[Federal Register Volume 61, Number 176 (Tuesday, September 10, 1996)]
[Notices]
[Pages 47775-47777]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23038]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37629; File No. SR-Phlx-96-33]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to an 
Increase in Narrow-Based Index Option Position and Exercise Limits

September 3, 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 August 2, 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 Phlx 
Rules 1001A(b)(1) and 1002A to increase the position and exercise 
limits for narrow-based index options from 6,000, 9,000, or 12,000 
contracts to 9,000, 12,000, or 15,000 contracts.\3\
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    \3\ Position limits impose a ceiling on the number of option 
contracts which an investor or group of investors acting in concert 
may hold or write in each class of options on the same side of the 
market (i.e., aggregating long calls and short puts or long puts and 
short calls). Exercise limits prohibit an investor or group of 
investors acting in concert from exercising more than a specified 
number of puts or calls in a particular class within five 
consecutive business days.
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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 prupose 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 Section 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
    According to the Phlx, the purpose of the proposed rule change is 
to increase narrow-based index option position and exercise limits in 
order to attract additional trading interest and, thus, promote depth 
and liquidity and Phlx index options. The Exchange believes that the 
current limits constrain certain investors from trading index options.
    Currently, Phlx Rules 1001A(b)(1) and 1002A establish the following 
position and exercise limits for narrow-based (industry) index options: 
(i) 6,000 contracts for an index where a single component stock 
accounted, on average, for 30% or more of the index value during the 
30-day period immediately preceding the Exchange's semi-annual review 
of narrow-based index option position limits; (ii) 9,000 contracts for 
an index where a single component stock accounted, on average, for 20% 
or more of the index value or any five component stocks together 
accounted, on average, for more than 50% of the index value, but no 
single component stock in the group accounted, on average, for 30% or 
more of the index value during the 30-day period immediately preceding 
the Exchange's semi-annual review of narrow-based index option position 
limits; and (iii) 12,000 contracts where the conditions required a 
limit of 6,000 contracts or 9,000 contracts have not occurred. For the 
reasons presented herein, the Phlx proposes to amend Phlx Rules 
1001A(b)(1) and 1002A to increase the position and exercise limits for 
narrow-based index options from 6,000, 9,000, or 12,000 contracts to 
9,000, 12,000, or 15,000 contracts.

[[Page 47776]]

