[Federal Register Volume 69, Number 167 (Monday, August 30, 2004)]
[Notices]
[Pages 52953-52954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-1961]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50229; File No. SR-Phlx-2004-42]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to Its Specialist Unit Fixed Monthly Fee

August 23, 2004.
    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 June 30, 2004, 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 Phlx. 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

    Phlx proposes to amend its Specialist Unit Fixed Monthly Fee 
(``fixed monthly fee'') to address situations where an equity option or 
index option is relinquished by a specialist unit and subsequently 
reallocated to a new specialist unit.

A. Background \3\

    The fixed monthly fee affords specialist units \4\ the opportunity 
to elect to pay a fixed monthly fee in lieu of paying fees currently in 
effect for equity option and index option transaction charges and for 
the equity option specialist deficit (shortfall) fee (collectively 
``variable fees'').\5\ The Exchange rules provide two methods for 
calculating the fixed monthly fee.\6\ Pursuant to the first methodology 
implemented in 2003, specialist units that traded an equity option or 
index option on the Phlx trading floor in their capacity as a 
specialist unit with Phlx equity option or index option transactions in 
at least one equity option or index option for at least one year from 
September 1, 2002, and that elected to pay a fixed monthly fee, use May 
and June 2003 volume as the basis to calculate the fixed monthly fee. 
In 2004, the Exchange extended the application of the fixed monthly fee 
calculation from February 29, 2004 to August 31, 2004.\7\
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    \3\ Clarifying changes in this section were made pursuant to 
telephone conversations on July 29, 2004, between Cynthia K. 
Hoekstra, Counsel, Phlx, and Steve Kuan, Attorney, Division of 
Market Regulation, Commission.
    \4\ The Exchange uses the terms ``specialist'' and ``specialist 
unit'' interchangeably herein.
    \5\ The fixed monthly fee does not affect additional charges, 
such as non-transactional and membership-related charges listed on 
Appendix A of the Exchange's fee schedule. In addition, a $0.10 
charge per contract side for specialist unit transactions in the QQQ 
equity options (``QQQ license fee'') is imposed, if applicable, if 
the specialist unit elects to pay the fixed monthly fee. This fee is 
in addition to the fixed monthly fee. The QQQ license fee is in 
effect through August 31, 2004.
    \6\ See Securities Exchange Act Release Nos. 48459 (September 8, 
2003), 68 FR 54034 (September 15, 2003) (SR-Phlx-2003-61); 49467 
(March 24, 2004), 69 FR 17017 (March 31, 2004) (SR-Phlx-2004-17); 
and 49770 (May 25, 2004), 69 FR 31150 (June 2, 2004) (SR-Phlx-2004-
31).
    \7\ See Securities Exchange Act Release No. 49467 (March 24, 
2004), 69 FR 17017 (March 31, 2004) (SR-Phlx-2004-17).
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    Subsequently, in 2004, the Exchange implemented a fixed monthly fee 
for those specialist units who were not enrolled in the specialist unit 
fixed monthly fee program implemented in 2003.\8\ Pursuant to the 
second methodology, specialist units that elect the fixed monthly fee 
who have been trading an equity option or index option on the Phlx 
trading floor in their capacity as a specialist unit with Phlx equity 
option or index option transactions in at least one equity option or 
index option for at least nine months as of March 1, 2004, use October, 
November and December 2003 volume as the basis for calculating their 
fixed monthly fee. This fixed monthly fee is also in effect through 
August 31, 2004. Thus, there are two different time periods under which 
the fixed monthly fee may be calculated.\9\
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    \8\ See id.
    \9\ A specialist that elected the first methodology may not 
elect the second methodology. A specialist that did not elect the 
first methodology may only elect the second methodology.
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    The fixed monthly fee for both methods of calculation is currently 
capped at $310,000 per specialist unit per month for transactions 
settling on May 1, 2004 through August 31, 2004.\10\
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    \10\ See Securities Exchange Act Release No. 49693 (May 12, 
2004), 69 FR 28974 (May 19, 2004) (SR-Phlx-2004-30).
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B. Proposed Modifications to the Fixed Monthly Fee

