[Federal Register Volume 60, Number 94 (Tuesday, May 16, 1995)]
[Notices]
[Pages 26067-26068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11945]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35694; File No. SR-PHLX-95-16]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to 
Modifications of the Position and Exercise Limits for Narrow-Based 
Index Options

May 9, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 6, 
1995, 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 self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

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

    Currently, PHLX Rule 1001A, ``Position Limits,'' \1\ establishes 
the following position limits for industry (or narrow-based) index 
options (i) 5,500 contracts for an index where a single component stock 
accounted, on average, for 30% or more of the index value during the 
30-day period immediately preceding the review; (ii) 7,500 contracts 
for an index where a single component stock accounted, on average, for 
20% or more of the index value or any five component stocks together 
accounted, on average, for more than 50% of the index value but no 
single component stock accounted, on average, for 30% or more of the 
index value during the 30-day period immediately preceding the review; 
or (iii) 10,500 contracts where the conditions requiring a limit of 
5,500 contracts or 7,500 contracts have not occurred. The PHLX proposes 
to amend Exchange Rule 1001A(b)(1) and Exchange Rule 1002A, ``Exercise 
Limits,'' \2\ to increase the position and exercise limits for industry 
index options from 5,500, 7,500, or 10,500 contracts to 6,000, 9,000, 
or 12,000 contracts.

    \1\ Position limits impose a ceiling on the number of option 
contracts which an investor or group of investors acting in concert 
may hold or write in each class of options on the same side of the 
market (i.e., aggregating long calls and short puts or long puts and 
short calls).
    \2\ Exercise limits prohibit an investor or group of investors 
acting in concert from exercising more than a specified number of 
puts or calls in a particular class within five consecutive business 
days.
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    The text of the proposed rule change is available at the Office of 
the Secretary, PHLX, 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 self-regulatory organization 
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 self-regulatory organization 
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

    The PHLX proposes to amend PHLX Rule 1001A to raise the position 
limits for its narrow-based index options. Specifically, the PHLX 
proposes to amend PHLX Rule 1001A(b)(1) to establish narrow-based index 
option position limits of 6,000, 9,000, or 12,000 contracts. In 
addition, the PHLX proposes to amend PHLX Rule 1002A to establish a 
corresponding increase in exercise limits for industry index options.
    Currently, the PHLX trades options on the following narrow-based 
indexes:

(1) Gold/Silver Index (``XAU''): 5,500 contracts
(2) Utility Index (``UTY''): 10,500 contracts
(3) PHLX/KBW Bank Index (``KBX''): 10,500 contracts
(4) Phone Index (``PNX''): 5,500 contracts
(5) Semiconductor Index (``SOX''): 7,500 contracts
(6) Airline Sector Index (``PLN''): 10,500 contracts

    These position limits, which are standard among all of the options 
exchanges for narrow-based index options, are based on the degree of 
concentration of a component stock of the index.\3\ Currently, under 
PHLX Rule 1001A, the three-tiered levels of position and exercise 
limits are 5,500, 7,500, or 10,500 contracts. For the reasons stated 
below, the PHLX proposes to increase these limits to 6,000, 9,000, or 
12,000 contracts.

    \3\ See PHLX Rule 1001A.
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    First, the Exchange notes that the current levels have been in 
place since [[Page 26068]] 1993.\4\ However, there have been no further 
increases in position limits since 1993, despite substantial changes in 
the marketplace. Most notable among these changes, according to the 
PHLX, is an appreciable growth in index options trading. This marked 
increase in index options volume has significantly increased liquidity 
in PHLX-traded index options, as open interest has similarly 
increased.\5\ 

    \4\ See Securities Exchange Act Release No. 33288 (Dec. 3, 
1993), 58 FR 65221 (Dec. 13, 1993) (order approving File No. SR-
PHLX-93-07).
    \5\ The PHLX states that index options volume increased 450% 
(from 354,614 contracts to 1,957,171 contracts) in 1994 as compared 
to 1993.
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    Second, the Exchange believes that the proposed increases are 
reasonable. The PHLX states that in prior releases approving increased 
position limits, the Commission acknowledged that a gradual, 
evlutionary approach has been adopted by the Commission and the various 
options exchanges in increasing position and exercise limits. 
Accordingly, the PHLX proposes a 33% increase in the lowest tier (from 
5,000 to 6,000 contracts); a 31% increase for options currently at the 
7,500 contract limit; and a 20% increase in the highest tier, which is 
currently at 10,500 contracts. The Exchange believes that these 
proposed increases are consistent with the gradual evolution cited by 
the Commission, because the proposed levels represent reasonable 
increases which are in line with prior changes.\6\ 

    \6\ According to the PHLX, the most recent position limit 
changes in 1993 represented changes of 38% (from 4,000 to 5,500 
contracts); 25% (from 6,000 to 7,500 contracts); and 31% (from 8,000 
to 10,500 contracts).
    Third, the Exchange believes that the proposed increases are needed 
by traders and investors. According to the PHLX, Exchange members and 
customers have asked the Exchange to propose an increase in position 
limits. The PHLX states that the requests have focused on the inability 
of interested trading participants to meet their investment needs at 
current position limit levels and the deleterious effect this inability 
is having on these products. Based on such member and customer 
requests, the Exchange has realized that the current position limit 
levels discourage market participation by large investors and the 
institutions that compete to facilitate the trading interests of large 
investors.
    Accordingly, the PHLX proposes to raise position limits to 
accommodate the liquidity and hedging needs of large investors and the 
facilitators of those investors. Specifically, certain institutional 
traders handling industry funds deal in securities valued many times 
higher than the maximum permissible position under PHLX rules.
    In addition, the Exchange believes that the proposed limit of 
6,000, 9,000, and 12,000 contracts should increase the depth and 
liquidity of the markets for index options. The PHLX also believes that 
higher position limits would further accommodate the hedging needs of 
Exchange market makers and specialists, who are also restricted by 
current levels.
    The Exchange has considered the effects of increased position 
limits on the marketplace, recognizing the purposes of these limits in 
preventing manipulation and protecting against disruption of the 
markets for both the option as well as the underlying security. The 
PHLX notes that it nevertheless continues to monitor the markets for 
evidence of manipulation or disruption caused by investors with 
positions at or near current position or exercise limits and that the 
new limits will not diminish the surveillance function in this regard. 
Additionally, surveillance procedures have become increasingly 
sophisticated and automated.
    For these reasons, the Exchange believes that the proposal to 
increase narrow-based index option position limits is consistent with 
Section 6 of the Act, in general, and, in particular, with Section 
6(b)(5), in that it is designed to promote just and equitable 
principles of trade and to prevent fraudulent and manipulative acts and 
practices, as well as to protect investors and the public interest. The 
Exchange believes that the proposal should remove impediments to and 
perfect the mechanism of a free and open market by providing market 
opportunity to investors constricted by current position limit levels. 
The PHLX also believes that by stimulating market participation and 
thereby increasing option market depth and liquidity, the proposed rule 
change should promote just and equitable principles of trade. At the 
same time, the PHLX believes that the proposed position limits should 
continue to prevent fraudulent and manipulative acts and practices as 
well as protect investors and the public interest by limiting the 
ability to disrupt and manipulate the markets for options as well as 
the underlying securities.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The PHLX does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    No written comments were either received or requested.

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 publishes its reason for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve such proposed 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, 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 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 at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by June 6, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\

    \7\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-11945 Filed 5-15-95; 8:45 am]
BILLING CODE 8010-01-M