Federal Register / Vol. 63, No. 81 /Tuesday, April 28, 1998 / Notices 23327

7 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2Amendment No. 1 revised the proposal’s

maintenance criteria, position and exercise limits,

concentration limits, and corrected technical errors

and oversights.

3Amendment No. 2 clarified that the 9,000

contract position limit governing options on the

proposed index is independent of the three-tiered

position limits found in Exchange Rule 1001A(b)(i),

and instead appears as part of Exchange Rule

1001A(c). The second amendment also modified the

concentration criteria that trigger the application of

alternative position and exercise limits. See Letter

to Sharon Lawson, Senior Special Counsel, Division

of Market Regulation, Commission, from Nandita

Yagnik, Attorney, Exchange, dated April 20, 1998.

4See Exchange Rule 1101A(b)(iii). Long term

options also are referred to as ‘‘LEAPs.’’ For ease of

reference and clarity, the term ‘‘options’’ hereafter

shall include LEAPs where applicable.

5The Index is comprised of the following stocks

(primary markets in parentheses): Apple Computer,

Inc. (Nasdaq); Compaq Computer Corp. (NYSE);

Dell Computer Corp. (Nasdaq); Gateway 2000, Inc.

(NYSE); Hewlett Packard Co. (NYSE); International

Business Machines (NYSE); Micron Technology,

Inc. (NYSE); Sun Microsystems, Inc. (Nasdaq); and

Unisys Corp. (NYSE). 6 17 CFR 240.11Aa3–1.

proposed rule change (File No. SR–

Philadep–98–01) be and hereby is

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–11213 Filed 4–27–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39895; File No. SR–Phlx–

98–07]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change and Amendment Nos. 1

and 2 Thereto by the Philadelphia

Stock Exchange, Inc., Relating to the

Listing and Trading of Options on the

Exchange’s Computer Box Maker

Index

April 21, 1998.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

February 5, 1998, the Philadelphia

Stock Exchange, Inc. (‘‘Exchange’’ or

‘‘Phlx’’) 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 Exchange.

On April 3, 1998, the Exchange filed

with the Commission Amendment No. 1

to the proposed rule change.2 On April

20, 1998, the Exchange filed with the

Commission Amendment No. 2 to the

proposed rule change.3 The Commission

is publishing this notice to solicit

comments on the proposed rule change,

as amended, from interested persons

and is accelerating approval of the

amended proposal.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange proposes to list and

trade European style, cash-settled

options, including long term options,4

on the Exchange’s Computer Box Maker

Index (‘‘Index’’). The Index is a priceweighted, narrow-based, A.M. settled,

index comprised of nine stocks issued

by companies that manufacture, market,

and support desktop and notebook

personal computers and fault tolerant

systems.5

The text of the proposed rule change

is available at the Office of the

Secretary, the Exchange, and at the

Commission.

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 III 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

The purpose of the proposed rule

change is to list for trading European

style, cash-settled options on the Index,

a new index developed by the Exchange

pursuant to Exchange Rule 1009A(a).

Options on the Index will provide a

potential hedging vehicle for basket

traders and other market participants

who trade the securities comprising this

small subsector of the technology

industry. The following is a detailed

description of the proposed option

contract and the underlying Index:

(a). Ticker Symbol: BMX.

(b). Settlement Value Symbol: BMZ.

(c). Underlying Index: The Index is a

price-weighted index comprised of nine

stocks issued by companies that

manufacture, market, and support

desktop and notebook personal

computers and fault tolerant systems.

All of the nine component stocks trade

on the New York Stock Exchange, Inc.

(‘‘NYSE’’), or are National Market

System (‘‘NMS’’) securities that trade

through the facilities of the Nasdaq

Stock market (‘‘Nasdaq’’), and therefore

are reported securities as defined in

Rule 11Aa3–1 under the Act.6 Further,

all of the component 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. national

securities exchanges.

