[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
[[Page 50369]]
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