32876 Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Notices

8The PSE has represented that the restriction

applies to both initial allocations and allocations

available as a result of subsequent reallocations.

Furthermore, it also would apply in situations

where two specialists desire to ‘‘swap’’ issues with

each other . See Letter from Michael Pierson, Senior

Attorney, PSE, to John Kroeper, Attorney, SEC,

dated June 7, 1996 (‘‘PSE Letter’’).

9 In the PSE Letter the Exchange gave the

following, non-definitive, examples of ‘‘mitigating

circumstances’’ that have been accepted by the EAC

in the past two years: i) extensive systems problems

existed that clearly were beyond the specialist’s

control; ii) a specialist was able to show that, of the

trades covered in a specialist evaluation, the

percentage of trades involving interaction with a

broker was very low, and undue weight therefore

was placed on the Questionnaire Survey; iii) a

specialist’s financial backer withdrew mid-quarter,

having a negative impact on the specialist’s

performance during that quarter; and iv) the

specialist’s overall score on the quarterly evaluation

(as opposed to the specialist’s ranking) was above

80%. The Exchange further represented that based

on past EAC decisions, relief by mitigation is the

exception, not the rule. See PSE Letter, supra note

8.

10Cf. Securities Exchange Act Release NO. 31539

(November 30, 1992), 57 FR 57851 (December 7,

1992) (File No. SR–PSE–92–32). This order

approved, among other things, the addition of

Commentary .03 to PSE Rule 5.36(d), which

precludes a specialist whose specialist ranking falls

in the bottom 10% of his or her Floor from acting

as an alternate specialist until his or her ranking

raises above the bottom 10%, unless the EAC

determines otherwise.

11 15 U.S.C. 78f(b)(5).

12 15 U.S.C. 78k(b).

13 17 CFR 240.11b–1.

14Rule 11b–1, 17 CFR 240.11b–1; PSE Rules

5.29(f).

15See PSE Rule 5.36(d), Commentary .03. As

discussed previously, under PSE Rule 5.37 the

exchange has the ability to take more significant

action against any specialist who is ranked in the

bottom 10% in any two out of four consecutive

evaluations. See PSE Rule 5.37(j).

16See PSE Letter, supra note 8.

17 15 U.S.C. 78s(b)(2).

18 17 CFR 200.30–3(a)(12).

The Exchange is now proposing to

adopt a rule providing that any

registered specialist who fails into the

bottom 10% of all registered specialists

on his trading floor as determined by

the overall evaluation scores received by

each specialist in any one quarterly

evaluation shall not be eligible for new

allocations until such ranking rises

above the bottom 10%.8 However, the

proposal also provides that the EAC

may make exceptions if there are

sufficient mitigating circumstances.9

At the PSE’s specialist evaluation

results and overall rankings are reported

in the quarter following the quarter of

the evaluation, e.g., the results of the

fourth quarter of 1995 are reported in

the first quarter of 1996. Accordingly, a

specialist who was in the bottom 10%

for the fourth quarter of 1995 will not

be eligible for new allocations of stocks

until, at the earliest, the second quarter

of 1996, when the results from the first

quarter of 1996 are reported.

The Exchange believes that the

restriction on new allocations is an

effective tool in encouraging specialists

to improve their performance, and

thereby to improve their evaluation

scores.10

The Commission finds that the PSE’s

proposal to codify its policy that a

specialist whose quarterly evaluation

score falls in the bottom 10% of

registered specialists on his or her

trading floor shall not be eligible for any

allocations of stock until such specialist

is no longer in the bottom 10% is

consistent with the requirements of

Sections 6 and 11 of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange. Specifically, the Commission

finds that the proposed rule change is

consistent with the Section 6(b)(5) 11

requirement that the rules of an

exchange be designed to promote just

and equitable principles of trade, to

remove impediments to and perfect the

mechanism of a free and open market

and a national market system, and, in

general, to protect investors and the

public interest. Further, the Commission

finds that the proposal is consistent

with Section 11(b) of the Act 12 and Rule

11b–1 thereunder 13 which allow

national securities exchanges to

promulgate rules relating to specialists

in order to maintain fair and orderly

markets and to remove impediments to

and perfect the mechanism of a national

market system. For the reasons set forth

below, the Commission believes that the

proposal should encourage improved

specialist performance, consistent with

the protection of investors and the

public interest.

Specialists play a crucial role in

providing stability, liquidity, and

continuity to the trading of stocks.

