[Federal Register Volume 59, Number 86 (Thursday, May 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10752]
[[Page Unknown]]
[Federal Register: May 5, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33973; File No. SR-Phlx-93-64]
Self Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 4 to the Proposed Rule Change by the Philadelphia Stock
Exchange, Inc., Relating to the Listing and Trading of Options on the
Bid Cap Index
April 28, 1994.
I. Introduction
On January 2, 1994, 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 provide for the listing and trading of options
on the Phlx Big Cap Index (``Big Cap Index'' or ``Index''). On January
5, 1994, January 25, 1994, January 28, 1994, and April 7, 1994, the
Exchange filed Amendment Nos. 1,\3\ 2,\4\ 3,\5\ and 4,\6\ respectively,
to this proposal.
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\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
\3\The Phlx amended the proposal to change the name of the index
from ``Nifty Fifty Index'' to ``The Big Cap Index.'' See Letter from
Michele R. Weisbaum, Associate General Counsel, Phlx, to Brad
Ritter, Office of Derivatives Regulation, Division, SEC, dated
January 5, 1994 (``Amendment No. 1'').
\4\The Phlx amended the proposal:
(1) To set the exercise prices at five point intervals instead
of 2\1/2\ point intervals; and
(2) To request accelerated approval of the proposed rule change.
See Letter from Michele R. Weisbaum, Associate General Counsel,
Phlx, to Richard Zack, Branch Chief, Office of Derivatives
Regulation, Division, SEC, dated January 25, 1994 (``Amendment
No.2'').
\5\The Phlx amended the proposal:
(1) To reflect the new ticker symbol as a result of Amendment
No. 1;
(2) To provide that the index will be updated during the trading
day at least once every 15 seconds, rather than once every minute;
(3) To specify that the expiration cycle applicable to options
on the Index will be three expiration months from the March, June,
September, December cycle plus two additional near-term months; and
(4) To clarify the Exchange's obligations with respect to
delisting and replacing components of the Index. See Letter from
Michele R. Weisbaum, Associate General Counsel, Phlx, to Richard
Zack, Branch Chief, Office of Derivatives Regulation, Division, SEC,
dated January 27, 1994 (``Amendement No. 3'').
\6\The Phlx amended its proposal:
(1) To clarify that all of the stocks comprising the Index are
options eligible and have overlying exchange traded options on them;
(2) To note that, if at any time less than 90 percent of the
component stocks in the Index, by weight, are eligible for exchange
options trading, or if the number of stocks in the Index ever
increases to more than 60 or decreases to less than 40, the Exchange
would submit a filing to the Commission pursuant to Rule 19b-4 under
the Act prior to opening any new series of options on the Index for
trading;
(3) To clarify that surveillance procedures currently used to
monitor trading in each of the Exchange's other index options also
will be used to monitor trading in options on the Index (which
procedures include having complete access to trading activity in the
underlying securities);
(4) To clarify that the Intermarket Surveillance Group
Agreement, dated July 14, 1983, as amended on January 29, 1990, will
be applicable to the trading of options on the Index;
(5) To confirm that the Index trading hours will be from 9:30
a.m. to 4:10 p.m.; and
(6) To amend the formula with which the current Index value will
be calculated. See Letter from Michele R. Weisbaum, Associate
General Counsel, Phlx, to Thomas McManus, Esq., Division of Market
Regulation (``Division''), SEC, dated April 7, 1994 (``Amendment No.
4'').
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The proposed rule change and Amendment Nos. 1, 2, and 3 thereto
were published for comment in the Federal Register on February 10,
1994.\7\ No comments were received on the proposed rule. This order
approves the proposal and its four amendments.
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\7\Securities Exchange Act Release No. 33579 (February 4, 1994),
59 FR 6320 (February 10, 1994).
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II. Description of Proposal
A. Composition of the Index
The Phlx proposes to list for trading options on the Big Cap Index,
a stock index to be calculated and maintained by the Phlx. The Index
will be composed of 50 of the largest and most widely-held U.S. common
stock issues representing a variety of industries, including, but not
limited to, technology, manufacturing, and the service industries, 49
of which are listed on the New York Stock Exchange (``NYSE''), and one
of which is listed on the Nasdaq National Market. The Phlx will use a
capitalization-weighted methodology to calculate the Index.\8\
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\8\See infra Section II.C., entitled ``Calculation of the
Index,'' for a description of this calculation method.
