[Federal Register: May 9, 2003 (Volume 68, Number 90)]
[Notices]
[Page 25076-25079]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09my03-138]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47794; File No. SR-Phlx-2003-27]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change, and Amendment No. 1 Thereto, by
the Philadelphia Stock Exchange, Inc. Relating to the Amendment of
Price Criteria for Certain Securities that Underlie Options Traded on
the Exchange
May 5, 2003.
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 April 23, 2003, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. On April
30, 2003, the Phlx filed Amendment No. 1 to the proposal.\3\ The
proposed rule change, as amended, has been filed by Phlx as a ``non-
controversial'' rule change under Rule 19b-4(f)(6) under the Act.\4\
The Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Jurij Trypupenko, Counsel and Director of
Litigation andOperations, Legal Department, Phlx to Terri Evans,
Assistant Director, Division of Market Regulation (``Division''),
Commission, dated April 29, 2003 (``Amendment No. 1''). In Amendment
No. 1, the Exchange submitted a technical correction by inserting
rule text that had been inadvertently omitted in the original
filing.
\4\ 17 CFR 240.19b-4(f)(6). For purposes of determining the
effective date and calculating the sixty-day period within which the
Commission may summarily abrogate the proposed rule change under
Section 19(b)(3)(C) of the Act, the Commission considers that period
to commence on April 30, 2003, the date Phlx filed Amendment No. 1.
See 15 U.S.C. 78s(b)(3)(C).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx proposes to amend Commentary .01 to Phlx Rule 1009 to
allow the Exchange to list options series on covered securities, as
defined under Section 18(b)(1)(A) of the Securities Act of 1933
(``Covered Securities''),\5\ where the closing market price of the
underlying Covered Securities was at least $3.00 per share for the five
consecutive business days prior to the date that the Phlx submits an
option class certification for listing and trading options to the
Options Clearing Corporation (``OCC''). The listing criteria will
remain the same for non--Covered Securities.
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\5\ Section 18(b)(1)(A) of the Securities Act of 1933 (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 (or any successor to such entities) * * *.'' 15 U.S.C.
77r(b)(1)(A). The term ``Covered Security,'' for the operation of
proposed Commentary .01 to Phlx Rule 1009, will not include those
securities defined in Section 18(b)(1)(B) of the 1933 Act. 15 U.S.C.
77r(b)(1)(B).
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The text of the proposed rule change, as amended, is below.
Proposed additions are in italics and proposed deletions are in
[brackets.]
* * * * *
Rule 1009. Criteria for Underlying Securities
(a) No change.
(b) No change.
(c) No change.
Commentary:
.01 The Board of Governors has established guidelines to be
considered by the Exchange in evaluating potential underlying
securities for Exchange option transactions. Absent exceptional
circumstances with respect to items 1, 2, 3, or 4 listed below, at the
time the Exchange selects an underlying security for Exchange options
transactions, the following guidelines with respect to the issuer shall
be met:
(1) No change.
(2) No change.
(3) No change.
(4) (i) If the underlying security is a ``covered security'' as
defined in 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 (5) 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.
[Either (i)](ii) 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
[[Page 25077]]
the guidelines for continued listing in Rule 1010; (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 proceeding the
date of selection has been at least 5,000 contracts.
(5) No change.
.02 No change.
.03 No change.
.04 No change.
.05
(a) through (c) No change.
(d) In the case of a Restructured Transaction that satisfies either
or both of the conditions of subparagraphs (a)(1) or (2) above in which
shares of the restructure security are sold in a public offering or
pursuant to a rights distribution: (i) the Exchange may assume the
satisfaction of one or both of the requirements of paragraph (1) and
(2) of Commentary .01 above on the date the restructure security is
selected for options trading only if (A) the applicable conditions set
forth in paragraph (c)(i) above are met with respect to whichever of
these requirements is assumed to be satisfied, or (B) the condition set
forth in paragraph (c)(ii) above is met, in either case subject to the
limitations stated in said paragraph (c); (ii) the Exchange may certify
that the market price of the restructure security satisfies the
requirement of paragraph (4) of Commentary .01 above by relying on the
market price history of the original security prior to the ex-date for
the Restructure Transaction in the manner described in paragraph (a)
above, 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
at 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 (4) of
Commentary .01 above, the market price of the restructure security was
at least $3.00; and (iii) the Exchange may certify that the trading
volume of the restructure security satisfies the requirement of
paragraph (3) of Commentary .01 above only if the trading volume in the
restructure security has been at least 2,400,000 shares during a period
of 12 months or less ending on the date the restructure security is
selected for options trading.
