[Federal Register Volume 63, Number 206 (Monday, October 26, 1998)]
[Notices]
[Pages 57147-57149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28594]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40565; File No. SR-Phlx-98-30]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval of Amendment No. 1 Thereto 
Relating to the Reduction in the Value of the National Over-the-Counter 
Index

October 16, 1998.

I. Introduction

    On July 16, 1998, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section

[[Page 57148]]

19(b)(1) 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 
National Over-the-Counter Index (``Index'') option (``XOC'') to one-
fourth its present value.
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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 August 31, 1998.\3\ No comments were received on the 
proposal. On October 7, 1998, the Exchange submitted to the Commission 
Amendment No. 1 to the proposed rule change.\4\ This order approves the 
proposal and grants accelerated approval to Amendment No. 1 thereto. 
The Commission is also soliciting comments on Amendment No. 1 to the 
proposed rule change.
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    \3\ Securities Exchange Act Release No. 40355 (August 24, 1998) 
63 FR 46270 (August 31, 1998).
    \4\ Letter from Nandita Yagnik, Attorney, Phlx to Michael 
Walinskas, Deputy Associate Director, Division of Market Regulation, 
Commission, dated October 6, 1998 (``Amendment No. 1''). In 
Amendment No. 1, the Exchange agreed to give additional notice to 
members of the reversion to original position and exercise limits of 
25,000 contracts, one month before the last expiration for existing 
contracts which at the time of Amendment No. 1 was March 1999. 
Currently however, the last expiration for existing contracts is 
June 1999. Accordingly, the Exchange will give the additional notice 
to members in May 1999. Telephone call between Nandita Yagnik, 
Attorney, Phlx and Kelly McCormick, Attorney, Division of Market 
Regulation, Commission, October 16, 1998.
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II. Description of the Proposal

    The Index is a capitalization-weighted market index composed of the 
100 largest capitalized stocks traded over-the-counter. The Exchange 
began trading the XOC in 1985.\5\ 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.\6\ According to the 
Exchange, as of June 10, 1998, the value of the index was 869.22. As a 
result of the increase in value of the Index, the premium for the XOC 
options has also risen.
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    \5\ Securities Exchange Act Release No. 22044 (May 17, 1985), 50 
FR 21532 (May 24, 1985).
    \6\ Securities Exchange Act Release No. 36577 (December 12, 
1995), 60 FR 65705 (December 20, 1995).
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    In response to these increases in the value of the Index and the 
XOC, the Exchange proposes to conduct a ``four-for-one split'' of the 
Index, such that the value would be reduced to one-quarter to its 
present value. In order to account for the split, the number of XOC 
contracts will be quadrupled, such that for each XOC contract currently 
held, the holder will receive four contracts at the reduced value, with 
a strike price one-quarter of the current 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 to one-quarter of its 
current value, the position and exercise limits applicable to the XOC 
will be temporarily quadrupled, from 25,000 contracts to 100,000 
contracts. The position and exercise limits will return to the current 
level of 25,000 contracts in June 1999, the last outstanding expiration 
for the existing contracts now trading. The Exchange believes that this 
procedure is similar to the one employed respecting equity options 
where the underlying security is subject to a four-for-one split. The 
other contract specifications for the XOC will remain unchanged and the 
trading symbol will remain XOC (plus any necessary wrap symbols). The 
Exchange will list strike prices surrounding the new, lower index 
value, pursuant to Rule 1101A.\7\ Notice of the strike price changes, 
as well as the effective date and position limit changes will be made 
by way of an Exchange memorandum to the membership. In addition, Phlx 
will notify members that their positions will have to be reduced from 
100,000 contracts to 25,000 contracts one month prior to the reduction 
in June 1999.\8\
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    \7\ Specifically, because the Index value will be less than 500, 
the applicable strike price interval will be $5 in the first four 
months and $25 in the fifth month. Phlx Rule 1101A(a).
    \8\ See Amendment No. 1, supra note 4.
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    According to the Exchange, 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, according to the 
Phlx, on June 11, 1998, the September 870 calls were quoted at 51-52 
while the puts were quoted at 40-41. The Exchange believes that certain 
investors and traders may be impeded from trading XOC options at these 
current levels. 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 reduced premium value should, in the Phlx's view, 
encourage additional investor interest.
    The Phlx believes the 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. The Exchange believes this 
should attract additional investors, and in turn, create a more 
attractive and liquid trading environment.

