[Federal Register Volume 60, Number 208 (Friday, October 27, 1995)]
[Notices]
[Pages 55073-55076]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26702]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36406; File No. SR-PHLX-95-75]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc., Relating to the Price Weighting of the PHLX Forest and 
Paper Products Sector Index

October 23, 1995.
    Purusant 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 October 
17, 1995, the Philadelphia Stock Exchange, Inc. (``PHLX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.

[[Page 55074]]


I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PHLX proposes to change the method of calculating the PHLX 
Forest and Paper Products Sector Index (``Index'') from equal dollar 
weighting to price weighting. Options on the cash-settled, European-
style\1\ Index, which is comprised of the stocks of 14 domestic forest 
and paper product companies became eligible for Exchange trading on 
September 6, 1995.\2\ However, the PHLX has not yet commenced trading.

    \1\A European-style option can be exercised only during a 
specified period immediately prior to the expiration of the option.
    \2\See Securities Exchange Act Release No. 36193 (September 6, 
1995), 60 FR 47635 (September 13, 1995) (File No. SR-PHLX-95-56) 
(``Index Release'').
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    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 self-regulatory organization 
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 self-regulatory organization 
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 Purposes of, and 
Statutory Basis for, the Proposed Rule Change

    The Purpose of the proposed rule change is to change the method of 
calculating the Index from equal dollar weighting to price weighting. 
Options on the cash-settled, European-style Index became eligible for 
Exchange trading on September 6, 1995.\3\ However, the PHLX has not yet 
commenced trading. The Index is comprised of the stocks of 14 domestic 
forest and paper product companies which, the PHLX represents, 
effectively represent the available forest and paper products 
industry.\4\ The PHLX originally submitted its proposal to list and 
trade options on the Index pursuant to and in accordance with the 
procedures set forth in Securities Exchange Act Release No. 34157.\5\ 
The PHLX represents that the price-weighted Index will continue to meet 
the criteria provided in the Generic Index Approval Order, and codified 
in PHLX Rule 1009A, ``Designation of the Index,'' for listing options 
on narrow-based indexes.

    \3\Id.
    \4\The components of the Index are: Boise Cascade; Bowater Inc.; 
Champion International Corporation; Federal Paper Board Company; 
Georgia Pacific Corporation; International Paper Company; James 
River Corporation; Louisiana Pacific Corporation; Mead Corporation; 
Stone Container Corporation; Temple Inland, Inc.; Union Camp 
Corporation; Westvaco Corporation; and Weyerhauser Company.
    \5\See Securities Exchange Act Release No. 34157 (June 3, 1994), 
59 FR 30062 (June 10, 1994) (``Generic Index Approval Order'').
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    According to the PHLX, the Exchange recently received comments from 
potential investors that the Index's equal dollar weighting would cause 
hardship to investors who hedge their portfolios with baskets of the 
underlying stocks. The PHLX states that such investors would have to 
adjust their positions in every one of the underlying 14 stocks every 
quarter when the Index is rebalanced. The PHLX received a suggestion 
that Index options would be a more liquid product if the Index were 
price weighted, and after speaking to other prospective users, the 
Exchange has determined to make the proposed change in order to address 
their concerns. The current proposal changes no other aspect of the 
original Index filing. Below is a review of the Index's specifications.
    Ticker Symbol: FPP.
    Underlying Index: The Index will be a price weighted index 
comprised of stocks from 14 domestic forest and paper products 
companies. All 14 stocks in the Index are traded on the New York Stock 
Exchange (``NYSE'') and are therefore ``reported securities'' as 
defined in Rule 11Aa-3-1 under the Act. The PHLX represents that all of 
the Index's component stocks presently meet the listing criteria for 
equity options contained in PHLX Rule 1009, ``Criteria for Underlying 
Stocks,'' and are currently the subject of standardized options trading 
in the U.S.
    According to the PHLX, as of October 11, 1995, the market 
capitalization of all of the stocks in the Index exceeded $57 billion 
and the individual capitalizations of the Index's component stocks 
ranged from $1.7 billion to $9.6 billion. The PHLX states that all 14 
of the Index's component stocks had monthly trading volumes in excess 
of one million shares over each of the past six months from April 
through September 1995.
    Index Calculation: The Index will be computed using the following 
formula:
[GRAPHIC][TIFF OMITTED]TN27OC95.014

where:

    SP = current stock price
    divisor = number of stocks in the Index

    To maintain the continuity of the Index, the divisor will be 
adjusted to reflect non-market changes in the prices of the component 
securities as well as changes in the composition of the Index. Changes 
which may result in divisor adjustments include, but are not limited 
to, stock splits and dividends, spin-offs, certain rights issuances, 
and mergers and acquisitions. If the Index fails at any time to satisfy 
the maintenance criteria set forth in the Generic Index Approval Order, 
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 the Exchange determines that such failure is not significant and 
the Commission concurs in that determination or unless the continued 
listing of options on the Index has been approved by the Commission 
under Section 19(b)(2) of the Act.
    Absent Commission approval, the PHLX will not increase to more than 
19, 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, ``Criteria 
for Underlying Stocks.''\6\ The PHLX will take into account the 
capitalization, liquidity, volatility and name recognition of any 
proposed replacement stock and assure that the Index continues to meet 
the maintenance criteria provided in PHLX Rule 1009.

