[Federal Register Volume 60, Number 78 (Monday, April 24, 1995)]
[Notices]
[Pages 20135-20136]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9979]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35616; File No. SR-Phlx-95-11]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to the Listing of Long-Term Index Options 
Series (``LEAPS'') With a Duration of up to Sixty Months Until 
Expiration

April 17, 1995.
    On February 8, 1995, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to permit the listing of long-
term index options series (``LEAPS'') with a duration of up to sixty 
months (five years) until expiration. Notice of the proposal appeared 
in the Federal Register on February 22, 1995.\3\ No comment letters 
were received on the proposed rule change. The Exchange filed Amendment 
No. 1 to the proposal on February 23, 1995.\4\ This order approves the 
Phlx proposal, as amended.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
    \3\See Securities Exchange Act Release No. 35376 (February 14, 
1995), 60 FR 9880.
    \4\In Amendment No. 1, the Phlx proposed to: (1) Amend Rule 
1101A to specify that ten additional expiration months may be added 
for the proposed longer-term index LEAPS, as opposed to the six 
additional months currently allowed for LEAPS; and (2) provide that 
the proposal will apply to all indexes, both broad-based and narrow-
based, previously approved for the trading of standardized index 
options on the Exchange. See Letter from Edith Hallahan, Special 
Counsel, Phlx, to Michael Walinskas, Branch Chief, Office of Market 
Supervision, Division of Market Regulation, Commission, dated 
February 23, 1995.
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    The purpose of the proposed rule change is to permit the Exchange 
to list index LEAPS with a duration of up to sixty months (five 
years).\5\ Presently, the Exchange has authority pursuant to Phlx Rule 
1101A(b)(iii) to list index LEAPS that expire from twelve to thirty-six 
months from the time they are listed. The Exchange represents that 
there has been increasing member firm and customer interest in longer 
term instruments. The Exchange, therefore, is proposing to amend 
Exchange Rule 1101A to permit the listing of index options with up to 
sixty months until expiration. In addition, the Exchange proposes to 
amend Rule 1101A(b)(iii) to allow for up to ten expiration months for 
index LEAPS, as opposed to the six months currently allowed.\6\ The 
proposal does not change any other rule regarding the listing and 
trading of index LEAPS.\7\

    \5\The proposal would permit five-year LEAPS on both broad-based 
and narrow-based indexes on which LEAPS have been approved for 
trading on the CBOE. Id.
    \6\Id.
    \7\See Phlx Rule 1101A(b)(iii) and Securities Exchange Act 
Release No. 28910 (February 22, 1991), 56 FR 9032 (March 4, 1991) 
(``Exchange Act Release No. 28910'').
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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).\8\ Specifically, the 
Commission believes the proposal is designed to provide investors with 
additional means of hedging equity portfolios from long-term market 
risk with an exchange-traded security (i.e., a standardized option), 
thereby facilitating transactions in options and contributing to the 
protection of investors and the maintenance of fair and orderly 
markets.\9\

    \8\15 U.S.C. 78f(b)(5) (1988 & Supp. V 1993).
    \9\The Commission also finds that extending the maximum term for 
Index LEAPS from three to five years does not alter the Commission's 
designation of index LEAPS as standardized options pursuant to Rule 
9b-1(a)(4) of the Act.
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    Currently, institutional customers use index options to hedge the 
risks associated with holding diversified equity portfolios. The 
Commission continues to believe, as originally stated in its approval 
of the listing of index LEAPS by the Exchange, that allowing investors 
to lock in their hedges with longer-term index LEAPS will permit 
institutions to protect better their portfolios from adverse market 
moves.\10\ Further, the Commission believes that index LEAPS with up to 
five years until expiration will allow this protection at a known and 
limited cost.\11\ Moreover, the proposal will provide institutions with 
an additional securities product with which to hedge their portfolios 
as an alternative to hedging with futures positions or off-exchange 
customized index options.\12\ Accordingly, the Commission believes that 
the proposed rule change will better serve the long-term hedging needs 
of institutional investors.\13\

    \10\See Exchange Act Release No. 28910, supra note 7.
    \11\Id.
    \12\Id.
    \13\The Commission's findings are predicated on the somewhat 
limited length of five-year index LEAPS. Any subsequent proposal to 
list index LEAPS with expirations beyond five years could alter the 
nature of the product and would raise new regulatory concerns, 
including, among other things, the appropriate margin treatment, 
disclosure, and trading rules for the product.
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    Finally, although as with index LEAPS presently trading on the 
Exchange, specific strike price interval, bid/ask differential, and 
price continuity rules will not apply until the proposed longer-term 
index LEAPS have less than 12 months until expiration,\14\ the 
Commission notes that Phlx's general rule obligating market makers to 
maintain fair and orderly markets will continue to apply to the 
proposed longer-term index LEAPS.\15\ The Commission believes that the 
requirements of Phlx Rules 1014 and 1020 are broad enough, even in the 
absence of strike price interval, bid/ask differential, and continuity 
requirements, to provide the Exchange with the authority to make a 
finding of inadequate market maker performance should market makers 
enter into transactions or make bids or offers (or fail to do so) in 
the proposed longer-term index LEAPS that are inconsistent with the 
maintenance of a fair and orderly market.

    \14\See Exchange Act Release No. 28910, supra note 7.
    \15\See Phlx Rules 1014, 1020, and 1000A(a).
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    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, Amendment No. 1 provides that the Exchange may list up to 
ten additional expiration months when listing the proposed longer-term 
index LEAPS. The Commission believes this is consistent with the 
original approval of index LEAPS which allowed for up to six additional 
expiration months for LEAPS expiring 36 months from the date of 
[[Page 20136]] listing\16\ and, therefore, does not raise any new 
regulatory issues.

    \16\See Exchange Act Release No. 28910, supra note 7.
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    Moreover, Amendment No. 1 provides that the Exchange may list 
longer-term LEAPS on all indexes currently approved for the trading of 
standardized options, regardless of whether the index was previously 
approved for the trading of LEAPS. For those indexes approved for 
trading LEAPS, the Commission believes that Amendment No. 1 clarifies 
the application of the proposal and minimizes the potential for 
investor confusion. With regard to those indexes not previously 
approved for trading LEAPS, the Commission believes that allowing index 
LEAPS on these indexes, including the proposed longer-term LEAPS, does 
not raise any new regulatory issues. Specifically, each of these 
indexes has previously been approved by the Commission for the listing 
of standardized index options, and LEAPS on these indexes will be 
subject to the limitations discussed above.
    Accordingly, the Commission believes it is consistent with Section 
6(b)(5) of the Act to approve Amendment No. 1 to the Phlx's proposal on 
an accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1. 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 
submissions should refer to the File No. SR-Phlx-95-11 and should be 
submitted by May 15, 1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (File No. SR-Phlx-95-11) is 
approved.

    \17\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\

    \18\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-9979 Filed 4-21-95; 8:45 am]
BILLING CODE 8010-01-M