[Federal Register Volume 59, Number 51 (Wednesday, March 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6117]


[[Page Unknown]]

[Federal Register: March 16, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33749; File No. SR-Phlx-92-30]

 

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Accelerated Approval of Amendment to 
Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating 
to Clearing Agents' Responsibility for Ensuring That Good Faith Margin 
Treatment Is Properly Granted

March 10, 1994.

I. Introduction

    On December 21, 1992, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), 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 adopt new Options Floor 
Procedure Advice (``Advice'') F-19 and new Commentary .14 to Phlx Rule 
722 (``Commentary'') to require that Phlx Clearing Members take 
reasonable steps to ensure that only positions in Phlx-listed options 
that qualify for good faith margin treatment are carried in the market 
functions account of a specialist or registered options trader/market 
maker (``ROT'').\3\ Notice of the proposal, including Amendment No. 1, 
appeared in the Federal Register on July 7, 1993.\4\ No comment letters 
were received on the proposed rule change. This order approves the 
Exchange's proposal.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1992).
    \3\On March 25, 1993 the Phlx amended the rule change proposal 
to provide that the ``reasonable steps'' to ensure that only 
positions in Phlx-listed options that qualify for good faith margin 
treatment are carried in the market functions account of a 
specialist or market maker include ``the adoption and implementation 
of procedures designed to detect any pattern of activity that 
results in options that do not qualify for good faith margin 
treatment being carried in a specialist's or market maker's market 
functions account.'' See letter from Edith Hallahan, Attorney, 
Market Surveillance, Phlx to Richard Zack, Branch Chief, Options 
Regulation, Division of Market Regulation, SEC, dated March 25, 1993 
(``Amendment No. 1''). On March 4, 1994 the Phlx amended the 
proposal to (1) clarify that the proposed rule change applies to 
[applicable persons] for any transaction on another exchange in an 
option that is also listed on the Phlx; (2) redefine the term 
``Clearing Agent'' as ``clearing member of the Exchange''; and (3) 
redefine the term ``market maker account'' as ``market functions 
account.'' See letter from Gerald D. O'Connell, Vice President, 
Market Surveillance, Phlx to Sharon Lawson, Branch Chief, Options 
and Derivatives Branch, Division of Market Regulation, SEC, dated 
March 4, 1994 (``Amendment No. 2'').
    \4\See Securities Exchange Act Release No. 32557 (June 30, 
1993), 58 FR 36495.
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II. Description of the Proposal

    The Phlx proposes to adopt new Advice F-19 and new Commentary .14 
to Phlx Rule 722 to require that Phlx Clearing Members take reasonable 
steps to ensure that only positions in Phlx-listed options that qualify 
for good faith margin treatment are carried in the market functions 
accounts of specialists and ROTs. For purposes of the Advice and 
Commentary, ``positions in Phlx-listed options'' includes positions 
originating on another options exchange in an option that is also 
listed on the Phlx. The proposal provides that ``reasonable steps'' 
include the adoption and implementation of procedures designed to 
detect any pattern of activity that results in options that do not 
qualify for good faith margin treatment being carried in the 
specialist's or ROT's market functions account. The purpose of the 
proposed rule change is to ensure that good faith margin treatment is 
granted to positions held in a specialist's or ROT's market functions 
accounts only where appropriate.
    The Phlx believes that these requirements should help ensure that 
only specialists and ROTs who are registered to trade in such capacity 
in options listed for trading on the Phlx are afforded specialist/
market maker margin treatment with respect to those options. The Phlx 
also believes that, in order to ensure compliance with Regulation T by 
its Clearing Members, a policy clearly stating the Clearing Members' 
responsibility is necessary.
    The Phlx notes that the proposed Advice would only be applicable to 
the equity options floor. Thus, the Phlx has placed the notation 
``(O)'' after the Advice. In addition, the Phlx proposal has also 
incorporated the Advice into the Phlx's minor rule plan\5\ and has set 
forth a fine schedule for violation of the Advice.\6\
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    \5\See letter from Gerald D. O'Connell, Vice President, Market 
Surveillance, Phlx, to Sharon Lawson, Assistant Director, Division 
of Market Regulation, SEC, dated March 7, 1994.
    \6\The fine schedule for Advice F-19 provides that a fine of 
$500 will be imposed for the first violation and a fine of $1,000 
will be imposed for the second violation. The sanction for the third 
violation is discretionary with the Phlx Business Conduct Committee. 
In addition, under a rolling three-year cycle, if three years elapse 
between the first and second violation, the second violation would 
be treated as a first violation. If there is a violation within 
three years after the most recent violation, the next highest fine 
will be issued. Thus, a third violation less than three years after 
a fine was issued for a second violation would be treated as a 
``third violation,'' even though more than three years may have 
elapsed after the first violation.
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    The Exchange believes the proposal is consistent with Regulation T 
of the Federal Reserve Board (``Regulation T'').\7\ Regulation T grants 
good faith margin treatment in the market functions accounts of 
specialists and ROTs only to qualified or offsetting positions. 
``Customer'' margin is to be applied to all other positions. 
Accordingly, because the purpose of the proposal is to reserve good 
faith margin treatment for bona fide specialist or market maker trades, 
the Phlx believes that the proposal is consistent with Regulation T.
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    \7\Regulation T is issued by the Board of Governors of the 
Federal Reserve System (``Board'') pursuant to the Act. Its 
principal purpose is to regulate extensions of credit by and to 
brokers and dealers. It also covers related transactions within the 
Board's authority under the Act and imposes, among other 
obligations, initial margin requirements and payment rules on 
securities transactions.
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III. Commission Findings and Conclusions

    The Commission believes 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 Sections 6(b)(5) in that the proposal 
is designed to prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, as well as to protect 
investors and the public interest.
    Specifically, the proposal, by imposing an Exchange requirement for 
Phlx Clearing Members to take reasonable steps to ensure that such 
Members only provide exempt credit treatment for positions taken in 
Phlx-listed options when properly eligible, helps to provide the Phlx 
the ability to police an important margin policy. The Phlx proposed 
rule change is consistent with Regulation T by expressly requiring Phlx 
Clearing Members to undertake certain reasonable steps to ensure 
compliance with Regulation T in Phlx-listed options transactions. The 
Commission believes that the Phlx proposed rule change imposes 
requirements that Phlx Clearing Members should already be undertaking 
in order to ensure their compliance with Regulation T. Accordingly, the 
Commission does not believe that the proposed rule change unfairly 
burdens Phlx Clearing Members. In addition, the Commission also 
believes that the fine schedule for proposed Advice F-19 is 
appropriate.
    The Commission finds good cause for approving Amendment No. 2 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. Accelerating the amendment will allow 
the proposal to be enacted without delay. Further, the amendment merely 
clarifies the meaning of certain language contained in the original 
filing and redefines several terms in order to strengthen the proposed 
rule change's consistency with certain other Exchange rules and 
Regulation T. The Commission also notes that the proposal, including 
Amendment No. 1, was published for the full 21 day comment period and 
no comments were received.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549. 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, 450 Fifth Street, 
NW., Washington, DC. 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-92-30 and should be 
submitted by April 6, 1994.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-Phlx-92-30), as amended, is 
approved.
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    \8\15 U.S.C. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-6117 Filed 3-15-94; 8:45 am]
BILLING CODE 8010-01-M