[Federal Register Volume 62, Number 150 (Tuesday, August 5, 1997)]
[Notices]
[Pages 42150-42153]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20510]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38884; File No. SR-PCX-97-29]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Pacific Exchange, 
Incorporated Relating to the Listing and Trading of Options on the 
Morgan Stanley Emerging Growth Index

July 29, 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 Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'' or 
``SEC'') the proposed rule change \3\ as described in Items I, II and 
III below, which Items have been prepared by the self-regulatory 
organization. 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\ On July 23, 1997, PCX submitted an amendment to the proposed 
rule change (``Amendment No. 1'') that addressed, among other 
issues, maintenance standards and the Exchange's limitation of 
liability. See Letter from Michael D. Pierson, Senior Attorney, 
Regulatory Policy, PCX to James T. McHale, Special Counsel, Division 
of Market Regulation, SEC, dated July 29, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX is proposing to list for trading index options on the 
Morgan Stanley Emerging Growth Index (``Index''), a market 
capitalization-

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weighted broad-based index developed by Morgan Stanley & Co. 
Incorporated (``Morgan Stanley'') comprised of 50 domestic emerging 
growth securities representing 26 different industry groups.

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 PCX 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 PCX 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 PCX is proposing to list and trade cash-settled, European-style 
stock index options on the Index. The Index is comprised of 50 
representative stocks \4\ traded on the New York Stock Exchange, 
Incorporated (``NYSE''), the American Stock Exchange, Incorporated 
(``Amex'') and through the facilities of the National Association of 
Securities Dealers, Incorporated (``NASD'') automated quotation system 
and are reported national market system securities.\5\
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    \4\ The 50 stocks comprising the Index are: BMC Software Inc. 
(BMCS), Parametric Technology Corp. (PMTC), Diamond Offshore 
Drilling, Inc. (DO), Ascend Communications Inc. (ASND), Cabletron 
Systems (CS), Altera Corp. (ALTR), Ciena Corp. (CIEN), Linear 
Technology Inc. (LLTC), Paychex Inc. (PAYX), Compuware Corp. (CPWR), 
XILINX Inc. (XLNX), Maxim Integrated Products (MXIM), Health 
Management Assoc. (HMA), McAfee Associates Inc. (MCAF), Sterling 
Commerce Inc. (SE), Iomega Corp. (IOM), Robert Half Intl. Inc. 
(RHI), ATMEL Corp. (ATML), Bed Bath & Beyond Inc. (BBBY), American 
Power Conversion (APCC), Planet Hollywood Intl. Inc. (PHII), 
Synopsys Inc. (SNPS), Reading and Bates Corp. (RB), Viking Office 
Prods. Inc. (VKNG), Micron Electronics Inc. (MUEI), Cambridge 
Technology Partners (CAPT), Blyth Industries Inc. (BTH), Jabil 
Circuit Inc. (JBIL), Novellus Systems Inc. (NVLS), Dollar Tree 
Stores Inc. (DLTR), Jones Medical Inds. Inc. (JMED), Pairgain 
Technologies Inc. (PAIR), Rexall Sundown Inc. (RXSD), CDW Computer 
Centers Inc. (CDWC), Titanium Metals Corp. (TIMT), Remedy Corp. 
(RMDY), Aspect Telecommunications (ASPT), Delta & Pine Land Co. 
(DLP), Telco Communications Grp. Inc. (TCGX), APAC Teleservices Inc. 
(APAC), Learning Tree Intl. Inc. (LTRE), Visio Corp. (VSIO), 
Catalina Marketing Corp. (POS), Nautica Enterprises Inc. (NAUT), 
Boston Technology Inc. (BSN), ETEC Systems Inc. (ETEC), Mentor Corp. 
(MNTR), Gentex Corp. (GNTX), Veritas Software Co. (VRTS), and Bio 
Technology General Corp. (BTGS).
    \5\ Attached as Exhibit B to the proposed rule change is a chart 
analyzing the components of the Index including the market upon 
which each is traded.
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    The Index was designed by Morgan Stanley to reflect the emerging 
growth equity market. The component securities were selected for their 
market capitalization, price per share, long-term debt as a percentage 
of total capital, mean estimated long-term (three year) earnings per 
share growth rate, net sales and return on average total equity. 
Specifically, stocks were selected based on whether they are 
``emerging'' stocks (in general, having current sales figures of 
between $25 million and $2 billion annually) and ``growth'' stocks (in 
general, having a high mean I/B/E/S anticipated earnings growth 