Among the obligations imposed upon

specialists by the Exchange, and by the

Act and the rules promulgated

thereunder, is the maintenance of fair

and orderly markets in their designated

securities.14 To ensure that specialists

fulfill these obligations, the Commission

has encouraged the Exchange to have an

effective program for evaluating

specialists’ performance. In this regard,

the Commission believes that stocks

should be allocated to those specialists

who are performing the best. Such stock

allocation policies encourage specialists

to strive for optimal market making

performance.

At present, the only incentive to

improved specialist performance found

in the PSE specialist performance

evaluation program that is applicable

beginning with a specialist’s first

quarter of ranking in the bottom 10% is

the restriction on acting as an alternate

specialist while the specialist remains

ranked in the bottom 10%.15 The

proposed rule change will add another

such incentive to the PSE rules by

codifying an existing policy of the

Exchange that restricts specialists whose

ranking falls in the bottom 10% of

specialists on his or her floor from

eligibility for any allocations (i.e.,

allocations of new issues, reallocations

of existing issues, or swapping of issues

with other specialists) until such

specialist is no longer in the bottom

10%.

The Commission believes that the

codification of this policy into the PSE

rules will be an effective and

appropriate means by which to

encourage improved specialist

performance. As a specialist’s

profitability is directly related to the

stocks he or she is allocated, the

possibility of a restriction on allocations

will provide a strong incentive to PSE

specialists to remain out of the bottom

10%. This should translate into

improved market making performance

by specialists, thereby benefitting

investors. Moreover, the imposition of

the restriction on allocations to

specialists in the bottom 10% should

increase the likelihood that stocks are

allocated to specialists who will make

the best markets.

Finally, the Commission notes that

the EAC retains the ability to allow

specialists whose scores are in the

bottom 10% in any quarterly evaluation

to continue receiving allocations if it

finds that sufficient ‘‘mitigating

circumstances’’ are present. While the

Exchange has represented that relief

from the restriction by mitigation is the

exception 16 and the Commission

recognizes the need for the EAC to

retain the discretion to refrain from

imposing this restriction in appropriate

instances, the Commission expects that

findings by the EAC that ‘‘mitigating

circumstances’’ are present will not

become routine, but will remain the

exception and be made only when

appropriately warranted.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,17 that the

proposed rule change (SR–PSE–96–13)

is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.18

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16166 Filed 6–24–96; 8:45 am]

BILLING CODE 8010–01–M
Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Notices 32877

1 15 U.S.C. § 78s(b)(1) (1988).

2 17 CFR 240.19b–4.

3The Exchange notes that with respect to index

option contracts, clearing members are also

required to follow the procedures of the Options

Clearing Corporation (‘‘OCC’’) for tendering exercise

notices. Exercise notices are the exercise

instructions required by OCC and are distinct from

exercise advices which are required by Exchange

rules.

4See Securities Exchange Act Release No. 37077

(April 5, 1996), 61 FR 16156 (April 11, 1996) (File

No. SR–Phlx–95–86). In this regard, the Exchange

has attempted to create a level playing field among

option investors by maintaining a cut-off time to

ensure that all exercise decisions occur promptly

after the close of trading. Consequently, to prevent

fraud and unfairness, a long option holder is

prohibited from exercising index options on nonexpiration days based on information obtained after

the cut-off.

5See Securities Exchange Act Release No. 36903

(February 28, 1996), 61 FR 9001 (March 6, 1996)

(File No. SR–Phlx–96–01).

6See Exchange Rule 970.

7Advice G–1 states that the fine schedule

provides sanctions for infractions of the index

option Exercise Advice Form procedures which are

minor in nature. Any violation of the procedure

which has been deemed serious by the Phlx will be

referred directly to the Exchange’s Business

Conduct Committee where stronger sanctions may

result. The Phlx notes, however, that this language

does not affect the other floor procedure advices

administered pursuant to the plan which do not

specifically contain this statement; infractions cited

pursuant to the plan are minor in nature regardless

of whether this specific language was added to the

advice.

8See, e.g., Advice F–15 which pertains to the

Exchange’s position and exercise limits.

