[Federal Register Volume 61, Number 39 (Tuesday, February 27, 1996)]
[Notices]
[Pages 7297-7298]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4353]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36862; File No. SR-Phlx-95-86]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to Index 
Options Exercise Advices

February 20, 1996
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 28, 1995, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``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.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx, pursuant to Rule 19b-4 of the Act, proposes to amend Phlx 
Rule 1042A, Exercise of Option Contracts, and Floor Procedure Advice 
(``Advice'') G-1, Exercise Requirements, by extending the deadline for 
the receipt or preparation of a memorandum to exercise, as well as the 
submission of an exercise advice form, from five minutes after the 
close of trading to 4:30 p.m. In addition, as minor changes to 
paragraph (ii) will result in the inclusion of the National Over-the-
Counter Index option, Phlx Rule 1042A(a)(iii) is being deleted. The 
text of the proposed rule change is available at the Office of the 
Secretary, the Phlx, and 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 Phlx 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 Phlx has prepared summaries, set forth in Section A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Phlx Rule 1042A and Advice G-1 govern the exercise of index 
options. These provisions state that with respect to index option 
contracts, clearing members are required to follow the procedures of 
the Options Clearing Corporation (``OCC'') for tendering exercise 
notices. Phlx member organizations are also required to comply with the 
following procedures. First, a memorandum to exercise any American 
style index option must be received or prepared by the Phlx member 
organization no later than five minutes after the close of trading on 
the day of exercise. Thus, the current deadline is 4:15 p.m. for 
narrow-based index options and 4:20 p.m. for broadbased index options. 
Second, when exercising 25 or more American style index option 
contracts, other than an option contract on the National Over-the-
Counter Index, submission on an exercise advice form to the Exchange is 
required no later than five minutes after the close of trading on the 
day of exercise. Third, with respect to options on the National Over-
the-Counter Index, the deadline for compliance with the 

[[Page 7298]]
above provisions is 4:20 p.m. or five minutes after the close of 
trading.
    Purusant to Phlx Rule 1042A(b), however, the above requirements are 
not applicable with respect to any series of stock index options on the 
last day of trading prior to the expiration date of such series of 
options. The above stated requirements are also not applicable to 
European style index options which, by definition, cannot be exercised 
prior to expiration. Lastly, the Exchange notes that the procedures for 
exercising equity option contracts contained in Phlx Rule 1042, are not 
affected by this rule proposal.
    The Phlx proposes to establish a 4:30 p.m. deadline for both a 
memorandum to exercise and exercise advice forms for all index options. 
This will extend the cut-off time by 15 minutes for narrow-based index 
options and by 10 minutes for broad-based index options. According to 
the Phlx, the purpose of this rule change is to provide additional time 
for the preparation and transmission of the required exercise 
information. After the close of trading, index option position holders 
are not instantly aware of their final positions, including hedges in 
the underlying security and futures contracts. According to the Phlx, 
knowing the exact, final position is often crucial to making a 
determination of whether to exercise.
    In addition, the current procedure for these submissions presents 
logistical problems for compliance within five minutes after the close 
of trading. For example, the distance between trading stations for 
certain index options on the Phlx trading floor (e.g., Gold/Silver 
Index) and the depository for advice submissions is not easy to 
traverse within five minutes, especially at the close of trading when 
there is a great deal of movement on the trading floor. If a trade 
occurs during the final minute of trading, this situation is 
exacerbated since additional time might be used to ensure that the 
trade ticket and participation was properly submitted. And, as stated 
above, reports from futures orders placed to hedge option positions 
must still be ascertained, usually by going to another location on the 
floor (e.g., the booth where telephones and clerks are located). The 
Phlx believes that it is in the interest of order and safety to change 
this process.
    The Phlx believes that the current deadline not only creates time 
pressure and uncertainty, but may also force index option traders not 
to participate in large or complex trades, especially near the close, 
thereby hampering liquidity. The Phlx believes that the extra time is 
reasonable under these circumstances.
    Lastly, to improve clarity, the Exchange proposes to delete 
paragraph (a)(iii) of Phlx Rule 1042A and incorporate the exercise 
requirements pertaining to options on the National Over-the-Counter 
Index in paragraph (a)(ii).
2. Statutory Basis
    The Phlx believes that the proposed rule change is consistent with 
Section 6(b) of the Act in general, and with Section 6(b)(5) in 
particular, \3\ in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, by eliminating the hardship to all index 
option investors and traders that is caused by having insufficient time 
after the close to make exercise decisions, will serve to protect 
investors and the public interest.

    \3\ 15 U.S.C. Sec. 78f (b)(5) (1988).
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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 solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Phlx consents, the Commission will:
    A. by order approve the proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 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 also will be available 
for inspection and copying at the principal office of the Phlx. All 
submissions should refer to File No. SR-Phlx-95-86 and should be 
submitted by March 19, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \4\

    \4\ 17 CFR 200.30-3 (a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-4353 Filed 2-26-96; 8:45 am]
BILLING CODE 8010-01-M