2560 Federal Register / Vol. 61, No. 18 / Friday, January 26, 1996 / Notices

9 15 U.S.C. § 78f(b)(5) (1988 & Supp. V 1993).

10The Commission notes that to the extent the

potential for manipulation increases because of the

expanded hedge exemption, the Commission

believes that the PHLX’s surveillance programs will

be adequate to detect as well as to deter attempted

manipulative activity. The Commission will, of

course, continue to monitor the PHLX’s

surveillance programs to ensure that problems do

not arise.

11 15 U.S.C. § 78s(b)(2) (1982).

12 17 CFR 200.30–3(a)(12) (1995).

15, the PHLX believes that the proposal

is consistent with Section 6(b) 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, remove impediments to and

perfect the mechanism of a free and

open market and protect investors and

the public interest by incorporating the

new, broader equity hedge exemption in

to the Exchange’s Minor Rule Plan.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The PHLX does not believe that the

proposed rule change will impose an

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

solicited or received.

III. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

The Exchange has requested that the

proposed rule change be given

accelerated effectiveness pursuant to

Section 19(b)(2) of the Act in order to

promptly correct Advice F–15 to reflect

the expanded equity option hedge

exemption approved in the Hedge

Exemption Order and to clarify the

application of the Minor Rule Plan to

the exemption.

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange, and, in particular, the

requirements of Section 6(b)(5) in that it

is designed to protect investors and the

public interest and to facilitate

transactions in securities.9 Exchange

Rule 1001, Commentary .07 and Advice

F–15(b) set forth an exemption from

equity option position and exercise

limits for equity options hedge by 100

shares of stock or securities convertible

into the stock. In the Hedge Exemption

Order, the Commission approved a

proposal to amend PHLX Rule 1001,

Commentary .07, to expand the

maximum allowable hedged position for

equity options to three times the

standard position and exercise limit of

the option. However, a corresponding

amendment to Advice F–15(b) was

inadvertently omitted from the PHLX’s

proposal to amend PHLX Rule 1001,

Commentary .07.

The Commission believes that the

proposal protects investors and the

public interest by making Advice F–

15(b) consistent with PHLX Rue 1001,

Commentary .07, as amended by the

Hedge Exemption Order, thereby

clarifying the Exchange’s rules and

eliminating potential confusion.

Specifically, the proposal amends

Advise F–15(b) to indicate that the

maximum allowable position for each

option contract hedge by 100 shares of

stock or securities convertible into the

stock, will be three times, instead of

twice, the standard position and

exercise limit of the option.

As the Commission found in the

Hedge Exemption Order, the

Commission believes that the proposal

to expand the hedge exemption is an

appropriate method to accommodate the

needs of options market participants. By

increasing the hedge exemption, the

Commission continues to believe that

large hedge funds and institutional

accounts will be provided with the

means necessary to adequately hedge

their stock holdings without adding risk

to the options market. Based on the

PHLX’s experience, the Commission

believes, as it concluded in the Hedge

Exemption Order, that the increased

equity option hedge exemption should

result in little or no additional risk to

the marketplace.10

In addition, the Commission believes

that it is appropriate to continue to

administer Advice F–15, as amended,

pursuant to the PHLX’s Minor Rule

Plan. Under the proposal, violations of

the hedge exemption continue to be

objective in nature and easily verifiable;

therefore, the enforcement of the

expanded hedge exemption should not

entail the complicated factual and

interpretive inquiries associated with

more sophisticated disciplinary actions.

Accordingly, the Commission believes

that violations of the equity option

hedge exemption continue to lend

themselves to the use of the PHLX’s

Minor Rule Plan and the fines provided

for in Advice F–15.

The Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice of filing thereof

in the Federal Register. The

Commission believes that the proposal

clarifies the PHLX’s rules by making

Advice F–15(b) consistent with PHLX

Rule 1001, Commentary .07. In addition,

the proposal does not raise any new

regulatory issues since the Commission

previously approved an identical

amendment to PHLX Rule 1001,

Commentary .07. Accordingly, the

Commission believes that granting

accelerated approval of the proposed

rule change is appropriate and

consistent with Sections 6(b)(5) and

19(b)(2) of the Act.

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

February 16, 1996.

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,11 that the

proposed rule change (SR–PHLX–95–

87) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–1362 Filed 1–25–96; 8:45 am]

BILLING CODE 8010–01–M
Federal Register / Vol. 61, No. 18 / Friday, January 26, 1996 / Notices 2561

1 15 U.S.C. § 78s(b)(1) (1988).

2 17 CFR 240.19b–4 (1994).

3Position limits impose a ceiling on the aggregate

number of option contracts on the same side of the

market that an investor, or group of investors acting

in concert, may hold or write. See Phlx Rule

1001A(a)(ii).

4Exercise limits impose a ceiling on the aggregate

long positions in option contracts that an investor,

or group of investors acting in concert, can or will

have exercised within five consecutive business

days. See Phlx Rule 1002A.

5The Index is a capitalization-weighted market

index composed of the 100 largest capitalized

stocks trading over-the-counter.

