Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 to the Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating to the Listing of Options on the Phlx Airlines Sector Index

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35131; File No. SR-Phlx-94-64]

Self-Regulatory Organizations; Notice of Filing and Immediate

Effectiveness of Proposed Rule Change and Amendment No. 1 to the

Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating

to the Listing of Options on the Phlx Airlines Sector Index

December 20, 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 December

13, 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 Exchange. The

Exchange filed Amendment No. 1 to the proposed rule change on December

15, 1994.\1\ The Commission is publishing this notice to solicit

comments on the proposed rule change from interested persons.

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\1\In Amendment No. 1, the Exchange proposes that options on the

Phlx Airline Sector Index will be European-style instead of

American-style as originally proposed. See Letter from Michele

Weisbaum, Associate General Counsel, Phlx, to Brad Ritter, Senior

Counsel, Office of Market Supervision, Division of Market

Regulation, Commission, dated December 14, 1994 (``Amendment No.

1'').

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

of the Proposed Rule Change

The Exchange, pursuant to Rule 19b-4 of the Act, proposes to list

and trade options on the Phlx Airline Sector Index (``Index''), a new

stock index developed by the Phlx and composed of 12 domestic airline

stocks. The text of the proposed rule change is available at the Office

of the Secretary, the Phlx, 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 Phlx included statements

concerning the purpose of and basis for the proposed rule change. The

text of these statements may be examined at the places specified in

Item IV below. The Exchange has prepared summaries, set forth in

Section (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 purpose of the proposed rule change is to list for trading,

cash-settled, European-style\2\ options on the Phlx Airline Sector

Index, a new index developed by the Exchange. The Index is composed of

the stocks of 12 domestic passenger air carriers which, the Exchange

represents, effectively represent the available domestic air

transportation industry.\3\ The Exchange also represents that the Index

meets the generic criteria for listing options on narrow-based indexes

as set forth in Exchange Rule 1009A, as approved by the Commission.\4\

Accordingly, the Phlx is submitting this proposed rule change pursuant

to and in accordance with the procedures set forth in the Generic Index

Approval Order.\5\ The Phlx proposes to list and trade options on the

Index no sooner than 30 days after December 13, 1994, the filing date

of this proposed rule change. The contract specifications for options

on the proposed Index are as follows:

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\2\A European-style option can be exercised only during a

specified period immediately prior to expiration of the option.

\3\The components of the Index are: Alaska Air Group, Inc.; AMR

Corporation; Atlantic Southeast Airlines, Inc.; Continental

Airlines, Inc.; Comair Holdings Inc.; Delta Air Lines, Inc.;

Southwest Airlines Co.; Mesa Airline Inc.; Northwest Airlines Corp.;

Skywest, Inc.; USAir Group Inc.; and UAL Corporation.

\4\See Securities Exchange Act Release No. 34157 (June 3, 1994),

59 FR 30062 (June 10, 1994) (``Generic Index Approval Order'').

\5\Id.

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Underlying Index: The Index is an equal-dollar weighted sector

index composed of stocks from 12 domestic, passenger, air carriers.

Seven of the stocks are traded on the New York Stock Exchange

(``NYSE'') and the other five are national market securities traded

through Nasdaq. The Exchange represents that 11 out of 12 stocks in the

Index presently satisfy the Exchange's listing criteria for equity

options contained in Exchange Rule 1009. Moreover, the Phlx notes that

all 11 of such stocks are currently the subject of standardized options

trading in the U.S.

As of December 9, 1994, the market capitalization of each of the

stocks in the index exceeded $75 million. The Exchange represents that

the market capitalizations ranged from a low of $98 million to a high

of $3.8 billion. Eleven of the 12 component issues in the Index had

monthly trading volumes in excess of one million shares over each of

the past six months and the remaining component, accounting for 8.33%

of the value of the Index, had monthly trading volume in excess of

500,000 shares in each of the prior six months. Accordingly, the

Exchange represents that with respect to the criteria for market

capitalization and trading volume, the Index satisfies the generic

listing standards as stated in Phlx Rule 1009A and in the Generic Index

Approval Order.\6\

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\6\Id.

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Index Calculation: The methodology used to calculate the Index is

an equal dollar-weighting method, meaning that each of the component

stocks is represented in the Index in approximately equal dollar

amounts. The Exchange believes that this method of calculation is

important because it will provide each component issue with equivalent

influence on the movement of the Index value instead of allowing one

highly capitalized stock to dominate the movement of the Index. To

determine the initial dollar weighting of the stocks, the Exchange

calculated the number of shares of each stock that would represent an

investment of approximately $10,000 in each of those stocks comprising

the Index based on closing prices on December 1, 1994. The value of the

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

of shares of all of the stocks in the Index divided by the current

Index divisor. the Index divisor was set to yield an initial Index

value of 200 at the opening of November 28, 1994.

Index Maintenance: The Exchange will rebalance the Index quarterly,

following the close of trading on the third Friday of each March, June,

September, and December by changing the number of shares of each

component stock so that each company is again represented in $10,000

``equal'' dollar amounts. If it becomes necessary, a divisor adjustment

will be made when rebalancing occurs to ensure continuity of the

Index's value. The newly adjusted portfolio will then become the basis

for the Index's value on the first trading day following the quarterly

adjustment.

