[Federal Register Volume 69, Number 206 (Tuesday, October 26, 2004)]
[Notices]
[Pages 62493-62495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2841]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50563; File No. SR-Phlx-2004-64]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to the Change in Weighting Methodology of the 
Phlx/KBW Bank Index

October 19, 2004.
    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 15, 2004, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' 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 Exchange has filed the proposal as a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) of the 
Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission.\5\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ The Phlx provided the five day-pre-filing requirement but 
requested that the Commission waive the 30-day operative delay. See 
Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to change the weighting methodology of the Phlx/
KBW Bank Index (the ``Bank Index'' or ``Index''), an index developed by 
Keefe, Bruyette & Woods, Inc. (``KBW''), a registered broker-dealer 
that specialized in U.S. bank stocks, from capitalization-weighted to 
modified capitalization weighted. No other changes are being made to 
the Index. The Exchange seeks continued approval to list and trade 
options on the Index after it has instituted this 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 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
    According to the Phlx, the purpose of the proposal is to change the 
weighting methodology of the Index from

[[Page 62494]]

capitalization weighted to modified capitalization-weighted, which 
change has been requested by the Index's sponsor, KBW.\6\ The Index is 
currently a capitalization-weighted index composed of 24 geographically 
diverse stocks select representing national money center banks and 
leading regional institutions. The Exchange currently lists and trades 
European-style, cash-settled options on the Index. The Exchange has 
been informed that KBW plans, as of Friday, October 15, 2004 (after the 
close of trading), to begin calculating the Index under a ``modified 
capitalization-weighted'' methodology. The Exchange commits that all of 
the terms of the Commission's 1992 approval order for this product 
remain in place, including but not limited to the description of the 
composition of the Index, maintenance of the Index and maintenance 
standards for continued listing of Index options, calculation of the 
Index, contract specifications, and the Exchange's obligation to 
provide surveillance of the trading of Index options and KBW's trading 
activity in the options and related instruments (i.e., stocks included 
in or deleted from the Index and options on such stocks); only the 
weighting methodology is being modified.\7\ The Index was originally 
listed in 1992 as a narrow-based (industry) index.\8\
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    \6\ Because the Index is maintained by Keefe, Bruyette & Woods, 
a broker-dealer, Keefe, Bruyette & Woods has represented to Phlx 
that it has appropriate information barriers around the personnel 
who have access to information concerning changes and adjustments to 
the Index, and the Index is calculated by an independent, third-
party who is not a broker-dealer. Telephone conference between Mark 
Salvacion, Director and Counsel, Phlx, and Florence Harmon, Senior 
Special Counsel, Division, Commission on October 19, 2004.
    \7\ Telephone conference between Mark Salvacion, Director and 
Counsel, Phlx, and Florence Harmon, Senior Special Counsel, 
Division, Commission on October 19, 2004.
    \8\ See Securities Exchange Act Release No. 31145 (September 3, 
1992), 57 FR 41531 (September 10, 1992) (File No. SR-Phlx-91-
27)(``Approval Order''). Even though the BKX was listed prior to the 
development of generic listing standards for industry (narrow-based) 
options in Phlx 1009A, it will be maintained in compliance with such 
standards, along with criteria set out in the 1992 Approval Order. 
Telephone conference between Mark Salvacion, Director and Counsel, 
Phlx, and Florence Harmon, Senior Special Counsel, Division, 
Commission on October 19, 2004.
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    The Index was developed by KBW, a New York investment banking firm, 
which maintains the Index pursuant to an agreement with the Exchange. 
The Index is evaluated at least annually by KBW to assure that the 
composition is highly representative of the banking industry. Options 
on the Index (``BKX Options'') commenced trading on the Phlx on 
September 21, 1992.\9\
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    \9\ Id.
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    The Exchange intends to institute this proposed change of weighting 
methodology for options listed and traded as of October 19, 2004, the 
Tuesday following October expiration.\10\ Prior to October 19, 2004, 
the Exchange will begin calculating a new Index employing the modified 
capitalization weighting (the ``Reconstituted Index'').\11\ The 
Reconstituted Index will then be effective for all series of BKX 
Options outstanding at the open of the market on October 20, 2004. 
There will be no ``side-by-side'' trading of option series on the old 
Index and the Reconstituted Index.\12\ KBW has stated that the new, 
modified capitalization weighting methodology is expected to: (1) 
Retain in general the economic attributes of capitalization weighting; 
(2) promote portfolio weight diversification (thereby limiting 
domination of the Index by a few large stocks); (3) reduce Index 
performance distortion by preserving the capitalization ranking of 
component companies; and (4) reduce market impact on the smallest 
component securities from necessary weight rebalancings.
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    \10\ Telephone conference between Mark Salvacion, Director and 
Counsel, Phlx, and Florence Harmon, Senior Special Counsel, 
Division, Commission on October 19, 2004 (adjusted date of weighting 
change).
    \11\ Prior notice of the composition, weighting, and divisor of 
the Reconstituted Index is necessary so that specialists and other 
member organizations may rebalance or adjust their hedge positions 
in accordance with the new weighting methodology.
    \12\ The divisor of the Reconstituted Index will be adjusted in 
order to ensure that there is economic equivalence between the old 
Index and the Reconstituted Index. Therefore, upon the launch of the 
Reconstituted Index, there will be no change in the index value 
between the old Index and the Reconstituted Index and, consequently, 
strike prices for all open interest will not need to be adjusted.
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    Under the new, modified capitalization weighting methodology, the 
four largest component stocks,\13\ will be assigned maximum initial 
weights equal to the lesser of their actual capitalization weight or 
10% in the Reconstituted Index. All other component stocks with a 
capitalization weight of more than 4.5% will be assigned initial 
weights of 4.5% in the Reconstituted Index. All component stocks with 
capitalization weights under 4.5% will share equally in the weight 
available for redistribution, but none of these banks will be assigned 
an initial weight of more than 4.5%.
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    \13\ Currently, these are Citigroup, Bank of America, J.P. 
Morgan-Chase and Wells Fargo.
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    Based on capitalizations of component securities as of the close on 
the Monday before the third Saturday of the last month in each calendar 
quarter, the Index will be rebalanced \14\ according to the following 
rules:
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    \14\ The rebalancing will be implemented at the close on the 
Friday before the third Saturday of the last month in each calendar 
quarter.
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    1. If any of the top four banks' index weightings have increased 
beyond 12.5%, their weighting will be reduced to a maximum of 10% in 
the quarterly rebalancing.
    2. If any of the remaining banks' weightings have increased beyond 
5%, their weightings will be reduced to a maximum of 4.5% in the 
rebalancing.
    3. If any of the top four banks' weightings have dropped below 8%, 
their weightings will be increased to the lesser of their actual 
capitalization weight or 10% in the rebalancing.
    4. If any of the banks with unadjusted capitalization weights 
greater than 5% have declined in index weighting below 4%, their 
weightings will be increased to 4.5% in the rebalancing.
    5. Any excess weighting available will be reallocated to the 
smaller banks and any weighting needed to increase weighting in the 
larger banks will be taken from the smaller banks in the same manner as 
in the initial allocation at the time of the rebalancing.
    The Exchange notified market participants of the decision to modify 
the weighting methodology of the Index through a notice to members and 
member organizations in advance of Friday, October 15, 2004.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirement under section 6(b)(5) of the Act \15\ in that it is 
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 by modifying the weighting methodology of the Index 
from a capitalization-weighted index to a modified capitalization-
weighted index that will contribute to the maintenance of fair and 
orderly markets consistent with investor protection, ensuring that no 
one component stock or group of component stocks dominate the Index. 
Moreover, the Exchange believes that the proposal will have the effect 
of increasing the potential influence of smaller component stocks on 
the movement of the Index.
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    \15\ 15 U.S.C. 78f(b)(5).

