[Federal Register Volume 63, Number 228 (Friday, November 27, 1998)]
[Notices]
[Pages 65630-65633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31583]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40685; File No. SR-Phlx-98-48]


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

November 17, 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 October 23, 1998, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 for 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 on The Street.com Internet Index (``Index''),\3\ an equal 
dollar-weighted, A.M.-settled, narrow-based index of 20 small to mid-
size companies by capitalization that are involved in Internet 
software, computer data security, and consulting services.\4\ The Phlx 
is filing this proposal pursuant to Phlx Rule 1009(A), which provides 
for the commencement of trading of options on the Index 30 days after 
the date of the filing. The Phlx believes that this proposal is in 
compliance with Phlx Rule 1009(A) and the standards approved in the 
Generic Index Option Approval Order (``Generic Index Approval 
Order'').\5\
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    \3\ The Phlx pre-filed the Index with the Commission in August 
1998. The pre-filing was submitted in accordance with the Generic 
Index Approval Order, infra note 5. Subsequent to the pre-filing, 
the Exchange renamed the Phlx Internet Growth Index as The 
Street.com Internet Index. The Street.com, Inc. does not guaranty 
the accuracy or completeness of the Index, makes no express or 
implied warranties with respect to the Index and shall have no 
liability for any damages, claims, losses or expenses caused by 
errors in the Index calculation. The Exchange represents that it 
will have sole discretion over the calculation of the Index.
    \4\ Since the pre-filing, the Phlx represented to the Commission 
that nothing has changed with the Index, including the stocks 
selected for the Index; only the name of the Index was changed. 
Telephone conversation between Nandita Yagnik, Counsel, Phlx, and 
Joseph Corcoran, Division of Market Regulation, Commission on 
November 12, 1998.
    \5\ See Securities Exchange Act Relese No. 34157 (June 3, 1994), 
59 FR 30062 (June 9, 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 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 statements may be examined at the places specified in 
Item IV below. The Exchange 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 proposal is to list for trading European style, 
cash-settled options on The Street.com Internet Index, a new index 
developed by the Exchange pursuant to Phlx Rule 1009A(b) in accordance 
with the Generic Index Approval Order for the listing and trading of 
narrow-based index options. Options on The Street.com Internet Index 
will provide an important hedging vehicle for basket traders who engage 
in trading securities that comprise this subsector of the computer 
industry.
    The following is a more detailed description of the proposed Index 
options:
    Ticker Symbol: DOT
    Settlement Value Symbol: DOS
    Underlying Index: The Street.com Internet Index is an equal dollar-
weighted index composed of 20 stocks involved in Internet software, 
computer data security, and counsulting services that are traded on the 
New York Stock Exchange (``NYSE'') and Nasdaq Stock Market 
(``Nasdaq''), and are therefore, reported securities as defined in Rule 
``11Aa3-1 under the Act. Further, all of the stocks presently meet the 
Exchange's listing criteria for equity options contained in Exchange 
Rule 1009 and are currently the subject of

[[Page 65631]]

listed options on U.S. options exchanges.
    The Exchange notes that all of the companies represented in the 
Index are U.S. companies. However, if non-U.S. companies are added to 
the Index (such as American Depository Receipts) that are not subject 
to comprehensive surveillance sharing agreements, those components will 
not account for more than 20% of the weight of the Index.
    As of September 30, 1998, the market capitalization of all the 
stocks in the Index exceeded $50 billion, with individual 
capitalizations ranging from $167 million to $24 billion. All 20 
component issues in the Index had monthly trading volumes in excess of 
one million shares over each of the months from April through 
September.
    Index Calculation: The methodology used to calculate the Index is 
an equal dollar-weighted method, meaning that each of the component 
stocks is represented in the Index in approximately equal dollar 
amounts. The Exchange believes that this method of calculation is 
important because it will provide each component issue with equivalent 
influence on the movement of the Index value instead of allowing one 
highly capitalized stock to dominate the movement of the Index. To 
determine the initial dollar weighting of the stocks, the Exchange 
calculated the number of shares of each that would represent an 
investment of approximately $10,000 in each of those stocks comprising 
the Index based on closing prices on September 30, 1998. The value of 
the Index equals the current market value of the sum of the assigned 
number of shares of all of the stocks in the Index divided by the 
current Index divisor. The Index divisor was set to yield an initial 
Index value of 200 at the opening on October 1, 1998.
    Index Maintenance: To maintain the continuity of the Index, the 
divisor will be adjusted to reflect nonmarket 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 Phlx 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 market character of the Index. Any 
replacement components will be reported securities as defined in Rule 
11Aa3-1 under the Act.
    Currently, the Index is comprised of 20 component stocks. Absent 
Commission approval, the Exchange will not change the number of 
components to more than 24 or fewer than 16. The Exchange notes 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 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.
    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 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 Street.com Internet 
Index has been approved by the Commission under Section 19(b)(2) of the 
Act.\6\ 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.\7\
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    \6\ See Phlx Rule 1009A.
    \7\ See Phlx Rule 1010.
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    In addition to the maintenance criteria above, no single component 
of the Index shall account for more than 25% of the Index and the three 
highest weighted component securities shall not account for more than 
60% of the Index. If the Index fails to satisfy the maintenance listing 
standards set forth above, the Exchange shall not open for trading any 
additional series of options of that class unless such failure is 
determined by the Exchange not to be significant and the Commission 
concurs in that determination, or unless the continued listing of that 
class of Index options has been approved by the Commission under 
Section 19(b)(2) of the Act.
    Rebalancing: Following the close of trading on the third Friday of 
January, April, July and October the Index portfolio will be adjusted 
by changing the number of whole shares of each component so that each 
company is gains represented in ``equal'' dollar amounts. If necessary, 
a divisor adjustment will be made at the rebalancing to ensure the 
continuity of the Index's value. The newly adjusted portfolio will then 
become the basis for the Index's value on the first trading day 
following the adjustment.
    The number of shares of each component stock in the Index portfolio 
will remain fixed between quarterly rebalances except in the event of 
certain types of corporate actions, such as the payment of a dividend 
other than an ordinary cash dividend, stock dividend, stock split, 
reverse stock split, rights offering, distribution, reorganization, 
recapitalization, or similar event with respect to the component 
stocks. In the case of a merger or consolidation of an issuer of a 
component stock, if the stock remains in the Index, the number of 
shares of that security in the portfolio may be adjusted to the nearest 
whole share to maintain the component's relative weight in the Index at 
the level immediately prior to the corporate action. In the event of a 
stock addition or replacement, the average dollar value of the 
remaining portfolio components will be calculated and that amount 
invested in the stock of new component, to the nearest whole share. In 
all cases, the divisor will be adjusted, if necessary, to ensure Index 
continuity. All stock replacements and the handling of non-routine 
corporate actions will be announced at least ten business days in 
advance of such effective change, whenever possible. The Exchange will 
make this information available to the public through dissemination of 
an information circular.
    Unit of Trading: Each option 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).
    Exercise Price: The exercise prices will be set in accordance with 
Phlx Rule 1101A(a).
    Settlement: A.M.--settled index options.
    Settlement Value: The Index value for purposes of settling 
outstanding Index option contracts upon expiration will be calculated 
based upon the regular way opening sale prices for each of the Index's 
component stocks in their primary market on the last trading day

