

[Federal Register: October 4, 2005 (Volume 70, Number 191)]
[Notices]               
[Page 57919-57921]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04oc05-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52512; File No. SR-Phlx-2005-50]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating To Reduce the Value of PHLX Housing Sector\SM\ Index Options 
by Half

September 27, 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 September 15, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Phlx. The 
Phlx filed the proposal pursuant to Section 19(b)(3)(A) under 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to reduce the value of its PHLX Housing 
Sector\SM\ Index (``Index'') option (``HGX'') \5\ to one-half

[[Page 57920]]

its present value by multiplying by two the base market divisor used to 
calculate the Index. In addition, the option contract position and 
exercise limits applicable to the HGX (currently 31,500 contracts per 
Rule 1001A) will be increased to 63,000 contracts until all pre-split 
option contracts expire.\6\
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    \5\ The PHLX Housing Sector\SM\ (HGX\SM\) is a modified 
capitalization-weighted index composed of 21 companies whose primary 
lines of business are directly associated with the U.S. housing 
construction market. The index composition encompasses residential 
builders, suppliers of aggregate, lumber and other construction 
materials, manufactured housing and mortgage insurers. The Index is 
currently composed of the following stocks: American Standard 
Companies, Beazer Homes USA, Inc., Champion Enterprises, Inc., 
Centex Corp., DR Horton, Inc., Hovnanian Enterprises, Inc., KB Home, 
Lennar Corp., Masco Corp., MDC Holdings, Inc., OfficeMax, Inc., 
Pulte Homes, PMI Group, Inc., Radian Group, Inc., Ryland Group, 
Inc., Standard Pacific Corp., Temple Inland, Inc., Toll Brothers, 
Inc., USG Corp., Vulcan Materials Company, and Weyerhaeuser Company.
    \6\ Phlx Rule 1002A indicates that exercise limits for index 
option contracts shall be equivalent to the position limits 
described in Phlx Rule 1001A.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The 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 purpose of the proposed rule change is to do a two-for-one 
split of the Index to reduce its value by half. A two-for-one split 
should have a positive effect on overall transaction volumes of options 
on the Index by attracting additional liquidity and making option 
premiums more attractive for retail investors. A split would allow 
investors to better utilize the HGX as a trading and hedging vehicle 
with a smaller capital outlay.
    HGX was listed on the Exchange and commenced trading on or about 
July 17, 2002,\7\ and has continued trading. As of July 3, 2005, the 
Index value was $571.75 and the near-month at-the-money call premium 
was $12.50 per contract. The Exchange's proposed ``two-for-one split'' 
of the Index would reduce the Index value to one-half of its current 
value, or $285.88; the options premium would likewise be reduced by 
half. In order to maintain economic equivalence pre and post-split, 
however, the number of HGX contracts will be increased two-fold for 
current contract holders, such that for each HGX contract currently 
held, the holder would receive two contracts at the reduced post-split 
value, each with a strike price equal to one-half of the original 
strike price. For example, the holder of one HGX 570 call with a 
premium of $12.50 would receive two HGX 285 calls with a premium of 
$6.25.
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    \7\ HGX was listed for trading pursuant to Section 19b-4(e) on 
July 17, 2002. The initial index value of HGX was established on or 
about January 2, 2002, at $250 by dividing the total market value of 
all HGX components by a divisor to reach the $250 valuation. The HGX 
index value has increased substantially with the increase in the 
total market value of the HGX components, leading to the proposed 
market value split that will be achieved by increasing the divisor.
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    In addition, the position limits applicable to HGX, which are 
currently 31,500 contracts per Rule 1001A, would be increased to 63,000 
until such time that all pre-split options expire, at which point the 
position limits would return to the 31,500 position limit specified in 
Phlx Rule 1001A. This is being done to accommodate the two-fold 
increase in the number of contracts outstanding. By operation of Phlx 
Rule 1002A, exercise limits would be equivalent to the position limits 
established in Phlx Rule 1001A. The proposed rule change process is 
similar to what has been previously employed pursuant to an index value 
split.\8\ The trading symbol would remain HGX.
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    \8\ See Securities Exchange Act Release No. 42814 (May 23, 
2000), 65 FR 35152 (June 1, 2000) (SR-Phlx-00-11) (two-for-one split 
of index value resulted in a doubling of the applicable position and 
exercise limits until the last expiration month expired or traded 
out, and then reverted to pre-split levels).
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    In conjunction with the proposed split, the Exchange would continue 
to list strike price intervals surrounding the new lower Index value 
pursuant to Phlx Rule 1101A, which will not change pursuant to this 
proposal. The Exchange would announce the effective date of the split 
by way of an Exchange memorandum to the membership, which would also 
serve as notice of the strike price and position limit changes.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\9\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\10\ in particular, in that it 
is designed to promote just and equitable principles of trade and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest, by establishing a lower Index value, 
which should, in turn, facilitate trading in HGX, creating a more 
liquid trading environment. The Exchange believes that reducing the 
value of the Index should not raise manipulation concerns and should 
not cause adverse market impact because the Exchange will continue to 
employ its surveillance procedures and has proposed an orderly 
procedure to achieve the Index split, including adequate prior notice 
to market participants.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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 inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Phlx has filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \11\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\12\ Because the foregoing proposed rule change: (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 30 days from the date of filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
and Rule 19b-4(f)(6) thereunder. As required under Rule 19b-
4(f)(6)(iii), the Phlx provided the Commission with written notice of 
its intent to file the proposed rule change at least five business days 
prior to filing the proposal with the Commission or such shorter period 
as designated by the Commission.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The

[[Page 57921]]

Exchange has requested that the Commission waive the 30-day operative 
delay specified in Rule 19b-4(f)(6), so that all options traded on the 
indexes can be treated uniformly.\13\
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    \13\ The Exchange plans to issue a memorandum to membership 
announcing an effective date of the split that is prior to 
expiration of the 30-day operative period. Telephone conversation 
between Jurij Trypupenko, Director, Phlx, and Florence Harmon, 
Senior Special Counsel, Commission, on September 26, 2005.
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\14\ Specifically, the Commission believes that the Phlx's 
proposal raises no new issues or regulatory concerns that the 
Commission did not consider in approving a similar proposal of a two-
for-one split.\15\ Additionally, the Commission notes that the Exchange 
will continue to employ its surveillance procedures and has proposed an 
orderly procedure to achieve the Index split, including adequate prior 
notice to market participants. For these reasons, the Commission 
designates that the proposal become operative immediately.
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    \14\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \15\ See supra, note 8.
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    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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an E-mail to rule-comments@sec.gov. Please include 

File Number SR-Phlx-2005-50 on the subject line.

Paper comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Phlx-2005-50. 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 (http://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 Section, 100 F Street, 
NE., Washington, DC 20549. Copies of this filing also will be available 
for inspection and copying at the principal office of the Phlx. 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 Number SR-Phlx-2005-50 and should be 
submitted on or before October 25, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-19806 Filed 10-3-05; 8:45 am]

BILLING CODE 8010-01-P