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As of December 1, 1993, the market capitalizations of the
individual stocks in the Index ranged from a high of $81.8 billion to a
low of $7.4 billion, with the mean and median being $25.6 billion and
$20.2 billion, respectively. The market capitalization of all the
stocks in the Index was $1.3 trillion. The total number of shares
outstanding for the stocks in the Index ranged from a high of 2.3
billion shares to a low of 1.03 million shares. In addition, the
average daily trading volume of the stocks in the Index, for the period
between June 1, 1992 and January 31, 1994, ranged from a high of
4,179,900 shares per day to a low of 241,900 shares per day, with a
mean of approximately 1,168,000 shares. For the same period, the
average monthly trading volume of the stocks in the Index ranged from a
high of 87,778,300 shares per month to a low of 5,081,800 shares per
month, with a mean of approximately 24,523,000 shares. Finally, no one
stock comprised more than 6.38 percent of the Index's total value and
the percentage weighting of the five largest issues in the Index
accounted for 27.62 percent of the Index's value. The percentage
weighting of the lowest weighted stock was 0.58 percent of the Index
and the percentage weighting of the five smallest issues in the Index
accounted for 3.05 percent of the Index's value.
B. Maintenance
The Index will be maintained by the Phlx. The Phlx will make
special adjustments to the securities comprising the Index to reflect
such events as stock splits or reverse splits, spinoffs, stock
dividends, reorganizations, recapitalizations, and similar events, upon
their occurrence. In accordance with Phlx Rule 1009A, if any change in
the nature of any stock in the Index that is caused by delisting,
merger, acquisition, or otherwise, occurs which would change the
overall market character of the Index, the Exchange will take
appropriate steps to delete this Index component stock from the Index.
Such Index component stock would be replaced by another Index component
stock which the Exchange in its discretion believes would be compatible
with the intended market character of the Index.
If at any time less than 90 percent of the component stocks in the
Index, by weight, are eligible for exchange options trading, or if the
number of stocks in the Index ever increases to more than 60 or
decreases to less than 40, the Exchange would submit a filing to the
Commission pursuant to Rule 19b-4 under the Act prior to opening any
new series of options on the Index for trading.
C. Calculation of the Index
The 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 of the securities in the Index. The value of the Index was set to
equal 200 on March 31, 1994. As of April 5, 1994, the Index value was
193.12. The formula for calculating the Index value is as follows:
TN05MY94.119
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 March 31, 1994), yielded an
Index value of 200
The Index divisor will be adjusted for changes in the
capitalization of any of the component securities resulting from
mergers, acquisitions, delistings, substitutions, and other like
corporate events. The formula for adjusting the divisor is as follows:
TN05MY94.120
Adjustments in the value of the Index which are necessitated by the
addition and/or deletion of an issue from the Index are made by adding
and/or subtracting the market value (price x shares outstanding) of
the relevant issues.
The Index value will be updated dynamically and disseminated at
least once every fifteen seconds during the trading day.\9\ 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
also will be available on broker/dealer interrogation devices to
subscribers of the option information.
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\9\To the extent that a component stock does not open for
trading on a particular trading day, or trading in that component
stock is halted during the course of a particular trading day, the
last reported sale price of such security will be used for purposes
of calculating the current Index value. Telephone conversation
between Michele R. Weisbaum, Associate General Counsel, Phlx, and
Thomas N. McManus, Division of Market Regulation, SEC, on April 26,
1994.
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The Index value, for purposes of settling outstanding Index options
contracts upon expiration, will be calculated based upon the regular
way opening sale prices for each of the Index's component stocks on the
last trading day prior to expiration. Once all of the component stocks
have opened, the value of the Index will be determined and that value
will be used as the final settlement value for expiring Index options
contracts. If any of the component stocks do not open for trading on
the last trading day before expiration, then the last reported sale
price of such security will be used in any case where that security
does not trade on that day.
D. Contract Specifications
the proposed options on the Index will be cash-settled, European-
style options.\10\ Standard options trading hours (9:30 a.m. to 4:10
p.m. New York time) will apply to the contracts. The Index multiplier
will be 100. Strike prices will be set at 5.0 point intervals in terms
of the current value of the Index.\11\
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\10\A European-style option can be exercised only during a
specified period before the option expires.
\11\Additional exercise prices will be added in accordance with
Phlx Rule 1101A(a).
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The Exchange 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 two additional
near-term months so that the three nearest term months always will be
available.
Index options will expire on the Saturday following the third
Friday of the expiration month. Since options on the Index will settle
based upon the opening prices of the component stocks on the last
trading day before expiration (normally a Friday), the last trading day
for an expiring Index option series will be the second to last business
day before expiration (normally a Thursday).
