[Federal Register Volume 59, Number 248 (Wednesday, December 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31887]


[Federal Register: December 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35131; File No. SR-Phlx-94-64]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 to the 
Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating 
to the Listing of Options on the Phlx Airlines Sector Index

December 20, 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 December 
13, 1994, the Philadelphia Stock Exchange, Inc. (``Phlx'' 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 
Exchange filed Amendment No. 1 to the proposed rule change on December 
15, 1994.\1\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\In Amendment No. 1, the Exchange proposes that options on the 
Phlx Airline Sector Index will be European-style instead of 
American-style as originally proposed. See Letter from Michele 
Weisbaum, Associate General Counsel, Phlx, to Brad Ritter, Senior 
Counsel, Office of Market Supervision, Division of Market 
Regulation, Commission, dated December 14, 1994 (``Amendment No. 
1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, pursuant to Rule 19b-4 of the Act, proposes to list 
and trade options on the Phlx Airline Sector Index (``Index''), a new 
stock index developed by the Phlx and composed of 12 domestic airline 
stocks. The text of the proposed rule change is available at the Office 
of the Secretary, the 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 Phlx included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Section (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 purpose of the proposed rule change is to list for trading, 
cash-settled, European-style\2\ options on the Phlx Airline Sector 
Index, a new index developed by the Exchange. The Index is composed of 
the stocks of 12 domestic passenger air carriers which, the Exchange 
represents, effectively represent the available domestic air 
transportation industry.\3\ The Exchange also represents that the Index 
meets the generic criteria for listing options on narrow-based indexes 
as set forth in Exchange Rule 1009A, as approved by the Commission.\4\ 
Accordingly, the Phlx is submitting this proposed rule change pursuant 
to and in accordance with the procedures set forth in the Generic Index 
Approval Order.\5\ The Phlx proposes to list and trade options on the 
Index no sooner than 30 days after December 13, 1994, the filing date 
of this proposed rule change. The contract specifications for options 
on the proposed Index are as follows:
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    \2\A European-style option can be exercised only during a 
specified period immediately prior to expiration of the option.
    \3\The components of the Index are: Alaska Air Group, Inc.; AMR 
Corporation; Atlantic Southeast Airlines, Inc.; Continental 
Airlines, Inc.; Comair Holdings Inc.; Delta Air Lines, Inc.; 
Southwest Airlines Co.; Mesa Airline Inc.; Northwest Airlines Corp.; 
Skywest, Inc.; USAir Group Inc.; and UAL Corporation.
    \4\See Securities Exchange Act Release No. 34157 (June 3, 1994), 
59 FR 30062 (June 10, 1994) (``Generic Index Approval Order'').
    \5\Id.
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    Underlying Index: The Index is an equal-dollar weighted sector 
index composed of stocks from 12 domestic, passenger, air carriers. 
Seven of the stocks are traded on the New York Stock Exchange 
(``NYSE'') and the other five are national market securities traded 
through Nasdaq. The Exchange represents that 11 out of 12 stocks in the 
Index presently satisfy the Exchange's listing criteria for equity 
options contained in Exchange Rule 1009. Moreover, the Phlx notes that 
all 11 of such stocks are currently the subject of standardized options 
trading in the U.S.
    As of December 9, 1994, the market capitalization of each of the 
stocks in the index exceeded $75 million. The Exchange represents that 
the market capitalizations ranged from a low of $98 million to a high 
of $3.8 billion. Eleven of the 12 component issues in the Index had 
monthly trading volumes in excess of one million shares over each of 
the past six months and the remaining component, accounting for 8.33% 
of the value of the Index, had monthly trading volume in excess of 
500,000 shares in each of the prior six months. Accordingly, the 
Exchange represents that with respect to the criteria for market 
capitalization and trading volume, the Index satisfies the generic 
listing standards as stated in Phlx Rule 1009A and in the Generic Index 
Approval Order.\6\
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    \6\Id.
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    Index Calculation: The methodology used to calculate the Index is 
an equal dollar-weighting method, meaning that each of the component 
stocks is represented in the Index in approximately equal dollar 
amounts. The Exchange believes that this method of calculation is 
important because it will provide each component issue with equivalent 
influence on the movement of the Index value instead of allowing one 
highly capitalized stock to dominate the movement of the Index. To 
determine the initial dollar weighting of the stocks, the Exchange 
calculated the number of shares of each stock that would represent an 
investment of approximately $10,000 in each of those stocks comprising 
the Index based on closing prices on December 1, 1994. The value of the 
Index equals the current market value of the sum of the assigned number 
of shares of all of the stocks in the Index divided by the current 
Index divisor. the Index divisor was set to yield an initial Index 
value of 200 at the opening of November 28, 1994.
    Index Maintenance: The Exchange will rebalance the Index quarterly, 
following the close of trading on the third Friday of each March, June, 
September, and December by changing the number of shares of each 
component stock so that each company is again represented in $10,000 
``equal'' dollar amounts. If it becomes necessary, a divisor adjustment 
will be made when rebalancing occurs to ensure continuity of the 
Index's value. The newly adjusted portfolio will then become the basis 
for the Index's value on the first trading day following the quarterly 
adjustment.
    The number of shares of each component stock in the Index will 
remain fixed between quarterly reviews except in the event of certain 
types of corporate action such as the payment of a dividend (other than 
an ordinary cash dividend), stock distribution, stock split, rights 
offering, recapitalization, reorganization or similar event with 
respect to the component stocks. In the case of a merger or 
consolidation of the 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 prior to the merger. Should a 
stock replacement occur, 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 selecting 
replacement components for the Index, the Phlx will take into account 
