[Federal Register Volume 62, Number 186 (Thursday, September 25, 1997)]
[Notices]
[Pages 50422-50426]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25376]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39087; File No. SR-PCX-97-29]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 Thereto and Notice of Filing and Order 
Granting Accelerated Approval of Amendment No. 2 Thereto by the Pacific 
Exchange, Inc. Relating to the Listing and Trading of Options on the 
Morgan Stanley Emerging Growth Index

September 17, 1997.

I. Introduction

    On July 8, 1997, the Pacific Exchange, Inc. (``PCX'' 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 list and trade options on the 
Morgan Stanley Emerging Growth Index (``Index''). On July 29, 1997, the 
Exchange submitted an amendment to the proposal.\3\ Notice of the 
proposed rule change and Amendment No. 1 appeared in the Federal 
Register on August 5, 1997.\4\ No comment letters were received 
concerning the proposed rule change. On September 17, 1997, the 
Exchange submitted Amendment No. 2.\5\ This order approves the PCX's 
proposal, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Michael D. Pierson, Senior Attorney, 
Regulatory Policy, PCX to James T. McHale, Special Counsel, Division 
of Market Regulation (``Division''), SEC, dated July 29, 1997 
(``Amendment No. 1''). Amendment No. 1, among other issues, 
addressed maintenance standards and revised the Exchange's 
limitation of liability rule, PCX Rule 7.13.
    \4\ See Securities Exchange Act Release No. 38884 (July 29, 
1997), 62 FR 42150 (August 5, 1997).
    \5\ See Letter from Michael D. Pierson, Senior Attorney, 
Regulatory Policy, PCX to Marianne H. Duffy, Special Counsel, 
Division, SEC, dated September 17, 1997 (``Amendment No. 2''). 
Amendment No. 2 proposed an additional maintenance standard 
regarding options eligibility of the Index components.
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II. Description of the Proposal

    The purpose of the proposed rule change is to permit the Exchange 
to list and trade European-style, cash-settled options on the Index, a 
market capitalization-weighted, broad-based index developed by Morgan 
Stanley & Co. Incorporated (``Morgan Stanley'') comprised of the common 
stocks of 50 domestic emerging growth securities representing 26 
different industry groups.

A. Design of the Index

    The Index is comprised of 50 representative stocks \6\ traded on 
the New York Stock Exchange, Incorporated (``NYSE''), the American 
Stock Exchange, Incorporated (``Amex'') and through the facilities of 
the National Association of Securities Dealers, Incorporated (``NASD'') 
automated quotation system and are reported national market system 
securities.
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    \6\ The 50 stocks comprising the Index are: BMC Software Inc. 
(BMCS), Parametric Technology Corp. (PMTC), Diamond Offshore 
Drilling, Inc. (DO), Ascend Communications Inc. (ASND), Cabletron 
Systems (CS), Altera Corp. (ALTR), Ciena Corp. (CIEN), Linear 
Technology Inc. (LLTC), Paychex Inc. (PAYX), Compuware Corp. (CPWR), 
XILINX Inc. (XLNX), Maxim Integrated Products (MXIM), Health 
Management Assoc. (HMA), McAfee Associates Inc. (MCAF), Sterling 
Commerce Inc. (SE), Iomega Corp. (IOM), Robert Half Intl. Inc. 
(RHI), ATMEL Corp. (ATML), Bed Bath & Beyond Inc. (BBBY), American 
Power Conversion (APCC), Planet Hollywood Intl. Inc. (PHII), 
Synopsys Inc. (SNPS), Reading and Bates Corp. (RB), Viking Office 
Prods. Inc. (VKNG), Micron Electronics Inc. (MUEI), Cambridge 
Technology Partners (CAPT), Blyth Industries Inc. (BTH), Jabil 
Circuit Inc. (JBIL), Novellus Systems Inc. (NVLS), Dollar Tree 
Stores Inc. (DLTR), Jones Medical Inds. Inc. (JMED), Pairgain 
Technologies Inc. (PAIR), Rexall Sundown Inc. (RXSD), CDW Computer 
Centers Inc. (CDWC), Titanium Metals Corp. (TIMT), Remedy Corp. 
(RMDY), Aspect Telecommunications (ASPT), Delta & Pine Land Co. 
(DLP), Telco Communications Grp. Inc. (TCGX), APAC Teleservices Inc. 
(APAC), Learning Tree Intl. Inc. (LTRE), Visio Corp. (VSIO), 
Catalina Marketing Corp. (POS), Nautica Enterprises Inc. (NAUT), 
Boston Technology Inc. (BSN), ETEC Systems Inc. (ETEC), Mentor Corp. 
(MNTR), Gentex Corp. (GNTX), Veritas Software Co. (VRTS), and Bio 
Technology General Corp. (BTGS).
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    The Index was designed by Morgan Stanley to reflect the emerging 
growth equity market. The component securities were selected for their 
market capitalization, price per share, longterm debt as a percentage 
of total capital, mean estimated longterm (three year) earnings per 
share growth rate, net sales and return on average total equity. 
Specifically, stocks were selected based on whether they are 
``emerging'' stocks (in general, having current sales figures of 
between $25 million and $2 billion annually) and ``growth'' stocks (in 
general, having a high mean I/B/E/S \7\ anticipated earnings growth 
rate). A primary consideration in determining ``growth'' is whether a 
stock's expected growth rate is significantly higher than that of other 
stocks. In addition, currently all of the issues are traded in the 
United States and there are no foreign issues or American Depositary 
Receipts (``ADRs'') included in the Index.\8\
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    \7\ The term I/B/E/S refers to the Institutional Broker's 
Estimate System, a source of analysts' earnings expectation data 
that is obtained from over 7,000 analysts working for approximately 
750 research organizations.
    \8\ In the future, should the Index include non-U.S. registered 
securities, such securities will not in the aggregate comprise more 
than 10% of the Index weight and will not represent more than 3 
Index components. Prior to reaching these limits, PCX will notify 
the Commission to determine if a new filing under Rule 19b-4 is 
required.
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    The Exchange represents that the Index currently is representative 
of the domestic emerging growth stock market as a whole, and therefore, 
believes it is a broad-based index. In support of this, the PCX notes 
that the Index is comprised of companies in 26 different industry 
groups, which range from apparel (.76%) to auto parts (.63%) to 
restaurants (1.79%).\9\ Although

