[Federal Register Volume 67, Number 61 (Friday, March 29, 2002)]
[Notices]
[Pages 15269-15271]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7567]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45622; File No. SR-Phlx-2002-14]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to Modified Capitalization Weighting 
Methodology for Index Options

March 21, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 15270]]

notice is hereby given that on March 1, 2002, the Philadelphia Stock 
Exchange, Inc. (``Phlx'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'' or ``SEC'') 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 from 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 Exchange proposes to amend Phlx Rule 1009A(b), Designation of 
the Index, to include modified capitalization weighting as an approved 
weighting methodology for index 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 IV 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 increase and 
diversify the number and types of securities products the Exchange may 
offer to the investing public by including modified capitalization 
weighting as a methodology for index options under Phlx Rule 1009A(b). 
Increasingly, the Exchange receives requests to trade new indexes using 
the modified capitalization weighting methodology; accordingly, in 
order to accommodate those requests in a timely manner and respond to 
market demand, the Exchange seeks to permit this calculation 
methodology for narrow-based indexes. The Exchange wishes to 
accommodate these requests, and proposes to add this methodology to the 
existing narrow based criteria set forth in Phlx Rule 1009A(b) which 
permits the listing of options on stock index groups pursuant to Rule 
19b-4(e) under the Act. Currently, Phlx Rule 1009A requires an index to 
be calculated using the capitalization-weighted, price-weighted, or 
equal dollar-weighted methodologies. Use of the modified capitalization 
weighted methodology should allow the Exchange greater flexibility in 
developing indexes and facilitate the listing of options on stock 
industry index groups that more accurately reflect the industry 
represented by the index.
    When determining the value using capitalization weighting 
methodology, the following calculation applies: multiply the primary 
exchange regular way last sale price of each component security by the 
number of shares outstanding, add the result for each product and 
divide the sum by the current index divisor. The index value for a 
modified capitalization-weighted index is calculated in a similar 
manner. However, instead of using the actual number of shares 
outstanding, an adjusted number of shares outstanding are used in the 
calculation. (Thus, the following calculation applies: multiply the 
primary exchange regular way last sale price of each component security 
by an adjusted number of shares outstanding, add the results for each 
product, and then divide the sum by the current index divisor). The 
adjusted number of shares is determined by a proprietary algorithm. 
When using the modified capitalization weighting the Exchange will use 
a calculation methodology that will be clearly defined, and will 
consist of objective standards in accordance with the generic criteria 
set forth in Phlx Rule 1009A. In addition, the terms of the index will 
be defined in the marketing materials describing a new index and in the 
circulars that the Exchange distributes to its members upon the launch 
of a new index option.
    The modified capitalization weighting methodology uses an adjusted 
number of shares outstanding to prevent component companies with a 
relatively high market capitalization from representing an inordinately 
large portion of an index's value. For example, inclusion of a company 
that is highly capitalized, in relation to the other smaller 
capitalized companies in the index, may result in the higher 
capitalized company's representation in the index exceeding 25% of the 
index's value. Thus, options on these indexes could not be listed on 
the Phlx. However, because use of the modified capitalization 
methodology permits a reduction in the higher capitalized company's 
representation in the index to an amount less than 25% of the index's 
value, the listing criteria of Phlx Rule 1009A(b)(6) are satisfied. 
Therefore, modifying the capitalization amounts of the securities 
underlying an index can prevent an individual stock from 
inappropriately skewing the performance of an entire index, thus market 
accuracy and transparency should be correspondingly enhanced by use of 
the modified capitalization methodology. Currently, indexes such as the 
Nasdaq 100 \3\ and Fortune e-50 \4\ utilize modified capitalization 
weighting. Thus, it is an established calculation methodology that the 
Exchange seeks to capture in its listing standards.
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    \3\ The Nasdaq-100, Nasdaq-100 Index, and 
Nasdaq are trade or service marks of The Nasdaq Stock 
Market, Inc.
    \4\ The Fortune e-50 is a trade or service mark of the 
American Stock Exchange LLC.
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    Additionally, the Exchange will review the component weightings of 
indexes employing the modified capitalization weighting methodology at 
least semi-annually (or pursuant to then-existing standards), and if 
necessary, adjust them to ensure that the index continues to meet the 
weighting guidelines. Also, adjustments will be made on an intra-semi-
annual basis, as necessary, to reflect corporate actions such as, share 
issuances, repurchases and other events of significance.
2. Statutory Basis
    For these reasons, the Exchange believes that this proposal is 
consistent with Section 6 of the Act,\5\ in general, and furthers the 
objectives of Section 6(b)(5),\6\ in that this proposal is designed to 
promote just and equitable principles of trade, and to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect the investors and the public 
interest, by encouraging and adding flexibility to the development of 
new indexes, thereby, increasing the amount of new products available 
to the investing public, consistent with the purposes of option listing 
standards. Specifically, the Exchange seeks to list new index options 
based on this calculation methodology.
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    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

[[Page 15271]]

C. Self-Regulatory Organization's Statement 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. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the foregoing proposed rule: (1) Does not significantly 
affect the protection of investors or the public interest; (2) does not 
impose any significant burden on competition; and (3) does not become 
operative for 30 days or such shorter time as the Commission may 
designate, and the Exchange provided the Commission with written notice 
of its intent to file the proposed rule change at least five business 
days prior to the filing date, it has become effective pursuant to 
Section 19(b)(3)(A) of the Act \7\ and subparagraph (f)(6) of Rule 19b-
4 thereunder. \8\ At any time within 60 days of the filing of the 
proposed rule change, as amended, 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.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission notes that under Rule 19b-4(f)(6)(iii),\9\ the 
proposal does not become operative for 30 days after date of its 
filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
The Exchange has requested that the Commission designate that the 
proposed rule change become operative immediately, which the Phlx 
believes is consistent with investor protection and the public 
interest. In particular, because the proposed rule change is 
significantly similar to the rules of another self-regulatory 
organization already approved by the Commission,\10\ the Exchange 
requests that Commission accelerate the operative date to promptly 
begin eligibility of modified capital weighted indexes for option 
trading.
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    \9\ 17 CFR 240.19b-4(f)(6).
    \10\ See Securities Exchange Act Release No. 41557, June 24, 
1999, 64 FR 36055 (July 2, 1999) (Order approving File No. SR-Amex-
99-09 to allow modified equal-dollar and modified capitalization 
weighting calculation methodologies for narrow-based index options 
on the American Stock Exchange LLC).
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    The Commission believes that it is consistent with the protection 
of investors and the public interest to designate the proposal 
immediately operative.\11\ Accelerating the operative date will permit 
the Exchange to implement Phlx Rule 1009(b) without undue delay. For 
this reason, the Commission finds good cause to designate that the 
proposal become operative immediately.
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    \11\ For purposes of accelerating the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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IV. 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 
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 Section. 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-2002-14 and should be 
submitted by April 19, 2002.

    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. 02-7567 Filed 3-28-02; 8:45 am]
BILLING CODE 8010-01-P