Self-Regulatory Organizations; Pacific Exchange, Inc., Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment Nos. 2 and 3 Relating to Generic Listing Standards for Options on Narrow-Based and Micro Narrow-Based Indexes, 74399-74409 [E5-7372]
Download as PDF
Federal Register / Vol. 70, No. 240 / Thursday, December 15, 2005 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52923; File No. SR–PCX–
2005–79]
Self-Regulatory Organizations; Pacific
Exchange, Inc., Notice of Filing and
Order Granting Accelerated Approval
of Proposed Rule Change and
Amendment Nos. 2 and 3 Relating to
Generic Listing Standards for Options
on Narrow-Based and Micro NarrowBased Indexes
December 7, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 27,
2005, the Pacific Exchange, Inc. (‘‘PCX’’
or ‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’ or ‘‘SEC’’) the proposed
rule change as described in Items I and
II below, which Items have been
substantially prepared by the Exchange.
The PCX filed Amendment Nos. 1 3 and
2 4 on November 3, 2005. On December
6, 2005, the PCX filed Amendment No.
3.5 The Commission is publishing this
notice to solicit comments on the
proposed rule change, as amended, from
interested persons and is approving the
proposed rule change, as amended, on
an accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
index options rules in order to provide
for the listing and trading of narrowbased index options pursuant to Rule
19b–4(e) under the Act.6 The Exchange
is also proposing to amend the position
and exercise limits with respect to
narrow-based index options, as well as
a number of conforming changes in
order to bring the PCX narrow-based
index option rules up to date with those
of other Self-Regulatory Organizations
(‘‘SROs’’).7 In addition, the Exchange
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The Exchange withdrew Amendment No. 1 on
November 3, 2005.
4 Amendment No. 2 supplemented the PCX’s
original filing and made certain technical
corrections to the purpose section and to the
proposed rule text.
5 Amendment No. 3 makes certain technical
corrections to the proposed rule text and purpose
section, but did not materially impact the filing.
6 17 CFR 240.19b–4(e).
7 The Exchange states that, on October 28, 2003,
it filed a proposed rule change to update its broadbased and narrow-based index options rules. The
Exchange further states that due to the timesensitive circumstances at that time, the Exchange
amended its filing to address only the updates to
the broad-based index options rules and deleted all
2 17
VerDate Aug<31>2005
17:24 Dec 14, 2005
Jkt 208001
proposes to adopt new generic listing
standards for options on micro narrowbased indexes. The proposed rule
changes are based on the rules of the
International Securities Exchange, Inc.
(‘‘ISE’’) 8 and the Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’),9
which were approved by the
Commission. The text of the proposed
rule change appears below. Additions
are italicized; deletions are [bracketed].
Rule 5—Options Contracts Traded on
the Exchange
*
*
*
*
*
Definitions
Rule 5.10(b)(1)–(24)—No Change.
(25) The term ‘‘Micro Narrow-Based
Index’’ means an industry or narrowbased index that meets the specific
criteria provided under Rule 5.13(d).
*
*
*
*
*
Designation of the Index Narrow-Based
Index Options
Rule 5.13(a) The component securities
of an index underlying an index option
contract need not meet the requirements
of Rule 5.3. Except as set forth in
subsection (b) below, the listing of a
class of index options on a narrowbased index requires the filing of a
proposed rule change to be approved by
the SEC under Section 19(b) of the
Securities Exchange Act of 1934 (‘‘1934
Act’’). [The listing of a class of index
options on a new narrow-based index
will be treated by the Exchange as a
proposed rule change subject to filing
with and approval by the Securities and
Exchange Commission (‘‘Commission’’)
under Section 19(b) of the Act. A rule
change proposing the listing of a class
references to modifications to the narrow-based
index options rules. At this time, the Exchange is
proposing to update its narrow-based index options
rules in order to bring its rules in line with other
SROs. See Securities Exchange Act Release No.
49455 (March 22, 2004), 69 FR 16316 (March 29,
2004) (Order approving SR–PCX–2003–60). The
Commission notes, however, that Rule 19b–4(e),
with which the Exchange now proposes to bring its
listing standards into compliance, has been in effect
since December 8, 1998. See Securities Exchange
Act Release No. 40761 (December 8, 1998), 63 FR
70952 (December 22, 1998).
8 See Securities Exchange Act Release No. 48405
(August 25, 2003), 68 FR 52257 (September 2, 2003)
(SR–ISE–2003–05) (Order approving the ISE’s
generic listing standards for options on narrowbased indexes).
9 See Securities Exchange Act Release No. 49932
(June 28, 2004), 69 FR 40994 (July 7, 2004) (SR–
CBOE–2002–24) (Order approving generic listing
standards for options on micro narrow-based
security indexes) and Securities Exchange Act
Release No. 51346 (March 9, 2005), 70 FR 12916
(March 16, 2005) (SR–CBOE–2005–08) (Order
approving CBOE’s proposed modified
capitalization-weighted methodology as an
acceptable generic listing standard for options on
narrow-based index).
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
74399
of index options on a new underlying
index may be designated by the
Exchange as constituting a stated policy,
practice or interpretation with respect to
the administration of this Rule 5.13(a)
within the meaning of subparagraph
(3)(A) of subsection 19(b) of the Act,
thereby qualifying the rule change for
effectiveness upon filing with the
Commission if the Exchange prefiles
with the Commission a draft copy of the
rule change not less than one week
before it is filed, and if the Exchange
proposes to commence trading in the
subject class of index options not earlier
than 30 days after the date of filing, and
if each of the following conditions is
satisfied:]
(b) Narrow-Based Index. The
Exchange may trade options on a
narrow-based index pursuant to Rule
19b–4(e) of the 1934 Act, if each of the
following conditions is satisfied:
(1)—No Change.
(2) The index is capitalizationweighted, price weighted, [or] or equal
dollar-weighted, or modified
capitalization-weighted, and consists of
ten or more component securities;
(3)–(4)—No Change.
(5) In a capitalization-weighted index
or a modified capitalization-weighted
index, the lesser of the five highest
weighted component securities in the
index or the highest weighted
component securities in the index that
in the aggregate represent at least 30%
of the total number of component
securities in the index each have had an
average monthly trading volume of at
least 2,000,000 shares over the past six
months;
(6) No single component security
represents more than [25] 30% of the
weight of the index, and the five highest
weighted component securities in the
index do not in the aggregate account
for more than 50% ([60] 65% for an
index consisting of fewer than 25
component securities) of the weight of
the index.
(7)—No Change.
(8) [All Component securities are
‘‘reported securities’’ as defined in Rule
11Aa3–1 under the Exchange Act.] Each
component security must be an ‘‘NMS
Stock’’ as defined in Rule 600 of
Regulation NMS of the Securities
Exchange Act of 1934.
(9)–(12)—No Change.
[Maintenance Requirements NarrowBased Index Options]
[5.13(b)](c) Maintenance Criteria. The
following maintenance listing standards
shall apply to each class of index
options originally listed pursuant to
subsection [paragraph] [(a)](b) above:
E:\FR\FM\15DEN1.SGM
15DEN1
74400
Federal Register / Vol. 70, No. 240 / Thursday, December 15, 2005 / Notices
(1) The requirements [conditions]
stated in subsections [subparagraphs]
[(a)](b)(1), (3), (6), (7), (8), (9), (10), (11)
and (12) must continue to be satisfied,
provided that the requirements
[conditions] stated in subparagraph
[(a)](b)(6) must be satisfied only as of
the first day of January and July in each
year;
(2)–(3)—No change.
(4) In a capitalization-weighted index
or a modified capitalization-weighted
index, the lesser of the five highest
weighted component securities in the
index or the highest weighted
component securities in the index that
in the aggregate represent at least 30%
of the total number of stocks in the
index each have had an average
monthly trading volume of at least
1,000,000 shares over the past six
months.
In the event of a class of index options
listed on the Exchange fails to satisfy
the maintenance listing standards set
forth herein, the Exchange shall not
open for trading any additional series of
options of that class 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 that class of index
options has been approved by the
Commission under Section 19(b)(2) of
the Act.
(d) Notwithstanding subsection (a)
above, the Exchange may trade options
on a Micro Narrow-Based security index
pursuant to Rule 19b–4(e) of the 1934
Act, if each of the following condition is
satisfied:
(1) The Index is a security index:
(i) That has 9 or fewer component
securities; or
(ii) In which a component security
comprises more than 30 percent of the
index’s weighting; or
(iii) In which the 5 highest weighted
component securities in the aggregate
comprise more than 60 percent of the
index’s weighting; or
(iv) In which the lowest weighted
component securities comprising, in the
aggregate, 25 percent of the index’s
weighting have an aggregate dollar
value of average daily trading volume of
less than $50,000,000 (or in the case of
an index with 15 or more component
securities, $30,000,000) except that if
there are two or more securities with
equal weighting that could be included
in the calculation of the lowest weighted
component securities comprising, in the
aggregate, 25 percent of the index’s
weighting, such securities shall be
ranked from lowest to highest dollar
value of average daily trading volume
and shall be included in the calculation
VerDate Aug<31>2005
17:24 Dec 14, 2005
Jkt 208001
based on their ranking starting with the
lowest ranked security;
(2) The index is capitalizationweighted, modified capitalizationweighted, price-weighted, share
weighted, equal dollar-weighted,
approximate equal-dollar weighted, or
modified equal-dollar weighted;
(i) For the purposes of this Rule
5.13(d), an approximate equal-dollar
weighted index is composed of one or
more securities in which each
component security will be weighted
equally based on its market price on the
index’s selection date and the index
must be reconstituted and rebalanced if
the notional value of the largest
component is at least twice the notional
volume of the smallest component for
fifty percent or more of the trading days
in the three months prior to December
31 of each year. For purposes of this
provision the ‘‘notional value’’ is the
market price of the component times the
number of shares of the underlying
component in the index. Reconstitution
and rebalancing are also mandatory if
the number of components in the index
is greater than five at the time of
rebalancing. The Exchange reserves the
right to rebalance quarterly at its
discretion.
(ii) For the purposes of this Rule
5.13(d), a modified equal-dollar
weighted index is an index in which
each underlying component represents
a pre-determined weighting percentage
of the entire index. Each component is
assigned a weight that takes into
account the relative market
capitalization of the securities
comprising the index. A modified equaldollar weighted index will be balanced
quarterly.
(iii) For the purposes of this Rule
5.13(d), a share-weighted index is
calculated by multiplying the price of
the component security by an
adjustment factor. Adjustment factors
are chosen to reflect the investment
objective deemed appropriate by the
designer of the index and will be
published by the Exchange as part of the
contract specifications. The value of the
index is calculated by adding the weight
of each component security and
dividing the total by an index divisor,
calculated to yield a benchmark index
level as of a particular date. A shareweighted index is not adjusted to reflect
changes in the number of outstanding
shares of its components. A shareweighted Micro Narrow-Based index
will not be re-balanced. If a shareweighted Micro Narrow-Based Index
fails to meet the maintenance listing
standards under Rule 5.13(e), the
Exchange will restrict trading in existing
option series to closing transactions and
PO 00000
Frm 00112
Fmt 4703
Sfmt 4703
will not issue additional series for that
index.
(iv) The Exchange may rebalance any
Micro Narrow-Based index on an
interim basis if warranted as a result of
extraordinary changes in the relative
values of the component securities. To
the extent investors with open positions
must rely upon the continuity of the
options contract on the index,
outstanding contracts are unaffected by
rebalancings.
(3) Each component security in the
index has a minimum market
capitalization of at least $75 million,
except that each of the lowest weighted
securities in the index that in the
aggregate account for no more than 10%
of the weight of the index may have a
minimum market capitalization of only
$50 million;
(4) The average daily trading volume
in each of the preceding six months for
each component security in the index is
at least 45,500 shares, except that each
of the lowest weighted component
securities in the index that in the
aggregate account for no more than 10%
of the weight of the index may have an
average daily trading volume of only
22,750 shares for each of the last six
months;
(5) In a capitalization-weighted index,
the lesser of: (1) The five highest
weighted component securities in the
index each have had an average daily
trading volume of at least 90,000 shares
over the past six months; or (2) the
highest weighted component securities
in the index that in the aggregate
represent at least 30% of the total
number of component securities in the
index each have had an average daily
trading volume of at least 90,000 shares
over the past six months;
(6) Subject to subparagraphs (4) and
(5) above, the component securities that
account for at least 90% of the total
index weight and at least 80% of the
total number of component securities in
the index must meet the requirements of
Rule 5.3 applicable to individual
underlying securities;
(7)(i) Each component security must
be an ‘‘NMS Stock’’ as defined in Rule
600 of Regulation NMS of the Securities
Exchange Act of 1934; and
(ii) Foreign securities or ADRs that are
not subject to comprehensive
surveillance sharing agreements do not
represent more than 20% of the weight
of the index;
(8) The current underlying index
value will be reported at least once
every fifteen seconds during the time the
index options are traded on the
Exchange;
E:\FR\FM\15DEN1.SGM
15DEN1
Federal Register / Vol. 70, No. 240 / Thursday, December 15, 2005 / Notices
(9) An equal dollar-weighted index
will be rebalanced at least once every
quarter;
(10) If the underlying index is
maintained by a broker-dealer, the
index is calculated by a third party who
is not a broker-dealer, and the brokerdealer has in place an information
barrier around its personnel who have
access to information concerning
changes in and adjustments to the
index;
(11) Each component security in the
index is registered pursuant to Section
12 of the Exchange Act; and
(12) Cash settled index options are
designated as A.M.-settled options.
