[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Notices]
[Pages 65705-65707]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30855]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36577; File No. SR-Phlx-95-61]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change by the Philadelphia Stock Exchange, Inc., Relating 
to a Reduction of the Value of the Phlx National Over-the-Counter Index

December 12, 1995.

I. Introduction

    On September 22, 1995, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to reduce the value of the Phlx's 
National Over-the-Counter Index (`'Index'') option (``XOC'') to one-
half of its present value.\3\ The Index is a capitalization-weighted 
market index composed of the 100 largest capitalized stocks trading 
over-the-counter. The other contract 

[[Page 65706]]
specifications for the XOC remain unchanged.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ The Exchange will accomplish this reduction in value by 
doubling the divisor used in calculating the Index.
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    The proposed rule change appeared in the Federal Register on 
November 14, 1995.\4\ No letters were received in response to the 
Commission's solicitation for comment on the proposed rule filing.\5\ 
This order approves the Phlx's proposal.

    \4\ See Securities Exchange Act release No. 36460 (November 6, 
1995), 60 FR 57256 (November 14, 1995).
    \5\ The Commission notes, however, that the Phlx forwarded to 
the Commission one comment letter it received prior to filing this 
rule proposal. This letter and the Phlx's response is discussed 
below. See infra note 10 and accompanying discussion.
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II. Background and Description

    The Phlx began trading the XOC in 1985.\6\ The Index was created 
with a value of 150 on its base date of September 28, 1984, which rose 
to 548 in June 1994, and to 700 in June 1995. On September 14, 1995, 
the Index value was 868. Thus, the Index value has increased 
significantly, especially during the last year. Consequently, the 
premium for XOC options has also risen.

    \6\ See Securities Exchange Act Release Nos. 21576 (January 18, 
1985), 50 FR 3445 (January 24, 1985); and 22044 (May 17, 1985), 50 
FR 21532 (May 24, 1985) (File No. SR-Phlx-84-28).
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    As a result, the Phlx proposes to conduct a ``two-for-one split'' 
of the Index, such that the value will be reduced by one-half. In order 
to account for the split, the number of outstanding XOC contracts will 
be doubled, such that for each XOC contract currently held, the holder 
will receive two contracts at the reduced value, with a strike price of 
one-half the original strike price. For instance, the holder of an XOC 
800 call will receive two XOC 400 calls. In addition, the Phlx will 
double to the position and exercise limits applicable to the XOC, from 
17,000 contracts to 34,000 contracts until the last expiration then 
trading, which is the June 1996 expiration.\7\ According to the Phlx, 
this procedure is similar to that employed with equity options when the 
underlying security is subject to a two-for-one stock split, as well as 
that used for the recent split of the Phlx's Semiconductor Index.\8\

    \7\ Separately, the Exchange is proposing to increase the XOC 
position and exercise limits to 25,000 contracts. See SR-Phlx-95-38.
    \8\ See Securities Exchange Act Release No. 35999 (July 20, 
1995), 60 FR 38387 (July 26, 1995) (File No. SR-Phlx-95-41).
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    In conjunction with the split, the Exchange will list strike prices 
surrounding the new, lower Index value, pursuant to Phlx Rule 1101A. 
The Phlx will announce the effective date by way of an Exchange 
memorandum to its membership, which will also serve as notice of the 
strike price and position limit changes.\9\

    \9\ In this regard, the Commission notes that in a memorandum 
dated November 20, 1995, the Phlx provided notice to its members and 
member organizations of its intention to reduce the value of the XOC 
by one-half.
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    According to the Phlx, the purpose of the proposal is to attract 
additional liquidity to the product in those series that public 
customers are most interested in trading. For example, according to the 
Phlx, a near-term, at-the-money call option series currently trades at 
approximately $1,200 per contract. After the Index split, the same 
option series (once adjusted), with all else remaining equal, could 
trade at approximately $600 per contract. Thus, while certain investors 
and traders may currently be impeded from trading at such levels, a 
reduced Index value should encourage additional investor interest.
    The Phlx believes the XOC options provide an important opportunity 
for investors to hedge and speculate upon the market risk associated 
with the underlying over-the-counter stocks. By reducing the value of 
the Index such investors will be able to utilize this trading vehicle, 
while extending a smaller outlay of capital. According to the Phlx, 
this should attract additional investors, and, in turn, create a more 
active and liquid trading environment.

III. Summary of Comments

    The Phlx received one comment letter opposing the proposed rule 
change from a financial planner at Smith Barney Shearson.\10\ The 
issues raised therein and the Phlx's response thereto \11\ are 
discussed below.

