[Federal Register Volume 61, Number 18 (Friday, January 26, 1996)]
[Notices]
[Pages 2560-2562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1363]
-----------------------------------------------------------------------
[[Page 2561]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36745; File No. SR-Phlx-95-38]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change by the Philadelphia Stock Exchange, Inc., Relating
to an Increase in Position and Exercise Limits on the Phlx National
Over-the-Counter Index
January 19, 1996.
I. Introduction
On September 25, 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 increase the position \3\ and
exercise limits \4\ for options (``XOC'') on the Phlx's National Over-
the-Counter Index (``Index'')\5\ from 17,000 to 25,000 contracts.
\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ Position limits impose a ceiling on the aggregate number of
option contracts on the same side of the market that an investor, or
group of investors acting in concert, may hold or write. See Phlx
Rule 1001A(a)(ii).
\4\ Exercise limits impose a ceiling on the aggregate long
positions in option contracts that an investor, or group of
investors acting in concert, can or will have exercised within five
consecutive business days. See Phlx Rule 1002A.
\5\ The Index is a capitalization-weighted market index composed
of the 100 largest capitalized stocks trading over-the-counter.
---------------------------------------------------------------------------
The proposed rule change appeared in the Federal Register on
November 14, 1995.\6\ No comments were received on the proposed rule
change. This order approves the Phlx's proposal.
\6\ See Securities Exchange Act Release No. 36461 (November 6,
1995), 60 FR 57257 (November 14, 1995).
---------------------------------------------------------------------------
II. Background and Description
On May 17, 1985, the Commission approved the Exchange's proposal to
list and trade options on the Index.\7\ According to the Phlx, trading
volume on the Index has increased sharply since 1991, and consistently
since 1993.\8\
\7\ See Securities Exchange Act No. 22044 (May 17, 1985), 50 FR
21532 (May 24, 1985) (File Nos. SR-Phlx-84-28 and SR-Phlx-85-11).
\8\ According to the Exchange, XOC volume for the period
January-June 1995 was 167,894 contracts, compared to 158,228
contracts for the period January-June 1993.
---------------------------------------------------------------------------
The Exchange recently conducted a ``two-for-one split'' of the
Index, which effectively reduced the value of the Index to one-half of
its previous value.\9\ In accounting for the split, the Phlx doubled
the position and exercise limits applicable to the XOC from 17,000
contracts \10\ to 34,000 contracts until the last expiration then
trading, which is the June 1996 expiration.
\9\ See Securities Exchange Act Release No. 36577 (December 12,
1995) (order approving File No. SR-Phlx-95-61).
\10\ See Securities Exchange Act Release No. 33634 (February 17,
1994), 59 FR 9263 (February 25, 1994) (order approving increase in
position and exercise limits on Index from 10,000 to 17,000
contracts) (File No. SR-Phlx-93-07).
---------------------------------------------------------------------------
In the absence of the proposed rule change, following the
expiration of the June 1996 option series, the XOC's position limit
would revert to the 17,000 contract level. At this limit, with the
Index at a post-split value of 424,\11\ the aggregate dollar value of
the maximum permissible XOC position would be approximately $721
million.\12\ In comparison, with the limit raised to 25,000 contracts,
the aggregate dollar value of the maximum permissible XOC position
would be approximately $1 billion.\13\ The Exchange believes that even
with the increased position limit, the Index's value compares with the
values of other exchanges' broad-based index options,\14\ as well as
its own.\15\ Moreover, as most broad-based index options have position
limits of at least 25,000 contracts,\16\ with certain products trading
with higher limits,\17\ the proposed rule change is intended to keep
the Phlx in line with the position limits of index options traded on
other exchanges.
\11\ This value of the Index was recorded on December 19, 1995.