The number of shares of each component stock in the Index will

remain fixed between quarterly reviews except in the event of certain

types of corporate action such as the payment of a dividend (other than

an ordinary cash dividend), stock distribution, stock split, rights

offering, recapitalization, reorganization or similar event with

respect to the component stocks. In the case of a merger or

consolidation of the 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 prior to the merger. Should a

stock replacement occur, 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 selecting

replacement components for the Index, the Phlx will take into account

the capitalization, liquidity, volatility, and name recognition of any

proposed replacement stock, and will assure that the maintenance

criteria in Rule 1009A(c) continue to be met by the Index. In each of

the above cases the divisor will be adjusted, if necessary, to ensure

the continuity of the Index. If the Index fails at any time to satisfy

the maintenance criteria set forth in the Generic Index Approval

Order,\7\ the Exchange will immediately notify the Commission of that

fact and will not open for trading any additional series of options on

the Index unless such failure is determined by the Exchange not to be

significant and the Commission concurs in that determination or unless

the continued listing of options on the Phlx Airline Sector Index has

been approved by the Commission under Section 19(b)(2) of the Exchange

Act.

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\7\Id.

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Pursuant to the Generic Index Approval Order,\8\ absent prior

Commission approval, the Exchange will not increase to more than 15, or

decrease to fewer than 9, the number of stocks in the Index, nor will

the Phlx make any change in the composition of the Index that would

cause fewer than 90% of the stocks, by weight, or fewer than 80% of the

total number of stocks in the Index to qualify as stocks eligible for

equity options trading under Phlx Rule 1009.

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\8\Id.

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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 and do all necessary maintenance

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 (``OPRA'').\9\ The Index value will

also be available on broker/dealer interrogation devices to subscribers

of the option information.

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\9\The Phlx represents that the Phlx and the OPRA have the

necessary systems capacity to support those new series of options

that would result from the introduction of options and long-term

options on the Index. See Letter from Joseph Corrigan, Executive

Director, OPRA, to Jamie Farmer, New Product Development, Phlx,

dated November 29, 1994.

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Unit of Trading: Each options contract will represent $100, the

index multiplier, times the Index value. For example, an Index value of

200 will result in an option contract value of $20,000 ($100 x 200).

Exercise Price: The exercise prices for Index options will be set

at 5 point intervals in terms of the current value of the Index.

Additional exercise prices will be added in accordance with Phlx Rule

1101A(a).

Aggregate Exercise Price: The aggregate exercise price is found by

multiplying the Index multiplier ($100) by the exercise price.

Settlement Price Determination: The Index option settlement value

will be determined by using the opening prices of the component stocks

of the Index on the third Friday of each month.

Last Trading Day: The Thursday prior to the third Friday of the

month for options which expire on the Saturday following the third

Friday of that month.

Trading Hours: 9:30 a.m. to 4:10 p.m. EST.

Position and Exercise Limits: The Phlx Airline Sector Index is an

industry index such that the Phlx will employ position and exercise

limits pursuant to Phlx Rules 1001A(b)(i) and 1002A, respectively.

Expiration Cycles: Three months from the March, June, September,

December, cycle plus two additional near-term months.

Premium Quotations: Premiums will be expressed in terms of dollars

and fractions of dollars pursuant to Phlx Rule 1033A. For example, a

bid or offer of 1\1/2\ will represent a premium per options contract of

$150 (1\1/2\ x 100). The minimum change in a premium under $3 will be

\1/16\ and \1/8\ for a quote of $3 or greater.

The options will be traded pursuant to current Phlx rules governing

the trading of index options.\10\ The Exchange also represents that

surveillance procedures currently used to monitor trading in each of

the Exchange's other index options will also be used to monitor trading

in options on the Index. These procedures include having complete

access to trading activity in the underlying securities which are all

traded on either the NYSE or as national market securities traded

through Nasdaq. In addition, the Intermarket Surveillance Group

Agreement (``ISG Agreement'') dated July 14, 1983, as amended on

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

Index. The Exchange also requests the ability to list long-term options

on the Index pursuant to Exchange Rule 1101A(b)(iii).

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\10\See Phlx Rules 1000 through 1072 and 1000A through 1102A.

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The Phlx represents that the proposed rule change is consistent

with Section 6(b) of the Act in general and furthers the objectives of

Section 6(b)(5)\11\ in particular in that it will permit trading in

options based on the Phlx Airline Sector Index pursuant to rules

designed to prevent fraudulent and manipulative acts and practices, to

promote just and equitable principles of trade, to facilitate

transactions in securities, and to remove impediments to and perfect

the mechanism of a free and open market.

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\11\15 U.S.C. Sec. 78f(b)(5) (1988).

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(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.

(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

Because the foregoing proposed rule change, as amended, complies

with the standards set forth in the Generic Index Approval Order,\12\

it has become effective pursuant to Section 19(b)(3)(A) of the Act.

Pursuant to the Generic Index Approval Order, the Exchange may not list

Phlx Airline Index options for trading prior to 30 days after December

13, 1994, the date the proposed rule change was filed with the

Commission. At any time within 60 days of the filing of the proposed

rule change, the Commission may summarily abrogate the rule change if

it appears to the Commission that such action is necessary or

appropriate in the public interest, for the protection of investors, or

otherwise in furtherance of the purposes of the Act.

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\12\See supra note 4.

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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, N.W., Washington, D.C. 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. Sec. 552, will be available for inspection and copying at

the Commission's Public Reference Section, 450 Fifth Street, N.W.,

Washington, DC 20549. Copies of such filing will also be available for

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

submissions should refer to File No. SR-Phlx-94-64 and should be

submitted by January 17, 1995.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\13\

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\13\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-31887 Filed 12-27-94; 8:45 am]

BILLING CODE 8010-01-M