[Federal Register Volume 67, Number 221 (Friday, November 15, 2002)]
[Notices]
[Pages 69284-69287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28990]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46789; File No. SR-Phlx-2002-71]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 and Amendment No. 2 Thereto by the Philadelphia Stock Exchange, Inc. 
Relating to Maintenance Listing Criteria for Underlying Securities in 
Phlx Rule 1010 and Original Listing Criteria for Underlying Securities 
in Phlx Rule 1009

November 7, 2002.
    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 October 31, 2002, 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 and 
II below, which Items have been prepared by the Phlx. On November 5, 
2002, Phlx filed Amendment No. 1 to the proposed rule change.\3\ On 
November 6, 2002, Phlx filed Amendment No. 2 to the proposed rule 
change.\4\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 7 CFR 240.19b-4.
    \3\ See letter to Florence Harmon, Senior Special Counsel, 
Office of Market Supervision, Commission, from Jurij Trypupenko, 
Phlx, dated November 1, 2002 (``Amendment No. 1''). In Amendment No. 
1, Phlx clarified that another purpose of the proposal was to allow 
the Exchange to reflect a change in the name of the department of 
the Exchange that will perform certain listing-related functions 
noted in Commentary .02 to Phlx Rule 1009. Specifically, the 
Exchange proposes to modify the language in Commentary .02 to Phlx 
Rule 1009 so that references to the Business and Operations Planning 
Department (``BOP'') are changed to the Department of Securities 
(``DOS'').
    \4\ See letter to Florence Harmon, Senior Special Counsel, 
Office of Market Supervision, Commission, from Jurij Trypupenko, 
Phlx, dated November 5, 2002 (``Amendment No. 2''). In Amendment No. 
2, Phlx corrected a typographical error in Commentary .01 to Phlx 
Rule 1009 by changing ``$7\1/2\'' to ``$7.50''.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Commentaries .01 and .02 to Phlx Rule 
1010 to allow the Exchange to list additional options series where the 
underlying security satisfies all of the maintenance listing 
requirements other than the underlying security trading at $3.00 per 
share of the underlying security, the series the Exchange wants to list 
is traded on at least one other registered national securities 
exchange, and at the time the other exchange listed the series the 
underlying security was trading at $3.00 or more.
    The Exchange proposes to amend Commentary .01 to Phlx Rule 1009 to 
allow the Exchange to list an option on an underlying security that 
satisfies all of the initial listing requirements except the $7.50 
share price requirement,\5\ as long as the option that the Exchange 
wants to list trades on another options exchange, meets continued 
listing guidelines, and during the three calendar months preceding the 
date of selection to originally list an option on the Exchange, the 
average daily trading volume for such options has been at least 5,000 
contracts.
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    \5\ Telephone call between Jennifer Lewis, Attorney, Division of 
Market Regulation, Commission, and Jurij Trypupenko, Phlx, on 
November 7, 2002.
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    The Exchange also proposes to make non-substantive changes to 
Commentary .02 to Phlx Rule 1009 to indicate a change in the name of 
the department of the Exchange that will perform certain listing-
related functions noted therein.
    The text of the proposed rule change is below. Proposed new 
language is italicized; deleted language is in brackets.
    Rule 1010. Withdrawal Of Approval Of Underlying Securities Rule 
1010. No change.
    Commentary:
    .01 The Board of Governors has established guidelines to be 
considered by the Exchange in determining whether an underlying 
security previously approved for Exchange option transactions no longer 
meets its requirements for the continuance of such approval. Absent 
exceptional circumstances, with respect to items 1, 2, 3, or 4 listed 
below, an underlying security will not be deemed to meet the Exchange's 
requirements for continued approval whenever any of the following 
occur:
    1. No change.
    2. No change.
    3. No change.
    4. Subject to Commentary .02 below, [T]the market price per share 
of the underlying security closed below $3 on the previous trading day 
as measured by the highest closing price reported in the primary market 
in which the underlying security traded.
    5. No change.
    6. No change.
    7. No change.
    .02 In connection with paragraph 4 of Commentary .01 above, the 
Exchange shall not open for trading any additional series of option 
contracts of the class covering an underlying security at any time when 
the market price per share of such underlying security is less than $3 
in the primary market in which it is traded unless the additional 
series is traded on at least one other registered national securities 
exchange and at the time the additional series was listed by such other 
registered national securities exchange it met the $3 market price 
requirement. Subject to paragraph 4 of Commentary .01 above, the 
Exchange may open for trading additional series of option contracts of 
a class covering an underlying security when the market price per share 
of such underlying security is at or above $3 at the time such 
additional series are authorized for trading. For purposes of this 
Commentary .02, the market price of such underlying security is 
measured by (i) for intra-day series additions, the last reported trade 
in the primary market in which the underlying security traded at the 
time the Exchange determines to add these additional series intra-day, 
and (ii) for next-day and expiration series additions, the closing 
price reported in the primary market in which the underlying security 
is traded on the last trading day before the series are added.
    Commentary .03 to .10 No change.
Rule 1009. Criteria for Underlying Securities
    Rule 1009. (a) No change.
    (b) No change.

