[Federal Register Volume 70, Number 100 (Wednesday, May 25, 2005)]
[Notices]
[Pages 30171-30178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2637]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51718; File No. SR-Phlx-2004-65]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment Nos. 1, 2 and 3 
Thereto Relating to Backup Trading Arrangements

May 19, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on October 18, 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 the 
Phlx. On April 29, 2005, the Exchange submitted Amendment No. 1 to the 
proposal.\3\ On May 12, 2005, the Exchange submitted Amendment No. 2 to 
the proposal.\4\ On May 16, 2005, the Exchange submitted Amendment No. 
3 to the proposal.\5\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange substantially revised the 
proposed rule text and added a new paragraph (d), Member 
Proceedings, to establish disciplinary jurisdiction as between the 
Disabled Exchange and the Back-up Exchange in situations where there 
is an ongoing disciplinary action involving a member of the Disabled 
Exchange at the time of termination of the back-up period. The 
Exchange also proposed amendments to its fee schedules, which 
incorporate Rule 99.
    \4\ In Amendment No. 2, the Exchange made minor revisions to the 
proposed rule text and corresponding description of the proposal. 
Phlx also refiled corrected versions of the exhibits submitted with 
the proposal. Amendment No. 2 replaces and supersedes Phlx's earlier 
submissions in their entirety.
    \5\ In Amendment No. 3, the Exchange submitted a revised Exhibit 
5 to its amended Form 19b-4 to correctly identify the new rule text 
in the proposal, including Exchange Rule 99 and changes to the Phlx 
Fee Schedule.

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[[Page 30172]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to adopt a rule that will permit Phlx to enter 
into arrangements with one or more other exchanges that would provide 
trading facilities for Phlx listed options at another exchange in the 
event that the functions of Phlx are severely and adversely affected by 
an emergency or extraordinary circumstances (a ``Disabling Event''), 
and similarly provide trading facilities at Phlx for another exchange 
to trade its listed options if that exchange's facility experiences a 
Disabling Event. Additionally, the Exchange has submitted a 
corresponding back-up trading agreement between itself and the Chicago 
Board Options Exchange, Incorporated (``CBOE'') as Exhibit B to its 
Form 19b-4 filing. This back-up trading agreement is available for 
viewing on the Commission's Web site, http://www.sec.gov/rules/sro.shtml, and at the Exchange and the Commission.\6\
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    \6\ See infra note 10. The Commission notes that the text of the 
back-up trading agreement that appears on the Commission's Web site 
was filed as part of Amendment No. 2.
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    The Exchange also proposes an amendment to its Fee Schedule 
relative to the fees that shall apply to transactions in the options of 
a Disabled Exchange effected on a Back-up Exchange.
    The text of the proposed rule change is set forth below. Proposed 
new language is in italics.
* * * * *

