[Federal Register Volume 61, Number 158 (Wednesday, August 14, 1996)]
[Notices]
[Pages 42298-42299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20718]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37536; File No. SR-Phlx-96-17]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to Reducing 
the Value of the Super Cap Index

August 7, 1996.
    On May 24, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to reduce the value of its Super 
Cap Index (``Index'') option (``HFX'') to one-third its present value 
by tripling the divisor used in calculating the Index. The Index is 
comprised of the top five options-eligible common stocks of U.S. 
companies traded on the New York Stock Exchange, as measured by 
capitalization. The other contract specifications for the HFX will 
remain unchanged.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposal was published for comment and appeared in 
the Federal Register on June 25, 1996.\3\ No comment letters were 
received on the proposal. This order approves the Phlx's proposal.
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    \3\ See Securities Exchange Act Release No. 37319 (June 18, 
1996), 61 FR 32881 (June 25, 1996).
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I. Description of the Proposal

    The Exchange began trading the HFX in November, 1995.\4\ The Index 
was created with a value of 350 on its base date of May 31, 1995 which 
rose to 430 on April 12, 1996. Thus, the value of the Index has 
increased 23% in less than one year. Consequently, the premium for HFX 
options has also risen.
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    \4\ See Securities Exchange Act Release No. 36369 (October 13, 
1995), 60 FR 54274 (October 20, 1995).
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    As a result, the Exchange proposes to conduct a ``three-for-one 
split'' of the Index, such that the value would be reduced to one-third 
of its present value. In order to account for the split, the number of 
HFX contracts will be tripled, such that for each HFX contract 
currently held, the holder would receive three contracts at the reduced 
value,

[[Page 42299]]

with a strike price one-third of the original strike price. For 
instance, the holder of a HFX 420 call will receive three HFX 140 
calls. In addition to the strike price being reduced to one-third, the 
position and exercise limits applicable to the HFX will be tripled, 
from 5500 contracts \5\ to 16,500 contracts, for a six month period 
after the split is effectuated. After the initial six month period, the 
position and exercise limits will be reduced to the original 5,500 
contract limit. This procedure is similar to the one employed 
respecting equity options where the underlying security is subject to a 
two-for-one stock split, as well as previous reductions in the value of 
other Phlx indexes.\6\ The trading symbol will remain HFX.
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    \5\ See Phlx Rule 1001A(c).
    \6\ See Securities Exchange Act Release Nos. 36577 (December 12, 
1995), 60 FR 65705 (December 20, 1995) (reducing the value of the 
Phlx National Over-the-Counter Index); and 35999 (July 20, 1995), 60 
FR 38387 (July 26, 1995) (reducing the value of the Phlx 
Semiconductor Index).
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    In conjunction with the split, the Exchange will list strike prices 
surrounding the new, lower index value, pursuant to Phlx Rule 1101A. 
\7\ The Exchange will announce the effective date by way of Exchange 
memoranda to the membership, also serving as notice of the strike price 
and position limit changes.\8\
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    \7\ Specifically, because the Index value would be less than 
500, the applicable strike price interval would be $5 in the first 
four months and $25 in the fifth month and the long-term options. 
See Rule 1101A(a).
    \8\ See note 10, infra.
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    The Phlx states that the purpose of the proposal is to attract 
additional liquidity to the product in those series that public 
customers are most interested in trading. For example, a near-term, at-
the-money call option series currently trades at approximately $1,150 
per contract. The Exchange believes that certain investors and traders 
currently may be impeded from trading at such levels. With the Index 
split, that same option series (once adjusted), with all else remaining 
equal, could trade at approximately $387 per contract. The Phlx 
believes that a reduced premium value should encourage additional 
investor interest.
    The Exchange believes that Super Cap Index Options provide an 
important opportunity for investors to hedge and speculate upon the 
market risk associated with the underlying stocks. By reducing the 
value of the Index, such investors will be able to utilize this trading 
vehicle, while extending a smaller outlay of capital. The Exchange 
believes that this, in turn, should attract additional investors and 
create a more active and liquid trading environment.

II. 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, the requirements of Section 6(b)(5) of the Act.\9\ 
Specifically, the Commission believes that reducing the value of the 
Index will serve to promote the public interest and help remove 
impediments to a free and open securities market, by providing a 
broader range of investors with a means of hedging exposure to market 
risk associated with securities representing the most highly 
capitalized companies. Further, the Commission notes that reducing the 
value of HFX options should help attract additional investors, thus 
creating a more active and liquid trading market. The Commission notes 
that the Phlx will be providing market participants with adequate prior 
notice of the Index level change in order to avoid investor 
confusion.\10\
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    \9\ 15 U.S.C. 78f(b)(5).
    \10\ The Phlx will be issuing two circulars to its membership 
prior to the effective date of this change. The first circular will 
advise the members generally of the reduction in value of the HFX 
and the temporary increase in position and exercise limits. The 
second circular, which will be issued within one week of the 
effective date of the change, will also list specific strike prices 
for the adjusted HFX options. Telephone Conversation between Terry 
McClosky, Vice President, Regulatory Services, Phlx, and James T. 
McHale, Attorney, Office of Market Supervision, Division of Market 
Regulation, on August 7, 1996.
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    The Commission also believes that the Phlx's position and exercise 
limits and strike price adjustments are appropriate and consistent with 
the Act. In this regard, the Commission notes that the position and 
exercise limits and strike price adjustments are similar to the 
approach used to adjust outstanding options on stocks that have 
undergone a two-for-one stock split as well as reductions in value of 
other indexes. \11\
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    \11\ See note 6, supra.
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    The Commission believes that tripling the Index's divisor will not 
have an adverse market impact or make trading HFX options susceptible 
to manipulation. After the split, the Index will continue to be 
comprised of the same stocks with the same weightings and will be 
calculated in the same manner (except for the change in divisor). 
Finally, the Phlx's surveillance procedures will also remain the same.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-Phlx-96-17) is approved.

    \12\ 15 U.C.C. 78s(b)(2).
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    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. 96-20718 Filed 8-13-96; 8:45 am]
BILLING CODE 8010-01-M