Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 to the Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating to the Listing and Trading of Options on the Phlx Phone Index

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34130; File No. SR-Phlx-94-01]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change and Amendment Nos. 1, 2, 3, and 4 to the Proposed Rule Change by

the Philadelphia Stock Exchange, Inc. Relating to the Listing and

Trading of Options on the Phlx Phone Index

May 27, 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 January

3, 1994, 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 Phlx.\1\ The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

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\1\On February 18, 1994, the Phlx amended the proposal: (1) To

provide that the Index will be updated during the trading day at

least once every 15 seconds, rather than once every minute; (2) to

provide that the exercise prices will be set at five point Index

intervals rather than 2.5 point Index intervals as stated in the

original filing; (3) to specify that the expiration cycle applicable

to options on the Index will be three expiration months from the

March, June, September, December cycle plus two additional near-term

months; (4) to clarify the Exchange's obligations with respect to

delisting and replacing components of the Index; (5) to clarify that

all of the proposed Index's component stocks are, and any future

replacement or added component securities will be, traded either on

NASDAQ National Market, the New York Stock Exchange (``NYSE''), or

the American Stock Exchange (non-ECM); and (6) to clarify that all

of the current Index component stocks have overlying exchange traded

options on them. See Letter from Michele R. Weisbaum, Associate

General Counsel, Phlx, to Sharon Lawson, Assistant Director,

Division of Market Regulation, SEC, dated February 16, 1994

(``Amendment No. 1''). On February 24, 1994, the Phlx amended the

proposal to change the name of the Index from the Phlx Baby Bell

Index to the Phlx Phone Index. See Letter from Michele R. Weisbaum,

Associate General Counsel, Phlx, to Michael Walinskas, Staff

Attorney, Division of Market Regulation, SEC, dated February 24,

1994 (``Amendment No. 2''). On April 6, 1994, the Phlx amended the

proposal to represent that the Phlx will submit a Rule 19b-4 filing

to the Commission prior to opening any new series of options on the

Index for trading if at any time less than 90 percent of the

component securities, by weight, are eligible for exchange options

tradings, or if at any time the number of stocks in the Index

increases to more than ten or decreases to less than eight. See

Letter from Michele R. Weisbaum, Associate General Counsel, Phlx, to

Sharon Lawson, Assistant Director, Division of Market Regulation,

SEC, dated March 3, 1994 (``Amendment No. 3''). On April 11, 1994,

the Phlx amended the proposal: (1) To change the manner in which the

current Index value would be calculated; (2) to represent that the

surveillance procedures currently used to monitor trading in each of

the Exchange's other index options, which include having complete

access to trading activity in the underlying securities comprising

the Index (all of which are traded on the NYSE), also will be used

to monitor trading in options on the Index; (3) to provide that the

Intermarket Surveillance Group Agreement dated July 14, 1983, as

amended on January 29, 1990, will be applicable to the trading of

options on the Index; and (4) to confirm that the trading hours for

the Index will be 9:30 a.m. to 4:10 p.m. (New York time). See Letter

from Michele R. Weisbaum, Associate General Counsel, Phlx, to Thomas

McManus, Esq., Division of Market Regulation, SEC, dated April 7,

1994 (``Amendment No. 4'').

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

of the Proposed Rule Change

The Phlx, pursuant to Rule 19b-4 under the Act, proposes to list

and trade options on the Phlx Phone Index (``Index''), an index

developed by the Phlx and comprised of eight common stocks representing

the companies created as a result of the divestiture of the American

Telephone & Telegraph Co. (``AT&T'') in 1983, as well as AT&T itself.

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 Phlx 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 Phlx 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 the

Statutory Basis for, the Proposed Rule Change

The purpose of the proposed rule change is to list for trading an

American-style option on the Index. The Index, which is comprised of

the common stocks of the eight companies created as a result of the

divestiture of AT&T in 1983, includes the seven regional telephone

companies spun off from AT&T as well as AT&T. AT&T and the spun-off

regional telephone companies represent some of the largest and most

widely-held U.S. common stocks. If at any time the number of stocks

comprising the Index increases to more than ten or decreases to less

than eight, the Exchange will submit a filing to the Commission

pursuant to Rule 19b-4 under the Act prior to opening any new option

series on the Index.

The Phlx believes that there is a need for an index option that

represents solely AT&T and its spun-off regional telephone companies.