(e) The following maintenance listing
standards shall apply to each class of
index options originally listed pursuant
to paragraph (d) above:
(1) The index meets the criteria of
paragraph (d)(1) of this Rule;
(2) Subject to subparagraphs (9) and
(10) below, the component securities
that account for at least 90% of the total
index weight and at least 80% of the
total number of component securities in
the index must meet the requirements of
Rule 5.3;
(3) Each component security in the
index has a market capitalization of at
least $75 million, except that each of the
lowest weighted component securities
that in the aggregate account for no
more than 10% of the weight of the
index may have a market capitalization
of only $50 million;
(4) Each component security must be
an ‘‘NMS stock’’ as defined in Rule 600
of Regulation NMS of the Securities and
Exchange Act of 1934; and
(5) Foreign securities or ADRs thereon
that are not subject to comprehensive
surveillance sharing agreements do not
represent more than 20% of the weight
of the index;
(6) The current underlying index
value will be reported at least once
every fifteen seconds during the time the
index options are traded on the
Exchange;
(7) If the underlying index is
maintained by a broker-dealer, the
index is calculated by a third party who
is not a broker-dealer, and the brokerdealer has in place an information
barrier around its personnel who have
access to information concerning
changes in and adjustments to the
index;
(8) The total number of component
securities in the index may not increase
or decrease by more than 331⁄3% from
the number of component securities in
the index at the time of its initial listing;
(9) Trading volume of each
component security in the index must
be at least 500,000 shares for each of the
VerDate Aug<31>2005
17:24 Dec 14, 2005
Jkt 208001
last six months, except that for each of
the lowest weighted component
securities in the index that in the
aggregate account for no more than 10%
of the weight of the index, trading
volume must be at least 400,000 shares
for each of the last six months;
(10) In a capitalization-weighted
index and a modified capitalizationweighted index, the lesser of the five
highest weighted component securities
in the index or the highest weighted
component securities in the index that
in the aggregate represent at least 30%
of the total number of stocks in the
index each have had an average
monthly trading volume of at least
1,000,000 shares over the past six
months;
(11) Each component security in the
index is registered pursuant to Section
12 of the Exchange Act;
(12) In an approximate equal-dollar
weighted index, the index must be
reconstituted and rebalanced if the
notional value of the largest component
is at least twice the notional volume of
the smallest component for fifty percent
or more of the trading days in the three
months prior to December 31 of each
year. For purposes of this provision the
‘‘notional value’’ is the market price of
the component times the number of
shares of the underlying component in
the index. Reconstitution and
rebalancing are also mandatory if the
number of components in the index is
greater than five at the time of
rebalancing. The Exchange reserves the
right to rebalance quarterly at its
discretion;
(13) In a modified equal-dollar
weighted index the Exchange will rebalance the index quarterly;
(14) In a share-weighted index, if a
share-weighted Micro Narrow-Based
Index fails to meet the maintenance
listing standards under Rule 5.13(e), the
Exchange will not re-balance the index,
will restrict trading in existing option
series to closing transactions, and will
not issue additional series for that
index; and
(15) In the event a class of index
options listed on the Exchange fails to
satisfy the maintenance listing
standards set forth herein, the Exchange
shall not open for trading any
additional series of options of that class
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 that class of index options has
been approved by the Commission
under Section 19(b)(2) of the 1934 Act.
*
*
*
*
*
PO 00000
Frm 00113
Fmt 4703
Sfmt 4703
74401
Position Limits for Industry (NarrowBased) Index Options
[Narrow-Based Index Options]
Rule 5.16(a). Rule 6.8 generally shall
govern position limits for industry index
options, as modified by this Rule 5.16.
Option contracts on an industry index
shall, subject to the procedures
specified in subsection (c) of this rule,
be subject to the following position
limits: [In determining compliance with
Rule 6.8, narrow based (industry) index
option contracts shall be subject to
position limits determined as follows:]
(1) 18,000 [—9,000] contracts if the
Exchange determines, at the time of a
review conducted pursuant to
subsection [paragraph] (b) below, that
any single underlying stock [in the
group] accounted, on average, for 30%
or more of the index value during the
30-day period immediately preceding
the review; or
(2) 24,000 [—12,000] contracts if the
Exchange determines, at the time of a
review conducted pursuant to
subsection [paragraph] (b) below, that
any single underlying stock [in the
group] accounted, on average, for 20%
or more of the index value or that any
five underlying stocks [in the group]
together accounted, on average, for more
than 50% of the index value, but that no
single stock in the group accounted, on
average, for 30% or more of the index
value, during the 30-day period
immediately preceding the review; or
(3) 31,500 [—15,000] contracts if the
Exchange determines that the
conditions specified above, which
would require the establishment of a
lower limit, have not occurred.
(b) The Exchange shall make the
determinations required by subsection
(a) above with respect to options on
each industry index at the
commencement of trading of such
options on the Exchange and thereafter
review the determination semi-annually
on January 1 and July 1. [determine the
appropriate position limit at the time
options on an index are initially opened
for trading and shall review its
determination semi-annually, at the
same time it reviews position and
exercise limits for stock options,
pursuant to Rule 6.8 and Rule 6.9. If the
Exchange determines after conducting
its review that a higher position limit is
appropriate for an index the Exchange
shall increase the limit as soon as
practicable. If the Exchange determines
that a lower limit is appropriate for an
index, the lower limit shall take effect
after the expiration of the farthest term
series open for trading at the time of the
Exchange’s review.]
E:\FR\FM\15DEN1.SGM
15DEN1
74402
Federal Register / Vol. 70, No. 240 / Thursday, December 15, 2005 / Notices
(c) If the Exchange determines, at the
time of a semi-annual review, that the
position limit in effect with respect to
options on a particular industry index is
lower than the maximum position limit
permitted by the criteria set forth in
subsection (a), the Exchange may effect
an appropriate position limit increase
immediately. If the Exchange
determines, at the time of a semi-annual
review, that the position limit in effect
with respect to options on a particular
industry index exceeds the maximum
position limit permitted by the criteria
set forth in subsection (a), the Exchange
shall reduce the position limit
applicable to such options to a level
consistent with such criteria; provided,
however, that such a reduction shall not
become effective until after the
expiration date of the most distantly
expiring options series relating to the
industry index that is open for trading
on the date of the review; and provided
further that such a reduction shall not
become effective if the Exchange
determines, at the next semi-annual
review, that the existing position limit
applicable to such options is consistent
with the criteria set forth in subsection
(a).
(d)—No Change.
[(c)] (e) Index [O]option contracts [on
an index] shall not be aggregated with
option contracts on any stocks whose
prices are the basis for the calculation
of the index.
(f) Positions in reduced-value index
options shall be aggregated with
positions in full-value index options.
For such purposes, ten (10) reducedreduced value options shall equal one
(1) full-value contract.
Position Limits for Options on Cash
Settled Micro Narrow-Based Indexes
Rule 5.16(f) Methodology for
Establishing Position Limits on CashSettled Options on Micro Narrow-Based
Indexes as defined under Rule
5.10(b)(25). The position limit for a
cash-settled option on a Micro NarrowBased Index that meets the criteria
under Rule 5.13(d) shall be calculated
in accordance with the following
methodology:
(1) Determine the Market
Capitalization of the S&P 500 Index.
(2) Calculate the Notional Value of a
position at the limit in the Chicago
Mercantile Exchange’s (‘‘CME’’) S&P
500 futures contract. The position limit
for that contract is 20,000 (in all months
combined) and the Index Multiplier is
$250.
Notional Value for the purposes of
this rule = Index Level * Index
Multiplier. Therefore, Notional Value of
VerDate Aug<31>2005
17:24 Dec 14, 2005
Jkt 208001
20,000 S&P 500 futures contracts =
20,000 * S&P 500 Index Level * 250.
(3) Calculate the Market
Capitalization Ratio of the S&P 500
Index Market Capitalization to the
Notional Value of a position limit at the
limit.
Market Capitalization Ratio = Market
Capitalization of the S&P 500/Notional
Value of 20,000 S&P 500 futures
contract positions.
(4) Determine the Market
Capitalization of the Micro NarrowBased Index by adding together the
market capitalization of each
underlying security component.
(5) Determine the Notional Value of
the Micro Narrow-Based Index Option
(Index Level * Contract Multiplier).
(6) Calculate the Position Limit of the
Micro Narrow-Based Index using the
following formula:
Contract Position Limit on the Micro
Narrow-Based Index = Market
Capitalization of Micro Narrow-Based
Index/(Notional Value of Micro NarrowBased Index Option * Market
Capitalization Ratio).
(7) Establishing the Position Limit.
After the applicable position limit has
been determined pursuant to Rule
5.16(f)(1)–(6), round the calculated
position limit to the nearest 1,000
contracts using standard rounding
procedures. For position limits that are
400 or greater, but less than 1000
contracts, round up to 1,000 contracts.
Rule 5.13(d) shall not apply to any
Micro Narrow-Based Index in which the
applicable position limit, as calculated
using Rule 5.16(f)(1)–(6), for that Micro
Narrow-Based Index is less than 400
contracts.
Exemptions From Position Limits
Rule 5.17(a). Broad-based Index
Hedge Exemptions—No Change.
(b) Industry (Narrow-Based) Index
Hedge Exemptions. The industry
(narrow-based) index hedge exemption
is in addition to the other exemptions
available under Exchange Rules,
interpretations and policies, and may
not exceed twice the standard limit
established under Rule 5.16. Industry
[Narrow-based (industry)] index option
positions may be exempt from
established position limits for each
option contract ‘‘hedged’’ by an
equivalent dollar amount of the
underlying component securities or
securities convertible into such
components; provided that, in applying
such hedge, each option position to be
exempted is hedged by a position in at
least 75% of the number of component
securities underlying the index. In
addition, the underlying value of the
option position may not exceed the
PO 00000
Frm 00114
Fmt 4703
Sfmt 4703
value of the underlying portfolio. The
value of the underlying portfolio is:
(1)[(a)] the total market value of the
net stock position; and [, less]
(2)[(b)] for positions in excess of the
standard limit, subtract the underlying
market value of:
(A)[(1)] any offsetting calls and puts in
the respective index option; and
(B)[(2)] any offsetting positions in
related stock index futures or options;
and
(C)[(3)] any economically equivalent
positions (assuming no other hedges for
these contracts exist).
The following procedures and criteria
must be satisfied to qualify for an
industry index hedge exemption:
[Prior Exchange approval on the
appropriate form designated by the
Exchange is required. This exemption
requires that both the option and stock
positions be initiated and liquidated in
an orderly manner. Specifically, a
reduction of the option position must
occur at or before the corresponding
reduction in the stock portfolio position.
The position in a narrow-based index
option may not exceed the total of: (a)
the limit established under Rule 5.16,
plus (b) two times that limit (for hedged
positions). The Exchange may
determine, in its discretion, to grant a
hedge exemption for a number of
contracts that is less than the maximum
number permitted under this
Commentary. The Exchange may also
grant other position limit exemptions
under Exchange rules, and such
exemptions shall be applied in addition
to any exemption provided under this
Commentary.]
(1) The hedge exemption account
must have received prior Exchange
approval for the hedge exemption
specifying the maximum number of
contracts that may be exempt under this
Rule. The hedge exemption account
must have provided all information
required on Exchange-approved forms
and must have kept such information
current. Exchange approval may be
granted on the basis of verbal
representations, in which event the
hedge exemption account shall within
two business days, or such other time
period designated by the Exchange,
furnish the Exchange with appropriate
forms and documentation
substantiating the basis for the
exemption. The hedge exemption
account may apply from time to time for
an increase in the maximum number of
contracts exempt from the position
limits.
(2) A hedge exemption account that is
not carried by an OTP Holder or OTP
Firm must be carried by a member of a
E:\FR\FM\15DEN1.SGM
15DEN1
Federal Register / Vol. 70, No. 240 / Thursday, December 15, 2005 / Notices
self-regulatory organization
participating in the Intermarket
Surveillance Group.
(3) The hedge exemption account
shall:
(A) liquidate and establish options,
stock positions, or economically
equivalent positions in an orderly
fashion; not initiate or liquidate
positions in a manner calculated to
cause unreasonable price fluctuations
or unwarranted price changes; and not
initiate or liquidate a stock position or
its equivalent with an equivalent index
option position with a view toward
taking advantage of any differential in
price between a group of securities and
an overlying stock index option;
(B) liquidate any options prior to or
contemporaneously with a decrease in
the hedged value of the portfolio which
options would thereby be rendered
excessive.
(C) promptly notify the Exchange of
any change in the portfolio that
materially affects the unhedged value of
the portfolio.
(4) If an exemption is granted, it will
be effective at the time the decision is
communicated. Retroactive exemptions
will not be granted.
(5) The hedge exemption account
shall promptly provide to the Exchange
any information requested concerning
the portfolio.
(6) Positions included in a portfolio
that serve to secure an index hedge
exemption may not also be used to
secure any other position limit
exemption granted by the Exchange or
any other self regulatory organization or
futures contract market.
(7) Any OTP Holder or OTP Firm that
maintains an industry index option
position in such OTP Holder or OTP
Firm’s own account or in a customer
account, and has reason to believe that
such position is in excess of the
applicable limit, shall promptly take the
action necessary to bring the position
into compliance. Failure to abide by this
provision shall be deemed to be a
violation of Rule 6.8 and this Rule 5.16
by the OTP Holder or OTP Firm.
(8) Violation of any of the provisions
of this Rule, absent reasonable
justification or excuse, shall result in
withdrawal of the index hedge
exemption and may form the basis for
subsequent denial of an application for
an index hedge exemption hereunder.
*
*
*
*
*
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
VerDate Aug<31>2005
17:24 Dec 14, 2005
Jkt 208001
concerning the purpose of, and the 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 III below.
