[Federal Register Volume 63, Number 168 (Monday, August 31, 1998)]
[Notices]
[Pages 46270-46271]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23312]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40355; File No. SR-Phlx-98-30]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. To Reduce the Value of 
the National Over-the-Counter Index (``XOC'')

August 24, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 16, 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 Exchange. 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).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to reduce the value of its National Over-the-
Counter Index (``Index'') option (``XOC'') to one-fourth its present 
value by quadrupling the divisor used in calculating the Index. In 
addition, the position and exercise limits applicable to the XOC will 
be quadrupled until the last expiration date then trading. The Index is 
a capitalization-weighted market index composed of the 100 largest 
capitalized stocks traded over-the-counter. The other contract 
specifications for the XOC remain unchanged.

II. Self-Regulatory Organization's Statements of the Purpose of, 
and Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange 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

[[Page 46271]]

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

    The Exchange began trading the XOC in 1985.\2\ The Index was 
created with a value of 150 on its base date of September 28, 1984, 
which rose to 548 in June 1994, 700 in June 1995 and 868 in September 
1995. In December 1995, the Exchange split the Index to one-half its 
value.\3\ As of June 10, 1998, the index value was 869.22. Thus, the 
value has increased significantly, especially during the last eighteen 
months. Consequently, the premium for XOC options has also risen.
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    \2\ Securities Exchange Act Release No. 22044 (May 17, 1985) 50 
FR 21532 (May 24, 1985) (File No. SR-Phlx-84-28).
    \3\ Securities Exchange Act Release No. 36577 (December 12, 
1995) 60 FR 65705 (December 20, 1995) (SR-Phlx-95-61).
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    As a result, the Exchange proposes to conduct a ``four-for-one 
split'' of the Index, such that the value would be reduced to one-
quarter of its present value. The number of XOC contracts will be 
quadrupled, such that for each XOC contract currently held, the holder 
would receive four contracts at the reduced value, with a strike price 
one quarter of the original strike price. For instance, the holder of 
an XOC 800 call will receive four XOC 200 calls. In addition to the 
strike price being reduced by one quarter, the position and exercise 
limits applicable to the XOC will be quadrupled, from 25,000 contracts 
to 100,000 contracts until the last expiration then trading, which is 
the March 1999 expiration.\4\ This procedure is similar to the one 
employed respecting equity options where the underlying security is 
subject to a four-for-one stock split. The trading symbol will remain 
as XOC (plus any necessary wrap symbols).
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    \4\ At this time, the position and exercise limits will return 
to the current level of 25,000 contracts.
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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.\5\ 
The Exchange will announce the effective date by way of an Exchange 
memorandum to the membership, also serving as notice of the strike 
price and position limit changes.
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    \5\ Specifically, because the Index value would be less than 
500, the applicable strike price interval would be $5 in the first 
four months and $25 in the fifth month. Phlx Rule 1101A(a).
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    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, the September 870 calls on June 11 were quoted 
at 51-52 while the puts were quoted at 40-41. A four-for-one split 
would serve to reduce the price of the aforementioned options to 
approximately 12\3/4\-13 for the calls and 10-10\1/4\ for the puts, 
thus making them more accessible to the retail investor. The Exchange 
believes that certain investors and traders may be impeded from trading 
XOC options at their current levels. A reduced value should, in the 
Phlx's view, encourage additional investor interest.
    The Exchange believes that XOC options provide an important 
opportunity for investors to hedge and speculate upon the market risk 
associated with the underlying over-the-counter stocks. By reducing the 
value of the Index, such investors will be able to utilize this trading 
vehicle, while extending a smaller outlay of capital. This should 
attract additional investors, and, in turn, create a more active and 
liquid trading environment.
    The Exchange believes the proposed rule change is consistent with 
Section 6 of the Act in general, and in particular, with Section 
6(b)(5), in that it is designed to promote just and equitable 
principles of trade, as well as to protect investors and the public 
interest, by establishing a lower index value, which should, in turn, 
facilitate trading in XOC options. The Exchange believes that reducing 
the value of the Index does not raise manipulation concerns and would 
not cause adverse market impact, because the Exchange will continue to 
employ its surveillance procedures and has proposed an orderly 
procedure to achieve the index split, including adequate prior notice 
to market participants.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Phlx consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 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, 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-98-30 and should be submitted by September 
21, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-23312 Filed 8-25-98; 8:45 am]
BILLING CODE 8010-01-M