[Federal Register Volume 61, Number 123 (Tuesday, June 25, 1996)]
[Notices]
[Pages 32876-32878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16063]



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[[Page 32877]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37321; File No. SR-Phlx-96-21]


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

June 18, 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 June 7, 1996, 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.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
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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 
Exchange Rule 1042A, Exercise of Option Contracts, and Floor Procedure 
Advice (``Advice'') G-1, to be retitled Index Option Exercise Advice 
Forms, by requiring an index option exercise advice form for all non-
expiration exercises. In this manner, the Exchange will eliminate the 
rule's current 25 contract threshold.

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 Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Exchange Rule 1042A and Advice G-1 govern the exercise of index 
options.\3\ Specifically, Exchange Rule 1042A(a)(i) requires that a 
memorandum to exercise any American-style index option must be received 
or prepared by the Phlx member organization no later than 4:30 p.m. on 
the day of exercise.\4\ In addition, Exchange Rule 1042A(a)(ii) and 
Advice G-1 require the submission of an exercise advice form to the 
Exchange when exercising 25 or more American-style index option 
contracts.
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    \3\ The Exchange notes that with respect to index option 
contracts, clearing members are also required to follow the 
procedures of the Options Clearing Corporation (``OCC'') for 
tendering exercise notices. Exercise notices are the exercise 
instructions required by OCC and are distinct from exercise advices 
which are required by Exchange rules.
    \4\ See Securities Exchange Act Release No. 37077 (April 5, 
1996), 61 FR 16156 (April 11, 1996) (File No. SR-Phlx-95-86). In 
this regard, the Exchange has attempted to create a level playing 
field among option investors by maintaining a cut-off time to ensure 
that all exercise decisions occur promptly after the close of 
trading. Consequently, to prevent fraud and unfairness, a long 
option holder is prohibited from exercising index options on non-
expiration days based on information obtained after the cut-off.
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    Pursuant to Exchange Rule 1042A(b), however, these requirements are 
not applicable on the last business day before expiration.\5\ The above 
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 Exchange Rule 1042, are not affected by this 
rule proposal.
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    \5\ See Securities Exchange Act Release No. 36903 (February 28, 
1996), 61 FR 9001 (March 6, 1996) (File No. SR-Phlx-96-01).
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    As stated above, the Phlx proposes to amend Exchange Rule 1042A and 
Advice G-1 by requiring the submission of an index option exercise 
advice form for all non-expiration exercises. In this manner, the 
Exchange is eliminating the rule's current 25 contract threshold.
    According to the Phlx, the purpose of this change is to enhance 
surveillance efforts in determining compliance with the exercise cut-
off time. Currently, the submission of an exercise advice form where 25 
or more contracts are exercised creates an audit trail for the Exchange 
to examine when ascertaining compliance with the exercise cut-off time. 
Thus, by eliminating the 25 contract threshold, all non-expiration 
exercises will require the submission of an exercise advice form. By 
providing a more complete audit trail for smaller exercises, the Phlx 
believes that its surveillance efforts will be enhanced.
    The Exchange also believes that eliminating the 25 contract 
threshold should prevent the confusion associated with having to 
calculate the number of index option contracts being exercised for each 
Phlx index as exercise advices will be required for all non-expiration 
exercises. In addition, the Exchange notes that the requirement of 
Exchange Rule 1042A(a)(i) to prepare a memorandum to exercise pertains 
to all non-expiration exercises, not just to those over 25 contracts. 
Thus, according to the Phlx, because member organizations are already 
preparing such memoranda, the additional preparation of an advice form 
does not impose a substantial burden.
    The Phlx notes that because Advice G-1 is based on Exchange Rule 
1042A and contains certain pertinent provisions of the rule for easy 
reference on the trading floor, specific reference to Exchange Rule 
1042A is proposed to be added to Advice G-1.
    The Phlx, in administering advices such as Advice G-1 as part of 
its minor rule violation enforcement and reporting plan (``minor rule 
plan''),\6\ understands that infractions cited pursuant to the plan are 
minor in nature. Thus, in order to bolster the distinction between 
minor and serious violations, the Phlx proposes that Advice G-1 
expressly state that it is only intended to cover minor infractions.\7\ 
At the same time, however, the Exchange notes that it does not believe 
that including certain provisions of Exchange Rule 1042A into Advice G-
1 deems all violations of Advice G-1 as minor. Exchange Rule 1042A was 
intended to govern exercise memorandum and advice procedures in order 
to prevent abuses and fraudulent activity; incorporating part of the 
rule into an advice does not diminish this critical purpose. Rather, as 
with many other important, substantive provisions in Exchange rules 
that are codified into Advices,\8\ this system merely allows for the 
efficient handling of minor violations.
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    \6\ See Exchange Rule 970.
    \7\ Advice G-1 states that the fine schedule provides sanctions 
for infractions of the index option Exercise Advice Form procedures 
which are minor in nature. Any violation of the procedure which has 
been deemed serious by the Phlx will be referred directly to the 
Exchange's Business Conduct Committee where stronger sanctions may 
result. The Phlx notes, however, that this language does not affect 
the other floor procedure advices administered pursuant to the plan 
which do not specifically contain this statement; infractions cited 
pursuant to the plan are minor in nature regardless of whether this 
specific language was added to the advice.
    \8\ See,  e.g., Advice F-15 which pertains to the Exchange's 
position and exercise limits.
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2. Statutory Basis
    The Phlx believes that the proposed rule change is consistent with 
Section 6(b) of the Act in general, and with

[[Page 32878]]

Section 6(b)(5) in particular,\9\ in that it is designed to prevent 
fraudulent and manipulative acts and practices, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in, securities as well as to protect investors and the 
public interest, by bolstering the exercise advice requirement to 
include all non-expiration exercises, not just exercises of 25 or more 
contracts. Specifically, the Phlx believes that requiring exercise 
advices for all American-style index options exercised prior to 
expiration should enhance surveillance efforts regarding compliance 
with the exercise cut-off time by providing a more complete audit 
trail.
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    \9\ 15 U.S.C. Sec. 78f(b)(5)(1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The self-regulatory organization 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 self-regulatory organization 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 self-
regulatory organization. All submissions should refer to File No. SR-
Phlx-96-21 and should be submitted by July 16, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16063 Filed 6-24-96; 8:45 am]
BILLING CODE 8010-01-M