The PCX 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
Purpose
1. Designation of Narrow-Based Index
Options. The Exchange is proposing to
amend PCX’s index option rules to
provide for the listing and trading of
narrow-based stock index options
pursuant to Rule 19b–4(e) under the
Act.10 The purpose of the proposal is to
allow the PCX to list and trade narrowbased index options immediately
without filing a proposed rule change
with the Commission under Section
19(b)(3)(A) of the Act prior to trading
the product, as PCX Rule 5.13(a)
currently requires.11 Current PCX Rule
5.13(a) states that the Exchange may list
and trade options on a narrow-based
index 30 days after the Exchange files a
formal rule filing under Section
19(b)(3)(A) describing the index option,
provided that the index meets the
generic listing criteria set forth in PCX
Rule 5.13(a)(1)–(12). However, the 19b–
4(e) Adopting Release no longer requires
a Section 19(b)(3)(A) filing and
subsequent waiting period so long as the
exchange, relying on Rule 19b–4(e)
under the Act, has generic listing
criteria which have been approved by
the Commission. The 19b–4(e) Adopting
Release indicated that products meeting
the listing criteria approved by the
Commission qualified for filing under
10 Rule 19b–4(e)(1) provides that ‘‘the listing and
trading of a new derivative securities product by a
self-regulatory organization shall not be deemed a
proposed rule change, pursuant to paragraph (c)(1)
of [Rule 19b–4], if the Commission has approved,
pursuant to Section 19(b) of the Exchange Act, the
self-regulatory organization’s trading rules,
procedures and listing standards for the product
class that would include the new derivative
securities product and the self-regulatory
organization has a surveillance program for the
product class.’’ 17 CFR 240.19b–4(e)(1). When
relying on Rule 19b–4(e), the SRO must submit
Form 19b–4(e) to the Commission within five
business days after the exchange begins trading the
new derivative securities products. See Securities
Exchange Act Release No. 40761 (December 8,
1998), 63 FR 70952 (December 22, 1998) (File S7–
13–98) (‘‘19b–4(e) Adopting Release’’).
11 The Commission notes that this procedure for
listing and trading of narrow-based stock index
options has been obsolete since the Commission
approved the Rule 19b–4(e) Adopting Release in
1998.
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
74403
Rule 19b–4(e), so long as the exchange
eliminated that requirement from its
existing rules.12
Therefore, the PCX is proposing to
eliminate the Section 19(b)(3)(A) rule
filing requirement from PCX Rule
5.13(a) and, instead, incorporate the
provisions of Rule 19b–4(e) into the new
proposed PCX Rule 5.13(b). The
Exchange believes that this proposal
will allow the PCX to list and trade
narrow-based index options that comply
with the PCX Rule 5.13(b) criteria,
immediately, thereby providing a more
expeditious method of offering these
products in the marketplace. The
Exchange represents that PCX’s
surveillance procedures are adequate to
monitor the trading in options on
narrow-based indexes as defined under
Rule 5.13(b).
In addition, the Exchange proposes to
amend its Rules to include the modified
capitalization-weighted methodology as
an acceptable generic listing criteria for
options on a narrow-based index.13
Current PCX Rule 5.13(a)(2) requires
that the subject index be capitalizationweighted, price-weighted, or equaldollar weighted and consist of ten or
more component securities. The
Exchange proposes to include the
modified capitalization-weighted
methodology as an acceptable generic
listing criteria. The Exchange believes
that such methodology is a widely
established method of weighting
securities indexes and is already in
place at other SROs.14 The Exchange
represents that PCX’s surveillance
procedures are adequate to monitor the
trading in options on narrow-based
index options that meet the specified
criteria in PCX Rule 5.13(b).
2. Position and Exercise Limits. The
Exchange is proposing to amend PCX
Rule 5.16 in order to increase the
position and exercise limits for narrowbased index options to the levels
12 See
id. at note 89.
modified capitalization weighted index is
similar to a capitalization weighted index, where
the components are weighted according to the total
market value compared to the market value of the
outstanding shares, except that an adjustment to the
weighting of one or more of the components occurs.
The general purposes for using this methodology
are to: (1) retain the economic attributes of
capitalization weighting; (2) promote portfolio
weight diversification; (3) reduce index
performance distortion by preserving the
capitalization ranking of companies; and (4) reduce
market impact on the smallest underlying
components from necessary weight rebalancings.
For example, indexes such as the Nasdaq-100
Index, KBW Bank Index, KBW Capital Markets
Index, and the Goldman Sachs Technology Indexes
are calculated using the Modified CapitalizationWeighted Methodology.
14 See supra note 9.
13 A
E:\FR\FM\15DEN1.SGM
15DEN1
74404
Federal Register / Vol. 70, No. 240 / Thursday, December 15, 2005 / Notices
currently in place at the ISE,15 the
CBOE,16 the Philadelphia Stock
Exchange, Inc. (‘‘Phlx’’),17 and the
American Stock Exchange LLC
(‘‘Amex’’).18 The three-tier position and
exercise limit determination will remain
unchanged. Specifically, the PCX
proposes to increase the position and
exercise limits for narrow-based index
options from 9,000, 12,000 and 15,000
contracts to 18,000, 24,000 and 31,500
contracts, respectively.
In addition to providing regulatory
equality, the PCX believes that an
increase in the position and exercise
limits for narrow-based index options is
appropriate for a number of reasons.
First, the Exchange believes that
increased position and exercise limits
for narrow-based index options may
bring additional depth and liquidity, in
terms of both volume and open interest,
to these index options classes without
significantly increasing concerns
regarding inter-market manipulations or
disruptions of the index options or the
underlying component securities.
Second, the Exchange notes that the
proposal, while increasing the position
limits for narrow-based index options,
continues to reflect the unique
characteristics of each index option and
to maintain the structure of the current
three-tiered system. Specifically, under
the proposal, the lowest proposed limit,
18,000 contracts, will apply to narrowbased index options in which a single
underlying stock accounted on average
for 30% or more of the index value
during the 30-day period immediately
preceding the Exchange’s semi-annual
review of industry index option position
limits. A position limit of 24,000
contracts will apply if: (1) any single
underlying stock accounted, on average,
for 20% or more of the index value, or
(2) any five underlying stocks together
accounted, on average, for more than
50% of the index value, but no single
stock in the group accounted, on
average, for more than 30% or more of
the index value, during the 30-day
period immediately preceding the
Exchange’s semi-annual review of
industry index option position limits.
The 31,500 contract limit will apply
only if the Exchange determines that the
above-specified conditions requiring
either the 18,000 contract limit or the
24,000 contract limit have not occurred.
3. Narrow-Based Index Hedge
Exemptions. The Exchange proposes to
amend PCX Rule 5.17(b) in order to
update the Exchange’s exemptions from
15 See
ISE Rules 2004 and 2005.
CBOE Rules 24.4, 24.4A, and 24.5.
17 See Phlx Rule 1001A and 1002A.
18 See Amex Rules 904C and 905C.
16 See
VerDate Aug<31>2005
17:24 Dec 14, 2005
Jkt 208001
position limits for narrow-based index
options and the procedures for
requesting such exemptions. The
Exchange represents that the proposed
exemptions are substantially identical to
those of other SROs.
4. Micro Narrow-Based Index Options.
The Exchange proposes to adopt new
PCX Rules 5.13(d) and 5.16(f) in order
to adopt the criteria for a new
classification of narrow-based indexes,
classified as ‘‘micro narrow-based’’
indexes and adopt initial listing
standards, maintenance standards, and
position and exercise limits for options
on micro narrow-based security
indexes.19
a. Listing and Maintenance
Standards. The Exchange proposes to
use the term ‘‘micro narrow-based’’ to
distinguish this classification of narrowbased indexes from the existing
‘‘narrow-based’’ security indexes.
Specifically, the Exchange proposes to
list and trade options on a micro
narrow-based security index, pursuant
to Rule 19b–4(e) under the Act, if the
index is a micro narrow-based security
index: (1) That has 9 or fewer
component securities; or (2) in which a
component security comprises more
than 30% of the index’s weighting; or
(3) in which the 5 highest weighted
component securities in the aggregate
comprise more than 60% of the index’s
weightings; or (4) in which the lowest
weighted component securities
comprising, in the aggregate, 25% of the
index’s weighting, have an aggregate
dollar value of average daily trading
volume of less than $50 million (or in
the case of an index with 15 or more
component securities, $30 million),
except that if there are 2 or more
securities with equal weighting that
could be included in the calculation of
the lowest weighted securities
comprising, in the aggregate, 25% of the
index’s weighting, such securities shall
be ranked from lowest to highest dollar
value of average daily trading volume
and shall be included in the calculation
based on their ranking starting with the
lowest ranked security. The proposed
rule change also makes other
modifications that are consistent with
the standards for futures on narrowbased indices, including a requirement
that all component securities of a
narrow-based security index be
registered pursuant to Section 12 of the
Act.
The Exchange proposes to permit a
micro narrow-based index to be a
modified capitalization-weighted
19 See
PO 00000
supra note 9.
Frm 00116
Fmt 4703
Sfmt 4703
index 20 and proposes three additional
index weighting methodologies for
micro narrow-based indexes—modified
equal-dollar weighted, approximate
equal-dollar weighted, and share
weighted. A modified equal-dollar
weighted methodology is designed to be
a fair measurement of the particular
industry or sector represented by the
index, but without assigning an
excessive weight to one or more index
components that have a larger market
capitalization relative to other index
components. Under this methodology,
each component is assigned a weight
that takes into account the relative
market capitalization of the securities
comprising the index. The index is
subsequently rebalanced to maintain
these pre-established weighting levels.
In the case of an index with 9
components or less, the weight assigned
to the largest component will not exceed
50% of the entire index weight. Like
equal-dollar weighted indexes, the value
of a modified equal-dollar weighted
index will equal the current combined
market value (based on U.S. primary
market prices) of the assigned number of
shares of each of the underlying
components divided by the appropriate
index divisor. A modified equal-dollar
weighted will be balanced quarterly.
An approximate equal-dollar
weighted index is composed of one or
more securities in which each
component security will be weighted
equally based on its market price on the
index’s selection date. The index must
be reconstituted and rebalanced if the
notional value of the largest component
is at least twice the notional volume of
the smallest component for fifty percent
or more of the trading days in the three
months prior to December 31 of each
year. For purposes of this provision, the
Exchange defines ‘‘notional value’’ as
the market price of the component times
the number of shares of the underlying
component in the index. The Exchange
also states that the reconstitution and
rebalancing are also mandatory if the
number of components in the index
changes. The Exchange also states that
it will reserve the right to rebalance
quarterly at its discretion.
A share-weighted index is designed to
mimic the value of a portfolio consisting
of two or more securities. The weight of
each component security is calculated
by multiplying the price of the
component security by an adjustment
20 See Securities Exchange Act Release No. 49932
(June 28, 2004), 69 FR 40994 (July 7, 2004) (SR–
CBOE–2002–24). The Exchange states that these
listing and maintenance standards are consistent
with the Commission’s Staff Legal Bulletin No. 15:
Listing Standards for Trading Security Futures
Products (September 5, 2001).
E:\FR\FM\15DEN1.SGM
15DEN1
Federal Register / Vol. 70, No. 240 / Thursday, December 15, 2005 / Notices
factor. Adjustment factors are chosen to
reflect the investment objective deemed
appropriate by the designer of the index
and will be published by the Exchange
as part of the contract specifications.21
The value of the index is calculated by
adding the weight of each component
security and dividing the total by an
index divisor.22 If a share-weighted
micro narrow-based index fails to meet
the maintenance listing standards under
PCX Rule 5.13(e), the index would not
be rebalanced by the Exchange. Instead,
the Exchange would restrict options
transactions to ‘‘closing-only’’
transactions and would not issue any
additional series for that index.23 Upon
the expiration of the last series on that
index, the Exchange will no longer
calculate that index and no additional
series would be listed.
Regardless of the weighting
methodology, the Exchange represents
that it will also reserve the right to
rebalance any micro narrow-based index
on an interim basis if warranted as a
result of extraordinary changes in the
relative values of the component
securities. Proposed PCX Rule
5.13(d)(2)(iv) shall provide that, to the
extent investors with open positions
must rely upon the continuity of the
options contracts on the index,
outstanding contracts are unaffected by
rebalancings. The Exchange believes
that these provisions are consistent with
previous rule changes approved by the
Commission.24
Proposed PCX Rule 5.13(e) contains
the maintenance standards that will
apply to micro narrow-based security
indexes.25 The Exchange believes that
the maintenance standards generally
adhere to the Commission’s Division of
21 For example, an index designer might want to
apply an adjustment factor in order to prevent one
or a few components from dominating the weight
of the index. This is similar to an adjustment factor
in other types of weighting methods, such as
modified capitalization weighted indexes.
22 The index ‘‘divisor’’ is calculated to yield a
benchmark index level (50, 100, 200, etc.) as of a
particular date.
23 When option series are restricted to ‘‘closingonly’’ status, the only opening transactions allowed
in such a series are (i) opening transactions by
market-makers executed to accommodate closing
transactions of other market participants and (ii)
opening transactions by an OTP Holder to facilitate
the closing transactions of public customers
executed as crosses pursuant to and in accordance
with PCX Rule 6.47. PCX will issue a bulletin to
notify OTP Holders and OTP Firms of such a
situation.
24 See Securities Exchange Act Release No. 42787
(May 24, 2000), 65 FR 33598 (May 24, 2000)
(Commentary .03 to Amex Rule 1000 and
Commentary .02 to Amex Rule 1000A).
25 Exhibit A summarizes how the Exchange
generally expects to handle certain corporate
actions upon listing Micro Narrow-Based Index
Options based on approximate equal-dollar
weighted or share-weighted indexes.
VerDate Aug<31>2005
17:24 Dec 14, 2005
Jkt 208001
Market Regulation’s Bulletin 26 and
those standards applicable to futures in
a narrow-based security index. The
Exchange represents that PCX’s
surveillance procedures are adequate to
monitor the trading in options on micro
narrow-based indexes as defined under
PCX Rule 5.10(b)(25).
b. Position and Exercise Limits. The
Exchange also proposes to establish a
new method for determining the
applicable position limits for options on
any micro narrow-based index that
meets the generic listing standards
under proposed PCX Rule 5.13(d). The
Exchange represents that it will utilize
a formulaic approach as provided in
proposed PCX Rule 5.16(f), ‘‘Position
Limits for Options on Cash Settled
Micro Narrow-Based Indexes’’ as
defined under PCX Rule 5.10(b)(25).