[[Page 50423]]

technology issues comprise 61% of the market capitalization of the 
Index, these companies are included in nine different industries 
ranging from computer software to semiconductors to computer services.
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    \9\ The industry groupings and their Index weight are as 
follows: apparel (0.76%); auto parts (0.63%); biotechnology (0.56%); 
catalog/specialty distribution (2.55%); computer communications 
(5.66%); computer local area networks (4.52%); computer software 
(20.45%); contract drilling (6.29%); discount stores (1.14%); 
diversified commercial services (8.37%); electronic data processing 
peripherals (2.55%); electronic data processing services (4.06%); 
electrical products (1.82%); electronic data processing (1.53%); 
electronic production equipment (3.18%); farming/seeds/milling 
(0.86%); hospital/nursing management (2.88%); medical specialties 
(0.64%); other metals/minerals (0.91%); other pharmaceuticals 
(2.15%); other speciality stores (1.89%); other telephone/
communications (0.84%); packaged goods/cosmetics (1.35%); 
restaurants (1.79%); semiconductors (16.99%); and telecommunications 
equipment (5.63%). The industry groupings are based upon the 
classifications used by FactSet Research Systems, Inc., an 
electronic market data provider of information that is available by 
subscription in the securities industry.
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    The Index is weighted by the market capitalization of the component 
stocks. As of June 18, 1997, the total market capitalization of the 
Index was $112.7 billion, and the average market capitalization of the 
component stocks was $2.3 billion. The individual market capitalization 
of the stocks ranged from $629 million (Bio Technology General Corp.) 
to $5.9 billion (BMC Software, Inc.) on the same date. The largest 
component stock accounted for 5.20% of the Index, while the smallest 
accounted for 0.56%. The top five stocks in the Index by weight 
accounted for 24.05% of the Index. The average daily trading volume in 
the component securities for the period from December 18, 1996 through 
June 18, 1997, ranged from a low of 94,688 shares to a high of 
6,291,777 shares, with an average daily trading volume for all the 
component stocks of approximately 926,131 shares per day.

