[Federal Register Volume 66, Number 110 (Thursday, June 7, 2001)]
[Notices]
[Pages 30780-30783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14312]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 44372; File No. SR-Phlx-2001-59]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. Relating to Dealing Directly With 
Specialist and Registered Options Traders in Foreign Currency Options

May 32, 2001.
    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 May 30, 2001, 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. 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).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt new Phlx Rule 1089 entitled 
``Dealing Directly With Specialist and Registered Options Trader in 
Foreign Currency Options'' on a one-year pilot basis. The pilot will 
expire on May 31, 2002.\3\ Proposed new language is in italics.
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    \3\ Telephone conversation between Edith Hallahan, First Vice 
President & Deputy General Counsel, Phlx, and Florence Harmon, 
Senior Special Counsel, Division of Market Regulation 
(``Division''), Commission on May 31, 2001.
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* * * * *

Dealing Directly With Specialist and Registered Option Trader in 
Foreign Currency Options

    Rule 1089.(a) Applicability. The provisions in this Rule are 
applicable to options on foreign currencies and supercede any Rules 
of general applicability to trading of options which are or may be 
construed as contrary to or inconsistent with these Rules.
    (b) Non-Customized Foreign Currency Options. In the vent that 
there is no floor broker present to accept and execute orders for 
non-customized foreign currency options on the trading floor for 
such options:
    (1) Market and Limit Orders. Foreign currency options 
participants and foreign currency options participant organizations 
may transmit market and limit orders for such options directly to 
the specialist by telephone or other means. In addition, any person 
who is not a foreign currency options participant or participant 
organization may, pursuant to authorization of a foreign currency 
options participant organization and subject to the consent of the 
specialist, transmit limit orders, marketable limit orders and 
market orders for such options directly to the specialist by 
telephone or other means.
    (2) Complex Orders. Foreign currency options participants and 
foreign currency options participant organizations may contact the 
specialist directly by telephone to negotiate the total debit or 
credit for transacting a complex order, provided that the specialist 
is responsible for complying with Rules 1033 and 1066 in setting the 
price of the individual option legs of the order. In addition, a 
person who is not a foreign currency options participant or 
participant organization may, (provided that such person's account 
is not with the specialist's firm) pursuant to authorization of a 
foreign currency options participant organization and subject to the 
consent of the specialist, contact the specialist directly by 
telephone to negotiate the total debit or credit for transacting a 
complex order, provided that the specialist is responsible for 
complying with Rules 1033 and 1066 in setting the price of the 
individual option legs of the order. Complex orders include orders 
consisting of two or more option series of non-customized foreign 
currency options such as spreads, straddles and combinations. In no 
event shall the specialist accept complex orders for representation 
or placement onto the specialist's book.
    (c) Customized Foreign Currency Options. In the event that there 
is no floor broker present to accept and execute orders for 
customized foreign currency options on the trading floor for such 
options; foreign currency options participants and foreign currency 
options participant organizations may submit a request for quote 
(``RFQ'') under Rule 1069 for a customized foreign currency option 
directly to an ROT on the floor by telephone or other means, and, if 
applicable, negotiate a transaction with an ROT. In addition, a 
person who is not a foreign currency options participant or 
participant organization may, pursuant to authorization of a foreign 
currency options participant organization and subject to the consent 
of the ROT, submit an RFQ under Rule 1069 for a customized foreign 
currency option directly to an ROT on the floor by telephone or 
other means, and if applicable, negotiate a transaction with an ROT.
* * * * *


[[Page 30781]]



