[Federal Register Volume 60, Number 203 (Friday, October 20, 1995)]
[Notices]
[Pages 54274-54279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26004]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36369; File No. SR-Phlx-95-22]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1, 2, 3, 4 and 5 to the Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc., Relating to the Listing and Trading 
of Options on the Phlx Super Cap Index

October 13, 1995.

I. Introduction

    On April 10, 1995, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed a proposed rule change with the Securities and 
Exchange Commission (``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ to provide for the listing and trading of index 
options on the Phlx Super Cap Index (``Super Cap Index'' or ``Index'').

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposal was published for comment and appeared in 
the Federal Register on May 16, 1995.\3\ On June 23, 1995, the Phlx 
submitted to the Commission Amendment No. 1 to its proposed rule 
change.\4\ On July 24, 1995, the Phlx submitted to the Commission 
Amendment No. 2 to its proposed rule change.\5\ On August 7, 1995, the 
Phlx submitted to the Commission Amendment No. 3 to its proposed rule 
change.\6\ On October 12, 1995, the Phlx submitted to the Commission 
Amendment Nos. 4 and 5 to its proposed rule change.\7\ No 

[[Page 54275]]
comment letters were received on the proposed rule change. This order 
approves the Exchange's proposal, as amended.

    \3\ See Securities Exchange Act Release No. 35699 (May 10, 
1995), 60 FR 26065.
    \4\ The Phlx submitted Amendment No. 1 to its proposed rule 
change to replace Walmart with Philip Morris as one of the component 
issues of the Super Cap Index. The Phlx also proposes to set a new 
starting value of 350 as of May 31, 1995. Finally, the Phlx proposes 
to list LEAPs on the Super Cap Index pursuant to Phlx Rule 
1101A(b)(iii). See Letter from Michele Weisbaum, Associate General 
Counsel, Phlx, to John Ayanian, Attorney, Office of Market 
Supervision (``OMS''), Division of Market Regulation (``Market 
Regulation''), Commission, dated June 23, 1995 (``Amendment No. 
1'').
    \5\ The Phlx submitted Amendment No. 2 to its proposed rule 
change to withdraw the proposed amendment to Phlx Rule 1006A. See 
Letter from Michele Weisbaum, Associate General Counsel, Phlx, to 
John Ayanian, Attorney, OMS, Market Regulation, Commission, dated 
July 24, 1995 (``Amendment No. 2'').
    \6\ The Phlx submitted Amendment No. 3 to its proposed rule 
change to indicate that at all times, the 5 components of the Index 
must be options eligible. Therefore, the Index will be composed of 
the top 5 options eligible common stocks of U.S. Companies, measured 
by capitalization traded on the NYSE. The Phlx also indicated that 
it will evaluate the Index on a semi-annual basis to ensure that it 
is an accurate representation of the intended market character of 
the Index. If any components would need to be removed pursuant to 
these requirements, the Exchange will immediately notify the staff 
of the Division of Market Regulation and will file a new Rule 19b-4 
submission if so determined by the Division staff prior to opening 
any new series of options. Additionally, the Exchange proposes to 
immediately replace any component that drops out of the top 10 
highest capitalized stocks on the NYSE, without waiting for the next 
semi-annual review. The Exchange also proposes to notify the 
Division staff if, at any time, any one component issue represents 
50% or more of the Index. See Letter from Michele Weisbaum, 
Associate General Counsel, Phlx, to John Ayanian, Attorney, OMS, 
Market Regulation, Commission, dated August 7, 1995 (``Amendment No. 
3'').
    \7\ The Phlx submitted Amendment No. 4 to its proposed rule 
change to indicate that pursuant to proposed amendment to Phlx Rule 
1047A, the opening rotation for Super Cap Index options may be held 
after underlying securities representing 75% of the current index 
value of all the securities underlying the index have opened for 
trading on the primary market. See Letter from Michele Weisbaum, 
Associate General Counsel, Phlx, to John Ayanian, Attorney, OMS, 
Market Regulation, Commission, dated October 12, 1995 (``Amendment 
No. 4'').
    Additionally, the Phlx submitted Amendment No. 5 to its proposed 
rule change to delete the reference to the Super Cap Index in 
proposed amended Phlx Rule 1101A, Commentary .01. The Phlx 
represents that it will include the proper reference to the Super 
Cap Index when it files proposal SR-Phlx-95-37 with the Commission. 
Specifically, the Phlx will propose to amend Phlx Rule 1101A, 
Commentary .01 to indicate that transactions may be effected until 
4:15 p.m. each business day through the last trading day (ordinarily 
a Thursday) prior to expiration for Super Cap Index options, as well 
as other a.m. settled index options. The Exchange further represents 
that it will issue a circular to Phlx members disclosing this 
information. See Letter from Michele Weisbaum, Associate General 
Counsel, Phlx, to John Ayanian, Attorney, OMS, Market Regulation, 
Commission, dated October 12, 1995 (``Amendment No. 5'').
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II. Description of the Proposal

