[Federal Register Volume 60, Number 183 (Thursday, September 21, 1995)]
[Notices]
[Pages 49031-49032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23378]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36236; File No. SR-PSE-95-18]


Self-Regulatory Organizations; Pacific Stock Exchange, Inc.; 
Order Granting Partial, Accelerated Approval of a Proposed Rule Change 
Relating to the PSE Technology Index and Opening Price Settlement of 
Component Securities

September 14, 1995.
    On August 21, 1995, the Pacific Stock Exchange, Inc. (``PSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to increase the existing position 
and exercise limits for options on the PSE Technology Index 
(``Technology Index'' or ``Index'') and change the terms of option 
contracts overlying the Index from closing price (p.m.) settlement to 
opening price (a.m.) settlement.

    \1\15 U.S.C. 78s(b)(1) (1988 & Supp. V 1993).
    \2\17 CFR 240.19b-4 (1994).
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    Notice of the proposed rule change was published for comment and 
appeared in the Federal Register on August 31, 1995.\3\ No comments 
were received on the proposal. This order grants partial accelerated 
approval of that portion of the proposal relating to a.m. settlement of 
options on the Index.\4\

    \3\See Securities Exchange Act Release No. 36146 (August 23, 
1995), 60 FR 45509.
    \4\In partially approving the PSE proposal, the Commission is 
not approving, at this time, the portion of the proposal relating to 
increasing the position and exercise limits on the Technology Index 
from 15,000 contracts to 37,500 contracts, with no more than 22,500 
of such contracts in the series with the nearest expiration month. 
That portion of the proposal has been published for comment. The 
comment period expires on September 21, 1995.
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I. Description of the Proposal

    On November 26, 1991, the Commission approved an exchange proposal 
to re-classify the Technology Index as a broad-based index for position 
limit and margin purposes.\5\ The Index is a price-weighted, European-
style\6\ index comprised of 100 stocks that are intended to represent a 
broad spectrum of companies principally engaged in manufacturing and 
service-related products within advanced technology fields.

    \5\Securities Exchange Act Release No. 29994, 56 FR 63536 (Dec. 
4, 1991). The Commission initially approved options trading on the 
Index in November 1983. See Securities Exchange Act Release Nos. 
20424, 48 FR 54557 (Dec. 5, 1983); and 20499, 48 FR 58880 (Dec. 23. 
1983).
    \6\A European-style option may only be exercised during a 
specified period prior to expiration.
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    The Exchange is proposing that options on the Index be settled 
based on opening market prices for the underlying securities rather 
than based on closing market prices for such underlying securities as 
originally approved. Accordingly, the last day of trading for options 
on the Index shall be the business day preceding the last day of 
trading in the underlying securities prior to expiration. This day will 
generally be the Thursday preceding an expiration Friday. The current 
index value at the expiration of an opening price settled index option 
shall be determined based on opening prices on the last day of trading 
in the underlying securities prior to expiration (i.e., the Friday 
immediately preceding the third Saturday of the month). In this regard, 
for settlement purposes, the first reported sale (opening) prices of 
the underlying securities on such day would be used, except that the 
last reported sale price of such a security from the previous day would 
be used in any case where the security does not open for trading on 
that day. There are no currently outstanding Technology Index option 
series.

II. Discussion

    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),\7\ in particular, in 
that it should help remove impediments to and perfect the mechanism of 
a free and open market, promote just and equitable principles of trade 
and protect investors and the public interest. Moreover, the Commission 
believes that the PSE's proposal to reclassify the Technology Index 
option from a closing price settled contract to an opening price 
settled contract may help ameliorate the price effects associated with 
expirations of Technology Index options.

    \7\15 U.S.C. 78f(b)(5)(1982).
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    Further, the Commission believes that the PSE's Technology Index 
option opening price settlement proposal is a reasonable attempt to 
address and ameliorate the effects on the equity markets that have been 
associated with, but not necessarily the result of, the expiration of 
index options.
    The Commission has identified several benefits to opening-price 
settlement for broad-based index options. First, an opening price 
settlement method for Technology Index options can help facilitate the 
development of contra-side interest to alleviate order imbalances in 
underlying markets from the unwinding of index-related positions. In 
contrast to expirations associated with closing price settled options, 
firms providing contra-side interest will not necessarily assume 
overnight or weekend position risks because they will have the rest of 
the day to liquidate or trade out of their positions. Second, even if 
the opening price settlement results in a significant change in 
underlying stock prices, participants in the markets for those stocks 
will have the remainder of the trading day to adjust to those price 
movements and to determine whether those movements reflect changes in 
fundamental values or rather short-term supply/demand considerations. 
In addition, settling Technology Index options at the underlying market 
opening will allow corresponding stock positions associated with 
expiring Technology Index contracts to be subject to the NYSE's 
auxiliary opening procedures implemented on expiration Fridays, where 
applicable. These procedures provide for the orderly entry, 
dissemination and matching of orders. The Commission also notes that 
because currently there are no Technology Index options series with 
closing settlement values outstanding, approval of the proposal will 
not result in investor confusion. This will also 

[[Page 49032]]
ensure that all series of Technology Index options utilize the same 
opening price settlement procedures.
    The Commission finds good cause for approving that portion of the 
rule change relating to a.m. settlement prior to the thirtieth day 
after the date of publication of notice thereof in the Federal 
Register. As discussed above, and on the basis of the expirations over 
the past several years, the Commission believes that opening-price 
settlement of stock index options and futures is beneficial. Opening-
price settlement procedures have operated smoothly and effectively and 
have contributed to dampening expiration Friday volatility. The 
Commission believes opening price settlement for Technology Index 
options will permit the market to benefit from the pre-opening 
procedures described above when positions in the contract are unwound 
on expiration Fridays. In addition, because there are currently no 
outstanding Technology Index options series, all new Technology Index 
options listed in the future will have the same opening settlement 
procedures, thereby avoiding investor confusion. For these reasons, the 
Commission believes that it is consistent with Sections 19(b)(2) and 
6(b)(5) of the Act to approve the PSE's Technology Index opening price 
based settlement proposal on an accelerated basis.
    It Therefore Is Ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the portion of the proposed rule change (SR-PSE-95-18) 
relating to the changing of the settlement feature of options on the 
Technology Index from closing price settlement to opening price 
settlement is approved on an accelerated basis.

    \8\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.\9\

    \9\17 CFR 200.30-3(a)(12)(1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-23378 Filed 9-20-95; 8:45 am]
BILLING CODE 8010-01-M