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 a 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 purpose of the proposed rule is to establish special procedures 
for transmitting orders and requests for quotes for non-customized and 
customized foreign currency options to the floor, and for executing 
transactions in such options on the floor, when no floor broker is 
present. The Exchange is proposing the rules as an alternative 
mechanism for handling orders and executing transactions in foreign 
currency options in the event that there are no floor brokers present 
on the trading floor for such options.
    Since the late 1980s, the number of foreign currency options 
participants and firms clearing foreign currency options has steadily 
declined as the market has increasingly shifted to over-the-counter 
trading. Currently, the Exchange has one foreign currency options 
participant registered as the specialist unit in all non-customized 
foreign currency options listed on the Exchange. Similarly, there is 
also one foreign currency options participant organization acting as 
floor broker to accept and handle foreign currency options orders. The 
use of floor brokers is currently the only mechanism for customer 
trading interest to be communicated on the foreign currency options 
floor. In the event that, for whatever reason, there is no longer any 
qualified floor broker on the foreign currency options floor to handle 
and execute customers orders, it would effectively make it impossible 
for the foreign currency option floor to continue to operate. 
Therefore, the Exchange is adopting an alternative mechanism for 
communicating trading interest to the specialist or Registered Options 
Trader (``ROT'') (for customized foreign currency options).
    Proposed Phlx Rule 1089 would apply to trading of non-customized 
and customized foreign currency options and would supercede any 
contrary or inconsistent Exchange rules applicable to options trading. 
The Exchange represents that the distinction between non-customized and 
customized options is relevant because they are traded differently 
under Phlx rules. Whereas the Phlx trading rules for non-customized 
foreign currency options provide for a traditional specialist model, 
the rules for the customized options do not, principally because their 
highly tailored nature is not conducive to continuous quoting of 
markets. Instead, Phlx rules contemplate trading of customized options 
by floor brokers (on behalf of customers) and registered options 
traders (``ROTs'') as market makers trading for their own account 
through Request-for-Quote (``RFQ'') procedures.\4\
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    \4\ Customized foreign currency options are traded pursuant to 
Rule 1069. Securities Exchange Act Release No. 34925 (November 1, 
1994), 59 FR 55720 (November 8, 1994) (approving SR-Phlx-94-18).
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    Proposed Phlx Rules 1089(b) and 1089(c) would set out the terms for 
submitting orders and RFQs to the floor and executing trades on the 
floor for non-customized options (including complex orders) and 
customized options, respectively. The proposal would permit foreign 
currency options participants and foreign currency options participant 
organizations, and, subject to certain conditions,\5\ persons who are 
not such participants or participant organizations to: (1) Place market 
and limit orders for non-customized foreign currency options directly 
with the registered specialist for such options by telephone or other 
mean; \6\ (2) negotiate and execute complex orders consisting of 
combinations of two or more series of non-customized foreign currency 
options at a total debit or credit directly with the specialist over 
the telephone; \7\ and (3) submit RFQs under Phlx Rule 1069 directly 
with an ROT and, if applicable, to negotiate a transaction with an 
ROT.\8\
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    \5\ Any person who is not a foreign currency options participant 
or participant organization must be authorized by a foreign currency 
options participant organization to engage in the enumerated 
activities because the foreign currency options participant 
organization is responsible for such person's activities on the 
Exchange. Similar to the Nasdaq market, the specialist or ROT, as 
applicable, is entitled to know with whom they are dealing on the 
