[Federal Register Volume 60, Number 166 (Monday, August 28, 1995)]
[Notices]
[Pages 44533-44537]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21276]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36127; File No. SR-PHLX-95-19]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to Proposed Rule Change by the Philadelphia 
Stock Exchange, Inc., Relating to the Listing and Trading of DIVS, OWLS 
and RISKS

August 18, 1995.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on May 
8, 1995, 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. On July 
12, 1995, the PHLX filed Amendment No. 1 (``Amendment No. 1'') to the 
proposal to address concerns raised by Commission staff.\1\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change and Amendment No. 1 from interested persons.

    \1\ Letter from Shelle R. Weisbaum, Associate General Counsel, 
PHLX, to Sharon Lawson, Assistant Director, SEC, dated June 30, 
1995. Among the issues addressed in Amendment No. 1 are provisions 
relating to position reporting, sales practice rules, margin and 
issuance size.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PHLX, pursuant to Rule 19b-4 of the Act, proposes to list for 
trading ``DIVS'' (Dividend Value of Stock), ``OWLS'' (Options With 
Limited Stock) and ``RISKS'' (Residual Interest in Stock) (collectively 
hereinafter referred to as the ``Americus Derivatives''), which are new 
hybrid option products developed by Americus Stock Process Corp. 
(``ASPC''). It is contemplated that the Americus Derivatives will be 
issued and guaranteed by the Options Clearing Corporation (``OCC'') and 
will allow the purchase or sale of any of three distinct optionable 
economic interests inherent in a share of common stock. The PHLX 
proposes to adopt the new Rule 1000D series to apply to the trading of 
these securities. 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 PHLX 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 PHLX 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 PHLX proposes to list a new product developed by and licensed 
to it by ASPC that allows the purchase or sale of any of three distinct 
optionable economic interests inherent in a share of common stock. On 
January 3, 1995, the Exchange filed for approval to list and trade a 
product known as DIVS, ZIPS and SPECS (``DZ&S''). DZ&S provided, in 
part, for the pass-through of the voting rights of the underlying 
common stock to DZ&S holders.\2\ The present filing proposes an 
alternative product that is similar in most respects to DZ&S except for 
the fact that the shareholder voting rights are not passed through to 
the holders of the proposed Americus Derivatives.

    \2\ Securities Exchange Act Release 35400 (Feb. 21, 1995), 60 FR 
10887 (Feb. 28, 1995).
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    Each of the proposed new instruments, called DIVS, OWLS and RISKS, 
will be traded separately on the PHLX's equity options floor. The 
Exchange believes that, combined, the Americus Derivatives have all the 
characteristics of a share of the underlying common stock (except for 
voting rights) and that the ability to trade the Americus Derivatives 
as separate component instruments will provide novel hedge, arbitrage, 
speculation and investment opportunities.

[[Page 44534]]

    The Americus Derivatives will be regulated, except as described 
herein, by the rules governing standardized options. Proposed Rule 
1001D establishes position limits of 1 million DIVS, OWLS and RISKS, 
each, respecting any particular underlying stock, and holders will be 
required to report to the Exchange when they have established an 
aggregated position of 20,000 DIVS, OWLS and RISKS.\3\ The sales 
practice rules applicable to options (Rules 1024 through 1029) will 
also be applicable to sales of DIVS, OWLS and RISKS. (See Rule 1000D(a) 
\4\). The OCC will be the exclusive issuer of the Americus Derivatives 
which the Exchange proposes to issue in accordance with the disclosure 
scheme provided for under Rule 9b-1 of the Act. The Americus 
Derivatives will be issued in separate series with each series having 
its own distinct CUSIP number and trading symbol. The Americus 
Derivatives will be issued in book-entry only form. DIVS, OWLS and 
RISKS will be created when opening buy and sell orders are executed, 
and the additional execution of such orders will increase the open 
interest of the Americus Derivatives. Quotation and transaction 
reporting will occur through the facilities of the Options Price 
Reporting Authority.

