[Federal Register Volume 60, Number 134 (Thursday, July 13, 1995)]
[Notices]
[Pages 36172-36173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17204]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35943; File No. SR-Phlx-95-05]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to the 
Response Period for Customized Foreign Currency Options

July 7, 1995.
    On February 21, 1995, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to eliminate the response 
period and the special parity rules that apply following a request for 
quote (``RFQ'') for a customized foreign currency option (``FCO''). 
Notice of the proposal appeared in the Federal Register on April 24, 
1995.\3\ No comment letters were received on the proposed rule change. 
This order approves the Phlx proposal.

    \1\ 15 U.S.C. 73s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ See Securities Exchange Act Release no. 35615 (April 17, 
1995), 60 FR 20133.
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    The purpose of the proposed rule change is to amend Exchange Rule 
1069(b) in order to eliminate both the response period permitted 
following an RFQ for a customized FCO and the special parity rules for 
assigned Registered Options Traders (``ROTs'') that apply during that 
response period.\4\ Currently, when a participant submits an RFQ, any 
other participant may request a preset response time.\5\ Once the 
response period has been invoked, a trade may occur prior to the end of 
the response period only if at least two assigned ROTs respond to the 
RFQ.

    \4\ The proposal also adopts Floor Procedure Advice F-20 
(Quoting and Trading Customized Foreign Currency Options) which will 
parallel the provisions in Exchange Rule 1069(b), as amended.
    \5\ The response period was initially set by the Exchange's FCO 
Committee at two minutes for simple strike options, five minutes for 
simple spreads, inverses, and cross-rates, and eight minutes for 
options strategies involving more than three legs. The FCO Committee 
shortened the response period to one minute for all types of RFQs 
for customized FCOs on January 16, 1995, effective at the opening on 
January 17, 1995.
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    The special parity provisions in Rule 1069 provide that any 
assigned ROT who enters a responsive quote that is improved upon during 
the response time by another participant is entitled to participate on 
a parity basis with that other participant by announcing immediately 
thereafter, and prior to the execution of the order, that he or she is 
matching the best bid or offer. This ability to match is available to 
assigned ROTs until the execution of the trade or the end of the 
response time period, whichever occurs first.
    The Phlx now proposes to amend Rule 1069 to eliminate the response 
time period and the special parity provisions. As a result, the 
Exchange represents that customized FCOs would trade more like other 
FCOs listed on the Exchange in that trades would be executable as soon 
as any responsive quote \6\ is made and the Exchange's existing parity 
and priority provisions in Phlx Rule 1014(h) would apply.

    \6\ See infra note 8.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder 

[[Page 36173]]
applicable to a national securities exchange, and, in particular, the 
requirements of Section 6(b)(5).\7\ Specifically, the Commission 
believes the proposal may attract additional customized FCO 
transactions to the Exchange, particularly crossing transactions \8\ 
that are currently executed in the over-the-counter (``OTC'') market. 
As the Commission stated in approving the listing of customized FCOs by 
the Exchange, the benefits of trading on an exchange versus OTC trading 
include, but are not limited to, a centralized market, posted 
transparent market quotations and transaction reporting, parameters and 
procedures for clearance and settlement, and the guarantee of The 
Options Clearing Corporation as the issuer of all customized FCOs 
listed on the Exchange.\9\ Even though eliminating the response time 
period may reduce some of the opportunity for price improvement that is 
currently available for customized FCOs traded on the Exchange,\10\ the 
structure currently in place for the trading of customized FCOs, which 
the Commission has found to be consistent with the Act,\11\ will 
otherwise remain unchanged.

    \7\ 15 U.S.C. 78f(b)(5) (1988).
    \8\ A crossing transaction is one in which the same broker acts 
as agent in both sides of a trade. As applied to customized FCOs, 
Phlx's crossing rules (see Phlx Rule 1064) provide that a 
participant may cross orders by submitting an RFQ in which he 
announces his intention to cross and his market for the transaction. 
After providing an opportunity for responsive bids and offers to be 
made, he may then execute the cross by improving the best bid or 
offer by the minimum fractional change and announcing the quantity 
and price for the transaction. Telephone conversation between 
Michele Weisbaum, Associate General Counsel, Phlx, and Brad Ritter, 
Senior Counsel, Division of Market Regulation, Commission, on July 
5, 1995.
    \9\ See Securities Exchange Act Release No. 34925 (November 1, 
1994), 59 FR 55720 (November 8, 1994) (``Exchange Act Release No. 
34925'').
    \10\ Phlx's parity and priority provisions in Rule 1014(h) will 
apply to transactions in customized FCOs. For crossing transactions, 
however, by eliminating the response time period, the Commission 
recognizes that the opportunity for other participants to better the 
market will be diminished. See supra note 8.
    \11\ See Exchange Act Release No. 34925, supra note 9.
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    In this regard, the proposal effectively alters the trading 
structure of customized FCOs in a manner making it more similar to the 
trading of regular FCOs listed by the Exchange. As a result, the 
Commission believes that the proposal does not raise any significant 
regulatory concerns that have not been previously addressed by the Phlx 
and the Commission in connection with the trading of regular FCOs.
    Finally, the Exchange stated in its proposal that the response 
period and the attendant parity rules were intended to assure that the 
floor traders, who the Phlx believes are crucial to providing liquidity 
to the marketplace, were not placed at a disadvantage to the off-floor 
traders. The Exchange represents, however, that the level of trading in 
customized FCOs has not provided sufficient activity to determine 
whether this concern is valid. The Exchange believes, however, that as 
additional trading history for customized FCOs develops, it will be in 
a better position to monitor the trading activity in customized FCOs to 
ensure that no material competitive disparity is actually occurring.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (File No. SR-Phlx-95-05) is 
approved.

    \12\ 15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\

    \13\ 17 CFR 200.30-3(a)(12) (1944).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-17204 Filed 7-12-95; 8:45 am]
BILLING CODE 8010-01-M