Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 to a Proposed Rule Change by the Pacific Stock Exchange, Inc. Relating to Listing and Trading Options and Long-Term Options on the PSE Israel Index

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34410; International Series Release No. 689; File No.

SR-PSE-94-15]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change and Amendment Nos. 1 and 2 to a Proposed Rule Change by the

Pacific Stock Exchange, Inc. Relating to Listing and Trading Options

and Long-Term Options on the PSE Israel Index

July 20, 1994.

Pursuant to section 19(b)(1) of the Securities and Exchange Act of

1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given

that on June 13, 1994, the Pacific Stock Exchange (``PSE'' 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 Exchange. The PSE

filed Amendment No. 1 to the proposed rule change on June 27, 1994\3\

and Amendment No. 2 on June 28, 1994.\4\ The Commission is publishing

this notice to solicit comments on the proposed rule change from

interested persons.

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\1\15 U.S.C. 78s(b)(1) (1988).

\2\17 CFR 240.19b-4 (1933).

\3\In Amendment No. 1, Exchange proposes to: (1) Reconfigure the

Index so that it is initially composed of 12 components; (2) provide

that the Index will be equal dollar-weighted instead of

capitalization-weighted, as originally proposed; and (3) provide

that any security added to the Index must be a security that is

traded in the United States either on a securities exchange or as a

National Market security traded through NASDAQ (as defined herein).

See Letter from Michael Pierson, Senior Attorney, PSE, to Brad

Ritter, Attorney, Office of Market Supervision, Division of Market

Regulation, Commission, dated June 24, 1994. (``Amendment No. 1'').

\4\In Amendment No. 2, the PSE proposes: (1) To maintain the

Index so that at least 85% of the Index, by weight, and at least 80%

of the number of components of the Index are eligible for

standardized options trading pursuant to PSE Rule 3.6; (2) to

clarify that any replacement securities will be stocks or ADRs

representing Israeli companies; and (3) to consider the market

capitalization, liquidity, volatility, and name recognition of

proposed replacement securities for the Index. See Letter from

Michael Pierson, Senior Attorney, PSE, to Brad Ritter, Attorney,

Office of Market Supervision, Division of Market Regulation,

Commission, dated June 28, 1994. (``Amendment No. 2'').

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

of the Proposed Rule Change

The PSE proposes to list for trading options and long-term options

(``Index LEAPS'') on the PSE Israel Index (``Israel Index''). The text

of the proposed rule change is available at the Office of the

Secretary, PSE, and at the Commission.

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 Exchange 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 PSE 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

The Exchange proposes to trade options and Index LEAPS on the PSE

Israel Index, a new narrow-based stock index developed by the Exchange.

The Index is equal dollar-weighted,\5\ is presently composed of 12

component securities,\6\ and is designed to reflect the performance of

the Israeli economy in general.

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\5\See Amendment No. 1, supra note 3.

\6\The component securities of the Index are: Ampal-American

Israel Corp.; Bio Technology General Corp.; Comverse Technology

Inc.; ECI Telecom Ltd.; Electronics for Imaging Inc.; Elscint Ltd.;

Geotek Communications Inc.; I.I.S. Intelegent Information System;

Netmanage Inc.; Sapiens International Corp.; Scitex Corp.; Tadiran

Ltd.; and Teva Pharmaceutical Industries (ADR). Id.

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Index Design

Of the 12 components of the Index, one presently trades on the New

York Stock Exchange, one presently trades on the American Stock

Exchange, and ten (including one American Depositary Receipt

(``ADR'')\7\ representing 8.33% of the weight of the Index as of May

31, 1994) are National Market securities traded through the facilities

of the National Association of Securities Dealers, Inc. Automated

Quotation System (``NASDAQ''). The 11 non-ADR components of the Index

are listed for trading only in the United States. For the one ADR

component, more than 50% of the combined worldwide trading volume for

the ADR and the underlying security occurs in the United States through

NASDAQ. The Exchange believes, therefore, that options on the Index

should not raise the types of surveillance concerns that may be raised

by options on an index of non-U.S. traded securities.

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\7\An ADR is a negotiable receipt which is issued by a

depositary, generally a bank, representing shares of a foreign

issuer that have been deposited and are held, on behalf of holders

of the ADRs, at a custodian bank in the foreign issuer's home

country.

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As of May 31, 1994, the securities comprising the Index ranged in

market capitalization from a low of $59.03 million to a high of $1.22

billion, with an average capitalization of $386 million. As of that

date, over 90% of the number of stocks in the Index, and over 90% of

the weight of the Index, met the Exchange's initial listing

requirements for standardized options trading pursuant to PSE Rule 3.6.

Calculation

The Index is calculated using an equal dollar-weighting methodology

designed to ensure that each of the component securities is represented

in approximately an equal dollar amount in the Index. The following is

a description of how the equal dollar-weighting methodology works. As

of the market close on May 31, 1994, a portfolio of stocks was

established representing an investment of $83,333 in the stock (rounded

to the nearest whole share) of each of the companies in the Index. The

value of the Index equals the current market value of the sum of the

assigned number of shares of each of the stocks in the Index, divided

by the Index divisor. Each quarter, following the close of trading on

the third Friday of January, April, July, and October, the Index will

be adjusted by changing the number of whole shares of each component

stock so that each component is again represented in equal dollar

amounts. The Exchange has chosen to rebalance the Index following the

close of trading on the quarterly expiration cycle because it allows an

option contract to be held for up to three months without a change in

the Index portfolio while at the same time, maintaining the equal

dollar-weighting feature of the Index. If necessary, a divisor

adjustment will be made when the rebalancing occurs to ensure

continuity of the value of the Index. The newly adjusted portfolio then

becomes the basis for the Index's value on the first trading day

following the quarterly adjustment.

