[Federal Register Volume 66, Number 163 (Wednesday, August 22, 2001)]
[Notices]
[Pages 44194-44197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21163]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44709; File No. SR-Phlx-2001-71]


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

August 16, 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 July 19, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change, and amended such proposed 
rule change on August 13, 2001,\3\ as described in Items I and II 
below, which Items have been prepared by the Phlx. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons and to approve the proposal and 
Amendment No. 1 on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 added language stating that options on trust 
issued receipts will be physically-settled and have the American-
style exercise feature and that FLEX Equity options will be 
available with both the American-style and European-style exercise 
feature. See letter from Carla Behnfeldt, Director, New Product 
Development Group, Legal Department, Phlx, to Nancy Sanow, Assistant 
Director, Division of Market Regulation, SEC, dated August 10, 2001.
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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. Below is the text of the proposed rule change. 
Proposed new language is in italics.
* * * * *

Rule 1009. Criteria for Underlying Securities

    Rule 1009(a)-(c)--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 Commentary .01 to this Rule 
1009; 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 not 
subject to a comprehensive surveillance agreement.
* * * * *

Rule 1010. Withdrawal of Approval of Underlying Securities

    Rule 1010--No change.
* * * * *

[[Page 44195]]

Commentary
    .01-.08--No change.
    .09--Absent exceptional circumstances, securities initially 
approved for options trading pursuant to Commentary .07 to Phlx Rule 
1009 (such securities are defined and referred to in that Commentary as 
``Trust Issued Receipts'') shall not 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 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:
    (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 
1009;
    (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.
    .10 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 Phlx 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 III 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

1. Purpose
    The purpose of the proposed rule change is to provide for the 
trading of options, including FLEX equity options, 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 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''), the Chicago Board Options Exchange, Inc. (``CBOE''), the 
Pacific Exchange, Inc. (``PCX''), and the International Securities 
Exchange (``ISE'')\4\ Trust issued receipts are exchange-listed 
securities representing beneficial ownership of the specific deposited 
securities represented by the receipts.\5\ 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.\6\ 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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    \4\ See Securities Exchange Act Release Nos. 42947 (June 15, 
2000), 65 FR 39211 (June 23, 2000) (approving SR-Amex-99-37); 43043 
(July 17, 2000), 65 FR 46520 (July 28, 2000) (approving SR-CBOE-00-
25); 44138 (March 30, 2001), 66 FR 19593 (April 16, 2001) (approving 
SR-PCX-2001-15); and 44331 (May 21, 2001), 66 FR 29193 (May 29, 
2001) (approving SR-ISE-2001-11).
    \5\ The Exchange received approval to trade certain trust issued 
receipts on December 27, 2000. See Securities Exchange Act Release 
No. 43773 (December 27, 2000), 66 FR 838 (January 4, 2001) 
(approving SR-Phlx-00-31). Specifically, the Exchange received 
approval to trade the following Holding Company Depositary Receipts 
(``HOLDRs''), a type of trust issued receipt, pursuant to unlisted 
trading privileges: biotech, Broadband, business to business, 
Internet, Internet Architecture, Internet Infrastructure, Market 
2000+, Pharmaceutical, Regional Bank, Semiconductor, Software, 
Telecom and Utilities HOLDRs. ``HOLDRs'' and ``Holding Company 
Depositary Receipts'' are service marks of Merrill Lynch & Co.
    \6\ The Exchange received approval to trade options on exchange-
traded fund shares on February 2, 2001. See Securities Exchange Act 
Release No. 43921 (February 2, 2001), 66 FR 9739 (February 9, 2001) 
(approving SR-Phlx-00-107).
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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 Phlx Rule 1012. 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 
Phlx Rule 1001 and Phlx Rule 1002, 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 consistent with Rule 1001. 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.\7\
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    \7\ See Phlx Rule 1079(d)(2).
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    The listing and maintenance standards proposed for options on trust 
issued receipt are set forth respectively in proposed Commentary .07 to 
Phlx Rule 1009, and in proposed Commentary .09 to Phlx Rule 1010. 
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 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 
Phlx Rule 1009(a), Commentary .01, which include criteria covering the

