[Federal Register Volume 62, Number 57 (Tuesday, March 25, 1997)]
[Notices]
[Pages 14177-14179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7394]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38415; File No. SR-Phlx-97-05]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 1 Thereto by the Philadelphia Stock Exchange, Inc. 
Relating to Reducing the Value of the Super Cap Index

March 18, 1997.
    On January 9, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to reduce the value of its Super 
Cap Index (``Index'') option (``HFX'') to one-half its present value by 
doubling the divisor used in calculating the Index. The Index is 
comprised of the top five options-eligible common stocks of U.S. 
companies traded on the New York Stock Exchange (''NYSE''), as measured 
by capitalization. The other contract

[[Page 14178]]

specifications for the HFX will remain unchanged.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposal was published for comment and appeared in 
the Federal Register on February 12, 1997.\3\ No comment letters were 
received on the proposal. On March 18, 1997, the Phlx filed Amendment 
No. 1 to the proposed rule change.\4\ This order approves the Phlx's 
proposal, as amended.
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    \3\ See Securities Exchange Act Release No. 38247 (February 5, 
1997), 62 FR 6596 (February 12, 1997).
    \4\ In Amendment No. 1, the Exchange provides that the position 
and exercise limits for HFX options will remain at 5,500 contracts, 
as opposed to being doubled as originally proposed, upon the 
effective date of the two-for-one split of the Index. The Phlx 
states that because the Super Cap Index currently maintains low open 
interest in the non-expiring series, non of which involves customer 
accounts, the Phlx does not believe a doubling of the position and 
exercise limits is warranted. See letter from Theresa McCloskey, 
Vice President, Regulatory Services, Phlx, to Sharon Lawson, Senior 
Special Counsel, Office of Market Supervision (``OMS''), Division of 
Market Regulation (`'Divsion''), Commission, dated March 17, 1997 
(``Amendment No. 1'').
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I. Description of the Proposal

    The Exchange began trading the HFX in November, 1995.\5\ The Index 
was created with a value of 350 on its base date of May 31, 1995 which 
rose to 540 on January 29, 1997. Thus, the value of the Index has 
increased 54% since inception.\6\ Consequently, the premium for HFX 
options also has risen. In May, 1996, the Exchange filed a proposed 
rule change to reduce the value of the Index to one-third of its then 
present value; although this proposal was approved by the Commission, 
operational limitations prevented its implementation.\7\ Thus, the 
Index has never been split.
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    \5\ See Securities Exchange Act Release No. 36369 (October 13, 
1995), 60 FR 54272 (October 20, 1995).
    \6\ See letter from Theresa A. McCloskey, Vice President, 
Regulatory Services, Phlx, to James T. McHale, Attorney, OMS, 
Division, Commission, dated January 31, 1997 (``Phlx letter'').
    \7\ See Securities Exchange Act Release No. 37536 (August 7, 
1996) (SR-Phlx-96-17). The Options Clearing Corporation was not able 
to accept certain strike prices resulting from a three-for-one 
split, because dividing certain strike prices by three resulted in a 
strike price with too many decimal places. This operational 
limitation does not arise in a two-for-one split.
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    As a result, the Exchange proposes to conduct a ``two-for-one 
split'' of the Index, such that the value would be reduced to one-half 
of its present value. In order to account for the split, the number of 
HFX contracts will be doubled, such that for each HFX contract 
currently held, the holder would receive two contracts at the reduced 
value, with a strike price one-half of the original strike price. For 
instance, the holder of a HFX 540 call will receive two HFX 270 calls. 
The position and exercise limits applicable to the HFX will remain at 
5,500 contracts,\8\ and the trading symbol will remain HFX.
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    \8\ See Amendment No. 1, Supra note 4.
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    In conjunction with the split, the Exchange will list strike prices 
surrounding the new, lower index value, pursuant to Phlx Rule 1101A.\9\ 
The Exchange will announce the effective date of the split by way of an 
Exchange memorandum to the membership, which will include notice of the 
strike price changes.\10\
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    \9\ Specifically, because the Index value would be less than 
500, the applicable strike price interval would be $5 in the near 
term months (the first four consecutive months series) and $25 in 
the far term. See Rule 1101A(a).
    \10\ See note 13, infra.
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    The Phlx states that the purpose of the proposal is to attract 
additional liquidity to the product in those series that public 
customers are most interested in trading. For example, a near-term, at-
the-money call option series currently trades at approximately $2,125 
per contract.\11\ The Exchange believes that certain investors and 
traders currently may be impeded from trading at such levels. With the 
Index split, that same option series (once adjusted), with all else 
remaining equal, could trade at approximately $1,062 per contract. The 
Phlx believes that a reduced premium value should encourage additional 
investor interest.
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    \11\ With the Index at 540, a February 540 call on January 29, 
1997 was priced at approximately 21\1/4\, multiplied by 100=$2,125. 
See Phlx letter, supra note 6.
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    In support of its proposal, the Exchange notes that Super Cap Index 
options provide an important opportunity for investors to hedge and 
speculate upon the market risk associated with the underlying stocks. 
By reducing the value of the Index, the Phlx believes such investors 
will be able to utilize this trading vehicle, while extending a smaller 
outlay of capital. The Exchange believes that this, in turn, should 
attract additional investors and create a more active and liquid 
trading environment.