B. Maintenance of the Index

    The Index will be maintained by PCX in conjunction with Morgan 
Stanley. Index maintenance includes monitoring Index criteria and 
completing the adjustments for company additions and deletions, share 
changes, stock splits, stock dividends and stock price adjustments due 
to events such as company restructurings or spin-offs, as well as a 
semi-annual rebalancing and quarterly review.\10\ In order to ensure 
that the Index continues to represent the overall character of the 
emerging growth equity market, any changes made to the Index, including 
those made at the time of semi-annual rebalancing and quarterly review, 
will be in compliance with the following initial inclusion and 
maintenance criteria: (a) the number of component stocks in the Index 
will be no less than 42 and no greater than 58; (b) the top weighted 
component stock will not account for more than 25% of the weight of the 
Index; (c) the top five weighted component stocks will not account for 
more than 50% of the weight of the Index; (d) no component stock will 
have a market capitalization of below $75 million; (e) no component 
issue will have an average trading volume of less than 20,000 shares 
per day; (f) no component issue will have an average trading value of 
less than $100,000 per day; (g) no component will have a price per 
share of less than $3; (h) at least 80% of the issues comprising the 
Index and at least 90% of the Index weight will meet the initial 
listing requirements for options trading pursuant to PCX Rule 3.6; and 
(i) the minimum market capitalization for all of the issues included in 
the Index, collectively, will be $60 billion.
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    \10\ Routine corporate actions, such as stock splits and stock 
dividends that require simple changes in the common shares 
outstanding and the stock prices of the companies in the Index will 
be handled by PCX through a contract with Bridge Data. Non-routine 
corporate actions and other material changes such as share issuances 
that change the market value of the Index and require an Index 
divisor adjustment are performed by Morgan Stanley. In addition, 
Morgan Stanley will select all of the stocks that are added to the 
Index at the time of the semi-annual rebalancing and quarterly 
review.
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    In the event that the Index does not comply with any of these 
criteria at the time of semi-annual rebalancing and quarterly review, 
the Exchange either will: (i) make adjustments to the composition of 
the Index to place it in compliance with such criteria; or (ii) notify 
Commission staff to determine the appropriate regulatory response, 
which could include, but is not limited to, the removal of securities 
from the Index, prohibiting opening transactions, or discontinuing the 
listing of new series of Index options.

C. Calculation and Dissemination of Index Value

    The value of the Index is determined by multiplying the price of 
each stock by the number of shares outstanding, adding those sums and 
dividing by a divisor which resulted in an Index value of 300.00 on its 
base date of February 7, 1997. The Index value will be calculated by 
Bridge Data Corporation and will be disseminated at 15-second intervals 
during regular PCX trading hours to market information vendors via the 
Consolidated Tape Authority. Notice of component changes will be 
disseminated to vendors and Member Firms via facsimile and over the 
Options News Network.

D. Trading of the Index Options

    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'') and for FLEX options on the Index. The Exchange will list 
expiration months for Index options and Index LEAPS in accordance with 
PCX Rule 7.8. Strike prices will be set to bracket the Index in 5 point 
increments. The minimum tick size for series trading below $3 will be 
\1/16\th and the minimum tick size for all other series will be \1/
8\th.\11\
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    \11\ See PCX Rule 6.72.
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E. Position Limits

    The Exchange is proposing to establish position limits for Index 
options equal to 37,500 contracts on the same side of the market, with 
no more than 22,500 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.\12\ Furthermore, the 
hedge exemption rule applicable to broad-based index options, 
Commentary .02 to PCX Rule 7.6, will apply to Index options. With 
regard to FLEX Index options, the Exchange is proposing to establish 
position limits of 200,000 contracts on the same side of the market 
pursuant to PCX Rule 8.107(a). The PCX also represents that it has the 
necessary systems capacity to support new series that would result from 
the introduction of the Index options.\13\
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    \12\ For example, on June 18, 1997, a position of 37,500 
contracts would have a dollar value of $1,168,800,000 (37,500 times 
the Index value of 311.68 times the Index multiplier of 100). For a 
comparison of position limits on similar indices, see Securities 
Exchange Act Release No. 32554 (June 29, 1993) 58 FR 36492 (July 7, 
1993) (order approving increase in position and exercise limits on 
the Wilshire Small Cap Index to 37,500 contracts on the same side of 
the market with no more than 22,500 of such contracts in the series 
with the nearest expiration date) and Securities Exchange Act 
Release No. 36504 (November 22, 1995) 60 FR 61275 (November 29, 
1995) (order approving increase in position and exercise limits on 
the PSE Technology Index to 37,500 contracts on the same side of the 
market with no more than 22,500 on such contracts in the series with 
the nearest expiration date).
    \13\ In addition, the Options Price Reporting Authority 
(``OPRA'') has represented that it has the necessary systems 
capacity to support those new series of index options that would 
result from the introduction of Index options and long-term Index 
options. See letter from Joe Corrigan, Executive Director, OPRA, to 
Kim Koppien, Vice President-Operations, Options Division, PCX, dated 
August 18, 1997.
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F. 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 PCX will normally cease at 1:15 p.m. 
(Pacific Time) on the business day preceding the last day of trading in 
the component securities of the Index (ordinarily the Thursday before 
expiration Saturday, unless there is an intervening holiday). The 
exercise settlement value of Index options at expiration will be 
determined from opening prices established at the open of the regular 
Friday trading sessions at the appropriate exchange or market system. 
If a stock does not trade during