\12\ The aggregate dollar value of the maximum permissible XOC
position is calculated by multiplying the Index value by the
multiplier by the position limit as follows:
424 x 100 x 17,000=$720,800,000
\13\ 424 x 100 x 25,000=$1,060,000,000
\14\ These values were recorded on June 27, 1995:
CBOE: OEX 520 x 100 x 25,000=$1,300,000,000
CBOE: SPX 545 x 100 x 45,000=$2,452,500,000
CBOE: RUT 281 x 100 x 50,000=$1,405,000,000
CBOE: NDX 534 x 100 x 25,000=$1,335,000,000
Amex: XMI 477 x 100 x 34,000=$1,621,800,000
PSE: WSX 363 x 100 x 37,500=$1,361,250,000
NYSE: NYA 292 x 100 x 45,000=$1,314,000,000
\15\ VLE 518 x 100 x 25,000=$1,295,000,000
TPX 482 x 100 x 25,000=$1,205,000,000
\16\ See, e.g., American Stock Exchange, Inc.'s (``Amex'') EUR--
25,000 contracts, HKO--25,000 contracts, JPN--25,000 contracts; and
Chicago Board Options Exchange, Inc.'s (``CBOE'') NDX--25,000
contracts.
\17\ See, e.g., CBOE's SPX--45,000 contracts, RUT--50,000
contracts; Amex's XII--45,000 contracts, XMI--34,000 contracts; and
New York Stock Exchange, Inc.'s (``NYSE'') NYA and NNA--45,000
contracts each.
---------------------------------------------------------------------------
III. 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, with the requirements of Section 6(b)(5),\18\ in that it
should help to 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.
\18\ 15 U.S.C. Sec. 78f(b) (1988).
---------------------------------------------------------------------------
In analyzing and reviewing specific position and exercise limits
proposed by the options exchanges, the Commission has attempted to
balance two competing concerns. First, limits must be sufficiently low
to prevent investors from disrupting the underlying cash market.
Second, limits must not be established at levels that are so low as to
unnecessarily discourage participation in the options market by
institutions and other investors who have substantial hedging needs or
to prevent specialists and market makers from adequately meeting their
obligations to maintain fair and orderly markets.
The Commission believes that the proposed increase in position and
exercise limits to 25,000 contracts \19\ should increase the depth and
liquidity of the XOC market without significantly increasing concerns
regarding intermarket manipulations or disruptions of the markets for
the options or the underlying securities. The Commission has previously
stated that markets with active and deep trading, as well as broad
public ownership, are more difficult to manipulate or disrupt than less
active markets with smaller public floats.\20\ In this regard, the
Commission notes that the Index is a broad-based index consisting of
the 100 largest capitalized stocks trading over-the-counter (``OTC'').
Moreover, the Phlx's maintenance requirements ensure that the Index
will not contain a large number of thinly-capitalized, low-priced
securities with small public floats and low trading volumes.\21\
Accordingly, given the size and breadth of the Index, the Commission
does not believe that increasing the position and exercise limits for
the Index will substantially increase the Index's susceptibility to
manipulation or increase the potential for disruption in the markets
for the underlying securities.
\19\ The Commission again notes that the Exchange's proposal
will not be implemented until after the June 1996 expiration.
\20\ See, e.g., Securities Exchange Act Release No. 31330
(October 16, 1992), 57 FR 48408 (October 23, 1992).
\21\ See Securities Exchange Act Release No. 22026 (May 8,
1985), 50 FR 20310 (May 15, 1985).
---------------------------------------------------------------------------
In addition, the Exchange's surveillance program will continue to
be applicable to the trading of XOC options and should detect and deter
any trading
[[Page 2562]]
abuses arising from the Index's increased position and exercise limits.
Lastly, the Exchange submitted data comparing the Index to several
other broad-based indexes, including the CBOE's Nasdaq 100 Index, which
is comprised of OTC stocks similar to those companies in the XOC.\22\
The Commission believes that the comparative data confirms that the
proposed increase in the Index's position and exercise limits to 25,000
contracts are comparable to those of similar indexes which trade on
other options exchanges.
\22\ See also supra notes 14-15.
---------------------------------------------------------------------------
IV. Conclusion
For the foregoing reasons, the Commission finds that the Phlx's
proposal to increase the position and exercise limits of the Index from
17,000 to 25,000 contracts is consistent with the requirements of the
Act and the rules and regulations thereunder. In addition, the
Commission notes that the change in position and exercise limits on the
XOC does not become effective until after the expiration of the June
1996 option series.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-Phlx-95-38) is approved.
\23\ 15 U.S.C. Sec. 78s(b)(2) (1988).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
\24\ 17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-1363 Filed 1-25-96; 8:45 am]
BILLING CODE 8010-01-M