The Exchange represents that only the

securities of U.S. companies are

represented in the Index. However, if

component securities issued by nonU.S. companies are added to the Index

(stocks or American Depositary

Receipts) and such component

securities are not subject to

comprehensive surveillance sharing

agreements, those component securities

will not account for more than 20% of

the weight of the Index.

Statistical information provided by

the Exchange indicates that as of April

2, 1998, the aggregate market

capitalization of the nine component

stocks in the Index exceeded $266

billion. The individual market

capitalizations ranged from a high of

$103.4 billion (IBM) to a low of $3.43

billion (Unisys Corp.). Each of the nine

component stocks in the Index had

average daily trading volumes in excess

of one million shares per trading day

over the preceding six months. The

average daily trading volumes ranged

from a high of 19.9 million shares per

day (Compaq Computer Corp.) to a low

of 2.1 million shares per day (Gateway

2000, Inc.). The Exchange believes the

Index’s component stocks are some of

the most widely held and highly

capitalized common stocks.

(d) Index Calculation: The Index is a

price-weighted index. The following

formula will be used to compute the

Index value:

SP SP SP 1 2 9

3 5

100 + +× ....

.

Where: SP=current stock price

The initial divisor is an arbitrary

number selected to achieve a certain

index value. The divisor for the Index

shall be 3.5 which generates an Index

value of 118 as of April 2, 1998.

(e). Index Maintenance: To maintain

the continuity of the Index, the divisor
23328 Federal Register / Vol. 63, No. 81 /Tuesday, April 28, 1998 / Notices

7See infra note 23.

8See 15 U.S.C. 78s(b)(2), and Exchange Rule

1009A. 9See Exchange Rule 1010.

10See OCC By-Laws, Article XVII, Section 4, and

Securities Exchange Act Release No. 37315 (June

17, 1996), 61 FR 32471 (June 24, 1996).

11The 9,000 contract position limit for options on

the Index is separate and independent of the

position limits set forth in Exchange Rule

1001A(b)(i). See supra note 3.

12As a back-up to Bridge Data Inc., the Exchange

will utilize its own internal index calculation

system, the Index Calculation Engine (‘‘ICE’’)

System.

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 in the

Index (for example, due to a delisting,

merger, acquisition or other event) will

change the overall market character of

the Index, the Exchange will take

appropriate steps to remove the

component stock or replace it with

another stock that the Exchange believes

would be compatible with the intended

market character of the Index. The

Exchange represents that any

replacement components will be

reported securities as defined in Rule

11Aa3–1 of the Act.

Initially, the Index will be comprised

of nine component stocks. Absent

Commission approval, the Exchange

will not increase the number of

components to more than twelve or

reduce the number of components to

fewer than eight. The Exchange

represents 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 each

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 average at

least 400,000 shares per month. No

fewer than 90% of the component

securities, by weight, or no fewer than

80% of the total number of the

components, shall qualify as stocks

eligible for options trading.7 If the Index

fails at any time to satisfy one or more

of the required maintenance criteria, the

Exchange will immediately notify the

Commission staff of that fact and will

not open for trading any additional

series of options on the Index, unless

the Exchange determines that such

failure is insignificant and the

Commission concurs in that

determination, or unless the

Commission approves the continued

listing of options on the Index under

Section 19(b)(2) of the Act.8 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.9

In addition to the above maintenance

criteria, the Exchange represents that no

single component security of the Index

shall account for more than 35% of the

Index, and that the three highest

weighted component securities shall not

account for more than 65% of the Index.

If the Index fails to satisfy these

concentration criteria, the Exchange will

reduce the position and exercise limit to

5,500 contracts or to such other level

approved by the Commission under

Section 19(b) of the Act. All series of

Index options would be scheduled for a

position limit decrease to 5,500

contracts effective the Monday

following the expiration of the farthestout, then-trading, non-LEAP option

series. If prior to the scheduled position

limit decrease, however, the Index

complied with the concentration

requirements, the position limit would

not be reduced. As of April 2, 1998, the

highest weighted component stock

(IBM) made up 24.6% of the Index and

the top three components (IBM, Dell

Computer Corp., and Hewlitt Packard

Co.) accounted for 55% of the Index.