A. General

    The Phlx proposes to list for trading options on the Phlx Super Cap 
Index, a new securities index developed by the Phlx and based on the 
top five capitalized, options eligible U.S. stocks traded on the New 
York Stock Exchange (``NYSE''). The Phlx further proposes to amend Phlx 
Rules 1000A, Applicability and Definitions; 1001A, Position Limits; 
1047A, Trading Rotations, Halts or Reopenings; 1101A, Terms of Option 
Contracts; and 722, Margin Accounts, to include references to this 
proposed Index. The Phlx will use a capitalization-weighted methodology 
to calculate the value of the Index.\8\

    \8\ See Infra Section II.E, entitled ``Calculation of Index,'' 
for a description of this calculation method.
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B. Composition of the Index

    The Index was designed by the Exchange and is composed of the 5 
most highly capitalized, standardized options-eligible common stocks of 
U.S. companies currently trading on the NYSE.\9\ All component stocks 
are ``reported securities,'' as that term is defined in Rule 11Aa3-1 of 
the Act.\10\

    \9\ Currently, the components of the Index are: General Electric 
Company; Exxon Corporation; AT&T Corp.; Coca-Cola Company; and 
Philip Morris Companies Inc.
    \10\ See 17 CFR 240.11Aa3-1. A ``reported security'' is defined 
in paragraph (a)(4) of this rule as ``any listed equity security or 
NASDAQ security for which transaction reports are required to be 
made on a real-time basis pursuant to an effective transaction 
reporting plan.'' A ``transaction reporting plan'' is defined in 
paragraph (a)(2) of this rule as ``any plan for collecting, 
processing, making available or disseminating transaction reports 
with respect to transactions in reported securities filed with the 
Commission pursuant to, and meeting the requirements of, this 
section.''
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    As of May 31, 1995, the market capitalizations of the individual 
securities in the Index ranged from a high of $98.2 billion (General 
Electric Company) to a low of $61.6 billion (Philip Morris Companies 
Inc.), with the mean being $81.4 billion. The market capitalization of 
all the securities in the Index was $406.9 billion. The total number of 
shares outstanding on that date for the stocks in the Index ranged from 
a high of 1.7 billion shares (General Electric Company) to a low of 844 
million shares (Philip Morris Companies Inc.). Also on that date, the 
price per share in the U.S. of the securities in the Index ranged from 
a high of $72.88 (Philip Morris Companies Inc.) to a low of $50.75 
(AT&T Corp.). In addition, the average daily trading volume in the U.S. 
of the stocks in the Index, for the six-month period from January 1, 
1995 to June 30, 1995, ranged from a high of 2.4 million shares per day 
(AT&T Corp.) to a low of 1.2 million shares per day (Exxon 
Corporation). Lastly, no one component accounted for more than 24.15% 
(General Electric Companies), or less than 15.13% (Philip Morris 
Companies), of the Index's total value.\11\

    \11\ The weightings of all 5 components of the Super Cap Index 
as of May 31, 1995 are as follows: General Electric Company--24.15%; 
Exxon Corporation--21.79%; AT&T Corp.--19.74%; Coca-Cola Company--
19.20%, and Philip Morris Companies Inc.--15.13%.
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C. Maintenance

