[Federal Register Volume 61, Number 208 (Friday, October 25, 1996)]
[Notices]
[Pages 55345-55346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27389]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37842; File No. SR-PSE-96-40]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Stock Exchange, Inc., Relating to Index Options 
on the Dow Jones & Co. Taiwan Index

October 18, 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 October 17, 1996, the Pacific Stock Exchange, Inc. (``PSE'' 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 PSE, pursuant to Rule 19b-4 of the Act, proposes to list for 
trading index options on the Dow Jones & Co. Taiwan Index (``Index'').

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. The Exchange is proposing to list and trade cash-
settled, European-style stock index options on the Dow Jones & Co. 
Taiwan Index. The Index is comprised of 113 representative stocks 
traded on the Taiwan Stock Exchange (``TSE'').\3\ The Exchange 
represents that the Index is representative of the Taiwan stock market 
as a whole, and therefore, is deemed to be a broad-based index.
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    \3\ A list of index components is available at the Commission 
and at the PSE.
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Index Design
    The Index was designed by, and is maintained by, Dow Jones & Co. 
The 113 stocks comprising the Index were selected for their market 
weight, trading liquidity, and representation of the business 
industries reflected on the TSE. The Exchange believes that these 
stocks reflect the industrial composition of the broader Taiwanese 
equity market.
    The Index is weighted by the market capitalization of the component 
stocks. As of August 30, 1996, the market capitalization of the Index 
was US$181 billion (at the exchange rate of NT $27.5 per dollar). The 
average market capitalization of these stocks was $1.6 billion on the 
same date (at the same rate of exchange). The individual market 
capitalization of these stocks ranged from $150 million (Hong Ho 
Precision Textile Co.) to $18.6 billion (Cathay Life Insurance) on the 
same date. The largest stock accounted for 10.26% of the Index, while 
the smallest accounted for .08%. The top five stocks in the Index, by 
weight, accounted for approximately 31% of the Index. The average daily 
trading volume of the component securities for the period April 1 
through August 30, 1996, ranged from a low of 457,091 shares (Hsing Ta 
Cement Co.) to a high of 49,879,418 shares (China Steel), with an 
average daily trading volume for all components of the Index of 
approximately 7,698,763 shares.
Calculation and Maintenance of Index
    The value of the Index is determined by multiplying the price of 
each stock by its number of shares outstanding, adding those sums, and 
then dividing by a divisor which gives the Index a value of 100 on its 
base date of December 31, 1991. The Index had a closing value of 160.33 
on August 30, 1996. The Index will be maintained by Dow Jones & Co. 
and, in order to maintain continuity of the Index, the divisor of the 
Index will be adjusted to reflect certain events relating to the 
component stocks. These events include, but are not limited to, changes 
in the number of shares outstanding, spin-offs, certain rights 
issuances, and mergers and acquisitions.
    The composition of the Index will be reviewed periodically and Dow 
Jones & Co. may make component changes at any time to ensure that the 
Index continues to represent the overall character of the Taiwanese 
equity market. When considering replacement stocks, Dow Jones & Co. 
will choose from among the most heavily capitalized and actively traded 
stocks on the TSE. In addition, Dow Jones & Co. will consider other 
factors including industry grouping, level of foreign accessibility 
(i.e., whether foreigners may purchase the stock), name recognition, 
and volatility.
Index Option Trading
    The Exchange proposes to base trading in options on the Index on 
the full value of the Index as expressed in U.S. dollars. The Exchange 
also may provide for the listing of long-term index option series 
(``LEAPS'') on the Index. The Exchange will list expiration months for 
Index options and Index LEAPS in accordance with PSE Rule 7.8.
    The trading hours for options on the Index will be from 6:30 a.m. 
Pacific time to 1:15 p.m. Pacific time. Dow Jones Telerate 
(``Telerate'') will calculate the value of the Index every fifteen 
seconds throughout the trading day and disseminate the Index value 
through the Options Price Reporting Authority (``OPRA'').
    The Exchange is proposing to establish position limits for Index 
options equal to 50,000 contracts on the same side of the market, with 
no more than 30,000 contracts in the series with the nearest expiration 
date. These limits are roughly equivalent, in dollar terms, to the 
limits applicable to options on other indices. Furthermore, the hedge 
exemption rule applicable to broad-based index options, Commentary .02 
to PSE Rule 7.6, will apply to Index options.
    The PSE also represents that it has the necessary systems capacity 
to support new series that would result from the introduction of the 
Index options.
Exercise and Settlement
    The proposed options on the Index will expire on the Saturday 
following the third Friday of the expiration month, and trading in the 
expiring contract month on the PSE will normally cease on Friday at 
1:15 p.m. Pacific time unless a holiday occurs.

[[Page 55346]]

The exercise settlement value of Index options at expiration will be 
determined from closing prices established at the close of the regular 
Friday trading sessions in Taiwan. If a stock does not trade during 
this interval or if it fails to open for trading, the last available 
price of the stock will be used in the calculation of the Index. When 
expirations are removed in accordance with Exchange holidays, such as 
when the PSE is closed on the Friday before expiration, the last 
trading day for expiring options will be Thursday and the exercise 
settlement value of Index options at expiration will be determined at 
the close of the regular Thursday trading sessions in Taiwan even if 
the Taiwanese markets are open on Friday. If the Taiwanese markets are 
closed on the Friday before expiration but the PSE is open for trading, 
the last trading day for expiring options will similarly be Thursday, 
with the exercise settlement value being determined from Thursday 
closing prices on the TSE.
Surveillance
    The Exchange will apply its existing index option surveillance 
procedures to Index options. In addition, the Exchange has entered into 
a surveillance sharing agreement with the TSE, which will enable the 
Exchange to obtain information concerning the trading of the component 
stocks of the Index.
    2. Statutory basis. The PSE believes that the proposed rule change 
is consistent with Section 6(b)(5) of the Act in that it is designed to 
facilitate transactions in securities as well as to protect investors 
and the public interest.

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 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 PSE. All 
submissions should refer to File No. SR-PSE-96-40 and should be 
submitted by November 15, 1996.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\

    \4\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-27389 Filed 10-24-96; 8:45 am]
BILLING CODE 8010-01-M