[[Page 65632]]

prior to expiration. In the case of 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 last 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.\8\
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    \8\ 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: 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.
    Position and Exercise Limits: The Street.com Internet Index is an 
industry or narrow-based index option. Accordingly, the Exchange will 
employ position and exercise limits pursuant to Phlx Rules 1001A(b) and 
1002A, respectively. The position and exercise limits will be 15,000 
contracts.
    Expiration Cycles: Three months from the March, June, September, 
December cycle, plus two additional near-term months.
    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 Street.com Internet Index value will be disseminated every 15 
seconds during the trading day. The Phlx has retained Bridge Data Inc. 
to compute and perform all of the 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 it has the capacity 
to handle the additional traffic of The Street.com Internet Index. 
Further, the Options Price Reporting Authority (``OPRA'') represents 
that it has the capacity to handle the additional traffic generated by 
the Index.\10\
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    \9\ As a back-up to Bridge Data Inc., the Phlx will utilize its 
own internal calculation system called the Index Calculation Engine 
(``ICE'') System.
    \10\ See Letter from Joe Corrigan, Executive Director, OPRA, to 
Michael Walinskas, Deputy Associate Director, Commission dated 
September 22, 1998.
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    The options will be traded pursuant to current Phlsx 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.\11\ The 
Exchange also represents that surveillance procedures currently used to 
monitor trading in index options will be applicable to this Index 
option. These procedures include having complete access to trading 
activity in the underlying securities which are all traded on the NYSE 
and Nasdaq. In addition, the Intermarket Surveillance Group (``ISG'') 
Agreement dated July 14, 1983, as amended on January 29, 1990 and June 
20, 1994 will be applicable to the trading of options on the Index.
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    \11\ See Phlx Rule 722 and Rule Phlx Rules 1000A through 1102A; 
See generally Phlx Rules 1000 to 1080.
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2. Statutory Basis
    The Phlix believes that the proposed rule change is consistent with 
Section 6 of the Act in general, and in particular, with section 
6(b)(5),\12\ in that it is designed to promote just and equitable 
principles of trade, foster cooperation and coordination with persons 
engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanisms of a free and open market and 
a national market system, and to protect investors and the public 
interest.
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    \12\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that the introduction of the 
proposed The Street.com Internet Index 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 of hedging exposure to 
market risks associated with the securities issued by companies that 
comprise this subsector of the computer industry. The trading of 
options on the Index will permit investors to participate in the price 
movement of the 20 securities on which the Index is based. 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 risks 
associated with these securities. Accordingly, the Exchange believes 
that options on the Index will provide investors with an additional 
trading and hedging mechanism that outweighs any potential for 
manipulation that would diminish public confidence. Further, the 
Exchange believes that the proposed Index will have a positive impact 
on efficiency, competition and capital formation consistent with 
section 3(f) of the Act.\13\
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    \13\ 15 U.S.C. 78c(f).
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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

    Because the foregoing rule change complies with the standards set 
forth in the Generic Index Approval Order,\14\ it has become effective 
pursuant to section 19(b)(3)(A) of the Act \15\ and subparagraph (e) of 
Rule 19b-4 thereunder.\16\ Pursuant to the Generic Index Approval 
Order, the Exchange may not list options on the Street.com Internet 
Index prior to thirty days after the date that the proposed rule change 
was filed with the Commission.
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    \14\ See note 5, supra.
    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(e).
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    At any time within 60 days of the filing of such 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
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

[[Page 65633]]

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. 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-98-48 and should 
be submitted by December 18, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-31583 Filed 11-25-98; 8:45 am]
BILLING CODE 8010-01-M