[Federal Register Volume 62, Number 144 (Monday, July 28, 1997)]
[Notices]
[Pages 40391-40394]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19710]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38856; File Nos. SR-Amex-97-24; SR-CBOE-97-31; SR-PCX-
97-30; and SR-Phlx-97-33]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Changes by the American 
Stock Exchange, Inc., Chicago Board Options Exchange, Inc., Pacific 
Exchange, Inc., and Philadelphia Stock Exchange, Inc.; Relating to an 
Extension of the 2\1/2\ Point Strike Price Pilot Program

July 21, 1997.
    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 July 8, 1997, the American Stock Exchange, Inc. (``Amex''); on July 
10, 1997, the Chicago Board Options Exchange, Inc. (``CBOE''); on July 
10, 1997, the Pacific Exchange, Inc. (``PCX''); and on July 10, 1997, 
the Philadelphia Stock Exchange, Inc. (``Phlx'') (collectively the 
``Exchanges'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule changes as described in 
Items I and II below, which Items have been prepared by the Exchanges. 
The CBOE submitted to the Commission Amendment No. 1 to its proposal on 
July 17, 1997 \3\ and Amendment No. 2 to its proposal on

[[Page 40392]]

July 17, 1997.\4\ The Amex submitted to the Commission Amendment No. 1 
to its proposed rule change on July 21, 1997 \5\ and Amendment No. 2 to 
its proposal on July 21, 1997.\6\ The Commission is publishing this 
notice to solicit comments on the proposed rule changes from interested 
persons, and to grant accelerated approval of the proposed rule 
changes, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the CBOE submitted to the Commission the 
required report detailing open interest and volume for the past 
year. See Letter from Timothy H. Thompson, Senior Attorney, CBOE, to 
Deborah Flynn, Attorney, Division of Market Regulation 
(``Division''), SEC, dated July 15, 1996 (``CBOE Amendment No. 1'').
    \4\ In amendment No. 2, the CBOE: 1) set forth the allocation of 
the 100 option classes to be included in the pilot program; 2) 
detailed the treatment of the eleven classes selected for the pilot 
program by the New York Stock Exchange (``NYSE'') prior to the sale 
of its options business to the CBOE; and 3) enclosed a memorandum 
from the Options Price Reporting Authority (``OPRA'') stating that 
based on the Exchange's representations, additional traffic 
generated by extending the 2\1/2\ point strike pilot is within 
OPRA's capacity. See Letter from Timothy H. Thompson, Senior 
Attorney, CBOE, to Deborah Flynn, Attorney, Division, SEC, dated 
July 16, 1997 (``CBOE Amendment No. 2'').
    \5\ In Amendment No. 1, the Amex clarified that the pilot 
program will be extended until July 17, 1998 and discussed the 
allocation of the 100 options classes and the treatment of the 
eleven classes selected by the NYSE. See Letter from Claire P. 
McGrath, Vice President and Special Counsel, Derivative Securities, 
Ames, to Ivette Lopez, Assistant Director, Division, SEC, dated July 
16, 1997 (``Amex Amendment No. 1'').
    \6\ See Letter Claire P. McGrath, Vice President and Special 
Counsel, Derivative Securities, to Ivette Lopez, Assistant Director, 
Division, SEC, dated July 17, 1997 (``Amex amendment No. 2''). In 
Amendment No. 2, the Amex stated that the Exchange has sufficient 
capacity to handle the extension of the 2-\1/2\ strike price pilot 
program for another year.
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I. Self-Regulatory Organizations' Statement of the Terms of Substance 
of the Proposed Rule Changes

    The Exchanges propose to extend for one-year (i.e., July 17 1998) 
the Exchanges' pilot program whereby the Exchanges may select a limited 
number of their listed options for inclusion in a pilot program for the 
listing of strike prices at 2\1/2\ point intervals. The text of the 
proposed rule changes is available at the Office of the Secretary, the 
Exchanges, and at the Commission.