rate).\6\ A primary consideration in determining ``growth'' is whether 
a stock's expected growth rate is significantly higher than that of 
other stocks. In addition, currently all of the issues are traded in 
the United States and there are no foreign issues or American 
Depositary Receipts (``ADRs'') included in the Index.\7\
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    \6\ The term I/B/E/S refers to the Institutional Broker's 
Estimate System, a source of analysts' earnings expectation data 
that is obtained from over 7,000 analysts working for approximately 
750 research organizations.
    \7\ In the future, should the Index include non-U.S. registered 
securities, such securities will not in the aggregate comprise more 
than 10% of the Index weight and will not represent more than 3 
Index components. Prior to exceeding these limits, PCX will notify 
the Commission to determine if a new filing under Rule 19b-4 is 
required.
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    The Exchange represents that the Index currently is representative 
of the domestic emerging growth stock market as a whole, and therefore, 
is deemed to be a broad-based index. The Index is comprised of 
companies in 26 different industry groups, which range from apparel 
(.76%) to auto parts (.63%) to restaurants (1.79%).\8\ Although 
technology issues comprise 61% of the market capitalization of the 
index, these companies are included in nine different industries 
ranging from computer software to semiconductors to computer services.
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    \8\ The industry groupings and their Index weight are as 
follows: apparel (0.76%); auto parts (0.63%); biotechnology (0.56%) 
catalog/specialty distribution (2.55%); computer communications 
(5.66%); computer local area networks (4.52%); computer software 
(20.45%); contract drilling (6.29%); discount stores (1.14%); 
diversified commercial services (8.37%); electronic data processing 
peripherals (2.55%); electronic data processing services (4.06%); 
electrical products (1.82%); electronic data processing (1.53%); 
electronic production equipment (3.18%); farming/seeds/milling 
(0.86%); hospital/nursing management (2.88%); medical specialties 
(0.64%); other metals/minerals (0.91%); other pharmaceuticals 
(2.15%); other specialty stores (1.89%); other telephone/
communications (0.84%); packaged goods/cosmetics (1.35%); 
restaurants (1.79%); semiconductors (16.99%); and telecommunications 
equipment (5.63%). The industry groupings are based upon the 
classifications used by FactSet Research Systems, Inc., an 
electronic market data provider of information that is available by 
subscription in the securities industry.
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    The Index is weighted by the market capitalization of the component 
stocks. As of June 18, 1997 the market capitalization of the Index was 
$112.7 billion. The average market capitalization of these stocks was 
$2.3 billion on the same date. The individual market capitalization of 
these stocks ranged from $629 million (Bio Technology General Corp.) to 
$5.9 billion (BMC Software, Inc.) on that date. The largest stock 
accounted for 5.20% of the index, while the smallest accounted for 
0.56%. The top five stocks in the Index by weight accounted for 24.05% 
of the Index. The average daily trading volume in the component 
securities for the period from December 18, 1996 through June 18, 1997, 
ranged from a low of 94,688 shares to a high of 6,291,777 shares, with 
an average daily trading volume for all components of the Index of 
approximately 926,131 shares per day.
    The Index will be maintained by PCX in conjunction with Morgan 
Stanley. Index maintenance includes monitoring Index criteria and 
completing the adjustments for company additions and deletions, share 
changes, stock splits, stock dividends and stock price adjustments due 
to events such as company restructurings or spin-offs, as well as a 
semi-annual rebalancing and quarterly review.\9\ In order to ensure 
that the Index continues to represent the overall character of the 
emerging growth equity market, any changes made to the Index, including 
those made at the time of semi-annual rebalancing and quarterly review, 
will be in compliance with the following initial inclusion and 
maintenance criteria: (a) The number of component stocks in the Index 
will be no less than 42 and no greater than 58; (b) the top weighted 
component stock will not account for more than 25% of the weight of the 
Index; (c) the top five weighted component stocks will not