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[[Page 62495]]

B.Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) does not become 
operative for 30 days (or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest) after the date of the filing, the proposed rule change has 
become effective pursuant to section 19(b)(3)(A) of the Act \16\ and 
Rule 19b-4(f)(6) thereunder.\17\ At any time within 60 days of the 
filing of the proposed rule change, 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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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally must 
not become operative prior to 30 days after the date of the filing. In 
addition, a self-regulatory organization filing a proposed rule change 
under Rule 19-4(f)(6)(iii) normally must give the Commission written 
notice of its intent to file the proposed rule change five days prior 
to the date of filing. However, Rule 19b-4(f)(6)(iii) permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
provided the five-day pre-filing requirement, but the Exchange has 
requested that the Commission waive the 30-day operative delay and 
allow the proposed rule change become operative immediately to promote 
portfolio weight diversification, reduce Index performance distortion, 
reduce market impact on the smallest component securities from 
necessary weight rebalancings, and in general, retain the economic 
attributes of capitalization weighting.
    The Commission believes it is consistent with the protection of 
investors and the public interest to designate the proposal immediately 
operative.\18\ Accelerating the operative date should permit the 
Exchange to conform its methodology of the Index to that employed by 
the sponsor of the Index, KBW. Furthermore, the Commission believes 
that the proposed change in weighting methodology does not present any 
new novel regulatory issues, and is similar to proposed rule changes 
that were approved previously by the Commission.\19\ The Commission 
also finds determinative that the weighting methodology reduces the 
weighting concentration of components of the Index in a manner similar 
to that of Phlx Rule 1009A. Accordingly, the Commission designates the 
proposed rule change to be operative upon filing with the Commission.
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    \18\ For purposes only 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).
    \19\ See Securities Exchange Act Release No. 40642 (November 5, 
1998), 63 FR 63759 (November 16, 1998) (SR-CBOE-98-43).
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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 proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Phlx-2004-64 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-Phlx-2004-64. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 the 
filing also will be available for inspection and copying at the 
principal office of the Phlx. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-Phlx-2004-64 and should be submitted on or before 
November 16, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\

    \20\ 17 CFR 200.30-3(a)(12).

Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E4-2841 Filed 10-25-04; 8:45 am]
BILLING CODE 8010-01-P