[Federal Register Volume 63, Number 242 (Thursday, December 17, 1998)]
[Notices]
[Pages 69704-69706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33361]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40757; File No. SR-Phlx-98-39]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to an Increase 
in Position and Exercise Limits for Narrow-Based Index Options

December 7, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on September 3, 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 self-regulatory organization. Phlx filed an amendment to the 
proposed rule change on September 28, 1998.\3\ The Commission is 
publishing this notice to solicit

[[Page 69705]]

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.
    \3\ See Letter to Michael Walinskas, Deputy Associate Director, 
Division of Market Regulation, Commission, from Nandita Yagnik, 
Attorney, Phlx, dated September 25, 1998 (``Amendment No. 1''). 
Amendment No. 1 clarified that the Exchange intended to propose a 
tripling of the current position and exercise limits for narrow-
based index options, not a doubling of the limits as stated in the 
original filing.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Phlx proposed to amend Phlx Rule 1001A(b)(1) by increasing narrow-
based (industry) index option position limits,\4\ which are subject to 
a three-tier position limit determination. Specifically, the current 
levels of 9,000, 12,000 and 15,000 contracts are proposed to be 
increased to 27,000, 36,000 and 45,000 contracts--a tripling of the 
current limits.
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    \4\ Position limits impose a ceiling on the number of option 
contracts in each class on the same side of the market (i.e., 
aggregating long calls and short puts or long puts and short calls) 
that can be held or written by an investor or group of investors 
acting in concert.
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    Exchange exercise limits,\5\ which are contained in Phlx Rule 
1002A, are established by reference to position limits, such that any 
increase in position limits would also increase exercise limits. 
Accordingly, the Phlx is proposing to increase its exercise limits to 
correspond to the proposed increases in position limits.
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    \5\ Exercise limits prohibit an investor or group of investors 
acting in concert from exercising more than a specified number of 
puts or calls in a particular class within five consecutive business 
days.
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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 self-regulatory organization 
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 self-regulatory organization 
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 increase industry 
index option position and exercise limits in order to attract 
additional trading interest and, thus, promote depth and liquidity in 
Phlx index options. The Exchange believes that the current limits 
constrain certain investors from trading index options. Pursuant to 
Rule 1001A, the three-tiered levels of position and exercise limits are 
currently 9,000, 12,000 or 15,000 contracts. These position limits, 
which are standard among all of the options exchanges respecting 
narrow-based index options, are based on the degree of concentration of 
a component stock of the index.\6\ For the reasons given below, the 
Exchange proposes to increase these limits to 27,000, 36,000 or 45,000 
contracts.
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    \6\ Specifically, Rule 1001A(b)(1) currently provides the 
following position limits for industry index options: (i) 9,000 
contracts for an index where a single component stock accounted, on 
average, for 30% or more of the index value during the 30-day period 
immediately preceding the Exchange's semi-annual review of industry 
index option position limits; (ii) 12,000 contracts for an index 
where a single component stock accounted, on average, for 20% or 
more of the index value or any five component stocks together 
accounted, on average, for more than 50% of the index value but not 
single component stock accounted, on average, for 30% or more of the 
index value during the 30-day period immediately preceding the 
Exchange's semi-annual review of industry index option position 
limits; or (iii) 15,000 contracts where the conditions requiring a 
limit of 9,000 or 12,000 contracts have not occurred.
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    The Exchange believes that the proposed increase is appropriate at 
this time, in light of the Exchange's nearly 15 years experience 
trading index options. In 1983, the Gold/Silver Index, XAU, was the 
first narrow-based index option to be traded on the Phlx, listed with a 
position limit of 4,000 contracts.\7\ Since that time, the Exchange has 
listed additional index options, many of which have been successful 
products. Currently, the Phlx trades options on the following ten 
narrow-based indexes, noting the current position limits:

    \7\ Exchange Act Release No. 20437 (December 2, 1983)(SR-Phlx-
83-17).