Backup Trading Arrangements

Rule 99

    (a) Phlx is Disabled Exchange.
    (i) Exchange (``Phlx'') Exclusively Listed Options.
    (A) For purposes of this Rule 99, the term ``exclusively listed 
option'' means an option that is listed exclusively by an exchange 
(because such exchange has an exclusive license to use, or has 
proprietary rights in, the interest underlying the option).
    (B) The Phlx may enter into arrangements with one or more other 
exchanges (each a ``Backup Exchange'') to permit the Phlx and its 
members and associated persons and other personnel to use a portion of 
the Backup Exchange's facilities to conduct the trading of some or all 
of the Phlx's exclusively listed options in the event that the 
functions of the Phlx are, or are threatened to be, severely and 
adversely affected by an emergency or extraordinary circumstances (a 
``Disabling Event''). Such options shall trade as listings of Phlx. The 
facility of the Backup Exchange used by the Phlx for this purpose will 
be deemed to be a facility of the Phlx.
    (C) Trading of Phlx exclusively listed options shall be conducted 
in accordance with the rules of the Backup Exchange, except that such 
trading shall be subject to Phlx rules with respect to doing business 
with the public, margin requirements, net capital requirements, listing 
requirements, and position limits. In addition, the Phlx and the Backup 
Exchange may agree that other rules of the Phlx will apply to such 
trading. The Phlx and the Back-up Exchange have agreed to communicate 
to their respective members which rules apply in advance of trading. 
The Backup Exchange rules that govern trading on Phlx's facility at the 
Back-up Exchange shall be deemed to be Phlx rules for purposes of such 
trading.
    (D) The Back-up Exchange has agreed to perform the related 
regulatory functions with respect to trading of Phlx exclusively listed 
options on Phlx's facility at the Back-up Exchange, in each case except 
as Phlx and the Back-up Exchange may specifically agree otherwise. The 
Back-up Exchange and Phlx have agreed to coordinate with each other 
regarding surveillance and enforcement respecting trading of Phlx 
exclusively listed options on Phlx's facility at the Back-up Exchange. 
Phlx shall retain the ultimate legal responsibility for the performance 
of its self-regulatory obligations with respect to Phlx's facility at 
the Back-up Exchange.
    (E) If the Backup Exchange is unable to accommodate all Phlx 
members that desire to trade on Phlx's facility at the Backup Exchange 
pursuant to paragraph (a)(i)(A), the Phlx may determine which members 
shall be eligible to trade at that facility. Factors to be considered 
in making such determinations may include, but are not limited to, any 
one or more of the following: Whether the member is a specialist in the 
applicable product(s), the number of contracts traded by the member or 
member organization in the applicable product(s), market performance, 
and other factors relating to a member's contribution to the market in 
the applicable product(s) during a specific period.
    (F) Members of the Backup Exchange shall not be authorized to trade 
in any Phlx exclusively listed options, except that (i) Phlx may 
deputize willing floor brokers of the Back-up Exchange as temporary 
Phlx members to permit them to execute orders as brokers in Phlx 
exclusively options traded on Phlx's facility at the Back-up Exchange; 
and (ii) the Back-up Exchange has agreed that it will, at the 
instruction of Phlx, select members of the Back-up Exchange that are 
willing to be deputized by Phlx as temporary Phlx members authorized to 
trade Phlx exclusively listed options on Phlx's facility at the Back-up 
Exchange for such period of time following a Disabling Event as Phlx 
determines to be appropriate, and Phlx may deputize such members of the 
Back-up Exchange as temporary Phlx members for that purpose.
    (ii) Phlx Singly Listed Options.
    (A) For purposes of this Rule 99, the term ``singly listed option'' 
means an option that is not an ``exclusively listed option'' but that 
is listed by an exchange and not by any other national securities 
exchange.
    (B) The Exchange may enter into arrangements with a Backup Exchange 
under which the Backup Exchange will agree, in the event of a Disabling 
Event, to list for trading singly listed options that are then singly 
listed only by the Phlx and not by the Backup Exchange. Any such 
options listed by the Backup Exchange shall trade on the Backup 
Exchange and in accordance with the rules of the Backup Exchange. Such 
options shall be traded by members of the Backup Exchange and by Phlx 
members selected by the Phlx to the extent the Backup Exchange can 
accommodate Phlx members in the capacity of temporary members of the 
Back-up Exchange. If the Back-up Exchange is unable to accommodate all 
Phlx members that desire to trade at the Back-up Exchange pursuant to 
paragraph (a)(i)(A), Phlx may determine which members shall be eligible 
to trade at the Back-up Exchange. Factors to be considered in making 
such determinations may include, but are not limited to, any one or 
more of the following: Whether the member is a specialist in the 
applicable product(s), the number of contracts traded by the member or 
specialist unit in the applicable product(s), market performance, and 
other factors relating to a member's contribution to the market in the 
applicable product(s).
    Any Phlx member who is granted temporary access to the Backup 
Exchange pursuant to this paragraph shall only be permitted (i) to act 
in those Backup Exchange capacities that are authorized by the Backup 
Exchange and that are comparable to capacities in which the temporary 
member has been authorized to act on the Phlx and (ii) to trade in 
those options in which the temporary member is authorized to trade on 
the Phlx.