[[Page 50424]]

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.\14\ 
When the last trading day is moved in accordance with Exchange holidays 
(such as when the PCX is closed on the Friday before expiration), the 
last trading day for expiring options will be Wednesday and the 
exercise settlement value of Index options at expiration will be 
determined at the open of the regular Thursday trading sessions.
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    \14\ If a stock does not trade during the opening of the regular 
Friday trading session at the appropriate exchange or market system, 
or if it fails to open for trading, then pursuant to PCX Rule 
7.8(e), the last reported sale price of stock will be used in the 
calculation of the Index, unless the exercise settlement amount is 
fixed in accordance with the Rules and By-Laws of The Options 
Clearing Corporation.
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G. Surveillance

    The Exchange will apply its existing index option surveillance 
procedures to Index options. These procedures include complete access 
to trading activity in the underlying securities. Further, the 
Intermarket Surveillance Group (``ISG'') Agreement, dated July 14, 
1983, as amended on January 29, 1990, will be applicable to the trading 
of options on the Index.\15\
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    \15\ ISG was formed on July 14, 1983 to, among other things, 
coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets. 
See Intermarket Surveillance Group Agreement, July 14, 1983. The 
most recent amendment to the ISG Agreement, which incorporates the 
original agreement and all amendments made thereafter, was signed by 
ISG members on January 29, 1990. See Second Amendment to the 
Intermarket Surveillance Group Agreement, January 29, 1990. The 
members of the ISG are: the Amex; the Boston Stock Exchange, Inc.; 
the Chicago Board Options Exchange, Inc. (``CBOE''); the Chicago 
Stock Exchange, Inc.; the NASD; the NYSE; the PCX; and the 
Philadelphia Stock Exchange, Inc. Because of potential opportunities 
for trading abuses involving stock index futures, stock options, and 
the underlying stock, and the need for greater sharing of 
surveillance information for these potential intermarket trading 
abuses, the major stock index futures exchanges (e.g., the Chicago 
Mercantile Exchange and the Chicago Board of Trade) joined the ISG 
as affiliate members in 1990.
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H. Other Exchange Matters

    Finally, the Exchange proposes to amend PCX Rule 7.13 regarding 
limitation of liability in order to be consistent with the limitation 
of liability rules of other self-regulatory organizations 
(``SROs'').\16\
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    \16\ See Amendment No. 1, supra note 3. The Commission notes 
that the text of new Rule 7.13 is substantially similar to the 
limitation of liability provisions of other SROs. See CBOE Rule 
24.14.
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III. Commission Findings and Conclusions

    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, the requirements of Section 6(b)(5).\17\ Further, the 
trading of options on the Index will allow investors holding positions 
in some or all of the securities underlying the Index to hedge the risk 
associated with their portfolios. Specifically, the Commission finds 
that the listing and trading of options on the Index, including LEAPS 
and FLEX Index options, will serve to promote the public interest and 
help to remove impediments to a free and open securities market by 
providing investors with a means to hedge exposure to market risk 
associated with the emerging growth equity market \18\ and promote 
efficiency, competition, and capital formation.\19\
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    \17\ 15 U.S.C. 78f(b)(5).
    \18\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of any new securities product upon a finding that 
the introduction of such product is in the public interest. Such a 
finding would be difficult with respect to a product that served no 
hedging or other economic function, because any benefits that might 
be derived by market participants likely would be outweighed by the 
potential for manipulation, diminished public confidence in the 
integrity of the markets, and other valid regulatory concerns. In 
this regard, the trading of listed options on the Index will provide 
investors with a hedging vehicle that should reflect the overall 
movement of the stocks representing companies in the emerging growth 
sector in the U.S. stock markets.
    \19\ 15 U.S.C. 78c(f).
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    Nevertheless, the trading of options on the Index raises several 
concerns related to the design and maintenance of the Index, customer 
protection, surveillance and market impact. The Commission believes, 
however, for the reasons discussed below, that the PCX has adequately 
addressed these concerns.