E. Position and Exercise Limits, Margin Requirements, and Trading Halts
Position limits for the Index options will be set at no more than
25,000 contracts on the same side of the market, provided that no more
than 15,000 of such contracts are in series in the nearest expiration
month.\12\ Exercise limits will be set at the same level as position
limits.\13\ Exchange rules applicable to options on the Big Cap Index
will be identical to the rules applicable to other broad-based index
options for purposes of trading rotations, halts, and suspensions,\14\
and margin treatment.\15\
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\12\See Phlx Rule 1001A(a)(i).
\13\See Phlx Rule 1002A.
\14\See Phlx Rule 1047A.
\15\See Phlx Rules 722 and 1000A.
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F. Surveillance
The Exchange will use the same surveillance procedures currently
utilized for each of the Exchange's other index options to monitor
trading in Big Cap Index options. These procedures include complete
access to trading activity in the underlying securities. Further, the
Intermarket Surveillance Group (``ISG'') Agreement, dated July 14,
1983, as amended on January 29, 1990, will be applicable to the trading
of options on the Index.\16\
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\16\The Exchange is a member of the ISG, which was formed on
July 14, 1983, among other things, to coordinate more effectively
surveillance and investigative information sharing arrangements in
the stock and options markets. See Intermarket Surveillance Group
Agreement, July 14, 1983. The most recent amendment to the ISG
Agreement, which incorporates the original agreement and all
amendments made thereafter, was signed by ISG members on January 29,
1990. See Second Amendment to the Intermarket Surveillance Group
Agreement, January 29, 1990. The Commission understands that the ISB
Agreement, as amended, covers investigations and inquiries regarding
trading activity in options on the Big Cap Index and the underlying
component securities.
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III. Commission Findings and Conclusions
The Commission has reviewed the proposal to list and trade options
on the Big Cap Index. As discussed below, the Commission believes that
the proposed rule change is consistent with the requirements of section
6(b)(5) of the Act and the rules and regulations thereunder applicable
to a national securities exchange. In particular, the Index is broad-
based, the proposed options are designed to reduce the potential for
manipulation, and the proposal to list and trade options on the Big Cap
Index is consistent with the Exchange's obligation to promote investor
protection.
The Commission finds that the trading of options on the Index will
permit investors to participate in the price movements of the 50
securities on which the Index is based. Further, trading of options on
the Index will allow investors holding positions in some or all of the
securities underlying the Index to hedge the risks associated with
their portfolios. Accordingly, the Commission believes the Big Cap
Index options will provide investors with an important trading and
hedging mechanism that should reflect accurately the overall movement
of 50 of the largest and most widely-held U.S. common stocks. By
broadening the hedging and investment opportunities of investors, the
Commission believes that the trading of Index options will serve to
protect investors, promote the public interest, and contribute to the
maintenance of fair and orderly markets.\17\
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\17\Pursuant to section 6(b)(5) of the Act, the Commission must
predicate approval of any new option or warrant proposal upon a
finding that the introduction of such new derivative instrument is
in the public interest. Such a finding would be difficult for a
derivative instrument that served no hedging or other economic
function, because any benefits that might be derived by market
participants likely would be outweighed by the potential for
manipulation, diminished public confidence in the integrity of the
markets, and other valid regulatory concerns. In this regard, the
trading of listed options on the Big Cap Index will provide
investors with a hedging vehicle that should reflect the overall
movement of the 50 component stocks.
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The trading of options on the Big Cap Index, however, raises
several concerns, namely issues related to index design, customer
protection, surveillance, and market impact. The Commission believes,
for the reasons discussed below, that the Exchange has addressed these
concerns adequately.
A. Index Design and Structure
The Commission finds that the Big Cap Index is a broad-based index,
and thus it is appropriate to permit Exchange rules applicable to the
trading of broad-based index options to apply to the Index options.
Specifically, the Commission believes the Index is broad-based because
it contains 50 actively-traded stocks representing 25 industry groups,
and thus reflects a substantial segment of the U.S. equities market.
The Commission also finds that the large capitalizations, liquid
markets, and relative weighings of the Index's component stocks
significantly minimize the potential for manipulation of the Index.
First, the Index represents and consists of the common stock values of
50 actively-traded U.S. companies. Second, as of December 1, 1993, no
one stock comprised more than 6.38 percent of the Index's total value
and the percentage weighting of the five largest issues in the Index
accounted for 27.62 percent of the Index's value. Third, the
overwhelming majority of the stocks that comprise the Index are
actively-traded, with a mean average daily trading volume and average
monthly trading volume of approximately 1,168.000 and 24,523,000
shares, respectively. Fourth, as of December 1, 1993, the market
capitalizations of the stocks in the Index were substantial, ranging
from a high of $81.8 billion to a low of $7.4 billion, with the mean
and median at $25.6 billion and $20.2 billion, respectively. Fifth, the
Index is comprised of stocks representing a diverse group of
industries, the most heavily represented by Index weight including
technology, manufacturing, and telecommunications industries. Sixth,
all of the component securities currently are eligible for options
trading.\18\ Finally, the Commission believes that, as discussed below,
existing mechanisms to monitor trading activity in those securities
will help deter as well as detect illegal trading activity involving
the index option.
