[Federal Register Volume 59, Number 38 (Friday, February 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4253]
[[Page Unknown]]
[Federal Register: February 25, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33634; File No. SR-Phlx-93-07]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Approving and Notice of Filing and Order Granting Accelerated
Approval of Amendment No. 2 to a Proposed Rule Change Relating to an
Increase in Position and Exercise Limits for Options on the National
Over-The Counter Index
February 17, 1994.
On March 2, 1993, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
a proposal (1) to increase the position limits\3\ and exercise
limits\4\ for individual equity options, narrow-based options, and
options on the National Over-the-Counter Index (``XOC Index'' or
``Index''), and (2) to amend Commentaries .03 and .04 to Rule 1001 with
respect to the procedures applicable to specialists' requests for
position limit exemptions (``specialists' exemptions''). Notice of the
proposed rule change appeared in the Federal Register on May 21,
1993.\5\ No comments were received on the proposed rule change. On
December 3, 1993, the Commission granted partial approval of the
proposed rule change. Specifically, the Commission approved the
Exchange's proposal to increase the three-tiered position and exercise
limits: (1) For individual equity options to 4,500, 7,500, and 10,500
contracts depending on certain criteria related to the trading volume
of the underlying stock or a combination of both the trading volume and
the number of shares outstanding of the underlying stock; and (2) for
narrow-based stock index options to 5,500, 7,500, and 10,500 contracts
depending on the concentration of the stocks included in the index.\6\
In that approval order, the Commission deferred a decision on
increasing position and exercise limits for the XOC Index pending
further review.\7\ On February 8, 1994, the Exchange filed Amendment
No. 2 to the proposed rule change requesting that position and exercise
limits for the XOC Index be increased to 17,000 contracts instead of
15,000 contracts as originally proposed.\8\ This order approves the
Exchange's proposal, as amended.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1989).
\3\Position limits impose a ceiling on the number of options
contracts relating to an underlying instrument which an investor, or
group of investors acting in concert, may own or control.
\4\Exercise limits prohibit the exercise by an investor or group
of investors acting in concert of more than a specified number of
option contracts on a particular underlying security within five
consecutive business days.
\5\See Securities Exchange Act Release No. 32309 (May 14, 1993),
58 FR 29653 (May 21, 1993).
\6\See Securities Exchange Act Release No. 33288 (December 3,
1993), 58 FR 65221 (December 13, 1993).
\7\Id. at note 7. In addition, the Commission deferred
consideration of the Phlx's proposed amendments to Commentaries .03
and .04 to rule 1000.
\8\See Letter from William Uchimoto, General Counsel, Phlx, to
Sharon Lawson, Assistant Director, Office of Derivatives Regulation,
Division of Market Regulation, Commission, dated February 8, 1994
(``Amendment No. 2'').
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On May 17, 1985, the Commission approved an Exchange proposal to
list and trade options on the XOC Index.\9\ As subsequently amended,
the position limits and exercise limits for options on the Index are
currently set at 10,000 contracts on the same side of the market.\10\
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\9\See Securities Exchange Act Release No. 22044 (May 17, 1985),
50 FR 21532 (May 24, 1985).
\10\See Securities Exchange Act Release No. 25644 (May 3, 1988),
53 FR 16829 (May 11, 1988). See also Phlx Rule 1001A.
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The proposal would increase the position and exercise limits
available on the Index to 17,000 contracts on the same side of the
market.\11\ These proposed position limits are similar in terms of
aggregate dollar value with those that the Commission recently approved
for options on the broad-based NASDAQ 100 Index, which are listed for
trading by the Chicago Board Options Exchange, Inc.\12\
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\11\See Amendment No. 2, supra note 8.
\12\See Securities Exchange Act Release No. 33428 (January 5,
1994), 59 FR 1576 (January 11, 1994) (order approving the listing
and trading of options on the NASDAQ 100 Index). Specifically, as of
February 8, 1994, the maximum position limit of 25,000 contracts for
the NASDAQ 100 corresponded to an aggregate dollar value of $1.0037
billion, while the maximum proposed position limit for the XOC Index
corresponded to an aggregate dollar value of $1.0006 billion.
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The Exchange believes that the characteristics of the XOC Index and
the NASDAQ 100 Index are sufficiently similar to justify comparable
position and exercise limits for both indexes. Both indexes are
capitalization weighted, have a correlation rate of 98.72% (taken on an
annual basis for 1993), and are primarily comprised of highly
capitalized common stocks traded in the U.S. over-the-counter market.