[[Page 69285]]

    (c) No change.
    Commentary:
    .01 The Board of Governors has established guidelines to be 
considered by the Exchange in evaluating potential underlying 
securities for Exchange option transactions. Absent exceptional 
circumstances with respect to items 1, 2, 3, or 4 listed below, at the 
time the Exchange selects an underlying security for Exchange options 
transactions, the following guidelines with respect to the issuer shall 
be met:
    1. No change.
    2. No change.
    3. No change.
    4. Either (i) [T]the market price per share of the underlying 
security has been at least $7.50 for the majority of business days 
during the three calendar months preceding the date of selection, as 
measured by the lowest closing price reported in any market in which 
the underlying security traded on each of the subject days or (ii)(a) 
the underlying security meets the guidelines for continued listing in 
Rule 1010; (b) options on such underlying security are traded on at 
least one other registered national securities exchange; and (c) the 
average daily trading volume for such options over the last three (3) 
calendar months proceeding the date of selection has been at least 
5,000 contracts.
    .02 (a) Members, member organizations or any person proposing to 
list any option not currently listed on the Exchange shall submit a 
form of request (a ``Request to List an Option''), available from the 
Exchange's [Business and Operations Planning Department (BOP), to BOP] 
Department of Securities (``DOS''), to DOS staff.
    (b) As soon as practicable, but not later than three (3) business 
days following receipt of the Request to List an Option, [BOP] DOS 
staff shall review the proposed option's eligibility for listing, using 
the objective listing criteria set forth in Commentary .01 of this 
Rule. If [BOP] DOS staff determines that the proposed option does not 
meet the objective listing criteria set forth in Commentary .01 of this 
Rule, [BOP] DOS staff shall prepare a responsive form (a ``Notification 
Memorandum'') stating the reason(s) why the proposed option is not 
eligible for listing. [BOP] DOS staff shall forward the Notification 
Memorandum to the member or member organization that submitted the 
Request to List an Option within three (3) business days of its 
determination that the proposed option does not meet objective listing 
criteria. [BOP] DOS staff shall maintain all Requests to List an Option 
and Notification Memoranda in a central file for a period of not less 
than five (5) years.
    (c) If [BOP] DOS staff determines that the proposed option meets 
the objective listing criteria set forth in Commentary .01 of this 
Rule, [BOP] DOS staff shall present the initial Request to List an 
Option and the subsequent review to the Chairman of the Board of 
Governors or his designee, who shall, within ten (10) business days of 
receipt of the Request to List an Option, instruct [BOP] DOS staff to:
    (i) Solicit options specialists to submit applications for 
specialist privileges in the option; or
    (ii) Within three (3) business days, prepare and forward a letter 
to the member or member organization that submitted the Request to List 
an Option, setting forth in reasonable detail the basis on which the 
decision not to list, or to place limitations or conditions upon, the 
proposed option was made.
    (d) In considering underlying securities, the Exchange shall 
ordinarily rely on information made publicly available by the issuer 
and/or the markets in which the security is traded.
    (e) In determining whether to list an option that otherwise meets 
objective listing criteria, the Chairman of the Board of Governors or 
his designee may consider such factors as the Exchange's current and 
projected computer capacity, and the current and projected demands for 
that capacity, including telecommunications and Option Price Reporting 
Authority (``OPRA'') inbound and outbound message capacity or message 
volume restrictions placed on the Exchange by OPRA; the projected 
likely number of series and open interest in the option; the projected 
likely volatility of the option; the projected likely liquidity of the 
option; name recognition of the option or underlying security; the 
projected volume of trading in the option that is likely to occur on 
the Exchange; the projected share of total trading in the option that 
is likely to occur at the Exchange; whether any intellectual property 
right or license thereof exists with respect to the option; whether the 
proposal is consistent with Exchange rules and/or the Securities 
Exchange Act of 1934 and the rules, regulations, and orders thereunder; 
whether unusual or unfavorable market conditions exist with respect to 
the option; and whether it is in the bona fide business interest of the 
Exchange to list the option. If, in denying a request or approving a 
request subject to conditions or limitations, the Exchange relies upon 
a factor of other bona fide business interests, the Exchange shall, in 
addition to providing the member with a written response specifying 
that the Exchange has relied upon other bona fide business interests, 
maintain a record of the bona fide business interests supporting its 
decision.
    Commentary .03 to .07 No change.

