[Federal Register Volume 60, Number 94 (Tuesday, May 16, 1995)]
[Notices]
[Pages 26065-26067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12004]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35699; File No. SR-PHLx-95-22]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to the Listing 
and Trading of Options on the PHLX Super Cap Index

May 10, 1995.
    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 April 10, 1995, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade options on the Phlx Super 
Cap Index (``Super Cap Index'' or ``Index''), a capitalization weighted 
index developed by the Phlx composed of the five largest stocks, by 
capitalization, traded on the New York Stock Exchange (``NYSE''). 
Exchange Rules 1000A, Applicability and Definitions; 1001A, Position 
Limits; 1006A, Other Restrictions on Options Transactions and 
Exercises; 1047A, Trading Rotations, Halts or Reopenings; 1101A, Terms 
of Option Contracts; and 722, Margin Accounts will be amended to 
include reference to this proposed Index. The text of the proposed rule 
changes 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. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Section (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 list for trading an European-style option \3\ 
on the Phlx Super Cap Index which is composed of the five largest 
capitalized common stock issues traded on the New York Stock Exchange.

    \3\ European-style options can be exercised only during a 
specific time period prior to expiration of the options.
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    The Phlx believes there are numerous benefits to listing the Super 
Cap Index options. First, the Exchange believes that the Super Cap will 
appeal to individual investors as well as program and basket traders 
because the Index reflects the direction and pricing of some of the 
nation's largest and most important companies. These stocks are 
frequently found in investor and trader portfolios alike and currently 
account for 10% of the capitalization on the NYSE.\4\ Second, because 
the Super Cap Index is based on a relatively small number of actively 
traded stocks, replication of the Index for hedging purposes with 
underlying stocks can be readily accomplished with complete accuracy. 
Thus, the Phlx believes that the proposed Super Cap Index is unique and 
will fill a current market void. Third, the Exchange does not believe 
that the Super Cap Index will be susceptible to manipulation as the 
stocks comprising the Super Cap Index are some of the largest and most 
widely held common stocks in the country.

    \4\ New York Stock Exchange's Fact Book 1994.
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    The Phlx represents that as of April 5, 1995, the market 
capitalization of the individual stocks in the Index ranged from a high 
of $93.8 billion to a low of $59.7 billion. The market capitalization 
of all five of the stocks in the Index was approximately $394 trillion. 
As of that same date, no one stock accounted for more than 23.81%, or 
less than 15.17%, of the Index's total value.
    The formula for calculating the Super Cap Index ``Current Index 
Value'' is as follows:
[GRAPHIC][TIFF OMITTED]TN16MY95.252


total capitalization = the sum of the market values (price times shares 
outstanding) for all of the component issues
[GRAPHIC][TIFF OMITTED]TN16MY95.253


    The index value was set at a starting value of 200 as of January 
12, 1995. In order to maintain continuity in the value of the Index, 
the Index divisor will be adjusted for changes in capitalization of any 
of the component issues resulting from, among other things, mergers, 
acquisitions, delistings, and substitutions. Adjustments in the value 
of the Index which are necessitated by the addition and/or the deletion 
of an issue from the Index are made by adding and/or subtracting the 
market value (price times shares outstanding) of the relevant issues. 
The value of the index as of the close of trading on Wednesday, April 
5, 1995 was 214.42.
    The Super Cap Index value will be updated dynamically at least once 
every 15 seconds during the trading day. The Phlx has retained Bridge 
Data, Inc. to compute and do all necessary maintenance of the Index. 
Pursuant to Phlx Rule 1100A, updated Index values will be disseminated 
and displayed by means of primary market prints reported by the 
Consolidated Tape Association and over the facilities of the Options 
Price Reporting Authority. The Index value will also be available on 
broker/dealer interrogation devices to subscribers of the option 
information. [[Page 26066]] 
    In accordance with Phlx Rule 1009A, if any change in the nature of 
any stock in the Index occurs as a result of delisting, merger, 
acquisition or otherwise, the Exchange will take appropriate steps to 
delete that stock from the Index and replace it with another stock 
which is in the top five, as measured by capitalization, of issue 
traded on the NYSE at the time the Phlx makes the substitution.
    The Phlx shall evaluate the index annually to ensure that the index 
is an accurate representation of the five largest stocks, measured by 
capitalization, traded on the NYSE. Public notice of any changes will 
be made immediately and the Phlx will then make any substitutions, if 
necessary, of the component issues of the Index on the first business 
day after the January expirations for the Super Cap Index options.
    The Exchange represents that all of the stocks comprising the Index 
are options eligible \5\ and have overlying options currently trading. 
If at any time, any of the component issues are not options eligible, 
the Exchange will submit a Rule 19b-4 filing to the Commission before 
opening any new series of options on the Index for trading. 
Additionally, if at any time, the Exchange determines to increase or 
decrease the number of component issues, the Exchange will submit a new 
Rule 19b-4 filing.