III. Discussion

    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,\9\ and in 
particular, the requirements of Section 6(b)(5) of the Act.\10\ 
Specifically, the Commission believes the proposed rule change is 
consistent with the Section 6(b)(5) requirement to remove impediments 
to a free and open securities market. By reducing the value of the 
Index, the Commission believes that a broader range of investors will 
be provided a means of hedging their exposure to the market risk 
associated with the underlying over-the-counter stocks. In addition, 
the reduced value of the Index could attract additional investors, and 
create a more active and liquid trading market.
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    \9\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that quadrupling the Index's divisor should 
not have an adverse market impact in XOC options or increase 
manipulation concerns. The Index will continue to be comprised of the 
same stocks with the same weightings and will be calculated in the same 
manner (except for the change in the divisor). Accordingly, the dollar 
value of the XOC options contracts an investor holds and controls will 
not change as a result of the reduced value of the index. In addition, 
the Exchange's surveillance procedures will remain the same.
    The Commission also believes that the Phlx's position and exercise 
limits and strike price adjustments are appropriate and consistent with 
the Act. In this regard, the Commission notes that the position and 
exercise limits and strike price adjustments are similar to the 
approach used to adjust outstanding options on stocks that have 
undergone stock splits as well as reductions in the value of other 
indexes.\11\ Moreover, the Commission believes that the temporary 
quadrupling of the position and exercise

[[Page 57149]]

limits are reasonable in light of the fact that the size of the options 
contracts will be reduced to one-quarter of their present value and as 
a result the number of outstanding options contracts an investor holds 
will be quadrupled. The temporary increase of the position and exercise 
limits, therefore, will ensure that investors will not potentially be 
in violation of the lower existing position and exercise limits while 
permitting market participants to maintain, after the split of the XOC, 
their current level of investment in the options contracts. As noted 
above, the increased position and exercise limits of 100,000 contracts 
will revert to their original limit of 25,000 in June 1999, the last 
outstanding expiration for contracts now trading.
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    \11\ See, Securities Exchange Act Release No. 38415 (March 18, 
1997), 62 FR 14177 (March 25, 1997)(reducing the value of the Super 
Cap Index); Securities Exchange Act Release No. 36577 (December 12, 
1995), 60 FR 65705 (December 20, 1995)(reducing the value of the 
National Over-the-Counter Index); Securities Exchange Act Release 
No. 35999 (July 20, 1995), 60 FR 38387 (July 26, 1995)(reducing the 
value of the Semiconductor Index).
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    Finally, the Commission notes that the Exchange has agreed able to 
provide adequate notice to the market. The Exchange shall send prior 
notice to its membership setting forth the changes in the Index value, 
position limits, strike prices and effective date. This notice should 
facilitate the transition and prevent investor confusion. Moreover, the 
Exchange has agreed to issue a second notice to members one month prior 
to the June 1999 expiration reminding members that the position and 
exercise limits will revert to their original levels of 25,000 
contracts.\12\ The Commission believes that the second notice should 
provide adequate time for holders of all open positions in XOC options 
to adjust their holdings accordingly.
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    \12\ Amendment No. 1.
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    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after publication 
in the Federal Register. The Commission notes that Amendment No. 1 
merely memorializes the notification procedures that the Exchange has 
agreed to follow for the notification of members. The Commission 
believes that Amendment No. 1 should ensure that market participants 
will receive adequate notice prior to the eventual reversion to the 
original position and exercise limits. Accordingly, the Commission 
finds that good cause exists, consistent with Section 6(b)(5) of the 
Act,\13\ and Section 19(b) of the Act \14\ to accelerate approval of 
Amendment No. 1 to the proposed rule change.
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78s(b).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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 at 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 November 16, 1998.

V. Conclusion

    For the foregoing reasons, the Commission finds that the Exchange's 
proposal to reduce the value of the Index to one-quarter of its present 
value 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,\15\ that the amended proposed rule change (SR-Phlx-98-30) is 
approved.

    \15\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28594 Filed 10-23-98; 8:45 am]
BILLING CODE 8010-01-M