[Federal Register Volume 59, Number 9 (Thursday, January 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-822]
[[Page Unknown]]
[Federal Register: January 13, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33431; File No. SR-PSE-93-32]
Self-Regulatory Organizations; Filing of Proposed Rule Change by
the Pacific Stock Exchange, Inc. Relating to Listing and Trading
Options on the Interactive Communications Sector Index
January 5, 1994.
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 November
30, 1993, the Pacific Stock Exchange (``PSE'' 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 self-regulatory 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 PSE proposes to list for trading options on the Interactive
Communications Sector Index. The text of the proposed rule change is
available at the Office of the Secretary, PSE, 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 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 PSE 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
The Exchange proposes to trade options on the Interactive
Communications Sector Index (``Index''), a new stock index developed by
the Exchange based on various stocks in the interactive communications
industry that are traded on either the New York Stock Exchange, Inc.
(``NYSE''), the American Stock Exchange, Inc. (``Amex''), or are
national market system (``NMS'') securities traded through the
facilities of the National Association of Securities Dealers (``NASD'')
Automated Quotations System (``NASDAQ''). The Exchange also proposes to
list long-term options on the Index and on a reduced-value Index
(``Index LEAPS''), which will trade independent of and in addition to
regular Index options traded on the Exchange.
Composition of the Index
The Index contains securities of highly-capitalized companies in
the interactive communications industry. Currently, the Index is
comprised of 24 stocks from the following three categories: Content
providers (8 stocks);\1\ distribution networks (8 stocks);\2\ and
information processors (8 stocks).\3\ More specifically, the Index is
comprised of individual stocks from the following 15 industry
subgroups: Transaction services; filmed entertainment; programmers;
music, games & education; publishing; business information systems;
cable television operating companies; regional telephone companies;
long-distance telephone companies; wireless communications; computers;
consumer electronics; software; semiconductors; and communications
equipment.
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\1\These components of the Index are: Time Warner, Inc.; Walt
Disney Co.; turner Broadcasting System Inc. (Class B); QVC Network,
Inc.; Viacom, Inc. (Class B); Tribune Company; Electronic Arts,
Inc.; and Broderbund Software, Inc.
\2\These components of the Index are: Bell Atlantic Corp.;
BellSouth Corp.; U.S. West, Inc.; Motorola, Inc.; American Telephone
& Telegraph Co.; Comcast Corp.; Pacific Telesis Group; and Telephone
and Data Systems, Inc.
\3\These components of the Index are: DSC Communications Corp.;
Northern Telecom Limited; 3DO Co.; Apple Computer, Inc.; Silicon
Graphics, Inc.; General Instrument Corp.; Scientific-Atlanta, Inc.;
and Microsoft Corp.
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The 24 component stocks are listed for trading on the NYSE (13
stocks), the Amex (3 stocks),\4\ or are traded through NASDAQ (8
stocks).\5\ As of November 9, 1993, all of the component stocks in the
Index, with the exception of one component (comprising 4.2% of the
Index value) meet the Exchange's initial listing standards set forth in
PSE Rule 3.6.
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\4\All of the Amex components are listed pursuant to Amex's
Original Listing Requirements contained in Sections 101-145 of the
Amex Company Guide. Telephone conversation between Michael Pierson,
Senior Attorney, Market Regulations, PSE, and Brad Ritter, Attorney,
Office of Derivatives Regulation, Division of Market Regulation,
Commission, on January 5, 1994.
\5\Currently all of the NASDAQ issues included in the Index are
NMS securities.
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Index Calculation
The Index value is calculated using an ``equal-dollar weighting''
methodology designed to ensure that each of the component securities is
represented in approximately an ``equal'' dollar amount in the Index.
The Exchange believes that this method of calculation is important
since even among the largest companies in the interactive
communications industry there is a great disparity in market value. For
example, although the stocks included in the Index represent many of
the most highly capitalized companies in the interactive communications
industry, AT&T currently represents over 22% of the aggregate market
value of the Index. The Exchange believes that options on market-value
weighted indexes dominated by one component stock are less useful to
investors, since the index will tend to represent the one component and
not the target industry that the Index is designed to represent.