(f). Unit of Trading: Each option

contract on the Index 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 × 200).

(g). Exercise Price: The exercise price

of an option contract on the Index will

be set in accordance with Exchange

Rule 1101A(a).

(h). 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

option contracts, 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(s) 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 may determine an exercise

settlement amount for the Index in

accordance with Article XVII, Section 4,

of the OCC By-Laws.10

(i). Last Trading Day: The last

business day prior to the third Friday of

the month for options which expire on

the Saturday following the third Friday

of that month.

(j). Trading Hours: 9:30 a.m. to 4:02

p.m. e.s.t.

(k). Position and Exercise Limits: The

Index is an industry or narrow-based

index. The position and exercise limits

will be 9,000 contracts.11 As described

earlier, if at any time any one

component security accounts for more

than 35% of the Index, or any three

component securities account for more

than 65% of the Index, the Exchange

will reduce the position and exercise

limits to 5,500 contracts, or to such

other level approved by the Commission

under Section 19(b) of the Act.

(l). Expiration Cycles: Three months

from the March, June, September,

December cycle plus at least two

additional near-term months. LEAPs

also will be traded on the Index

pursuant to Exchange Rule

1101A(b)(iii).

(m). Exercise Style: European.

(n). Premium Quotations: Premiums

will be expressed in terms of dollars and

fractions of dollars pursuant to

Exchange Rule 1033A. For example, a

bid or offer of 11⁄2 will represent a

premium per options contract of $150

($11⁄2 × 100).

The value of the Index will be

calculated and disseminated every 15

seconds during the trading day. The

Exchange has retained Bridge Data Inc.

to compute and perform all necessary

maintenance of the Index.12 Pursuant to

Exchange Rule 100A, 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 (‘‘OPRA’’). The Index value

also will be available on broker-dealer
Federal Register / Vol. 63, No. 81 /Tuesday, April 28, 1998 / Notices 23329

13See Letter to Michael Walinskas, Senior Special

Counsel, Office of Market Supervision,

Commission, from Thomas A. Wittman, First Vice

President, Trading Systems, Exchange, dated

February 6, 1998.

14See Letter to Michael Walinskas, Senior Special

Counsel, Office of Market Supervision,

Commission, from Joseph P. Corrigan, Executive

Director, OPRA, dated February 11, 1998.

15See Exchange Rule 722, Exchange Rules 1000A

through 1102A, and generally Exchange Rules 1000

through 1072.

16 15 U.S.C. 78f.

17 15 U.S.C. 78f(b)(5).

18 15 U.S.C. 78s(b)(2).

19See infra note 27.

20See Letter to Michael Loftus, Attorney, Division

of Market Regulation, Commission, from Nandita

Yagnik, Attorney, Exchange, dated April 3, 1998.

21 15 U.S.C. 78f(b)(5).

22Pursuant to Section 6(b)(5) of the Act, the

Commission must predicate approval of any new

option proposal upon a finding that the

introduction of such new derivative instrument is

in the public interest. Such finding would be

difficult for a derivative instrument that served no

hedging or other economic function, because any

benefits that might be derived by market

participants likely would be outweighed by the

potential for manipulation, diminished public

confidence in the integrity of the markets, and other

valid regulatory concerns.

interrogation devices to subscribers of

options information. The Exchange

represents that it has the capacity to

handle the additional traffic expected to

be generated by the Index.13 In addition,

OPRA has informed the Commission

that the additional traffic from option

contracts on the Index is within OPRA’s

capacity.14

Option contracts on the Index will be

traded pursuant to current Exchange

rules governing the trading of narrowbased index options, including

provisions addressing sales practices,

floor trading procedures, margin

requirements, and trading halts and

suspensions.15 The Exchange represents

that the surveillance procedures

currently used to monitor trading in

index options also will be used to

monitor options based on the Index.

