[Federal Register Volume 61, Number 187 (Wednesday, September 25, 1996)]
[Notices]
[Pages 50367-50369]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24492]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37694; File No. SR-Phlx-95-19]


Self-Regulatory Organizations; Notice of Filing of Amendments No. 
2, 3, and 4 to Proposed Rule Change by the Philadelphia Stock Exchange, 
Inc., Relating to the Listing and Trading of DIVS, OWLS and RISKS

September 17, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on May 
8, 1995, 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

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below, which Items have been prepared by the self-regulatory 
organization. On July 12, 1996, Phlx submitted Amendment No. 1 
(``Amendment No. 1'') to the proposal to address various issues.\1\ 
Notice of the proposal and Amendment No. 1 appeared in the Federal 
Register on August 28, 1995.\2\ No comments were received on the 
proposal. On May 30, August 22, and September 9, 1996, Phlx submitted 
Amendments No. 2, 3, and 4 to the proposal, respectively, to address, 
among other things, issues related to spread margin and position 
limits.\3\ The commission is publishing this notice to solicit comments 
on the Amendments from interested persons.
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    \1\Letter from Michele R. Weisbaum, Associate General Counsel, 
Phlx, to; Sharon Lawson, SEC, dated June 30, 1996.
    \2\Securities Exchange Act Release No. 36127 (Aug. 18, 1995), 60 
FR 44533.
    \3\Letters from Michele R. Weisbaum, Phlx, to: Sharon Lawson, 
SEC, dated May 30, 1996 (``Amendment No. 2'') and August 21, 1996 
(``Amendment No. 3''); and Stephen Youhn, SEC, dated September 6, 
1996 (``Amendment No. 4'' together with Amendments No. 2 and 3, 
``Amendments''). In Amendment No. 3, Phlx responds to issues raised 
by the SEC's review of Amendment No. 2. Amendment No. 4 addresses 
strike price intervals for the products.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Phlx proposes to amend its limiting standards applicable to the 
trading of DIVS, OWLS and RISKS (``DIVS, OWLS and RISKS'' or ``DORs''). 
The text of the Amendments are available at the Office of the 
Secretary, Phlx and at the Commission.

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 Phlx 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 Phlx 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

    Phlx proposes to amend its DORs filing in the following respects:
    1. Contract Size: Phlx originally proposed that one DIVS, OWLS or 
RISKS contract represent an interest in one share of the underlying 
security. In order to prevent rounding problems that may occur at 
settlement, the Exchange proposes to have the DIVS, OWLS and RISKS each 
represent 100 shares of the underlying security. For example, a 
purchaser of one DIVS contract would own the right to receive 
substitute payments in the same amount as the regular dividends 
declared and paid on 100 shares of the underlying common stock.
    2. Position Limits: The Exchange originally proposed to adopt a 
position limit of 1 million each of DIVS, OWLS and RISKS and would not 
have required aggregation with options positions pursuant to new Rule 
1001D. In Amendment No. 2, the Exchange proposed that the greater of a 
holder's OWLS or RISKS positions be aggregated with option positions on 
the underlying security and have the same position limit as that set 
for the options on the underlying security. In Amendment No. 3, Phlx 
now proposes to aggregate all positions in OWLS and RISKS with put and 
call options on the same side of the market on the same underlying 
security.
    According to Phlx, since an OWLS or RISKS position to the holder is 
a bullish position, the Exchange proposes that long OWLS and RISKS be 
aggregated with long call and short put positions in the related class 
of equity options. Similarly, since the Exchange believes that OWLS and 
RISKS, from the position of the seller is a bearish position, short 
OWLS and RISKS will be aggregated with short call and long put 
positions in the related class of equity options.
    Because the DIVS positions only entitle holders to a substitute 
dividend stream and not actual control of the underlying stock, the 
Exchange proposes that the position limit for DIVS be equal to the 
position limit on the same class of options pursuant to Rule 1001, 
however, they would not be aggregated with positions in those options 
or with positions in OWLS and RISKS on that same underlying security. 
As an example, a customer could hold 25,000 XON DIVS in addition to a 
combined total of 25,000 OWLS, RISKS or equity options on XON on the 
same side of the market.
    3. Adjustments: Phlx originally proposed a specific scheme for 
adjusting DIVS, OWLS and RISKS positions for stock splits, stock 
dividends, liquidating, special or partial liquidating dividends, spin-
offs, mergers, rights offerings and tender offers. Phlx now proposes to 
withdraw those sections of the filing. Adjustments to the products for 
all corporate and other actions will be made in accordance with the 
rules of the Options Clearing Corporation (``OCC'').\4\
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     \4\ See Amendment No. 2.
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    4. Customer Margin: Phlx originally proposed equity margin for all 
positions in DORS. In Amendment No. 1, Phlx proposed options margin 
requirements for RISKS positions and equity margin for positions in 
OWLS and DIVS. In addition, Phlx proposed the use of escrow receipts or 
letters of guarantee in lieu of margin. Finally, Amendment No. 1 also 
introduced the use of spread margin treatment for certain positions in 
DORs. In Amendment No. 2, Phlx proposed that boths OWLS and RISKS be 
margined as options (DIVS remain subject to equity margin). 
Accordingly, the full value of the purchase price of an OWLS or RISKS 
must be paid at the time of purchase. The minimum margin required for 
any short position would be 100% of the OWLS or RISKS current market 
price plus 20% of the market value of the OWLS or RISKS except that the 
maximum margin for a short OWLS position shall not exceed its 
termination claim. In Amendment No. 3, however, Phlx proposes two 
spread margin exceptions to this general rule.
    First, under proposed Rule 1022D(C)(4)(A), if a customer has a 
short OWLS position and as long OWLS position which expires on or 
before the termination date of the short position, Phlx proposes to 
treat the positions exactly like an options spread. Accordingly, the 
margin requirement will be the lesser or the uncovered margin 
requirement or the amount, if any, by which the termination claim of 
the short position exceeds the termination claim of the long position. 
Similarly, pursuant to subparagraph (a)(B), the margin requirement for 
a short RISKS position and a long RISKS position which expires after 
the termination date of the short position would be the lesser of the 
uncovered margin requirement or the amount by which the termination 
claim of the long position exceeds the termination claim of the short 
position.\5\
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    \5\ See Amendment No. 3.
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    Second, under Rule 1022D(c)(5)(A), Phlx proposes to treat covered 
OWLS or RISKS short positions similar to the method in which covered 
call positions are treated in Rule 722(c)(2)(F). Accordingly, if a 
customer holds a short OWLS or RISKS position and a long position in 
the underlying security or one exchangeable or convertible into the 
underlying security (excluding warrants), no margin will be required on 
the short position provided the long position is margined in accord 
with Rule 722 and the long position expires

