[Federal Register Volume 66, Number 73 (Monday, April 16, 2001)]
[Notices]
[Pages 19593-19596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9340]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44138; File No. SR-PCX-01-15]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc. to Trade Standardized Equity Options on Trust Issued 
Receipts

March 30, 2001.
    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 March 15, 2001, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I and II 
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 and to approve the proposed rule change 
on an accelerated basis.
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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 Exchange proposes to adopt new listing and maintenance 
standards to allow for trading of standardized equity options on trust 
issued receipts. The text of the proposed rule change follows. Proposed 
new language is in italics; proposed deletions are in brackets.
* * * * *

Options

    Rule 3.6(a)-(b)--No Change.
* * * * *

Commentary

    .01-.06--No change.
    .07  Securities deemed appropriate for options trading shall 
include shares or other securities (``Trust Issued Receipts'') that 
are principally traded on a national securities exchange or through 
the facilities of a national securities association and reported as 
a national market security, and that represent ownership of the 
specific deposited securities held by a trust, provided:
    (a)(i) the Trust Issued Receipts meet the criteria and 
guidelines for underlying securities set forth in Rule 3.6(a); or
    (ii) the Trust Issued Receipts must be available for issuance or 
cancellation each business day from the Trust in exchange for the 
underlying deposited securities; and
    (b) not more than 20% of the weight of the Trust Issued Receipt 
is represented by ADRs on securities for which the primary market is

[[Page 19594]]

not subject to a comprehensive surveillance agreement.
* * * * *

Withdrawal of Approval of Underlying Securities

    Rule 3.7(a)-(b)--No change.
* * * * *

Commentary

    .01-.10-No change.
    .11  Absent exceptional circumstances, securities initially 
approved for options trading pursuant to Commentary .07 to PCX Rule 
3.6 (such securities are defined and referred to in that Commentary 
as ``Trust Issued Receipts'') shall not \3\ be deemed to meet the 
Exchange's requirements for continued approval, and the Exchange 
shall not open for trading any additional series of option contracts 
of the class covering such Trust Issued Receipts, whenever the Trust 
Issued Receipts are delisted and trading in the Receipts is 
suspended on a national securities exchange, or the Trust Issued 
Receipts are no longer traded as national market securities through 
\4\ the facilities of a national securities association. In 
addition, the Exchange shall consider the suspension of opening 
transactions in any series of options of the class covering Trust 
Issued Receipts in any of the following circumstances:
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    \3\ PCX corrected a typographical error that appeared in the 
proposed rule language. Telephone conversation between Hassan A. 
Abedi, Attorney, PCX and Susie Cho, Attorney, Division of Market 
Regulation (``Division''), Commission, March 30, 2001.
    \4\ PCX corrected a typographical error that appeared in the 
proposed rule language. Telephone conversation between Hassan A. 
Abedi, Attorney, PCX and Susie Cho, Attorney, Division, Commission, 
March 26, 2001.
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    (1) In accordance with the terms of Commentary .01 of this Rule 
in the case of options covering Trust Issued Receipts when such 
options were approved pursuant to paragraph (a)(i) of Commentary .07 
under Rule 3.6;
    (2) The Trust has more than 60 days remaining until termination 
and there are fewer than 50 record and/or beneficial holders of 
Trust Issued Receipts for 30 or more consecutive trading days;
    (3) The Trust has fewer than 50,000 receipts issued and 
outstanding;
    (4) The market value of all receipts issued and outstanding is 
less than $1,000,000; or
    (5) Such other event shall occur or condition exist that in the 
opinion of the Exchange makes further dealing in such options on the 
Exchange inadvisable.
    .12  For Holding Company Depositary Receipts (HOLDRs), the 
Exchange will not open additional series of options overlying HOLDRs 
(without prior Commission approval) if: (1) the proportion of 
securities underlying standardized equity options to all securities 
held in a HOLDRs trust is less than 80% (as measured by their 
relative weightings in the HOLDRs trust); or (2) less than 80% of 
the total number of securities held in a HOLDRs trust underlie 
standardized equity options.
* * * * *