    The Phlx has retained Bridge Data, Inc. to compute and do all 
necessary maintenance of the Index. The Phlx may change the composition 
of the Index at any time, subject to compliance with the maintenance 
criteria discussed herein, to reflect the 5 largest options eligible 
stocks, by capitalization, listed on the NYSE. In accordance with Phlx 
Rule 1009A, if it becomes necessary to replace a security in the Index, 
the Exchange represents that it will be replaced with a stock which 
reflects the intended market character of the Index.\12\ If any change 
in the nature of any stock in the Index occurs as a result of 
delisting, merger, acquisition or otherwise, the Exchange will take 
appropriate steps to delete that stock from the Index and replace it 
with another stock which is in the top five, as measured by 
capitalization, of options eligible issues traded on the NYSE at the 
time the PHlx makes the substitution. The Exchange represents that all 
of the stocks comprising the Index are options eligible and have 
overlying options currently trading.\13\ If the Exchange determines to 
increase or decrease the number of component issues, the Exchange will 
submit a new proposed rule change pursuant to Section 19(b) of the Act 
and that proposal would have to be specifically approved by the 
Commission before any trading in the revised index could commence.\14\

    \12\ The Exchange represents that any future replacement 
component securities will be in the top five, as measured by 
capitalization, of options eligible issues traded on the NYSE at the 
time the Phlx makes the substitution.
    \13\ The Phlx's options listing standards, which are uniform 
among the options exchanges, provide that a security underlying an 
option must, among other things, meet the following requirements: 
(1) The public float must be at least 7,000,000 shares; (2) there 
must be a minimum of 2,000 stockholders; (3) trading volume in the 
U.S. must have been at least 2.4 million over the preceding twelve 
months; and (4) the U.S. market price must have been at least $7.50 
for a majority of the business days during the preceding three 
calendar months. See Phlx Rule 1009, Commentary .01.
    \14\ See infra note 30.
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    The Phlx will evaluate the Index on a semi-annual basis to ensure 
that it is an accurate representation of the five largest options 
eligible stocks, measured by capitalization, traded on the NYSE. Public 
notice of any changes will be made immediately and the Phlx will then 
make any substitutions, if necessary, of the component issues of the 
Index on the first business day after the January and July expirations 
for the Super Cap Index options. If any components would have to be 
changed because a component issue was no longer options-eligible, the 
Exchange proposes to immediately notify the Commission's Division of 
Market Regulation (``Division'') and will file a new Rule 19b-4 
submission prior to opening any new series of options, if so required 
by the Division staff. Further, if at any time during the year, a 
component issue of the Index drops out of the top 10 highest 
capitalized stocks on the NYSE, the Exchange will not wait for the next 
semi-annual review to replace it.\15\

    \15\ See Amendment No. 3, supra note 6.
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D. Applicability of Phlx Rules Regarding Index Options

    Except as modified by this order,\16\ Phlx Rules 1000A through 
1103A, and Phlx Rules 1000 through 1070, in general, will be applicable 
to Super Cap Index options. Those rules address, among other things, 
the applicable position and exercise limits, policies regarding trading 
halts and suspensions, restrictions on exercise, and margin treatment 
for the Super Cap Index options.

    \16\ See infra Section II,G.
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E. Calculation of the Index

    The Phlx Super Cap Index will be calculated using a capitalization-
weighting methodology. The representation of each security in the Index 
will be proportional to the security's last sale price multiplied by 
the total number of shares outstanding, in relation to the total market 
value of all of the securities in the Index. The value of the Index was 
set to equal 350 on May 31, 1995.\17\ As of August 1, 1995, the Index 
value was 357.72. The formula for calculating the Index value is as 
follows:

    \17\ See Amendment No. 1, supra note 4.
    [GRAPHIC][TIFF OMITTED]TN20OC95.000
    
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Where:


[[Page 54276]]

Total Capitalization=Sum of Market Values (price x shares outstanding) 
for all component securities
Divisor=The number which, when divided from the total capitalization 
when the Index was initially calculated (on May 31, 1995), yielded an 
Index value of 350.

