[Federal Register Volume 59, Number 142 (Tuesday, July 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18133]


[[Page Unknown]]

[Federal Register: July 26, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34410; International Series Release No. 689; File No. 
SR-PSE-94-15]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 to a Proposed Rule Change by the 
Pacific Stock Exchange, Inc. Relating to Listing and Trading Options 
and Long-Term Options on the PSE Israel Index

July 20, 1994.
    Pursuant to section 19(b)(1) of the Securities and Exchange Act of 
1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 13, 1994, the Pacific Stock Exchange (``PSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The PSE 
filed Amendment No. 1 to the proposed rule change on June 27, 1994\3\ 
and Amendment No. 2 on June 28, 1994.\4\ The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1933).
    \3\In Amendment No. 1, Exchange proposes to: (1) Reconfigure the 
Index so that it is initially composed of 12 components; (2) provide 
that the Index will be equal dollar-weighted instead of 
capitalization-weighted, as originally proposed; and (3) provide 
that any security added to the Index must be a security that is 
traded in the United States either on a securities exchange or as a 
National Market security traded through NASDAQ (as defined herein). 
See Letter from Michael Pierson, Senior Attorney, PSE, to Brad 
Ritter, Attorney, Office of Market Supervision, Division of Market 
Regulation, Commission, dated June 24, 1994. (``Amendment No. 1'').
    \4\In Amendment No. 2, the PSE proposes: (1) To maintain the 
Index so that at least 85% of the Index, by weight, and at least 80% 
of the number of components of the Index are eligible for 
standardized options trading pursuant to PSE Rule 3.6; (2) to 
clarify that any replacement securities will be stocks or ADRs 
representing Israeli companies; and (3) to consider the market 
capitalization, liquidity, volatility, and name recognition of 
proposed replacement securities for the Index. See Letter from 
Michael Pierson, Senior Attorney, PSE, to Brad Ritter, Attorney, 
Office of Market Supervision, Division of Market Regulation, 
Commission, dated June 28, 1994. (``Amendment No. 2'').
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PSE proposes to list for trading options and long-term options 
(``Index LEAPS'') on the PSE Israel Index (``Israel Index''). The text 
of the proposed rule change is available at the Office of the 
Secretary, PSE, 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 Exchange 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 PSE 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

    The Exchange proposes to trade options and Index LEAPS on the PSE 
Israel Index, a new narrow-based stock index developed by the Exchange. 
The Index is equal dollar-weighted,\5\ is presently composed of 12 
component securities,\6\ and is designed to reflect the performance of 
the Israeli economy in general.
---------------------------------------------------------------------------

    \5\See Amendment No. 1, supra note 3.
    \6\The component securities of the Index are: Ampal-American 
Israel Corp.; Bio Technology General Corp.; Comverse Technology 
Inc.; ECI Telecom Ltd.; Electronics for Imaging Inc.; Elscint Ltd.; 
Geotek Communications Inc.; I.I.S. Intelegent Information System; 
Netmanage Inc.; Sapiens International Corp.; Scitex Corp.; Tadiran 
Ltd.; and Teva Pharmaceutical Industries (ADR). Id.
---------------------------------------------------------------------------

Index Design
    Of the 12 components of the Index, one presently trades on the New 
York Stock Exchange, one presently trades on the American Stock 
Exchange, and ten (including one American Depositary Receipt 
(``ADR'')\7\ representing 8.33% of the weight of the Index as of May 
31, 1994) are National Market securities traded through the facilities 
of the National Association of Securities Dealers, Inc. Automated 
Quotation System (``NASDAQ''). The 11 non-ADR components of the Index 
are listed for trading only in the United States. For the one ADR 
component, more than 50% of the combined worldwide trading volume for 
the ADR and the underlying security occurs in the United States through 
NASDAQ. The Exchange believes, therefore, that options on the Index 
should not raise the types of surveillance concerns that may be raised 
by options on an index of non-U.S. traded securities.
---------------------------------------------------------------------------

    \7\An ADR is a negotiable receipt which is issued by a 
depositary, generally a bank, representing shares of a foreign 
issuer that have been deposited and are held, on behalf of holders 
of the ADRs, at a custodian bank in the foreign issuer's home 
country.
---------------------------------------------------------------------------

