wall Street Journal and other financial 
publications.
3. Index Construction and Calculation
    In order to keep the XOC current and representative of general 
market trends in the OTC market, each January and July the Exchange 
identifies and ranks the 125 most highly capitalized NMS common stock 
issues. The stocks included in the 125 ranking are compared to the 
issues in the Index, and issue(s) not ranked within the 100 most highly 
capitalized issues are deleted from the Index and replaced by the 
issue(s) which has increased in capitalization since the previous 
ranking. Thus, on a semi-annual basis, the XOC is adjusted to reflect 
changes in the capitalization ranking of NMS stock issues. In addition, 
any time a component stock registers on a national securities exchange 
or is the subject of a merger or acquisition, the stock is deleted from 
the Index and replaced by the next highest capitalized issue as 
identified in the most current ranking of the 125 most highly 
capitalized NMS issues. The Index is adjusted to reflect stock splits 
and dividends.
    In computing the value of the Index, the current market value of 
each component stock is multiplied by the number of outstanding shares. 
The resulting market values are added together to determine the current 
aggregate market value of the issues in the Index. To compute the 
current Index value, the aggregate market value is divided by the base 
market value and multiplied by 100. The base value is adjusted 
periodically to account for changes in capitalization of any of the 
component stocks resulting from mergers, acquisitions, listings, and 
substitutions.
4. Contract Specifications
    The proposed long-term reduced-value XOC options will trade 
independently of an in addition to currently listed full-value XOC 
options and will be subject to the same rules that presently govern the 
trading of full-value XOC options, including sales practice rules, 
margin requirements, and floor trading procedures. The strike price 
intervals for the proposed options will be fixed at no less than $2.50, 
and the proposed options will be aggregated with full-value XOC options 
for position and exercise limit purposes.
    The PHLX has determined that since positions in the full-value XOC 
options and those in the proposed reduced-value long-term XOC options 
are based upon the same underlying stock index, the proposed reduced-
value XOC options will be aggregated with full-value XOC options for 
position and exercise limit purposes. Accordingly, the PHLX proposes to 
amend PHLX Rule 1001A to state that for aggregation purposes, ten 
reduced-value long-term XOC options are the equivalent of one full-
value XOC contract. Since one full-value XOC contract is equivalent to 
ten reduced-value XOC contracts, each reduced-value XOC contract will 
be considered one-tenth of a full-value XOC contract when the contracts 
are aggregated for position and exercise limit purposes.
    Thus, under the current XOC position limit of 10,000 contracts, an 
option holder with no full-size XOC contracts would be permitted to 
hold 100,000 reduced-value XOC contracts. Similar to full-value XOC 
options, the proposed reduced-value options will feature American-style 
exercise. The PHLX will continuously calculate and disseminate the 
underlying index value for the proposed reduced-value XOC options in 
addition to the full-value Index.
    As a result of the one-tenth reduced-value feature of the proposed 
options, the reduced-value XOC may vary slightly from one-tenth of the 
full-value Index. In this regard, the PHLX intends to adopt the 
following procedure in rounding the reduced-value Index: the PHLX will 
divide the calculated value of the XOC by ten and round the resulting 
quotient to the nearest one-hundredth. The digits one through four will 
be rounded down to the next number and digits five through nine will be 
rounded up to the next number.
    Upon Commission approval of the proposal, the PHLX intends to list 
initial long-term option series on the new reduced-value XOC with 
December 1995 and December 1996 expirations. While the initial series 
listings would have less than 36 months to expiration, thereafter, the 
PHLX plans to list options with 36-month expirations at each December 
expiration, resulting in the introduction of a December 1977 expiration 
after the December 1994 expiration. Initially, three strike prices for 
calls and puts will be listed at and surrounding the prevailing 
reduced-value XOC option. However, the Exchange may list only a put or 
a call if two strike prices are introduced. The Exchange also proposes 
to list additional strike prices when the market reaches either the 
highest or lowest existing strike price. The Exchange believes this 
procedure will result in the listing of only a limited number of series 
for any expiration, thereby eliminating confusion that might otherwise 
be caused by a myriad of strike prices and expirations.
    The Exchange expects that its proposed policy of listing strike 
prices on the reduced-value XOC will permit the offering of options at 
premiums between $2.00 and $7.00 ($200 to $700 per contract) based upon 
current market volatility and other pricing considerations. Such 
premiums appear to be in the desired range of prices that investors 
have favored in trading index warrants. Such premiums could not be 
achieved by using full-size XOC options without the listing of strike 
prices so deeply out of the money and away from the current index value 
as to offer investors limited ability to participate in the market or 
protect a portfolio of primarily OTCV stocks.
    The PHLX believes that the proposal is consistent with Section 6 of 
the Act, in general, and in particular, with Section 6(b)(5), in that 
it is designed to facilitate transactions in securities and protect 
investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    No written comments were either solicited or received.