    To maintain the continuity of the Index, the divisor will be 
adjusted to reflect non-market changes in the capitalization of the 
component securities as well as changes in the composition of the 
Index. Changes that may result in divisor adjustments include, but are 
not limited to, stock splits and dividends, spin-offs, certain rights 
issuances, and mergers and acquisitions. The formula for adjusting the 
divisor is as follows:
[GRAPHIC][TIFF OMITTED]TN20OC95.001

    Adjustments in the value of the Index which are necessitated by the 
addition and/or deletion of an issue from the Index are made by adding 
and/or subtracting the market value of the relevant issues.
    The Super Cap Index will be updated dynamically at least once every 
15 seconds during the trading day.\18\ The Phlx has retained Bridge 
Data, Inc. to compute the value 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''). The Index value will also be available on broker/dealer 
interrogation devices to subscribers of the option information.

    \18\ To the extent that a component stock does not open for 
trading on a particular trading day, or trading in that component 
stock is halted during the course of a particular trading day, the 
last reported sale price of such security will be used for purposes 
of calculating the current Index value.
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    The Index value for purposes of settling outstanding Index options 
contracts upon expiration will be calculated based upon the regular way 
opening sale prices for each of the Index's component stocks on the 
last trading day prior to expiration. Once all of the component stocks 
have opened, the value of the Index will be determined and that value 
will be used as the final settlement value for expiring Index option 
contracts. If any component stocks do not open for trading on the last 
trading day before expiration, then the last reported sale price of 
such security will be used in any case where that security does not 
trade on that day.

F. Contract Specifications

    The proposed options on the Index will be cash-settled, European-
style options.\19\ The Super Cap Index options will trade from 9:30 
a.m. to 4:15 p.m. eastern time.\20\ The Index multiplier will be 100. 
Strike prices will be set at five point intervals in terms of the 
current value of the Index.\21\

    \19\ A European-style option can be exercised only during a 
specified period before the option expires.
    \20\ Transactions in the Super Cap Index option may be effected 
on the Exchange until 4:15 p.m. each business day and through the 
last trading day (ordinarily a Thursday) prior to expiration. See 
Amendment No. 5, supra note 7.
    \21\ Additional exercise prices will be added in accordance with 
Phlx Rule 1101A(a).
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    The Phlx will trade consecutive and cycle month series pursuant to 
Phlx Rule 1101A. Specifically, there will be three expiration months 
from March, June, and December cycle plus two additional near-term 
months so that the three nearest term months will always be available. 
In addition, pursuant to and in accordance with Phlx Rule 
1101A(b)(iii), the Exchange will list and trade series of LEAPs on the 
Index.\22\

    \22\ See Amendment No. 1, supra note 4.
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    Index options will expire on the Saturday following the third 
Friday of the expiration month. Because options on the Index will 
settle based upon the opening prices of the component stocks on the 
last business day before expiration (ordinarily a Friday), the last 
trading day for an expiring Index option series will be the second to 
the last business day before expiration (ordinarily a Thursday).

G. Position and Exercise Limits, Margin Requirements, and Trading 
Rotations, Halts or Reopenings

    Because the Super Cap Index is not classified as either an 
``industry index'' or a ``market index'' under Phlx rules, the Exchange 
proposes new rules that specifically address the Super Cap Index.\23\ 
The Exchange proposes amendments to rules governing margin 
requirements,\24\ position and exercise limits, and trading rotation, 
halt, or reopening procedures.\25\

    \23\ See Phlx Rule 1000A(11).
    \24\ Pursuant to the proposed amendment to Phlx Rule 722, the 
margin requirements for the Index options will be: (1) For short 
options positions, 100% of the current market value of the options 
contract plus 20% of the underlying aggregate Index value, less any 
out-of-the-money amount, with a minimum requirement of the options 
premium plus 10% of the underlying Index value; and (2) for long 
options positions, 100% of the options premium paid. These margin 
requirements are identical to industry index, and equity options 
margin requirements.
    \25\ Pursuant to proposed amendment to Phlx Rule 1047A, the 
opening rotation for industry index options and Super Cap Index 
options may be held after underlying securities representing 75% of 
the current index value of all the securities underlying the index 
have opened for trading on the primary market. Once the underlying 
securities representing 90% of the current index value of all the 
securities underlying the index have opened for trading on the 
primary market, the opening rotation must be held as soon as 
practicable. Additionally, trading on the Phlx of Index options may 
be halted whenever trading in underlying securities whose weighted 
value represents more than 10% of the Index value are halted or 
suspended. See Amendment No. 4, supra note 7.
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    Specifically, pursuant to proposed amendments to Phlx Rules 1001A 
and 1002A, respectively, the position and exercise limits for the Index 
options will be 5,500 contracts on the same side of the market. The 
Super Cap Index will not have available a position limit hedge 
exemption. Additionally, Super Cap Index option positions will not be 
aggregated with equity option positions on the same underlying 
component stocks for the purpose of calculating position limits.