[[Page 42152]]

account for more than 50% of the weight of the Index; (d) no component 
stock will have a market capitalization of below $75 million; (e) no 
component issue will have an average trading volume of less than 20,000 
shares per day; (f) no component issue will have an average trading 
value of less than $100,000 per day; (g) no component will have a price 
per share of less than $3; (h) at least 80% of the issues comprising 
the index will meet the initial listing requirements for options 
trading pursuant to PCX Rule 3.6; and (i) the minimum market 
capitalization for all of the issues included in the index, 
collectively, will be $60 billion.
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    \9\ Routine corporate actions, such as stock splits and stock 
dividends that require simple changes in the common shares 
outstanding and the stock prices of the companies in the Index will 
be handled by PCX through a contract with Bridge Data. Non-routine 
corporate actions and other material changes such as share issuances 
that change the market value of the Index and require an Index 
divisor adjustment are performed by Morgan Stanley. In addition, 
Morgan Stanley will select all of the stocks that are added to the 
Index at the time of semi-annual rebalancing and quarterly review.
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    In the event that the Index does not comply with any of these 
criteria at the time of semi-annual rebalancing and quarterly review, 
the Exchange first either will make adjustments to the composition of 
the Index to place it in compliance with such criteria or alternatively 
will notify Commission staff to determine the appropriate regulatory 
response, which could include, but is not limited to, the removal of 
securities from the Index, prohibiting opening transactions, or 
discontinuing the listing of new series of Index options.
    The value of the Index is determined by multiplying the price of 
each stock by the number of shares outstanding, adding those sums and 
dividing by a divisor which resulted in an Index value of 300.00 on its 
base date of February 7, 1997. The Index value will be calculated by 
Bridge Data Corporation and will be disseminated at 15-second intervals 
during regular PCX trading hours to market information vendors via the 
Consolidated Tape Authority. Notice of component changes will be 
disseminated to vendors and Member Firms via facsimile and over the 
Options News Network.
    The Exchange proposes to base trading in options on the Index on 
the full value of the Index as expressed in U.S. dollars. The Exchange 
also may provide for the listing of long-term index option series 
(``LEAPS'') and for flexible exchange (``FLEX'') options on the Index. 
The Exchange will list expiration months for Index options and Index 
LEAPS in accordance with PCX Rule 7.8. Strike prices will be set to 
bracket the Index in 5 point increments. The minimum tick size for 
series trading below $3 will be \1/16\ and the minimum tick size for 
all other series will be \1/8\.\10\
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    \10\ See PCX Rule 6.72.
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    The Exchange is proposing to establish position limits for Index 
options equal to 37,500 contracts on the same side of the market, with 
no more than 22,500 contracts in the series with the nearest expiration 
date. These limits are roughly equivalent, in dollar terms, to the 
limits applicable to options on other indices.\11\ Furthermore, the 
hedge exemption rule applicable to broad-based index options, 
Commentary .02 to PCX Rule 7.6, will apply to Index options. With 
regard to FLEX Index options, the Exchange is proposing to establish 
position limits of 200,000 contracts on the same side of the market 
pursuant to PCX Rule 8.107(a). The PCX also represents that it has the 
necessary systems capacity to support new series that would result from 
the introduction of the Index options.
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    \11\ For example, on June 18, 1997, a position of 37,500 would 
have a dollar value of $1.17 billion (37,500 times the Index value 
of 311.68 times the Index multiplier of 100). For a comparison of 
position limits on similar indices, see Securities Exchange Act 
Release No. 32554 (June 29, 1993) 58 FR 36492 (July 7, 1993) (order 
approving increase in position and exercise limits on the Wilshire 
Small Cap Index to 37,500 contracts on the same side of the market 
with no more than 22,500 of such contracts in the series with the 
nearest expiration date) and Securities Exchange Act Release No. 
