[Federal Register Volume 63, Number 110 (Tuesday, June 9, 1998)]
[Notices]
[Pages 31543-31545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15278]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40058; File No. SR-Phlx-98-21]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to the Listing and Trading of Options on the 
Over-The-Counter Prime Index

June 2, 1998.
    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 May 15, 1998, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the Phlx. 
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. 78s(b)(1).
    \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 Phlx proposes to list and trade European style, cash-settled 
options, including long term options,\3\ on the Over-The-Counter Prime 
Index \4\ (``OTC Prime Index'' or ``Index''), a price weighted, A.M. 
settled index composed of fifteen \5\ stocks which are considered the 
``most active'' \6\ stocks traded on the Nasdaq market.
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    \3\ See Phlx Rule 1101A(b)(iii). Long term options are also 
known as LEAPs.
    \4\ The Exchange submitted a pre-filing on April 30, 1998 in 
accordance with the Generic Index Approval Order. See Generic Index 
Approval Order, infra note 7. Since the pre-filing the Exchange has 
changed the name of the Index from the ``Over-The-Counter Most 
Active Index'' to the ``Over-The-Counter Prime Index'' and the 
trading symbols have changed. However, the Exchange represents that 
none of the other contract specifications have been modified since 
the pre-filing.
    \5\ Since the pre-filing on April 30, 1998, the Exchange added 
three stocks to the Index increasing the number of components in the 
Index from 12 to 15 in order to alleviate concerns regarding the 
concentration of the five highest-weighted securities.
    \6\ Most active is defined as those underlying securities which 
had the largest trading volume in the previous year.
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    The Exchange is filing this proposal pursuant to Phlx 1009A(b) 
which provides for the commencement of trading of options on the Index 
thirty (30) days after the date of this filing. The Exchange believes 
the proposal is in compliance with Rule 1009A(b) and the standards 
approved in the Generic Index Option Approval Order (``Generic Index 
Approval Order'').\7\
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    \7\ See Securities Exchange Act Release No. 34157 (June 3, 1994) 
59 FR 30062 (June 10, 1994) (order approving File Nos. SR-Amex-92-
35; SR-CBOE-93-59; SR-NYSE-94-17; SR-PSE-94-07; and SR-Phlx-94-10). 
The Generic Index Approval Order established generic listing 
standards for options on narrow-based indexes and adopted 
streamlined procedures for introducing trading in options satisfying 
the generic listing standards.
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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 Phlx 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 Phlx 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 purpose of the proposed rule change is to list for trading 
European style, cash-settled options on the OTC Prime Index, a new 
index developed by the Exchange pursuant to Rule 1009A(b) in accordance 
with the Generic Index Approval Order for the listing and trading of 
narrow-based index options. Options on this Index will provide a 
hedging vehicle for a group of some of the most active securities 
traded on the Nasdaq market. In order to assure that the Index reflects 
the most active securities traded on the Nasdaq market, the Index will 
be rebalanced annually to reflect the previous year's fifteen most 
actively traded issues.
    Pursuant to Rule 1009A, (1) the options on the Index will be A.M. 
settled; (2) the Index is price weighted; (3) no one component security 
will represent more than 25% of the weight of the Index, and the five 
highest weighted component securities in the Index do not in the 
aggregate account for more than 60% of the weight of the Index; (4) 
each of the component securities has a minimum market capitalization of 
a least $75 million and has a trading volume in each of last six months 
of not less than 1,000,000 shares; (5) all of the components of the 
Index meet the current criteria for standardized options trading set 
forth in Exchange Rule 1009 and are currently the subject of listed 
options on U.S.