    \3\ See Amendment No. 1. The PHLX originally proposed a position 
reporting requirement of 200,000 contracts.
    \4\ See Amendment No. 1.
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    The criteria for underlying common stocks upon which the Americus 
Derivatives will be based are the same criteria as utilized for 
standardized equity options listed on the PHLX under PHLX Rule 1009, 
with the additional limitation that only the top 250 U.S. market 
capitalized stocks that trade on either a national securities exchange 
or the NASDAQ national market will be eligible for consideration (See 
Rule 1009D). DIVS, OWLS and RISKS of a particular series will all be 
issued for the same length of time, currently contemplated to be up to 
60 months, and therefore all components of the same series will possess 
the same termination date (``Termination Date''), as defined in PHLX 
Rule 1000D(b)(5). The Americus Derivatives will have a European-style 
\5\ settlement similar to standardized options.

    \5\ A European-style option may only be exercised during a 
limited period of time before the option expires.
    OWLS and RISKS of the same series also will have a coordinate 
termination claim (``Termination Claim''), as defined in PHLX Rule 
1000D(b)(4). The Termination Claim is a preset price established at the 
time of the issuance of a new series of RISKS and OWLS and is used to 
determine these instruments' payout on the pertinent Termination Date. 
In accordance with PHLX Rule 1004D, Termination Claims will be set at 
the underlying stock price reflecting the most recent business day's 
consolidated closing value rounded to the nearest $2.50 increment for 
stocks priced at or below $25.00 or to the nearest $5.00 increment for 
stocks priced above $25.00. The PHLX may list new series of DIVS, OWLS 
and RISKS annually, or at more frequent intervals, depending on market 
conditions. No new series will be opened nor opening transactions be 
permitted if open interest in DIVS, OWLS and RISKS represents more than 
10 percent of the outstanding shares of any underlying stock. (See Rule 
1012D.)
    The PHLX anticipates that the sum of the market prices of DIVS, 
OWLS and RISKS on the same underlying security with the same 
Termination Date and Termination Claim will approximate the actual 
market price for the underlying security. Because DIVS, OWLS and RISKS 
are each economic interests in a single underlying share, if the 
combined price of the related DIVS, OWLS and RISKS diverges from that 
of the underlying security, the PHLX believes that arbitrage 
opportunities would tend to remove the pricing disparity.
    For customer margin purposes, DIVS and OWLS are contemplated to be 
margined as equity securities pursuant to Regulation T for initial 
margin purposes, which generally requires that equity securities be 
subject to a margin level of 50% of its current market value. Moreover, 
the PHLX proposes to apply Rule 722 for maintenance margin purposes, 
which would subject DIVS and OWLS to a 25% margin requirement for long 
positions and 30% margin requirement for each short position.\3\ 
Furthermore, the PHLX proposes that where a short DIVS or OWLS position 
is covered by a long position in the underlying security or any other 
security immediately exchangeable or convertible (other than warrants) 
into the security, the margin will be 10% of the market value of the 
long securities position.\4\

    \3\ Counsel for ASPC and the PHLX's Legal Department are 
currently seeking agreement and confirmation of this treatment from 
the staff of the Board of Governors of the Federal Reserve System.
    \4\ See Amendment No. 1.
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    The PHLX proposes to apply options margin to RISKS, requiring that 
the full value of the purchase price of the RISKS component be paid at 
the time of purchase. The minimum margin required for any short 
position would be 100% of the RISKS price plus 20% of the market value 
of the RISKS, except that the maximum margin shall not exceed the 
termination claim for the RISKS (``uncovered margin requirement''). The 
PHLX, however proposes that the margin treatment applicable to RISKS be 
subject to three exceptions:

    (a) In subparagraph (4) of Proposed Rule 1722D, if a customer 
has a short RISKS position and a long RISKS position which expires 
on or before the termination date of the short position, the 
positions will be treated exactly like an options spread. The margin 
requirement will be the lesser of the uncovered margin requirement 
or the amount, if any, by which the termination claim of the short 
position exceeds the termination claim of the long position. If the 
long position expires after the short position, however, the margin 
on the short position will be the lesser of the uncovered margin 
requirement or 20% of the market value of the long position.
    (b) In subparagraph (5) of Proposed Rule 1722D, covered RISKS 
short positions will be treated in a manner similar to that of 
covered call options positions under existing Rule 722(c)(2)(F). 
When a customer holds a short RISKS position and a long position in 
the underlying security or one exchangeable or convertible into the 
underlying security (excluding warrants), no margin will be required 
on the short position if the long position is margined in accord 
with Rule 722 and the long position expires after the termination 
date of the short RISKS position.
    The margin requirement for a short RISKS position which is 
covered by a long warrant convertible into an equivalent number of 
shares of the underlying security, will be the lesser of the 
uncovered margin requirement or the amount by which the conversion 
price of the long warrant exceeds the termination claim of the short 
RISKS, provided the right to convert the warrant does not expire on 
or before the termination date of the short RISKS.
    (c) Customers will also be allowed to use escrow receipts or 
letters of guarantee in lieu of posting margin for short RISKS 
positions similar to the options rule provisions in existing Rule 
722(c)(2)(G).