II. Discussion

    The Commission finds that 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, the 
requirements of Section 6(b)(5) of the Act.\12\ Specifically, the 
Commission believes that reducing the value of the Index will serve to 
promote the public interest and help remove impediments to a free and 
open securities market, by providing a broader range of investors with 
a means of hedging exposure to market risk associated with securities 
representing the most highly capitalized companies traded on the NYSE. 
Further, the Commission notes that reducing the value of HFX options 
should help attract additional investors, thus creating a more active 
and liquid trading market. The Commission notes that the Phlx will be 
providing market participants with adequate prior notice of the Index 
level change in order to avoid investor confusion.\13\
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    \12\ 15 U.S.C. 78f(b)(5).
    \13\ The Phlx will be issuing a circular to its membership, 
within one week of the effective date of the change, which will 
advise members of the reduction in value of the HFX and specific 
strike prices for the adjusted HFX options. Telephone Conversation 
between Edith Hallahan, Special Counsel, Regulatory Services, Phlx, 
and James T. McHale, Attorney, OMS, Division, Commission, on March 
17, 1997.
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    The Commission believes that doubling the Index's divisor will not 
have an adverse market impact or make trading in HFX options 
susceptible to manipulation. After the split, the Index will continue 
to be comprised of the same stocks with the same weightings, will be 
calculated in the same manner (except for the change in divisor) and 
will have the same position and exercise limits. Finally, the Phlx's 
surveillance procedures also will remain the same.
    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. Amendment No. 1 
provides that the position and exercise limits for HFX options will 
remain at 5,500 contracts, as opposed to being doubled as originally 
proposed, upon the effective date of the two-for-on split of the Index. 
The Phlx states that because the Super Cap Index currently maintains 
low open interest in the non-expiring series, none of which involves 
customer accounts, the Phlx does not believe a doubling of the position 
and exercise limits is warranted. The Commission finds that Amendment 
No. 1 strengthens the proposal by maintaining position and exercise 
limits at their current levels, which should continue to reduce the 
likelihood of manipulation. Moreover, the Commission notes that all of 
the market participants holding existing positions in HFX options will 
continue to hold positions well within the 5,500 contract limit once 
the Index is split and their positions are doubled. Accordingly, there 
is no market need to double position limits, as Phlx originally 
proposed, to provide investors a period of time in which to reduce 
their double

[[Page 14179]]

positions to the lower limit levels. The Commission also notes that no 
comments were received on the original Phlx proposal, which was subject 
to the full 21-day comment period. Therefore, the Commission believes 
that it is consistent with Section 6(b)(5) 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 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 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. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 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-97-05 and should be 
submitted by April 15, 1997.
    For the foregoing reasons, the Commission finds that the Phlx's 
proposal, as amended, 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,\14\ that the amended proposed rule change (SR-Phlx-97-05) is 
approved.

    \14\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-7394 Filed 3-24-97; 8:45 am]
BILLING CODE 8010-01-M