[[Page 31544]]

options exchanges; (6) the Index contains no American Depositary 
Receipts (``ADRs''); and (7) all component stocks are listed on the 
Nasdaq and are reported National Market System securities pursuant to 
Rule 11Aa3-1 of the Act.\8\
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    \8\ 17 CFR 240.11Aa3-1.
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    The OTC Prime Index value will be disseminated every 15 seconds 
during the trading day. The Phlx has retained Bridge Data Inc. to 
compute and do all necessary maintenance of the Index.\9\ Pursuant to 
Phlx Rule 1100A, updated Index values will be disseminated and 
displayed by means of primary market prints reported by the 
Consolidated Tape Association and over the facilities of the Options 
Price Reporting Authority. The Index value will also be available on 
broker-dealer interrogation devices to subscribers of options 
information. The Exchange represents that both the Exchange and the 
Options Price Reporting Authority \10\ have the necessary systems 
capacity to handle the additional traffic of the OTC Prime Index.
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    \9\ As a back-up to Bridge Data Inc., the Phlx will utilize its 
own internal index calculation system called the Index Calculation 
Engine (``ICE'') System.
    \10\ See Letter from Joe Corrigan, Executive Director, Options 
Price Reporting Authority to Michael Walinskas, Senior Special 
Counsel, Division, Commission, dated May 4, 1998.
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    As of May 13, 1998, the market capitalization of all the stocks in 
the Index exceeded $680 billion and such individual capitalizations 
ranged from $3 billion (Quantum Corporation) to $214 billion (Microsoft 
Corporation). All fifteen component issues in the Index had average 
daily trading volumes in excess of one million shares over the past six 
months. The Exchange believes the component issues are some of the most 
widely-held and highly-capitalized common stocks.
    Ticker Symbol: OTX.
    Settlement Symbol: OTS.
    Index Calculation: The Index is a price weighted index. To compute 
the Index value, the following formula would be used:
[GRAPHIC] [TIFF OMITTED] TN09JN98.000

Where: SP=current stock price

The Initial divisor in an arbitrary number set to achieve a certain 
index value. The divisor for this Index will be 4.0 will result in an 
Index value of 188.70 on May 13, 1998. Index Maintenance: To maintain 
the continuity of the Index, the divisor will be adjusted to reflect 
non-market changes in the price of the component securities as well as 
changes in the composition of the Index. Changes which may result in 
divisor adjustments include, but are not limited to, stock splits, 
dividends, spin-offs, mergers and acquisitions. In accordance with Rule 
1009A, if any change in the nature of any component (e.g., delisting, 
merger, acquisition or otherwise) in the Index will change the overall 
market character of the Index, the Exchange will take appropriate steps 
to remove the stock or replace it with another stock that the Exchange 
believes would be compatible with the intended character of the Index. 
Any replacement components will be reported securities as defined in 
Rule 11Aa3-1 of the Act.\11\ The Index will be rebalanced on an annual 
basis to reflect the previous year's fifteen most active issues traded 
on the over-the-counter market.
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    \11\ 17 CFR 240.11Aa3-1.
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    Pursuant to Rule 1009(c)(2), the Exchange will not increase to more 
than 20 or decrease to less than 10, the number of components 
comprising the Index during the year. However, at the end of the 
calendar year the Index will be rebalanced in order to reflect fifteen 
of the most actively traded issues from the previous year. The Exchange 
maintains that the component stocks comprising the top 90% of the 
Index, by weight, will each maintain a minimum market capitalization of 
$75 million. The remaining 10%, by weight, will each maintain a minimum 
market capitalization of $50 million. The component stocks comprising 
the top 90% of the Index, by weight, will maintain a trading volume of 
at least 500,000 shares per month. The trading volume for each of the 
component stocks constituting the bottom 10% of the Index, by weight, 
will maintain an average trading volume of at least 400,000 shares per 
month. No fewer than 90% of the component issues by weight or fewer 
than 80% of the total number of the components qualify as stocks 
eligible for options trading. In addition to the maintenance criteria 
above, no single component of the Index shall account for more than 25% 
of the Index and the five highest weighted component securities shall 
not account for more than 60% of the Index.\12\
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    \12\ If the concentration of the five highest-weighted 
securities increase to above 60%, then the Exchange warrants that it 
will increase the number of components in the Index to 16 
components. The Exchange will monitor the concentration of the top 
five components in the Index on a monthly basis.
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    If the Index fails at any time to satisfy one or more of the 
required maintenance criteria, the Exchange will notify the Commission 
staff immediately of that fact and will not open for trading any 
additional series of options on the Index, unless the above is 
determined by the Exchange not to be significant and the Commission 
concurs in that determination, or unless the continued listing of 
options on the OTC Prime Index has been approved by the Commission 
under Section 19(b)(2) of the Act.\13\ In addition to not opening for 
trading any additional series, the Exchange may, in consultation with 
the Commission, prohibit opening purchase transactions in series of 
options previously opened for trading to the extent that the Exchange 
deems such action necessary or appropriate.\14\ The components which 
are substituted in the Index will comply with the maintenance 
requirements above.
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    \13\ See Phlx Rule 1009A.
    \14\ See Phlx Rule 1010
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    Unit of Trading: Each options contract will represent $100, the 
Index multiplier, times the Index value. For example, an Index value of 
200 will result in an option contract value of $20,000 (100  x  200).
    Excercise Price: The exercise prices will be set in accordance with 
Phlx Rule 1101A(a).
    Settlement Value: Because all of the components are national Market 
Securities traded through Nasdaq, the first reported sale price will be 
used for the final settlement value for expiring Index option 
contracts. In the event that a component security does not open for 
trading on the last day before the expiration of a series of Index 
options, the previous day's first reported sale price for that security 
will be used in calculating the Index value. However, in the event that 
the Options Clearing Corporation (``OCC'') determines that the current 
Index value is unreported or otherwise unavailable (including instances 
where the primary market for securities representing a substantial part 
of the value of the Index is not open for trading at the time when the 
current Index value used for exercise settlement purposes would be 
determined), the OCC shall determine an exercise settlement amount for 
the Index in accordance with Article XVII, Section 4 of the OCC By-
laws.\15\
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    \15\ See e.g., OCC Article XVII, Section 4 and Securities 
Exchange Act Release No. 37315 (June 17, 1996) 61 FR 32471 (June 24, 
1996) (order approving File No. SR-OCC-95-19).
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    Last Trading Day: The last business day prior to the third Friday 
of the month for options which expire on the Saturday following the 
third Friday of that month.
    Trading Hours: 9:30 a.m. to 4:02 p.m. EST.
    Position and Exercise Limits: Pursuant to Phlx Rules 1001A(b)(i) 
and 1002A,

