[Federal Register Volume 63, Number 242 (Thursday, December 17, 1998)]
[Notices]
[Pages 69704-69706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33361]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40757; File No. SR-Phlx-98-39]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. Relating to an Increase
in Position and Exercise Limits for Narrow-Based Index Options
December 7, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on September 3, 1998, 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 self-regulatory organization. Phlx filed an amendment to the
proposed rule change on September 28, 1998.\3\ The Commission is
publishing this notice to solicit
[[Page 69705]]
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter to Michael Walinskas, Deputy Associate Director,
Division of Market Regulation, Commission, from Nandita Yagnik,
Attorney, Phlx, dated September 25, 1998 (``Amendment No. 1'').
Amendment No. 1 clarified that the Exchange intended to propose a
tripling of the current position and exercise limits for narrow-
based index options, not a doubling of the limits as stated in the
original filing.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Phlx proposed to amend Phlx Rule 1001A(b)(1) by increasing narrow-
based (industry) index option position limits,\4\ which are subject to
a three-tier position limit determination. Specifically, the current
levels of 9,000, 12,000 and 15,000 contracts are proposed to be
increased to 27,000, 36,000 and 45,000 contracts--a tripling of the
current limits.
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\4\ Position limits impose a ceiling on the number of option
contracts in each class on the same side of the market (i.e.,
aggregating long calls and short puts or long puts and short calls)
that can be held or written by an investor or group of investors
acting in concert.
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Exchange exercise limits,\5\ which are contained in Phlx Rule
1002A, are established by reference to position limits, such that any
increase in position limits would also increase exercise limits.
Accordingly, the Phlx is proposing to increase its exercise limits to
correspond to the proposed increases in position limits.
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\5\ Exercise limits prohibit an investor or group of investors
acting in concert from exercising more than a specified number of
puts or calls in a particular class within five consecutive business
days.
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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
The purpose of the proposed rule change is to increase industry
index option position and exercise limits in order to attract
additional trading interest and, thus, promote depth and liquidity in
Phlx index options. The Exchange believes that the current limits
constrain certain investors from trading index options. Pursuant to
Rule 1001A, the three-tiered levels of position and exercise limits are
currently 9,000, 12,000 or 15,000 contracts. These position limits,
which are standard among all of the options exchanges respecting
narrow-based index options, are based on the degree of concentration of
a component stock of the index.\6\ For the reasons given below, the
Exchange proposes to increase these limits to 27,000, 36,000 or 45,000
contracts.
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\6\ Specifically, Rule 1001A(b)(1) currently provides the
following position limits for industry index options: (i) 9,000
contracts for an index where a single component stock accounted, on
average, for 30% or more of the index value during the 30-day period
immediately preceding the Exchange's semi-annual review of industry
index option position limits; (ii) 12,000 contracts for an index
where a single component stock accounted, on average, for 20% or
more of the index value or any five component stocks together
accounted, on average, for more than 50% of the index value but not
single component stock accounted, on average, for 30% or more of the
index value during the 30-day period immediately preceding the
Exchange's semi-annual review of industry index option position
limits; or (iii) 15,000 contracts where the conditions requiring a
limit of 9,000 or 12,000 contracts have not occurred.
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The Exchange believes that the proposed increase is appropriate at
this time, in light of the Exchange's nearly 15 years experience
trading index options. In 1983, the Gold/Silver Index, XAU, was the
first narrow-based index option to be traded on the Phlx, listed with a
position limit of 4,000 contracts.\7\ Since that time, the Exchange has
listed additional index options, many of which have been successful
products. Currently, the Phlx trades options on the following ten
narrow-based indexes, noting the current position limits:
\7\ Exchange Act Release No. 20437 (December 2, 1983)(SR-Phlx-
83-17).
(1) Gold/Silver Index (``XAU''): 9,000 contracts
(2) Utility Index (``UTY''): 15,000 contracts
(3) Phlx/KBW Bank Index (``BKX''): 15,000 contracts
(4) Phone Index (``PNX''): 12,000 contracts
(5) Semiconductor Index (``SOX''): 12,000 contracts
(6) Airline Sector Index (``PLN''): 15,000 contracts
(7) Forest and Paper (``FPP''): 15,000 contracts
(8) Box Maker Index (``BMX''): 9,000 contracts
(9) OTC Prime Index (``OTC''): 12,000 contracts
(10) Oil Service Index (``OSX''): 12,000 contracts
The market for index options has also evolved, as more investors
are familiar with the product and its uses.