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 Exchange represents that the purpose of the proposed rule 
change is to ensure that the Exchange will not be at a competitive 
disadvantage by not being able to list additional option series or to 
originally list options that are listed on other exchanges. The 
Exchange notes that, although maintenance listing and original listing 
standards are generally similar among the options exchanges, several 
exchanges have recently adopted changes similar to those proposed by 
the Phlx.\6\
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    \6\ See maintenance listing filings at Securities Exchange Act 
Release Nos. 46375 (August 16, 2002), 67 FR 54628 (August 26, 2002) 
(SR-AMEX-2002-68); 46501 (September 16, 2002), 67 FR 59585 (SR-CBOE-
2002-52); 46647 (October 11, 2002), 67 FR 64426 (October 18, 2002) 
(SR-ISE-2002-21); and 46406 (August 23, 2002), 67 FR 55446 (August 
29, 2002) (SR-PCX-2002-51). See also original listing filings at 
Securities Exchange Act Release Nos. 45505 (March 5, 2002), 67 FR 
10941 (March 11, 2002) (SR-AMEX-2002-13); 45220 (December 31, 2001), 
67 FR 760 (January 7, 2002) (SR-ISE-2001-33); and 46382 (August 20, 
2002), 67 FR 55054 (August 27, 2002) (SR-PCX-2002-41).
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    Specifically, the Exchange seeks to list additional options series 
where the underlying security satisfies all of the maintenance listing 
requirements other than the underlying security trading at $3 per share 
of the underlying security,\7\ the series the Exchange wants to list is 
traded on at least one other registered

[[Page 69286]]

national securities exchange, and the underlying security traded at 
least at $3.00 when that exchange listed the series. The purpose is 
also to allow the Exchange to list an option where the underlying 
security satisfies all of the initial listing requirements except that 
the price of the underlying security is below $7.50, as long as the 
option that the exchange wants to list trades on another options 
exchange, meets all continued listing guidelines, and during the three 
calendar months preceding the date of selection to originally list an 
option on the Exchange, the average daily trading volume for such 
options has been at least 5,000 contracts.
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    \7\ The maintenance requirements of Phlx Rule 1010, which will 
continue to be applied under the proposal, include: (a) the 
underlying security consists of a large number of outstanding shares 
by non-affiliates of the issuer, (b) there is a large number of 
holders of the underlying security, (c) the underlying security is 
actively traded, and (d) the underlying security continues to be 
listed on a national securities exchange or traded through the 
facilities of a national securities association.
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$3.00 Maintenance Listing

    Currently, Commentary .01 to Phlx Rule 1010 provides the guidelines 
to be used in determining whether an underlying individual equity 
security, previously approved for options trading, meets the 
requirements for continued approval. In particular, Commentary .01 (4) 
of Rule 1010 provides that that the Exchange may not list additional 
series for an options class if the market price per share of the 
underlying security closed below $3.00 on the previous trading day as 
measured by the highest closing price reported on the primary market in 
which the underlying security traded.
    The Exchange therefore proposes to amend Commentaries .01 and .02 
to Phlx Rule 1010 to allow the Exchange to add additional series of 
options that satisfy all of the maintenance listing requirements other 
than the $3.00 per share requirement, so long as such series are traded 
on at least one other registered national securities exchange, and at 
the time that the additional series were listed by such other exchange, 
the underlying security met the $3.00 market price requirement. Without 
the proposed filing, the Exchange believes it would be at a significant 
competitive disadvantage if it could not list options series that are 
listed on other exchanges simply because the underlying security has 
fallen to a market price that is less than $3.00 when the Exchange 
wanted to list such series.
    The Exchange believes that once an options series is trading on 
another exchange and the series is therefore already available to the 
investing public, the $3.00 market price threshold is not necessary and 
becomes an impediment to competition. The Exchange believes allowing 
the Exchange to list such series will increase competition for order 
flow and benefit investors.\8\ Moreover, the Exchange believes that the 
maintenance listing standards other than the $3.00 market price would 
assure that options would be listed and traded on the securities of 
companies that should be financially sound.
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    \8\ The Exchange represents that the proposal would not serve to 
introduce additional option series, and does not believe that it 
will be susceptible to manipulation.
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$7.50 Original Listing

    Currently, Commentary .01 to Phlx Rule 1009 sets forth the 
guidelines that must be used in order to determine whether the Exchange 
may originally list options covering underlying securities. In 
particular, Commentary .01(4) to Phlx Rule 1009 states that in order to 
list an equity option, the market price per share of the underlying 
security must be at least $7.50 for the majority of business days 
during the three calendar months preceding the date of selection 
(listing) of the option, as measured by the lowest closing price 
reported in any market in which the underlying security traded on each 
of the subject days.
    The Exchange therefore proposes to amend Commentary .01 to Phlx 
Rule 1009 to allow an alternative listing standard.\9\ Specifically, 
the Exchange proposes to allow listing an option where the underlying 
security satisfies all of the initial listing requirements except that 
the price of the underlying security is below $7.50, as long as the 
option that the Exchange wants to list:
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    \9\ The Exchange will continue to be able to apply original 
listing criteria pursuant to Exchange Rule 1009 where the market 
price of the underlying security has been $7.50 or higher for the 
requisite period of time and the other requirements of Commentary 
.01 to the rule are met.