.06 No change.
.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 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 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 purpose of the proposed rule change is to amend the pricing
requirement to initially list options overlying Covered Securities that
have traded at a price of $3.00 or higher for the five consecutive
business days prior to the date that the Phlx submits an option class
certification for listing and trading options to the OCC. The proposal
would allow the Exchange to act competitively in listing options
pursuant to a listing standard similar to one that has been adopted by
other options exchanges.\6\
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\6\ See Securities Exchange Act Release Nos. 47190 (January 15,
2003), 68 FR 3072 (January 22, 2003) (SR-CBOE-2002-62); 47352
(February 11, 2003), 68 FR 8319 (February 20, 2003) (SR-PCX-2003-
06); 47483 (March 11, 2003), 68 FR 13352 (March 19, 2003) (SR-ISE-
2003-04); and 47613 (April 1, 2003), 68 FR 17120 (April 8, 2003)
(SR-Amex-2003-19).
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The Exchange is proposing to amend its pricing requirement for
underlying securities in Commentary .01 to Phlx Rule 1009 to provide
that, for underlying securities that are deemed to be Covered
Securities, the closing market price of the underlying security must be
at least $3.00 per share for the five consecutive business days prior
to the date on which Phlx submits an option issue certification to the
OCC. The $7.50 price per share requirement would continue to apply to
underlying securities that are not Covered Securities. In particular,
for non-Covered Securities, Commentary .01 to Phlx Rule 1009 would
continue to require 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.\7\ 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 Phlx first started trading listed options, the Exchange
believes that the options market is a mature market with sophisticated
investors. The Exchange does not believe that the $7.50 initial listing
criteria serves to accomplish its presumed intended purpose of
preventing the proliferation of option issues on overlying securities
that lack liquidity needed to maintain fair and orderly markets. Phlx
now seeks to move away from the current approach to listing standards
and allow the desires of its customers and the workings of the
marketplace to determine the securities that underlie the option that
the Exchange will list.
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\7\ In the alternative to the $7.50 price requirement, an option
on a non-Covered Security may meet the requirements provided in
Commentary .01 to Phlx Rule 1009 when: (a) The underlying security
meets the guidelines for continued listing in Phlx Rule 1010; (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. Telephone conversation among Jurij Trypupenko, Counsel
and Director of Litigation and Operations, Legal Department, Phlx,
Terri Evans, Assistant Director, Division, Commission, and Tim Fox,
Attorney, Division, Commission on April 28, 2003.
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Due to recent trends in the securities markets, which include,
among other things, a precipitous decline in the price of many
securities, there has been a marked increase in the number of
underlying securities that, but for the current pricing standard, would
otherwise qualify for options listing on the Exchange. The Phlx states
that changing the pricing standard to the proposed $3.00 market price
per share requirement would allow it to evaluate whether to list
options on a greater number of classes without compromising investor
protection. In doing so, the Exchange would endeavor to ensure that its
own systems and those of the Options Price Reporting Authority have the
capacity to handle the potential increased capacity requirements.
The Exchange notes that although this proposal amends the minimum
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 before its overlying option can be listed on the Exchange,
the Phlx will otherwise continue to maintain its initial listing
standards. The Exchange does not
[[Page 25078]]
propose to amend any of the other criteria in Commentary .01 to Phlx
Rule 1009, 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.
Moreover, the Exchange believes that requiring in the proposal that
the underlying security be listed on the New York Stock Exchange, Inc.
(``NYSE''), the American Stock Exchange LLC (``Amex''), or the Nasdaq
Stock Market, Inc. (``Nasdaq''), as provided for in the definition of
``Covered Security'' from Section 18(b)(1)(A) of the 1933 Act \8\ would
ensure that the underlying security meets the highest listing standards
in the securities industry. Should the underlying security not qualify
as a Covered Security, the $7.50 market price per share standard would
still apply.
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\8\ See note 5 supra.
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The Exchange believes that the proposed $3.00 market price per
share standard is also consistent with the Phlx maintenance and
delisting criteria found in Phlx Rule 1010, which are used to determine
whether an underlying security previously approved for Exchange options
transactions no longer meets the requirements for listing. Commentary
.02 to Phlx Rule 1010 sets a $3.00 market price per share of the
underlying security threshold for determining whether the Exchange may
continue listing and trading options on an underlying security that has
been previously approved for options trading under Phlx Rule 1009. 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 as well.
