[Federal Register Volume 61, Number 168 (Wednesday, August 28, 1996)]
[Pages 44379-44380]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21888]


[Release No. 34-37593; File No. SR-Phlx-96-32]

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

    Pursuant to Section 19(b)(1) of the Securities and Exchange Act of 
1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 29, 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.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.

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, retitled Index Option Exercise Advice Forms, 
to provide that the deadline for submitting a memorandum to exercise 
and an exercise advice form will be ``no later than 4:30 p.m. or 
fifteen minutes after the close of trading, if trading hours are 
modified or extended beyond 4:15 p.m.'' Currently, the deadline for 
such submissions is ``no later than 4:30 p.m.'' In addition, the Phlx 
proposes to codify that anyone intending to exercise index options must 
complete a memorandum to exercise and/or an exercise advice form in 
compliance with the exercise cut-off time and must exercise that amount 
of option contracts indicated on such forms.

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 contract must be 
received or prepared by the Phlx member organization no later than 4:30 
p.m. on the day of exercise. In addition, Exchange Rule 1042A(a)(ii) 
requires the submission of an exercise advice form to the Exchange no 
later than 4:30 p.m. when exercising American-style index option 

    \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\ The Phlx notes that Exchange Rule 1042A previously allowed 
the submission of a memorandum to exercise and an exercise advice 
form until five minutes after the close of trading. See Securities 
Exchange Act Release No. 32991 (September 30, 1993), 58 FR 52337 
(October 7, 1993) (File No. SR-Phlx-92-31). Specifically, the 
exercise cut-off time for narrow-based index options was 4:15 p.m. 
or five minutes after the close of trading, and for broad-based 
index options it was 4:20 pm or five minutes after the close of 
trading. When the exercise cut-off time was changed to 4:30 p.m., 
however, the language ``or five minutes after the close of trading'' 
was deleted. See Securities and Exchange Act Release No. 37077 
(April 5, 1996), 61 FR 16156 (April 11, 1996) (File No. Phlx-95-86). 
As such, the Phlx's current proposal resurrects this concept.

    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 

[[Page 44380]]

based on information obtained after the cut-off.\5\

    \5\ Pursuant to Exchange Rule 1042A(b), however, these 
requirements are not applicable on the last business day before 
expiration, generally an ``expiration Friday.'' 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.

    The Exchange currently proposes to amend these provisions such that 
the exercise cut-off time would be 4:30 p.m. or fifteen minutes after 
the close of trading, where trading hours are modified or extended 
beyond 4:15 p.m. For instance, on certain days prior to a holiday, the 
Exchange may cease trading broad-based index options at 1:15 p.m. Under 
the current rule, however, the exercise cut-off time would remain at 
4:30 p.m., regardless of when trading ceased. In comparison, under the 
proposal, the exercise cut-off time in the above example would change 
to 1:30 p.m.
    With respect to trading hours extending beyond 4:15 p.m., the 
Exchange notes that in certain situations a trading rotation may occur 
after the ordinary 4:10 or 4:15 p.m. close of trading. For instance, if 
a halt in the trading of a component issue causes an index option to 
halt trading, and if the index option re-opens at 4:00 p.m., an opening 
rotation may need to be conducted. Because such rotation may result in 
extended trading hours, the exercise cut-off time under the proposal 
would be fifteen minutes after the end of the rotation. In this manner, 
a cut-off of fifteen minutes after the close of trading will ensure 
that index option traders and investors have adequate time to make 
exercise decisions.
    In addition, the Exchange proposes to adopt an amendment procedure 
to facilitate changes in exercise decisions prior to the cut-off time. 
The amended exercise advice form and amendment procedure should add 
certainty to the exercise process by clarifying how a change in a 
decision to exercise should be indicated to the Exchange. In this 
manner, when amending an exercise decision, a new exercise advice form 
must be filed with the Exchange, listing all exercise decisions, not 
just the one being amended. Omitting one series means that no exercise 
of that series is intended and a violation of the rule occurs if that 
series is exercised. Further, all exercise advice forms, whether 
original or those amending previous submissions, must be filed prior to 
the exercise cut-off time.
2. Statutory Basis
    The Phlx believes that its proposal is consistent with Section 6(b) 
of the Act, in general, and furthers the objectives of Section 6(b)(5), 
in particular, in that it is designed to promote just and equitable 
principles of trade, prevent fraudulent and manipulative acts and 
practices, to foster cooperation and coordination with persons engaged 
in regulating, clearing, settling, and processing information with 
respect to securities, as well as to protect investors and the public 
interest, by allowing a reasonable amount of time to submit an exercise 
decision when trading hours are modified or extended.

B. Self-Regulatory Organization's Statement on Bruden 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

    Comments were neither solicited nor 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 changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes 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, wil 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 filings also will be 
available for inspection and copying at the principal office of the 
Phlx. All submissions should refer to File No. SR-Phlx-96-32 and should 
be submitted by September 18, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\

    \6\ 17 CFR 200.30-3 (a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21888 Filed 8-27-96; 8:45 am]