(1) Gold/Silver Index (``XAU''): 9,000 contracts
(2) Utility Index (``UTY''): 15,000 contracts
(3) Phlx/KBW Bank Index (``BKX''): 15,000 contracts
(4) Phone Index (``PNX''): 12,000 contracts
(5) Semiconductor Index (``SOX''): 12,000 contracts
(6) Airline Sector Index (``PLN''): 15,000 contracts
(7) Forest and Paper (``FPP''): 15,000 contracts
(8) Box Maker Index (``BMX''): 9,000 contracts
(9) OTC Prime Index (``OTC''): 12,000 contracts
(10) Oil Service Index (``OSX''): 12,000 contracts
    The market for index options has also evolved, as more investors 
are familiar with the product and its uses.
    The Exchange recognizes that the purposes of these limits are to 
prevent manipulation and protect against disruption of the markets for 
both the option as well as the underlying security. The Exchange has 
considered the effects of increased position limits on the marketplace, 
and believes that manipulation and disruption concerns are addressed by 
a tripled position limit and are offset by the market need for the 
increased limits. Specifically, the Phlx continues to monitor the 
markets for evidence of manipulation or disruption caused by investors 
with positions at or near current position or exercise limits; the new 
limits will not diminish the surveillance function in this regard.
    The current levels has been in place since October 1996,\8\ such 
that a review of the current position limits is appropriate. The 
Exchange believes that the proposed increases are reasonable. In prior 
releases approving increased position limits, the Commission 
acknowledged that a gradual, evolutionary approach has been adopted by 
the Commission and the various options exchanges in increasing position 
and exercise limits. In light of the nearly 2 years since limits were 
changed, the Exchange believes that these increases are reasonable.\9\
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    \8\ See Exchange Act Release No. 37863 (October 24, 1996) (SR-
Phlx-96-33). Previously, position limits were increased in 1983, 
1993 and 1995.
    \9\ The most recent position limit change in 1996 represented a 
50% percent increase in the lowest tier from 6,000 to 9,000 
contracts; a 33% increase in the middle tier from 9,000 to 12,000 
contracts and a 25% increase in the highest tier from 12,000 to 
15,000 contracts. In 1995, the changes represented a 9% increase in 
the lowest tier from 5,500 to 6,000 contracts; a 20% increase from 
7,500 to 9,000 contracts; and a 15% increase in the highest tier 
from 10,500 to 12,000 contracts. In 1993, the changes resulted in 
increases in 38% from 4,000 to 5,500 contracts; 25% from 6,000 to 
7,500 contracts; and 31% from 8,000 to 10,500 contracts.
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    The Phlx also believes that higher position limits would further 
accommodate the hedging needs of Exchange market makers and 
specialists, who are also restricted by current levels. The Exchange 
continues to believe that increases are needed for traders and 
investors. The Exchange has been requested by its members and 
customers, who have repeatedly expressed that these limits hamper the 
ability to execute investment strategies, to again propose an increase 
in position limits. Such requests emphasize that institutional hedging 
needs and trading objectives may exceed current limits, in view of the 
large portfolios common to institutional trading and that certain sized 
transactions are required to execute complicated, cross-market 
strategies. Floor members have expressed the resulting deleterious 
effect on index options trading in an exchange environment. Based on 
such

[[Page 69706]]

member and customer requests, the Exchange has also realized that the 
current position limit levels continue to discourage market 
participation by large investors and the institutions that compete to 
facilitate the trading interests of large investors. Accordingly, this 
proposal aims to also accommodate the liquidity and hedging needs of 
large investors and the facilitators of those investors.
    Concurrent with the proposed increase to position limits, the 
Exchange is also proposing a corresponding increase to industry index 
option exercise limits. The Exchange believes that this increase is 
necessary and appropriate for the same reasons as the rationale cited 
herein for the proposed position limit increases. Furthermore, exercise 
limits constrict trading strategies by preventing investors from 
exercising positions larger than the limit within five consecutive 
business days. The Exchange also notes that most of its index options 
currently are European style, exercisable only during a specified 
period at expiration, such that the manipulation and market disruption 
concerns associated with large exercises will be limited.\10\
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    \10\ The following index options are European style: UTY, BKX, 
PLN, FPP, BMX, OTC, OSX and SOX (SOX have both European and American 
style options).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \11\ in general, and in particular, with 
Section 6(b)(5) in that it is designed to promote just and equitable 
principles trade, prevent fraudulent and manipulative acts and 
practices, as well as to protect investors and the public interest. The 
Exchange believes that the proposed rule change should remove 
impediments to and perfect the mechanism of a free and open market by 
providing market opportunity to investors constricted by current 
position limit level. The Phlx also believes that by stimulating market 
participation and thereby increasing option market depth and liquidity, 
the proposed rule change should promote just and equitable principles 
of trade. At the same time, the Phlx believes that the proposed 
position limits should continue to prevent fraudulent and manipulative 
acts and practices as well as protect investors and the public interest 
by limiting the ability to disrupt and manipulate the markets for 
options as well as the underlying securities. The Exchange believes 
that the proposal represents a balance between creating a disincentive 
to manipulate or disrupt the marketplace consistent with the purposes 
of such limits, and setting such limit so low so as to discourage 
market participation or liquidity providing activity.
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    \11\ 15 U.S.C. 78f(b).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believes 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 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 findings or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested person are invited to submit written date, 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, N.W., Washington, D.C. 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 of 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. Copies of such filing will also be 
available for inspection and copying at the principal office at the 
Exchange. All submissions should refer to File No. SR-File-98-39 and 
should be submitted by January 7, 1999.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-33361 Filed 12-16-98; 8:45 am]
BILLING CODE 8010-01-M