In this regard, the Phlx states that there is a significant segment of

the investing community that avidly follows these companies. The Phlx

believes that the Index, therefore, would fill a current market void by

creating a pure U.S. telephone industry index that would not be diluted

with other telecommunications stocks.

The Index will be calculated using a capitalization-weighting

methodology. The value of the Index was set to equal 200 on December 1,

1993. The formula for calculating the Index value is as follows:

TN06JN94.002

Where:

Total Capitalization = Sum of Market Values (price x shares

outstanding) for all component securities

Divisor = The number which, when divided from the total capitalization

when the Index was initially calculated (on December 1, 1993), yielded

an Index value of 200

The Index divisor will be adjusted for changes in the

capitalization of any of the component securities resulting from

mergers, acquisitions, delistings, substitutions, and other like

corporate events. The formula for adjusting the divisor is as follows:

Adjustments in the value of the Index which are necessitated by the

addition and/or deletion of an issue from the Index are made by adding

and/or subtracting the market value (price x shares outstanding) of the

relevant issues.

The Index value will be updated dynamically and disseminated at

least once every 15 seconds during the trading day. The Phlx has

retained Bridge Data, Inc. to compute the value of the Index. Pursuant

to Phlx Rule 1100A, updated Index values will be disseminated and

displayed by means of primary market prints reported by the

Consolidated Tape Association and over the facilities of the Options

Price Reporting Authority. The Index value also will be available on

broker/dealer interrogation devices to subscribers of the option

information.

TN06JN94.003

In accordance with Phlx Rule 1009A, if any change in the nature of

any stock in the Index occurs as a result of delisting, merger,

acquisition, or otherwise, the Exchange will take appropriate steps to

delete this stock from the Index and replace it with another stock

which the Exchange believes would be compatible with the intended

market character of the Index.

Index options will be traded pursuant to the current Phlx rules

governing the trading of index options, particularly Phlx Rules 1000A

through 1103A, and generally, Phlx Rules 1000 through 1070.

Index options will be ``A.M.-settled index options'' and will

expire on the Saturday following the third Friday of the expiration

month, and the last day for trading in an expiring series will be the

second business day (ordinarily a Thursday) preceding the expiration

date.

The Phlx proposes to employ position and exercise limits pursuant

to Phlx Rule 1001A(b)(i) and 1002A, respectively.\2\ Exercise price

intervals will be set initially at five point intervals, and additional

exercise prices will be added in accordance with Phlx Rule 1101A(a).

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\2\Because, as of March 11, 1994, AT&T represented 31.15 percent

of the Index, the position and exercise limits applicable to options

on the Index are 5,500 contracts, respectively. See Phlx Rules

1001A(b)(i) and 1002A.

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The Phlx will trade consecutive and cycle month series pursuant to

Phlx Rule 1101A. Specifically, there will be three expiration months

from the March, June, September, December cycle plus two additional

near-term months so that the three nearest-term months always will be

available.

All of the component securities in the Index currently are eligible

to have, and do have, overlying exchange traded options on them. The

Exchange represents that, if at any time less than 90 percent of the

component securities, by weight, are eligible for options trading, the

Exchange will submit a filing to the Commission pursuant to Rule 19b-4

under the Act prior to opening any new series of options on the Index.

The Exchange represents that surveillance procedures currently used

to monitor trading in each of the Exchange's other index options also

will be used to monitor trading in options on the Index. These

procedures include having complete access to trading activity in the

underlying securities comprising the Index, all of which are traded on

the NYSE. In addition, the Exchange represents that the Intermarket

Surveillance Group Agreement dated July 14, 1983, as amended on January

29, 1990, will be applicable to the trading of options on the Index.

The exchange believes that the proposed rule change is consistent

with Section 6 of the Act in general, and with Section 6(b)(5) in

particular, in that it is designed to prevent fraudulent and

manipulative acts and practices, to facilitate transactions in

securities, and to remove impediments to and perfect the mechanism of a

free and open market.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The Phlx 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

No written comments were solicited or received with respect to the

proposed rule change.

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 also will be available for

inspection and copying at the principal office of the Phlx. All

submissions should refer to File No. SR-Phlx-94-01 and should be

submitted by June 27, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\3\

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\3\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-13605 Filed 6-3-94; 8:45 am]

BILLING CODE 8010-01-M