[Federal Register Volume 61, Number 158 (Wednesday, August 14, 1996)]
[Notices]
[Pages 42298-42299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20718]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37536; File No. SR-Phlx-96-17]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to Reducing
the Value of the Super Cap Index
August 7, 1996.
On May 24, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to reduce the value of its Super
Cap Index (``Index'') option (``HFX'') to one-third its present value
by tripling the divisor used in calculating the Index. The Index is
comprised of the top five options-eligible common stocks of U.S.
companies traded on the New York Stock Exchange, as measured by
capitalization. The other contract specifications for the HFX will
remain unchanged.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Notice of the proposal was published for comment and appeared in
the Federal Register on June 25, 1996.\3\ No comment letters were
received on the proposal. This order approves the Phlx's proposal.
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\3\ See Securities Exchange Act Release No. 37319 (June 18,
1996), 61 FR 32881 (June 25, 1996).
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I. Description of the Proposal
The Exchange began trading the HFX in November, 1995.\4\ The Index
was created with a value of 350 on its base date of May 31, 1995 which
rose to 430 on April 12, 1996. Thus, the value of the Index has
increased 23% in less than one year. Consequently, the premium for HFX
options has also risen.
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\4\ See Securities Exchange Act Release No. 36369 (October 13,
1995), 60 FR 54274 (October 20, 1995).
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As a result, the Exchange proposes to conduct a ``three-for-one
split'' of the Index, such that the value would be reduced to one-third
of its present value. In order to account for the split, the number of
HFX contracts will be tripled, such that for each HFX contract
currently held, the holder would receive three contracts at the reduced
value,
[[Page 42299]]
with a strike price one-third of the original strike price. For
instance, the holder of a HFX 420 call will receive three HFX 140
calls. In addition to the strike price being reduced to one-third, the
position and exercise limits applicable to the HFX will be tripled,
from 5500 contracts \5\ to 16,500 contracts, for a six month period
after the split is effectuated. After the initial six month period, the
position and exercise limits will be reduced to the original 5,500
contract limit. This procedure is similar to the one employed
respecting equity options where the underlying security is subject to a
two-for-one stock split, as well as previous reductions in the value of
other Phlx indexes.\6\ The trading symbol will remain HFX.
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\5\ See Phlx Rule 1001A(c).
\6\ See Securities Exchange Act Release Nos. 36577 (December 12,
1995), 60 FR 65705 (December 20, 1995) (reducing the value of the
Phlx National Over-the-Counter Index); and 35999 (July 20, 1995), 60
FR 38387 (July 26, 1995) (reducing the value of the Phlx
Semiconductor Index).
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In conjunction with the split, the Exchange will list strike prices
surrounding the new, lower index value, pursuant to Phlx Rule 1101A.
\7\ The Exchange will announce the effective date by way of Exchange
memoranda to the membership, also serving as notice of the strike price
and position limit changes.\8\
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\7\ Specifically, because the Index value would be less than
500, the applicable strike price interval would be $5 in the first
four months and $25 in the fifth month and the long-term options.
See Rule 1101A(a).
\8\ See note 10, infra.
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The Phlx states that the purpose of the proposal is to attract
additional liquidity to the product in those series that public
customers are most interested in trading. For example, a near-term, at-
the-money call option series currently trades at approximately $1,150
per contract. The Exchange believes that certain investors and traders
currently may be impeded from trading at such levels. With the Index
split, that same option series (once adjusted), with all else remaining
equal, could trade at approximately $387 per contract. The Phlx
believes that a reduced premium value should encourage additional
investor interest.
The Exchange believes that Super Cap Index Options provide an
important opportunity for investors to hedge and speculate upon the
market risk associated with the underlying stocks. By reducing the
value of the Index, such investors will be able to utilize this trading
vehicle, while extending a smaller outlay of capital. The Exchange
believes that this, in turn, should attract additional investors and
create a more active and liquid trading environment.
II. Discussion
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) of the Act.\9\
Specifically, the Commission believes that reducing the value of the
Index will serve to promote the public interest and help remove
impediments to a free and open securities market, by providing a
broader range of investors with a means of hedging exposure to market
risk associated with securities representing the most highly
capitalized companies. Further, the Commission notes that reducing the
value of HFX options should help attract additional investors, thus
creating a more active and liquid trading market. The Commission notes
that the Phlx will be providing market participants with adequate prior
notice of the Index level change in order to avoid investor
confusion.\10\
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\9\ 15 U.S.C. 78f(b)(5).
\10\ The Phlx will be issuing two circulars to its membership
prior to the effective date of this change. The first circular will
advise the members generally of the reduction in value of the HFX
and the temporary increase in position and exercise limits. The
second circular, which will be issued within one week of the
effective date of the change, will also list specific strike prices
for the adjusted HFX options. Telephone Conversation between Terry
McClosky, Vice President, Regulatory Services, Phlx, and James T.
McHale, Attorney, Office of Market Supervision, Division of Market
Regulation, on August 7, 1996.
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The Commission also believes that the Phlx's position and exercise
limits and strike price adjustments are appropriate and consistent with
the Act. In this regard, the Commission notes that the position and
exercise limits and strike price adjustments are similar to the
approach used to adjust outstanding options on stocks that have
undergone a two-for-one stock split as well as reductions in value of
other indexes. \11\
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\11\ See note 6, supra.
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The Commission believes that tripling the Index's divisor will not
have an adverse market impact or make trading HFX options susceptible
to manipulation. After the split, the Index will continue to be
comprised of the same stocks with the same weightings and will be
calculated in the same manner (except for the change in divisor).
Finally, the Phlx's surveillance procedures will also remain the same.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-Phlx-96-17) is approved.
\12\ 15 U.C.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-20718 Filed 8-13-96; 8:45 am]
BILLING CODE 8010-01-M