[Federal Register Volume 63, Number 15 (Friday, January 23, 1998)]
[Notices]
[Pages 3611-3612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1553]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39552; File No. SR-Phlx-97-55]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Establishing an 
Enhanced Parity Split Pilot Program for Specialists in Foreign Currency 
Options Effective Until December 31, 1998

January 14, 1998.
    Purusant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 1, 1997, the 
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 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. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange seeks to revise Exchange Rule 1014(h) to establish an 
enhanced parity split pilot program (``Pilot Program'') for its foreign 
currency option (``FCO'') specialists effective until December 31, 
1998.
    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 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 Exchange 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

1. Purpose
    The Exchange previously provided and enhanced parity split to the 
specialist dealing in dollar denominated delivery German Mark (``3D 
German Mark'') options.\2\ The enhanced parity split gave the 
specialist 50% of the first 500 contracts of any trade in 3D German 
Mark options. The Exchange eliminated the enhanced parity split earlier 
this year because the specialist in 3D German Mark options and other 
traders of the product found it to be of little benefit.\3\ At the time 
the enhanced parity split was eliminated, the Exchange informed the 
Commission that it would continue to study the potential use of an 
enhanced parity split for all FCO specialists on a broader basis. This 
proposed rule change sets forth the Exchange's plan for the expanded 
use of the enhanced parity split in FCOs.
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    \2\ The enhanced parity split for the specialist in 3D German 
Mark options was first approved on December 29, 1994. See Securities 
Exchange Act Release No. 35177 (Dec. 29, 1994), 60 FR 2419 (Jan. 9, 
1995). 3D German Mark options are cash-settled, European-style, 
cash/spot foreign currency option contracts on the German Mark that 
trade in one-week and two-week expirations.
    \3\ The enhanced parity split was eliminated as of September 8, 
1997. See Securities Exchange Act Release No. 39030 (Sept. 8, 1997), 
62 FR 48332 (Sept. 15, 1997). The sole specialist firm trading 3D 
German Mark options indicated that the enhanced parity split was not 
particularly useful and that it did not generally take advantage of 
it. Furthermore, the Exchange represented that the order size in 3D 
German Mark options generally was not large enough to trigger the 
application of the enhanced parity split (i.e., such orders 
represented less than 100 contracts).
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    The Exchange seeks to implement an enhanced parity split procedure 
similar to the one currently applied to transactions in equity and 
index options at the Exchange.\4\ Under the Pilot Program, however, the 
application of the proposed FCO enhanced parity split would be more 
widespread, and the enhanced parity split would be available to all FCO 
specialists assigned to FCO products.\5\ The Pilot Program would be in 
effect until December 31, 1998.
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    \4\ The Exchange recently amended its enhanced parity split 
pilot program for equity and index option specialists to expand its 
application. As a result of the amendment, all index options and all 
newly listed equity options receive the enhanced parity split. 
However, only 50% of those equity options not considered ``newly 
listed'' are eligible to receive the enhanced parity split. In 
addition, specialists are now permitted to revise the list of 
eligible equity options on a quarterly basis, rather than an annual 
basis. See Securities Exchange Act Release No. 39401 (Dec. 4, 1997), 
62 FR 65300 (Dec. 11, 1997).
    \5\ It should be noted that because FCOs on the Italian Lira and 
the Spanish Peseta are traded as customized options, there are no 
specialists assigned to those products. For simplicity and clarity, 
all further references to FCOs shall not include these two products.
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    The enhanced parity split would apply to the first 500 contracts in 
a FCO transaction in a FCO transaction. When the enhanced parity split 
is applied, the

[[Page 3612]]

FCO specialist will be counted as two crowd participants when 
determining the allocation of the FCO contracts among the trading crowd 
participants on parity, except in the following circumstances: (i) when 
there is one other trading crowd participant on parity, the FCO 
specialist will receive 60% of the FCO contracts making up the order; 
or (ii) when there are two other trading crowd participants on parity, 
the FCO specialist will receive 40% of the FCO contracts making up the 
order.
    Because a customer bid/offer for under 100 FCO contracts is deemed 
to have time priority over all other bids/offers, such an order will 
not be subject to the enhanced parity split.\6\ This provision will 
help ensure that small customer orders are not disadvantaged by the 
application of the enhanced parity split. If a FCO transaction involves 
more than 500 contracts, those contracts exceeding the 500 contract 
threshold will be allocated on a pro rata basis among the crowd 
participants on parity.
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    \6\ Exchange Rule 1014(h), ``Options on Foreign Currencies,'' 
Section (i), states that ``all bids/offers of customer accounts for 
under 100 contracts have time priority over all other bids/offers'' 
on the FCO floor. In that instance, the FCO specialist cannot be on 
parity with such customer so the enhanced parity split will not 
apply. However, because Exchange Rule 1014(h)(i) does not confer 
time priority on customer orders for 100 or more contracts, FCO 
specialists may avail themselves of the enhanced parity split when 
interacting with customer orders involving 100 or more FCO 
contracts.
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    It should be noted that the application of this enhanced parity 
split will be mandatory. Therefore, with respect to any FCO transaction 
that implicates the enhanced parity split, the FCO specialist will be 
required to accept the preferential allocation and may not decline the 
enhancement.\7\
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    \7\ Telephone conversation between Michele R. Weisbaum, Vice 
President and Associate General Counsel, Exchange, and Michael L. 
Loftus, Attorney, Division of Market Regulations, Commission 
(December 15, 1997).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\8\ in general, and with Section 6(b)(5),\9\ 
in particular, in that it is designed to promote just and equitable 
principles of trade; to 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; and to protect investors and the public interest. The 
Exchange further believes that the proposed rule change balances the 
competing interests of specialists and market makers while assisting 
specialists in making tight and liquid markets and protecting customer 
interests.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    The Exchange did not solicit or receive written comments with 
respect to the proposed 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 Exchange 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, DC 20549. 
Copies of the submissions, 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 persons, 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 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-Phlx-97-55 and should be 
submitted by February 13, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-1553 Filed 1-22-98; 8:45 am]
BILLING CODE 8010-01-M