[Federal Register Volume 61, Number 18 (Friday, January 26, 1996)]
[Notices]
[Pages 2559-2560]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1362]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36747; File No. SR-PHLX-95-87]

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to a Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc., Relating to Advice F-15 and the 
Expanded Equity Option Hedge Exemption
January 19, 1996.
    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 December 
7, 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 and II below, which Items have been prepared by the self-
regulatory organization. The Commission is approving this proposal on 
an accelerated basis.
I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change
    The PHLX proposes to amend paragraph (b) of Floor Procedure Advice 
(``Advice'') F-15, ``Minor Infractions of Position/Exercise Limits and 
Hedge Exemptions,'' to indicate that the maximum allowable position for 
each option contract ``hedged'' 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.\1\ The proposed 
amendment to Advice F-15 will make Advice F-15 consistent with a 
proposal approved previously by the Commission which expands the 
maximum allowable hedge exemption for equity options to three times the 
standard limit of the option.\2\
    \1\ 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. 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.
    \2\ See Securities Exchange Act Release No. 36409 (October 23, 
1996), 60 FR 55399 (October 31, 1995) (order approving File Nos. SR-
NYSE-95-31; SR-PSE-95-25; SR-Amex-95-42; and SR-PHLX-95-71) (``Hedge 
Exemption Order''). See also Securities Exchange Act Release No. 
36371 (October 13, 1995), 60 FR 54269 (October 20, 1995) (order 
approving File No. SR-CBOE-95-42).
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    The text of the proposal is available at the Office of the 
Secretary, the 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
    Recently, the Commission approved proposals by various options 
exchanges, including the PHLX, to create two additional tiers of equity 
option position and exercise limits and to expand the equity option 
hedge exemption from two times to three times the applicable position 
limit for the option.\3\ The PHLX's equity option hedge exemption, 
which is contained in Commentary .07 to PHLX Rule 1001, ``Position 
Limits,'' was adopted originally on a pilot basis, and recently was 
permanently approved by the Commission.\4\ The equity hedge exemption 
applies where each option contract is ``hedged'' by 100 shares of stock 
or securities convertible into such stock, (in the case of an adjusted 
option, the number of shares at option), as follows: (1) long call and 
short stock; (2) short call and long stock; (3) long put and long 
stock; and (4) short put and short stock.

    \3\ Id.
    \4\ See Securities Exchange Act Release No. 35738 (May 18, 
1995), 60 FR 27573 (May 24, 1995) (order approving File Nos. SR-
Amex-95-13; SR-CBOE-95-13; SR-NYSE-95-04; SR-PSE-95-05; and SR-PHLX-
95-10).
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    Advice F-15 was adopted in 1993.\5\ Paragraph (a) of Advice F-15 
provides for a fine for violations of the Exchange's position and 
exercise limits which do not exceed the position and exercise limits by 
more than 5%. Paragraph (b) of Advice F-15 governs the equity option 
hedge exemption, with paragraph (b)(1) requiring the filing of a hedge 
exemption report and paragraph (b)(ii) providing for a fine if an 
option position is not reduced when the stock side to a hedge exemption 
is decreased.

    \5\ Securities Exchange Act Release No. 32423 (June 7, 1993), 58 
FR 32976 (June 14, 1993) (order approving File No. SR-PHLX-92-21).
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    The PHLX proposes to amend Advice F-15(b) to reflect the recent 
expansion of the equity option hedge exemption,\6\ which was 
inadvertently omitted from the PHLX's proposal to expand the equity 
option hedge exemption. Specifically, the PHLX proposes to amend Advice 
F-15 to provide that the equity hedge exemption permits positions up to 
three times the applicable equity option position limit, rather than 
two times the applicable equity option position limit.

    \6\ See Hedge Exemption Order, supra note 2.
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    The PHLX notes that because Advice F-15 contains a fine schedule 
which is administered pursuant to the PHLX's minor rule violation 
enforcement and reporting plan (``Minor Rule Plan''),\7\ the proposal 
necessarily amends the Exchange's Minor Rule Plan. Since the equity 
option hedge exemption has already been expanded to three times the 
position limit,\8\ the PHLX believes that the proposal does not raise 
new regulatory issues; rather, the Exchange believes that the proposal 
enhances investors' hedging abilities by correcting Advice F-15 to 
correspond to PHLX Rule 1001, as amended by the Hedge Exemption Order.

    \7\ The PHLX's Minor Rule Plan, codified in PHLX Rule 970, 
``Floor Procedure Advices: Violations, Penalties, and Procedures,'' 
contains Advices with accompanying fine schedules. Pursuant to 
paragraph (c)(1) of Rule 19d-1 under the Act, a self-regulatory 
organization (``SRO'') is required to file promptly with the 
Commission notice of any ``final'' disciplinary action taken by the 
SRO. Pursuant to paragraph (c)(2) of Rule 19d-1, any disciplinary 
action taken by the SRO for violation of an SRO rule that has been 
designated a minor rule violation pursuant to the plan shall not be 
considered ``final'' for purposes of Section 19(d)(1) of the Act if 
the sanction imposed consists of a fine not exceeding $2500 and the 
sanctioned person has not sought an adjudication, including a 
hearing, or otherwise exhausted his or her administrative remedies. 
By deeming unadjudicated minor violations as not final, the 
Commission permits the SRO to report violations on a periodic 
(quarterly), as opposed to immediate, basis.
    \8\ See Hedge Exemption Order, supra note 2.
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    The PHLX believes that increasing the maximum levels of the 
automatic hedge exemption should provide greater depth and liquidity, 
and, hence, greater protection to investors against market declines. 
Because the proposal codifies the expanded exemption in Advice F-

[[Page 2560]]
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.

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

    \10\ The 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.
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    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.

    \11\ 15 U.S.C. Sec. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\

    \12\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-1362 Filed 1-25-96; 8:45 am]
BILLING CODE 8010-01-M