This new methodology is a departure
from the manner in which position
limits are assigned for index options
under existing PCX rules. The current
position limits for narrow-based index
options are assigned from predetermined tiers based on an analysis of
the respective index’s underlying
components. Under the proposed
methodology, position limits would be
determined in accordance with a
formula that considers a cash settled
micro narrow-based index’s market
capitalization and contract size in
relation to the market capitalization of
the S&P 500 index and the contract size
and position limit of a futures contract
on the S&P 500 index.
In determining compliance with PCX
Rule 5.18 (Exercise Limits), the
applicable exercise limit for option
contracts on any micro narrow-based
index, as defined under proposed PCX
Rule 5.10(b)(25), shall be a limit
equivalent to the applicable position
limits for options on that micro narrowbased index, as calculated under
proposed PCX Rule 5.16(f)(1)–(7).
c. Margin and Strikes Prices. PCX
Rule 4.16 governs the determination of
the applicable margin treatment for
options traded on the Exchange,
including options that overlie narrowbased indexes. The existing applicable
margin for options on narrow-based
indexes, as provided under PCX Rule
4.16, also shall apply to micro narrowbased indexes. The interval between
strike prices for options on indexes that
meet the criteria under PCX Rule 5.13(d)
will be no less than $2.50.
5. System Capacity. Finally, the
Exchange reasonably believes it has
adequate system capacity to support the
26 Commission Staff Legal Bulletin No. 15: Listing
Standards for Trading Security Futures Products
(September 5, 2001).
PO 00000
Frm 00117
Fmt 4703
Sfmt 4703
74405
trading of options on narrow-based and
micro narrow-based indexes, based on a
calculation of the Exchange’s current
ISCA allocation and the number of new
messages per second expected to be
generated by options on such index.
Statutory Basis
The Exchange believes that the
proposal is consistent with Section 6(b)
of the Act,27 in general, and furthers the
objectives of Section 6(b)(5) 28 of the
Act, in particular, in that it is designed
to facilitate transactions in securities, to
promote just and equitable principles of
trade, to enhance competition, and to
protect investors and the public
interest.29
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 that is not
necessary or appropriate in furtherance
of the purposes of the Act.
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. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulescomments@sec.gov. Please include Filed
No. SR–PCX–2005–79 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
27 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
29 PCX clarified that it believes the proposal is
consistent with Section 6(b)(5) of the Act as
opposed to Section 6(b)(4) as stated in Exhibit 1 to
the original proposed rule change and requested
that the statutory language relating to Section
6(b)(5) of the Act provided on page 13 of the
original rule filing be inserted in place of the
language cited from Section 6(b)(4) in Exhibit 1.
Telephone conversation between David Strandberg,
Director, Issuer Services PCX and Johnna B.
Dumler, Attorney, Division of Market Regulation,
Commission, December 6, 2005.
28 15
E:\FR\FM\15DEN1.SGM
15DEN1
74406
Federal Register / Vol. 70, No. 240 / Thursday, December 15, 2005 / Notices
100 F Street, NE., Washington, DC
20549–9303.
All submissions should refer to File No.
SR–PCX–2005–79. This file number
should be included on the subject line
if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). 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
Room. Copies of such filing will also be
available for inspection and copying at
the principal office of the PCX. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File No.
SR–PCX–2005–79 and should be
submitted on or before January 5, 2006.
IV. Commission’s Findings and Order
Granting Accelerated Approval of
Proposed Rule Change
After careful review, the Commission
finds that the proposed rule change, as
amended, is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange. In
particular, the Commission finds that
the PCX’s proposal is consistent with
Section 6(b)(5) of the Act,30 which
requires that the rules of an exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism for a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.31
Specifically, the Commission notes that
the proposed rule change would permit
the Exchange to list and trade, pursuant
30 15
U.S.C. 78f(b)(5).
approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
31 In
VerDate Aug<31>2005
17:24 Dec 14, 2005
Jkt 208001
to Rule 19b–4(e) under the Act,32
options on narrow-based and micro
narrow-based security indexes that meet
the listing criteria set forth in PCX Rule
5.13. The Commission finds that the
proposal strikes a reasonable balance
between the Commission’s mandates
under Section 6(b)(5) 33 of the Act to
remove impediments to, and perfect the
mechanism of a free and open market
and a national market system, while
protecting investors and the public
interest.
The Commission believes that the
proposed initial listing and maintenance
standards for options on narrow-based
and micro narrow-based security
indexes are consistent with the
standards previously established by
other SROs.34
The Commission also believes that the
proposed generic listing standards for
micro narrow-based index options
covering, among other things, minimum
capitalization, monthly trading volume,
and relative weightings of component
stocks are reasonably designed to ensure
that the trading market for component
stocks are adequately capitalized and
sufficiently liquid. In addition, the
Commission notes that position limits
for options on any micro narrow-based
index that meets the generic listing
standards of proposed PCX Rule 5.13(d)
would be determined in accordance
with a proposed new formula that
considers the index’s market
capitalization and contract size in
relation to the market capitalization of
the S&P 500 index and the contract size
and position limit of a futures contract
on the S&P 500 index. The Commission
believes that the proposed formula for
determining position limits for micro
narrow-based index options is
appropriate to deter manipulation of the
index. In addition, the Commission
finds that the weighting methodologies
employed by the PCX, including the
modified equal-dollar weighted,
approximate equal-dollar weighted and
share-weighted methodologies, are
appropriate index construction
standards. The Commission notes that
the Exchange represents that it
reasonably believes it has sufficient
32 17
CFR 240.19b–4(e).
U.S.C. 78f(b)(5).
34 See CBOE Rule 24.2. See e.g. Securities
Exchange Act Release No. 51346 (March 9, 2005),
70 FR 12916 (March 16, 2005) (SR–CBOE–2005–08)
(Order approving CBOE’s proposed modified
capitalization-weighted methodology as an
acceptable generic listing standard for options on
narrow-based index); see also Securities Exchange
Act Release No. 34157 (June 3, 1994), 59 FR 30062
(June 10, 1994) (SR–Amex–92–35) (SR–CBOE–93–
59) (SR–NYSE–94–17) (SR–PSE–94–07) (SR–Phlx–
94–10). The Commission findings in this approval
order are prospective from the date of this order.
33 15
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
operational system capacity to
accommodate the PCX’s listing and
trading of narrow-based and micro
narrow-based security indexes.
The Exchange is also charged with
surveillance for the product classes,
including options on narrow-based and
micro narrow-based security indexes.
The Exchange represents that it has
developed and submitted surveillance
procedures that it will use to monitor
the general trading and settlement
activity in narrow-based and micro
narrow-based indexes to ensure full
compliance with Exchange Rules and
federal securities laws. The Exchange
indicates that it will have complete
access to information regarding trading
activity in the underlying securities.
The Exchange has developed new
surveillance procedures specific to these
products that the Commission finds
adequate to monitor for manipulation in
the narrow-based and micro narrowbased indexes.
The Commission’s approval of the
proposed generic listing standards for
options on narrow-based and micro
narrow-based security indexes will
allow those options that satisfy these
standards to start trading under Rule
19b–4(e), without constituting a
proposed rule change within the
meaning of Section 19(b) of the Act 35
and Rule 19b–4,36 for which notice and
comment and Commission approval is
necessary. Rule 19b–4(e) 37 states that
the listing and trading of a new
derivative securities product by an SRO
shall not be deemed a proposed rule
change, pursuant to paragraph (c)(1) of
Rule19b–4, if the Commission has
approved, pursuant to Section 19(b) of
the Act, such SRO’s trading rules,
procedures and listing standards for the
product class that would include the
new derivative securities product, and
the SRO has a surveillance program for
the product class.
The Exchange’s ability to rely on Rule
19b–4(e) for these products potentially
reduces the time frame for brining these
securities to the market, promoting
competition and providing investors
with derivative securities products to
meet their needs more quickly. As
stated above, the Commission believes
that the Exchange has adequate trading
rules, procedures, listing standards, and
a surveillance program for the narrowbased and micro narrow-based indexes,
and thus, the Commission is approving
the generic listing standards pursuant to
19b–4(e) for these product classes.
35 15
U.S.C. 78s(b).
CFR 240.19b–4.
37 17 CFR 240.19b–4(e).
36 17
E:\FR\FM\15DEN1.SGM
15DEN1
Federal Register / Vol. 70, No. 240 / Thursday, December 15, 2005 / Notices
The PCX has requested that the
Commission find good cause for
approving the proposed rule change, as
amended, prior to the thirtieth day after
the proposal is published for comment
in the Federal Register. The
Commission believes that the adoption
of the proposal will enable the PCX to
act expeditiously in listing options on
narrow-based and micro narrow-based
securities indexes in the same manner
currently afforded to other options
exchanges, such as the CBOE.38 In
addition, the Commission believes that
the proposed rule change would remove
impediments to a free and open market
place by providing competition among
exchanges for new products.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act,39 for approving the proposed
rule change, as amended, prior to the
thirtieth day after publication thereof in
the Federal Register.
V. Conclusion
For the foregoing reasons, the
Commission finds that the proposed
rule change, as amended, is consistent
with the Act and the rules and
regulations thereunder applicable to a
74407
national securities exchange, and, in
particular, Section 6(b)(5) of the Act.40
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,41 that the
proposed rule change (SR–PCX–2005–
79), as amended by Amendment Nos. 2
and 3, is approved on an accelerated
basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.42
Jonathan G. Katz,
Secretary.
Exhibit A
CORPORATE ACTION SUMMARY A FOR APPROXIMATELY EQUAL DOLLAR-WEIGHTED INDEXES
Type
Action
Adjustments
Company
Special Cash
Dividend.
Component of
Index.
Adj. Close = Prev. Close—
Dividend.
Stock Split or
Dividend.
Spin Off ..........
Component of
Index.
Component of
Index (A).
Adj. Close = Prev. Close/Adjustment Factor.
Adj. Close = Close—(Ratio *
Spun off Company’s Price).
Spun Off Company (B).
ADDED ..................................
Two Components Merge
in an All
Stock, Cash
or Combination Deal.
A Non-Component Takes
Over a
Component.
Rights Issue ...
Remaining
Companies
(A).
Adj. Share lot = Prev. Share
lot + (Prev. Share lot *
Div.)/Adj. Close.
Adj. Round Lot = Prev. Share
Lot* Adjustment Factor.
Share lot = ((Share lot A*
Prev. Close A)¥(Share lot
A * Adj. Close A))/Close B.
Adj. Share Lot = Share Lot +
((B’s Close * B’s Share
Lot))/# of remaining components)/A’s Close.
Acquired Company (B).
Acquirer (A) ...
DELETED ..............................
ADDED ..................................
Share Lot = (B’s Round Lot *
B’s Close) / A’s Close.
Acquired Component of
Index (B).
Component of
Index.
DELETED ..............................
Adj. Share Lot = (Close *
Share Lot)/Adj. Close.
Adjustment Factor = # of New Shares for 1
Old Share.
Ratio = # of shares of spun off company received for every share of parent company
owned. Spun off company will be added at
a weight such that the index contribution
of the two companies after the event is
equal to the index contribution of the parent prior to the event.
All remaining companies will be adjusted
using the formula to the left. Their shares
will increase based on their price so as to
distribute the weight of the acquired company evenly.
................................................
Adj. Close = (Close + (Ratio *
Subscription Price))/(1 +
Ratio).
Companies contribution to index not affected
by Special dividend.
................................................
38 See
40 15
39 15
supra note 9.
U.S.C. 78s(b)(2).
41 15
VerDate Aug<31>2005
Notes
Share lot (1)
Close price/Action
17:24 Dec 14, 2005
Jkt 208001
PO 00000
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
Frm 00119
Fmt 4703
The acquiring company will replace the acquired company. Its share lot will be set to
contribute the same amount to the index
as the acquired company contributed prior
to the acquisition.
Ratio = # of rights received for 1 share of A.
42 17
Sfmt 4703
E:\FR\FM\15DEN1.SGM
CFR 200.30–3(a)(12).
15DEN1
74408
Federal Register / Vol. 70, No. 240 / Thursday, December 15, 2005 / Notices
CORPORATE ACTION SUMMARY A FOR APPROXIMATELY EQUAL DOLLAR-WEIGHTED INDEXES—Continued
Type
Adjustments
Company
Close price/Action
(1) Remaining
Securities
(A) or (2)
Replacement Company (A).
ADDED if (2) ..........................
If (1): ......................................
Adj. Share Lot (A) = Prev.
Share lot (A) + (B’s share
lot * B’s Close)/(# of Remaining Components * A’s
Close).
If (2): Share lot A = (B’s
Share lot * B’s Close)/A’s
Close.
Component of
Index (B).
Extraordinary
Removal.
DELETED ..............................
(1) Share
Notes
Share lot (1)
................................................
Action
Company B may be removed for any of the
following
reasons:
Bankruptcy
proceedings, Financial distress, Delisting from
a primary exchange (NYSE, Nasdaq,
Amex), or Illiquidity (10 consecutive no
trade days).
The Exchange would either:
(1) Divide B’s index contribution evenly between remaining components or
(2) If Replacement Company A is added,
Replacement Company A would be the
highest ranked (as of the most recent selection date) of the remaining securities in
the industry group which qualify for inclusion.
The method to be utilized will be described
in the index’s contract specification.
lots will be rounded to the nearest hundred at rebalance. Odd lots may exist between rebalances.
