[Federal Register Volume 67, Number 140 (Monday, July 22, 2002)]
[Notices]
[Pages 47874-47876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18402]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46211; File No. SR-Phlx 2002-42]


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

July 16, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ 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 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 approving the proposed 
rule change on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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 delete, and then to repropose, modified capitalization 
weighting as an approved weighting methodology for index options so 
that there is no change to the actual present language of Rule 
1009A(b). The following is the text of the proposed rule change. 
Language that is currently in the text of the rule, which is proposed 
to be deleted and immediately reinserted, is underlined.

Designation of the Index

    Rule 1009A.
    (a) No change.
    (b)-(b)(1) No change.
    (b)(2) The index is capitalization-weighted, price-weighted, 
modified capitalization-weighted or equal dollar-weighted, and consists 
of ten or more component securities;
    (b)(3)-b(10) No change.
    (b)(11) An equal dollar-weighted index will be rebalanced at least 
once every calendar quarter; and a modified capitalization-weighted 
index will be rebalanced at least twice annually;

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 first delete, and 
immediately to reinsert pursuant to Commission approval, language in 
Rule 1009A(b) relating to modified capitalization weighting as a 
permissible weighting methodology for narrow-based index options listed 
and traded pursuant to Rule 1009A(b). The language is currently in 
effect, inasmuch as it became immediately effective on March 1, 2002, 
pursuant an Exchange filing made pursuant to section

[[Page 47875]]

19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6). See Securities Exchange Act Release 
No. 45622 (March 21, 2002), 67 FR 15269 (March 29, 2002).
---------------------------------------------------------------------------

    In 1998 the Commission adopted new Rule 19b-4(e),\5\ eliminating 
the requirement that a self-regulatory organization (``SRO'') file a 
proposal under Section 19(b)(3)(A) \6\ to list and trade options on a 
narrow-based index, provided that the SRO has generic listing criteria 
approved by the Commission and meets certain other requirements. The 
Exchange is now seeking Commission approval, under section 19(b)(2) of 
the Act,\7\ of the addition of modified capitalization weighting as a 
permissible methodology in order to ensure the applicability of Rule 
19b-4(e) \8\ to products which the Exchange may list and trade pursuant 
to Rule 1009A(b).\9\ With the affirmative Commission approval of the 
proposed rule change, Phlx will have greater assurance that it will be 
permitted under Rule 19b-4(e) to introduce new options that are based 
on narrow-based stock indexes using modified capitalization weighting, 
but without the Exchange having to file a proposal under Section 
19(b)(3)(A) of the Act.\10\
---------------------------------------------------------------------------

    \5\ 17 CFR 240.19b-4(e). See Securities Exchange Act Release No. 
40761 (December 8, 1998), 63 FR 70952 (December 22, 1998).
    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 15 U.S.C. 78s(b)(2).
    \8\ 17 CFR 240.19b-4(e).
    \9\ Rule 19b-4(e) provides in relevant part that ``[t]he listing 
and trading of a new derivative securities product by a self-
regulatory organization shall not be deemed a proposed rule change * 
* * if the Commission has approved, pursuant to section 19(b) of the 
Act (15 U.S.C. 78s(b)), the self-regulatory organization's trading 
rules, procedures and listing standards for the product class that 
would include the new derivative securities product and the self-
regulatory organization has a surveillance program for the product 
class (emphasis added).''
    \10\ 15 U.S.C. 78s(b)(3)(A).
---------------------------------------------------------------------------

    As discussed in the Exchange's original filing made pursuant to 
section 19(b)(3)(A) of the Act,\11\ the purpose of the language adding 
modified capitalization weighting as a permitted weighting methodology 
is to increase and diversify the number and types of securities 
products the Exchange may offer to the investing public. The reasons 
for the original proposal are set forth below and serve as the basis of 
the Exchange's current request for Commission approval under section 
19(b)(2) of the Act.\12\
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 15 U.S.C. 78s(b)(2). To date, the Exchange has not listed 
and traded any modified capitalization weighted index options 
pursuant to 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.\13\ Use of the modified capitalization weighted 
methodology (in addition to the capitalization-weighted, price-
weighted, or equal dollar-weighted methodologies) 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.
---------------------------------------------------------------------------

    \13\ 17 CFR 240.19b-4(e).
---------------------------------------------------------------------------

    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 correspondently enhanced by use of 
the modified capitalization methodology. Currently, indexes such as the 
Nasdaq 100 \14\ and Fortune e-50 \15\ utilize modified capitalization 
weighting. Thus, it is an established calculation methodology that the 
Exchange seeks to capture in its listing standards.
---------------------------------------------------------------------------

    \14\ The Nasdaq-100[reg], Nasdaq-100 Index[reg], and Nasdaq[reg] 
are trade or service marks of The Nasdaq Stock Market, Inc.
    \15\ The Fortune e-50[reg] is a trade or service mark of the 
American Stock Exchange LLC.
---------------------------------------------------------------------------

    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 its proposal is 
consistent with section 6(b) \16\ of the Act in general, and furthers 
the objectives of section 6(b)(5),\17\ in that it 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

[[Page 47876]]

new index options based on this calculation methodology pursuant to 
Rule 1009A(b), the Exchange's generic narrow-based index option rule. 
The Exchange believes that it will have greater assurance that such 
options are eligible for listing pursuant to Rule 19b-4(e) \18\ if the 
language regarding modified capitalization weighting as a permitted 
index weighting methodology is added to the text of Rule 1009A(b) 
pursuant to Commission approval.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ 17 CFR 240.19b-4(e).
---------------------------------------------------------------------------

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.

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

    No written comments were neither solicited nor received.

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, 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 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 File No. SR-PHLX -2002-42 and 
should be submitted by August 12, 2002.

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

    After careful review, the Commission finds good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register pursuant to 
section 19(b)(2) of the Act.\19\ The proposed rule change will enable 
the Exchange to provide investors access to certain narrow-based index 
options based upon modified capitalization weighted indexes more 
quickly than would be possible if the Exchange were required to a file 
proposed rule change for each such option. Acceleration of the 
Commission's approval order will permit the Exchange to begin 
eligibility of modified capitalization weighted indexes for narrow 
based index option trading, with the assurance that such indexes may 
underlie options to which Commission Rule 19b-4(e) applies. The 
Commission notes that the proposed rule change is significantly similar 
to the rules of another self-regulatory organization already approved 
by the Commission pursuant to section 19(b)(2) of the Act and does not 
raise novel regulatory issues.\20\ 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.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 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).
    \21\ 15 U.S.C. 78f(b)(5).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-18402 Filed 7-19-02; 8:45 am]
BILLING CODE 8010-01-P