[Federal Register Volume 61, Number 71 (Thursday, April 11, 1996)]
[Notices]
[Pages 16156-16157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9021]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37077; File No. SR-Phlx-95-86]

Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change by the Philadelphia Stock Exchange, Inc., Relating 
to Index Options Exercise Advices
April 5, 1996.
I. Introduction
    On December 28, 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 amend Phlx Rule 1042A, 
Exercise of Option Contracts, and Floor Procedure Advice (``Advice'') 
G-1, Exercise Requirements. The Phlx proposes to extend 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) will be deleted.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
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    The proposed rule change appeared in the Federal Register on 
February 27, 1996.\3\ No comments were received on the proposed rule 
change. This order approves the Phlx's proposal.

    \3\ See Securities Exchange Act Release No. 36862 (February 20, 
1996), 61 FR 7297 (February 27, 1996).
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II. Background and Description
    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 broad-based 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 of 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 above 
provisions is 4:20 p.m. or five minutes after the close of trading.
    Pursuant 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).
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),\4\ in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and will serve to 
protect investors and the public interest. Specifically, the Commission 
believes that the amendments to Phlx Rule 1042A and Advice G-1 to 
extend the deadline for submitting exercise advice forms will benefit 
market participants by allowing them to make investment decisions based 
on the evaluation of their final positions after having completed 
trading for the day.

    \4\ 15 U.S.C. 78f(b) (1988).
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    The Commission also believes that the proposal will benefit the 
market in general by fostering higher quality markets at the close of 
the trading day. First, market makers will not be preoccupied with the 
process of submitting exercise advice forms prior to the actual close 
of the market and, therefore, can concentrate more fully on proving a 
quality market at the close. Second, market participants will be able 
to determine whether or not their orders on other related markets were 
executed, such as orders intended to hedge their options positions. If 
their hedging transactions in other markets are not executed by 4:30 
p.m., then, under the proposal, market participants will still be able 
to exercise their options positions and not remain in an unhedged 
position. Third, the proposal will give market participants additional 
time to evaluate the closing prices of the stocks that are used to 
calculate the indexes and determine whether or not to exercise their 
positions.

[[Page 16157]]

    In addition, the Commission believes that the proposal to delete 
paragraph (a)(iii) to Phlx Rule 1042A and to incorporate that provision 
into paragraph (a)(ii) will help to clarify the application of the 
rule.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the Phlx's 
proposal to extend the deadline for the receipt or preparation of a 
memorandum to exercise, as well as the submission of an exercise advice 
form, 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,\5\ that the proposed rule change (SR-Phlx-95-86) is approved.

    \5\ 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.\6\

    \6\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9021 Filed 4-10-96; 8:45 am]
BILLING CODE 8010-01-M