[[Page 44196]]

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 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, Rule 1009, Commentary .01 generally 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 $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 Exchanges' 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 addition, the Exchange will consider the suspension of 
opening transactions in any series of options of the class covering 
trust issued receipts if: (i) The options fail to meet the option 
maintenance standards in Phlx Rule 1010, Commentary .01 when the 
options on trust issued receipts were listed pursuant to the equity 
option listing standards in Phlx Rule 1009, Commentary .01,\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 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 weighings 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, Rule 1010, Commentary .01 generally provides 
that an underlying security will not meet the Exchange's 
requirements for continued listing when, among other things: (1) 
There are fewer than 6,3000,000 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 weight of each security in a HOLDR trust will be 
determined by calculating the sum of the number of shares of each 
security (represented by 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. A European-style option, however, may be 
exercised only on 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 
Phlx Rule 722, 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 receipt 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 Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \12\ in general, and furthers the objectives of 
Section 6(b)(5)\13\ in particular, in that it is designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and, in general, to protect investors and the public 
interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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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 result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    No written comments were solicited or received with respect to 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 proposal 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 20549-0609. 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 
that are filed with 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 number SR-Phlx-2001-71 and 
should be submitted by September 12, 2001.

[[Page 44197]]

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 applicable to a national securities exchange and, in 
particular, the requirements of Section 6(b)(5) of the Act.\14\ The 
Commission notes that it has previously approved similar listing 
standards proposed by the Amex, the CBOE, the PCX, and the ISE for 
options on trust issued receipts, and it believes that the Phlx's 
proposal contains in adequate safeguards, matching those previously 
approved.\15\ As the Commission found in its previous approvals of the 
listing standards proposed by the other exchanges, 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.\16\
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    \14\ 15 U.S.C. 78f(b)(5).
    \15\ See supra note 4.
    \16\ In approving this proposed rule change, the Commission 
notes that it has 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.\17\ The Phlx's additional requirements for opening 
additional series of options on HOLDERs will also ensure that the 
underlying securities are options eligible, and, for the most part, 
will satisfy minimum thresholds previously approved by the Commission.
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    \17\ The Commission notes that even if options on trust issued 
receipts were not listed under the uniform equity option listing 
standards, the exchanges trading trust issued receipts generally 
require a minimum number of trust issued receipts to be outstanding 
before trading in a series of trust issued receipts may commence. 
See Amex Rule 1202; Boston Stock Exchange Guide, Chapter XXIV-A, 
Sec. 5; Chicago stock Exchange Guide, Rule 27; Cincinnati Stock 
Exchange, Rule 11.9(w); PCX Rule 8.200; and Phlx Rule 803(j).
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    The Commission also believes that the surveillance standards 
developed by the Phlx for options on trust issued receipts are adequate 
to address the concerns associated with the listing and trading of such 
securities. The Phlx'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.\18\ As to 
domestically traded trust issued receipts themselves and the domestic 
stocks in the underlying portfolio, the Internmarket Surveillance Group 
(``ISG'') Agreement will be applicable to the trading of options on 
trust issued receipts.\19\
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    \18\ See supra note 4.
    \19\ 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 Phlx'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, the CBOE, the ISE, and the PCX.\20\
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    \20\ See supra 4.
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice of filing thereof in the Federal Register pursuant to Section 
19(b)(2) of the Act.\21\ As noted above, the trading requirement for 
options on trust issued receipts at the Phlx will be substantially 
similar to those at the Amex, the CBOE, the ISE, and the PCX, which the 
Commission has previously approved.\22\ 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,\23\ to 
approve the proposal on an accelerated basis.
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    \21\ 15 U.S.C. 78s(b)(2).
    \22\ See supra note 4.
    \23\ 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,\24\ that the proposed rule change (SR-Phlx-2001-71) and Amendment 
No. 1 are hereby approved on an accelerated basis.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to deletated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 01-21163 Filed 8-21-01; 8:45 am]
BILLING CODE 8010-01-M