[Federal Register Volume 65, Number 105 (Wednesday, May 31, 2000)]
[Notices]
[Pages 34765-34767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-13533]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42811; File No. SR-PHLX-00-14]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Regarding Listing and 
Trading Options on the Wireless Telecom Sector Index

May 23, 2000.
    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 February 24, 2000,\3\ 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, II, and III below, which Items have been prepared 
by the Phlx. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On March 30, 2000 and April 13, 2000, the Exchange submitted 
Amendment Nos. 1 and 2 to the proposed rule change, respectively, 
the substance of which has been incorporated into this notice. See 
letters from John Kenney, Jr., Counsel, Phlx, to John Roeser, 
Attorney, Commission, dated March 29, 2000 (``Amendment No. 1'') and 
April 13, 2000 (``Amendment No. 2'').
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange, pursuant to Rule 19b-4 of the Act, proposes to list 
and trade European style, cash-settled options, on the Wireless Telecom 
Sector Index (``Index''), an equal dollar-weighted, A.M.-settled, 
narrow-based, index of twenty companies, involved in various aspects of 
wireless telecommunications services and equipment. A list of the 
specific companies comprising the Index, their capitalizations, six-
month share volumes and the percentage weightings of these companies, 
as of April 10, 2000, is available from the Exchange.

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 proposal is to list for trading European style, 
cash-settled options on the Index, a new index developed pursuant to 
Exchange Rule 1009A(b). Options on the Index will provide an important 
hedging vehicle for basket traders who engage in trading securities 
that comprise this subsector of the telecommunications industry.
    The following is a more detailed description of the proposed Index 
option:
    Ticker Symbol: YLS.
    Settlement Value Symbol: YSO.
    Underlying Index: The Index is an equal dollar-weighted index 
composed of twenty stocks involved in wireless telecommunications 
services and equipment all of which are traded on the New York Stock 
Exchange (``NYSE'') or Nasdaq Stock Market (``Nasdaq''), and are, 
therefore, reported securities as defined in Rule 11Aa3-1 under the 
Act. Further, all of the stocks presently meet the Exchange's listing 
criteria for equity options contained in Exchange Rule 1009 and are 
currently the subject of listed options on U.S. options exchanges.
    The Exchange notes that most of the companies represented in the 
Index are U.S. companies. However, to the extent that non-U.S. 
companies are part of or are added to the Index (such as American 
Depository Receipts) and therefore are not subject to comprehensive 
surveillance sharing agreements, those components do not and will not 
account for more than 20% of the weight of the Index.
    As of April 10, 2000, the market capitalization of all the stocks 
in the Index exceeded $1 trillion and such individual capitalizations 
ranged from approximately $1 billion to $176 billion. All twenty 
component issues in the Index had monthly trading volumes in excess of 
one million shares over each of the past six months.
    Index Calculation: The methodology used to calculate the Index is 
an equal dollar-weighted method, meaning that each of the component 
stocks is represented in the Index in approximately equal dollar 
amounts. The Exchange believes that this method of calculation is 
appropriate because it will provide each component issue with 
equivalent influence on the movement of the Index value instead of 
allowing

[[Page 34766]]

one highly capitalized stock to dominate the movement of the Index. To 
determine the initial dollar weighting of the stocks, the Exchange 
calculated the number of shares of each that would represent an 
investment of approximately $10,000 in each of those stocks comprising 
the Index based on closing prices on July 16, 1999. The value of the 
Index equals the current market value of the sum of the assigned number 
of shares of all of the stocks in the Index divided by the current 
Index divisor. The Index divisor was set to yield an initial Index 
value of 150 at the opening on July 19, 1999.
    Index Maintenance: To maintain the continuity of the Index, the 
divisor will be adjusted to reflect non-market changes in the price of 
the component securities as well as changes in the composition of the 
Index. Changes which may result in divisor adjustments include but are 
not limited to stock splits, dividends, spin-offs, mergers and 
acquisitions. In accordance with Exchange Rule 1009A, if any change in 
the nature of any component (e.g., delisting, merger, acquisition or 
otherwise) in the Index will change the overall market character of the 
Index, the Exchange will take appropriate steps to remove the stock or 
replace it with another stock that the Exchange believes would be 
compatible with the intended market character of the Index. Any 
replacement components will be reported securities as defined in Rule 
11Aa3-1 of the Act.\4\
---------------------------------------------------------------------------

    \4\ 17 CFR 240.11Aa3-1.
---------------------------------------------------------------------------

