[Federal Register: February 20, 2003 (Volume 68, Number 34)]
[Notices]
[Page 8319-8322]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20fe03-88]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47352; File No. SR-PCX-2003-06]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. To
Amend the Price Criteria for Securities That Underlie Options Traded on
the Exchange
February 11, 2003.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4
[[Page 8320]]
thereunder,\2\ notice is hereby given that on February 10, 2003, the
Pacific Exchange, Inc. (``PCX'' or ``Exchange'') filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend PCX Rule 3.6 in order to amend its
pricing requirement for securities that underlie options traded on the
Exchange (``underlying security''). The text of the proposed rule
change follows. Additions are in italics. Deleted text is in brackets.
Rules of the Board of Governors
Rule 3.6. The underlying securities of option contracts traded on
the Exchange shall be approved for Exchange transactions by the Board
of Governors following the recommendation of the Options Listing
Committee. In approving underlying securities, both the Options Listing
Committee and the Board shall give due regard to, and the Board shall
promulgate guidelines relative to, the following factors:
(a)--No change.
(1)-(3)--No change.
(4) [Either (i) the market price per share of the underlying
security will have been at least $7.50 for the majority of business
days during the three calendar months preceding the date of selection,
as measured by the lowest closing price recorded in any market in which
the underlying security traded on each of the subject days;] (A) If the
underlying security is a ``covered security'' as defined under Section
18(b)(1)(A) of the Securities Act of 1933, the market price per share
of the underlying security has been at least $3.00 for the previous
five consecutive business days preceding the date on which the Exchange
submits a certificate to the Options Clearing Corporation for listing
and trading. For purposes of this rule, the market price of such
underlying security is measured by the closing price reported in the
primary market in which the underlying security is traded.
(B) If the underlying security is not a ``covered security'', the
market price per share of the underlying security has been at least
$7.50 for the majority of business days during the three calendar
months preceding the date of selection, as measured by the lowest
closing price reported in any market in which the underlying security
traded on each of the subject days, or [(ii)](a) the underlying
security meets the guidelines for continued listing in Rule 3.7; (b)
options on such underlying security are traded on at least one other
registered national securities exchange; and (c) the average daily
trading volume for such options over the last three (3) calendar months
preceding the date of selection has been at least 5,000 contracts; and
(5)--No change.
(b)-(c)--No change.
Commentary:
.01-.04--No change.
.05 (a)-(c)--No change.
(d) In the case of a Restructured Transaction that satisfies either
or both of the conditions of subsections (a)(1) and (a)(2) to this
Commentary .05 in which shares of a Restructured Security are sold in a
public offering or pursuant to a rights distribution:
(i)--No Change.
(ii) the exchange may certify that the market price of the
Restructure Security satisfies the requirement of Rule 3.6(a)(4) by
relying on the market price history of the Original Security prior to
the ex-date for the Restructuring Transaction in the manner described
by subsection (a) to this Commentary .05, but only if the Restructure
Security has traded ``regular way'' on an exchange or automatic
quotation system for at least five trading days immediately preceding
the date of selection, and at the close of trading on each trading day
preceding the date of selection, as well as the opening of trading on
the date of selection the market price of the Restructure Security was
at least $7.50; or, if the Restructure Security is a Covered Security
as defined in paragraph (a)(4) above, the market price of the
Restructure Security was at least $3.00; and
(iii)--No change.
.06- .07--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 Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The Exchange 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 amend its pricing requirement for
underlying securities. Currently, PCX Rule 3.6 requires that the market
price per share of any underlying security must be at least $7.50 for
the majority of business days during the three calendar months
preceding the date of selection of an option class, as measured by the
lowest closing price reported in any market in which the underlying
security traded on each of the subject days.
The Exchange now proposes to amend Rule 3.6 to provide that, for
underlying securities that are deemed Covered Securities, as defined
under section 18(b)(1)(A) of the Securities Act of 1933 (``1933
Act''),\3\ the closing market price of the underlying security must be
at least $3.00 per share for the five previous consecutive business
days prior to the date on which PCX submits an option issue
certification. For underlying securities that are not Covered
Securities, the Exchange states that the current $7.50 price per share
requirement would continue to apply.