CORPORATE ACTION SUMMARY B FOR SHARE-WEIGHTED INDEXES
Type
Adjustments
Notes
Action
Company
Component price change
Adjustment factor change
Special Cash
Dividend.
Component of
Index.
New Close = Prev. Close—
Dividend.
Stock Split or
Dividend.
Component of
Index.
New Close = Prev. Close/
Split Ratio.
New Adj. Factor = (Prev. Adj.
Factor * Prev. Close)/New
Close.
New Adj. Factor = Prev. Adj.
Factor * Split Ratio.
Spin Off ..........
Component of
Index (A).
New Close = Prev. Close—
(Price Adjstment due to
value of spun-off company).
New Adj. Factor = (Prev. Adj.
Factor * Prev. Close)/New
Close.
Two Components Merge
in an All
Stock, Cash
or Combination Deal.
Acquiring
Company.
................................................
New Adj. Factor = Prev. Adj.
Factor + ((Acquired Company’s Close * Acquired
Company’s Adj. Factor)/Acquiring Company’s Close).
Acquired Company.
Non-Component Acquiring Company.
DELETED ..............................
................................................
ADDED ..................................
Non-Component Acquiring Company added
to index at Acquired Company’s weight.
Acquired Component of
Index.
Component of
Index.
DELETED ..............................
New Adj. Factor = ((Acquired
Company’s Close * Acquired Company’s Adj. Factor)/Acquiring Company’s
Close).
................................................
New Close = Prev. Close—
Price Adjustment due to
value of offering.
New Adj. Factor = (Prev. Adj.
Factor * Prev. Close)/New
Close.
Extraordinary
Removal.
Index Component.
DELETED ..............................
The Adjustment Factors for
each remaining component
will be increased to reflect
an equal distribution of the
weight of a deleted component.
Price Adjustment due to value of rights offering = (market capitalization of parent company—market capitalization of rights)/number of outstanding shares of the parent
company.
An Index Component will be removed for
bankruptcy proceedings, financial distress,
or delisting from a national market (NYSE,
Nasdaq, Amex).
VerDate Aug<31>2005
17:24 Dec 14, 2005
A Non-Component Takes
Over a
Component.
Rights Offering
Jkt 208001
PO 00000
Frm 00120
Fmt 4703
Sfmt 4703
For example, in the case of a 2-for-1 split,
the Split Ratio would be 2. In the case of a
5% stock dividend, the split ratio would be
1.05.
Price Adjustment due to value of spun-off
company = (Market capitalization of parent
company—market capitalization of spunoff company)/number of outstanding
shares of the parent company. Spun-off
Company is not added.
The weight of the Acquired Company is
added to the weight of the Acquiring Company.
E:\FR\FM\15DEN1.SGM
15DEN1
Federal Register / Vol. 70, No. 240 / Thursday, December 15, 2005 / Notices
[FR Doc. E5–7372 Filed 12–14–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52924; File No. SR–Phlx–
2005–74]
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change Relating to Elimination of
Commentary .01, Guideline 5 to Phlx
Rule 1010
December 7, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 2 thereunder,
notice is hereby given that on December
5, 2005, 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 and II below, which Items have
been prepared by the Phlx. The Phlx
filed the proposed rule change pursuant
to Section 19(b)(3)(A) of the Act 3 and
Rule 19b–4(f)(6) thereunder,4 which
renders the proposal effective upon
filing with the Commission. 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
The Exchange proposes to eliminate
Commentary .01, guideline 5 to Phlx
Rule 1010 (‘‘Withdrawal of Approval of
Underlying Securities’’), so that an
underlying security may be deemed to
meet the Exchange’s requirements for
continued approval for options
transactions where an issuer has failed
to make timely reports pursuant to the
Act.
The Exchange also proposes as a
matter of housekeeping to amend
Commentary .01, guideline 6 to Phlx
Rule 1010 and Phlx Rule 1009(a)(1)(ii)
to substitute the term ‘‘NMS stock’’ for
the previous description of a national
market system security, for consistency
with Regulation NMS.5 The text of the
proposed rule change is below.
Proposed new language is italicized,
and deleted language is in brackets.
*
*
*
*
*
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
5 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
2 17
VerDate Aug<31>2005
17:24 Dec 14, 2005
Jkt 208001
Rule 1010 Withdrawal of Approval of
Underlying Securities
Commentary:
.01 The Board of Governors has
established guidelines to be considered
by the Exchange in determining whether
an underlying security previously
approved for Exchange option
transactions no longer meets its
requirements for the continuance of
such approval. Absent exceptional
circumstances, with respect to items 1,
2, 3, or 4 listed below, an underlying
security will not be deemed to meet the
Exchange’s requirements for continued
approval whenever any of the following
occur:
1. through 4.—No Change.
5. [The issuer has failed to make
timely reports as required by applicable
requirements of the Securities Exchange
Act of 1934, and such failure has not
been corrected within 30 days after the
date the report was due to be filed.
6.] The underlying security ceases to
be an ‘‘NMS stock’’ as defined in Rule
600 of Regulation NMS under the
Securities Exchange Act of 1934. [The
issue, in the case of an underlying
security that is principally traded on a
national securities exchange, is delisted
from trading on that exchange and
neither meets NMS criteria nor is traded
through the facilities of a national
securities association, or the issue, in
the case of an underlying security that
is principally traded through the
facilities of a national securities
association, is no longer designated as
an NMS security].
[7]6. If an underlying security is
approved for options listing and trading
under the provisions of Commentary .05
of Rule 1009, the trading volume and
price history of the original security (as
therein defined) prior to but not after
the commencement of trading in the
restructure security (as therein defined),
including ‘‘when issued’’ trading, may
be taken into account in determining
whether the trading volume and market
price requirements of paragraph (3) and
(4) of this Commentary .01 are satisfied
provided, however, that in the case of a
Restructure Security approved for
options listing and trading under
paragraph (d) of Commentary .05 under
Rule 1009, such trading volume
requirements must be satisfied based on
the trading volume history of the
Restructure Security.
Commentaries .02 to .10—No Change.
*
*
*
*
*
Rule 1009
Securities
Criteria for Underlying
(a) Underlying securities in respect of
which put or call option contracts are
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
74409
approved for listing and trading on the
Exchange must meet the following
criteria:
(1) The security must be duly
registered and be an ‘‘NMS stock’’ as
defined in Rule 600 of Regulation NMS
[(i) listed on the national securities
exchange; or (ii) traded through the
facilities of a national securities
association and is a reported national
market system (‘‘NMS’’) security as
defined in Rule 11Aa3–1] under the
Securities Exchange Act of 1934;
(2) No Change.
Remainder of Rule 1009—No Change.
*
*
*
*
*
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 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
1. Purpose
The Exchange proposes to eliminate
Phlx Commentary .01, guideline 5 to
Phlx Rule 1010. Phlx Commentary .01
sets forth the guidelines to be
considered by the Exchange in
determining whether an underlying
security previously approved for
options trading continues to be
appropriate. Specifically, Phlx Rule
1010 and related Phlx Commentary .01
provide that if an underlying security
previously approved by the Exchange
does not meet the then current
requirements for continuance, the
Exchange will not open for trading
additional series of such options class
and may also limit any new opening
transactions in those options series that
have previously been opened for
trading.
Phlx Commentary .01, guideline 5 in
particular provides that an underlying
security will not be deemed to meet the
Exchange’s requirements for continued
approval whenever:
5. The issuer has failed to make
timely reports as required by applicable
requirements of the Securities Exchange
Act of 1934, and such failure has not
E:\FR\FM\15DEN1.SGM
15DEN1
Agencies
[Federal Register Volume 70, Number 240 (Thursday, December 15, 2005)]
[Notices]
[Pages 74399-74409]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-7372]
[[Page 74399]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52923; File No. SR-PCX-2005-79]
Self-Regulatory Organizations; Pacific Exchange, Inc., Notice of
Filing and Order Granting Accelerated Approval of Proposed Rule Change
and Amendment Nos. 2 and 3 Relating to Generic Listing Standards for
Options on Narrow-Based and Micro Narrow-Based Indexes
December 7, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 27, 2005, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'' or
``SEC'') the proposed rule change as described in Items I and II below,
which Items have been substantially prepared by the Exchange. The PCX
filed Amendment Nos. 1 \3\ and 2 \4\ on November 3, 2005. On December
6, 2005, the PCX filed Amendment No. 3.\5\ The Commission is publishing
this notice to solicit comments on the proposed rule change, as
amended, from interested persons and is approving the proposed rule
change, as amended, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Exchange withdrew Amendment No. 1 on November 3, 2005.
\4\ Amendment No. 2 supplemented the PCX's original filing and
made certain technical corrections to the purpose section and to the
proposed rule text.
\5\ Amendment No. 3 makes certain technical corrections to the
proposed rule text and purpose section, but did not materially
impact the filing.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its index options rules in order to
provide for the listing and trading of narrow-based index options
pursuant to Rule 19b-4(e) under the Act.\6\ The Exchange is also
proposing to amend the position and exercise limits with respect to
narrow-based index options, as well as a number of conforming changes
in order to bring the PCX narrow-based index option rules up to date
with those of other Self-Regulatory Organizations (``SROs'').\7\ In
addition, the Exchange proposes to adopt new generic listing standards
for options on micro narrow-based indexes. The proposed rule changes
are based on the rules of the International Securities Exchange, Inc.
(``ISE'') \8\ and the Chicago Board Options Exchange, Incorporated
(``CBOE''),\9\ which were approved by the Commission. The text of the
proposed rule change appears below. Additions are italicized; deletions
are [bracketed].
---------------------------------------------------------------------------
\6\ 17 CFR 240.19b-4(e).
\7\ The Exchange states that, on October 28, 2003, it filed a
proposed rule change to update its broad-based and narrow-based
index options rules. The Exchange further states that due to the
time-sensitive circumstances at that time, the Exchange amended its
filing to address only the updates to the broad-based index options
rules and deleted all references to modifications to the narrow-
based index options rules. At this time, the Exchange is proposing
to update its narrow-based index options rules in order to bring its
rules in line with other SROs. See Securities Exchange Act Release
No. 49455 (March 22, 2004), 69 FR 16316 (March 29, 2004) (Order
approving SR-PCX-2003-60). The Commission notes, however, that Rule
19b-4(e), with which the Exchange now proposes to bring its listing
standards into compliance, has been in effect since December 8,
1998. See Securities Exchange Act Release No. 40761 (December 8,
1998), 63 FR 70952 (December 22, 1998).
\8\ See Securities Exchange Act Release No. 48405 (August 25,
2003), 68 FR 52257 (September 2, 2003) (SR-ISE-2003-05) (Order
approving the ISE's generic listing standards for options on narrow-
based indexes).
\9\ See Securities Exchange Act Release No. 49932 (June 28,
2004), 69 FR 40994 (July 7, 2004) (SR-CBOE-2002-24) (Order approving
generic listing standards for options on micro narrow-based security
indexes) and Securities Exchange Act Release No. 51346 (March 9,
2005), 70 FR 12916 (March 16, 2005) (SR-CBOE-2005-08) (Order
approving CBOE's proposed modified capitalization-weighted
methodology as an acceptable generic listing standard for options on
narrow-based index).
---------------------------------------------------------------------------
Rule 5--Options Contracts Traded on the Exchange
* * * * *
Definitions
Rule 5.10(b)(1)-(24)--No Change.
(25) The term ``Micro Narrow-Based Index'' means an industry or
narrow-based index that meets the specific criteria provided under Rule
5.13(d).
* * * * *
Designation of the Index Narrow-Based Index Options
Rule 5.13(a) The component securities of an index underlying an
index option contract need not meet the requirements of Rule 5.3.
Except as set forth in subsection (b) below, the listing of a class of
index options on a narrow-based index requires the filing of a proposed
rule change to be approved by the SEC under Section 19(b) of the
Securities Exchange Act of 1934 (``1934 Act''). [The listing of a class
of index options on a new narrow-based index will be treated by the
Exchange as a proposed rule change subject to filing with and approval
by the Securities and Exchange Commission (``Commission'') under
Section 19(b) of the Act. A rule change proposing the listing of a
class of index options on a new underlying index may be designated by
the Exchange as constituting a stated policy, practice or
interpretation with respect to the administration of this Rule 5.13(a)
within the meaning of subparagraph (3)(A) of subsection 19(b) of the
Act, thereby qualifying the rule change for effectiveness upon filing
with the Commission if the Exchange prefiles with the Commission a
draft copy of the rule change not less than one week before it is
filed, and if the Exchange proposes to commence trading in the subject
class of index options not earlier than 30 days after the date of
filing, and if each of the following conditions is satisfied:]
(b) Narrow-Based Index. The Exchange may trade options on a narrow-
based index pursuant to Rule 19b-4(e) of the 1934 Act, if each of the
following conditions is satisfied:
(1)--No Change.
(2) The index is capitalization-weighted, price weighted, [or] or
equal dollar-weighted, or modified capitalization-weighted, and
consists of ten or more component securities;
(3)-(4)--No Change.
(5) In a capitalization-weighted index or a modified
capitalization-weighted index, the lesser of the five highest weighted
component securities in the index or the highest weighted component
securities in the index that in the aggregate represent at least 30% of
the total number of component securities in the index each have had an
average monthly trading volume of at least 2,000,000 shares over the
past six months;
(6) No single component security represents more than [25] 30% of
the weight of the index, and the five highest weighted component
securities in the index do not in the aggregate account for more than
50% ([60] 65% for an index consisting of fewer than 25 component
securities) of the weight of the index.
(7)--No Change.
(8) [All Component securities are ``reported securities'' as
defined in Rule 11Aa3-1 under the Exchange Act.] Each component
security must be an ``NMS Stock'' as defined in Rule 600 of Regulation
NMS of the Securities Exchange Act of 1934.
(9)-(12)--No Change.