H. Surveillance

    The Exchange will use the same surveillance procedures currently 
utilized for each of the Exchange's other index options to monitor 
trading in the Super Cap Index options. These procedures include 
complete access to trading activity in the underlying securities. 
Further, the Intermarket Surveillance Group Agreement, dated July 14, 
1983, as amended on January 29, 1990, will be applicable to the trading 
of options on the Index.\26\

    \26\ The Intermarket Surveillance Group (``ISG'') was formed on 
July 14, 1983 to, among other things, coordinate more effectively 
surveillance and investigative information sharing arrangements in 
the stock and options markets. See Intermarket Surveillance Group 
Agreement, July 14, 1983. The most recent amendment to the ISG 
Agreement, which incorporates the original agreement and all 
amendments made thereafter, was signed by ISG members on January 29, 
1990. See Second Amendment to the Intermarket Surveillance Group 
Agreement, January 29, 1990. The members of the ISG are: the 
American Stock Exchange; the Boston Stock Exchange, Inc.; the 
Chicago Board Options Exchange, Inc.; the Chicago Stock Exchange, 
Inc.; the National Association of the Securities Dealers, Inc.; the 
NYSE; the Pacific Stock Exchange, Inc.; and the Phlx. Because of the 
potential opportunities for trading abuses involving stock index 
futures, stock options, and the underlying stock and the need for 
greater sharing of surveillance information for these potential 
intermarket trading abuses, the major stock index futures exchanges 
(e.g., the Chicago Mercantile Exchange and the Chicago Board of 
Trade) joined the ISG as affiliate members in 1990.
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III. Commission Finding and Conclusions

    The Commission finds that the proposed rule change is consistent 
with 

[[Page 54277]]
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) of the Act.\27\ Specifically, the 
Commission finds that the trading of Super Cap Index options will serve 
to promote the public interest and help to remove impediments to a free 
and open securities market by providing investors with a means of 
hedging exposure to market risk associated with securities representing 
the most highly capitalized companies.\28\

    \27\ 15 U.S.C. 78f(b)(5).
    \28\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of any new option proposal upon a finding that 
the introduction of such new derivative instrument that served no 
hedging or other economic function, because any benefits that might 
be derived by market participants likely would be outweighed by the 
potential for manipulation, diminished public confidence in the 
integrity of the markets, and other valid regulatory concerns. In 
this regard, the trading of listed Index options will provide 
investors with a hedging vehicle that should reflect the overall 
movement of stocks representing the 5 largest issues, as measured by 
capitalization, that are listed on the NYSE.
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A. Index Design and Structure

    The Commission believes that it is appropriate to allow the Phlx to 
trade options based on the Super Cap Index, which is comprised of the 
top five capitalized, options-eligible issues traded on the NYSE. The 
Commission recognizes, however, that the Super Cap Index does not 
properly qualify as either as market or industry index. The Super Cap 
Index consists of a very small number of stocks, and therefore does not 
qualify as a broad-based market index. Moreover, it does not represent 
any particular industry sector. In addition, as discussed in greater 
detail below, the small number of the index components raises concerns 
that the Index would be used as a surrogate for individual equity 
options trading. This raises questions as to whether the Super Cap 
Index should trade at all as an index product. Nevertheless, for the 
reasons discussed in more detail below, the Commission believes the 
Phlx has proposed a reasonable approach that specifically designates 
the Super Cap Index as eligible for options trading and that applies 
specific rules applicable to the Index options covering margin, 
position and exercise limits, trading rotations, halts, and reopenings, 
and trading hours.\29\

