[Federal Register Volume 60, Number 96 (Thursday, May 18, 1995)]
[Notices]
[Pages 26754-26756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12259]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35710; File No. SR-Phlx-95-14]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 of Proposed Rule Change by the Philadelphia 
Stock Exchange, Inc., Relating to Extension of Market Marker Margin 
Treatment to Certain Market Marker Orders Entered From Off the Trading 
Floor

May 12, 1995.
    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 March 1, 1995, 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. The 
Exchange subsequently filed Amendment No. 1 on April 3, 1995.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange proposes to require Phlx 
ROTs to execute at least 75% of their quarterly trades in-assigned 
options for purposes of receiving market maker margin treatment for 
off-floor orders. The Exchange originally proposed to require an ROT 
to trade at least 50% of his quarterly contract volume in-assigned 
options. In addition, Amendment No. 1 states that Phlx proposes to 
delete the fine schedules under the minor rule plan originally 
proposed to address violations of the heightened trading 
requirements, because violations of this program are to be reviewed 
directly by the Business Conduct Committee and are not to be treated 
as minor rule plan violations. Finally, Phlx proposes to clarify 
that the phrase ``may exempt one or more classes of options from 
this calculation'' in Commentary .01 to Phlx Rule 1014, is intended 
to mean that certain options may not be eligible for off-floor 
market maker treatment, consistent with the approved provisions of 
the other exchanges. See Letter from Gerald O'Connell, First Vice 
President, Phlx, to Michael Walinskas, Branch Chief, Office of 
Market Supervision (``OMS``), Division of Market Regulation 
(``Market Regulation''), Commission , dated March 29, 1995 
(``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, pursuant to Rule 19b-4 of the Act, proposes to amend 
Phlx Rule 1014, Commentary .01, to extend market maker margin treatment 
to opening orders entered by Phlx Registered Options Traders (``ROTs'') 
from off the Exchange floor, provided that the greater of 1,000 
contracts or 80% of ROT's total transactions on the Exchange in a 
calendar quarter are executed in person, and not through the use of 
orders. Phlx ROTs would also be required to execute at least 75% of 
their quarterly contract volume in assigned options.\4\ In addition, 
the proposal requires that all off-floor orders for which an ROT 
receives market maker treatment be consistent with such ROT's duty to 
maintain fair and orderly markets, and, in general, be effected for the 
purposes of hedging, reducing risk of, or rebalancing open positions of 
the ROT.

    \4\ See Amendment No. 1, supra note 3.
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    Corresponding amendments to five Floor Procedure Advices 
(``Advices''), which are administered pursuant to the Exchange's minor 
rule violation enforcement and reporting plan,\5\ are also proposed: B-
3, Trading Requirements; B-4, Phlx ROTs Entering Orders from On-Floor 
and Off-Floor for Execution of the Exchange; B-8, Use of Floor Brokers; 
B-12, Phlx ROTs and Specialist Entering Orders for Execution on Other 
Exchanges in Multiply Traded Options; and C-3, Handling Orders of Phlx 
ROTs and Other Registered Options Market Makers.

    \5\ The Phlx's minor rule violation enforcement and reporting 
plan (``minor rule plan''), codified in Phlx Rule 970, contains 
floor procedure advices with accompanying fine schedules. Rule 19d-
1(c)(2) authorizes national securities exchanges to adopt minor rule 
violation plans for summary discipline and abbreviated reporting; 
Rule 19d-1(c)(1) requires prompt filing with the Commission of any 
final disciplinary actions. However, minor rule violations not 
exceeding $2,500 are deemed not final, thereby permitting periodic, 
as opposed to immediate reporting. Although the Exchange is 
proposing to amend several advices, only Advice C-3 will contain a 
minor rule plan fine; hence, the Exchange hereby proposes to amend 
its minor rule plan by incorporating the proposed changes to Advice 
C-3.
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    First, a new paragraph (b) to Advice B-3, with a separate fine 
schedule for violations, would contain the heightened trading 
requirement to receive limited market maker margin treatment for off-
floor orders. Violations of Advice B-3(b) would not be subject to a 
minor rule plan citation and fine, but would be reviewed directly by 
the Exchange's Business Conduct Committee pursuant to Phlx Rule 960 
governing disciplinary proceedings.
    In addition, an exception from the general prohibition against 
placing off-floor orders in market maker accounts would be added to 
Advice B-4 to permit the proposed treatment for off-floor orders. In 
order to incorporate this proposal into the Floor Procedure Advice 
handbook, Advice B-4 would generally parallel the proposed provision in 
Commentary .01. In addition, Advice B-4 would require an ROT to 
disclose to a Floor Broker, among other things, that he is entering an 
off-floor order for his market maker account. Entering an off-floor 
order in violation of the proposed new paragraph in Advice B-4 would be 
subject to full disciplinary proceedings and reviewed by the Exchange's 
Business Conduct Committee.
    Advice B-8 is proposed to be amended by limiting its application to 
the use of floor brokers while an ROT is on the trading floor. 
Otherwise, an ROT entering an order from off-floor could not comply 
with the requirement to initial the order ticket.
    Advice B-12 governs Phlx traders entering orders in multiply traded 
options onto another exchange, currently requiring such orders to be 
entered while the trader is on the Phlx floor. Because off-floor orders 
for a market maker account will become permissible, Advice B-12 is 
proposed to be amended to permit the entry of off-floor orders for 
execution on another exchange in multiply traded options. Such orders, 
entered pursuant to Rule 1014, Commentary .01, must otherwise comply 
with the requirements of Advice B-12, including ``clearing the Phlx 
crowd.''
    Lastly, Advice C-3 would be amended to require Floor Brokers to 
mark an order ticket with the letter ``P'' if an ROT indicates that an 
off-floor order is to be entered into his market maker account. Fines 
for violations of Advice C-3 would be administered pursuant to the 
Exchange's minor rule plan. This proposal would apply to ROTs on both 
the options floor (equity options and index options) as well as the 
foreign currency options floor. The text of the proposed rule change is 
available at the Office of the Secretary, the Exchange, and at the 
Commission.

