[Federal Register Volume 62, Number 152 (Thursday, August 7, 1997)]
[Notices]
[Pages 42616-42618]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20751]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34--38891; File No. SR-Phlx-97-34]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Amending the FCO Selective Quoting Facility

July 31, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 25, 1997, the 
Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization.\2\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ The proposal was filed originally by the Phlx on July 25, 
1997, and clarified on July 29, 1997. The Phlx clarified the text of 
the rule and the advice to state that the purpose of quarterly 
review by the foreign Currency Options Committee is to determine if 
series receiving designation as update strikes should continue to 
receive such designation. See Letter from Philip H. Becker, Senior 
Vice President and Chief Regulatory Officer, Phlx, to Michael 
Walinskas, Senior Special Counsel, Office of Market Supervision, 
Division of Market Regulation, SEC (July 28, 1997). See also 
Securities Exchange Act Release No. 35123 (Dec. 20, 1994), 59 FR 
66692, at 12 (permitting the staff discretion to accept editorial 
changes to a proposed rule filing without triggering a new 30 day 
comment period).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx pursuant to Rule 19b-4 of the Act,\3\ proposes to amend 
the foreign currency option (``FCO'') Selective Quoting Facility 
(``SQF''), embodied in Rule 1012, Commentary .04 and Floor Procedure 
Advice (``Advice'') F-18, FCO Expiration Months and Strike Prices--
Selective Quoting Facility, to re-designate some series that maintain 
open interest, but have not traded within the previous five trade days, 
as update strikes in certain situations. Currently, these strikes are 
considered non-update strikes under the provisions of Advice F-18 an 
Rule 1012.04. The proposal would permit the Foreign Currency Options 
Committee to designate these non-update strikes as update strikes, 
after notification to the trading community and with a quarterly review 
by the Committee. The SQF is a feature of the Exchange's Auto-Quote 
System. The complete text of the proposed rule change is available at 
the places specified in Item IV below.
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    \3\ 17 CFR 240.19b-4.
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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 self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in sections 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

    Implemented in 1994,\4\ the SQF was intended to reduce the number 
of strike prices being continuously updated and disseminated, thus 
resulting in more timely and accurate FCO quote displays. The SQF 
establishes criteria to determine whether the bid/ask quotation for 
each FCO series is eligible for transmission to the Options Price 
Reporting Authority (``OPRA'') for off-floor dissemination to 
securities data vendors. Currently, the SQF, a feature of the 
Exchange's Auto-Quote system, categories certain FCO strikes as ``non 
update'' or ``inactive'' strikes, which are disseminated with the OPRA 
indicator ``I'' and zeroes (e.g., 000-000), in lieu of market. When a 
series is inactive, those bids and offers are no longer updated in the 
Exchange's Auto-Quote system for dissemination. However, if interest is 
then voiced in any such series, it can be activated immediately upon 
establishment of a quote in that series. Inactive strikes with open 
interest (that have not traded in the previous five days) are quoted 
once at the close of trading in the previous five days) are quoted once 
at the close of trading each day for purposes of mark-to-market 
valuation.
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    \4\ Securities Exchange Act Release No. 33067 (October 19, 
1993), 58 FR 57658.
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    In contrast, ``update'' or ``active'' strikes include, at minimum: 
(1) Two in-the-money and six out-of-the-money, and (2) strikes with 
open interest that have traded within the previous five days. Because 
Rule 1012.04 establishes the minimum strikes to be activated, active 
strikes may also be added at the initiative of the Exchange or in 
response to a request by the Specialist or an FCO Floor Official.
    Designating as inactive those series that are away-from-the money 
or not recently traded (meaning have the least investor interest) 
eliminates quote changes in those series, thus reducing the 
dissemination delays caused by thousands of quote changes in volatile 
trading periods. Because inactive series are not continuously updated 
and disseminated, quotation processing times are reduced such that 
quotes respecting active strikes are updated and disseminated to 
customers much more quickly.
    At this time, the Exchange proposes that the SQF feature of Auto-
Quote

[[Page 42617]]