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\18\The Exchange's option 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;
(c) Trading volume must have been at least 2.4 million shares
over the preceding twelve months; and
(4) The 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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B. Customer Protection
The Commission believes that a regulatory system designed to
protect public customers must be in place before the trading of
sophisticated financial instruments, such as options on the Big Cap
Index, can commence on a national securities exchange. The Commission
notes that the trading of standardized, exchange-traded options occurs
in an environment that is designed to ensure, among other things, that:
(1) The special risks of options are disclosed to public customers;
(2) Only investors capable of evaluating and bearing the risks of
options trading are engaged in such trading; and
(3) Special compliance procedures are applicable to options
accounts. Accordingly, because the Index options will be subject to the
same regulatory regime as the other standardized options currently
traded on the Phlx, the Commission believes that adequate safeguards
are in place to ensure the protection of investors in options in the
Big Cap Index.
C. Surveillance
The Commission generally believes that a surveillance-sharing
agreement between an exchange proposing to list a stock index
derivative and the exchanges trading the stocks underlying the
derivative product is an important measure for the surveillance of the
derivatives and underlying securities markets. Such agreements ensure
the availability of information necessary to detect and deter potential
manipulations and other trading abuses, thereby making the stock index
product less readily susceptible to manipulation.\19\ In this regard,
the NYSE and National Association of Securities Dealers, Inc., which
together serve as the primary markets for all of the Index component
stocks, are members of the ISG, which provides for the exchange of all
necessary surveillance information.\20\
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\19\See Securities Exchange Act Release No. 31243 (September 28,
1992), 57 FR 45849 (October 5, 1992)
\20\See n.16, supra.
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D. Market Impact
The Commission believes that the listing and trading on the Phlx of
options on the Big Cap Index will not have an adverse impact on the
underlying securities markets.\21\ First, as described above, the Index
is broad-based and comprised of 50 stocks with no one stock dominating
the Index. Second, as noted above, the stocks contained in the Index
have relatively large capitalizations and are relatively actively-
traded. Third, the 25,000 contract position and exercise limits, along
with the 15,000 contract telescoping requirement, will serve to
minimize potential manipulation and market impact concerns. Fourth, the
risk to investors of contra-party performance will be minimized because
the Index options will be issued and guaranteed by The Options Clearing
Corporation just like any other standardized option traded in the
United States. Fifth, existing Phlx stock index options rules and
surveillance procedures will apply to options on the Big Cap Index.
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\21\The Commission notes that, prior to listing Big Cap Index
options, the Exchange will be required to provide written
representations that both the Exchange and the Options Price
Reporting Authority have the necessary systems capacity to support
those new series of Big Cap options.
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Lastly, the Commission believes that settling expiring Index
options based on the opening prices of component securities is
reasonable and consistent with the Act. As noted in other contexts,
valuing expiring index options for exercise settlement purposes based
on the opening prices rather than closing prices may help reduce any
adverse effects on the securities underlying options on the Index.\22\
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\22\See Securities Exchange Act Release No. 30944 (July 21,
1992), 57 FR 33376 (July 28, 1992).
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E. Accelerated Approval of Amendment No. 4
The Commission finds good cause for approving Amendment No. 4 to
the proposed rule change prior to the thirtieth day after the date of
publication on notice of filing thereof in the Federal Register.
Amendment No. 4 helps to conform the proposal to the Phlx's existing
rules governing index options, clarifies certain characteristics of the
proposal that were omitted in prior filings, and amends the formula for
calculating the current Index value. All of these changes strengthen
the proposal and, accordingly, the Commission believes it is consistent
with section 6(b)(5) of the Act to approve Amendment No. 4 on an
accelerated basis.
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 4 to the proposed rule change.
Persons making written submissions should file six copies thereof with
the Secretary, Securities and Exchange Commission, 450 Fifth Street
NW., Washington DC 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 in the Commission's Public
Reference Section, 450 Fifth Street NW., Washington, DC. Copies of such
filing also will 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 May 26, 1994.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\23\ that the proposed rule change (File No. SR-Phlx-93-64), as,
amended, is approved contingent upon the Exchange's submission to the
Commission of adequate systems capacity representations.\24\
\23\15 U.S.C. 78s(b)(2) (1988).
\24\See n.21, supra.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\25\
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\25\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-10752 Filed 5-4-94; 8:45 am]
BILLING CODE 8010-01-M