    \29\ See supra Sections II.F and II.G.
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    First, the extremely large capitalizations, very liquid markets, 
and relative weighings of the Index's component securities helps to 
reduce the potential for manipulation of the Index. Every component 
security of the Index is actively traded, with an average daily volume 
for the period from January 1, 1995 to June 30, 1995, ranged from a 
high of 2.4 million shares per day to a low of 1.2 million shares per 
day. The market capitalizations of the securities in the Index are very 
large, ranging from a high of $93.8 billion to a low of $59.7 billion 
as of April 5, 1995, with the mean being $78.7 billion. Second, 
although the Index is only comprised of five component securities, no 
on particular security dominates the Index. Specifically, as of May 31, 
1995, no one stock accounted for more than 24.15% of the Index's total 
capitalization. Third, every component of the Index must, at all times, 
be eligible for standardized options trading. Fourth, the five 
securities are derived from different industry sectors. Fifth, if the 
Phlx desires to increase or decrease the number of component securities 
from five, the Phlx will be required to seek Commission approval 
pursuant to Section 19(b)(2) of the Act.\30\ This will help protect 
against material changes in the composition and design of the Index 
that might adversely affect the Phlx's obligations to protect investors 
and to maintain fair and orderly markets in Index options. Finally, the 
Index is comprised, and in the future may only be comprised, of stocks 
listed and traded on the NYSE. This requirement will help to ensure 
that each component of the Index is a registered security subject to 
last sale reporting requirements in the United States and will further 
reduce the potential for manipulation of the value of the Index.

    \30\ The Commission notes that if an exchange should propose to 
list and trade an index with fewer than five equity stocks, it would 
be difficult for the Commission to allow it to be trade as an index 
product pursuant to SRO index option rules.
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B. Customer Protection

    The Commission believes that a regulatory system designed to 
protect public customers must be in place before the trading of 
sophisticated financial instruments, such as Super Cap Index options, 
can commence on a national securities exchange. The Commission notes 
that the trading of standardized exchange-traded options occurs in an 
environment that is designed to ensure, among other things, that: (1) 
The special risks of options are disclosed to public customers; (2) 
only investors capable of evaluating and bearing the risks of options 
trading are engaged in such trading; and (3) special compliance 
procedures are applicable to options accounts. Accordingly, because the 
Index options will be subject to the same regulatory regime as the 
other standardized options currently traded on the Phlx, the Commission 
believes that adequate safeguards are in place to ensure the protection 
of investors in Super Cap Index options.

C. Surveillance

    The Commission believes that a surveillance sharing agreement 
between an exchange proposing to list a security index derivative 
product and the exchange(s) trading the securities underlying the 
derivative product is an important measure for surveillance of the 
derivative and underlying securities markets. Such agreements ensure 
the availability of information necessary to detect and deter potential 
manipulations and other trading abuses, thereby making the security 
index product less readily susceptible to manipulation.\31\ In this 
regard, the Phlx, and the NYSE, which is the primary market for all of 
the stocks comprising the Index, as well as the markets currently 
trading individual equity options on the components, are all members of 
the ISG, which provides for the exchange of all necessary surveillance 
information.\32\

    \31\ See Securities Exchange Act Release No. 31243 (September 
28, 1992), 57 FR 45849 (October 5, 1992).
    \32\ See supra note 26.
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D. Market Impact

    The Commission believes that the listing and trading on the Phlx of 
options on the Super Cap Index will not have an adverse impact on the 
underlying securities markets.\33\ First, as described above, no 
security overwhelmingly dominates the Index. Second, because all five 
components of the Index must meet the Exchange's options listing 
standards, it will help to ensure that the component securities will 
remain liquid and actively traded and the Index will not be used as a 
surrogate to trade options on a security not eligible for options 
trading.