    \5\ The Phlx'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 stockholders; (3) trading volume in the 
U.S. must have been at least 2.4 million over the preceding twelve 
months; and (4) the U.S. market price must have been at least $7.50 
for a majority of the business days during the preceding three 
calendar months. See Phlx Rule 1009, Commentary .01.
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    The settlement value for the Index options will be based on the 
opening values of the component securities on the date prior to 
expiration. Index options will expire on the Saturday following the 
third Friday of the expiration month, and the last day for trading in 
an expiring series will be the second business day (ordinarily a 
Thursday) preceding the expiration date.
    The Phlx proposes to employ the same position limit applicable to 
the Exchange's other narrow-based indexes pursuant to Phlx Rule 
1001A(b)(i). Specifically, the Phlx proposes to codify in Rule 1001A(c) 
that for Super Cap Index options, the position limit will be 5,500 
contracts on the same side of the market. The Super Cap Index option 
will not be subject to a hedge exemption.
    The Super Cap Index is an index which does not neatly meet the 
traditional criteria of either a broad-based or narrow-based index. 
Unlike a typical broad-based index, the Super Cap Index consists of a 
relatively small number of stocks. Unlike a traditional narrow-based 
index, the stocks comprising the Super Cap are diversified and not 
industry specific. The Exchange understands that a concern may arise 
that investors could use the Index to circumvent the option position 
limits on the 5 individual component issues. The Exchange believes that 
by imposing a small position limit it will discourage investors from 
using the product for that purpose.
    The Super Cap Index is comprised of the top 5 capitalized issues on 
the NYSE, thus the overlying issues are all likely to be in the 
category of options which have the highest position limit (10,500 
contracts on the same side of the market). Further, all of the U.S. 
options exchanges currently have pilot programs wherein their position 
limit rules allow an investor to double the applicable limit by hedging 
their position with stock.\6\ Given the minimal position limit that the 
Phlx proposes to invoke for the Super Cap Index, it is unlikely that 
someone would buy Super Cap Index options in order to control more 
contracts on one component issue. For example, if an investor held the 
maximum amount of options on all 5 underlying issues and was hedged on 
all of them, he could control 105,000 contracts (21,000 X 5). Buying 
5,500 Super Cap Index options could only increase his position by 5%. 
This is no different from the situation with any other index where 
someone buys the options on underlying components and then buys the 
index options. By definition, the investor has increased his control 
over the individual component issues. Specifically, the Commission's 
Generic Narrow-Based Index approval order \7\ allows exchanges to list 
options on indexes with a minimum of 10 component stocks. Assuming as a 
best case, that all the component issues have overlying options traded 
on them, and the options on the index are subject to a 10,500 contract 
position limit, the same 5% incremental control of position could be 
achieved. The Exchange therefore, believes that it has proposed a 
reasonable approach to deal with the issue.

    \6\ See Phlx Rule 1001, Commentary .07, AMEX Rule 904, 
Commentary .09, PSE Rule 6.8, Commentary .07, CBOE Rule 4.11, 
Interpretation .04, and NYSE Rule 704(b)(ii).
    \7\ See Securities Exchange Act Release No. 34157 (June 3, 
1994), 59 FR 30062 (June 10, 1994).
    Exercise price intervals will be set at five point intervals in 
terms of the current value of the Index. Additional exercise prices 
will be added in accordance with Phlx Rule 1011A(a).
    As with the Exchange's other indexes, the multiplier for options on 
the Super Cap Index will be 100. The Super Cap Index options will trade 
from 9:30 a.m. to 4:15 p.m. eastern time.
    The Phlx will trade consecutive and cycle month series pursuant to 
Phlx Rule 1101A. Specifically, there will be three expiration months 
from the March, June, September, December cycle plus two additional 
near-term months so that the three nearest term months will always be 
available.
    Super Cap Index options will be traded pursuant to current Phlx 
rules governing the trading of index options.\8\ The Exchange notes 
that procedures currently used to monitor trading in each of the 
Exchange's other index options will also be used to monitor the trading 
of options on the Super Cap Index. These procedures included having 
complete access to trading activity in the underlying securities which 
are all traded on the NYSE via the Intermarket Surveillance Group 
Agreement (``ISG Agreement'') dated July 14, 1983, as amended on 
January 29, 1990.

    \8\ See Phlx Rules 1000A through 1103A, and 1000 through 1070.
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    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act, in general, and furthers the objectives of 
Section 6(b)(5),\9\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to facilities 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market.

    \9\ 15 U.S.C. 78f(b)(5) (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

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

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

    No written comments were solicited or received with respect to the 
proposed rule change. [[Page 26067]] 

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 reasons 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. Sec. 552, will be available for inspection and copying at 
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 Phlx. All 
submissions should refer to SR-Phlx-95-22 and should be submitted by 
June 6, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\

    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-12004 Filed 5-15-95; 8:45 am]
BILLING CODE 8010-01-M