[Federal Register Volume 62, Number 3 (Monday, January 6, 1997)]
[Notices]
[Pages 783-785]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-148]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38093; File No. SR-Phlx-96-32]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 1 to Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc., Relating to Index Options Exercise 
Advices

December 27, 1996.

I. Introduction

    On July 29, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Exchange Rule 1042A, Exercise of Option 
Contracts, and Floor Procedure Advice (``Advice'') G-1, retitled Index 
Option Exercise Advice Forms. On December 4, 1996, the Exchange 
submitted Amendment No. 1 to their proposal 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 it occurs at a time other than the regular close 
of trading.'' \3\ Currently, the deadline for such submissions is ``no 
later than 4:30 p.m.'' In addition, the Phlx proposed 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 the amount of

[[Page 784]]

option contracts indicated on such forms.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Philip H. Becker, Senior Vice President, 
Chief Regulatory Officer, Phlx, to Matthew Morris, Office of Market 
Supervision, Division of Market Regulation, Commission, dated 
December 4, 1996 (``Amendment No. 1''). According to the Phlx, the 
purpose of this change is to clarify that modified hours are not 
limited to trading hours extending beyond 4:15 p.m., but include any 
modification to Exchange trading hours, including an early close. As 
such, the Phlx's revised rule language does not alter the Exchange's 
original intent. (The Commission notes that the Exchange 
inadvertently filed Amendment No. 1 to the rule proposal as 
Amendment No. 2.)
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    The proposed rule change appeared in the Federal Register on August 
28, 1996.\4\ No comments were received on the proposed rule change. 
This order approves the Phlx's proposal, as amended.
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    \4\ See Securities Exchange Act Release No. 37593 (August 21, 
1996), 61 FR 44379 (August 28, 1996).
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II. Background and Description

    Exchange Rule 1042A and Advice G-1 govern the exercise of index 
options.\5\ 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 
contracts.\6\
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    \5\ 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.
    \6\ 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 p.m. 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 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.
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    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 
days based on information obtained after the cut-off.\7\
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    \7\ 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.
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    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, if it occurs at a time other than the regular 
close of trading. 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 time 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.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Section 6(b)(5),\8\ 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. The Commission believes that the 
amendments to Exchange Rule 1042A and Advice G-1 which modify the 
deadline for submitting exercise advice forms and memoranda will 
benefit market participants by enabling them to make investment 
decisions based upon the evaluation of their final positions after 
having completed trading for the day. Specifically, the proposal 
clarifies the application of Exchange Rule 1042A and Advice G-1 during 
periods when trading ends at a non-regular time. This clarification 
should help ensure that market participants have neither an inadequate 
nor an excessive amount of time in order to make their option exercise 
decisions after the close of trading.\9\
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    \8\ 15 U.S.C. Sec. 78f(b) (1988).
    \9\ The Commission notes that any change to the Phlx's regular 
trading hours for affected options would require an amendment to 
Exchange Rule 1042A and Advice G-1 in order to maintain the 
appropriate time interval allowed between the close of trading and 
the required submission of exercise forms and memoranda.
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    The Commission finds good cause to approve Amendment No. 1 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, because the revised rule language contained in Amendment 
No. 1 only serves to clarify the Exchange's submitted proposal, no new 
regulatory concerns are raised. In addition, the Phlx's rule proposal 
was subject to a full notice and comment period, and no comments were 
received. Accordingly, the Commission believes that it is consistent 
with Sections 6(b)(5) and 19(b)(2) of the Act to approve Amendment No. 
1 to the proposed rule change on an accelerated basis.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 to the rule proposal. 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

[[Page 785]]

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-96-32 and should be submitted by January 27, 1997.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the Phlx's 
proposal is consistent with the requirements of the Act and the rules 
and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-Phlx-96-32), as amended, is 
approved.

    \10\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-148 Filed 1-3-97; 8:45 am]
BILLING CODE 8010-01-M