Consistent with the listing standards proposed by other options
exchanges,\9\ the Exchange has proposed, as a safeguard against price
manipulation, that the underlying security has a closing market price
of at least $3.00 per share for the five consecutive business days
preceding the date on which the Exchange submits a certificate to the
OCC 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 this ``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.
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\9\ See note 6 supra.
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The Exchange also believes that the proposed rule change, as
amended, would encourage specialists to delist inactive option classes,
particularly those classes in which the market price of the underlying
security is below $7.50. In particular, under Phlx Rule 1009 as it
currently exists, a specialist 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
Phlx believes that the proposed $3.00 price standard and the five-day
look-back period would provide a reliable test for stability, would
present a more reasonable time period for qualifying the price of an
underlying security, and makes sense in today's economic conditions.
The Exchange notes that the Commission recently granted Phlx and other
options exchanges approval to list additional series on an option class
when the market price of the underlying security is below $3.00,
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 a new series, including the $3.00 price
requirement.\10\
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\10\ See Securities Exchange Act Release No. 46789 (November 7,
2002), 67 FR 69284 (November 15, 2002) (SR-Phlx-2002-71). The
Exchange represents that this rule (Commentary .02 to Phlx Rule
1010)is consistent with similar rules regarding listing and
maintenance standards of the Amex, International Securities
Exchange, Inc. (``ISE''), Chicago Board Options Exchange, Inc.
(``CBOE'') and the Pacific Exchange, Inc. (``PCX''). See Commentary
.02 to Amex Rule 916; ISE Rule 503(c); Interpretation and Policy .02
to CBOE Rule 5.4; and Commentary .02 PCX Rule 3.7.
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Finally, for the purposes of consistency within the Phlx rules, the
Exchange proposes to amend Commentary .05 to Phlx Rule 1009 which
relates to Restructure Securities. Currently, Commentary .05 provides a
method to certify that the market price of a Restructure Security
satisfies the pricing requirement of Commentary .01 to Phlx Rule 1009,
and specifically references the $7.50 market price per share in
Commentary .05(d). In order to make all of Phlx Rule 1009 consistent
with the pricing standard change of this proposal, the amended rule
would reflect that the market price standard for Restructure Securities
that are ``covered securities'' will also be reduced from $7.50 to
$3.00.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \11\ in general, and furthers the objectives of Section
6(b)(5) of the Act \12\ in particular, in that by changing listing
standards for Covered Securities, the Exchange can provide investors
with those options that are most useful and demanded by them without
sacrificing investor protection.
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\11\ 15 U.S.C. 78f(b).
\12\ 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, as
amended, will impose any burden on competition 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
No written comments were solicited or received with respect to the
proposed rule change, as amended.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change, as amended, has been filed by the
Exchange as a ``non-controversial'' rule pursuant to Section
19(b)(3)(A) of the Act \13\ and subparagraph (f)(6) of Rule 19b-4
thereunder.\14\ Consequently, because the foregoing rule change, as
amended: (1) Does not significantly affect the protection of investors
or the public interest; (2) does not impose any significant burden on
competition; and (3) does not become operative for thirty days from the
date on which it was filed, or such shorter time as the Commission may
designate if consistent with the protection of investors and the public
interest, it has become effective pursuant to Section 19(b)(3)(A) of
the Act \15\ and Rule 19b-4 thereunder.\16\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(6).
\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4.
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The Phlx has requested that the Commission waive the five-day pre-
filing notice requirement and the thirty-day operative waiting period.
The Commission is exercising its authority
[[Page 25079]]
to waive the five-day pre-filing requirement and believes that it is
consistent with the protection of investors and the public interest to
accelerate the operative date since the proposed rule change, as
amended, is similar to the programs of other options exchanges, and
raises no new regulatory issues.\17\ For these reasons, the Commission
designates the proposal to be effective and operative upon filing with
the Commission.\18\
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\17\ For purposes of accelerating the operative date of the
proposal, the Commission has considered the proposed rule's impact
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
\18\ For purposes of determining the effective date and
calculating the sixty-day period within which the Commission may
summarily abrogate the proposed rule change under Section
19(b)(3)(C) of the Act, the Commission considers that period to
commence on April 30, 2003, the date Phlx filed Amendment No. 1. See
15 U.S.C. 78s(b)(3)(C).
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At any time within sixty 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.
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 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 Phlx. All submissions should refer to File No.
SR-Phlx-2003-27 and should be submitted by May 30, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-11587 Filed 5-8-03; 8:45 am]
BILLING CODE 8010-01-P