These procedures entail complete access

to trading activity in the underlying

component securities which all trade on

either the NYSE or Nasdaq. In addition,

the Intermarket Surveillance Group

(‘‘ISG’’) Agreement dated July 14, 1983,

as amended on January 29, 1990, will be

applicable to the trading of option

contracts on the Index.

2. Statutory Basis

The Exchange believes the proposed

rule change is consistent with Section 6

of the Act,16 in general, and with

Section 6(b)(5),17 in particular, in that it

is designed to promote just and

equitable principles of trade; prevent

fraudulent and manipulative acts and

practices; foster cooperation and

coordination with persons engaged in

regulating, clearing, settling, processing

information with respect to, and

facilitating transactions in securities;

remove impediments to and perfect the

mechanism of a free and open market

and a national market system; and

protect investors and the public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe 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

The Exchange did not solicit or

receive written comments with respect

to the proposed rule change.

II. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing

proposed rule change and Amendment

Nos. 1 and 2 thereto, including whether

the proposed rule change, as amended,

is consistent with the Act. 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 submissions, 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 persons, 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

filing will also be available for

inspection and copying at the principal

office of the Exchange. All submissions

should refer to File No. SR–Phlx–98–07

and should be submitted by May 19,

1998.

IV. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The Exchange has requested that the

Commission grant accelerated approval

of the Index pursuant to Section 19(b)(2)

of the Act.18 The request for accelerated

approval is predicated on the Index’s

substantial compliance with the generic

listing standards 19 and the Exchange’s

desire to remain competitive in the area

of new product development.20

V. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

The Commission has carefully

reviewed the Exchange’s proposed rule

change and believes, for the reasons set

forth below, the proposal is consistent

with the requirements of the Act and the

rules thereunder applicable to a national

securities exchange, and, in particular,

the requirements of Section 6(b)(5).21

Specifically, the Commission finds that

the trading of options on 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

manufacture and support computers.

The Commission finds that the

trading of options on the Index will

permit investors to participate in the

price movements of the nine securities

on which the Index is based. Further

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

Commission believes that options on the

Index will provide investors with an

additional trading and hedging

mechanism.22

Nevertheless, the trading of options

on the Index raises several issues related

to design of the Index, customer

protections, and surveillance. The

Commission believes, however, for the

reasons described below, that the

Exchange adequately has addressed

these issues.

A. Index Design and Structure

The Commission believes it is

appropriate for the Exchange to apply

its rules governing the trading of

narrow-based index options to options

based on the Index. The Commission

notes that the Index contains nine

stocks representing one industry group,

and thus reflects a very narrow segment

of the U.S. equities market.

The Commission notes that the nine

securities comprising the Index are

actively-traded. For the six month

period ending April 2, 1998, the average

daily trading volume among the

component securities ranged from a

high of 19.9 million shares per day

(Compaq Computer Corp.) to a low of

2.1 million shares per day (Gateway

2000, Inc.). In addition, the market

capitalizations of the securities in the

Index are extremely large, ranging from
23330 Federal Register / Vol. 63, No. 81 /Tuesday, April 28, 1998 / Notices

23The Exchange’s options listing standards,

which are uniform among the options exchanges,

provide that a security underlying an option must,

among other things, meet the following

requirements: (1) the public float must be at least

7,000,000 shares; (2) there must be a minimum of

2,000 securityholders; (3) trading volume in the

U.S. must have been at least 2.4 million shares over

the preceding twelve months; and (4) the market

price per share must have been at least $7.50 for

a majority of the business days during the preceding

three calendar months. See Exchange Rule 1009,

‘‘Criteria for Underlying Securities,’’ Commentary

.01.

24 17 CFR 240.11Aa3–1.

25See 15 U.S.C. 78s(b)(2), and Exchange Rule

1009A.

26See Securities Exchange Act Release No. 31243

(Sept. 28, 1992), 57 FR 45849 (Oct. 5, 1992).