telephone to assure themselves of proper authorization by a foreign 
currency options participant and appropriate financial 
responsibility by a clearing firm on any trade executed. Usually, 
such authorization includes written ``give-up agreements'' or other 
similar documentation, in addition to general validation of the 
individual on the telephone, whether at first dealing or routinely.
    \6\ See Proposed Phlx Rule 1089(b). The Exchange notes that in 
addition to accepting market or limit orders, the specialist may 
negotiate and execute such orders as well. See infra note 11.
    \7\ See Proposed Phlx Rule 1089(b).
    \8\ See Proposed Phlx Rule 1089(c).
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    As explained above, the new rule will supercede any contrary or 
inconsistent Exchange rules that would otherwise apply, on the narrow 
terms proposed.\9\ Most notably, the Exchange intends for the proposal 
to:
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    \9\ The provisions applicable to recordkeeping and timestamping 
of orders and trades continue to apply. See e.g., Rule 17a-3 under 
the Act.
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     Provide a limited exemption from the provisions of Phlx 
Rule 104 to permit a specialist or ROT to negotiate and execute trades 
with non-members over the phone, including for complex orders and 
customized foreign currency options;
     Clarify that Phlx Options Floor Procedure Advice A-2 (as 
last amended September 26, 1994) \10\ does not prohibit a specialist 
negotiating the terms of complex orders in non-customized foreign 
currency options directly with order sending firms or customers; \11\ 
and
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    \10\ Securities Exchange Act Release No. 34721 (September 26, 
1994), 59 FR 50310 (October 23, 1994) (approving SR-Phlx-92-03).
    \11\ The Exchange believes that the proposal is not inconsistent 
with Advice A-2 because the foreign currency options specialist is 
not accepting a complex order for representation or placement on the 
book. The proposal allows an order-sending firm or customer who 
telephones a specialist to directly negotiate with the specialist as 
contra-side the total debit or credit for transacting a complex 
order; but the order sending firm or customer is not giving the 
order to the specialist for representation or for placement on the 
book. Rather, at the conclusion of the negotiation there will be a 
completed transaction based upon that total debit or credit. As 
such, the Exchange does not believe that the proposal would allow 
the specialist to accept discretionary orders, which could 
theoretically raise a question under Section 11(a) of the Act. 
Section 11(a)(1), among other things, prohibits a member of an 
exchange from effecting on the exchange any transaction for an 
account over which the member exercises ``investment discretion.'' 
The legislative history of Section 11(a) indicates that the 
discretionary account prohibition in that Section was intended in 
large part to address potential abuses arising out of the 
combination of brokerage and money management. See Securities 
Exchange Act Release No. 14563 (March 14, 1978), 43 FR 11542 (March 
17, 1978). ``Investment discretion'' is defined in Section 3(a)(35) 
of the Act to include a relationship where a person ``directly or 
indirectly (A) is authorized to determine what securities * * * 
shall be purchased or sold by or for the account, (B) makes 
decisions as to what securities * * * shall be purchased or sold by 
or for the account * * * or (C) otherwise exercises such influence 
with respect to the purchase and sale of securities * * * by or for 
the account as the Commission, by rule, determines * * * should be 
subject to the operation of the [Act] * * * '' The Commission has 
not adopted any rules under Subsection C. Given the fact that the 
specialist has no discretion in executing the legs of a complex 
order to affect either the price, timing or individual options 
purchased or sold, the Exchange does not believe that the specialist 
has the type of investment discretion that was intended to be 
covered by Section 11(a). Similarly the Exchange believes that the 
proposal is consistent with Section 11(b) of the Act because the 
specialist is only effecting on the Exchange as broker transactions 
upon ``market or limited price'' orders.