The Exchange recognizes that the purposes of these limits are to
prevent manipulation and protect against disruption of the markets for
both the option as well as the underlying security. The Exchange has
considered the effects of increased position limits on the marketplace,
and believes that manipulation and disruption concerns are addressed by
a tripled position limit and are offset by the market need for the
increased limits. Specifically, the Phlx continues to monitor the
markets for evidence of manipulation or disruption caused by investors
with positions at or near current position or exercise limits; the new
limits will not diminish the surveillance function in this regard.
The current levels has been in place since October 1996,\8\ such
that a review of the current position limits is appropriate. The
Exchange believes that the proposed increases are reasonable. In prior
releases approving increased position limits, the Commission
acknowledged that a gradual, evolutionary approach has been adopted by
the Commission and the various options exchanges in increasing position
and exercise limits. In light of the nearly 2 years since limits were
changed, the Exchange believes that these increases are reasonable.\9\
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\8\ See Exchange Act Release No. 37863 (October 24, 1996) (SR-
Phlx-96-33). Previously, position limits were increased in 1983,
1993 and 1995.
\9\ The most recent position limit change in 1996 represented a
50% percent increase in the lowest tier from 6,000 to 9,000
contracts; a 33% increase in the middle tier from 9,000 to 12,000
contracts and a 25% increase in the highest tier from 12,000 to
15,000 contracts. In 1995, the changes represented a 9% increase in
the lowest tier from 5,500 to 6,000 contracts; a 20% increase from
7,500 to 9,000 contracts; and a 15% increase in the highest tier
from 10,500 to 12,000 contracts. In 1993, the changes resulted in
increases in 38% from 4,000 to 5,500 contracts; 25% from 6,000 to
7,500 contracts; and 31% from 8,000 to 10,500 contracts.
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The Phlx also believes that higher position limits would further
accommodate the hedging needs of Exchange market makers and
specialists, who are also restricted by current levels. The Exchange
continues to believe that increases are needed for traders and
investors. The Exchange has been requested by its members and
customers, who have repeatedly expressed that these limits hamper the
ability to execute investment strategies, to again propose an increase
in position limits. Such requests emphasize that institutional hedging
needs and trading objectives may exceed current limits, in view of the
large portfolios common to institutional trading and that certain sized
transactions are required to execute complicated, cross-market
strategies. Floor members have expressed the resulting deleterious
effect on index options trading in an exchange environment. Based on
such
[[Page 69706]]
member and customer requests, the Exchange has also realized that the
current position limit levels continue to discourage market
participation by large investors and the institutions that compete to
facilitate the trading interests of large investors. Accordingly, this
proposal aims to also accommodate the liquidity and hedging needs of
large investors and the facilitators of those investors.
Concurrent with the proposed increase to position limits, the
Exchange is also proposing a corresponding increase to industry index
option exercise limits. The Exchange believes that this increase is
necessary and appropriate for the same reasons as the rationale cited
herein for the proposed position limit increases. Furthermore, exercise
limits constrict trading strategies by preventing investors from
exercising positions larger than the limit within five consecutive
business days. The Exchange also notes that most of its index options
currently are European style, exercisable only during a specified
period at expiration, such that the manipulation and market disruption
concerns associated with large exercises will be limited.\10\
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\10\ The following index options are European style: UTY, BKX,
PLN, FPP, BMX, OTC, OSX and SOX (SOX have both European and American
style options).
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act \11\ in general, and in particular, with
Section 6(b)(5) in that it is designed to promote just and equitable
principles trade, prevent fraudulent and manipulative acts and
practices, as well as to protect investors and the public interest. The
Exchange believes that the proposed rule change should remove
impediments to and perfect the mechanism of a free and open market by
providing market opportunity to investors constricted by current
position limit level. The Phlx also believes that by stimulating market
participation and thereby increasing option market depth and liquidity,
the proposed rule change should promote just and equitable principles
of trade. At the same time, the Phlx believes that the proposed
position limits should continue to prevent fraudulent and manipulative
acts and practices as well as protect investors and the public interest
by limiting the ability to disrupt and manipulate the markets for
options as well as the underlying securities. The Exchange believes
that the proposal represents a balance between creating a disincentive
to manipulate or disrupt the marketplace consistent with the purposes
of such limits, and setting such limit so low so as to discourage
market participation or liquidity providing activity.
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\11\ 15 U.S.C. 78f(b).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believes 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 either solicited or received.
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 findings 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 person are invited to submit written date, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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 submissions, 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 of 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 Room. Copies of such filing will also be
available for inspection and copying at the principal office at the
Exchange. All submissions should refer to File No. SR-File-98-39 and
should be submitted by January 7, 1999.
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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-33361 Filed 12-16-98; 8:45 am]
BILLING CODE 8010-01-M