6See Securities Exchange Act Release No. 36461

(November 6, 1995), 60 FR 57257 (November 14,

1995).

7See Securities Exchange Act No. 22044 (May 17,

1985), 50 FR 21532 (May 24, 1985) (File Nos. SR–

Phlx–84–28 and SR–Phlx–85–11).

8According to the Exchange, XOC volume for the

period January–June 1995 was 167,894 contracts,

compared to 158,228 contracts for the period

January–June 1993.

9See Securities Exchange Act Release No. 36577

(December 12, 1995) (order approving File No. SR–

Phlx–95–61).

10See Securities Exchange Act Release No. 33634

(February 17, 1994), 59 FR 9263 (February 25, 1994)

(order approving increase in position and exercise

limits on Index from 10,000 to 17,000 contracts)

(File No. SR–Phlx–93–07).

11This value of the Index was recorded on

December 19, 1995.

12The aggregate dollar value of the maximum

permissible XOC position is calculated by

multiplying the Index value by the multiplier by the

position limit as follows:

424×100×17,000=$720,800,000

13 424×100×25,000=$1,060,000,000

14These values were recorded on June 27, 1995:

CBOE: OEX 520×100×25,000=$1,300,000,000

CBOE: SPX 545×100×45,000=$2,452,500,000

CBOE: RUT 281×100×50,000=$1,405,000,000

CBOE: NDX 534×100×25,000=$1,335,000,000

Amex: XMI 477×100×34,000=$1,621,800,000

PSE: WSX 363×100×37,500=$1,361,250,000

NYSE: NYA 292×100×45,000=$1,314,000,000

15 VLE 518×100×25,000=$1,295,000,000

TPX 482×100×25,000=$1,205,000,000

16See, e.g., American Stock Exchange, Inc.’s

(‘‘Amex’’) EUR—25,000 contracts, HKO—25,000

contracts, JPN—25,000 contracts; and Chicago

Board Options Exchange, Inc.’s (‘‘CBOE’’) NDX—

25,000 contracts.

17See, e.g., CBOE’s SPX—45,000 contracts,

RUT—50,000 contracts; Amex’s XII—45,000

contracts, XMI—34,000 contracts; and New York

Stock Exchange, Inc.’s (‘‘NYSE’’) NYA and NNA—

45,000 contracts each.

18 15 U.S.C. § 78f(b) (1988).

19The Commission again notes that the

Exchange’s proposal will not be implemented until

after the June 1996 expiration.

20See, e.g., Securities Exchange Act Release No.

31330 (October 16, 1992), 57 FR 48408 (October 23,

1992).

21See Securities Exchange Act Release No. 22026

(May 8, 1985), 50 FR 20310 (May 15, 1985).

[Release No. 34–36745; File No. SR–Phlx–

95–38]

Self-Regulatory Organizations; Order

Granting Approval to Proposed Rule

Change by the Philadelphia Stock

Exchange, Inc., Relating to an Increase

in Position and Exercise Limits on the

Phlx National Over-the-Counter Index

January 19, 1996.

I. Introduction

On September 25, 1995, the

Philadelphia Stock Exchange, Inc.

(‘‘Phlx’’ or ‘‘Exchange’’) submitted to the

Securities and Exchange Commission

(‘‘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

increase the position 3 and exercise

limits 4 for options (‘‘XOC’’) on the

Phlx’s National Over-the-Counter Index

(‘‘Index’’)5 from 17,000 to 25,000

contracts.

The proposed rule change appeared in

the Federal Register on November 14,

1995.6 No comments were received on

the proposed rule change. This order

approves the Phlx’s proposal.

II. Background and Description

On May 17, 1985, the Commission

approved the Exchange’s proposal to list

and trade options on the Index.7

According to the Phlx, trading volume

on the Index has increased sharply since

1991, and consistently since 1993.8

The Exchange recently conducted a

‘‘two-for-one split’’ of the Index, which

effectively reduced the value of the

Index to one-half of its previous value.9

In accounting for the split, the Phlx

doubled the position and exercise limits

applicable to the XOC from 17,000

contracts 10 to 34,000 contracts until the

last expiration then trading, which is

the June 1996 expiration.

In the absence of the proposed rule

change, following the expiration of the

June 1996 option series, the XOC’s

position limit would revert to the 17,000

contract level. At this limit, with the

Index at a post-split value of 424,11 the

aggregate dollar value of the maximum

permissible XOC position would be

approximately $721 million.12 In

comparison, with the limit raised to

25,000 contracts, the aggregate dollar

value of the maximum permissible XOC

position would be approximately $1

billion.13 The Exchange believes that

even with the increased position limit,

the Index’s value compares with the

values of other exchanges’ broad-based

index options,14 as well as its own.15

Moreover, as most broad-based index

options have position limits of at least

25,000 contracts,16 with certain

products trading with higher limits,17

the proposed rule change is intended to

keep the Phlx in line with the position

limits of index options traded on other

exchanges.

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange, and, in particular, with the

requirements of Section 6(b)(5),18 in that

it should help to remove impediments

to and perfect the mechanism of a free

and open market, promote just and

equitable principles of trade, and

protect investors and the public interest.