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\3\ Section 18(b)(1)(A) of the 1933 Act provides that, ``(a)
security is a covered security if such security is--listed, or
authorized for listing, on the New York Stock Exchange or the
American Stock Exchange, or listed, or authorized for listing, on
the National Market System of the Nasdaq Stock Market * * *'' 15
U.S.C. 77r(b)(1)(A). The term Covered Security, for the operation of
proposed amendments to Rule 3.6 and Commentary .05 herein, would not
include those securities defined under Section 18(b)(1)(B) of the
1933 Act. 15 U.S.C. 77r(b)(1)(B).
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When the $7.50 price requirement was first implemented, the listed
options market was in its infancy. Now more than twenty-eight years
after the PCX first started trading listed options, the Exchange states
the listed options market is a mature market with sophisticated
investors. The Exchange does not believe that this particular criteria
serves to accomplish its presumed intended purpose, i.e., to prevent
the proliferation of option issues on overlying securities that lack
liquidity needed to maintain fair and orderly markets. The Exchange
states that it now seeks to move away from what it believes is a
paternalistic approach to listing standards and allow the desires of
its customers and the workings of the marketplace to determine the
securities on which the Exchange will list options.
In determining to list any number of new option classes, the
Exchange must
[[Page 8321]]
ensure that its own systems and those of the Options Price Reporting
Authority (``OPRA'') have the capacity to handle the potential
increased capacity requirements. Also, due to recent trends in the
securities markets, there has been a marked increase in the number of
underlying securities that, but for the pricing standard, would
otherwise qualify for options listing on the Exchange. The Exchange
states that changing the pricing standard to the proposed $3.00 market
price per share requirement would allow the Exchange to evaluate
whether to list options on a greater number of classes without
compromising investor protection.
The Exchange notes that although this proposal amends the closing
market price for an underlying security which is deemed a Covered
Security, as well as the time period for which it must trade at that
price prior to it being listed on the Exchange, the Exchange will
continue to maintain its initial listing standards. The Exchange does
not propose to amend any of the other criteria in PCX Rule 3.6,
including the requirements that: there must be a minimum of 7,000,000
shares of the underlying security owned by public investors; there must
be a minimum of 2,000 holders of the underlying security; and, that
there must be a trading volume of at least 2,400,000 shares in the
preceding twelve months. Additionally, by requiring the underlying
security to be listed on the New York Stock Exchange, Inc., American
Stock Exchange LLC (``Amex''), or Nasdaq National Market System
(``Nasdaq''),\4\ the Exchange states that this would ensure that the
underlying security meets the highest listing standards in the
securities industry. However, if the underlying security does not
qualify as a Covered Security, the $7.50 market price per share
standard still will apply.
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\4\ See 15 U.S.C. 77r(b)(1)(A).
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The Exchange believes that the proposed $3.00 market price per
share standard is also consistent with the guideline price in the PCX
Delisting Criteria Rule 3.7 which is used to determine whether an
underlying security previously approved for Exchange options
transactions no longer meets the requirements for the continuance of
approval. Commentary .02 to PCX Rule 3.7 sets a $3 market price per
share as the threshold for determining whether the Exchange may
continue listing and trading options on an underlying security that was
previously approved for options trading under PCX Rule 3.6. As long as
a $3.00 standard is recognized as an acceptable pricing standard for
options trading, albeit as a standard for continued listing, the
Exchange believes that the proposed $3.00 should be the threshold
standard for initial listing standards as well.
The Exchange also proposes, as a safeguard against price
manipulation, that the underlying security have a closing market price
of at least $3.00 per share for the previous five consecutive business
days preceding the date on which the Exchange submits a certificate to
the Options Clearing Corporation for listing and trading. The market
price of such underlying security would be measured by the closing
price reported in the primary market in which the underlying security
is traded. The Exchange believes that a ``look back'' period of five
consecutive days would provide a sufficient measure of protection from
any attempts to manipulate the market price of the underlying security.
The Exchange also believes that the proposed rule change would
encourage the delisting of inactive option classes, particularly those
classes in which the market price of the underlying security is below
$7.50. Currently, a Lead Market Maker (``LMM'') on the Exchange to whom
an option class has been allocated may be reluctant to delist an
inactive option class if the market price of the underlying security is
below $7.50 because once delisted, the Exchange's current initial
listing criteria must be met to re-list the option class, including the
requirement that the market price per share of the underlying security
be at least $7.50 for the majority of business days during the
preceding three months. The Exchange also notes that the Commission
recently granted PCX approval to list additional series on an option
class even though the market price of the underlying security is below
$3, provided that at least one other options exchange trades the series
to be added, and at the time the other options exchange added that
series, it met the requirements to add new series, including the $3
price requirement.\5\
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\5\ See Securities Exchange Act Release No. 46406 (August 23,
2002), 67 FR 55446 (August 29, 2002) (approving SR-PCX-2002-51). The
Exchange represents that these rules are consistent with similar
rules regarding listing and maintenance standards of the American
Stock Exchange LLC (``Amex''), International Securities Exchange,
Inc. (``ISE''), Chicago Board of Options Exchange, Inc. (``CBOE'')
and the Philadelphia Stock Exchange, Inc. (``Phlx''). See
Interpretation and Policy .02 to CBOE Rule 5.4; Commentary .02 to
Amex Rule 916; Commentary .02 to Phlx Rule 1010; and ISE Rule
503(c).
