[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