In analyzing and reviewing specific

position and exercise limits proposed by

the options exchanges, the Commission

has attempted to balance two competing

concerns. First, limits must be

sufficiently low to prevent investors

from disrupting the underlying cash

market. Second, limits must not be

established at levels that are so low as

to unnecessarily discourage

participation in the options market by

institutions and other investors who

have substantial hedging needs or to

prevent specialists and market makers

from adequately meeting their

obligations to maintain fair and orderly

markets.

The Commission believes that the

proposed increase in position and

exercise limits to 25,000 contracts 19

should increase the depth and liquidity

of the XOC market without significantly

increasing concerns regarding

intermarket manipulations or

disruptions of the markets for the

options or the underlying securities.

The Commission has previously stated

that markets with active and deep

trading, as well as broad public

ownership, are more difficult to

manipulate or disrupt than less active

markets with smaller public floats.20 In

this regard, the Commission notes that

the Index is a broad-based index

consisting of the 100 largest capitalized

stocks trading over-the-counter

(‘‘OTC’’). Moreover, the Phlx’s

maintenance requirements ensure that

the Index will not contain a large

number of thinly-capitalized, lowpriced securities with small public

floats and low trading volumes.21

Accordingly, given the size and breadth

of the Index, the Commission does not

believe that increasing the position and

exercise limits for the Index will

substantially increase the Index’s

susceptibility to manipulation or

increase the potential for disruption in

the markets for the underlying

securities.

In addition, the Exchange’s

surveillance program will continue to be

applicable to the trading of XOC options

and should detect and deter any trading
2562 Federal Register / Vol. 61, No. 18 / Friday, January 26, 1996 / Notices

22See also supra notes 14–15.

23 15 U.S.C. § 78s(b)(2) (1988).

24 17 CFR 200.30–3(a)(12) (1994).

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

2 17 CFR 240.19b–4.

3The Exchange amended the proposed rule

change to indicate that the Index will be treated as

a narrow based index. See Letter from Nandita

Yagnik, New Product Development, Phlx, to John

Ayanian, Attorney, Office of Market Supervision

(‘‘OMS’’), Division of Market Regulation (‘‘Market

Regulation’’), Commission, dated December 27,

1995 (‘‘Amendment No. 1’’).

4European-style options can be exercised only

during a specific time period prior to expiration of

the options.

5The components of the Index are: Amgen, Inc.;

Applied Materials; Bay Networks, Inc.; CISCO

Systems; Intel Corp.; Microsoft Corp.; MCI

Communications; Oracle Corp.; Sun Microsystems;

and Tele Communications, Inc.

abuses arising from the Index’s

increased position and exercise limits.

Lastly, the Exchange submitted data

comparing the Index to several other

broad-based indexes, including the

CBOE’s Nasdaq 100 Index, which is

comprised of OTC stocks similar to

those companies in the XOC.22 The

Commission believes that the

comparative data confirms that the

proposed increase in the Index’s

position and exercise limits to 25,000

contracts are comparable to those of

similar indexes which trade on other

options exchanges.

IV. Conclusion

For the foregoing reasons, the

Commission finds that the Phlx’s

proposal to increase the position and

exercise limits of the Index from 17,000

to 25,000 contracts is consistent with

the requirements of the Act and the

rules and regulations thereunder. In

addition, the Commission notes that the

change in position and exercise limits

on the XOC does not become effective

until after the expiration of the June

1996 option series.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,23 that the

proposed rule change (SR–Phlx–95–38)

is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.24

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–1363 Filed 1–25–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36744; File No. SR–Phlx–

95–92]

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 OTC Industrial

Average Index

January 19, 1996.

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 December

21, 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 29, 1995, the Exchange

filed with the Commission Amendment

No. 1 to the proposed rule change.3 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

The Exchange proposes to list and

trade options on the Phlx OTC

Industrial Average Index (‘‘OTC

Industrial Index’’ or ‘‘Index’’), a price

weighted index developed by the Phlx

composed of ten of the largest stocks, by

capitalization, traded through the

National Association of Securities

Dealers Automated Quotations system

and are reported national market system

securities (‘‘NASDAQ/NMS’’). 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

OTC Industrial Average Index which is

composed of ten of the largest

capitalized common stock issues traded

through NASDAQ/NMS representing

diversified industries including

Telecommunications, Pharmacetuicals,

Semiconductors, and Data Processing.5

The Phlx believes there are numerous

benefits to listing the OTC Industrial

Index options. First, the Exchange

believes that the OTC Industrial Index

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 most

important and heavily traded

companies. These stocks are frequently

found in investor and trader portfolios

alike. Second, because the OTC

Industrial 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. Third, the Exchange does not

believe that the OTC Industrial Index

will be susceptible to manipulation

because the stocks comprising the OTC

Industrial Index are some of the largest

and most widely held common stocks.

Furthermore, all of the component

stocks in the Index are options eligible

and have overlying options currently

trading.

The formula for calculating the OTC

Industrial Index is as follows:

Index Value

SP = the stock price of each component.

= + + + ⋅⋅⋅⋅⋅ +×

SP SP SP SP

divisor

1 2 3 13 100