    Periodically, an options specialist unit will relinquish an option 
for various business reasons, and in many cases the relinquished option 
is reallocated to another options specialist unit.\11\ For example, 
Options Specialist A, who is operating under the fixed monthly fee 
program, relinquishes an option that is subsequently allocated to 
Options Specialist B, also subject to the fixed monthly fee. Using the 
current fixed monthly fee methodology, Options Specialist A cannot 
reduce its fixed monthly fee by the amount of the relinquished option. 
In addition, using the current fixed monthly fee methodology, Options 
Specialist B will have its fee increased according to the applicable 
fixed monthly fee calculation under which it is operating, as opposed 
to applying the fixed monthly fee calculation under which Options 
Specialist A is operating.
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    \11\ Phlx represents that the procedure to reallocate a 
relinquished option is set forth in Phlx Rule 505 and Phlx Rule 506. 
Telephone conversation among Cynthia K. Hoekstra, Counsel, Phlx, and 
Marc McKayle and Steve Kuan, Division of Market Regulation, 
Commission (July 22, 2004).
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    To address this limited situation, the fixed monthly fee for an 
options specialist unit that has elected the fixed monthly fee and has 
relinquished an equity option or index option, will be reduced, pro-
rata for the month, by the amount equal to the amount used to determine 
the fixed monthly fee with respect to the relinquished option (e.g., a 
specialist that relinquishes Option A, which was factored into the 
fixed monthly fee using the May and June 2003 volume, will have its 
fixed monthly fee reduced using the same algorithm), provided the 
option is subsequently allocated within 30 days \12\ to another 
specialist unit who has

[[Page 52954]]

elected the fixed fee. If the specialist who has been reallocated the 
option elects to pay the fixed monthly fee, the new specialist will pay 
a pro-rata amount of the original fixed monthly fee calculation for the 
month in which the reallocation occurred.\13\
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    \12\ Phlx believes that the 30-day period is a reasonable time 
period. See id.
    \13\ If a specialist unit relinquishes an option and no other 
specialist unit has been allocated the option within 30 days, the 
specialist unit relinquishing the option may not reduce the amount 
of its fixed monthly fee.
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    The Exchange represents that when the same option is reallocated to 
another specialist that has elected the fixed monthly fee, that 
specialist's fixed monthly fee will then increase using the same 
methodology and time period as the original specialist unit for that 
option, which should, in turn, result in a revenue neutral outcome to 
the Exchange.
    The changes to the fixed monthly fee as set forth in this proposal 
are scheduled to be in effect for transactions settling on or after 
July 1, 2004 through August 31, 2004.
    A copy of the Specialist Unit Fixed Monthly Fee Schedule of the 
Exchange's fee schedule is available at Phlx 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, Phlx 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. Phlx 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 change is to more equitably assess 
fixed monthly fees in situations where a specialist unit relinquishes 
an option. By allowing the specialist unit to decrease its fixed 
monthly fee by the amount of the option that was relinquished, provided 
another specialist unit is allocated the option within 30 days and 
elects to pay a fixed monthly fee, the fixed monthly fee for the 
affected specialist units should more equitably reflect the appropriate 
amount of the fixed monthly fee. In addition, the Exchange represents 
that this proposal should maintain the same revenue stream to the 
Exchange.
2. Statutory Basis
    The Exchange believes that its proposal to amend its schedule of 
dues, fees and charges is consistent with Section 6(b) of the Act \14\ 
in general, and furthers the objectives of Section 6(b)(4) of the Act 
\15\ in particular, in that it is an equitable allocation of reasonable 
dues, fees, and other charges among Exchange members.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(4).
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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

    No written comments were either solicited or received.

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

    The foregoing proposed rule change has become effective pursuant to 
Section 19(b)(3)(A)(ii) of the Act \16\ and subparagraph (f)(2) of Rule 
19b-4 \17\ thereunder, because the proposed rule change establishes or 
changes a due, fee, or other charge imposed by the Exchange.
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    \16\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \17\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such proposed 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, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Phlx-2004-42 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609. All submissions should refer to File Number 
SR-Phlx-2004-42. This file number should be included on the subject 
line if e-mail is used. To help the Commission process and review your 
comments more efficiently, please use only one method. The Commission 
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 in the Commission's Public 
Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies 
of such filing also will be available for inspection and copying at the 
principal office of Phlx. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-Phlx-2004-42 and should be submitted on or before September 20, 
2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-1961 Filed 8-27-04; 8:45 am]
BILLING CODE 8010-01-P