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 Exchange included statements 
concerning the purpose of and basis for [[Page 26755]] 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 Section (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

    Generally, a trade for the account of a specialist or ROT receives 
market maker, or good faith, margin,\6\ as well as favorable capital 
treatment,\7\ due to the affirmative and negative market making 
obligations \8\ imposed on such floor traders by Exchange and 
Commission rules. Further, Rule 1014, Commentary .01 states that ROTs 
are considered ``specialists'' for the purposes of the Act and the 
rules thereunder, which includes capital and margin rules, respecting 
option transactions initiated and effected by the ROT on the floor in 
the capacity of an ROT. Accordingly, transactions initiated on-floor by 
Phlx ROTs receive this favorable margin treatment. Off-floor opening 
\9\ market maker transactions currently may not qualify for favorable 
margin treatment under Exchange rules, even if such orders are entered 
to adjust or hedge the risk of an ROT's positions resulting from on-
floor market making activity.

    \6\ Regulation T of the Federal Reserve Board, Section 220.12.
    \7\ SEC Rule 15c3-1(b)(1).
    \8\ See e.g., Phlx Rule 1014 (a) and (c).
    \9\ Closing transactions do not give rise to issues of margin 
and capital treatment, because such positions merely reduce or 
eliminate existing positions.
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    The purpose of the proposed rule change is to extend market maker 
margin treatment to certain off-floor orders in all Phlx options. A new 
provision in Rule 1014, Commentary .01 is required, as well as 
amendments to various advices impacted by the proposal.
    The Exchange believes that because an ROT cannot effectively adjust 
his positions, or hedge and otherwise reduce the risk of his opening 
transactions, from off the Phlx trading floor without incurring a 
significant economic penalty, such ROTs must either be physically 
present on the Exchange floor or face significant risks of adverse 
market movements when they must necessarily be absent from the trading 
floor.\10\ Because of these costs and risks, the Exchange believes that 
Phlx ROTs may be prevented from effectively discharging their market 
making obligations and may be exposed to unacceptable levels of risk.

    \10\ Certain off-floor orders may be considered on-floor orders. 
see Phlx Rule 1014, Commentary .08.
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    Accordingly, the proposed rule change is intended to accommodate 
the occasional needs of ROTs to adjust or hedge positions in their 
market maker accounts at times when they are not physically present on 
the trading floor. The Phlx believes the proposed rule change does so 
without diluting the requirement that such ROT's trading activity must 
nevertheless fulfill their market making obligations, including 
contributing to the maintenance of a fair and orderly market on the 
Exchange.
    Phlx Rule 1014, Commentary .03 and Floor Procedure Advice 
(``Advice'') B-3 currently require ROTs to effect at least 50% of their 
quarterly contract volume in assigned options. Further, ROTs are 
required to execute in person and not through the use of orders the 
greater of 1,000 contracts or 50% of their quarterly contract volume, 
pursuant to Advice B-3 and Rule 1014(b), Commentary .13. At this time, 
the Exchange is proposing to amend Rule 1014 to allow ROTs who meet a 
more stringent in-person, and in-assigned options requirement to 
receive market maker margin and capital treatment for opening off-floor 
orders. This proposal does not affect the above-referenced requirement 
that, notwithstanding an ROT's desire to qualify for favorable margin 
treatment for off-floor trading, an ROT remains obligated pursuant to 
Advice B-3 to trade (1) in-person, and not through the use of orders, 
the greater of 1,000 contracts or 50% of their total transactions each 
quarter, and (2) at least 50% of their quarterly contract volume in 
assigned options.
    Under the proposal, Phlx ROTs would receive market maker margin 
treatment for orders entered from off-floor in limited circumstances. 
Such ROTs would be required to execute in person, and not through the 
use of orders, the greater of 1,000 contracts or 80% of such ROT's 
total transactions that quarter. In addition, such off-floor orders 
must be effected for the purpose of hedging, reducing risk of, 
rebalancing or liquidating open positions of the ROT. Phlx ROTs would 
also be required to execute at least 75% of his quarterly contract 
volume in assigned options.\11\ The Exchange notes that ROTs who fail 
to comply with the proposed requirements in Rule 1014, Commentary .01, 
shall be subject to disciplinary proceedings under Phlx Rule 960.

