[Federal Register Volume 61, Number 2 (Wednesday, January 3, 1996)]
[Notices]
[Pages 211-213]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-00037]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36637; File No. SR-Phlx-95-74]


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 Big Three Auto Sector Index

December 26, 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 September 25, 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. On 
December 20, 1995, the Exchange submitted to the Commission Amendment 
No. 1 to the proposed rule change.\3\ The Commission is publishing this 
notice, as amended, 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.
    \3\ The Exchange proposes to amend its position limit rule to 
state that the position limit for options on the Big Three Auto 
Index is 5,500 contracts total. Additionally, the Exchange proposes 
to amend the filing to change the method of calculating the Index 
from equal-dollar weighting to capitalization weighting. See Letter 
from Michele Weisbaum, Associate General Counsel, Phlx, to John 
Ayanian, Attorney, Office of Market Supervision (``OMS''), Division 
of Market Regulation (``Market Regulation''), Commission, dated 
December 20, 1995 (``Amendment No. 1'').
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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 Big 
Three Auto Sector Index (``Big Three Auto Index'' or ``Index''), a 
capitalization weighted index developed by the Phlx composed of all of 
the U.S. automobile manufacturing company stocks. 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. 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 \4\ 
on the Phlx Big Three Auto Sector Index which is an index representing 
the domestic automobile industry. The Phlx believes that the Big Three 
Auto Index will appeal to individual investors as well as program and 
basket traders because the Index reflects the direction and pricing of 
the nation's entire domestic automobile industry. Because the Big Three 
Auto Index is based on a small number of actively traded stocks, the 
Exchange believes that replication of the Index for hedging purposes 
with underlying stocks can be readily accomplished with complete 
accuracy. Thus, the Phylx believes that the 

[[Page 212]]
proposed Big Three Auto Index is unique and will fill a current market 
void. The Exchange does not believe that the Big Three Auto Index will 
be susceptible to manipulation as the stocks comprising the Big Three 
Auto Index represent extremely large, liquid, and widely held common 
stocks. The Exchange represents that all three underlying component 
securities are traded on the New York Stock Exchange and are therefore, 
``report securities'' as defined in Rule 11Aa3-1 under the Act. 
Further, the Exchange represents that all three underlying component 
securities currently meet the Phlx's listing criteria for equity 
options contained in Exchange Rule 1009 and are the subject of options 
trading on U.S. options exchanges.

    \4\ European-style options can be exercised only during a 
specific time period prior to expiration of the options.
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    The Phlx represents that as of December 19, 1995, the market 
capitalization of the individual stocks in the Index ranged from a high 
of $37.37 billion (General Motors Corp.) to a low of $20.51 billion 
(Chrysler Corporation). The market capitalization of all three of the 
stocks in the Index was approximately $88.23 billion. The total number 
of shares outstanding on October 31, 1995 for the stocks in the Index 
ranged from a high of 1.07 billion shares (Ford Motor Company) to a low 
of 382 million shares (Chrysler Corporation). Additionally, the average 
monthly trading volume in the U.S. of the stocks in the Index, for the 
twelve-month period from November 1, 1995 to October 31, 1995, ranged 
from a high of 69 million shares per month (Ford Motor Company) to a 
low of 50.9 million shares per month (General Motors Corp.). Lastly, as 
of December 19, 1995, no one stock accounted for more than 42.57% 
(General Motors Corp.), or less than 23.19% (Chrysler Corporation), of 
the Index's total value.\5\

    \5\ The weightings of all 3 components of the Big Three Auto 
Index as of October 31, 1995 are as follows: General Motors Corp.--
42.57%; Ford Motor Company--34.22%; and Chrysler Corporation--
23.19%.
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    The Big Three Auto Index will be calculated using a capitalization-
weighting methodology. The representation of each security in the Index 
will be proportional to the security's last sale price multiplied by 
the total number of shares outstanding, in relation to the total market 
value of all the securities in the Index. The Exchange believes that 
this capitalization weighting methodology is appropriate because many 
investors who might use this Index as a hedging vehicle own stock 
baskets containing shares of each of the three component stocks in 
amounts proportionate to their respective market capitalizations. The 
Index value was set at a starting value of 200 as of September 29, 
1995. The value of the Index as of the close of trading on December 19, 
1995 was 199.58. The formula for calculating the ``Current Index 
Value'' is as follows:
[GRAPHIC] [TIFF OMITTED] TN03JA96.001

Where:
Total Capitalization = Sum of Market Values (price x shares 
outstanding) for all component securities
Divisor = The number which, when divided from the total capitalization 
when the Index was initially calculated (on September 29, 1995), 
yielded an Index value of 200.

    In order to maintain continuity in the value of the Index, the 
Index divisor will be adjusted to reflect non-market changes in the 
capitalization of the component securities as well as changes in the 
composition of the Index. Changes that may result in divisor 
adjustments include, but are not limited to, stock splits and 
dividends, spin-offs, certain rights issuances, and mergers and 
acquisitions. The formula for adjusting the divisor is as follows:
[GRAPHIC] [TIFF OMITTED] TN03JA96.002

    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 Big Three Auto 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.
    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 domestic 
automobile industry stock. If no replacement is available, the Exchange 
will submit a proposed rule change pursuant to Section 19(b) of the Act 
and that proposal would have to be specifically approved by the 
Commission before the Exchange is able to open any new series of 
options on the Index for trading.
    The Phlx will evaluate the Index quarterly, following the close of 
trading on the third Friday at each March, June, September, and 
December to ensure that it is an accurate representation of the 
intended market character of the Index. The Exchange represents that 
all of the stocks comprising the Index are options eligible \6\ and 
have overlying options currently trading. If at any time, any of the 
component issues are not options eligible, the Exchange will submit a 
new proposed rule change pursuant to 

[[Page 213]]
Section 19(b) of the Act and that proposal would have to be 
specifically approved by the Commission before the Exchange is able to 
open 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 proposed 
rule change pursuant to Section 19(b) of the Act.

    \6\ 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 Super Cap Index pursuant to Phlx Rule 1001A(b). 
Specifically, the position and exercise limits for the Big Three Auto 
Index options, will be 5,500 contracts on the same side of the 
market.\7\ The Big Three Auto Index option will not be subject to a 
hedge exemption.

    \7\ See Amendment No. 1, supra note 3.
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    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 Big Three Auto Index will be 100. The Big Three Auto Index options 
will trade from 9:30 a.m. to 4:10 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 at least two 
additional near-term months so that the three nearest term months will 
always be available. LEAPS will also be traded on the Index pursuant to 
Phlx Rule 1101A(b)(iii).
    Big Three Auto Index options will be traded pursuant to current 
Phlx rules governing the trading of index options.\8\ The Exchange 
notes that surveillance 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 Big Three Auto 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 facilitate 
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).
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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.

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-95-74 and should be submitted by 
January 24, 1996.

    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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Jonathan G. Katz,
Secretary.
[FR Doc. 96-00037 Filed 1-2-96; 8:45 am]
BILLING CODE 8010-01-M