II. Self-Regulatory Organizations' Statement of the Propose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their filings are the Commission, the Exchanges included 
statements concerning the purpose of and basis for the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item IV below. The Exchanges have prepared summaries, set 
forth in sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    The Commission has previously approved a pilot program proposed by 
the Exchanges to list selected options trading at a strike price 
greater than $25 but less than $50 at 2\1/2\ point intervals (i.e., 
27\1/2\, 32\1/2\, 37\1/2\, 42\1/2\ and 47\1/2\).\7\ Subsequently, the 
Commission extended the pilot program for the twelve month period 
ending July 18, 1997.\8\ Pursuant to the pilot program, the Exchanges 
are permitted to use such 2\1/2\ point strike price intervals for a 
joint total of up to 100 option issues. Ten options plus a percentage 
of the remaining 50 options equal to each exchange's pro rata share of 
the total number of equity options listed by the Exchanges were 
allocated to each exchange.\9\
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    \7\ See Securities Exchange Act Release No. 35993 (July 19, 
1995), 60 FR 38073 (July 25, 1995) (File Nos. SR-Phlx-95-08, SR-
Amex-95-12, SR-PSE-95-07, SR-CBOE-95-19, SR-NYSE-95-12) (``2\1/2\ 
Point Strike Price Approval Order'').
    \8\ See Securities Exchange Act Release No. 37441 (July 15, 
1996), 61 FR 38234 (July 23, 1996) (File Nos. SR-Amex-96-24; SR-
CBOE-96-41; SR-NYSE-96-19; SR-PSE-96-18; and SR-Phlx-96-22) (``2\1/
2\ Point Strike Price Approval Order'').
    \9\ The actual allotment of option issues for each exchange as 
of July 1996 was: CBOE (28), Amex (22), Phlx (18), PSE (18), and 
NYSE (14).
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    Subsequent to the issuance of the 2\1/2\ Point Strike Price 
Extension Order, the NYSE sold its options programs to the CBOE. As a 
result, the four remaining options Exchanges have agreed upon a new 
allocation \10\ of the 100 classes for purposes of the extension of the 
pilot program.\11\ Under the new proposal, each exchange would be 
allocated a whole number of classes based on the sum of the following: 
(1) one quarter of the first 50 issues; and (2) a percentage of the 
remaining 50 classes determined by each exchange's pro rata share of 
the total number of equity option listings as of July 1, 1997.\12\ The 
Exchanges also have proposed that the eleven options selected by the 
NYSE will continue to be eligible for the pilot program, but will not 
count against any exchange's allotment.\13\ However, these eleven 
classes may not be replaced by another selection in the event a class 
becomes ineligible or is decertified.
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    \10\ The Commission believes that if the Exchanges wish to 
modify the allocation agreement prior to the expiration of this 
point program, they should contact the Division to determine whether 
a Rule 19b-4 filing is required.
    \11\ See CBOE Amendment No. 2, supra note 4; Amex Amendment No. 
1, supra note 5; and Letters from Michael D. Pierson, Senior 
Attorney, Regulatory Policy, PCX, to Deborah Flynn, Attorney, 
Division, SEC, dated July 16, 1997 and Philip H. Becker, Senior Vice 
President, Senior Vice President and Chief Regulatory Officer, Phlx 
to Michael Walinskas, Senior Special Counsel, Division, SEC, dated 
July 17, 1997.
    \12\ The actual allotment of options issues for each exchange 
is: CBOE (31), Amex (25), Phlx (23), and PCX (21).
    \13\ See CBOE Amendment No. 2, supra note 4; Amex Amendment No. 
1, supra note 5; See also File Nos. SR-PCX-97-30 and SR-Phlx-97-33.
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    As has been the case since the inception of the 2\1/2\ point strike 
price pilot program, when more than one exchange selects a multiply-
traded option for its allotment, the Options Clearing Corporation 
(``OCC'') will determine which exchange will be deemed to have selected 
the option according to the procedures agreed upon by the Exchanges. 
The Exchanges have agreed that an exchange (``Selecting Exchange'') 
intending to list 2\1/2\ point strikes on an option will inform OCC of 
its selection by submitting a notice (``Selection Notice'') to OCC 
between the hours of 8:30 a.m. and 12:00 Noon (Central Time). In the 
event that more than one exchange submits a Selection Notice to the OCC 
for the same multiply-traded option, the exchange which first submits a 
Selection Notice to the OCC will be deemed to be the Selecting Exchange 
for that option. Such option will count toward the allotment of the 
Selecting Exchange, but not toward the allotment of any other exchange 
submitting a Selection Notice under the terms of the pilot program.
    In addition, each of the Exchanges has submitted a report to the 
Commission that includes data and written analysis regarding the 
operation of the pilot program during the previous year, as required in 
the 2\1/2\ Strike Price Extension Order.\14\ The Exchanges generally 
believe that the pilot program has provided customers greater 
opportunities and flexibility to tailor their options positions, while 
enhancing the depth and liquidity of the markets in the selected 
options classes. The Exchanges \15\ and the Options Price Reporting 
Authority (``OPRA'') \16\ represent that sufficient computer processing 
capacity is available to

