# 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 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-18133 ## Record - **Collection:** Federal Register - **Document type:** Uncategorized Document - **Published:** July 26, 1994 ## Text 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. --------------------------------------------------------------------------- \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''). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \1\317 CFR 200.30-3(a)(12) (1993). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-18133 Filed 7-25-94; 8:45 am] BILLING CODE 8010-01-M --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-18133. Public record. Not legal advice.