the capitalization, liquidity, volatility, and name recognition of any 
proposed replacement stock, and will assure that the maintenance 
criteria in Rule 1009A(c) continue to be met by the Index. In each of 
the above cases the divisor will be adjusted, if necessary, to ensure 
the continuity of the Index. If the Index fails at any time to satisfy 
the maintenance criteria set forth in the Generic Index Approval 
Order,\7\ the Exchange will immediately notify the Commission of that 
fact and will not open for trading any additional series of options on 
the Index unless such failure is determined by the Exchange not to be 
significant and the Commission concurs in that determination or unless 
the continued listing of options on the Phlx Airline Sector Index has 
been approved by the Commission under Section 19(b)(2) of the Exchange 
Act.
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    \7\Id.
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    Pursuant to the Generic Index Approval Order,\8\ absent prior 
Commission approval, the Exchange will not increase to more than 15, or 
decrease to fewer than 9, the number of stocks in the Index, nor will 
the Phlx make any change in the composition of the Index that would 
cause fewer than 90% of the stocks, by weight, or fewer than 80% of the 
total number of stocks in the Index to qualify as stocks eligible for 
equity options trading under Phlx Rule 1009.
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    \8\Id.
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    The Index value will be updated dynamically and disseminated at 
least once every 15 seconds during the trading day. The Phlx has 
retained Bridge Data, Inc. to compute and do all necessary maintenance 
of the Index. Pursuant to Phlx Rule 1100A, updated Index values will be 
disseminated and displayed by means of primary market prints reported 
by the Consolidated Tape Association and over the facilities of the 
Options Price Reporting Authority (``OPRA'').\9\ The Index value will 
also be available on broker/dealer interrogation devices to subscribers 
of the option information.
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    \9\The Phlx represents that the Phlx and the OPRA have the 
necessary systems capacity to support those new series of options 
that would result from the introduction of options and long-term 
options on the Index. See Letter from Joseph Corrigan, Executive 
Director, OPRA, to Jamie Farmer, New Product Development, Phlx, 
dated November 29, 1994.
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    Unit of Trading: Each options contract will represent $100, the 
index multiplier, times the Index value. For example, an Index value of 
200 will result in an option contract value of $20,000 ($100  x  200).
    Exercise Price: The exercise prices for Index options will be set 
at 5 point intervals in terms of the current value of the Index. 
Additional exercise prices will be added in accordance with Phlx Rule 
1101A(a).
    Aggregate Exercise Price: The aggregate exercise price is found by 
multiplying the Index multiplier ($100) by the exercise price.
    Settlement Price Determination: The Index option settlement value 
will be determined by using the opening prices of the component stocks 
of the Index on the third Friday of each month.
    Last Trading Day: The Thursday prior to the third Friday of the 
month for options which expire on the Saturday following the third 
Friday of that month.
    Trading Hours: 9:30 a.m. to 4:10 p.m. EST.
    Position and Exercise Limits: The Phlx Airline Sector Index is an 
industry index such that the Phlx will employ position and exercise 
limits pursuant to Phlx Rules 1001A(b)(i) and 1002A, respectively.
    Expiration Cycles: Three months from the March, June, September, 
December, cycle plus two additional near-term months.
    Premium Quotations: Premiums will be expressed in terms of dollars 
and fractions of dollars pursuant to Phlx Rule 1033A. For example, a 
bid or offer of 1\1/2\ will represent a premium per options contract of 
$150 (1\1/2\  x  100). The minimum change in a premium under $3 will be 
\1/16\ and \1/8\ for a quote of $3 or greater.
    The options will be traded pursuant to current Phlx rules governing 
the trading of index options.\10\ The Exchange also represents that 
surveillance procedures currently used to monitor trading in each of 
the Exchange's other index options will also be used to monitor trading 
in options on the Index. These procedures include having complete 
access to trading activity in the underlying securities which are all 
traded on either the NYSE or as national market securities traded 
through Nasdaq. In addition, the Intermarket Surveillance Group 
Agreement (``ISG Agreement'') dated July 14, 1983, as amended on 
January 29, 1990, will be applicable to the trading of options on the 
Index. The Exchange also requests the ability to list long-term options 
on the Index pursuant to Exchange Rule 1101A(b)(iii).
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    \10\See Phlx Rules 1000 through 1072 and 1000A through 1102A.
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    The Phlx represents that the proposed rule change is consistent 
with Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5)\11\ in particular in that it will permit trading in 
options based on the Phlx Airline Sector Index pursuant to rules 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to facilitate 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market.
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    \11\15 U.S.C. Sec. 78f(b)(5) (1988).
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(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 solicited or received with respect to the 
proposed rule change.

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

    Because the foregoing proposed rule change, as amended, complies 
with the standards set forth in the Generic Index Approval Order,\12\ 
it has become effective pursuant to Section 19(b)(3)(A) of the Act. 
Pursuant to the Generic Index Approval Order, the Exchange may not list 
Phlx Airline Index options for trading prior to 30 days after December 
13, 1994, the date the proposed rule change was filed with the 
Commission. At any time within 60 days of the filing of the proposed 
rule change, the Commission may summarily abrogate the rule change if 
it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \12\See supra note 4.
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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, N.W., Washington, D.C. 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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
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-94-64 and should be 
submitted by January 17, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31887 Filed 12-27-94; 8:45 am]
BILLING CODE 8010-01-M