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The proposed $3 price standard and the five-day look-back period
would provide a reliable test for stability and, at the same time,
presents a more reasonable time period for qualifying the price of an
underlying security. The Exchange further believes that this proposed
abbreviated qualification period, in combination with the Exchange's
existing quarterly delisting program,\6\ would contribute to reducing
unnecessary quote traffic.
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\6\ The Exchange states that it maintains an active delisting
program which requires the quarterly delisting of multiply listed
option classes that do not trade more than 20 contracts per day on
the Exchange.
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Finally, for the purposes of consistency within the PCX Rules, the
Exchange proposes to amend PCX Rule 3.6 Commentary .05 with respect to
Restructure Securities. Currently, Commentary .05 provides a method to
certify that the market price of a Restructure Security satisfies the
pricing requirement of PCX Rule 3.6 and specifically references the
$7.50 market price per share. In order to make the Rule consistent with
the pricing standard change of this proposal, the amended rule would
reflect that the market price standard for Restructure Securities also
will be reduced from $7.50 to $3.00 as long as the Restructure Security
is a Covered Security.
2. Statutory Basis
The Exchange believes that the current proposal will allow the
Exchange to provide investors with those options that are most useful
and demanded by them without sacrificing any investor protection. As
such, the Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act \7\ in general and furthers the objectives
of section 6(b)(5)\8\ in particular in that it will promote just and
equitable principles of trade; facilitate transactions in securities,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system; and protect investors and the
public interest.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
[[Page 8322]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change, as amended, has become effective
pursuant to section 19(b)(3)(A) of the Act \9\ and subparagraph (f)(6)
of Rule 19b-4 \10\ thereunder because it does not: (i) Significantly
affect the protection of investors or the public interest; (ii) impose
any significant burden on competition; (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate; and the Exchange has given the Commission
written notice of its intention to file the proposed rule change at
least five business days prior to filing. At any time within 60 days of
the filing of such proposed rule change, the Commission may summarily
abrogate such rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act.
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\9\ 15 U.S.C. 78s(b)(3)(A).
\10\ 17 CFR 240.19b-4(f)(6).
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Under Rule 19b-4(f)(6)(iii) of the Act,\11\ the proposal does not
become operative for 30 days after the date of its filing, or such
shorter time as the Commission may designate if consistent with the
protection of investors and the public interest and the Exchange is
required to give the Commission written notice of its intention to file
the proposed rule change at least five business days prior to filing.
The Exchange has requested that the Commission waive the 30-day
operative date and the five-day pre-filing notice requirement in order
for it to implement the proposed rule change as quickly as possible.
The Exchange contends that this proposed rule is substantially similar
to comparable rules the Commission approved for the CBOE, which was
published for public notice and comment.\12\ As a result, the Exchange
believes that the proposed rule change does not raise any new
regulatory issues, significantly affect the protection of investors or
the public interest, or impose any significant burden on competition.
The Commission, consistent with the protection of investors and the
public interest, has determined to waive the 30-day operative period as
well as the five-day pre-filing notice requirement,\13\ and, therefore,
the proposal is effective and operative upon filing with the
Commission.
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\11\ 17 CFR 240.19b-4(f)(6)(iii).
\12\ See Securities Exchange Act Release No. 47190 (January 15,
2003), 68 FR 3072 (January 22, 2003) (approving SR-CBOE-2002-62).
\13\ For purposes only of waiving the five-day pre-filing notice
requirement and the 30-day operative period for this proposal, the
Commission has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
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IV. 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. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying at the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the Exchange. All submissions should refer to File
No. SR-PCX-2003-06 and should be submitted by March 13, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-4047 Filed 2-19-03; 8:45 am]
BILLING CODE 8010-01-P