    \33\ In addition, the Phlx has represented that the Phlx and 
OPRA have the necessary systems capacity to support those new series 
of index options that would result from the introduction of options 
on the Super Cap Index. See Letter from William H. Morgan, Vice 
President, Trading Systems, Phlx, to Michael Walinskas, Branch 
Chief, OMS, Market Regulation, Commission, dated August 22, 1995; 
and Letter from Joseph P. Corrigan, Executive Director, OPRA, to 
Murray Ross, Secretary, Phlx, dated August 17, 1995.
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    Third, the five components of the Index are the five most highly-
capitalized, and five of the most actively-traded U.S. exchange listed 
securities. Specifically, as noted above, the market capitalizations of 
the individual securities in the Index, as of May 31, 1995, ranged from 
a high of 

[[Page 54278]]
$98.2 billion to a low of $61.6 billion. Additionally, the total number 
of shares outstanding on that date for the stocks in the Index ranged 
from a high of 1.7 billion shares to a low of 844 million shares. Also 
on that date, the price per share in the U.S. of the securities in the 
Index ranged from a high of $72.88 to a low of $50.75. In addition, the 
average daily trading volume in the U.S. of the stocks in the Index, 
for the six-month period from January 1, 1995 to June 30, 1995, ranged 
from a high of 2.4 million shares per day, to a low of 1.2 million 
shares per day. As a result, the component securities of the Index 
represent the absolute highest levels of market capitalization and 
liquidity of companies listed on any U.S. exchange.
    Fourth, the 5,500 contract position and exercise limits applicable 
to the Index options and the lack of a hedge exemption will serve to 
further minimize potential manipulation and market impact concerns. 
Additionally, unlike position and exercise limits for industry index 
options which currently fluctuate depending on concentration levels and 
trading volume of the underlying component securities, the Super Cap 
Index position and exercise limits will remain set at the 5,500 
contract level under Phlx rules.\34\ The Commission believes that 
setting the position and exercise limits relatively low for an index 
composed of such highly capitalized stocks and eliminating the hedge 
exemption should help to alleviate concerns that the Index would be 
used by market participants to exceed the equity position limits for 
individual equity options on the component securities.

    \34\ See Securities Exchange Act Release No. 36194 (September 6, 
1995), 60 FR 47637 (September 13, 1995) (order approving new three-
tiered position and exercise limits for industry index options. See 
also SR-Phlx-95-16. Any proposed increase in the position and 
exercise limits for Super Cap Index options would have to be 
submitted as a proposed rule change under Section 19(b) of the Act 
and specifically approved by the Commission.
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    The Commission believes that it is appropriate that margin 
requirements for the Super Cap Index options will be: (1) For short 
options positions, 100% of the current market value of the options 
contract plus 20% of the underlying aggregate Index value, less any 
out-of-the-money amount, with a minimum requirement of the options 
premium plus 10% of the underlying Index value; and (2) for long 
options positions, 100% of the options premium paid, as proposed in 
amended Phlx Rule 722--``Margin Accounts.'' This margin requirement is 
the same as applied to both industry index options and individual 
equity options. The Commission believes that this proposed margin 
requirement is appropriate for an index of only five securities.
    Lastly, the Commission believes that settling expiring Super Cap 
Index options based on the opening prices of component securities is 
consistent with the Act. As noted in other contexts, valuing options 
for exercise settlement on expiration based on opening prices rather 
than closing prices may help reduce the ``Expiration Friday'' effects 
on markets for securities underlying options on the Index.\35\

    \35\ See Securities Exchange Act Release No. 30944 (July 21, 
1992), 57 FR 33376 (July 28, 1992).
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E. Accelerated Approval of Amendment No. 1

    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 the notice thereof in the Federal Register. 
Specifically, Amendment No. 1 proposes to allow the Phlx to (1) Replace 
Walmart with Philip Morris as one of the component issues of the Super 
Cap Index; (2) set a new starting value of 350 for the Super Cap Index 
as of May 31, 1995; and (3) list LEAPs on the Index pursuant to Phlx 
Rule 1101A(b)(iii). The Commission notes that the Index does not yet 
underlie any options trading, therefore replacing a component issue to 
conform with the intended market character of the Index, and the 
setting of a new starting value for the Index does not raise any new 
regulatory issues. The Commission also notes that because Phlx Rule 
1101A(b)(iii) generally permits the Exchange to list series of LEAPS on 
stock indexes, the Commission finds that the portion of Amendment No. 1 
relating to the listing of series of LEAPs on the Index presents no new 
regulatory issues. Accordingly, the Commission believes that it is 
consistent with Sections 6(b)(5) and 19(b)(2) of the Act to approve 
Amendment No. 1 to the Phlx proposal on an accelerated basis.