[Release No. 34–37321; File No. SR–Phlx–

96–21]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Philadelphia Stock Exchange, Inc.,

Relating to Index Option Exercise

Advices

June 18, 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 June 7,

1996, 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 selfregulatory organization. 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 Phlx, pursuant to Rule 19b–4 of

the Act, proposes to amend Exchange

Rule 1042A, Exercise of Option

Contracts, and Floor Procedure Advice

(‘‘Advice’’) G–1, to be retitled Index

Option Exercise Advice Forms, by

requiring an index option exercise

advice form for all non-expiration

exercises. In this manner, the Exchange

will eliminate the rule’s current 25

contract threshold.

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

1. Purpose

Exchange Rule 1042A and Advice G–

1 govern the exercise of index options.3

Specifically, Exchange Rule 1042A(a)(i)

requires that a memorandum to exercise

any American-style index option must

be received or prepared by the Phlx

member organization no later than 4:30

p.m. on the day of exercise.4 In

addition, Exchange Rule 1042A(a)(ii)

and Advice G–1 require the submission

of an exercise advice form to the

Exchange when exercising 25 or more

American-style index option contracts.

Pursuant to Exchange Rule 1042A(b),

however, these requirements are not

applicable on the last business day

before expiration.5 The above

requirements are also not applicable to

European-style index options which, by

definition, cannot be exercised prior to

expiration. Lastly, the Exchange notes

that the procedures for exercising equity

option contracts, contained in Exchange

Rule 1042, are not affected by this rule

proposal.

As stated above, the Phlx proposes to

amend Exchange Rule 1042A and

Advice G–1 by requiring the submission

of an index option exercise advice form

for all non-expiration exercises. In this

manner, the Exchange is eliminating the

rule’s current 25 contract threshold.

According to the Phlx, the purpose of

this change is to enhance surveillance

efforts in determining compliance with

the exercise cut-off time. Currently, the

submission of an exercise advice form

where 25 or more contracts are

exercised creates an audit trail for the

Exchange to examine when ascertaining

compliance with the exercise cut-off

time. Thus, by eliminating the 25

contract threshold, all non-expiration

exercises will require the submission of

an exercise advice form. By providing a

more complete audit trail for smaller

exercises, the Phlx believes that its

surveillance efforts will be enhanced.

The Exchange also believes that

eliminating the 25 contract threshold

should prevent the confusion associated

with having to calculate the number of

index option contracts being exercised

for each Phlx index as exercise advices

will be required for all non-expiration

exercises. In addition, the Exchange

notes that the requirement of Exchange

Rule 1042A(a)(i) to prepare a

memorandum to exercise pertains to all

non-expiration exercises, not just to

those over 25 contracts. Thus, according

to the Phlx, because member

organizations are already preparing such

memoranda, the additional preparation

of an advice form does not impose a

substantial burden.

The Phlx notes that because Advice

G–1 is based on Exchange Rule 1042A

and contains certain pertinent

provisions of the rule for easy reference

on the trading floor, specific reference to

Exchange Rule 1042A is proposed to be

added to Advice G–1.

The Phlx, in administering advices

such as Advice G–1 as part of its minor

rule violation enforcement and

reporting plan (‘‘minor rule plan’’),6

understands that infractions cited

pursuant to the plan are minor in

nature. Thus, in order to bolster the

distinction between minor and serious

violations, the Phlx proposes that

Advice G–1 expressly state that it is

only intended to cover minor

infractions.7 At the same time, however,

the Exchange notes that it does not

believe that including certain provisions

of Exchange Rule 1042A into Advice G–

1 deems all violations of Advice G–1 as

minor. Exchange Rule 1042A was

intended to govern exercise

memorandum and advice procedures in

order to prevent abuses and fraudulent

activity; incorporating part of the rule

into an advice does not diminish this

critical purpose. Rather, as with many

other important, substantive provisions

in Exchange rules that are codified into

Advices,8 this system merely allows for

the efficient handling of minor

violations.

2. Statutory Basis

The Phlx believes that the proposed

rule change is consistent with Section

6(b) of the Act in general, and with
32878 Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Notices

9 15 U.S.C. § 78f(b)(5)(1988).

10 17 CFR 200.30–3(a)(12).

1 15 .S.C. § 78s(b)(1) (1988).

2 17 CFR 240.19b-4 (1994).

3Position limits impose a ceiling on the number

of option contracts which an investor or group of

investors acting in concert may hold or write in

each class of options on the same side of the market

(i.e., aggregating long calls and short puts or long

puts and short calls). Exercise limits prohibit an

investor or group of investors acting in concern

from exercising more than a specified number of

puts or calls in a particular class of options within

five consecutive business days.

4See Securities Exchange Act Release No. 36976

(March 14, 1996), 61 FR 11668 (March 21, 1996).