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 proposed rule change is to provide for the 
trading of options, including FLEX equity options,\5\ on trust issued 
receipts. The Exchange believes that the listing and maintenance 
criteria proposed in its new rule are consistent with the options 
listing and maintenance criteria for trust issued receipts currently 
used by the American Stock Exchange LLC (``Amex'') and the Chicago 
Board Options Exchange, Inc. (``CBOE'').\6\ Trust issued receipts are 
exchange-listed securities representing beneficial ownership of the 
specific deposited securities represented by the receipts. They are 
negotiable receipts issued by a trust representing securities of 
issuers that have been deposited and are held on behalf of the holders 
of the trust issued receipts. Trust issued receipts, which trade in 
round-lots of 100, and multiples thereof, may be issued after their 
initial offering through a deposit with the trustee of the required 
number of shares of common stock of the underlying issuers. This 
characteristic of trust issued receipts is similar to that of exchange-
traded fund shares, which also may be created on any business day upon 
deposit of the requisite securities comprising a creation unit.\7\ The 
trust will only issue receipts upon the deposit of the shares of 
underlying securities that are represented by a round-lot of 100 
receipts. Likewise, the trust will cancel, and an investor may obtain, 
hold, trade or surrender trust issued receipts in a round-lot and 
round-lot multiples of 100 receipts.
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    \5\ FLEX equity options provide investors with the ability to 
customize basic option features including size, expiration date, 
exercise style and certain exercise prices.
    \6\ The Commission approved the Amex provisions on June 15, 
2000. See Securities Exchange Act Release No. 42947 (June 15, 2000), 
65 FR 39211 (June 23, 2000) (SR-Amex-99-37). The Commission approved 
the CBOE provisions on July 17, 2000. See Securities Exchange Act 
Release No. 43043 (July 17, 2000), 65 FR 46520 (July 28, 2000) (SR-
CBOE-00-25).
    \7\ The Exchange received approval to trade options on exchange-
traded fund shares on February 28, 2001. See Securities Exchange Act 
Release No. 44025 (February 28, 2001), 66 FR 13986 (March 8, 2001).
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    Generally, options (including FLEX equity options) on trust issued 
receipts are proposed to be traded on the Exchange pursuant to the same 
rules and procedures that apply to trading in options on equity 
securities or indexes of equity securities. The Exchange will list 
option contracts covering 100 trust issued receipts, the minimum 
required round-lot trading size for the underlying receipts. Strike 
prices for the non-FLEX contracts will be set to bracket the trust 
issued receipts at the same intervals that apply to other equity 
options under PCX Rule 6.4. The proposed position and exercise limits 
for non-FLEX options on trust issued receipts would be the same as 
those established for other non-FLEX equity options, as set forth in 
PCX Rule 6.8 and PCX Rule 6.9 respectively. The Exchange anticipates 
that most options on trust issued receipts will initially qualify for 
the lowest position limit. However, as with other equity options, 
applicable position limits will be increased for options if the volume 
of trading in the trust issued receipts increases to the extent needed 
to permit a higher limit. As is the case of all FLEX equity options, no 
position and exercise limits will be applicable to FLEX equity options 
overlying trust issued receipts.
    The listing and maintenance standards proposed for options on trust 
issued receipts are set forth respectively in proposed Commentary .07 
to PCX Rule 3.6, and in proposed Commentary .11 to PCX Rule 3.7. 
Pursuant to the proposed initial listing standards, the Exchange will 
list only trust issued receipts that are principally traded on a 
national securities exchange or through the facilities of a national 
securities association and reported as national market securities. In 
addition, the initial listing standards require that either: (i) the 
trust issued receipts meet the uniform options listing standards in PCX 
Rule 3.6(a), which include criteria covering the minimum public float, 
trading volume, and share price of the underlying security in order to 
list the option; \8\ or (ii) the trust issued receipts