    \10\ See letter from Barry J. Weisberg, Vice President, Smith 
Barney Shearson, Inc., to Andy Kolinsky, Vice President, Phlx, dated 
August 1, 1995. The Commission notes that the commenter also raised 
other concerns regarding the trading of the XOC unrelated to the 
rule proposal which are not discussed herein.
    \11\ See letter from Gerald D. O'Connell, First Vice President, 
Market Regulation and Trading Operations, Phlx, to Barry J. 
Weisberg, Vice President, Smith Barney Shearson, Inc., dated 
November 20, 1995.
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    According to the commenter, one of the primary inducements to 
trading the Index is its volatility. If the Index is split in half, 
however, the commenter believes that investors will be unnecessarily 
forced to trade twice as many contracts in order to maintain their 
current degree of leverage. In response, the Phlx stated that a lower 
priced, less volatile Index will better serve the needs of investors as 
the Exchange will be able to more timely update quotes, particularly 
during periods of active market conditions.
    The commenter also opposes the proposed rule change because he 
believes that splitting the Index will reduce its value to an 
inappropriately low level. In this regard, the commenter suggests 
alternative split levels (e.g., a 4 for 3 split, or a 3 for 2 split) as 
a less problematic approach. In this manner, according to the 
commenter, the Index will retain a greater percentage of its current 
value. The Phlx responded that splitting the Index in a manner other 
than two-for-one would result in unnecessary calculations and 
adjustments to the divisor, position limits, and strike prices and 
would thereby create investor confusion and excessive system demands.
    Finally, the commenter suggests that the Exchange postpone the 
splitting of the Index to provide investors with a reasonable amount of 
time to adjust their positions as a result of the proposed rule change. 
In this regard, the Commission notes that to avoid investor confusion 
the Phlx has stated that it intends to provide market participants with 
adequate notice of the change to the Index value.\12\

    \12\ See supra note 9.
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IV. Discussion

    After careful consideration of the comment letter and the Phlx's 
response thereto, the Commission has decided to approve the proposed 
rule change. For the reasons discussed below, the Commmission 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, with the requirements 
of Section 6(b).\13\ Specifically, the Commission believes that the 
proposal is consistent with the Section 6(b)(5) requirement to protect 
investors and the public interest and to remove impediments to a free 
and open securities market. By reducing the value of the Index, the 
Commission believes that a broader range of investors will be provided 
with a means of hedging their exposure to the market risk associated 
with the underlying over-the-counter stocks. Similarly, the Commission 
believes that reducing the value of the Index could help attract 
additional investors, thus creating a more active and liquid trading 
market.

    \13\ 15 U.S.C. 78f(b) (1988).
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    The Commission also believes that the Phlx's position and exercise 
limits and strike price adjustments are appropriate and consistent with 
the Act. In this regard, the Commission notes that the position and 
exercise limits and strike price adjustments are identical to the 

[[Page 65707]]
approach used to adjust outstanding options on stocks that have 
undergone a two-for-one stock split.
    The Commission believes that doubling the Index's divisor will not 
have an adverse market impact or make trading in XOC options 
susceptible to manipulation. After the split, the Index will continue 
to be comprised of the same stocks with the same weightings and will be 
calculated in the same manner (except for the change in the divisor). 
The Phlx's surveillance procedures will also remain the same.
    Lastly, for the reasons discussed below, the Commission also 
believes that the commenter's criticisms of the rule proposal have been 
adequately addressed by the Phlx's response. First, issues regarding 
the appropriate value of an index are business decisions typically left 
to the discretion of an exchange, particularly in the absence of 
Commission concerns regarding potential manipulation, investor 
confusion, or other regulatory concerns. Second, the Commission 
believes that the Exchange's proposal to adjust the Index in a manner 
similar to a two-for-one stock split provides a simple, orderly, and 
efficient means to effect the adjustment. Third, the Commission 
believes that the Phlx will be able to provide adequate notice to 
market participants regarding to change to the Index value prior to its 
implementation. As noted above,\14\ the Phlx has already indicated its 
intent, subject to Commission approval, to adjust the Index value after 
the December expiration.

    \14\ See supra note 9.
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V. Conclusion

    For the foregoing reasons, the Commission finds that the Phlx's 
proposal to reduce the value of the Index to one-half of its present 
value is consistent with the requirements of the Act and the rules and 
regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-Phlx-95-61) is approved.

    \15\ 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.\16\

    \16\ 17 CFR 200.30-3(a)(12) (1994).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-30855 Filed 12-19-95; 8:45 am]
BILLING CODE 8010-01-M