--Trades on another options exchange,
--Meets the continued listing guidelines of Exchange Rule 1010, and
--During the three calendar months preceding the date of selection to 
originally list an option on the Exchange, the average daily trading 
volume for such options has been at least 5,000 contracts.

    The Exchange believes that this proposal is narrowly drafted to 
address particularly those circumstances where an actively-traded 
option is currently ineligible for listing on the Phlx while at the 
same time, the option is trading on another options exchange. The 
Exchange believes that when one or more exchanges have listed and begun 
trading an option, allowing the Exchange to likewise list such option 
(regardless of the market price of the underlying security) will 
increase competition for order flow and benefit investors. Moreover, 
the Exchange believes that the proposal would not introduce any 
additional options classes.
    Phlx believes the proposed amendments to Phlx Rule 1010 and 1009 
listing standards would enhance competition among the options exchanges 
and would enable the Exchange to remain competitive in the current 
volatile options market.

Change in Department Name

    Finally, the Phlx represents that the purpose of the proposal is 
also to allow the Exchange to make non-substantive changes to 
Commentary .02 to Phlx Rule 1009 for the sole purpose of reflecting a 
change in the name of the department of the Exchange that will perform 
certain listing-related functions noted in Commentary .02 to Phlx Rule 
1009. In particular, the Exchange proposes to modify the language in 
Commentary .02 to Phlx Rule 1009 so that references to the Business and 
Operations Planning Department (``BOP'') are changed to the Department 
of Securities (``DOS'').
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\10\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\11\ in particular, because it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest in that it would allow the Exchange 
to list additional options series and allow original listings where 
such series or listings are already traded on another exchange and meet 
certain requirements, and thereby promote competition to the benefit of 
investors.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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.

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. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written

[[Page 69287]]

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 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 No. 
SR-Phlx-2002-71 and should be submitted by December 6, 2002.

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

    The Commission finds that the proposed rule change, as amended, 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.\12\
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    \12\ Id.
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    The Commission believes investors benefit from the competition 
among options exchanges that results when options are listed on more 
than one options exchange; and that investors are sufficiently 
protected, even though, with respect to the portion of the proposal 
relating to the $3.00 maintenance requirement, Phlx will be permitted 
to list a series of option contracts when the market price of the 
underlying security is below $3, because the Exchange must comply with 
all of the other maintenance listing requirements, and the market price 
of the underlying security was at or above $3 when the options series 
was listed on the first options exchange.\13\ With respect to the 
portion of the proposal relating to the $7.50 original listing 
requirement, Phlx will be permitted to list a series of options 
contracts when the market price of the underlying security is below 
$7.50 for the majority of business days during the three calendar 
months preceding the date of selection, because the Exchange must 
comply with all of the other listing requirements in Phlx Rule 1009 
other than the $7.50 per share requirement, and must meet the 
guidelines for continued approval under Phlx Rule 1010. The Commission 
believes that these requirements should help to ensure that options 
traded on the Phlx are based on securities of companies that are 
financially sound and subject to adequate minimum standards. Therefore, 
the Commission finds that the proposed rule change, as amended, will 
promote just and equitable principles of trade, and, in general, 
protect investors and the public interest consistent with section 
6(b)(5) of the Act.\14\
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    \13\ The Commission notes that such series must have been 
properly listed by the original options exchange.
    \14\ 15 U.S.C. 78f(b)(5). 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 Phlx has requested that the proposed rule change, as amended, 
be given accelerated approval pursuant to Section 19(b)(2) of the 
Act.\15\ The Commission believes accelerated approval of the proposal 
would enhance competition among the options exchanges. Accordingly, the 
Commission finds good cause, consistent with Section 19(b)(2) of the 
Act,\16\ to approve the proposed rule change, as amended, prior to the 
thirtieth day after the date of publication of the notice of filing 
thereof in the Federal Register.
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ Id.
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-Phlx-2002-71), as amended, 
is hereby approved on an accelerated basis.
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    \17\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 240.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 02-28990 Filed 11-14-02; 8:45 am]
BILLING CODE 8010-01-P