The following is a description of how the equal-dollar weighted
calculation method works. As of the market close on November 11, 1993,
a portfolio of interactive communications stocks was established
representing an investment of $41,667 in the stock (rounded to the
nearest whole share) of each of the companies in the Index. The value
of the Index equals the current market value of the sum of the assigned
number of shares of each of the stocks in the Index portfolio divided
by the Index divisor. Each quarter, following the close of trading on
the third Friday of January, April, July, and October, the Index
portfolio will be adjusted by changing the number of whole shares of
each component stock so that each company is again represented in
``equal'' dollar amounts. The Exchange has chosen to rebalance the
Index following the close of trading on the quarterly expiration cycle
because it allows an option contract to be held for up to three months
without a change in the Index portfolio while at the same time,
maintaining the equal-dollar weighting feature of the Index. If
necessary, a divisor adjustment is made when the rebalancing occurs to
ensure continuity of the Index's value. The newly adjusted portfolio
then becomes the basis for the Index's value on the first trading day
following the quarterly adjustment.
The Exchange does not believe that there will be investor confusion
regarding the adjustments since they will be done on a regular and
timely basis, with adequate notice given. Specifically, the Exchange
represents that an information circular will be distributed to all
Exchange members notifying them of the quarterly changes. This circular
will also be sent by facsimile to the Exchange's contacts at the major
options firms, mailed to recipients of the Exchange's options-related
information circulars, and made available to subscribers of the Options
News Network. In addition, the Exchange will include in its promotional
and marketing materials for the Index a description of the equal-dollar
weighting methodology.
As noted above, the number of shares of each component stock in the
Index portfolio remains fixed between quarterly reviews except in the
event of certain types of corporate actions such as the payment of a
dividend (other than an ordinary cash dividend), stock distribution,
stock split, reverse stock split, rights offering, distribution,
reorganization, recapitalization, or similar event with respect to the
component stocks. In a merger or consolidation of an issuer of a
component stock, if the stock remains in the Index, the number of
shares of that security in the portfolio may be adjusted, to the
nearest whole share, to maintain the component's relative weight in the
Index at the level immediately prior to the merger or consolidation. In
the event of a stock replacement, the average dollar value of the
remaining portfolio components will be calculated and that amount
invested in the stock of the new component, to the nearest whole share.
In all cases, the divisor will be adjusted, if necessary, to ensure
Index continuity.
The Exchange or its designee will calculate and maintain the Index,
and may at any time or from time to time substitute stocks, or adjust
the number of stocks included in the Index, based on changing
conditions in the interactive communications industry. However, in the
event the Exchange determines to increase the number of index component
stocks to greater than thirty-two or reduce the number of component
stocks to fewer than sixteen, the Exchange will give prior written
notice to the Commission.\6\ In selecting securities to be included in
the Index, the Exchange will be guided by a number of factors including
market value of outstanding shares and trading activity. The
eligibility standards for Index components are described below.
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\6\Such a change in the number of components in the Index may
warrant the submission of a rule filing pursuant to Section 19 of
the Act of Rule 19b-4 thereunder.
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The value of the Index will be calculated every fifteen seconds
throughout the trading day by Bridge Data Services and will be
disseminated by the Options Price Reporting Authority to wire services,
quote vendors and the financial media.
Expiration and Settlement
The proposed options on the Index will be European-style\7\ and
cash-settled. The Exchange's standard options trading hours, from 6:30
a.m. to 1:15 p.m. Eastern Standard Time, will apply. The options on the
Index will expire on the Saturday (``Expiration Saturday'') following
the third Friday of the expiration month. The last trading day in an
expiring series will normally be the second to the last business day
preceding Expiration Saturday (normally a Thursday), with trading to
cease at the close of business on such day.
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\7\European-style options can only be exercised during a
specified period before the options expire.
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The Exchange plans to list option series with expirations in the
three near-term calendar months and in the two additional calendar
months in the January cycle. In addition, the Exchange proposes to list
longer term option series having up to thirty-six months to expiration.