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

    The PHLX has requested that the proposed rule change be given 
accelerated effectiveness pursuant to Section 19(b)(2) of the Act.
    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).\4\ Specifically, the 
Commission believes that the reduced-value long-term XOC options will 
benefit investors by providing them with a valuable hedging and 
investing vehicle that should reflect accurately the overall movement 
of the OTC market and provide investors with additional means to hedge 
portfolios against long-term market risk at a reduce cost. The 
Commission believes that the lower cost of the reduced-value XOC 
options should allow investors to hedge their portfolios with a smaller 
outlay of capital and may facilitate investor participation in the 
market for XOC options, which should, in turn, help to maintain the 
depth and liquidity of the market for XOC options, thereby protecting 
investors and the public interest.
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    \4\15 U.S.C. 78f(b)(5) (1988).
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    The Commission believes that trading in the reduced-value XOC 
options will not have an adverse market impact or be susceptible to 
manipulation.\5\ The Commission has determined previously that the 
full-value XOC is a broad-based index\6\ and does not believe that 
dividing the XOC by ten changes this determination. The reduced-value 
XOC index will contain the same stocks with the same weightings as the 
XOC and will be calculated in the same manner as the XOC (with the 
exception of being one-tenth the value of the XOC). Accordingly, the 
Commission finds that the reduced-value XOC is a broad-based index. 
Moreover, the Commission believes that any potential manipulation 
concerns raised by the reduced-value XOC options are minimized by the 
fact that positions in the reduced-value XOC options and full-value XOC 
options will be aggregated for position and exercise limit purposes.\7\ 
In addition, the Commission notes that the same Exchange surveillance 
procedures applied to full-value XOC options will be used for the 
reduced-value XOC options.\8\
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    \5\The Commission notes that, prior to listing long-term 
reduced-value XOC options, the PHLX will be required to provide 
written representations that both the Exchange and OPRA have the 
necessary systems capacity to support the new series of long-term 
reduced-value XOC options.
    \6\See Securities Exchange Act Release No. 33634 (February 17, 
1994), 59 FR 9263 (February 25, 1994).
    \7\In this regard, it is reasonable for the PHLX to count ten 
reduced-value XOC option contract as equivalent to one full-value 
XOC contract for position and exercise limit purposes because the 
underlying value of one XOC contract is equal to the underlying 
value of ten reduced-value XOC contracts.
    \8\Telephone conversation between Edith Hallahan, Attorney, 
PHLX, and Yvonne Fraticelli, Attorney, Options Branch, Division, on 
July 6, 1994.
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    Because the Exchange's existing rules applicable to stock index 
options, including, among others, sales practice rules, margin 
requirements, and position and exercise limits, will apply to the 
reduced-value XOC options, the Commission believes that the market for 
the reduced-value XOC options should be fair and orderly and does not 
raise any new customer protection concerns.
    The Commission finds good cause for approving the proposal and 
Amendment Nos. 1 and 2 prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. In 
light of the fact that the Commission has approved proposals by other 
exchanges to list reduced-value options on existing indexes, and in 
light of PHLX rule 1101A(b)(iii), which allows the PHLX to list series 
of long term options on stock indexes, the Commission believes that the 
proposal to list long term reduced-value XOC options presents no new 
regulatory issues. In addition, the Commission believes that Amendment 
Nos. 1 and 2 clarify and strengthen the Exchange's proposal. 
Accordingly, the Commission believes that it is consistent with the Act 
to approve the proposal and Amendment Nos. 1 and 2 on an accelerated 
basis.

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 withheld from the public in accordance with the provisions of 
5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Section, 450 Fifth Street NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the PHLX. All 
submissions should refer to File No. SR-PHLX-94-03 and should be 
submitted by [insert date 21 days from date of publication].
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act\9\ 
that the proposed rule change (SR-PHLX-94-03) is approved.

    \9\15 U.S.C. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17761 Filed 7-20-94; 8:45 am]
BILLING CODE 8010-01-M