[Federal Register Volume 59, Number 50 (Tuesday, March 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5919]
[[Page Unknown]]
[Federal Register: March 15, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33736; File No. SR-PHLX-93-27]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. Relating to Amendments
to Floor Procedure Advice F-5, Material Changes to Terms of a Matched
Trade
March 8, 1994.
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On July 23, 1993, the Philadelphia Stock Exchange, Inc. (``PHLX''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b 4
thereunder,\2\ a proposed rule change to amend Floor Procedure Advice
(``Advice'') F-5, ``Material Changes to Terms of a Matched Trade,'' to
designate the Advice's current language as paragraph (a)\3\ and to add
paragraph (b), which will require any person signing a correction sheet
to use due diligence to confirm the correction before signing the
correction sheet, including checking the appropriate floor tickets or
computerized report (``run'') in any case where a sizeable error may
result if appropriate corrective action is not taken. The proposed rule
change was noticed for comment in Securities Exchange Act Release No.
32894 (September 14, 1993), 58 FR 49078.\4\ No comments were received
on the proposed rule change.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1993).
\3\Specifically, paragraph (a) requires that all correction
sheet submissions which change material terms of a transaction
(security, price, volume, series, class and customer to firm
participation) be signed by all of the parties to the transaction
and by a representative of the specialist unit. In addition,
paragraph (a) states that if one of the parties to the transaction
is not present when the matter is being resolved, then a member of
the Exchange's Surveillance staff must sign the correction sheet to
acknowledge the contra side's absence.
\4\On February 2, 1994, the PHLX submitted a letter defining a
``sizeable error.'' Specifically, the PHLX views a sizeable error in
equity or index options, where the average trade size is
approximately 10 contracts, as an error of $1,000 or more. For
foreign currency options, where the average trade size is
approximately 80 contracts, the PHLX views an error of $3,000 or
more as a ``sizeable error.'' See Letter from Gerald D. O'Connell,
Vice President, Market Surveillance, PHLX, to Sharon Lawson,
Assistant Director, Division of Market Regulation (``Division''),
Commission, dated February 2, 1994 (``February 2 Letter''). In its
February 2 Letter the PHLX also amended the title of Advice F-5 to
``Material Changes to Terms of a Matched Trade'' rather than
``Material Changes to Terms of a Cleared Trade.'' Subsequently, the
PHLX submitted a letter incorporating its definition of ``sizeable
error'' into the text of Advice F-5. See Letter from Gerald D.
O'Connell, Vice President, Market Surveillance, PHLX, to Sharon
Lawson, Assistant Director, Division, Commission, dated February 28,
1994 (``February 28 Letter''). In its February 28 Letter the PHLX
also noted that the amounts specified as constituting a ``sizeable
error'' are guidelines and that the circumstances surrounding a
correction must be considered. In addition, in its February 28
Letter the PHLX deleted language indicating that the correction
confirmation requirement would apply only where the person ``has
reason to believe'' that a sizeable error will result without
appropriate corrective action. Instead, as noted above, the
correction confirmation requirement applies at any time when a
sizeable errors may result in the absence of appropriate corrective
action.
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Currently, Advice F-5 provides that all correction sheet
submissions which change material terms of a transaction (security,
price, volume, series, class and customer to firm participation) must
be signed by all parties to the transaction and by a representative of
the specialist unit. If one of the parties to the transaction is not
present at the time the matter is being resolved, the signature of one
of the Exchange's Surveillance staff is required to acknowledge the
contra side's absence. The Advice states that the signature of the
Surveillance staff member does not relieve any party to the trade from
liability in connection with the change.
The PHLX proposes to amend Advice F-5 to emphasize that correction
sheets should not be signed absent the use of due diligence to confirm
the correct terms of the trade. Specifically, the Exchange proposes to
amend Advice F-5 to add paragraph (b), which would require that a
person signing a correction sheet use due diligence to confirm the
correction by checking the appropriate floor tickets or the Exchange-
provided computer ``run.'' Recognizing that certain corrections are so
minor that a fine pursuant to proposed paragraph (b) would not be
warranted, the Exchange proposes to limit the imposition of a fine
under proposed paragraph (b) to situations where the person signing the
correction sheet has reason to believe that a sizeable error\5\ may
result if the terms of the correction sheet are not confirmed.
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\5\See February 2, Letter and February 28 Letter, supra note 3,
for the PHLX's definition of a ``sizeable error.''