[Maintenance Requirements Narrow-Based Index Options]
[5.13(b)](c) Maintenance Criteria. The following maintenance
listing standards shall apply to each class of index options originally
listed pursuant to subsection [paragraph] [(a)](b) above:
[[Page 74400]]
(1) The requirements [conditions] stated in subsections
[subparagraphs] [(a)](b)(1), (3), (6), (7), (8), (9), (10), (11) and
(12) must continue to be satisfied, provided that the requirements
[conditions] stated in subparagraph [(a)](b)(6) must be satisfied only
as of the first day of January and July in each year;
(2)-(3)--No change.
(4) In a capitalization-weighted index or a modified
capitalization-weighted index, the lesser of the five highest weighted
component securities in the index or the highest weighted component
securities in the index that in the aggregate represent at least 30% of
the total number of stocks in the index each have had an average
monthly trading volume of at least 1,000,000 shares over the past six
months.
In the event of a class of index options listed on the Exchange
fails to satisfy the maintenance listing standards set forth herein,
the Exchange shall not open for trading any additional series of
options of that class 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 that class of index options has been
approved by the Commission under Section 19(b)(2) of the Act.
(d) Notwithstanding subsection (a) above, the Exchange may trade
options on a Micro Narrow-Based security index pursuant to Rule 19b-
4(e) of the 1934 Act, if each of the following condition is satisfied:
(1) The Index is a security index:
(i) That has 9 or fewer component securities; or
(ii) In which a component security comprises more than 30 percent
of the index's weighting; or
(iii) In which the 5 highest weighted component securities in the
aggregate comprise more than 60 percent of the index's weighting; or
(iv) In which the lowest weighted component securities comprising,
in the aggregate, 25 percent of the index's weighting have an aggregate
dollar value of average daily trading volume of less than $50,000,000
(or in the case of an index with 15 or more component securities,
$30,000,000) except that if there are two or more securities with equal
weighting that could be included in the calculation of the lowest
weighted component securities comprising, in the aggregate, 25 percent
of the index's weighting, such securities shall be ranked from lowest
to highest dollar value of average daily trading volume and shall be
included in the calculation based on their ranking starting with the
lowest ranked security;
(2) The index is capitalization-weighted, modified capitalization-
weighted, price-weighted, share weighted, equal dollar-weighted,
approximate equal-dollar weighted, or modified equal-dollar weighted;
(i) For the purposes of this Rule 5.13(d), an approximate equal-
dollar weighted index is composed of one or more securities in which
each component security will be weighted equally based on its market
price on the index's selection date and the index must be reconstituted
and rebalanced if the notional value of the largest component is at
least twice the notional volume of the smallest component for fifty
percent or more of the trading days in the three months prior to
December 31 of each year. For purposes of this provision the ``notional
value'' is the market price of the component times the number of shares
of the underlying component in the index. Reconstitution and
rebalancing are also mandatory if the number of components in the index
is greater than five at the time of rebalancing. The Exchange reserves
the right to rebalance quarterly at its discretion.
(ii) For the purposes of this Rule 5.13(d), a modified equal-dollar
weighted index is an index in which each underlying component
represents a pre-determined weighting percentage of the entire index.
Each component is assigned a weight that takes into account the
relative market capitalization of the securities comprising the index.
A modified equal-dollar weighted index will be balanced quarterly.
(iii) For the purposes of this Rule 5.13(d), a share-weighted index
is calculated by multiplying the price of the component security by an
adjustment factor. Adjustment factors are chosen to reflect the
investment objective deemed appropriate by the designer of the index
and will be published by the Exchange as part of the contract
specifications. The value of the index is calculated by adding the
weight of each component security and dividing the total by an index
divisor, calculated to yield a benchmark index level as of a particular
date. A share-weighted index is not adjusted to reflect changes in the
number of outstanding shares of its components. A share-weighted Micro
Narrow-Based index will not be re-balanced. If a share-weighted Micro
Narrow-Based Index fails to meet the maintenance listing standards
under Rule 5.13(e), the Exchange will restrict trading in existing
option series to closing transactions and will not issue additional
series for that index.
(iv) The Exchange may rebalance any Micro Narrow-Based index on an
interim basis if warranted as a result of extraordinary changes in the
relative values of the component securities. To the extent investors
with open positions must rely upon the continuity of the options
contract on the index, outstanding contracts are unaffected by
rebalancings.
(3) Each component security in the index has a minimum market
capitalization of at least $75 million, except that each of the lowest
weighted securities in the index that in the aggregate account for no
more than 10% of the weight of the index may have a minimum market
capitalization of only $50 million;
(4) The average daily trading volume in each of the preceding six
months for each component security in the index is at least 45,500
shares, except that each of the lowest weighted component securities in
the index that in the aggregate account for no more than 10% of the
weight of the index may have an average daily trading volume of only
22,750 shares for each of the last six months;
(5) In a capitalization-weighted index, the lesser of: (1) The five
highest weighted component securities in the index each have had an
average daily trading volume of at least 90,000 shares over the past
six months; or (2) the highest weighted component securities in the
index that in the aggregate represent at least 30% of the total number
of component securities in the index each have had an average daily
trading volume of at least 90,000 shares over the past six months;
(6) Subject to subparagraphs (4) and (5) above, the component
securities that account for at least 90% of the total index weight and
at least 80% of the total number of component securities in the index
must meet the requirements of Rule 5.3 applicable to individual
underlying securities;
(7)(i) Each component security must be an ``NMS Stock'' as defined
in Rule 600 of Regulation NMS of the Securities Exchange Act of 1934;
and
(ii) Foreign securities or ADRs that are not subject to
comprehensive surveillance sharing agreements do not represent more
than 20% of the weight of the index;
(8) The current underlying index value will be reported at least
once every fifteen seconds during the time the index options are traded
on the Exchange;
[[Page 74401]]
(9) An equal dollar-weighted index will be rebalanced at least once
every quarter;
(10) If the underlying index is maintained by a broker-dealer, the
index is calculated by a third party who is not a broker-dealer, and
the broker-dealer has in place an information barrier around its
personnel who have access to information concerning changes in and
adjustments to the index;
(11) Each component security in the index is registered pursuant to
Section 12 of the Exchange Act; and
(12) Cash settled index options are designated as A.M.-settled
options.
(e) The following maintenance listing standards shall apply to each
class of index options originally listed pursuant to paragraph (d)
above:
(1) The index meets the criteria of paragraph (d)(1) of this Rule;
(2) Subject to subparagraphs (9) and (10) below, the component
securities that account for at least 90% of the total index weight and
at least 80% of the total number of component securities in the index
must meet the requirements of Rule 5.3;
(3) Each component security in the index has a market
capitalization of at least $75 million, except that each of the lowest
weighted component securities that in the aggregate account for no more
than 10% of the weight of the index may have a market capitalization of
only $50 million;
(4) Each component security must be an ``NMS stock'' as defined in
Rule 600 of Regulation NMS of the Securities and Exchange Act of 1934;
and
(5) Foreign securities or ADRs thereon that are not subject to
comprehensive surveillance sharing agreements do not represent more
than 20% of the weight of the index;
(6) The current underlying index value will be reported at least
once every fifteen seconds during the time the index options are traded
on the Exchange;
(7) If the underlying index is maintained by a broker-dealer, the
index is calculated by a third party who is not a broker-dealer, and
the broker-dealer has in place an information barrier around its
personnel who have access to information concerning changes in and
adjustments to the index;
(8) The total number of component securities in the index may not
increase or decrease by more than 33\1/3\% from the number of component
securities in the index at the time of its initial listing;
(9) Trading volume of each component security in the index must be
at least 500,000 shares for each of the last six months, except that
for each of the lowest weighted component securities in the index that
in the aggregate account for no more than 10% of the weight of the
index, trading volume must be at least 400,000 shares for each of the
last six months;
(10) In a capitalization-weighted index and a modified
capitalization-weighted index, the lesser of the five highest weighted
component securities in the index or the highest weighted component
securities in the index that in the aggregate represent at least 30% of
the total number of stocks in the index each have had an average
monthly trading volume of at least 1,000,000 shares over the past six
months;
(11) Each component security in the index is registered pursuant to
Section 12 of the Exchange Act;
(12) In an approximate equal-dollar weighted index, the index must
be reconstituted and rebalanced if the notional value of the largest
component is at least twice the notional volume of the smallest
component for fifty percent or more of the trading days in the three
months prior to December 31 of each year. For purposes of this
provision the ``notional value'' is the market price of the component
times the number of shares of the underlying component in the index.
Reconstitution and rebalancing are also mandatory if the number of
components in the index is greater than five at the time of
rebalancing. The Exchange reserves the right to rebalance quarterly at
its discretion;
(13) In a modified equal-dollar weighted index the Exchange will
re-balance the index quarterly;
(14) In a share-weighted index, if a share-weighted Micro Narrow-
Based Index fails to meet the maintenance listing standards under Rule
5.13(e), the Exchange will not re-balance the index, will restrict
trading in existing option series to closing transactions, and will not
issue additional series for that index; and
(15) In the event a class of index options listed on the Exchange
fails to satisfy the maintenance listing standards set forth herein,
the Exchange shall not open for trading any additional series of
options of that class 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 that class of index options has been
approved by the Commission under Section 19(b)(2) of the 1934 Act.
* * * * *
Position Limits for Industry (Narrow-Based) Index Options
[Narrow-Based Index Options]
Rule 5.16(a). Rule 6.8 generally shall govern position limits for
industry index options, as modified by this Rule 5.16. Option contracts
on an industry index shall, subject to the procedures specified in
subsection (c) of this rule, be subject to the following position
limits: [In determining compliance with Rule 6.8, narrow based
(industry) index option contracts shall be subject to position limits
determined as follows:]
(1) 18,000 [--9,000] contracts if the Exchange determines, at the
time of a review conducted pursuant to subsection [paragraph] (b)
below, that any single underlying stock [in the group] accounted, on
average, for 30% or more of the index value during the 30-day period
immediately preceding the review; or
(2) 24,000 [--12,000] contracts if the Exchange determines, at the
time of a review conducted pursuant to subsection [paragraph] (b)
below, that any single underlying stock [in the group] accounted, on
average, for 20% or more of the index value or that any five underlying
stocks [in the group] together accounted, on average, for more than 50%
of the index value, but that no single stock in the group accounted, on
average, for 30% or more of the index value, during the 30-day period
immediately preceding the review; or
(3) 31,500 [--15,000] contracts if the Exchange determines that the
conditions specified above, which would require the establishment of a
lower limit, have not occurred.
(b) The Exchange shall make the determinations required by
subsection (a) above with respect to options on each industry index at
the commencement of trading of such options on the Exchange and
thereafter review the determination semi-annually on January 1 and July
1. [determine the appropriate position limit at the time options on an
index are initially opened for trading and shall review its
determination semi-annually, at the same time it reviews position and
exercise limits for stock options, pursuant to Rule 6.8 and Rule 6.9.
If the Exchange determines after conducting its review that a higher
position limit is appropriate for an index the Exchange shall increase
the limit as soon as practicable. If the Exchange determines that a
lower limit is appropriate for an index, the lower limit shall take
effect after the expiration of the farthest term series open for
trading at the time of the Exchange's review.]
[[Page 74402]]
(c) If the Exchange determines, at the time of a semi-annual
review, that the position limit in effect with respect to options on a
particular industry index is lower than the maximum position limit
permitted by the criteria set forth in subsection (a), the Exchange may
effect an appropriate position limit increase immediately. If the
Exchange determines, at the time of a semi-annual review, that the
position limit in effect with respect to options on a particular
industry index exceeds the maximum position limit permitted by the
criteria set forth in subsection (a), the Exchange shall reduce the
position limit applicable to such options to a level consistent with
such criteria; provided, however, that such a reduction shall not
become effective until after the expiration date of the most distantly
expiring options series relating to the industry index that is open for
trading on the date of the review; and provided further that such a
reduction shall not become effective if the Exchange determines, at the
next semi-annual review, that the existing position limit applicable to
such options is consistent with the criteria set forth in subsection
(a).
(d)--No Change.
[(c)] (e) Index [O]option contracts [on an index] shall not be
aggregated with option contracts on any stocks whose prices are the
basis for the calculation of the index.
(f) Positions in reduced-value index options shall be aggregated
with positions in full-value index options. For such purposes, ten (10)
reduced-reduced value options shall equal one (1) full-value contract.
Position Limits for Options on Cash Settled Micro Narrow-Based Indexes
Rule 5.16(f) Methodology for Establishing Position Limits on Cash-
Settled Options on Micro Narrow-Based Indexes as defined under Rule
5.10(b)(25). The position limit for a cash-settled option on a Micro
Narrow-Based Index that meets the criteria under Rule 5.13(d) shall be
calculated in accordance with the following methodology:
(1) Determine the Market Capitalization of the S&P 500 Index.
(2) Calculate the Notional Value of a position at the limit in the
Chicago Mercantile Exchange's (``CME'') S&P 500 futures contract. The
position limit for that contract is 20,000 (in all months combined) and
the Index Multiplier is $250.
Notional Value for the purposes of this rule = Index Level * Index
Multiplier. Therefore, Notional Value of 20,000 S&P 500 futures
contracts = 20,000 * S&P 500 Index Level * 250.
(3) Calculate the Market Capitalization Ratio of the S&P 500 Index
Market Capitalization to the Notional Value of a position limit at the
limit.
Market Capitalization Ratio = Market Capitalization of the S&P 500/
Notional Value of 20,000 S&P 500 futures contract positions.
(4) Determine the Market Capitalization of the Micro Narrow-Based
Index by adding together the market capitalization of each underlying
security component.
(5) Determine the Notional Value of the Micro Narrow-Based Index
Option (Index Level * Contract Multiplier).