The Exchange does not believe that there will be investor confusion

regarding the adjustments because they will be done on a regular and

timely basis, with adequate notice given. An information circular will

be distributed to all Exchange members notifying them of the quarterly

changes. This circular will also be sent by facsimile to the Exchange's

contacts at the major options firms, mailed to recipients of the

Exchange's options-related information circulars, and made available to

subscribers of the Options News Network. In addition, the Exchange will

include in its promotional and marketing materials for the Index a

description of the equal dollar-weighting methodology.

As noted above, the number of shares of each component stock in the

Index portfolio remains fixed between quarterly reviews except in the

event of certain types of corporate actions such as the payment of a

dividend (other than an ordinary cash dividend), stock distribution,

stock split, reverse stock split, rights offering, distribution,

reorganization, recapitalization, or similar event with respect to the

component stocks. In a merger or consolidation of an issuer of a

component stock, if the stock remains in the Index, the number of

shares of that security in the portfolio may be adjusted, to the

nearest whole share, to maintain the component's relative weight in the

Index at the level immediately prior to the merger or consolidation. In

the event of a stock replacement, the average dollar value of the

remaining portfolio components will be calculated and that amount

invested in the stock of the new component, to the nearest whole share.

In all cases, the divisor will be adjusted, if necessary, to ensure

continuity of the Index value.

The value of the Index will be calculated by the PSE or its

designee on a real-time basis using last-sale prices and will be

disseminated every 15 seconds by the Exchange. The Exchange will

establish a benchmark of 200 for the Index when it begins disseminating

the Index. If a component stock of the Index is not currently being

traded, the most recent price at which the stock traded will be used in

the Index calculation.

Maintenance

The Index will be maintained by the Exchange. To maintain

continuity in the Index following an adjustment to a component

security, the divisor will be adjusted. Changes which may result in

divisor changes include, but are not limited to, spin-offs, certain

rights issuances, and mergers and acquisitions.

The Index will be reviewed on approximately a monthly basis by the

PSE staff. The Exchange may change the composition of the Index at any

time or from time to time to reflect the changes affecting the

components of the Index or the Israeli economy generally. If it becomes

necessary to remove a stock from the Index (generally due to a takeover

or merger), the Exchange will replace that component with an Israeli

stock or ADR\8\ that is traded on a U.S. securities exchange or that is

a National Market security traded through the facilities of NASDAQ.\9\

In such circumstances, the PSE will take into account the

capitalization, liquidity, volatility, and name recognition of the

proposed replacement stock.\10\ The Exchange will most likely maintain

twelve stocks in the Index at all times.\11\

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\8\See Amendment No. 2, supra note 4.

\9\See Amendment No. 1, supra note 3.

\10\See Amendment No. 2, supra note 4.

\11\The Exchange will notify the Commission of changes in the

number of components in the Index. Prior to increasing the number of

components of the Index to more than 16 or decreasing the number of

components to less than 9, the Exchange will submit a rule filing

pursuant to Section 19 of the Act and Rule 19b-4 thereunder.

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Long-Term Index Options

In addition to Index options on the Index, the Exchange also

proposes to list long-term Index option series (``LEAPS'') as provided

in PSE Rule 6.4(d).

Exercise and Settlement

Index options will have European-style exercise and will be A.M.-

settled.\12\ The proposed Index options would expire on the Saturday

following the third Friday on the expiration month, so that the last

day for trading in an expiring series will be the second business day

(ordinarily a Thursday) preceding the expiration date.

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\12\A.M.-settled index options are settled based on an index

value derived from opening prices on the last day of trading prior

to expiration.

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Strike Prices

The Exchange intends to introduce Index options series with

expirations up to one year in duration at five-point strike price

intervals. With respect to Index LEAPS, strike prices with as wide as

25 or 50 point intervals may be used. If, however, the value of the

Index falls below 200, the Exchange will use strike prices at two and

one-half point intervals.

Exchange Rules Applicable

Except as modified in the proposal, PSE Rule 7, and Rules 7.3(b)

and (c), in particular, will be applicable to Index options. Index

option contracts based on the Index will be subject to position limits

of 7,500 contracts on the same side of the market pursuant to PSE Rule

7.6(a). For purposes of position and exercise limits, Index LEAPS will

be aggregated with Index options on a one-for-one-basis. The Exchange

represents that it has the necessary systems capacity to support new

option series that would result from the introduction of Index options

and Index LEAPS.

Basis

The Exchange believes that the proposed rule change is consistent

with Section 6 of the Act, in general, and furthers the objectives of

Section 6(b)(5) of the Act, in particular, in that it is designed to

prevent fraudulent and manipulative acts and practices and to promote

just and equitable principles of trade.

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

The Exchange 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

Written comments on the proposed rule change were neither solicited

nor received.

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. 522, 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 PSE. All

submissions should refer to File No. SR-PSE-94-15 and should be

submitted by August 16, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.13

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\1\317 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-18133 Filed 7-25-94; 8:45 am]

BILLING CODE 8010-01-M