    Currently, the Index is composed of twenty component stocks. Absent 
Commission approval, the Exchange will not change the number of 
components to more than twenty-six or fewer than fourteen. The Exchange 
notes that the component stocks comprising the top 90% of the Index, by 
weight, will each maintain a minimum market capitalization of $75 
million. The remaining 10% by weight, will each maintain a minimum 
market capitalization of $50 million. The component stocks comprising 
the top 90% of the Index, by weight, will maintain a trading volume of 
at least 500,000 shares per month. The trading volume for each of the 
component stocks constituting the bottom 10% of the Index, by weight, 
will maintain at least 400,000 shares per month. No fewer than 90% of 
the component issues by weight or fewer than 80% of the total number of 
the components qualify as stocks eligible for options trading.
    If the Index fails at any time to satisfy one or more of the 
required maintenance criteria, the Exchange will notify the Commission 
staff immediately and will not open for trading any additional series 
of options on the Index, unless the above is determined by the Exchange 
not to be significant and the Commission concurs in that determination, 
or unless the continued listing of options on the Index has been 
approved by the Commission under Section 19(b)(2) of the Act.\5\ In 
addition to not opening for trading any additional series, the Exchange 
may, in consultation with the Commission, prohibit opening purchase 
transactions in series of options previously opened for trading to the 
extent that the Exchange deems such action necessary or appropriate.\6\
---------------------------------------------------------------------------

    \5\ See Phlx Rule 1009A.
    \6\ See Phlx Rule 1010.
---------------------------------------------------------------------------

    In addition to the maintenance criteria above, no single component 
of the index shall account for more than 25% of the Index and the five 
highest weighted component securities shall not account for more than 
60% of the Index. If the Index fails to satisfy the maintenance listing 
standards set forth above, the Exchange shall not open for trading any 
additional series of options of that class unless such failure is 
determined by the Exchange not to be significant and the Commission 
concurs in that determination, or unless the continued listing of that 
class of Index options has been approved by the Commission under 
Section 19(b)(2) of the Act.
    Rebalancing: Following the close of trading on the third Friday of 
January, April, July and October the Index portfolio will be adjusted 
by changing the number of whole shares of each component so that each 
company is again represented in ``equal'' dollar amounts. If necessary, 
a divisor adjustment will be made at the rebalancing to ensure 
continuity of the Index's value. The newly adjusted portfolio will then 
become the basis for the Index's value on the first trading day 
following the adjustment.
    The number of shares of each component stock in the Index portfolio 
will remain fixed between quarterly rebalances except in the event of 
certain types of corporate actions such as the payment of a dividend 
other than an ordinary cash dividend, stock dividend, stock split, 
reverse stock split, rights offering, distribution, reorganization, 
recapitalization, or similar event with respect to the component 
stocks. In the case of a merger or consolidation of an issuer of a 
component stock, if the stock remains in the Index, the number of 
shares of that security in the portfolio may be adjusted to the nearest 
whole share to maintain the component's relative weight in the Index at 
the level immediately prior to the corporate action. In the even of a 
stock addition or replacement, the average dollar value of the 
remaining portfolio components will be calculated and that amount 
invested in the stock of the new component, to the nearest whole share. 
In all cases, the divisor will be adjusted, if necessary, to ensure 
Index continuity. All stock replacements and the handling of non-
routine corporate action will be announced at least ten business days 
in advance of such effective change, whenever possible. The Exchange 
will make this information available to the public through 
dissemination of an information circular.
    Unit of Trading: Each options contract will represent $100, the 
Index multiplier, times the Index value. For example, an Index value of 
200 will result in an option contract value of $20,000 ($100 x $200).
    Exercise Price: The exercise prices will be set in accordance with 
Phlx Rule 1101A(a).
    Settlement: A.M.-settled index options
    Settlement Value: The Index value for purposes of settling 
outstanding Index option contracts upon expiration will be calculated 
based upon the regular way opening sale prices for each of the Index's 
component stocks in their primary market on the last trading day prior 
to expiration. In the case of National Market System securities traded 
through Nasdaq, the first reported sale price will be used for the 
final settlement value for expiring Index option contracts. In the 
event that a component security does not open for trading on the last 
day before the expiration of a series of Index options, the last sale 
price for that security will be used in calculating the Index value. 
However, in the event that The Options Clearing Corporation (``OCC'') 
determines that the current Index value is unreported or otherwise 
unavailable (including instances where the primary market for 
securities representing a substantial part of the value of the Index is 
not open for trading at the time when the current Index value used for 
exercise settlement purposes would be determined), the OCC shall 
determine an exercise settlement amount for the Index in accordance 
with Article XVII, Section 4 of the OCC By-Laws.\7\
---------------------------------------------------------------------------

    \7\ See, e.g., OCC Article XVII, Section 4 and Securities 
Exchange Act Release No. 37315 (June 17, 1996), 61 FR 32471 (June 
24,1996) (SR-OCC-95-19).
---------------------------------------------------------------------------