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after the termination date of the short OWLS or RISKS position.\6\
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    \6\ Id.
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    Also under proposed Rule 1022D(c)(5), the margin requirement for a 
short OWLS or RISKS position which is covered by a long warrant 
convertible into an equivalent number of shares of the underlying 
security, will be the lesser of the uncovered margin requirement or the 
amount by which the conversion price of the long warrant exceeds the 
termination claim of the short OWLS or RISKS provided the right to 
convert the warrant does not expire on or before the termination date 
of the short OWLS or RISKS.\7\
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    \7\ Id.
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    Phlx believes the sum of the prices for an OWLS and RISKS position 
on the same underlying stock should approximate the price of the 
underlying stock (less the value of the DIVS component). Accordingly, 
Phlx proposes that a long stock position be sufficient cover for both a 
shows OWLS and a short RISKS position, provided the OWLS and RISKS have 
the same strike price and expiration date.
    Phlx proposes that DIVS margin will be the same as it is for stock. 
The margin requirement will be 25% of the market value of all long 
positions plus 30% of the market value of each short position in a 
customer's account. Where a short DIVS position is covered by a long 
position in the underlying security or any other security immediately 
exchangeable or convertible (other than warrants) into the security, 
the margin on the short DIVSs position will be 10% of the market value 
of the long securities position.\8\
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    \8\  See Amendment No. 1.
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    Finally, because OCC cannot yet facilitate escrow receipts or 
letters of guarantee for these products, Phlx proposes to withdraw all 
corresponding provisions as they relate to DORs.\9\
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    \9\  See Amendment No. 3.
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    5. Strike Price Intervals: The Phlx proposes to amend proposed new 
Rule 1012D in order to address strike price intervals for DORs. 
Specially, Phlx proposes that DORs not be subject to the strike price 
interval, bid/ask differential and continuity rules respecting put and 
call options until the time to expiration is less than nine months. 
Phlx represents that this treatment is consistent with the rules for 
trading long-term equity and index options.\10\
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    \10\  See Amendment No. 4.
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    The Exchange believes the proposed Amendments are consistent with 
Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5) in particular in that they are designed to prevent 
fraudulent and manipulative acts and practices and to promote just and 
equitable principle of trade, and are not designed to permit unfair 
discrimination between customers, issuers, brokers, and dealers.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe the proposed Amendments will impose 
any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed Amendments.

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 its 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 Amendments. 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 will also be available 
for inspection and copying at the principal office of the Phlx. All 
submissions should refer to File No. SR-Phlx-95-19 and should be 
submitted October 16, 1996.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-24492 Filed 9-24-96; 8:45 am]
BILLING CODE 8010-01-M