27See Securities Exchange Act Release No. 34157

(June 3, 1994), 59 FR 30062 (June 10, 1994).

Although, a proposed rule change filed in

accordance with the generic listing standards

becomes effective immediately upon filing, trading

in the approved options may not commence until

30 days after the date of effectiveness.

28The generic listing standards require that a

narrow-based index initially consist of no fewer

than ten component securities. Thereafter, it may

not consist of fewer than nine component

securities. Id.

29Under the generic listing standards, an

individual component security may not represent

more than 25% of the weight of the index.

Furthermore, in an index of less than 25

components, the five highest weighted component

securities may not constitute more than 60% of the

weight of the index. Id.

30As previously noted, the Index currently

contains nine securities and may consist of as few

as eight component securities. On other occasions,

a high of $103.4 billion (IBM) to a low

of $3.43 billion (Unisys Corp.) as of

April 2, 1998. Finally, no one

component stock accounted for more

than 24.6% of the Index’s total value,

and the percentage weighting of the

three largest issues in the Index

accounted for 55% of the Index’s value.

With respect to the maintenance of

the Index, the Commission believes the

Exchange has implemented several

safeguards in connection with the

listing and trading of options on the

Index that will serve to ensure that the

Index remains comprised of highlycapitalized, actively-traded securities,

thereby ensuring that the Index will

remain substantially the same over time.

In this regard, the Exchange will

maintain the Index so that: (1) the

component securities comprising the

top 90% of the Index, by weight, each

will have market capitalizations of at

least $75 million, and the remaining

10% each will have market

capitalizations no less than $50 million;

(2) the component securities comprising

the top 90% of the Index, by weight,

each will have monthly trading volumes

of at least 500,000 shares, and the

remaining 10% each will have monthly

trading volumes no less than 400,000

shares; (3) at least 90% of the

components in the Index, by weight,

and 80% of the number of components

in the Index will be eligible 23 for

standardized options trading; (4) the

component securities will be ‘‘reported’’

securities pursuant to Rule 11Aa3–1 of

the Act; 24 (5) absent approval from the

Commission pursuant to Section

19(b)(2) of the Act, the Exchange will

not increase the number of components

to more than twelve or reduce the

number of components to fewer than

eight; and (6) if any component security

requires replacement because of a

delisting, merger, acquisition, or other

event affecting the market character of

such component security, the Exchange

will replace it with another security that

the Exchange believes would be

compatible with the intended market

character of the Index.

The Commission further believes the

maintenance standards governing the

Index will help protect against material

changes in the composition and design

of the Index that might adversely affect

the Exchange’s obligations to protect

investors and to maintain fair and

orderly markets in options based on the

Index. The Exchange is required to

immediately notify the Commission

staff if the Index fails at any time to

satisfy one or more of the specified

maintenance criteria. Further, in such

an event, the Exchange will not open for

trading any additional series of options

on the Index, unless the Exchange

determines that such failure is

insignificant and the Commission

concurs in that determination, or unless

the Commission approves the continued

listing of options on the Index under

Section 19(b)(2) of the ACt.25

B. Customer Protection

The Commission believes that a

regulatory system designed to protect

public customers must be in place

before the trading of sophisticated

financial instruments, such as options

based on the Index, can commence on

a national securities exchange. The

Commission notes that the trading of

standardized exchange-listed options

occurs in an environment that is

designed to ensure that: (1) the special

risks of options are disclosed to public

customers; (2) only investors capable of

evaluating and bearing the risks of

options trading are engaged in such

trading; and (3) special compliance

procedures are applicable to options

accounts. Accordingly, because the

Index options will be subject to the

same regulatory regime as the other

standardized options currently traded

on the Exchange, the Commission

believes that adequate safeguards are in

place to ensure the protection of

investors in Index options.