    \6\In addition, the Generic Index Approval order requires that 
at all times, at least 90% of the stocks in the Index, by weight, 
and 80% of the total number of stocks comprising the Index, 
individually, must satisfy the Exchange's rules governing the 
listing and maintenance of listing of options thereon. See Generic 
Index Approval Order, supra note 5.
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    The Index will be disseminated every 15 seconds during the trading 
day. The PHLX has retained Bridge Data, Inc. to compute and perform all 
necessary maintenance of the Index. Pursuant to PHLX Rule 1100A, 
``Dissemination of Information,'' 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 

[[Page 55075]]
Price Reporting Authority (``OPRA'').\7\ The Index value also will be 
available on broker/dealer interrogation devices to subscribers of the 
option information.

    \7\In the Index Release, the PHLX represented that the PHLX and 
OPRA have the necessary systems capacity to support the new series 
of options that will result from the introduction of options and 
long-term options on the Index. See Index Release, supra note 2.
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    Unit of Trading: Each options contact 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 price will be set at 5 point intervals 
in terms of the current value of the Index. The PHLX will list 
additional exercise prices in accordance with PHLX Rule 1101A(a), 
``Terms of Option Contracts.''
    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 
on the third Friday of each month.
    Settlement Value: Based upon the opening prices of the component 
stocks on the last day prior to expiration.
    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 Index is an industry index and 
the PHLX will apply position and exercise limits pursuant to PHLX Rules 
1001A(b)(i), ``Position Limits,'' and 1002A, ``Exercise Limits,'' 
respectively. Therefore, the position and exercise limits will be 
12,000 contracts.
    Expiration Cycles: Three months from the March, June, September, 
December, cycle plus at least two additional near-term months. The PHLX 
also will trade long-term Index options having up to 36 months to 
expiration pursuant to PHLX Rule 1101A(b)(iii).
    Issuer and Guarantor: The Options Clearing Corporation (``OCC'')
    Premium Quotations: Premiums will be expressed in terms of dollars 
and fractions of dollars pursuant to PHLX Rule 1033A, ``Meaning of 
Premium Bids and Offers.'' 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 Index options will be traded pursuant to current PHLX rules 
governing the trading of index options.\8\ In addition, the Exchange 
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 Index options. These procedures include having 
complete access to trading activity in the underlying securities, which 
are all traded on the NYSE. 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 Index options.

    \8\See PHLX Rules 1001A through 1102A, ``Limitation of Exchange 
Liability,'' and 1000, ``Applicability, Definitions, and 
References,'' through 1072, ``Reporting Requirements Applicable to 
Short Sales in NASD/NM Securities.''
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    The PHLX believes that the proposal is consistent with Section 6(b) 
of the Act, in general, and, in particular, with Section 6(b)(5), in 
that it is designed to promote just and equitable principles of trade, 
prevent fraudulent and manipulative acts and practices, foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, as well as to protect investors and the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The PHLX does not believe that the proposed rule change will impose 
any inappropriate 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 either solicited or received.

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

    Because the foregoing rule change: (1) Does not significantly 
affect the protection of investors or the public interest; (2) does not 
impose any significant burden on competition; and (3) the Exchange 
provided the Commission with notice of its intent to file the proposed 
rule change, along with a brief description and the text of the 
proposed rule change at least five business days prior to the date of 
filing of the proposed rule change, or such shorter time as designated 
by the Commission, it has become effective pursuant to Section 
19(b)(3)(A) of the Act and Rule 19b-4(e)(6) thereunder.\9\

    \9\17 CFR 240.19b-4(e)(6) (1994).
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    A proposed rule change filed under Rule 19b-4(e)(6)\10\ does not 
become operative prior to 30 days after the date of filing or such 
shorter times as the Commission may designate unless such action is 
consistent with the protection of investors and the public interest. 
The PHLX has requested that the Commission accelerate the 
implementation of the proposed rule change so that it may take effect 
prior to the 30 days specified under Rule 19b-4(e)(6) because the PHLX 
plans to begin trading Index options on October 24, 1995. The 
Commission finds that the proposed rule change is consistent with the 
protection of investors and the public interest and therefore has 
determined to make the proposed rule change operative as of October 24, 
1995.

    \10\Id.
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    In particular, the Commission finds that the proposal makes a non-
controversial amendment to a proposed rule change that was published 
for the full notice and comment period in the Federal Register on 
September 13, 1995.\11\ The Commission has received no comments on that 
proposal.\12\ In addition, the Commission notes that the Index, as 
amended, continues to meet the requirements of the Generic Index 
Approval Order, which permits indexes filed under those procedures to 
use either price, capitalization, or equal dollar weighting 
methods.\13\

    \11\See Index Release, supra note 2.
    \12\With equal dollar weighting, each component stock of the 
Index represented between 7.12% and 7.16% of the value of the Index. 
With price weighting, the most highly capitalized stock in the Index 
equals 13.98% of the Index weight and the top five stocks in 
capitalization represent 49.06% of the Index weight. Accordingly, 
when the Index is calculated through price weighting rather than 
equal dollar weighting, the Index continues to comply with the 
requirements of the Generic Index Approval Order.
    \13\See Generic Index Approval Order, supra note 5.
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such 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.

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 

[[Page 55076]]
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 at 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 above-mentioned self-regulatory organization. 
All submission should refer to the file number in the caption above and 
should be submitted by November 17, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\

    \14\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-26702 Filed 10-26-95; 8:45 am]
BILLING CODE 8010-01-M