    \11\ See Amendment No. 1, supra note 3.
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    In addition to the proposed amendment to Commentary .01 of Rule 
1014, the Exchange proposes to amend five Phlx floor procedure advices 
to cover such off-floor market maker orders. First, new paragraph (b) 
of Advice B-3 would effectuate the proposed provisions of Commentary 
.01 by referencing the heightened trading requirement in order to 
receive favorable margin treatment for off-floor orders. Accordingly, 
entering an off-floor order for a market maker account without 
compliance with the ``1,000 contracts or 80%'' requirement shall result 
in a Rule 960 disciplinary proceeding, which is separate from any 
violation of Advice B-3(a), which is administered pursuant to the 
Exchange's minor rule plan.
    Second, Advice B-4 is proposed to be amended to create an exception 
to the prohibition against entering off-floor orders into a market 
maker account. Generally, Advice B-4 would restate the provisions of 
Commentary .01 to Rule 1014 that an ROT who has executed the greater of 
1,000 contracts or 80% of his total transactions in a calendar quarter 
in person may enter opening transactions from off the floor on limited 
occasions for his market maker account if such transactions are for the 
purpose of hedging, reducing risk of, rebalancing, or liquidating open 
positions.
    Third, by amending the title of Advice B-8, the Phlx intends to 
limit its effect to situations where an ROT uses a Floor Broker while 
the ROT is on the Phlx Floor. Because ROTs cannot currently enter off-
floor opening orders into a market maker account, the language of this 
advice presumes that the ROT is on the floor, and, hence, able to 
comply with the requirements of initialing the order ticket. Because 
this proposal would permit entering opening orders from off-floor and 
because an ROT who is off-floor cannot initial and time stamp a ticket, 
Advice B-8 would now expressly apply, as reflected in the new title, 
only to on-floor situations. Nevertheless, the requirement that an ROT 
state whether an order is opening or closing appears in Advice B-4, and 
the Floor Broker must time stamp the order pursuant to Advice C-2. 
Thus, off-floor orders should be appropriately designated and handled, 
despite the inapplicability of Advice B-8.
    Fourth, Advice B-12 is proposed to be amended to clarify the margin 
treatment of orders sent to another exchange in a multiply traded 
option. Although such orders must currently be initiated from the Phlx 
floor and must clear the Phlx crowd, the proposed changes would permit 
off-floor orders to be sent to another exchange. Such orders must 
nevertheless clear the Phlx crowd. The purpose of this change is to 
treat orders in multiply traded options, whether 
[[Page 26756]] originating from on or off-floor, the same way for 
margin purposes, extending limited market maker treatment.
    Lastly, Advice C-3 is proposed to be amended to incorporate this 
extension of specialist margin treatment into the advice enumerating 
Floor Broker responsibilities. Specifically, Floor Brokers would be 
required to mark floor tickets where an ROT has indicated that the 
order is for his market maker account with the letter ``P''. A fine for 
violations would be administered pursuant to the Exchange's minor rule 
plan. The Exchange believes that this should assist its surveillance 
efforts respecting market maker margin for off-floor orders.
    The Phlx believes that the proposed rule change is consistent with 
Section 6 of the Act in general, and in particular, with Section 
6(b)(5), in that it is designed to promote just and equitable 
principles of trade and to protect investors and the public interest. 
Specifically, the Phlx believes that the proposal should increase the 
extent to which ROT trades contribute to liquidity and to the 
maintenance of the fair and orderly market on the Exchange by providing 
for a greater degree of in-person trading by ROTs and by enabling such 
ROTs to better manage the risk of their market making activities. 
Likewise, the Phlx believes that the corresponding amendments to Phlx 
advices are intended to incorporate specialist margin treatment for 
off-floor orders into the provisions governing trading requirements, 
ROTs entering orders, and Floor Broker responsibilities, consistent 
with Section 6(b)(5).

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any 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 solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Phlx consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, D.C. 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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street NW., 
Washington, D.C. 20549. 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-95-14 and should be 
submitted by June 8, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\

    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 95-12259 Filed 5-17-95; 8:45 am]
BILLING CODE 8010-01-M