C. Surveillance

In evaluating new derivative

instruments, the Commission,

consistent with the protection of

investors, considers the degree to which

the derivative exchange has the ability

to obtain information necessary to

detect and deter market manipulation

and other trading abuses. Therefore, the

Commission believes that a surveillance

sharing agreement between an exchange

proposing to list a security index

derivative product and the exchange(s)

trading the securities underlying the

derivative product is an important

measure for surveillance of the

derivative and underlying securities

markets. Such agreements facilitate and

ensure the availability of information

needed to fully investigate manipulation

if it were to occur.26 In this regard, the

Commission notes that the primary

markets for the stocks underlying the

Index—the NYSE and the NASD (the

self-regulatory organization which

oversees Nasdaq)—as well as the

Exchange, are members of the ISG,

which provides for the sharing of all

necessary surveillance information. The

Commission believes this arrangement

will ensure the availability of

information necessary to detect

potential manipulations and other

trading abuses.

The Commission finds good cause for

approving the proposal, including

Amendment Nos. 1 and 2 thereto, prior

to the thirtieth day after the date of

publication of notice thereof in the

Federal Register. The Commission notes

that proposed rule changes regarding

the listing and trading of options on

narrow-based indexes may become

effective immediately upon filing

provided they satisfy certain generic

listing standards.27 The generic listing

standards establish minimum guidelines

concerning the design and operation of

narrow-based indexes. The Commission

recognizes that the Index, as amended,

satisfies all of the generic listing

standards save two, the minimum

number of component securities 28 and

the concentration limits.29 In addition,

to the extent that the Index deviates

from the generic listing standards in

these categories, the Commission notes

that the Exchange has amended its

proposal to adequately address the

concerns identified by the Commission

staff. This includes for example,

providing for a reduction in position

and exercise limits if the concentration

limits are exceeded, and maintaining

the Index at a minimum of eight

component securities.30 Therefore, the
Federal Register / Vol. 63, No. 81 /Tuesday, April 28, 1998 / Notices 23331

the Commission has approved narrow-based

indexes with similar minimum component

standards. See e.g., Securities Exchange Act Release

Nos. 38143 (Jan. 8, 1997), 62 FR 2411 (Jan. 16, 1997)

(permitted American Stock Exchange’s ‘‘Tobacco

Index’’ to initially consist of nine securities and

thereafter consist of no fewer than nine securities);

37198 (May 10, 1996), 61 FR 25251 (May 20, 1996)

(permitted Chicago Board Options Exchange’s ‘‘PC

Index’’ to initially consist of eight securities and

thereafter consist of no fewer than eight securities);

and 34345 (July 11, 1994), 59 FR 36245 (July 15,

1994) (permitted Exchange’s ‘‘Phone Index’’ to

initially consist of eight securities and thereafter

consist of no fewer than eight securities).

31 15 U.S.C. 78s(b)(2).

32 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 39393

(December 3, 1997), 62 FR 65117 (December 10,

1997).

4See Phlx Rule 1063.

5The seller has the responsibility only when

there are two parties to a trade. When there are

multiple participants, the largest participant is

responsible for allocating the trade.

6See e.g., Securities Exchange Act Release No.

33512 (January 24, 1994) 59 FR 4759 (February 1,

1994).

7The Phlx’s minor rule plan, codified in Phlx

Rule 970, contains Advices, such as Advice F–2,

Continued

Commission believes there is no

compelling reason to delay the listing

and trading of options based on the

Index. Accordingly, because the Index

substantially complies with the generic

listing standards, and the investor

protection concerns have been

addressed, the Commission finds good

cause exists for granting accelerated

approval to the proposed rule change

and Amendment Nos. 1 and 2 thereto.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,31 that the

proposed rule change, SR–Phlx–98–07,

and Amendment Nos. 1 and 2 thereto,

are hereby approved on an accelerated

basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.32

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–11164 Filed 4–27–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39889; File No. SR–Phlx97–51]

Self-Regulatory Organizations;

Philadelphia Stock Exchange, Inc.;

Order Granting Approval to Proposed

Rule Change Relating to the Allocation

of Options Trades

April 20, 1998.