[[Page 19595]]

must be available for issuance or cancellation each business day from 
the trust in exchange for the underlying deposited securities.
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    \8\ Specifically, PCX Rule 3.6(a) requires the underlying 
security to have a public float of 7,000,000 shares, 2,000 holders, 
trading volume of 2,400,000 shares in the preceding 12 months, a 
share price of $7.50 for the majority of the business days during 
the three calendar months preceding the date of the selection, and 
that the issuer of the underlying security is in compliance with the 
Act.
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    In addition, listing standards for options on trust issued receipts 
will require that any American Depositary Receipts (ADRs) in the 
portfolio on which the Trust is based for which the securities 
underlying the ADRs' primary markets are in countries that are not 
subject to comprehensive surveillance agreements will not in the 
aggregate represent more than 20 percent of the weight of the 
portfolio.
    The Exchange's proposed maintenance standards provide that if a 
particular series of trust issued receipts should cease to trade on an 
exchange or as national market securities in the over the-counter 
market, there will be no opening transactions in the options on the 
trust issued receipts, and all such options will trade on a 
liquidation-only basis (i.e., only closing transactions to permit the 
closing of outstanding open options positions will be permitted). In 
addition, the Exchange will consider the suspension of opening 
transactions in any series of options of the class covering trust 
issued receipts if: (i) For options on trust issued receipts that were 
listed pursuant to the equity option listing standards in PCX Rule 
3.6(a), the options fail to meet the option maintenance standards in 
Commentary .01 to PCX Rule 3.7; \9\ (ii) the trust has more than 60 
days remaining until termination and there are fewer than 50 record 
and/or beneficial holders of trust issued receipts for 30 or more 
consecutive trading days; (iii) the trust has fewer than 50,000 
receipts issued and outstanding; (iv) the market value of all receipts 
issued and outstanding is less than $1,000,000; or (v) such other event 
shall occur or condition exists that, in the opinion of the Exchange, 
makes further dealing in such options on the Exchange inadvisable. 
Furthermore, the Exchange will not open additional series of options on 
any Holding Company Depositary Receipts (``HOLDRs''), a type of trust 
issued receipt, without prior Commission approval, if: (i) The 
proportion of securities underlying standardized equity options to all 
securities held in a HOLDRs trust is less than 80 percent (as measured 
by the relative weightings in the HOLDRs trust); \10\ or (ii) less than 
80 percent of the number of securities held by a HOLDR trust underlie 
standardized options.
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    \9\ Specifically, Commentary .01 to Rule 3.7 provides that an 
underlying security will not meet the Exchange's requirements for 
continued listing when, among other things: (i) there are fewer than 
6,300,000 publicly-held shares; (ii) there are fewer than 1,600 
holders; (iii) trading volume was less than 1,800,000 shares in the 
preceding twelve months; or (iv) the share price of the underlying 
security closed below $5 on a majority of the business days during 
the preceding 6 months.
    \10\ The Exchange represents that the weight of each security in 
a HOLDR trust will be determined by calculating the sum of the 
number of shares of each security (represented in a single HOLDR) 
and underlying options multiplied by its respective share price 
divided by the sum of the number of shares of all securities 
(represented in a single HOLDR) multiplied by their respective share 
prices.
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    Options on trust issued receipts will be physically settled and 
will have the American-style exercise feature used on all non-FLEX 
equity options, and not the European-style feature. The Exchange, 
however, also proposes to trade FLEX equity options which will be 
available with both the American-style and European-style exercise 
feature, as well as other FLEX equity features.\11\
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    \11\ An American-style option may be exercised at any time prior 
to its expiration, while a European-style option may be exercised 
only at its expiration date.
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    The proposed margin requirements for options on trust issued 
receipts are at the same levels that apply to options generally under 
PCX Rule 2.16, except, with respect to trust issued receipts based on a 
broad-based portfolio, minimum margin must be deposited and maintained 
equal to 100 percent of the current market value of the option plus 15 
percent of the market value of equivalent units of the underlying 
security value. Trust issued receipts that hold securities based upon a 
narrow-based portfolio must have options margin that equals at least 
100 percent of the current market value of the contract plus 20 percent 
of the market value of equivalent units of the underlying security 
value. In this respect, the margin requirements proposed for options on 
trust issued receipts are comparable to margin requirements that 
currently apply to broad-based and narrow-based index options. Also, 
holders of options on trust issued receipts that exercise and receive 
the underlying trust issued receipts must receive a product description 
or prospectus, as appropriate.
    Lastly, the Exchange believes it has the necessary systems capacity 
to support the additional series of options that would result from the 
trading of options on HOLDRs.
2. Statutory Basis
    The PCX believes that, by providing investors with a better means 
to hedge their positions in the underlying trust issued receipts, as 
well as an alternative market center in which to trade these products, 
thereby increasing competition, the proposed rule change is consistent 
with section 6(b)(5) of the Act.\12\ Section 6(b)(5) requires that 
exchange rules be designed to promote just and equitable principles of 
trade, to remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and, in general, to protect 
investors and the public interest.
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    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The PCX does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange did not solicit or receive comments on the proposed 
rule change.