36504 (November 22, 1995) 60 FR 61275 (November 29, 1995) (order 
approving increase in position and exercise limits on the PSE 
Technology Index to 37,500 contracts on the same side of the market 
with no more than 22,500 of such contracts in the series with the 
nearest expiration date).
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    The proposed options on the Index will expire on the Saturday 
following the third Friday of the expiration month and trading in the 
expiring contract month on the PCX will normally cease at 1:15 p.m. 
(Pacific Time) on the business day preceding the last day of trading in 
the component securities of the Index (ordinarily the Thursday before 
expiration Saturday, unless there is an intervening holiday). The 
exercise settlement value of Index options at expiration will be 
determined from opening prices established at the open of the regular 
Friday trading sessions at the appropriate exchange or market system. 
If a stock does not trade during this interval or if it fails to open 
for trading, the last available price of the stock will be used in the 
calculation of the Index.\12\ When the last trading day is moved in 
accordance with Exchange holidays (such as when the PCX is closed on 
the Friday before expiration), the last trading day for expiring 
options will be Wednesday and the exercise settlement value of Index 
options at expiration will be determined at the open of the regular 
Thursday trading sessions.
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    \12\ If a stock does not trade during the opening of the regular 
Friday trading session at the appropriate exchange or market system, 
or if it fails to open for trading, then pursuant to PCX Rule 
7.8(e), the last reported sale price of stock will be used in the 
calculation of the Index, unless the exercise settlement amount is 
fixed in accordance with the Rules and By-Laws of The Option 
Clearing Corporation.
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    The Exchange will apply its existing index option surveillance 
procedures to Index options. In addition, as a member of the 
Intermarket Surveillance Group (``ISG''), the Exchange has entered into 
a surveillance sharing agreement with the NYSE, the Amex and the NASD 
which will enable the Exchange to obtain information concerning the 
trading of the component stocks of the Index. \13\
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    \13\ The ISG was formed on July 14, 1983, among other things, to 
coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets. 
The primary markets for the underlying securities in the Index are 
all members of the ISG. See ISG Agreement, July 14, 1983. The 
participation of exchanges within the ISG and their sharing of 
surveillance information is governed by the ISG Agreement. The most 
recent amendment to the ISG Agreement, which incorporates the 
original agreement and all amendments made thereafter, was signed by 
the ISG members on January 29, 1990. See Second Amendment to ISG 
Agreement, January 29, 1990. There are currently 23 members of the 
ISG.
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    Finally, the Exchange proposes to eliminate PCX Rule 7.13 regarding 
limitation of liability and replace it with a more general rule 
addressing the same issue.\14\
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    \14\ Exhibit A of Amendment No. 1 to the proposed rule change 
contains the proposed replacement language for PCX Rule 7.13.
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2. Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act, in general, and Section 6(b)(5) of the Act, in 
particular, in that it is designed to facilitate transactions in 
securities, to promote just and equitable principles of trade, and to 
protect investors and the public interest.

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

    The PCX 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 on the proposed rule change 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and

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publishes its reasons for so finding or (ii) as to which the PCX 
consents, the Commission will:
    (A) By order approve such rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, NW., Washington, DC 20549. 
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, 450 Fifth Street, NW., Washington, 
DC 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of the PCX. All submissions should 
refer to File No. SR-PCX-97-29 and should be submitted by August 26, 
1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-20510 Filed 8-4-97; 8:45 am]
BILLING CODE 8010-01-M