[Federal Register Volume 62, Number 178 (Monday, September 15, 1997)]
[Notices]
[Pages 48332-48333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24304]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39030; File No. SR-PHLX-97-25]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval of Amendment No. 1 Thereto, 
Relating to Elimination of the Enhanced Parity Split for the Specialist 
in the 3D German Mark Foreign Currency Options

September 8, 1997.

I. Introduction

    On May 29, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``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 eliminate from Exchange Rule 
1014(h) (``Rule'') the enhanced parity split for the specialist in the 
dollar denominated delivery German Mark (``3D'') foreign currency 
options (``FCOs'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on July 10, 1997.\3\ No comments were received on the 
proposal. On August 6, 1997, the Phlx submitted Amendment No. 1 to the 
proposed rule change.\4\ This order approves the proposal as amended.
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    \3\ Securities Exchange Act Release No. 38808 (July 1, 1997), 62 
FR 37111 (July 10, 1997).
    \4\ See letter from Michele R. Weisbaum, Vice President and 
Associate General Counsel, Phlx to David Sieradzki, Attorney, SEC, 
dated August 6, 1997 (``Amendment No. 1''). In Amendment No. 1, the 
Phlx proposed to amend Option Floor Procedure Advice B-7, Time 
Priority of Bids/Offers in Foreign Currency Options, to delete text 
describing the enhanced specialist split for 3D options.
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II. Description of the Proposal

    In January, 1995, the Exchange amended the Rule to adopt an 
enhanced split for its specialist in 3D FCOs \5\ in order to encourage 
the specialist to make deeper markets to attract order flow.\6\ The 
Rule provides that the Foreign Currency Option Committee (``the 
Committee'') would conduct a review of the entitlement to the enhanced 
parity split at the end of the first year and then every 6 months 
thereafter. Pursuant to the most recent review, the Committee 
determined to eliminate the enhanced split which was only applicable to 
this one product traded on the Foreign Currency Option Floor of the 
Exchange. The specialist in the product has not objected to the 
elimination of the enhanced split. In fact, the specialist firm trading 
this product has indicated that enhanced split is not particularly 
useful to the firm and that the firm does not generally take advantage 
of it.\7\ In addition, the Exchange has represented that the order size 
in this product is generally not large enough to trigger the enhanced 
split.\8\ Although the Exchange is proposing to eliminate the 
enhancement at this time, it represents it is continuing to study the 
potential use of enhanced splits for the Foreign Currency Option Floor 
on a broader basis.\9\ By eliminating the current enhanced split, 
parity and priority will be determined in accordance with Exchange Rule 
119 and the remainder of section (h) to Rule 1014.
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    \5\ 3D FCOs are cash-settled, European-style, cash/spot FCO 
contracts on the German mark that trade in one-week and two-week 
expirations. See Securities Exchange Act Release No. 33732 (Mar. 8, 
1994), 59 FR 12023 (Mar. 15, 1994).
    \6\ See Securities Exchange Act Release No. 35177 (Dec. 29, 
1994), 60 FR 2419 (Jan 9, 1995) (``Original Split Approval Order'').
    \7\ See letter from Michele R. Weisbaum, Vice President and 
Associate General Counsel, Phlx to David Sieradzki, Attorney, SEC, 
dated June 30, 1997 (``Phlx Letter'').
    \8\ Telephone conversation between Michele R. Weisbaum, Vice 
President and Associate General Counsel, Phlx, James T. McHale, 
Special Counsel, SEC and David Sieradzki, Attorney, SEC (June 19, 
1997). Rule 1014(h) provides that ``[t]his enhanced split will not 
apply where a customer bid/offer for under 100 contracts has time 
priority.''
    \9\ The Exchange represents that it is in the process of 
considering new and different types of parity splits that, if 
adopted, would be applicable to all products traded by specialists 
on the foreign currency option floor or at least to a broader range 
of specialist traded products. See Phlx Letter, supra note 7.
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III. Discussion

    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, with the requirements of Section 6(b).\10\ Specifically, 
the Commission believes the proposal is consistent with the Section 
6(b)(5) \11\ requirements that the

[[Page 48333]]

rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts, and, 
in general, to protect investors and the public interest.\12\
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    The Exchange has represented that the enhanced parity split for 3D 
FCOs is not frequently used and has not served as an effective means of 
attracting order flow to the Exchange. When the enhanced parity split 
for 3D FCOs was initially approved, the Commission stated that it was 
reasonable for the Exchange to grant these benefits to specialists as 
long as they did not unreasonably restrain competition or harm 
investors. In addition, the Commission believed that granting these 
benefits to specialists was within the business judgement of the 
Exchange.\13\ Similarly, the Commission believes that it is within the 
business judgement of the Exchange to eliminate these benefits to 
specialists, provided that competition is not unreasonably restrained 
nor investors harmed. Accordingly, the Commission believes that it is 
reasonable for the Exchange to rescind the enhanced parity split and 
examine other potential methods of attracting order flow to the 
Exchange.
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    \13\ See Original Split Approval Order, supra note 6.
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    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 1 does not change the nature of the proposal, but merely 
conforms Options Floor Procedure Advice B-7 to reflect the elimination 
of the enhanced specialist split for 3D FCOs. Further, the Commission 
notes that the original proposal was published for the full 21-day 
comment period and no comments were received by the Commission. 
Accordingly, the Commission believes it is appropriate to approve 
Amendment No. 1 to the Exchange's proposal on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1. 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 at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the above-mentioned self-regulatory organization. 
All submissions should refer to File No. SR-Phlx-97-25 and should be 
submitted by October 6, 1997.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-Phlx-97-25) is approved, as 
amended.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24304 Filed 9-12-97; 8:45 am]
BILLING CODE 8010-01-M