    As of May 31, 1994, the securities comprising the Index ranged in 
market capitalization from a low of $59.03 million to a high of $1.22 
billion, with an average capitalization of $386 million. As of that 
date, over 90% of the number of stocks in the Index, and over 90% of 
the weight of the Index, met the Exchange's initial listing 
requirements for standardized options trading pursuant to PSE Rule 3.6.
Calculation
    The Index is calculated using an equal dollar-weighting methodology 
designed to ensure that each of the component securities is represented 
in approximately an equal dollar amount in the Index. The following is 
a description of how the equal dollar-weighting methodology works. As 
of the market close on May 31, 1994, a portfolio of stocks was 
established representing an investment of $83,333 in the stock (rounded 
to the nearest whole share) of each of the companies in the Index. The 
value of the Index equals the current market value of the sum of the 
assigned number of shares of each of the stocks in the Index, divided 
by the Index divisor. Each quarter, following the close of trading on 
the third Friday of January, April, July, and October, the Index will 
be adjusted by changing the number of whole shares of each component 
stock so that each component is again represented in equal dollar 
amounts. The Exchange has chosen to rebalance the Index following the 
close of trading on the quarterly expiration cycle because it allows an 
option contract to be held for up to three months without a change in 
the Index portfolio while at the same time, maintaining the equal 
dollar-weighting feature of the Index. If necessary, a divisor 
adjustment will be made when the rebalancing occurs to ensure 
continuity of the value of the Index. The newly adjusted portfolio then 
becomes the basis for the Index's value on the first trading day 
following the quarterly adjustment.
    The Exchange does not believe that there will be investor confusion 
regarding the adjustments because they will be done on a regular and 
timely basis, with adequate notice given. An information circular will 
be distributed to all Exchange members notifying them of the quarterly 
changes. This circular will also be sent by facsimile to the Exchange's 
contacts at the major options firms, mailed to recipients of the 
Exchange's options-related information circulars, and made available to 
subscribers of the Options News Network. In addition, the Exchange will 
include in its promotional and marketing materials for the Index a 
description of the equal dollar-weighting methodology.
    As noted above, the number of shares of each component stock in the 
Index portfolio remains fixed between quarterly reviews except in the 
event of certain types of corporate actions such as the payment of a 
dividend (other than an ordinary cash dividend), stock distribution, 
stock split, reverse stock split, rights offering, distribution, 
reorganization, recapitalization, or similar event with respect to the 
component stocks. In a merger or consolidation of an issuer of a 
component stock, if the stock remains in the Index, the number of 
shares of that security in the portfolio may be adjusted, to the 
nearest whole share, to maintain the component's relative weight in the 
Index at the level immediately prior to the merger or consolidation. In 
the event of a stock replacement, the average dollar value of the 
remaining portfolio components will be calculated and that amount 
invested in the stock of the new component, to the nearest whole share. 
In all cases, the divisor will be adjusted, if necessary, to ensure 
continuity of the Index value.
    The value of the Index will be calculated by the PSE or its 
designee on a real-time basis using last-sale prices and will be 
disseminated every 15 seconds by the Exchange. The Exchange will 
establish a benchmark of 200 for the Index when it begins disseminating 
the Index. If a component stock of the Index is not currently being 
traded, the most recent price at which the stock traded will be used in 
the Index calculation.
Maintenance
    The Index will be maintained by the Exchange. To maintain 
continuity in the Index following an adjustment to a component 
security, the divisor will be adjusted. Changes which may result in 
divisor changes include, but are not limited to, spin-offs, certain 
rights issuances, and mergers and acquisitions.
    The Index will be reviewed on approximately a monthly basis by the 
PSE staff. The Exchange may change the composition of the Index at any 
time or from time to time to reflect the changes affecting the 
components of the Index or the Israeli economy generally. If it becomes 
necessary to remove a stock from the Index (generally due to a takeover 
or merger), the Exchange will replace that component with an Israeli 
stock or ADR\8\ that is traded on a U.S. securities exchange or that is 
a National Market security traded through the facilities of NASDAQ.\9\ 
In such circumstances, the PSE will take into account the 
capitalization, liquidity, volatility, and name recognition of the 
proposed replacement stock.\10\ The Exchange will most likely maintain 
twelve stocks in the Index at all times.\11\
---------------------------------------------------------------------------

    \8\See Amendment No. 2, supra note 4.
    \9\See Amendment No. 1, supra note 3.
    \10\See Amendment No. 2, supra note 4.
    \11\The Exchange will notify the Commission of changes in the 
number of components in the Index. Prior to increasing the number of 
components of the Index to more than 16 or decreasing the number of 
components to less than 9, the Exchange will submit a rule filing 
pursuant to Section 19 of the Act and Rule 19b-4 thereunder.
---------------------------------------------------------------------------

Long-Term Index Options
    In addition to Index options on the Index, the Exchange also 
proposes to list long-term Index option series (``LEAPS'') as provided 
in PSE Rule 6.4(d).
Exercise and Settlement
    Index options will have European-style exercise and will be A.M.-
settled.\12\ The proposed Index options would expire on the Saturday 
following the third Friday on the expiration month, so that the last 
day for trading in an expiring series will be the second business day 
(ordinarily a Thursday) preceding the expiration date.
---------------------------------------------------------------------------

    \12\A.M.-settled index options are settled based on an index 
value derived from opening prices on the last day of trading prior 
to expiration.
---------------------------------------------------------------------------

Strike Prices
    The Exchange intends to introduce Index options series with 
expirations up to one year in duration at five-point strike price 
intervals. With respect to Index LEAPS, strike prices with as wide as 
25 or 50 point intervals may be used. If, however, the value of the 
Index falls below 200, the Exchange will use strike prices at two and 
one-half point intervals.
Exchange Rules Applicable
    Except as modified in the proposal, PSE Rule 7, and Rules 7.3(b) 
and (c), in particular, will be applicable to Index options. Index 
option contracts based on the Index will be subject to position limits 
of 7,500 contracts on the same side of the market pursuant to PSE Rule 
7.6(a). For purposes of position and exercise limits, Index LEAPS will 
be aggregated with Index options on a one-for-one-basis. The Exchange 
represents that it has the necessary systems capacity to support new 
option series that would result from the introduction of Index options 
and Index LEAPS.
Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act, in general, and furthers the objectives of 
Section 6(b)(5) of the Act, in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices and to promote 
just and equitable principles of trade.

(B) Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments on the proposed rule change were neither solicited 
nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve such proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 be withheld from the public in accordance with the provisions 
of 5 U.S.C. 522, 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 PSE. All 
submissions should refer to File No. SR-PSE-94-15 and should be 
submitted by August 16, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.13
---------------------------------------------------------------------------

    \1\317 CFR 200.30-3(a)(12) (1993).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18133 Filed 7-25-94; 8:45 am]
BILLING CODE 8010-01-M