III. 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, N.W., Washington, D.C. 20549-
0609. 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to the File No. SR-PCX-01-15 and 
should be submitted by May 7, 2001.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder

[[Page 19596]]

applicable to a national securities exchange, and in particular, with 
the requirements of section 6(b)(5).\13\ The Commission notes that it 
has previously approved similar listing standards proposed by the Amex 
and the CBOE for options on trust issued receipts, and it believes that 
the PCX's proposal contains adequate safeguards, matching those 
previously approved.\14\ As the Commission found in its previous 
approvals of the listing standards proposed by the Amex and the CBOE, 
the listing and trading of options, including FLEX equity options on 
exchange-traded trust issued receipts, should give investors a better 
means to hedge their positions in the underlying trust issued receipts. 
The Commission also believes that pricing of the underlying trust 
issued receipts may become more efficient, and market makers in these 
shares, by virtue of enhanced hedging opportunities, may be able to 
provide deeper and more liquid markets. In sum, the Commission believes 
that options on trust issued receipts likely will engender the same 
benefits to investors and the marketplace that exist with respect to 
options on common stock, thereby serving to promote the public 
interest, to remove impediments to a free and open securities market, 
and to promote efficiency, competition, and capital formation.\15\
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ See supra note 6.
    \15\ In approving this rule, the Commission notes that it has 
also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission finds that the Exchange's listing and delisting 
criteria for options on trust issued receipts are adequate. The 
proposed listing and maintenance requirements should ensure that there 
exist adequate supplies of the underlying trust issued receipts in case 
of the exercise of an option, and a minimum level of liquidity to 
control against manipulation and to allow for the maintenance of fair 
and orderly markets. The PCX's additional requirements for opening 
additional series or options on HOLDRs will also ensure that the 
underlying securities are options eligible, and for the most part will 
satisfy minimum thresholds previously approved by the Commission.
    The Commisssion also believes that the surveillance standards 
developed by the PCX for options on trust issued receipts are adequate 
to address the concerns associated with the listing and trading of such 
securities. The PCX's proposal to limit the weight of the portfolio 
that may be composed of ADRs whose primary markets are in countries 
that are not subject to comprehensive surveillance agreements is 
similar to that previously approved by the Commission.\16\ As to 
domestically traded trust issued receipts themselves and the domestic 
stocks in the underlying portfolio, the Intermarket Surveillance Group 
(``ISG'') Agreement will be applicable to the trading of options on 
trust issued receipts.\17\
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    \16\ See supra note 6.
    \17\ ISG was formed on July 14, 1983, to, among other things, 
coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets.
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    Finally, the Commission believes that the PCX's proposed margin 
requirements are appropriate. The Commission notes that they are 
comparable to margin requirements that currently apply to broad-based 
and narrow-based index options, and to those previously approved for 
use at the Amex.\18\
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    \18\ See supra note 6.
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    The Commission finds good cause for approving the proposed rule 
change (SR-PCX-01-15) prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register under section 
19(b)(2) of the Act.\19\ As noted above, the trading requirement for 
options on trust issued receipts at the PCX will be substantially 
similar to those at the Amex and the CBOE, which the Commission has 
approved.\20\ The Commission does not believe that the proposed rule 
change raises novel regulatory issues that were not already addressed 
and should benefit holders of trust issued receipts by permitting them 
to use options to manage the risks of their positions in the receipts. 
Accordingly, the Commission finds that there is good cause, consistent 
with section 6(b)(5) of the Act,\21\ to approve the proposal on an 
accelerated basis.
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ See supra note 6.
    \21\ 15 U.S.C. 78f(b)(5).
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V. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-PCX-01-15) is hereby 
approved on an accelerated basis.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-9340 Filed 4-13-01; 8:45 am]
BILLING CODE 8010-01-M