Characteristics of Individual Components

DIVS

    The basic characteristic of DIVS will be the right to receive 
substitute payments in the same amount as regular dividends declared 
and paid on the related shares of common stock for record dates that 
precede the Termination Date of the particular series of DIVS.
    On each ex-dividend date, OCC will notify clearing members of 
debits they have incurred on OCC's books for any net short DIVS 
positions. These debits will be charged to such clearing members' 
accounts at OCC on payment 

[[Page 44535]]
date. Ex dates and payment dates will coincide with that of the 
underlying common stock. Hence, DIVS sellers assume the obligation to 
fund the substitute dividend payments with respect to DIVS as they 
arise. On the Termination Date for a particular series of DIVS, DIVS 
holders' rights will cease except as to rights to unpaid dividends 
declared as of a record date occurring prior to the Termination Date.

OWLS

    Each OWLS will confer the right to receive on the Termination Date 
that number of common shares to which the OWLS relate having an 
aggregate value (determined solely by reference to the market price) 
equal to the lesser of (i) the Termination Claim for that class of OWLS 
or (ii) the market price of the common shares on the Termination 
Date.\5\

    \5\ All references to market price are to the last sale price on 
the relevant day as set forth on the appropriate consolidated tape, 
or if there is no such last sale price, the mean of the closing bid 
and ask price or as otherwise approved by the Commission prior to 
the commencement of trading in a series.
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    For example, if the Termination Claim for a class of OWLS is $50, 
and on the Termination Date of the OWLS the market price of the related 
common stock is $80, a holder of 100 OWLS would be entitled to receive 
that number of common shares with an aggregate market value of 
100 x $50=$5,000. $5,000/$80 equals 62.5 shares, so that an owner would 
be entitled to 62 whole shares and a payment of cash in lieu of the 
fractional share of $40.\6\ Brokers holding short component positions 
for clients would make delivery of the shares and cash for any 
fractional shares. Brokers holding long component positions for their 
clients would receive the shares and cash for any fractional shares, 
which they will forward to their clients.

    \6\ If the market price of a share of the related common stock 
on the Termination Date had been $50 or less, the owner of the 100 
OWLS would have received all 100 common shares. Exercise procedures 
in accordance with OCC guidelines would be followed on Termination 
Date.
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RISKS

    RISKS will reflect the appreciation in value of the underlying 
stock above the Termination Claim for that series of Americus 
Derivatives. Specifically, RISKS will constitute the right to receive 
on the Termination Date that number of related common shares having a 
market value equal to the amount, if any, by which the market price of 
the related common shares exceeds the Termination Claim.
    From the example given in the discussion above of OWLS, an owner of 
100 RISKS with respect to the same series of OWLS would be entitled to 
receive the following number of common shares: 100 x ($80-$50)=$3,000. 
$3,000/$80 equals 37.5 common shares, so the owner of the 100 RISKS 
would be entitled to 37 whole shares and a cash payment in lieu of the 
fractional share of $40.\7\

    \7\ If the market price of a common share had been $50 (the 
Termination Claim) or less, the RISKS would expire worthless.
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    On the Termination Date for a class of OWLS or RISKS, OCC will 
instruct delivery, based on information reconciled with the brokers. 
Shares of the underlying stock will be delivered from the accounts of 
investors short the OWLS or RISKS, to satisfy the entitlements of those 
investors long the OWLS and RISKS.

