Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Philadelphia Stock Exchange, Inc., Relating to Modifications of the Position and Exercise Limits for Narrow-Based Index Options

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35694; File No. SR-PHLX-95-16]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Philadelphia Stock Exchange, Inc., Relating to

Modifications of the Position and Exercise Limits for Narrow-Based

Index Options

May 9, 1995.

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 March 6,

1995, the Philadelphia Stock Exchange, Inc. (``PHLX'' or ``Exchange'')

filed with the Securities and Exchange Commission (``SEC'' or

``Commission'') 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.

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

of the Proposed Rule Change

Currently, PHLX Rule 1001A, ``Position Limits,'' \1\ establishes

the following position limits for industry (or narrow-based) index

options (i) 5,500 contracts for an index where a single component stock

accounted, on average, for 30% or more of the index value during the

30-day period immediately preceding the review; (ii) 7,500 contracts

for an index where a single component stock accounted, on average, for

20% or more of the index value or any five component stocks together

accounted, on average, for more than 50% of the index value but no

single component stock accounted, on average, for 30% or more of the

index value during the 30-day period immediately preceding the review;

or (iii) 10,500 contracts where the conditions requiring a limit of

5,500 contracts or 7,500 contracts have not occurred. The PHLX proposes

to amend Exchange Rule 1001A(b)(1) and Exchange Rule 1002A, ``Exercise

Limits,'' \2\ to increase the position and exercise limits for industry

index options from 5,500, 7,500, or 10,500 contracts to 6,000, 9,000,

or 12,000 contracts.

\1\ Position limits impose a ceiling on the number of option

contracts which an investor or group of investors acting in concert

may hold or write in each class of options on the same side of the

market (i.e., aggregating long calls and short puts or long puts and

short calls).

\2\ 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.

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

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

the Secretary, 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 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

The PHLX proposes to amend PHLX Rule 1001A to raise the position

limits for its narrow-based index options. Specifically, the PHLX

proposes to amend PHLX Rule 1001A(b)(1) to establish narrow-based index

option position limits of 6,000, 9,000, or 12,000 contracts. In

addition, the PHLX proposes to amend PHLX Rule 1002A to establish a

corresponding increase in exercise limits for industry index options.

Currently, the PHLX trades options on the following narrow-based

indexes:

(1) Gold/Silver Index (``XAU''): 5,500 contracts

(2) Utility Index (``UTY''): 10,500 contracts

(3) PHLX/KBW Bank Index (``KBX''): 10,500 contracts

(4) Phone Index (``PNX''): 5,500 contracts

(5) Semiconductor Index (``SOX''): 7,500 contracts

(6) Airline Sector Index (``PLN''): 10,500 contracts

These position limits, which are standard among all of the options

exchanges for narrow-based index options, are based on the degree of

concentration of a component stock of the index.\3\ Currently, under

PHLX Rule 1001A, the three-tiered levels of position and exercise

limits are 5,500, 7,500, or 10,500 contracts. For the reasons stated

below, the PHLX proposes to increase these limits to 6,000, 9,000, or

12,000 contracts.

\3\ See PHLX Rule 1001A.

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

First, the Exchange notes that the current levels have been in

place since [[Page 26068]] 1993.\4\ However, there have been no further

increases in position limits since 1993, despite substantial changes in

the marketplace. Most notable among these changes, according to the

PHLX, is an appreciable growth in index options trading. This marked

increase in index options volume has significantly increased liquidity

in PHLX-traded index options, as open interest has similarly

increased.\5\

\4\ See Securities Exchange Act Release No. 33288 (Dec. 3,

1993), 58 FR 65221 (Dec. 13, 1993) (order approving File No. SR-

PHLX-93-07).

\5\ The PHLX states that index options volume increased 450%

(from 354,614 contracts to 1,957,171 contracts) in 1994 as compared

to 1993.

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

Second, the Exchange believes that the proposed increases are

reasonable. The PHLX states that in prior releases approving increased

position limits, the Commission acknowledged that a gradual,

evlutionary approach has been adopted by the Commission and the various

options exchanges in increasing position and exercise limits.

Accordingly, the PHLX proposes a 33% increase in the lowest tier (from

5,000 to 6,000 contracts); a 31% increase for options currently at the

7,500 contract limit; and a 20% increase in the highest tier, which is

currently at 10,500 contracts. The Exchange believes that these

proposed increases are consistent with the gradual evolution cited by

the Commission, because the proposed levels represent reasonable

increases which are in line with prior changes.\6\

\6\ According to the PHLX, the most recent position limit

changes in 1993 represented changes of 38% (from 4,000 to 5,500

contracts); 25% (from 6,000 to 7,500 contracts); and 31% (from 8,000

to 10,500 contracts).

Third, the Exchange believes that the proposed increases are needed

by traders and investors. According to the PHLX, Exchange members and

customers have asked the Exchange to propose an increase in position

limits. The PHLX states that the requests have focused on the inability

of interested trading participants to meet their investment needs at

current position limit levels and the deleterious effect this inability

is having on these products. Based on such member and customer

requests, the Exchange has realized that the current position limit

levels discourage market participation by large investors and the

institutions that compete to facilitate the trading interests of large

investors.

Accordingly, the PHLX proposes to raise position limits to

accommodate the liquidity and hedging needs of large investors and the

facilitators of those investors. Specifically, certain institutional

traders handling industry funds deal in securities valued many times

higher than the maximum permissible position under PHLX rules.

In addition, the Exchange believes that the proposed limit of

6,000, 9,000, and 12,000 contracts should increase the depth and

liquidity of the markets for index options. 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 has considered the effects of increased position

limits on the marketplace, recognizing the purposes of these limits in

preventing manipulation and protecting against disruption of the

markets for both the option as well as the underlying security. The

PHLX notes that it nevertheless continues to monitor the markets for

evidence of manipulation or disruption caused by investors with

positions at or near current position or exercise limits and that the

new limits will not diminish the surveillance function in this regard.

Additionally, surveillance procedures have become increasingly

sophisticated and automated.

For these reasons, the Exchange believes that the proposal to

increase narrow-based index option position limits is consistent with

Section 6 of the Act, in general, and, in particular, with Section

6(b)(5), in that it is designed to promote just and equitable

principles of trade and to 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.

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.

(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 either received or requested.

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 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. 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. 552, will be available for inspection and copying at the

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

Washington, D.C. Copies of such filing will also be available for

inspection and copying at the principal office of the above-mentioned

self-regulatory organization. All submissions should refer to the file

number in the caption above and should be submitted by June 6, 1995.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\7\

\7\ 17 CFR 200.30-3(a)(12) (1994).

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

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-11945 Filed 5-15-95; 8:45 am]

BILLING CODE 8010-01-M