activate certain other strikes as update strikes. Specifically, the FCO 
Committee could re-designate some series that maintain open interest, 
but have not traded within the previous five trade days, as update 
strikes. Thus, the purpose of the proposal is to effect this systems 
change to disseminate additional strikes as active, upon FCO Committee 
approval.
    The Exchange believes that the flexibility to activate additional 
strikes is necessary to ensure that SQF dissemination includes truly 
active strikes. The Exchange also believes that allowing the Committee 
to determine which strikes are truly active is appropriate and 
reasonable. The definition of active strike has evolved since the 
beginning of the SQF.\5\ The Rule and Advice, in recognition of the 
need for flexibility, currently permit the Exchange to activate strikes 
intra-day. Consistent with this ability, the proposal would allow the 
Committee to activate strikes with open interest that have not traded 
within the previous five days, regardless of a qualifying request, in 
order to respond more promptly to the needs of the FCO investment 
community. Any such action by the Committee would involve notification 
to the FCO trading floor by Exchange memorandum. Any strikes activated 
by the Committee would be reviewed by the Committee quarterly \6\ to 
ensure that they warrant active status and do not remain indefinitely 
activated.\7\
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    \5\ In 1995, The Exchange amended the SQF to reduce the number 
of strikes considered active by: (1) eliminating series with open 
interest that have not traded within the previous five trading days; 
(2) ``de-activating'' strikes intra-day; and (3) redefining around-
the-money active strikes as the five options with an approximate 10, 
20, 30, 40 and 50 delta, instead of those four above and four below 
the spot price. Securities Exchange Act Release No. 36636 (December 
26, 1995), 61 FR 209, (File No. SR-Phlx-95-62). In 1996, the SQF was 
amended to redefine around-the-money strikes as two in and six out-
of-the-money strikes. Securities Exchange Act Release No. 37883 
(October 29, 1996), 61 FR 56991, (File No. SR-Phlx-96-39).
    \6\ See supra note 2.
    \7\ The Phlx should closely monitor the Committee's use of 
discretion to ensure that series are not designated as update 
strikes in an overly broad manner, materially impacting on the 
intended benefit of the SQF--to reduce the number of strike prices 
being continuously updated and disseminated in order to have more 
time and accurate FCO quote displays. Use of Committee discretion to 
this extent would require a Section 19(b) filing by the Phlx.
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    In addition, in establishing in the Rule and Advice last year that 
the defined active strikes are a minimum, the Exchange codified the 
ability to activate other strikes. In this regard, all expiration 
months (Except long-term) as opposed to the nearest three months, as 
well as around-the-money European style options (as opposed to only 
European style options with open interest and trading) were activated. 
Thus, at this time, the Exchange proposes to correct the text of the 
Rule and Advice to reflect two in-the-money strikes and six out-of-the-
money strikes for both puts and calls around the underlying price for 
American and European style options for all expiration dates (except 
long-term). The Exchange also notes that the aspect of the proposal 
granting the FCO Committee discretion to activate certain strikes is 
consistent with the previously-added ``at minimum'' language, and, in 
fact, bolsters the current provisions to reflect that certain strikes 
will be activated beyond the ``minimum'' definition.
    The Exchange believes the proposal balances the need to prevent 
excessive quote disseminations with preserving meaningful dissemination 
of FCO quotes. The proposal is also designed to facilitate orderly 
quote dissemination to and coordination between the Exchange, the 
Options Clearing Corporation (``OCC''), OPRA and securities information 
vendors. A quote will always be disseminated when a trade occurs in a 
previously-inactive series and quotes in inactive series can always be 
requested from the trading crowd, consistent with the protection of 
investors and the public interest. In sum, the Phlx believes that the 
proposed change to the SQF feature should facilitate the specialists' 
ability to focus on active series, which should, in turn, result in 
tighter, more liquid markets, consistent with Section 6(b)(5).\8\
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    \8\ 15 U.S.C. Sec. 78f(b)(5).
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    For these reasons, the proposed rule change is consistent with 
Section 6 \9\ of the Act in general, and in particular, with Section 
6(b)(5),\10\ in that it is designed to promote just and equitable 
principles of trade, prevent fraudulent and manipulative acts and 
practices, to foster cooperation and coordination with persons engaged 
in regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in securities, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, as well as to protect investors and the public interest.
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    \9\ 15 U.S.C. Sec. 78f.
    \10\ 15 U.S.C. Sec. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change will impose 
any inappropriate 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 either solicited or received.

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

    Because the foregoing rule change does not: (i) Significantly 
affect the protection of investors or the public interest; (ii) impose 
any significant burden on competition; and (iii) become operative for 
30 days from July 25, 1997, the date on which it was filed, or such 
shorter time that may be designated, it has become effective pursuant 
to Section 19(b)(3)(A) \11\ of the Act and rule 19b-4(e)(6).\12\ 
Specifically, the Exchange believes that the proposal is appropriate 
for the procedure applicable to non-controversial filings, because it 
deals with the operational details of an existing Commission-approved 
system. Further, the proposal does not significantly affect the 
protection of investors or the public interest: the proposed SQF 
amendments do not affect the price or time of the FCO executions, as 
only quoting is affected; the proposal is intended to activate more 
series, where needed. Third, the Exchange has requested that the 
proposal become effective seven days after the filing of of proposed 
rule change, noting that this shorter time period for effectiveness is 
consistent with the protection of investors and the public 
interest.\13\ The Exchange provided written notice of its intent to 
file the proposed rule change on July 16, 1997.
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    \11\ 15 U.S.C. Sec. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(e)(6).
    \13\ For the reasons submitted by the Exchange, the Commission 
finds that shortening the time period for effectiveness to seven 
days is consistent with the protection of investors and the public 
interest. See Securities Exchange Act Release No. 35123, supra note 
2, at 21.
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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

[[Page 42618]]

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. 
Sec. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW, 
Washington, DC 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-97-34 and should be 
submitted by August 28, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-20751 Filed 8-6-97; 8:45 am]
BILLING CODE 8010-01-M