Adjustments for Stock Splits or Stock Dividends

    An owner of DIVS, OWLS and RISKS will become the owner of the 
number of such securities adjusted proportionally, and, in the case of 
OWLS and RISKS, the Termination Claim adjusted proportionally as well, 
on the record date for such event. For example, if a company has a two 
for one stock split, an owner of 100 DIVS would become the owner of 200 
DIVS with the same Termination Date and receive dividends reflecting 
the new dividend policy; an owner of 100 OWLS would become the owner of 
200 OWLS with the same Termination Date and one-half the Termination 
Claim; and an owner of 100 RISKS would become the owner of 200 RISKS 
with the same Termination Date and one-half the Termination Claim on 
such record date.
    In the case of a stock dividend of 5% and OWLS and RISKS with a 
Termination Claim of $50, the adjustments would be as follows: an owner 
of 100 DIVS would become the owner of 105 DIVS; an owner of 100 OWLS 
would become the owner of 105 OWLS with an adjusted Termination Claim 
of $47.62; and an owner of 100 RISKS would become the owner of 105 
RISKS with an adjusted Termination Claim of $47.62.

Liquidating, Special or Partial Liquidating Dividends

    With regard to full liquidating dividends to shareholders, payments 
would be allocated among owners of DIVS, OWLS and RISKS of the same 
class as follows:

--DIVS would receive the discounted present value at the date of 
distribution of the liquidating dividend of an imputed dividend 
stream. It would be assumed that the most recent four quarterly 
dividends (unless the issuer has announced a change in its dividend 
policy, in which case assumed dividends complying with the policy 
would be used) of the issuer would continue through the latest 
record date preceding the Termination Date. That cash stream would 
be discounted to present value assuming payment on the usual 
dividend payment dates, using as the discount rate the interest rate 
on U.S. Treasury Notes having the closest maturity to the 
Termination Date.
--The remaining amount would be allocated between OWLS and RISKS 
based upon an adjusted Termination Claim. The Termination Claim 
would be adjusted by discounting the Termination Claim to its 
present value at the date of distribution of the liquidating 
dividend. The discount rate used would be the interest rate on U.S. 
Treasury Notes having the closest maturity to the Termination Date. 
OWLS will receive the amount of the distribution up to the adjusted 
Termination Claim, with any excess going to the RISKS.

    Any adjustments made to the terms of the contract, as a result of 
any of these triggering events, would be handled for these instruments 
in much the same way as with any other standardized option and would be 
in accordance with any applicable OCC rules.
    Transmission of money to beneficial owners would be accomplished 
through OCC and its participants in the same manner in which the 
substitute dividends would be transmitted from short DIVS to long DIVS.
    For purposes of allocating distributions among DIVS, OWLS and 
RISKS, special dividends are those dividends which are declared as such 
by the issuer of the common shares, if that issuer does not also 
declare that it is changing its dividend policy by reducing or 
increasing the amount of its regular dividends. Special dividends would 
be allocated among DIVS, OWLS and RISKS as follows:

--DIVS would be allocated and receive that portion of the special 
dividend equal to the quotient of (a) the annual dividend divided by 
(b) the last scale price \8\ of the stock on the day prior to the 
ex-distribution date reduced by the amount of the special dividend 
which quotient is multiplied by (c) the amount of the special 
dividend.

    \8\ If there is no last sale price, the mean of the closing bid 
and ask prices will be used.
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--If the remaining portion of the special dividend were less than 
the present value of the Termination Claim, the Termination Claim 
for OWLS and RISKS would be reduced, but not below zero, by the 
future value at the Termination Date of the remaining portion of the 
special dividend. All determinations of present value and future 
value are computed using the maximum potential internal rate of 
return (``IRR'') for OWLS. The maximum potential 

[[Page 44536]]
IRR for OWLS is computed assuming purchase on the ex-distribution date 
at a price equal to the average closing price for the 10-day trading 
period preceding the announcement of the special dividend and 
receipt of the Termination Claim on the Termination Date (such 
discount rate being hereinafter the ``maximum potential IRR for 
OWLS'').
--The remaining portion would be allocated and paid to the OWLS.
--If the remaining portion of the special dividend equals or exceeds 
the present value of the Termination Claim, OWLS would receive that 
portion of the special dividend equal in amount to such present 
value; the Termination Claim would be adjusted to zero and any 
additional amount of the special dividend would be allocated and 
paid to the RISKS. Any further liquidating, special or partial 
liquidating dividends would be allocated between DIVS and RISKS; the 
OWLS having received in full an adjusted Termination Claim.