    Last Trading Day: Last business day prior to the third Friday of 
the month

[[Page 34767]]

for options which expire on the Saturday following the third Friday of 
that month.
    Trading Hours: 9:30 a.m. to 4:02 p.m., E. T.
    Position and Exercise Limits: The Index is an industry or narrow-
based index; therefore, the Exchange will employ position and exercise 
limits pursuant to Phlx Rules 1001A(b) and 1002A, respectively. The 
position and exercise limits will be 31, 500 contracts.
    Expiration Cycles: Three months from the March, June, September, 
December cycle, plus two additional near-term months.
    Exercise Style: European.
    Premium Quotations: Premiums will be expressed in terms of dollars 
and fractions of dollars pursuant to Phlx Rule 1033A. For example, a 
bid or offer of 1\1/2\ will represent a premium per options contract of 
$150 (1\1/2\ x 100).
    The Index value will be disseminated every 15 seconds during the 
trading day. The Phlx has contracted with Bridge Data Inc. to compute 
and do all the necessary maintenance of the Index.\8\ Pursuant to Phlx 
Rule 1100A, updated Index values will be disseminated and displayed by 
means of primary market prints reported by the Consolidated Tape 
Association and over the facilities of the Options Price Reporting 
Authority. The Index value will also be available on broker-dealer 
interrogation devices to subscribers of options information. The 
Exchange represents that it will not list or trade this Index unless 
and until it has sufficient capacity to process the additional message 
traffic generated by the Index.\9\
---------------------------------------------------------------------------

    \8\ As a back-up to Bridge Data Inc., the Phlx will utilize its 
own internal index calculation system called the Index Calculation 
Engine System.
    \9\ See Amendment No. 1, supra note 3. The Options Price 
Reporting Authority (``OPRA'') represents that it has the capacity 
to handle the additional traffic generated by the Index. See letter 
from Joe Corrigan, Executive Director, OPRA, to Mathew Holm, 
Director, New Product Development, Phlx, dated March 23, 2000.
---------------------------------------------------------------------------

    The options will be traded pursuant to current Phlx rules governing 
the trading of index options including provisions addressing sales 
practices, floor trading procedures, position and exercise limits, 
margin requirements and trading halts and suspensions.\10\ The Exchange 
also represents that surveillance procedures currently used to monitor 
trading in index options will be applicable to this Index option. These 
procedures include having complete access to trading activity in the 
underlying securities which are all traded on the NYSE or Nasdaq. In 
addition, the Intermarket Surveillance Group Agreement dated July 14, 
1983, as amended on January 29, 1990 and June 20, 1994 will be 
applicable to the trading of options on the Index.
---------------------------------------------------------------------------

    \10\ See particularly, Phlx Rule 722, Phlx Rules 1000A through 
1102A, and generally, Phlx Rules 1000 to 1080.
---------------------------------------------------------------------------

2. Statutory Basis
    The proposed rule change is consistent with Section 6 of the Act in 
general, and in particular, with Section 6(b)(5), in that it is 
designated to promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
to protect investors and the public interest. Specifically, the 
Exchange believes that the introduction of the proposed the Index will 
serve to promote the public interest and help to remove impediments to 
a free and open securities market by providing investors with a means 
of hedging exposure to market risks associated with the securities 
issued by companies that comprise this subsector of the 
telecommunications industry. The trading of options on the Index will 
permit investors to participate in the price movements of the twenty 
securities on which the Index is based. The trading of options on the 
Index will allow investors holding positions in some or all of the 
securities underlying the Index to hedge the risks associated with 
these securities. Accordingly, the Exchange believes that options on 
the Index will provide investors with an additional trading and hedging 
mechanism that outweighs any potential for manipulation that would 
diminish public confidence. Further, the Exchange believes that the 
proposed Index will have a specific impact on efficiency, competition 
and capital formation consistent with Section 3(f) of the Act.

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

    The Exchange does not believe that the proposed rule change will 
impose any 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 solicited or received with respect to the 
proposed rule change.

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

    The Exchange is filing this rule change as constituting a stated 
policy, practice or interpretation with respect to the administration 
of Phlx Rule 1009A within the meaning of Section 19(b)(3)(A) of the Act 
and subparagraph (f) of Rule 19b-4 thereunder.\11\ Accordingly, 
pursuant to the Commission's Generic Index Option Approval Order 
(``Approval Order''),\12\ the Exchange is requesting immediate 
effectiveness so that options on the Phlx Wireless Telecom Index may 
begin trading 30 days after the date of this filing. The Phlx believes 
that this product complies with the Approval Order, as described above.
---------------------------------------------------------------------------

    \11\ In amendment No. 1, the Exchange designated the proposal as 
filed pursuant to subparagraph (f) of Rule 19b-4. See supra note 3.
    \12\ See Securities Exchange Act Release No. 34157 (June 3, 
1994), 59 FR 30062 (June 10, 1994).
---------------------------------------------------------------------------

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. 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 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-00-14 and should 
be submitted by June 21, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-13533 Filed 5-30-00; 8:45 am]
BILLING CODE 8010-01-M