In lieu of such long-term options on a full-value Index level, the
Exchange also proposes to have the option of listing long-term,
reduced-value put and call options based on one-tenth (\1/10\th) the
Index's full value. In either event, the interval between expiration
months for either a full-value or reduced-value long-term option would
not be less than six months. The trading of any long-term options would
be subject to the same rules which govern the trading of all the
Exchange's index options, including sales practice rules, margin
requirements and floor trading procedures and all options will have
European-style exercise. Position limits on reduced-value long-term
Index options would be ten times the position limits for regular (full
value) Index options and would be aggregated on a one for one basis
with such options (for example, if the position limit for full value
options is 10,500 contracts on the same side of the market, then the
position limit for the reduced-value options will be 105,000 contracts
on the same side of the market).
The Index value for purposes of settling the Index options will be
calculated based upon the opening prices of the component securities
pursuant to the normal opening procedures of the primary exchange where
the securities are traded on the Friday before Expiration Saturday. In
the case of securities traded through the NASDAQ system, the first
reported sale price on the Friday before Expiration Saturday will be
used. As trading begins in each of the Index's component securities,
its opening sale price is captured for use in the calculation. Once all
of the component stocks have opened, the Index settlement value is then
determined. If any of the component stocks do not open for trading on
the last trading day before Expiration Saturday, then the prior day's
last sale price is used in the calculation.
Eligibility Standards for Index Components
In choosing among interactive communications industry stocks for
inclusion in the Index, the Exchange will focus only on stocks that are
traded on the NYSE, the Amex,\8\ or are NMS securities traded through
the NASDAQ. In addition, the Exchange intends to select stocks that:
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\8\Securities listed on the Amex will only be considered for
inclusion in the Index if those securities satisfy the Original
Listing Requirements set forth in Sections 101-145 of the Amex
Company Guide. Telephone conversation between Michael Pierson,
Senior Attorney, Market Regulation, PSE, and Brad Ritter, Attorney,
Office of Derivatives Regulation, Division of Market Regulation,
Commission, on January 5, 1994.
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(1) Have a minimum market value (in U.S. dollars of at least $75
million;\9\ and
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\9\In the case of ADRs, this represents market value as measured
by total world-wide shares outstanding.
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(2) Have an average monthly trading volume in U.S. markets over the
previous six month period of not less than one million shares (or
American Depository Receipts (``ADRs''\10\)).
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\10\An ADR is a negotiable receipt which is issued by a
depository, generally a bank, representing shares of a foreign
issuer that have been deposited and are held, on behalf of holders
of the ADRs, at a custodian bank in the foreign issuer's home
country.
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The Index is currently comprised of 24 component securities. Of the
components, 23 are eligible for, and are the subject of, standardized
options trading.\11\ However, to address concerns about the possibility
of manipulation of an index containing a large percentage of stocks
that do not meet the eligibility standards applicable to stocks
eligible for standardized options trading, at each quarterly
rebalancing, stocks that meet the then current criteria for
standardized options trading set forth in Exchange Rule 3.6 will be
required to account for at least 90% of the Index's numerical index
value.
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\11\3DO Co. is the only component of the Index not currently
eligible for standardized options trading.
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Exchange Rules Applicable to Stock Index Options
PSE Rule 7 will apply to the trading of options contracts based on
the Index. Surveillance procedures currently used to monitor trading in
the Exchange's other index options will also be used to monitor trading
in options on the Index. The Exchange proposes to list near-the-money
(i.e., within ten points above or below the current index value) option
series on the Index at 2\1/2\ point strike (exercise) price intervals
when the value of the Index is below 200 points.
Basis
The Exchange believes that the proposed rule change is consistent
with section 6 of the Act, in general, and furthers the objectives of
section 6(b)(5) of the Act, in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices and to promote
just and equitable principles of trade.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of 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 such 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, 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 will also be available for
inspection and copying at the principal office of the PSE. All
submissions should refer to File No. SR-PSE-93-32 and should be
submitted by February 3, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-822 Filed 1-12-94; 8:45 am]
BILLING CODE 8010-01-M