[Federal Register Volume 62, Number 36 (Monday, February 24, 1997)]
[Notices]
[Pages 8291-8292]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4447]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38292; File No. SR-Phlx-96-36]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
of, and Order Granting Accelerated Approval to, Amendment No. 1 to the 
Proposed Rule Change Relating to Index Value Calculations by the Index 
Calculation Engine (``ICE'') System

February 14, 1997.
    On October 3, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``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 permit the Phlx to act as the 
reporting authority for its index options under certain circumstances.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on October 10, 1996.\3\ No comments were received on the 
proposal. Subsequently, the Phlx amended the proposed rule change.\4\ 
This order approves the proposal, including Amendment No. 1 on an 
accelerated basis.
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    \3\ Securities Exchange Act Release No. 37782 (Oct. 3, 1996), 61 
FR 53254.
    \4\ See Letter from Theresa McCloskey, Vice President, 
Regulatory Services, Phlx, to Sharon Lawson, Senior Special Counsel, 
Division of Market Regulation, Office of Market Supervision, SEC, 
dated January 23, 1997, and letter from Theresa McCloskey, Vice 
President, Regulatory Services, Phlx, to Sharon Lawson, Senior 
Special Counsel, Division of Market Regulation, Office of Market 
Supervision, SEC, dated January 29, 1997 (collectively ``Amendment 
No. 1''). Amendment No. 1 withdraws that portion of the proposal 
seeking ``interim authority'' to utilize the ICE system value. 
Interim authority, in this case, refers to the Exchange's ability to 
continue to utilize the ICE system during that interim time period 
after a temporary operational problem at the designated reporting 
authority is corrected, but before receiving Commission approval to 
appoint a different reporting authority. In addition, Amendment No. 
1 clarifies that designation of ICE as the reporting authority for a 
particular options product must be filed pursuant to Section 19(b) 
of the Act and that the Phlx's request for using ICE as the 
reporting authority for FLEX options will be incorporated into the 
FLEX options proposal (SR-Phlx-96-38).
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    Currently, three market (broad-based) index options, seven industry 
(narrow-based or sector) index options, and the Super Cap Index option 
trade on the Exchange. The reporting authority for each index option is 
currently Bridge Data. For each index option listed on the Exchange, 
the specifications and descriptions filed with the Commission detail 
how the index value is calculated and that the calculation is conducted 
by Bridge.
    In the course of reviewing inconsistencies in index value 
calculations, as well as the disaster recovery implications of using a 
single, outside reporting authority, the Exchange decided to create its 
own internal system for the calculation and dissemination of index 
values--the Index Calculation Engine (``ICE'') system. Recently, this 
system was completed, tested, and implemented as a surveillance tool 
for Phlx Regulatory Services and Market Surveillance staff monitoring 
Exchange index options trading. In an effort to make use of the 
capabilities of the ICE system, the Phlx proposes to utilize the ICE 
system value as the official index value in two situations.
    First, the ICE system value would act as the official index value 
in the event the reporting authority designated by the Phlx is 
experiencing difficulties in disseminating an accurate value (e.g., 
computer failure, line problem). Under these circumstances, the 
Exchange would automatically switch to using the ICE system value as 
the official index value, but only for the time period that is 
necessary for the designated agent to correct its problem.
    Second, the Phlx, when determining which entity to utilize as the 
permanent reporting authority for its index options, would like to be 
able to select the ICE system as the designated reporting authority.\5\ 
Economic and efficiency considerations are the impetus for this 
request.
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    \5\ Any request to utilize ICE as the permanent reporting 
authority for a particular options product will have to be submitted 
to the Commission for approval under Section 19(b) of the Act. See 
Amendment No. 1, supra note 4.
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    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

[[Page 8292]]

requirements of Section 6(b).\6\ Specifically, the Commission believes 
the proposal is consistent with the Section 6(b)(5) \7\ requirements 
that the rules of an exchange be designated to promote just and 
equitable principles of trade, to facilitate transactions in 
securities, to prevent fraudulent and manipulative acts, and, in 
general, to protect investors and the public interest.\8\
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The Commission believes it is appropriate to allow the temporary 
use of the ICE system value as the official index value when the 
designated reporting authority is experiencing operating difficulties. 
Utilizing the ICE system as a backup in such situations will add 
stability to the affected options market because it will ensure the 
continued availability of current index values, which are essential to 
investment decisions in index options, while the designated reporting 
authority identifies and corrects the problems prohibiting the 
dissemination of an accurate index value.
    The Commission also believes it is appropriate to provide the Phlx 
with the option of designating the ICE system as the reporting 
authority for its proprietary index options as long as prior Commission 
approval pursuant to Section 19 of the Act is obtained. Permitting the 
Phlx to act as the reporting authority for its proprietary index 
options should benefit investors by reducing the response time needed 
in the event there is a problem disseminating index values. Moreover, 
the Phlx has represented that the ICE system has been tested fully and 
that this system is capable of handling the proposed tasks.9
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    \9\ See letter from Thomas A. Wittman, Vice President, Trading 
Systems Development, Phlx, to George Jenkins, Division of Market 
Regulation, SEC, dated November 20, 1996; telephone conversation 
between Thomas A. Wittman, Vice President, Trading Systems 
Development, Phlx, and Anthony P. Pecora, Attorney, Division of 
Market Regulation, SEC, November 22, 1996 (representing that ICE is 
capable of acting as a primary system despite the fact that it 
originally was designed as a backup system).
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    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. Amendment No. 1 simply clarifies that designation 
of ICE as the reporting authority must be filed pursuant to Section 
19(b) of the Act, explains that the Phlx's request for using ICE as the 
reporting authority for FLEX options will be proposed in the FLEX 
options proposal (SR-Phlx-96-38), and removes the previous request for 
interim authority to utilize ICE which was deemed to be unnecessary 
given the Exchange's ability to use ICE until a problem in the 
designated reporting authority has been corrected.10
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    \10\ The proposal allows the Phlx to utilize the ICE system as 
the official reporting authority whenever the designated reporting 
authority is experiencing operating difficulties, but only until 
such difficulties are resolved. As soon as the problem is corrected, 
the Phlx must switch back to the designated reporting authority. If 
the reporting authority's problems occur on a regular basis, the 
Phlx can designate a different reporting authority, including ICE, 
by submitting a filing with the Commission pursuant to Section 
19(b)(1) of the Act and Rule 19b-4 thereunder.
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    Therefore, the Commission believes that granting accelerated 
approval to Amendment No. 1 is appropriate and consistent with Section 
6 and Section 19(b)(2) of the Act.11
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    \11\ 15 U.S.C. 78f, 78s(b)(2).
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    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1 to the proposed rule change. 
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 rules 
change that are filed with the Commission, and all written 
communications relating to Amendment No. 1 between the Commission and 
any persons, 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 in the Commission's Public Reference Room. 
Copies of such filing will also be available at the principal office of 
the Phlx. All submissions should refer to File No. SR-Phlx-96-36 and 
should be submitted by March 17, 1997.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,12 that the proposed rule change (SR-Phlx-96-36), as amended 
by Amendment No. 1, is approved.

    \12\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.13
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-4447 Filed 2-21-97; 8:45 am]
BILLING CODE 8010-01-M