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 Certain Broad-Based Index Options

[Federal Register Volume 64, Number 63 (Friday, April 2, 1999)]
[Notices]
[Pages 16019-16021]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8146]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41216; File No. SR-Phlx-98-55]


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 Certain Broad-Based Index Options

March 26, 1999.
    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 December 21, 1998, the Philadelphia Stock 
Exchange, Inc. (``Phlx'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'' or ``SEC'') 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to amend Phlx Rule 1001A(a)(i)-(ii) by increasing 
broad-based (``market'') index option position limits on the Value Line 
Composite Index (``VLE''), the US Top 100 Index (``TPX''), and the 
National Over-the-Counter Index (``XOC'').\3\ Specifically, the current 
levels of 25,000 contracts total and 15,000 contracts in the nearest 
expiration month for the VLE and the TPX, and 25,000 contracts for the 
XOC, are proposed to be tripled to 75,000 contracts total and 45,000 
contracts in the nearest expiration month for VLE and TPX, and 75,000 
contracts for XOC.
---------------------------------------------------------------------------

    \3\ 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.
---------------------------------------------------------------------------

    Exchange exercise limits,\4\ which are expressed 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.
---------------------------------------------------------------------------

    \4\ 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.
---------------------------------------------------------------------------

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 position and 
exercise limits for the market index options currently traded on the 
Exchange in order to attract additional trading interest and, thus, 
promote depth and liquidity in Phlx market index options. The Exchange 
believes that the current limits constrain certain investors from 
trading index options. Pursuant to Rules 1001A and 1002A, the position 
and exercise limits for the VLE and TPX are 25,000 contracts with no 
more than 15,000 contracts expiring in the nearest expiration month. 
The position and exercise limits for the XOC is 25,000 contracts with 
no additional restrictions for the nearest expiration month. For the 
reasons given below, the Exchange proposes tripling the limits or the 
VLE and TPX to 75,000 contracts overall with no more than 45,000 
contracts expiring in the nearest expiration month. Further, the 
Exchange proposed to triple the limits for XOC to three times the 
current level, or 75,000 contracts.
    The Exchange believes that the proposed increase is appropriate at 
this time, in light of the Exchange's nearly 13 years experience 
trading market index options. In 1985, the National Over-the-Counter 
Index, XOC, was the first market index option to be traded on the 
Phlx.\5\ Since that time, the Exchange has listed additional market 
index options. Additionally, the market for index options has also 
evolved, as more investors are familiar with the product and it uses. 
Currently, the Phlx lists

[[Page 16020]]

options on the following three market indexes, noting the current 
position limits.\6\
---------------------------------------------------------------------------

    \5\ Exchange Act Release No. 22044 (May 17, 1985), 50 FR 21532 
(May 24, 1985) (order approving File No. SR-Phlx-84-28).
    \6\ Please note that the Big Cap Index is being removed from the 
text of both Rule 1001A as well as 1101A, in order to correct both 
rules to reflect its delisting.
---------------------------------------------------------------------------

    (1) US Top 100 Index (``TPX'') 25,000 contracts (no more than 
15,000 contracts can be in the nearest expiration month);
    (2) Value Line Composite Index (``VLE'') 25,000 contracts (no more 
than 15,000 contracts can be in the nearest expiration month); and
    (3) National Over-the-Counter Index (``XOC'') 25,000 contracts.
    The Exchange recognizes that the purposes of these limits are to 
prevent manipulation and to protect against disruption of the markets 
for both the option as well as the underlying securities. 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 limits 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 have been in place since October 1996,\7\ such 
that a review of the current position limits is appropriate. Position 
and exercise limits for the National Over-the-Counter Index were raised 
from 17,000 to 25,000 contracts or 47% in 1996. Position and exercise 
limits for the Value Line Composite Index were raised from 
approximately 13,000 contracts, based on a position limit based on 
monetary value, to 25,000 contracts or 92% in 1988. The US Top 100 
Index were created with limits of 25,000 contracts in 1995.
---------------------------------------------------------------------------

    \7\ See Exchange Act Release No. 36745 (January 19, 1996), 61 FR 
2561 (January 26, 1996) (SR-Phlx-95-38) (establishing XOC position 
and exercise limits); Exchange Act Release No. 35591 (April 11, 
1995), 60 FR 19423 (April 18, 1995) (SR-Phlx-95-07) (establishing 
TPX position and exercise limits); Exchange Act Release No. 25644 
(May 3, 1988) 53 FR 16829 (May 11, 1988) (SR-Phlx-88-06) 
(establishing VLE position and exercise limits).
---------------------------------------------------------------------------

    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 two 
years since limits were changed, the Exchange believes that these 
increases are reasonable. Recently, the options exchanges have filed 
similar proposals respecting equity options.\8\
---------------------------------------------------------------------------

    \8\ See Exchange Act Release No. 40172 (July 6, 1998), 63 FR 
37913 (July 14, 1998) (SR-PCX-98-33); Exchange Act Release No. 40160 
(July 1, 1998), 63 FR 37155 (July 9, 1998) (SR-CBOE-98-25); and 
Exchange Act Release No. 40159 (July 1, 1998), 63 FR 37151 (July 9, 
1998) (SR-Amex-98-22). The Commission notes that these proposed rule 
changes were approved in January 1999. See Exchange Act Release No. 
40875 (December 31, 1998), 64 FR 1842 (January 12, 1999) (order 
approving PCX-98-33, CBOE-98-25 and Amex-98-22).
---------------------------------------------------------------------------

    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. Phlx also notes that floor members have expressed the 
resulting deleterious effect on index options trading in an exchange 
environment. Based on such member and customer requests, the Exchange 
believes 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 market 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. thermore, the 
Exchange believes that 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 all 
of the market index options currently trade on the Exchange 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. Finally, since index 
options are settled in cash, not in securities, the Phlx believes the 
underlying securities would experience very little price movement or 
increased volume, if any, due to the exercise of the index options.\9\
---------------------------------------------------------------------------

    \9\ The Commission notes that, depending on the trading strategy 
used by an investor in trading index options, the underlying 
securities could experience significant price movement and increased 
volume regardless of the fact that such index options are cash-
settled.
---------------------------------------------------------------------------

2. Basis
    The Exchange believes that the proposal to increase market index 
option position limits is consistent with Section 6 of the Act in 
general,\10\ and in particular, with Section 6(b)(5), in that it is 
design to promote just and equitable principles of trade, prevent 
fraudulent and manipulative acts and practices, as well as to protect 
investors and the public interest. The Exchange believes that the 
proposal 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 levels.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

    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 limits so low so as to discourage market participation 
or liquidity providing activity.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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.

[[Page 16021]]

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 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 reason 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, 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-
0609. 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 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room, located at the above address. 
Copies of such filing will also be available for inspection and copying 
at the principal office of the self-regulatory organization. All 
submissions should refer to File No. SR-Phlx-98-55 and should be 
submitted by April 23, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-8146 Filed 4-1-99; 8:45 am]
BILLING CODE 8010-01-M