[[Page 40393]]

accommodate the extension of the 2\1/2\ point strike price pilot 
program for another year.
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    \14\ In the 2\1/2\ Point Strike Price Extension Order, the 
Commission required that each Exchange submit a report before the 
Commission would review a proposal to extend, expand or make 
permanent the pilot program.
    \15\ See Letters from Thomas A. Wittman, Vice President, Trading 
Systems, Phlx, to Michael Walinskas, Senior Special Counsel, 
Division, SEC, dated July 16, 1997 and Claire McGrath, Vice 
President and Special Counsel, Derivative Securities, Amex, to 
Ivette Lopez, Assistant Director, Division, SEC, dated July 17, 
1997. See also File Nos. SR-CBOE-97-31 and SR-PCX-97-30.
    \16\ See Letter from Joseph P. Corrigan, Executive Director, 
OPRA, to Michael Walinskas, Senior Special Counsel, Division, SEC, 
dated July 18, 1997 (``OPA Capacity Statement'').
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    Each exchange has stated that it believes its respective proposed 
rule change is consistent with Section 6(b) of the Act \17\ in general 
and furthers the objectives of Section 6(b)(5) \18\ in particular in 
that the joint proposal is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and is not designed to permit unfair 
discrimination between customers, issuers, brokers or dealers.
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    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organizations' Statement on Burden on Competition

    The Exchanges believe that the proposed rule changes will impose no 
burden on competition.

C. Self-Regulatory Organizations' Statement on Comments on the Proposed 
Rule Changes Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule changes.