I. Introduction

On October 22, 1997, the Philadelphia

Stock Exchange, Inc. (‘‘Phlx’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’)1 and Rule 19b–4

thereunder,2 a proposed rule change to

amend two Floor Procedure Advices

(‘‘Advices’’): F–2, Allocation, Time

Stamping, Matching and Access to

Matched Trades; and F–12,

Responsibility for Assigning

Participation. The proposed rule change

was published for comment in the

Federal Register on December 10,

1997.3 No comments were received on

the proposal. This order approves the

proposal.

II. Description of the Proposal

The Phlx proposes to amend the two

Advices to provide that the seller or

largest participant to an option

transaction is responsible for allocating

an executed trade.

A. Advice F–2

Currently, Advice F–2 states that it is

the duty of the largest participant in an

options transaction to both match and

time stamp the order tickets involved.

There is currently no specific provision

for who allocates options trades among

trade participants. The Phlx represents

that the practice in most options crowds

is that specialists announce trade splits

by saying to the trading crowd, for

example, ‘‘You did 10, you did 5,’’ etc.

This practice may differ, especially

where a specialist unit is not involved

in a trade, or where a great deal of

trading and quote activity renders

specialists allocating trades impractical.

In these situations, Floor Brokers have

assisted in allocating trades, along with

performing their duty to match and

submit the trade and ensure the best

execution of orders.4 The purpose of the

proposed rule change to paragraph (a) of

Advice F–2 is to assign the

responsibility of properly allocating

option trades to the largest participant

(or seller)5 involved in the trade, which

normally will be the Floor Broker who

represents the original order in the

trading crowd. The Exchange asserts

that the amendment will promote the

original intent of Advice F–2 (i.e., the

facilitation of prompt and accurate trade

reporting).6 Paragraphs (b) concerning

ticket preservation and (c) concerning

member access to matched trades, of

Advice F–2, remain unchanged.

B. Advice F–12

The purpose of the proposed rule

change to Advice F–12 is to extend its

requirements regarding how trades are

allocated to the equity/index options

floor. Currently, Advice F–12 only

applies to foreign currency options

trading. Specifically, Advice F–12

currently requires that foreign currency

option trade participants: (a) must

confirm and immediately inform the

largest participant of their contra-side

participation; (b) should not leave the

crowd absent such confirmation; (c)

should not submit tickets absent

participation; and (d) must handle

disputes properly. The Exchange

additionally proposes that Advice F–12

is proposed to be amended to only

detain in the crowd actual trade

participants and simplify ticket

submission requirements.

The Phlx believes that the proposed

amendments to Advice F–12 will bolster

its effectiveness in controlling the trade

allocation process. Under the proposed

amendments, no one who has

participated in the trade would be

allowed to leave the crowd until the

level of his/her participation in the

trades has been confirmed by the largest

participant. Previously, this obligation

also applied to those who believed they

may have participated in a trade. This

change is intended to require only those

who actually participated in a trade to

remain in the trading crowd to confirm

their participation in the trade. The Phlx

states that the language concerning

belief was difficult to administer and

did not capture violations necessary to

improve the post-trade process.

Further, Advice F–12 currently

provides that no person in the crowd

shall submit a ticket for matching on a

trade when that person has or should

have grounds to believe that he is not

due participation in the trade. Thus, a

violation of Advice F–12 currently may

result from submitting a ticket where no

participation is due, even though the

participant believed he/she participated.

The Phlx asserts that by deleting the

reference to‘‘belief,’’ the proposal is

designed to simplify trade ticket

submission, and as a result, establish

the practice that a person who did not

participate in a trade should not submit

a ticket.

C. Minor Rule Plan

Violation of the new responsibility

under Advice F–2 will be subject to the

existing fine schedule accompanying

Advice F–2. Advice F–12 currently

contains a fine schedule, which is

proposed to apply to the entire options

floor. The proposal thus amends the

Exchange’s minor rule violation

enforcement and reporting plan (‘‘minor

rule plan’’),7 by amending the text of