[[Page 31545]]

the position and exercise limits will be 12,000 contracts.
    Expiration Cycles: Three months from the March, June, September, 
December cycle plus at least two additional near-term months. LEAPs may 
also be traded on the Index pursuant to Phlx Rule 1101A(b)(iii).
    Exercise Style: European.
    Premium Quotations: Premiums will be expressed in terms of dollars 
and fractions of dollars pursuant to Phlx Rule 1033A. For example, a 
bid or offer of 1\1/2\ will represent a premium per options contract of 
$150 (1\1/2\  x  100).
    The options will be traded pursuant to current Phlx rules governing 
the trading of index options including provisions addressing sales 
practices, floor trading procedures, position and exercise limits, 
margin requirements and trading halts and suspensions.\16\ The Exchange 
also represents that surveillance procedures currently used to monitor 
trading in index options will be applicable to this Index. These 
procedures include having complete access to trading activity in the 
underlying securities which are all traded on Nasdaq. In addition, 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.
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    \16\ See, Phlx Rule 722, Phlx Rules 1000A through 1102A and 
generally Phlx rules 1000 through 1072.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \17\ in general, and in particular with 
Section 6(b)(5),\18\ 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, processing information with 
respect to and facilitating transactions in securities to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, as well as to protect investors and the 
public interest by providing a hedging vehicle for the group of 15 of 
the most actively-traded securities on the Nasdaq market.
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    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx 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 either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The foregoing rule change constitutes a stated policy, practice, or 
interpretation with respect to the meaning, administration, or 
enforcement of an existing rule of the Exchange, and therefore, has 
become effective pursuant to Section 19(b)(3)(A) of the Act \19\ and 
paragraph (e) of Rule 19b-4 thereunder.\20\ At any time within 60 days 
of the filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act
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    \19\ 15 U.S.C. 78S(b)(3)(A).
    \20\ 17 CFR 240.19b-4.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. Copies 
of the submissions, 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, 450 Fifth Street, NW, Washington, 
DC 20549. 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-98-21 and should be submitted by June 30, 
1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-15278 Filed 6-8-98; 8:45 am]
BILLING CODE 8010-01-M