A. Design and Maintenance of the Index

    The Commission finds that it is appropriate and consistent with the 
Act for the PCX to designate the Index as broad-based for purposes of 
index options trading. First, the Index is composed of 50 companies 
from 26 industry groups including: computer software; semiconductors; 
consumer goods; energy; capital equipment; basic materials; 
agriculture/food and financial services.\20\ Second, no particular 
stock or group of stocks dominates the Index. Specifically, as of June 
18, 1997, the largest stock accounted for 5.20% of the Index weight, 
while the smallest accounted for 0.56%. The top five stocks in the 
Index by weight accounted for 24.05%. Accordingly, the Commission 
believes that it is appropriate for the PCX to apply its rules 
governing broad-based index options to trading in the proposed Index 
options. The Commission notes that with respect to the maintenance of 
the Index, Morgan Stanley has implemented several safeguards in 
connection with the listing and trading of the Index options that will 
serve to ensure that the Index components are highly capitalized, 
diversified and actively-traded. In this regard, Morgan Stanley will 
maintain the Index so that: (a) the number of component stocks in the 
Index will be no less than 42 and no greater than 58; (b) the top 
weighted component stock will not account for more than 25% of the 
weight of the Index; (c) the top five weighted component stocks will 
not account for more than 50% of the weight of the Index; (d) no 
component stock will have a market capitalization of below $75 million; 
(e) no component issue will have an average trading volume of less than 
20,000 shares per day; (f) no component issue will have an average 
trading value of less than $100,000 per day; (g) no component will have 
a price per share of less than $3; (h) at least 80% of the issues 
comprising the Index and 90% of the Index weight will meet the initial 
listing requirements for options trading pursuant to PCX Rule 3.6; and 
(i) the minimum market capitalization for all of the issues included in 
the Index, collectively, will be $60 billion.
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    \20\ Although technology issues comprise 61% of the market 
capitalization of the Index, these companies are included in nine 
different industries ranging from computer software to 
semiconductors to computer services. in addition, the Commission 
previously has approved the listing and trading of options on a 
broad-based index designed to measure the performance of high 
capitalization technology stocks. See e.g., Securities Exchange Act 
Release No. 37693 (September 17, 1996) 61 FR 50362 (September 25, 
1996) (order approving the listing and trading of options on the 
Goldman Sachs Technology Composite Index).
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    In addition, the Commission notes that Morgan Stanley has adopted 
appropriate procedures to be followed by those responsible for 
maintaining the Index in order to help to prevent and to deter the 
misuse of any informational advantages with respect to changes in the 
composition of the Index.\21\ Such procedures include, for example, 
informational barriers.
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    \21\ See Letter from Carol Shahmoon, Counsel, Morgan Stanley, to 
Sharon Lawson, Senior Special Counsel, Division of Market 
Regulations, Commission, dated August 7, 1997.
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B. Customer Protection

    The Commission believes that a regulatory system designed to 
protect public customers must be in place before the trading of 
sophisticated financial instruments, such as Index

[[Page 50425]]

options, can commence on a national securities exchange. The Commission 
notes that the trading of standardized exchange-traded options occurs 
in an environment that is designed to ensure, among other things, that 
(1) the special risks of options are disclosed to public customers; (2) 
only investors capable of evaluating and bearing the risks of options 
trading are engaged in such trading; and (3) special compliance 
procedures are applicable to options accounts. Accordingly, because the 
Index options will be subject to the same regulatory regime as the 
other standardized options currently traded on the PCX, the Commission 
believes that adequate safeguards are in place to ensure the protection 
of investors in Index options. In addition, the PCX plans to distribute 
a circular to its membership calling attention to specific risks 
associated with options on the Index.