(6) Calculate the Position Limit of the Micro Narrow-Based Index
using the following formula:
Contract Position Limit on the Micro Narrow-Based Index = Market
Capitalization of Micro Narrow-Based Index/(Notional Value of Micro
Narrow-Based Index Option * Market Capitalization Ratio).
(7) Establishing the Position Limit. After the applicable position
limit has been determined pursuant to Rule 5.16(f)(1)-(6), round the
calculated position limit to the nearest 1,000 contracts using standard
rounding procedures. For position limits that are 400 or greater, but
less than 1000 contracts, round up to 1,000 contracts.
Rule 5.13(d) shall not apply to any Micro Narrow-Based Index in
which the applicable position limit, as calculated using Rule
5.16(f)(1)-(6), for that Micro Narrow-Based Index is less than 400
contracts.
Exemptions From Position Limits
Rule 5.17(a). Broad-based Index Hedge Exemptions--No Change.
(b) Industry (Narrow-Based) Index Hedge Exemptions. The industry
(narrow-based) index hedge exemption is in addition to the other
exemptions available under Exchange Rules, interpretations and
policies, and may not exceed twice the standard limit established under
Rule 5.16. Industry [Narrow-based (industry)] index option positions
may be exempt from established position limits for each option contract
``hedged'' by an equivalent dollar amount of the underlying component
securities or securities convertible into such components; provided
that, in applying such hedge, each option position to be exempted is
hedged by a position in at least 75% of the number of component
securities underlying the index. In addition, the underlying value of
the option position may not exceed the value of the underlying
portfolio. The value of the underlying portfolio is:
(1)[(a)] the total market value of the net stock position; and [,
less]
(2)[(b)] for positions in excess of the standard limit, subtract
the underlying market value of:
(A)[(1)] any offsetting calls and puts in the respective index
option; and
(B)[(2)] any offsetting positions in related stock index futures or
options; and
(C)[(3)] any economically equivalent positions (assuming no other
hedges for these contracts exist).
The following procedures and criteria must be satisfied to qualify
for an industry index hedge exemption:
[Prior Exchange approval on the appropriate form designated by the
Exchange is required. This exemption requires that both the option and
stock positions be initiated and liquidated in an orderly manner.
Specifically, a reduction of the option position must occur at or
before the corresponding reduction in the stock portfolio position. The
position in a narrow-based index option may not exceed the total of:
(a) the limit established under Rule 5.16, plus (b) two times that
limit (for hedged positions). The Exchange may determine, in its
discretion, to grant a hedge exemption for a number of contracts that
is less than the maximum number permitted under this Commentary. The
Exchange may also grant other position limit exemptions under Exchange
rules, and such exemptions shall be applied in addition to any
exemption provided under this Commentary.]
(1) The hedge exemption account must have received prior Exchange
approval for the hedge exemption specifying the maximum number of
contracts that may be exempt under this Rule. The hedge exemption
account must have provided all information required on Exchange-
approved forms and must have kept such information current. Exchange
approval may be granted on the basis of verbal representations, in
which event the hedge exemption account shall within two business days,
or such other time period designated by the Exchange, furnish the
Exchange with appropriate forms and documentation substantiating the
basis for the exemption. The hedge exemption account may apply from
time to time for an increase in the maximum number of contracts exempt
from the position limits.
(2) A hedge exemption account that is not carried by an OTP Holder
or OTP Firm must be carried by a member of a
[[Page 74403]]
self-regulatory organization participating in the Intermarket
Surveillance Group.
(3) The hedge exemption account shall:
(A) liquidate and establish options, stock positions, or
economically equivalent positions in an orderly fashion; not initiate
or liquidate positions in a manner calculated to cause unreasonable
price fluctuations or unwarranted price changes; and not initiate or
liquidate a stock position or its equivalent with an equivalent index
option position with a view toward taking advantage of any differential
in price between a group of securities and an overlying stock index
option;
(B) liquidate any options prior to or contemporaneously with a
decrease in the hedged value of the portfolio which options would
thereby be rendered excessive.
(C) promptly notify the Exchange of any change in the portfolio
that materially affects the unhedged value of the portfolio.
(4) If an exemption is granted, it will be effective at the time
the decision is communicated. Retroactive exemptions will not be
granted.
(5) The hedge exemption account shall promptly provide to the
Exchange any information requested concerning the portfolio.
(6) Positions included in a portfolio that serve to secure an index
hedge exemption may not also be used to secure any other position limit
exemption granted by the Exchange or any other self regulatory
organization or futures contract market.
(7) Any OTP Holder or OTP Firm that maintains an industry index
option position in such OTP Holder or OTP Firm's own account or in a
customer account, and has reason to believe that such position is in
excess of the applicable limit, shall promptly take the action
necessary to bring the position into compliance. Failure to abide by
this provision shall be deemed to be a violation of Rule 6.8 and this
Rule 5.16 by the OTP Holder or OTP Firm.
(8) Violation of any of the provisions of this Rule, absent
reasonable justification or excuse, shall result in withdrawal of the
index hedge exemption and may form the basis for subsequent denial of
an application for an index hedge exemption hereunder.
* * * * *
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 the 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 III below. The PCX 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
Purpose
1. Designation of Narrow-Based Index Options. The Exchange is
proposing to amend PCX's index option rules to provide for the listing
and trading of narrow-based stock index options pursuant to Rule 19b-
4(e) under the Act.\10\ The purpose of the proposal is to allow the PCX
to list and trade narrow-based index options immediately without filing
a proposed rule change with the Commission under Section 19(b)(3)(A) of
the Act prior to trading the product, as PCX Rule 5.13(a) currently
requires.\11\ Current PCX Rule 5.13(a) states that the Exchange may
list and trade options on a narrow-based index 30 days after the
Exchange files a formal rule filing under Section 19(b)(3)(A)
describing the index option, provided that the index meets the generic
listing criteria set forth in PCX Rule 5.13(a)(1)-(12). However, the
19b-4(e) Adopting Release no longer requires a Section 19(b)(3)(A)
filing and subsequent waiting period so long as the exchange, relying
on Rule 19b-4(e) under the Act, has generic listing criteria which have
been approved by the Commission. The 19b-4(e) Adopting Release
indicated that products meeting the listing criteria approved by the
Commission qualified for filing under Rule 19b-4(e), so long as the
exchange eliminated that requirement from its existing rules.\12\
---------------------------------------------------------------------------
\10\ Rule 19b-4(e)(1) provides that ``the listing and trading of
a new derivative securities product by a self-regulatory
organization shall not be deemed a proposed rule change, pursuant to
paragraph (c)(1) of [Rule 19b-4], if the Commission has approved,
pursuant to Section 19(b) of the Exchange Act, the self-regulatory
organization's trading rules, procedures and listing standards for
the product class that would include the new derivative securities
product and the self-regulatory organization has a surveillance
program for the product class.'' 17 CFR 240.19b-4(e)(1). When
relying on Rule 19b-4(e), the SRO must submit Form 19b-4(e) to the
Commission within five business days after the exchange begins
trading the new derivative securities products. See Securities
Exchange Act Release No. 40761 (December 8, 1998), 63 FR 70952
(December 22, 1998) (File S7-13-98) (``19b-4(e) Adopting Release'').
\11\ The Commission notes that this procedure for listing and
trading of narrow-based stock index options has been obsolete since
the Commission approved the Rule 19b-4(e) Adopting Release in 1998.
\12\ See id. at note 89.
---------------------------------------------------------------------------
Therefore, the PCX is proposing to eliminate the Section
19(b)(3)(A) rule filing requirement from PCX Rule 5.13(a) and, instead,
incorporate the provisions of Rule 19b-4(e) into the new proposed PCX
Rule 5.13(b). The Exchange believes that this proposal will allow the
PCX to list and trade narrow-based index options that comply with the
PCX Rule 5.13(b) criteria, immediately, thereby providing a more
expeditious method of offering these products in the marketplace. The
Exchange represents that PCX's surveillance procedures are adequate to
monitor the trading in options on narrow-based indexes as defined under
Rule 5.13(b).
In addition, the Exchange proposes to amend its Rules to include
the modified capitalization-weighted methodology as an acceptable
generic listing criteria for options on a narrow-based index.\13\
Current PCX Rule 5.13(a)(2) requires that the subject index be
capitalization-weighted, price-weighted, or equal-dollar weighted and
consist of ten or more component securities. The Exchange proposes to
include the modified capitalization-weighted methodology as an
acceptable generic listing criteria. The Exchange believes that such
methodology is a widely established method of weighting securities
indexes and is already in place at other SROs.\14\ The Exchange
represents that PCX's surveillance procedures are adequate to monitor
the trading in options on narrow-based index options that meet the
specified criteria in PCX Rule 5.13(b).
---------------------------------------------------------------------------
\13\ A modified capitalization weighted index is similar to a
capitalization weighted index, where the components are weighted
according to the total market value compared to the market value of
the outstanding shares, except that an adjustment to the weighting
of one or more of the components occurs. The general purposes for
using this methodology are to: (1) retain the economic attributes of
capitalization weighting; (2) promote portfolio weight
diversification; (3) reduce index performance distortion by
preserving the capitalization ranking of companies; and (4) reduce
market impact on the smallest underlying components from necessary
weight rebalancings. For example, indexes such as the Nasdaq-100
Index, KBW Bank Index, KBW Capital Markets Index, and the Goldman
Sachs Technology Indexes are calculated using the Modified
Capitalization-Weighted Methodology.
\14\ See supra note 9.
---------------------------------------------------------------------------
2. Position and Exercise Limits. The Exchange is proposing to amend
PCX Rule 5.16 in order to increase the position and exercise limits for
narrow-based index options to the levels
[[Page 74404]]
currently in place at the ISE,\15\ the CBOE,\16\ the Philadelphia Stock
Exchange, Inc. (``Phlx''),\17\ and the American Stock Exchange LLC
(``Amex'').\18\ The three-tier position and exercise limit
determination will remain unchanged. Specifically, the PCX proposes to
increase the position and exercise limits for narrow-based index
options from 9,000, 12,000 and 15,000 contracts to 18,000, 24,000 and
31,500 contracts, respectively.
---------------------------------------------------------------------------
\15\ See ISE Rules 2004 and 2005.
\16\ See CBOE Rules 24.4, 24.4A, and 24.5.
\17\ See Phlx Rule 1001A and 1002A.
\18\ See Amex Rules 904C and 905C.
---------------------------------------------------------------------------
In addition to providing regulatory equality, the PCX believes that
an increase in the position and exercise limits for narrow-based index
options is appropriate for a number of reasons. First, the Exchange
believes that increased position and exercise limits for narrow-based
index options may bring additional depth and liquidity, in terms of
both volume and open interest, to these index options classes without
significantly increasing concerns regarding inter-market manipulations
or disruptions of the index options or the underlying component
securities.
Second, the Exchange notes that the proposal, while increasing the
position limits for narrow-based index options, continues to reflect
the unique characteristics of each index option and to maintain the
structure of the current three-tiered system. Specifically, under the
proposal, the lowest proposed limit, 18,000 contracts, will apply to
narrow-based index options in which a single underlying stock accounted
on average for 30% or more of the index value during the 30-day period
immediately preceding the Exchange's semi-annual review of industry
index option position limits. A position limit of 24,000 contracts will
apply if: (1) any single underlying stock accounted, on average, for
20% or more of the index value, or (2) any five underlying stocks
together accounted, on average, for more than 50% of the index value,
but no single stock in the group accounted, on average, for more than
30% or more of the index value, during the 30-day period immediately
preceding the Exchange's semi-annual review of industry index option
position limits. The 31,500 contract limit will apply only if the
Exchange determines that the above-specified conditions requiring
either the 18,000 contract limit or the 24,000 contract limit have not
occurred.
3. Narrow-Based Index Hedge Exemptions. The Exchange proposes to
amend PCX Rule 5.17(b) in order to update the Exchange's exemptions
from position limits for narrow-based index options and the procedures
for requesting such exemptions. The Exchange represents that the
proposed exemptions are substantially identical to those of other SROs.
4. Micro Narrow-Based Index Options. The Exchange proposes to adopt
new PCX Rules 5.13(d) and 5.16(f) in order to adopt the criteria for a
new classification of narrow-based indexes, classified as ``micro
narrow-based'' indexes and adopt initial listing standards, maintenance
standards, and position and exercise limits for options on micro
narrow-based security indexes.\19\
---------------------------------------------------------------------------
\19\ See supra note 9.
---------------------------------------------------------------------------
a. Listing and Maintenance Standards. The Exchange proposes to use
the term ``micro narrow-based'' to distinguish this classification of
narrow-based indexes from the existing ``narrow-based'' security
indexes. Specifically, the Exchange proposes to list and trade options
on a micro narrow-based security index, pursuant to Rule 19b-4(e) under
the Act, if the index is a micro narrow-based security index: (1) That
has 9 or fewer component securities; or (2) in which a component
security comprises more than 30% of the index's weighting; or (3) in
which the 5 highest weighted component securities in the aggregate
comprise more than 60% of the index's weightings; or (4) in which the
lowest weighted component securities comprising, in the aggregate, 25%
of the index's weighting, have an aggregate dollar value of average
daily trading volume of less than $50 million (or in the case of an
index with 15 or more component securities, $30 million), except that
if there are 2 or more securities with equal weighting that could be
included in the calculation of the lowest weighted securities
comprising, in the aggregate, 25% of the index's weighting, such
securities shall be ranked from lowest to highest dollar value of
average daily trading volume and shall be included in the calculation
based on their ranking starting with the lowest ranked security. The
proposed rule change also makes other modifications that are consistent
with the standards for futures on narrow-based indices, including a
requirement that all component securities of a narrow-based security
index be registered pursuant to Section 12 of the Act.