    The Exchange believes that the proposed increase is appropriate in 
light of the Exchange's more than ten years experience trading index 
options. In 1983, the Gold/Silver Index (``XAU'') was the first narrow-
based index option to be traded on the Phlx, listed with a position 
limit of 4,000 contracts.\4\ Since that time, the Exchange has honed 
its experience in monitoring and surveilling index options trading by 
developing and implementing an increasingly sophisticated regulatory 
program. This program has benefited from technological advances and has 
matured alongside index options trading. Moreover, the market for index 
options has also evolved, as more investors are familiar with the 
product and its uses. This is reflected in the appreciable growth in 
index options volume not only since 1983 but in most recent years as 
well.\5\
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    \4\ See Securities Exchange Act Release No. 20437 (December 2, 
1983), 48 FR 55229 (December 9, 1993) (File No. SR-Phlx-83-17).
    \5\ According to the Phlx, index options volume increased 48% 
(from 998,780 contracts to 1,483,585 contracts) from the period 
January-June 1995 to January-June 1996.
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    The Exchange recognizes that the purposes of these limits are to 
prevent manipulation and to protect against disruption of the markets 
for both options as well as the underlying securities. The Exchange has 
considered the effects of increased position limits on the marketplace 
and believes that concerns regarding manipulation and disruption are 
adequately addressed by the Phlx's regulatory program. The Phlx 
continues to monitor the markets for evidence of manipulation or 
disruption caused by investors with positions at or near current 
position or exercise limits and the new limits will not diminish the 
surveillance function in this regard.
    Since 1983 and the advent of the XAU, the Exchange has listed 
several index options. Currently, the Phlx trades options on the 
following seven narrow-based indexes, with their current position 
limits noted:
    1. Gold/Silver Index (``XAU'') 6,000 contracts.
    2. Utility Index (``UTY'') 12,000 contracts.
    3. Phlx/KBW Bank Index (``BKX'') 12,000 contracts.
    4. Phone Index (``PNX'') 6,000 contracts.
    5. Semiconductor Index (``SOX'') 12,000 contracts.
    6. Airline Sector Index (``PLN'') 12,000 contracts.
    7. Forest/Paper Products (``FPP'') 12,000 contracts.
    The current levels for narrow-based index options have been in 
place since September 1995.\6\ Since that time, however, index options 
have continued to experience heavy and steady volume, with a 
concomitant increase in open interest. In this light, the Exchange 
believes that the proposed limits of 9,000, 12,000, or 15,000 contracts 
should further increase the depth and liquidity of the markets for 
index options by attracting additional investor interest. The Phlx also 
believes that higher position limits would further accommodate the 
hedging needs of Exchange market makers and specialists, who are 
restricted by current levels.
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    \6\ See Securities Exchange Act Release No. 36194 (September 6, 
1995), 60 FR 47637 (September 13, 1995) (F8le No. SR-Phlx-95-16) 
(increasing position and exercise limits for narrow-based index 
options to 6,000, 9,000, or 12,000 contracts) (``Securities Exchange 
Act Release No. 36194'').
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    Further, the Exchange believes that the proposed increases are 
reasonable. The Phlx states that in prior releases approving increased 
position limits, the Commission has acknowledged that a gradual, 
evolutionary approach has been adopted in increasing position and 
exercise limits. Accordingly, the Phlx proposes a 25% increase in the 
highest tier (from 12,000 to 15,000 contracts); a 33% increase in the 
middle tier (from 9,000 to 12,000 contracts); and a 50% increase in the 
lowest tier (from 6,000 to 9,000 contracts). The Exchange believes that 
these proposed increases are consistent with the gradual evolution 
cited by the Commission, as the proposed levels represent reasonable 
increases which are in line with prior changes.\7\
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    \7\ See, e.g., Securities Exchange Act Release No. 36194, supra 
note 6, where the Phlx's narrow-based position limit changes 
represented a 9% increase in the lowest tier (from 5,500 to 6,000 
contracts); a 20% increase in the middle tier (from 7,500 to 9,000 
contracts); and a 14% increase in the highest tier (from 10,500 to 
12,000 contracts).
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    The Exchange believes that the 1995 changes were so modest (20% or 
less) that position limit increases are once again needed. Since the 
1995 changes were implemented, the Exchange has been requested by its 
members and customers to again propose an increase in position limits, 
arguing that these limits hamper their ability to execute investment 
strategies. In light of the large portfolios common to institutional 
trading and the large-sized transactions that are required to execute 
complicated, cross-market strategies, such requests emphasize that 
institutional hedging needs and trading objectives may exceed current 
limits. Floor members have also expressed the resulting deleterious 
effect on index options trading in an exchange environment. Based on 
such member and customer requests, the Exchange has also realized that 
the current position limit levels continue to discourage market 
participation by large investors and the institutions that compete to 
facilitate the trading interests of large investors. Accordingly, this 
proposal aims to accommodate the liquidity and hedging needs of large 
investors as well as the facilitators of hose investors.
    In proposing these position and exercise limit increases, the 
Exchange considered whether alternatives were available to accommodate 
both members and investors. For instance, an index option hedge 
exemption was recently implemented by the Exchange. However, the 
specific requirements of this exemption, including the definition of a 
hedge, may not be useful for all investors. In addition, the Exchange 
considered whether flexible index options (``FLEX options''), which are 
subject to separate, higher position limits, address the needs 
expressed to the Phlx. In this regard, the Exchange realized that 
because of certain attributes of FLEX options, such as lack of 
continuous quoting, this product's utility may be limited to a discrete 
group of investors. Likewise, the Exchange does not believe that FLEX 
options trading should foreclose the Exchange's responsibility to 
embellish upon its listed index options program by revisiting and 
addressing regulatory restrictions such as position limits.
    Concurrent with the proposed increase in position limits, the 
Exchange is also proposing a corresponding increase to narrow-based 
index option exercise limits. The Exchange believes that this increase 
is necessary and appropriate for the same reasons as the rationale 
cited above for the proposed position limit increases. Furthermore, 
exercise limits constrict trading strategies by preventing investors 
from exercising positions larger than the limit within five consecutive 
business days. The Exchange also notes that most of its index options 
currently are or will become European-style, exercisable only during a 
specified period at expiration, such that the manipulation and market 
disruption concerns associated with large exercises will be limited.\8\
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    \8\ See, e.g., Securities Exchange Act Release No. 37575 (August 
15, 1996), 61 FR 43289 (August 21, 1996), (File No. SR-Phlx-96-18) 
(order approving change in exercise style of Phlx's National Over-
the-Counter Index from American-style to European-style).
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2. Statutory Basis
    The Exchange believes that its proposal to increase narrow-based 
index option position and exercise limits is

[[Page 47777]]

consistent with Section 6 of the Act in general, and with 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, as well as to protect investors and the public interest. 
The Exchange also believes that the proposal should remove impediments 
to and perfect the mechanism of a free and open market by providing 
market opportunity to investors constricted by current position limit 
levels. The Phlx believes that by stimulating market participation, and 
thereby increasing option market depth and liquidity, the proposed rule 
change should promote just and equitable principles of trade. At the 
same time, the Phlx believes that the proposed position limits should 
continue to prevent fraudulent and manipulative acts and practices as 
well as protect investors and the public interest by limiting the 
ability to disrupt and manipulate the markets for options as well as 
the underlying securities.

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 either 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 Phlx. All 
submissions should refer to File No. SR-Phlx-96-33 and should be 
submitted by October 1, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23038 Filed 9-9-96; 8:45 am]
BILLING CODE 8010-01-M