C. Surveillance

    In evaluating new derivative instruments, the Commission, 
consistent with the protection of investors, considers the degree to 
which the derivative instrument is susceptible to manipulation. The 
ability to obtain information necessary to detect and deter market 
manipulation and other trading abuses is a critical factor in the 
Commission's evaluation. It is for this reason that the Commission 
requires that there be a comprehensive surveillance sharing agreement 
(``CSSA'') in place between an exchange listing or trading a derivative 
product and the exchanges trading the stocks underlying the derivative 
contract that specifically enables officials to surveil trading in the 
derivative product and its underlying stocks.\22\ Such agreements 
provide a necessary deterrent to manipulation because they facilitate 
the availability of information needed to fully investigate a potential 
manipulation if it were to occur. For foreign stock index derivative 
products, these agreements are especially important to facilitate the 
collection of necessary regulatory, surveillance and other information 
from foreign jurisdictions.\23\
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    \22\ The Commission believes that a CSSA should provide the 
parties thereto with the ability to obtain information necessary to 
detect and deter market manipulation and other trading abuses. 
Consequently, the Commission generally requires that a CSSA require 
that the parties to the agreement provide each other, upon request, 
information about market trading activity, clearing activity, and 
the identity of the ultimate purchasers and sellers of securities. 
See Securities Exchange Act Release No. 31529 (November 27, 1992).
    \23\ As noted above, presently there are no stocks of foreign 
issuers in the Index.
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    In order to address the above noted concerns, the Exchange will 
apply its existing index option surveillance procedures to Index 
options. In addition, as previously discussed, the markets on which all 
component stocks trade are members of the ISG which provides for the 
exchange of all necessary surveillance information.\24\
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    \24\ See supra note 14.
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D. Market Impact

    The Commission believes that the listing and trading of Index 
options on the PCX should not adversely impact the securities markets 
in the United States.\25\ First, the existing index option surveillance 
procedures of the PCX will apply to options based on the Index. Second, 
the Commission notes that the Index is broadbased and diversified and 
includes highly capitalized securities that are actively traded. Third, 
the position limit of 37,500 contracts on the same side of the market, 
provided no more than 22,500 of such contracts are in series in the 
nearest expiration month, will serve to minimize potential manipulation 
and market impact concerns. Fourth, the risk to investors of contra-
party non-performance will be minimized because Index and regular and 
long-term options will be issued and guaranteed by the Options Clearing 
Corporation just like any other standardized option traded into the 
United States. Accordingly, the Commission does not believe that the 
introduction of Index options on the PCX will have a significant effect 
on the underlying securities markets.
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    \25\ The Commission notes that both the Exchange and OPRA have 
represented that they have the necessary systems capacity to support 
those new series of index options that would result from the 
introduction of options on the Index. See supra note 13 and 
accompanying text.
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E. Other Exchange Matters

    The Commission finds that the proposed limitation of liability 
language will provide the PCX with protection that is substantively 
similar to protection already afforded other SROs.\26\ The Commission 
believes that by amending the Exchange's limitation of liability rule, 
entities will not be discouraged from creating new products or 
calculating and disseminating settlement values.\27\ Therefore, 
derivative products, that provide hedging or other economic functions, 
should remain available to investors.
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    \26\ See e.g., CBOE Rule 24.14, supra note 15. In order to 
conform its limitation of liability provisions to those of other 
SROs, the PSE will not rely on this rule to limit its liability for 
intentional misconduct or for any violation of the federal 
securities laws.
    \27\ See e.g., Securities Exchange Act Release No. 34125 (May 
27, 1994) 59 FR 29307 (June 6, 1994).
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    For the reasons described above, the Commission finds good cause to 
approve Amendment No. 2 prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, Amendment No. 2 provides, 90% of the Index weight will 
meet the initial listing requirements for options trading pursuant to 
PCX Rule 3.6.
    Accordingly, the Commission believes that it is consistent with 
Sections 6(b)(5) and 19(b)(2) \28\ of the Act, to find that good cause 
exists to approve Amendment No. 2 on an accelerated basis.
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    \28\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments and Conclusion

    Interested persons are invited to submit written data, views and 
arguments concerning Amendments No. 2. 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 Room in Washington, D.C. 
Copies of such filing will also be available for inspection and copying 
at the principal office of the PCX. All submissions should refer to the 
File No. SR-PCX-97-29 and should be submitted by October 16, 1997.
    For the foregoing reasons, the Commission finds that the PCX's 
proposal to list and trade options based on the Morgan Stanley Emerging 
Growth Index 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, 
that the proposed rule change (SR-PCX-97-29), as amended, is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).

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[[Page 50426]]

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-25376 Filed 9-24-97; 8:45 am]
BILLING CODE 8010-01-M