[Federal Register Volume 61, Number 152 (Tuesday, August 6, 1996)]
[Notices]
[Pages 40873-40875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19937]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37497; File No. SR-Phlx-96-21]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 1 to Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc., Relating to Index Options Exercise 
Advices

July 30, 1996.

I. Introduction

    On July 7, 1996, 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 Exchange Rule 1042A, Exercise of Option 
Contracts, and Floor Procedure Advice (``Advice'') G-1, to be retitled 
Index Option Exercise Advice Forms, requiring the submission of an 
index option exercise advice form for all

[[Page 40874]]

non-expiration exercises. In this manner, the Exchange will eliminate 
the rule's current 25 contract threshold.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change appeared in the Federal Register on June 
25, 1996.\3\ No comments were received on the proposed rule change. The 
Phlx subsequently filed Amendment No. 1 to the proposed rule change on 
July 26, 1996.\4\ This order approves the Phlx's proposal.
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    \3\ See Securities Exchange Act Release No. 37321 (June 18, 
1996), 61 FR 32877 (June 25, 1996).
    \4\ In Amendment No. 1, the Phlx proposed to delete the phrase 
``industry (narrow-based)'' from paragraph (a)(i) of Exchange Rule 
1042A because the requirements of that paragraph apply to all index 
options. Previously, there were separate paragraphs for industry and 
market index options, but once they were combined, deleting the 
reference to ``industry'' was overlooked. See Securities Exchange 
Act Release No. 37077 (April 5, 1996), 61 FR 16156 (April 11, 1996) 
(File No. SR-Phlx-95-86). This change will correct the omission. See 
letter from Gerald D. O'Connell, Senior Vice President, Market 
Regulation and Trading Operations, Phlx, to Matthew Morris, Office 
of Market Supervision, Division of Market Regulation, Commission, 
dated July 26, 1996 (``Amendment No. 1'').
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II. Background and Description

    Exchange Rule 1042A and Advice G-1 govern the exercise of index 
options.\5\ 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.\6\ 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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    \5\ 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.
    \6\ 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, generally an 
``expiration Friday.'' \7\ 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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    \7\ 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 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 
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 applies 
to all non-expiration exercises, not just to those over 25 contracts. 
Thus, according to the Phlx, because member organizations are already 
preparing such memorandum, the additional preparation of an advice form 
will 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, specified 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''), \8\ 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 the listed schedule of fines for the infractions 
of the applicable Exercise Advice Form procedures are only applicable 
to minor infractions.\9\ The Phlx notes, however, that by including 
certain provisions of Exchange Rule 1042A into Advice G-1 it is not 
implying that all violations of Advice G-1 are minor in nature. 
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,\10\ this 
system merely allows for the efficient handling of minor violations.
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    \8\ See Exchange Rule 970.
    \9\ 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.
    \10\ See, e.g., Advice F-15 which pertains to the Exchange's 
position and exercise limits.
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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), \11\ 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 Exchange Rule 1042A and Advice G-1 
requiring that the amendments to Exchange Rule 1042A and Advice G-1 
requiring the submission of an index option exercise advice form for 
all non-expiration exercises will benefit market participants by 
enhancing the Phlx's surveillance efforts through a more complete audit 
trail. The Commission also believes that the proposal will reduce the 
confusion associated with members' 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.
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    \11\ 15 U.S.C. Sec. 78f(b) (1988).
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    In addition, the Commission believes that the Phlx's proposal to 
incorporate part of Exchange Rule 1042A into Advice G-1 will serve as 
any easy reference on the trading floor, without

[[Page 40875]]

diminishing the rule's purpose of preventing abuses and fraudulent 
activity of the Exchange's exercise memorandum and advice procedures.
    The Commission finds good cause to approve Amendment No. 1 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice to filing thereof in the Federal Register. 
Specifically, because Amendment No. 1 is non-substantive in nature and 
therefore raises no new regulatory issues, the Commission believes that 
it is consistent with Section 6(b)(5) of the Act to approve Amendment 
No. 1 to the proposal on an accelerated basis.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 to the rule proposal. 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-96-21 and should be submitted by August 27, 1996.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the Phlx's 
proposal to require the submission of an index option exercise advice 
form for all non-expiration exercises, 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,\12\ that the proposed rule change (SR-Phlx-96-21), including 
Amendment No. 1, is approved.
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    \12\ 15 U.S.C. Sec. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19937 Filed 8-5-96; 8:45 am]
BILLING CODE 8010-01-M