[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