    For purposes of allocating distributions made by the issuer of the 
related common shares among DIVS, OWLS and RISKS, partial liquidating 
dividends are all dividends other than regular dividends, liquidating 
dividends and special dividends. It is assumed that partial liquidating 
dividends would be accompanied by an announcement of a reduction in the 
regular dividends paid by the issuer.
    Partial liquidating dividends would be split among the three 
components as follows:

--DIVS would be allocated and receive that portion of the partial 
liquidating dividend equal to the discounted present value of the 
amount of the reduction in the quarterly dividend as stated in the 
newly announced policy of the issuer. This computation would be made 
assuming payment on the usual dividend payment dates, using as the 
discount rate the interest rate on U.S. Treasury Notes having the 
closest maturity to the Termination Date.
--If the remaining portion of the partial liquidating dividend were 
less than the present value of the Termination Claim, the 
Termination Claim for OWLS and RISKS would be reduced, but not below 
zero, by the future value at the Termination Date of the remaining 
portion of the partial liquidating dividend. The determination of 
present value and future value for OWLS will be computed using the 
maximum potential IRR for OWLS. In this case, the maximum potential 
IRR for OWLS is computed assuming purchase on the ex-distribution 
date at a price equal to the average closing price for the 10-day 
trading period preceding the announcement of the partial liquidating 
dividend and receipt of the Termination Claim on the Termination 
Date.
--That remaining portion would be allocated and paid to the OWLS.
--If the remaining portion of the partial liquidating dividend 
equals or exceeds the present value of the Termination Claim, OWLS 
would receive that portion of the liquidating dividend equal in 
amount to such present value; the Termination Claim would be 
adjusted to zero and any additional amount of the partial 
liquidating dividend would be allocated and paid to the RISKS. Any 
further liquidating or partial liquidating dividends would be 
allocated between DIVS and RISKS; the OWLS having received in full 
an adjusted Termination Claim.

    Spin-offs and Split-ups. In the case of spin-off or split-up 
transactions, each DIVS, OWLS and RISKS holder would become the owner 
of two issues of DIVS, OWLS and RISKS--one for each company and each 
having the same number of such securities with the same Termination 
Date. The Termination Claim would be allocated between the two issues 
of OWLS and the two issues of RISKS based upon the ratio of the prices 
of the underlying common shares at the opening of trading in the 
underlying common shares on the effective date of the spin-off or 
split-up transaction.
    Mergers. If the company that issued the common shares from which 
the DIVS, OWLS and RISKS were created were to be the surviving company, 
there would be no adjustment to the terms of the DIVS, OWLS and RISKS 
unless, as part of such transaction, there was a stock split, stock 
dividend, partial liquidating dividend or other corporate transaction 
that would require adjustment. If the issuer were not the surviving 
entity, each owner of DIVS, OWLS and RISKS would receive his share of 
the compensation given for each common share as if a liquidating 
dividend was paid or an exchange offer was made, as appropriate.

Rights Offerings

    If the issuer of stock from which DIVS, OWLS and RISKS were created 
were to make a rights offering, the rights would be allocated to the 
OWLS and the Termination Claim would be reduced by the future value of 
the rights calculated to the Termination Date. The future value would 
be computed using as the interest rate, the maximum potential IRR for 
OWLS and using the average closing sale price for the first 10 days of 
trading in the rights.

Exchange or Tender Offers

    If there were an exchange or tender offer for the common shares to 
which DIVS, OWLS and RISKS relate, existing option procedures and 
practices would apply.
    These particularized procedures for adjusting the contract 
specifications of any open interest in any particular DIVS, OWLS and 
RISKS series will be well documented in the eventual disclosure 
document to be published by the issuer, OCC.
    The Exchange believes the proposed rule change is consistent with 
Section 6(b)(5) of the Securities Exchange Act of 1934 which provides 
in part that the rules of the Exchange be designed to prevent 
fraudulent and manipulative acts and practices, to facilitate 
transaction in securities, to remove impediments to and perfect the 
mechanism of a free and open market and to protect investors and the 
public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change will impose no 
burden on competition.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Within 35 days of the publication of this notice in the Federal 
Register or within such other 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 the 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, 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 

[[Page 44537]]
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 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-95-19 and should be 
submitted by September 18, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\

    \9\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21276 Filed 8-25-95; 8:45 am]
BILLING CODE 8010-01-M