[Federal Register Volume 61, Number 18 (Friday, January 26, 1996)]
[Notices]
[Pages 2560-2562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1363]



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SECURITIES AND EXCHANGE COMMISSION
[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.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ Position 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).
    \4\ Exercise 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.
    \5\ The Index is a capitalization-weighted market index composed 
of the 100 largest capitalized stocks trading over-the-counter.
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    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.

    \6\ See Securities Exchange Act Release No. 36461 (November 6, 
1995), 60 FR 57257 (November 14, 1995).
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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\

    \7\ See 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).
    \8\ According 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.
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    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.

    \9\ See Securities Exchange Act Release No. 36577 (December 12, 
1995) (order approving File No. SR-Phlx-95-61).
    \10\ See 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).
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    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.

    \11\ This value of the Index was recorded on December 19, 1995.
    \12\ The 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 x 100 x 17,000=$720,800,000
    \13\ 424 x 100 x 25,000=$1,060,000,000
    \14\ These values were recorded on June 27, 1995:

    CBOE: OEX 520 x 100 x 25,000=$1,300,000,000
    CBOE: SPX 545 x 100 x 45,000=$2,452,500,000
    CBOE: RUT 281 x 100 x 50,000=$1,405,000,000
    CBOE: NDX  534 x 100 x 25,000=$1,335,000,000
    Amex: XMI 477 x 100 x 34,000=$1,621,800,000
    PSE: WSX 363 x 100 x 37,500=$1,361,250,000
    NYSE: NYA 292 x 100 x 45,000=$1,314,000,000

    \15\ VLE 518 x 100 x 25,000=$1,295,000,000
    TPX 482 x 100 x 25,000=$1,205,000,000
    \16\ See, 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.
    \17\ See, 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.
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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.

    \18\ 15 U.S.C. Sec. 78f(b) (1988).
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    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, low-priced 
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.

    \19\ The Commission again notes that the Exchange's proposal 
will not be implemented until after the June 1996 expiration.
    \20\ See, e.g., Securities Exchange Act Release No. 31330 
(October 16, 1992), 57 FR 48408 (October 23, 1992).
    \21\ See Securities Exchange Act Release No. 22026 (May 8, 
1985), 50 FR 20310 (May 15, 1985).
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    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 

[[Page 2562]]
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.

    \22\ See also supra notes 14-15.
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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.

    \23\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\

    \24\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-1363 Filed 1-25-96; 8:45 am]
BILLING CODE 8010-01-M