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The proposed rule change will apply to all options traded on the
PHLX.\6\ The Exchange plans to increase the fine imposed for violations
of paragraph (a) from $50.00 to $100.00.\7\ The PHLX states that the
proposed increase is designed to impose a more realistic fine in view
of the violation; the PHLX notes that the current $50.00 fine has been
in place since 1986. In addition, the PHLX proposes to add the
following fine schedule for violations of proposed paragraph (b):
$250.00 for the first occurrence; $500.00 for the second occurrence;
and a sanction discretionary with the Exchange's Business Conduct
Committee (``BCC'') for the third and subsequent occurances.
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\6\Telephone conversation between Edith Hallahan, Attorney,
Market Surveillance, PHLX, and Yvonne Fraticelli, Staff Attorney,
Options Branch, Division of Market Regulation, Commission, on August
4, 1993.
\7\See note 3, supra, for a description of paragraph (a).
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The PHLX proposes to include proposed paragraph (b), as well as
paragraph (a), as amended, in the Exchange's minor rule violation
enforcement and reporting plan (``minor rule plan'').\8\ In addition,
the PHLX proposes to place Advice F-5 on a three-year rolling cycle for
the imposition of fines, so that repeat violations during the same
three-year period would result in escalating fines.\9\ The PHLX
believes that the proposed amendments to Advice F-5 should provide an
incentive to improve the handling of corrections to executed
transactions by increasing the fee for violations and adding a
correction confirmation requirement, consistent with the purposes of
section 6(b)(5) of the Act.
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\8\The Exchange's minor rule plan is administratered pursuant to
PHLX Rule 970, ``Floor Procedure Advices: Violations, Penalties, and
Procedures.''
\9\In November 1993, the Commission approved a PHLX proposal to
place nine Advices on a three-year rolling cycle for the imposition
of fines. See Securities Exchange Act Release No. 33130 (November 2,
1993), 56 FR 59502 (order approving File No. SR-PHLX-93-28).
Currently, most fines accrue under the Exchange's minor rule plan on
a one-year rolling calendar basis, so that a second violation of the
same provision within one year is subject to the next highest fine
(i.e. the second violation within that calendar year is treated as a
second occurrence). If the violation is not repeated in that
calendar year, then a subsequent violation of that provision is
treated as the person's first violation. Under the three-year
rolling cycle, a violation of Advice F-5 which occurs within three
years of the first violation of the Advice will be treated as a
second occurrence, and any violation of the Advice within three
years of the previous violation of the Advice will be subject to the
next highest fine. Thus, a third violation of Advice F-5 within less
than three years after a fine for a second violation of Advice F-5
will be treated as a third violation of that Advice, even though
more than three years may have elapsed since the first violation of
Advice F-5.
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The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of section 6(b)(5)\10\ in that the
proposal is designed to facilitate transactions in securities and to
protect investors and the public interest. Specifically, the Commission
believes that paragraph (b), which requires a person to use due
diligence to confirm a correction by checking the appropriate floor
ticket or computerized report, should benefit investors and help the
PHLX to maintain a fair and orderly market by enhancing the accuracy of
corrections to executed transactions. The Commission believes that the
fine schedule applied to paragraph (b), which is graduated to account
for repeat offenders and will be administered on a three-year rolling
calendar basis under the PHLX's minor rule plan, should provide a
prompt, effective and appropriate means to enforce compliance with the
correction confirmation requirement. Likewise, the Commission believes
that it is appropriate for the PHLX to increase the fine applicable to
violations of paragraph (a) from $50.00 to $100.00 because of the
importance of ensuring the accuracy of corrections to executed
transactions.
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\10\15 U.S.C. 78f(b)(5) (1988).
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In addition, the Commission believes that it is appropriate to
include paragraph (b), as well as paragraph (a), in the PHLX's minor
rule plan because a violation of the correction confirmation
requirement for sizeable errors through failure to check the
appropriate floor ticket or computerized report is easily verifiable
and should not entail the complicated factual and interpretative
inquiries associated with more sophisticated Exchange disciplinary
actions. Moreover, under the PHLX's minor rule plan, a person fined
under the Advice will be permitted to contest the fine pursuant to PHLX
Rule 970(d) and be entitled to full due process. In addition, the
Commission notes that the proposal provides the PHLX with flexibility
in administratering the Advice, in that the requirement to use due
diligence to confirm a correction applies only where the person has
reason believe that a sizeable error may result in the absence of
appropriate corrective action. At the same time, the PHLX's definition
of a ``sizeable error''\11\ should help to ensure that fines are not
imposed under the Advice in an arbitrary manner. The Advice also sets
forth specifically what action is expected to be taken to confirm the
correction.
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\11\See February 2 Letter and February 28 Letter, supra note 3.
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It is therefore ordered, Pursuant to section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-PHLX -93-27) is hereby
approved.
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\12\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\17 CFR 200.30-3(a)(12) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5919 Filed 3-14-94; 8:45 am]
BILLING CODE 8010-01-M