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[[Page 30782]]

     Expand the scope of Phlx Circular No. 86-09 to permit 
persons who are not foreign currency options participants and 
participant organizations to have direct telephone access to foreign 
currency options specialists and ROTs as well as floor brokers.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6 of the Act,\12\ in general, and with section 6(b)(5) 
\13\ of the Act in particular, in that it is designed to promote just 
and equitable principles of trade, foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and 
protect investors and the public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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 or unnecessary burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing including whether the proposal is 
consistent with the Act. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 filings will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-Phlx-2001-59 and should be 
submitted by June 28, 2001.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change on a one-year pilot basis is consistent with the Act and the 
rules and regulations under the Act applicable to a national securities 
exchange.\14\ In approving the proposed rule change, the Commission has 
considered the implications of the proposed rules under sections 11(a) 
and 11(b) of the Act.\15\ The Commission finds that the proposed rule 
change is consistent with section 11(a) \16\ because the foreign 
currency options specialist is not accepting a complex order for 
representation or placement on the specialist book. The specialist will 
have no discretion in executing the legs of a complex order to affect 
either the price, timing or individual options purchased or sold. 
Therefore, the Commission believes that under the proposed rules the 
specialist will not have the type of investment discretion prohibited 
by section 11(a). The Commission also finds that the proposed rule 
change is consistent with section 11(b) \17\ because the specialist 
will not accept complex orders from customers of the firm with which it 
is associated.\18\ The Commission notes that Phlx's rules, including 
the proposed rule change, permit the specialist to deal directly with 
customers. In this regard, the Commission notes that section 15(b)(8) 
of the Act \19\ states that it is unlawful for ``any registered broker 
or dealer to effect any transaction in, or induce or attempt to induce 
the purchase or sale of any security * * * unless such broker or dealer 
is a member of a securities association registered pursuant to section 
15A of this title or effects transactions in securities solely on a 
national securities exchange of which it is a member.''
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    \14\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78k(a) and (b).
    \16\ Section 11(a) of the Act states that it is ``unlawful for 
any member of a national securities exchange to effect any 
transaction on such exchange for its own account, the account of an 
associated person, or an account with respect to which it or an 
associated person thereof exercises investment discretion[.]''
    \17\ Section 11(b) of the Act states that it is ``unlawful for a 
specialist permitted to act as a broker and dealer to effect on the 
exchange as broker any transaction except upon a market or limited 
price order.''
    \18\ The Commission notes that the Exchange has represented 
that, currently, the specialist firm in foreign currency options 
does not carry customer accounts. Telephone conversation between 
Edith Hallahan, Vice President & Deputy General Counsel, Phlx, and 
Florence Harmon, Senior Special Counsel, Division, Commission on May 
30, 2001.
    \19\ 15 U.S.C. 78o(b)(8).
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    Finally, the Commission believes that the proposed rule change is 
consistent with section 6(b) of the Act \20\ in general, and furthers 
the objectives of section 6(b)(5) of the Act \21\ in particular in that 
it is designated to promote just and equitable principles of trade, to 
facilitate transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market, and to protect 
investors and the public interest. Specifically, the Commission 
believes that the proposed rule change will ensure that in the event 
there is no longer a qualified floor broker on the foreign currency 
options floor, there are provisions in place that will allow the floor 
to continue to operate, thus facilitating transactions in securities. 
Moreover, the Commission believes that the proposed rule change will 
protect investors from potential conflicts of interest on the part of 
the specialist in that the specialist will not have the type of 
investment discretion prohibited by section 11(a) \22\ and will not act 
as a broker in violation of section 11(b).\23\
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 15 U.S.C. 78k(a).
    \23\ 15 U.S.C. 78k(b).
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    The Exchange requests accelerated approval pursuant to Rule 
19(b)(2)(B).\24\ The Exchange has requested accelerated approval 
because in the event there is no longer a qualified floor broker on the 
foreign currency options floor, rules will be in place to allow the 
floor to continue to operate, thus facilitating transactions in 
securities. The Commission believes that it is appropriate to approve 
the proposed rules on an accelerated basis, to ensure that persons 
wishing to trade on the Exchange's foreign currency options floor can 
communicate directly with the specialist to communicate trading 
interest in the event there are no floor brokers, but only a 
specialist, on the floor. Therefore, the Commission finds good cause 
for approving the proposed rule change prior to the thirtieth day after 
the date of publication of notice thereof in the Federal Register.
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    \24\ 15 U.S.C. 78s(b)(2)(B).
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    It is therefore ordered, pursuant to section 19(b)(2) \25\ of the 
Act that the proposed rule change (SR-Phlx-2001-59) be, and hereby is, 
approved.
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    \25\ 15 U.S.C. 78s(b)(2).


[[Page 30783]]


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-14312 Filed 6-6-01; 8:45 am]
BILLING CODE 8010-01-M