The Exchange proposes to permit a micro narrow-based index to be a
modified capitalization-weighted index \20\ and proposes three
additional index weighting methodologies for micro narrow-based
indexes--modified equal-dollar weighted, approximate equal-dollar
weighted, and share weighted. A modified equal-dollar weighted
methodology is designed to be a fair measurement of the particular
industry or sector represented by the index, but without assigning an
excessive weight to one or more index components that have a larger
market capitalization relative to other index components. Under this
methodology, each component is assigned a weight that takes into
account the relative market capitalization of the securities comprising
the index. The index is subsequently rebalanced to maintain these pre-
established weighting levels. In the case of an index with 9 components
or less, the weight assigned to the largest component will not exceed
50% of the entire index weight. Like equal-dollar weighted indexes, the
value of a modified equal-dollar weighted index will equal the current
combined market value (based on U.S. primary market prices) of the
assigned number of shares of each of the underlying components divided
by the appropriate index divisor. A modified equal-dollar weighted will
be balanced quarterly.
---------------------------------------------------------------------------
\20\ See Securities Exchange Act Release No. 49932 (June 28,
2004), 69 FR 40994 (July 7, 2004) (SR-CBOE-2002-24). The Exchange
states that these listing and maintenance standards are consistent
with the Commission's Staff Legal Bulletin No. 15: Listing Standards
for Trading Security Futures Products (September 5, 2001).
---------------------------------------------------------------------------
An approximate equal-dollar weighted index is composed of one or
more securities in which each component security will be weighted
equally based on its market price on the index's selection date. The
index must be reconstituted and rebalanced if the notional value of the
largest component is at least twice the notional volume of the smallest
component for fifty percent or more of the trading days in the three
months prior to December 31 of each year. For purposes of this
provision, the Exchange defines ``notional value'' as the market price
of the component times the number of shares of the underlying component
in the index. The Exchange also states that the reconstitution and
rebalancing are also mandatory if the number of components in the index
changes. The Exchange also states that it will reserve the right to
rebalance quarterly at its discretion.
A share-weighted index is designed to mimic the value of a
portfolio consisting of two or more securities. The weight of each
component security is calculated by multiplying the price of the
component security by an adjustment
[[Page 74405]]
factor. Adjustment factors are chosen to reflect the investment
objective deemed appropriate by the designer of the index and will be
published by the Exchange as part of the contract specifications.\21\
The value of the index is calculated by adding the weight of each
component security and dividing the total by an index divisor.\22\ If a
share-weighted micro narrow-based index fails to meet the maintenance
listing standards under PCX Rule 5.13(e), the index would not be
rebalanced by the Exchange. Instead, the Exchange would restrict
options transactions to ``closing-only'' transactions and would not
issue any additional series for that index.\23\ Upon the expiration of
the last series on that index, the Exchange will no longer calculate
that index and no additional series would be listed.
---------------------------------------------------------------------------
\21\ For example, an index designer might want to apply an
adjustment factor in order to prevent one or a few components from
dominating the weight of the index. This is similar to an adjustment
factor in other types of weighting methods, such as modified
capitalization weighted indexes.
\22\ The index ``divisor'' is calculated to yield a benchmark
index level (50, 100, 200, etc.) as of a particular date.
\23\ When option series are restricted to ``closing-only''
status, the only opening transactions allowed in such a series are
(i) opening transactions by market-makers executed to accommodate
closing transactions of other market participants and (ii) opening
transactions by an OTP Holder to facilitate the closing transactions
of public customers executed as crosses pursuant to and in
accordance with PCX Rule 6.47. PCX will issue a bulletin to notify
OTP Holders and OTP Firms of such a situation.
---------------------------------------------------------------------------
Regardless of the weighting methodology, the Exchange represents
that it will also reserve the right to rebalance any micro narrow-based
index on an interim basis if warranted as a result of extraordinary
changes in the relative values of the component securities. Proposed
PCX Rule 5.13(d)(2)(iv) shall provide that, to the extent investors
with open positions must rely upon the continuity of the options
contracts on the index, outstanding contracts are unaffected by
rebalancings. The Exchange believes that these provisions are
consistent with previous rule changes approved by the Commission.\24\
---------------------------------------------------------------------------
\24\ See Securities Exchange Act Release No. 42787 (May 24,
2000), 65 FR 33598 (May 24, 2000) (Commentary .03 to Amex Rule 1000
and Commentary .02 to Amex Rule 1000A).
---------------------------------------------------------------------------
Proposed PCX Rule 5.13(e) contains the maintenance standards that
will apply to micro narrow-based security indexes.\25\ The Exchange
believes that the maintenance standards generally adhere to the
Commission's Division of Market Regulation's Bulletin \26\ and those
standards applicable to futures in a narrow-based security index. The
Exchange represents that PCX's surveillance procedures are adequate to
monitor the trading in options on micro narrow-based indexes as defined
under PCX Rule 5.10(b)(25).
---------------------------------------------------------------------------
\25\ Exhibit A summarizes how the Exchange generally expects to
handle certain corporate actions upon listing Micro Narrow-Based
Index Options based on approximate equal-dollar weighted or share-
weighted indexes.
\26\ Commission Staff Legal Bulletin No. 15: Listing Standards
for Trading Security Futures Products (September 5, 2001).
---------------------------------------------------------------------------
b. Position and Exercise Limits. The Exchange also proposes to
establish a new method for determining the applicable position limits
for options on any micro narrow-based index that meets the generic
listing standards under proposed PCX Rule 5.13(d). The Exchange
represents that it will utilize a formulaic approach as provided in
proposed PCX Rule 5.16(f), ``Position Limits for Options on Cash
Settled Micro Narrow-Based Indexes'' as defined under PCX Rule
5.10(b)(25).
This new methodology is a departure from the manner in which
position limits are assigned for index options under existing PCX
rules. The current position limits for narrow-based index options are
assigned from pre-determined tiers based on an analysis of the
respective index's underlying components. Under the proposed
methodology, position limits would be determined in accordance with a
formula that considers a cash settled micro narrow-based index's market
capitalization and contract size in relation to the market
capitalization of the S&P 500 index and the contract size and position
limit of a futures contract on the S&P 500 index.
In determining compliance with PCX Rule 5.18 (Exercise Limits), the
applicable exercise limit for option contracts on any micro narrow-
based index, as defined under proposed PCX Rule 5.10(b)(25), shall be a
limit equivalent to the applicable position limits for options on that
micro narrow-based index, as calculated under proposed PCX Rule
5.16(f)(1)-(7).
c. Margin and Strikes Prices. PCX Rule 4.16 governs the
determination of the applicable margin treatment for options traded on
the Exchange, including options that overlie narrow-based indexes. The
existing applicable margin for options on narrow-based indexes, as
provided under PCX Rule 4.16, also shall apply to micro narrow-based
indexes. The interval between strike prices for options on indexes that
meet the criteria under PCX Rule 5.13(d) will be no less than $2.50.
5. System Capacity. Finally, the Exchange reasonably believes it
has adequate system capacity to support the trading of options on
narrow-based and micro narrow-based indexes, based on a calculation of
the Exchange's current ISCA allocation and the number of new messages
per second expected to be generated by options on such index.
Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act,\27\ in general, and furthers the objectives of Section
6(b)(5) \28\ of the Act, in particular, in that it is designed to
facilitate transactions in securities, to promote just and equitable
principles of trade, to enhance competition, and to protect investors
and the public interest.\29\
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78f(b).
\28\ 15 U.S.C. 78f(b)(5).
\29\ PCX clarified that it believes the proposal is consistent
with Section 6(b)(5) of the Act as opposed to Section 6(b)(4) as
stated in Exhibit 1 to the original proposed rule change and
requested that the statutory language relating to Section 6(b)(5) of
the Act provided on page 13 of the original rule filing be inserted
in place of the language cited from Section 6(b)(4) in Exhibit 1.
Telephone conversation between David Strandberg, Director, Issuer
Services PCX and Johnna B. Dumler, Attorney, Division of Market
Regulation, Commission, December 6, 2005.
---------------------------------------------------------------------------
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 that is not necessary or appropriate
in furtherance of the purposes of the Act.
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. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rules-comments@sec.gov. Please include
Filed No. SR-PCX-2005-79 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission,
[[Page 74406]]
100 F Street, NE., Washington, DC 20549-9303.
All submissions should refer to File No. SR-PCX-2005-79. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/
sro.shtml). 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 Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the PCX. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File No. SR-PCX-2005-79 and should be submitted on or before January 5,
2006.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange. In particular, the Commission finds that the PCX's
proposal is consistent with Section 6(b)(5) of the Act,\30\ which
requires that the rules of an exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism for a free and open market and a national market system, and,
in general, to protect investors and the public interest.\31\
Specifically, the Commission notes that the proposed rule change would
permit the Exchange to list and trade, pursuant to Rule 19b-4(e) under
the Act,\32\ options on narrow-based and micro narrow-based security
indexes that meet the listing criteria set forth in PCX Rule 5.13. The
Commission finds that the proposal strikes a reasonable balance between
the Commission's mandates under Section 6(b)(5) \33\ of the Act to
remove impediments to, and perfect the mechanism of a free and open
market and a national market system, while protecting investors and the
public interest.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78f(b)(5).
\31\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\32\ 17 CFR 240.19b-4(e).
\33\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission believes that the proposed initial listing and
maintenance standards for options on narrow-based and micro narrow-
based security indexes are consistent with the standards previously
established by other SROs.\34\
---------------------------------------------------------------------------
\34\ See CBOE Rule 24.2. See e.g. Securities Exchange Act
Release No. 51346 (March 9, 2005), 70 FR 12916 (March 16, 2005) (SR-
CBOE-2005-08) (Order approving CBOE's proposed modified
capitalization-weighted methodology as an acceptable generic listing
standard for options on narrow-based index); see also Securities
Exchange Act Release No. 34157 (June 3, 1994), 59 FR 30062 (June 10,
1994) (SR-Amex-92-35) (SR-CBOE-93-59) (SR-NYSE-94-17) (SR-PSE-94-07)
(SR-Phlx-94-10). The Commission findings in this approval order are
prospective from the date of this order.
---------------------------------------------------------------------------
The Commission also believes that the proposed generic listing
standards for micro narrow-based index options covering, among other
things, minimum capitalization, monthly trading volume, and relative
weightings of component stocks are reasonably designed to ensure that
the trading market for component stocks are adequately capitalized and
sufficiently liquid. In addition, the Commission notes that position
limits for options on any micro narrow-based index that meets the
generic listing standards of proposed PCX Rule 5.13(d) would be
determined in accordance with a proposed new formula that considers the
index's market capitalization and contract size in relation to the
market capitalization of the S&P 500 index and the contract size and
position limit of a futures contract on the S&P 500 index. The
Commission believes that the proposed formula for determining position
limits for micro narrow-based index options is appropriate to deter
manipulation of the index. In addition, the Commission finds that the
weighting methodologies employed by the PCX, including the modified
equal-dollar weighted, approximate equal-dollar weighted and share-
weighted methodologies, are appropriate index construction standards.
The Commission notes that the Exchange represents that it reasonably
believes it has sufficient operational system capacity to accommodate
the PCX's listing and trading of narrow-based and micro narrow-based
security indexes.
The Exchange is also charged with surveillance for the product
classes, including options on narrow-based and micro narrow-based
security indexes. The Exchange represents that it has developed and
submitted surveillance procedures that it will use to monitor the
general trading and settlement activity in narrow-based and micro
narrow-based indexes to ensure full compliance with Exchange Rules and
federal securities laws. The Exchange indicates that it will have
complete access to information regarding trading activity in the
underlying securities. The Exchange has developed new surveillance
procedures specific to these products that the Commission finds
adequate to monitor for manipulation in the narrow-based and micro
narrow-based indexes.
The Commission's approval of the proposed generic listing standards
for options on narrow-based and micro narrow-based security indexes
will allow those options that satisfy these standards to start trading
under Rule 19b-4(e), without constituting a proposed rule change within
the meaning of Section 19(b) of the Act \35\ and Rule 19b-4,\36\ for
which notice and comment and Commission approval is necessary. Rule
19b-4(e) \37\ states that the listing and trading of a new derivative
securities product by an SRO shall not be deemed a proposed rule
change, pursuant to paragraph (c)(1) of Rule19b-4, if the Commission
has approved, pursuant to Section 19(b) of the Act, such SRO's trading
rules, procedures and listing standards for the product class that
would include the new derivative securities product, and the SRO has a
surveillance program for the product class.
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78s(b).
\36\ 17 CFR 240.19b-4.
\37\ 17 CFR 240.19b-4(e).
---------------------------------------------------------------------------
The Exchange's ability to rely on Rule 19b-4(e) for these products
potentially reduces the time frame for brining these securities to the
market, promoting competition and providing investors with derivative
securities products to meet their needs more quickly. As stated above,
the Commission believes that the Exchange has adequate trading rules,
procedures, listing standards, and a surveillance program for the
narrow-based and micro narrow-based indexes, and thus, the Commission
is approving the generic listing standards pursuant to 19b-4(e) for
these product classes.
[[Page 74407]]
The PCX has requested that the Commission find good cause for
approving the proposed rule change, as amended, prior to the thirtieth
day after the proposal is published for comment in the Federal
Register. The Commission believes that the adoption of the proposal
will enable the PCX to act expeditiously in listing options on narrow-
based and micro narrow-based securities indexes in the same manner
currently afforded to other options exchanges, such as the CBOE.\38\ In
addition, the Commission believes that the proposed rule change would
remove impediments to a free and open market place by providing
competition among exchanges for new products. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2) of the
Act,\39\ for approving the proposed rule change, as amended, prior to
the thirtieth day after publication thereof in the Federal Register.
---------------------------------------------------------------------------
\38\ See supra note 9.
\39\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
V. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, Section 6(b)(5) of the Act.\40\
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\41\ that the proposed rule change (SR-PCX-2005-79), as amended by
Amendment Nos. 2 and 3, is approved on an accelerated basis.
---------------------------------------------------------------------------
\41\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\42\
----------------------