The proposed amendments to Commentaries .03 and .04 to Rule 1001
would (1) transfer language from Commentary .03 dealing with
specialists' exemption to Commentary .04 which pertains specifically to
specialists, and (2) replace the requirement that specialists obtain
prior approval from the Exchange's Committee on Options for position
limit exemption with a requirement that specialists obtain approval
from two floor officials for such an exemption. The Exchange believes
these amendments are necessary in order to (1) eliminate possible
confusion by placing together Exchange position limit rules pertaining
to specialists, and (2) ensure that Phlx specialists are not at a
competitive disadvantage against specialists at other options
exchanges. Specifically, the Phlx represents that specialists at the
American Stock Exchange, Inc. (``Amex'') are able to obtain position
limits exemptions with the approval of a senior floor official.\13\ The
Phlx represents that having to obtain approval from the Committee on
Options for specialists' exemptions imposes a significant burden on
specialists because not all of the Committee members are present on the
Exchange floor during the trading day when the need for an exemption
arises.\14\ As a result, there can be significant delays before a
specialist exemption can be obtained which, the Exchange believes,
could result in lost business.\15\ The Phlx believes the proposed
amendments will eliminate these delays by allowing two floor officials
to grant a specialist exemption on-the-spot when necessary.The Exchange
also represents that the proposed procedure is identical to the
procedure already in place on the Exchange with respect to position
limit exemption requests by members and member organizations which has
not resulted in any abuses.\16\
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\13\See Amex Rule 904, Commentary .05.
\14\Telephone conversation between Edith Hallahan, Special
Counsel, Regulatory Services, Phlx, and Brad Ritter, Attorney,
Office of Derivatives Regulation, Division of Market Regulation,
Commission, on February 10, 1994.
\15\Id.
\16\Telephone conversation between Edith Hallahan, Special
Counsel, Regulatory Services, Phlx, and Brad Ritter, Attorney,
Office of Derivatives Regulation, Division of Market Regulation,
Commission, on February 10, 1994. See also, Phlx Rule, 1001,
Commentary .03.
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The Commission believes 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),\17\ in that it should
help 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.
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\17\15 U.S.C. 78f(b)(5) (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 markets by
institutions and other investors with 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 position limit of 17,000
contracts on the same side of the market could potentially increase the
depth and liquidity of the XOC market without significantly increasing
the concerns regarding intermarket manipulations or disruptions of the
markets for the options or the underlying securities. As previously
noted, markets that exhibit 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.\18\ In this regard, the
Commission notes that the Index is a broad-based index consisting of
100 domestic stocks from approximately thirty economic sectors. The
Exchange'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 volume.\19\ Accordingly, given
the size and breadth of the Index, the Commission does not believe that
increasing the position limits for the Index as proposed herein will
substantially increase the Index's susceptibility to manipulation or
increase the potential for disruption in the markets for the underlying
securities. In addition, the Exchange's surveillance program will
continue to be applicable and should detect and deter any trading
abuses arising from the increased XOC Index position and exercise
limits. Finally, the Commission notes that the proposed limits are
similar to those approved by the Commission in terms of aggregate
dollar value for options on the NASDAQ 100 traded on the CBOE,\20\
which is comparable in composition to the XOC Index.\21\
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\18\See, e.g., Securities Exchange Act Release No. 31330
(October 16, 1992), 57 FR 48408 (October 23, 1992) (``Exchange Act
Release No. 31330'').
\19\See Securities Exchange Act Release No. 22026 (May 8, 1985),
50 FR 20310 (May 15, 1985).
\20\See supra note 12.
\21\As of February 14, 1994, the XOC Index and the NASDAQ 100
Index contained 66 of the same component stocks.
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Amendments to Commentaries to Rule 1001
The Commission believes that the procedures proposed with respect
to specialists' exemptions are adequate to minimize any potential for
abuse. Specifically, a specialist exemption may not be granted
retroactively and an exemption usually will be granted only until the
nearest expiration. Additionally, the procedures proposed for obtaining
a specialist exemption are identical to the procedures currently used
by the Exchange for granting position limit exemptions to members and
member organizations, which the Exchange represents have not resulted
in any abuses.\22\ Finally, the Commission finds that the proposed
amendments to Commentaries .03 and .04 to Rule 1001 would conform the
Phlx rules with respect to specialists' exemptions to those previously
approved by the Commission for other options exchanges.\23\
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\22\See supra note 16.
\23\See supra, note 13.
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The Commission finds good cause for approving Amendment No. 2 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register.
Amendment No. 2 provides that the position and exercise limits for
options on the XOC Index will be 17,000 contracts instead of 15,000
contracts as originally proposed. The proposed position limits are
comparable to those that the Commission recently approved for options
on the NASDAQ 100 Index.\24\ In addition, the Commission received no
comments on the Exchange's original proposal to increase the position
limits on the XOC Index to 15,000 contracts. Accordingly, the
Commission believes it is consistent with section 6(b)(5) of the Act to
approve Amendment No. 2 to the Phlx's proposal on an accelerated basis.
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\24\The Commission notes that no comments were received by the
Commission with respect to the position limits which were approved
for options on the NASDAQ 100 Index.
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Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2 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 will also be available for inspection and copying at the
principal office of the Exchange. All submissions should refer to File
Number SR-Phlx-93-07 and should be submitted by March 18, 1994.
It is therefore ordered, Pursuant to section 19(b)(2) of the
Act,\25\ that the portions of the proposed rule change (File No. SR-
Phlx-93-07) proposing to increase the position and exercise limits for
options on the National Over-the-Counter Index from 10,000 contracts to
17,000 contracts and to amend the procedures for specialists to obtain
position limit exemptions, are approved.
\25\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
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\26\17 CFR 200.30-3(a)(12) (1993).
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Margaret M. McFarland,
Deputy Secretary.
[FR Doc. 94-4253 Filed 2-24-94; 8:45 am]
BILLING CODE 8010-01-M