5The Exchange notes that is adopting the

language ‘‘two times above the limit’’ to signify ‘‘in

addition to’’ the current position limit. For instance,

if the position limit for a market index option is

25,000 contracts, an additional 50,000 contracts

under this proposal would be permitted, for a total

of 75,000 contracts. This language parallels a recent

change by another exchange. See Securities

Exchange Act Release No. 36609 (December 20,

1995), 60 FR 67002 (December 27, 1995) (notice of

File No. SR–CBOE–95–68).

6See Phlx Rule 1001, Commentary .07. See also

Securities Exchange Act Release No. 35738 (May

18, 1995), 60 FR 27573 (May 24, 1995) (order

approving permanent hedge exemption pilot

programs) (File Nos. SR–Phlx–95–10, SR–Amex–

95–13, SR–CBOE–95–13, SR–NYSE–95–04, and

SR–PSE–95–05).

7See, e.g., CBOE Rule 24.4 and the Interpretations

and Policies thereunder, and Commentary .01 to

Amex Rule 904C.

8The Exchange permits the use of convertible

securities in its equity option hedge exemption as

long as such securities are immediately or readily

convertible into the underlying stock. See Securities

Exchange Act Release No. 32174 (April 20, 1993),

58 FR 25687 (April 27, 1993) (order approving file

No. SR–Phlx-92–22). Similarly, other options

exchange permit the use of convertible securities

with respect to broad-based index option hedge

exemptions.

9Under Phlx Rule 1001A(a), the Value Line

Composite Index (‘‘VLE’’) the U.S. Top 100 Index

(‘‘TPX’’), and the National Over-the-Counter Index

(‘‘XOC’’) each have a position limit of 25,000

contracts, of which no more than 15,000 contracts

can be in the nearest expiration month. The Phlx

notes that the Big Cap Index (‘‘MKT’’) is no longer

listed on the Exchange.

Section 6(b)(5) in particular,9 in that it

is designed to prevent fraudulent and

manipulative acts and practices, to

foster cooperation and coordination

with persons engaged in regulating,

clearing, settling, processing

information with respect to, and

facilitating transactions in, securities as

well as to protect investors and the

public interest, by bolstering the

exercise advice requirement to include

all non-expiration exercises, not just

exercises of 25 or more contracts.

Specifically, the Phlx believes that

requiring exercise advices for all

American-style index options exercised

prior to expiration should enhance

surveillance efforts regarding

compliance with the exercise cut-off

time by providing a more complete

audit trail.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The self-regulatory organization does

not believe that the proposed rule

change will impose any 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 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 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 the 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. § 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 also will be available for

inspection and copying at the principal

office of the self-regulatory organization.

All submissions should refer to File No.

SR–Phlx–96–21 and should be

submitted by July 16, 1996.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.10

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16063 Filed 6–24–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37320; File No. SR–Phlx–

96–07]

Self-Regulatory Organizations; Order

Granting Approval to Proposed Rule

Change by the Philadelphia Stock

Exchange, Inc., to Adopt a Market

Index Option Hedge Exemption

June 18, 1996.

I. Introduction

On February 13, 1996, the

Philadelphia Stock Exchange, Inc.

(‘‘Phlox’’ 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 amend Commentary .01 to

Phlx Rule 1001A to establish a hedge

exemption from broad-based (Market)

index option position and exercise

limits.3

The proposed rule change appeared in

the Federal Register on March 21,

1996.4 No comments were received on

the proposed rule change. This order

approves the Phlx’s proposal.

II. Background and Description

The Phlx proposes to adopt a market

index option hedge exemption under

which broad-based index option

positions hedged in accordance with the

proposal would be entitled to exceed

existing position and exercise limits by

up to two-times about the limit.5

According to the Phlx, the purpose of

the proposal is to establish a provision

parallel to the hedge exemption of

equity options 6 as well as the broadbased index option hedge exemptions

that are in place at other option

exchanges.7

In order to qualify for the exemption,

the market index option position must

be hedged by share positions in at lease

20 stocks, or securities immediately or

readily convertible into such stock,8 in

four industry groups comprising the

index, of which no one component

security accounts for more than 15% for

the value of the portfolio hedging the

index option position. Under the

proposal, no position in a market index

option may exceed two-times the broadbased index option position specified in

Phlx Rule 1001A(a).9 In addition, the

underlying value of the option position

may not exceed the value of the