III. Commission's Findings and Order Granting Accelerated Approval

    The Exchanges have requested accelerated approval for their 
respective proposals. The Commission finds that the proposed rule 
changes, as amended, are consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange,\19\ and, in particular, the requirements of 
Section 6(b)(5) of the Act.\20\ Specifically, the Commission believes 
that the proposed extension of the pilot program providing for the 
listing of 2\1/2\ point strike price intervals in selected equity 
options will continue to provide investors with more flexibility in the 
trading of equity options with a strike price greater than $25 but less 
than $50, thereby furthering the public interest by allowing investors 
to establish equity options positions that are better tailored to meet 
their investment objectives. The Commission also believes that the 
Exchanges' proposal strikes a reasonable balance between the Exchanges' 
desire to accommodate market participants by offering a wide array of 
investment opportunities and the need to avoid excessive proliferation 
of options series. The Commission expects the Exchanges to continue to 
monitor the applicable equity options activity closely to detect any 
proliferation of illiquid options series resulting from the narrower 
strike price intervals and to act promptly to remedy this situation 
should it occur.
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    \19\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposal allows the eleven options 
classes previously selected by the NYSE to continue to be eligible for 
the 2\1/2\ point strike pilot program, but such classes may not be 
replaced in the event a class becomes either ineligible or is 
decertified. The Commission further notes that the proposal provides 
that these eleven classes will not count against the allotment of any 
of the Exchanges. The Commission notes that he proposed treatment of 
these eleven options will allow investors to continue to trade in 2\1/
2\ point strikes in these options. Moreover, the Commission believes 
that the proposed treatment of the eleven options classes represents 
only a marginal increase in the total number of options classes 
eligible for the pilot program. Consequently, the Commission believes 
that the proposed treatment of the eleven options classes previously 
selected by the NYSE is reasonable.
    In addition, OPRA represents that adequate computer processing 
capacity to accommodate the additional strike prices is currently 
available.\21\ The Exchange also represent that their current systems 
capacities are sufficient to meet the expected demands of the 
additional strike prices.\22\ Nonetheless, the Commission expects the 
Exchanges to continue to monitor the trading volume associated with the 
additional options series listed as a result of the extension of the 
pilot program and the effect of these additional series on the capacity 
of the Exchanges', OPRA's and vendors' automated systems.
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    \21\ See OPRA Capacity Statement, supra note 16.
    \22\ See supra note 15.
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    In the event the Exchanges propose to (1) extend the pilot program 
beyond July 17, 1998, (2) expand the pilot program beyond the 100 
option classes,\23\ or (3) seek permanent approval of the pilot 
program, they should submit a report to the Commission along with the 
filing of such a proposal.\24\ The report should cover the period from 
May 19, 1997 to May 22, 1998 and should include data and written 
analysis on the open interest and trading volume in affected series, 
and delisted options series (for all strike price intervals) on the 
selected pilot program option classes. The report should also discuss 
any capacity problems that may have arisen during the pilot program and 
any other data relevant to the analysis of the pilot program, including 
an assessment of the appropriateness of the 2\1/2\ point strike price 
intervals for the options selected by the reporting exchange.
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    \23\ The Commission notes that he proposed treatment of the 
eleven options classes previously selected for the 2\1/2\ point 
strike pilot program by the NYSE temporarily establishes a maximum 
of 111 eligible options.
    \24\ The Commission expects that each Exchange will submit a 
proposed rule change at least two months before the expiration of 
the pilot program in the event the Exchanges wish to seek to extend, 
expand or seek permanent approval of the pilot program as noted 
above.
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    The Commission finds good cause for approving the proposed rule 
changes, including CBOE Amendment Nos. 1 and 2 and Amex Amendment Nos. 
1 and 2, prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. As mentioned above, 
the Exchanges submitted separate reports to the Commission that include 
data and written analysis regarding the operation of the pilot program 
as required in the 2\1/2\ Strike Price Extension Order. The Commission 
notes that the Exchanges have not reported any significant problems 
with the pilot program since its inception and that the Exchanges will 
continue to monitor the pilot program to ensure that no problems arise. 
Moreover, the Commission believes that the extension of the pilot 
program on an accelerated basis will provide the investing public with 
the added flexibility provided by 2\1/2\ point strike prices on an 
uninterrupted basis. Finally, no adverse comments have been received by 
the Exchanges or the Commission concerning the pilot program. Based on 
the above, the Commission believes good cause exists to approve the 
extension of the pilot program through July 17, 1998, on an accelerated 
basis. Accordingly, the Commission believes that granting accelerated 
approval of the proposals is appropriate and consistent with Sections 
6(b)(5) and 19(b)(2) of the Act.\25\
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    \25\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are field with 
the Commission, and all written communication relating to the proposed 
rule change between the Commission

[[Page 40394]]

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, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such 
filings will also be available for inspection and copying at the 
principal office of the Exchanges. All submissions should refer to File 
Nos. SR-Amex-97-24; SR-CBOE-97-31; SR-PCX-97-30; and SR-Phlx-97-33 and 
should be submitted by August 18, 1997.

V. Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the pilot program proposed by the Exchanges (File Nos. 
SR-Amex-97-24; SR-CBOE-97-31; SR-PCX-97-30; and SR-Phlx-97-33), as 
amended, is approved through July 17, 1998, on an accelerated basis.

    \26\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-19710 Filed 7-25-97; 8:45 am]
BILLING CODE 8010-01-M