F. Accelerated Approval of Amendment No. 2

    The Commission finds good cause for approving Amendment No. 2 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of the notice thereof in the Federal Register. 
Specifically, Amendment No. 2 to the proposed rule change withdraws the 
proposed amendment that included reference to Super Cap Index options 
(a European-style option) in Rule 1006A, ``Other Restrictions on 
Options Transactions and Exercises.'' The Commission recently approved 
a proposed rule change by the Phlx to delete restrictions on exercise 
respecting specific European-style index options, because a European-
style option can be exercised only during a specific period before the 
option expires. Accordingly, the Commission believes that it is 
consistent with Sections 6(b)(5) and 19(b)(2) of the Act to approve 
Amendment No. 2 to the Phlx proposal on an accelerated basis.

G. Accelerated Approval of Amendment No. 3

    The Commission finds good cause for approving Amendment No. 3 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of the notice thereof in the Federal Register. 
Specifically, the Phlx proposes to amend the composition of the Index 
so that it will be comprised of the 5 most highly capitalized, options-
eligible common stocks of U.S. companies listed on the NYSE (emphasis 
added). Additionally, the Phlx will evaluate the Index to ensure that 
it accurately represents the intended market character of the Index on 
a semi-annual basis, rather than annually, as originally proposed. If 
any components would have to be changed because a component issue was 
no longer options eligible, the Exchange proposes to immediately notify 
the Division of Market Regulation and will file, pursuant to Section 
19(b) of the Act, a submission prior to opening any new series of 
options, if so required by the Division staff. Further, if at any time 
during the year, a component issue of the Index drops out of the top 10 
highest capitalized stocks on the NYSE, the Exchange will not wait for 
the next semi-annual review to replace it. The Commission notes that 
Amendment No. 3 does not raise any new regulatory issues and actually 
improves the procedures for maintaining the Index. Accordingly, the 
Commission believes that it is consistent with Sections 6(b)(5) and 
19(b)(2) of the Act to approve Amendment No. 3 to the Phlx proposal on 
an accelerated basis.

H. Accelerated Approval of Amendment No. 4

    The Commission finds good cause for approving Amendment No. 4 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of the notice thereof in the Federal Register. 
Specifically, the Phlx proposes to amend Phlx Rule 1047A, to indicate 
that the opening rotation Super Cap Index options may be held after 
underlying securities representing 75%, 

[[Page 54279]]
rather than 50%, of the current index value of all the securities 
underlying the index have opened for trading on the primary market. The 
Commission notes that Amendment No. 4 does not raise any new regulatory 
issues and ensures that at least a majority of the 5 components will be 
open for trading before index option trading can commence. Accordingly, 
the Commission believes that it is consistent with Sections 6(b)(5) and 
19(b)(2) of the Act to approve Amendment No. 4 to the Phlx proposal on 
an accelerated basis.

I. Accelerated Approval of Amendment No. 5

    The Commission finds good cause for approving Amendment No. 5 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of the notice thereof in the Federal Register. 
Specifically, the Phlx proposes to delete the reference to the Super 
Cap Index in Phlx Rule 1101A, Commentary .01 regarding trading hours. 
The Commission believes that Amendment No. 5 is reasonable because the 
Phlx represents that it will include the proper reference to the Super 
Cap Index when it files proposal SR-Phlx-95-37 with the Commission. 
Specifically, the Phlx will propose to amend Phlx Rule 1101A, 
Commentary .01 to indicate that transactions may be effected until 4:15 
p.m. each business day through the last trading day (ordinarily a 
Thursday) prior to expiration for Super Cap Index options, as well as 
other a.m. settled index options. The Exchange further represents that 
it will issue a circular to Phlx members disclosing this information. 
Accordingly, the Commission believes that it is consistent with 
Sections 6(b)(5) and 19(b)(2) of the Act to approve Amendment No. 5 to 
the Phlx proposal on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing amendments. 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, 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 SR-Phlx-95-22 and should be 
submitted by November 10, 1995.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\36\ that the proposed rule change (File No. SR-Phlx-95-22), as 
amended, is approved.

    \36\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\37\

    \37\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-26004 Filed 10-19-95; 8:45 am]
BILLING CODE 8010-01-M