[[Page 30173]]

    (C) Any options listed by the Backup Exchange pursuant to paragraph 
(a)(ii)(B) that does not satisfy the standard listing and maintenance 
criteria of the Backup Exchange will be subject, upon listing by the 
Backup Exchange, to delisting (and, thus, restrictions on opening new 
series, and engaging in opening transactions in those series with open 
interest, as may be provided in the rules of the Backup Exchange).
    (b) Phlx is Backup Exchange.
    (i) Disabled Exchange Exclusively Listed Options.
    (A) The Exchange may enter into arrangements with one or more other 
exchanges (each a ``Disabled Exchange'') to permit the Disabled 
Exchange and its members to use a portion of the Phlx's facilities to 
conduct the trading of some or all of the Disabled Exchange's 
Exclusively Listed Securities in the event of a Disabling Event. The 
facility of the Phlx used by the Disabled Exchange for this purpose 
will be deemed to be a facility of the Disabled Exchange.
    (B) Trading of the Disabled Exchange's exclusively listed options 
on the Disabled Exchange's facility at Phlx shall be conducted in 
accordance with Phlx rules, except that (1) such trading shall be 
subject to the Disabled Exchange's rules with respect to doing business 
with the public, margin requirements, net capital requirements, listing 
requirements, and position limits, and (2) members of the Disabled 
Exchange that are trading on the Disabled Exchange's facility at Phlx 
(not including Phlx members who become temporary members of the 
Disabled Exchange pursuant to paragraph (b)(i)(D)) will be subject to 
the rules of the Disabled Exchange governing or applying to the 
maintenance of a person's or a firm's status as a member of the 
Disabled Exchange. In addition, the Disabled Exchange and Phlx may 
agree that other Disabled Exchange rules will apply to such trading. 
The Disabled Exchange and Phlx have agreed to communicate to their 
respective members which rules apply in advance of trading.
    (C) Phlx will perform the related regulatory functions with respect 
to trading of the Disabled Exchange's exclusively listed options on the 
Disabled Exchange's facility at Phlx, in each case except as the 
Disabled Exchange and Phlx may specifically agree otherwise. Phlx and 
the Disabled Exchange have agreed to coordinate with each other 
regarding surveillance and enforcement respecting trading of the 
Disabled Exchange's exclusively listed options on the Disabled 
Exchange's facility at Phlx. The Disabled Exchange has agreed that it 
shall retain the ultimate legal responsibility for the performance of 
its self-regulatory obligations with respect to the Disabled Exchange's 
facility at Phlx.
    (D) Phlx members shall not be authorized to trade in any 
exclusively listed options of the Disabled Exchange, except that: (1) 
the Disabled Exchange may deputize willing Phlx floor brokers as 
temporary members of the Disabled Exchange to permit them to execute 
orders as brokers in exclusively listed options of the Disabled 
Exchange traded on the facility of the Disabled Exchange at Phlx; and 
(2) at the instruction of the Disabled Exchange, the Phlx shall select 
Phlx members that are willing to be deputized by the Disabled Exchange 
as temporary members of the Disabled Exchange authorized to trade the 
Disabled Exchange's exclusively listed options on the facility of the 
Disabled Exchange at the Phlx for such period of time following a 
Disabling Event as the Disabled Exchange determines to be appropriate, 
and the Disabled Exchange may deputize such Phlx members as temporary 
members of the Disabled Exchange for that purpose.
    (ii) Disabled Exchange Singly Listed Options.
    (A) The Phlx may enter into arrangements with a Disabled Exchange 
under which the Phlx will agree, in the event of a Disabling Event, to 
list for trading options that are then singly listed only by the 
Disabled Exchange and not by the Phlx. Any such options listed by the 
Phlx shall trade on the Phlx and in accordance with Phlx rules. Such 
options shall be traded by Phlx members and by members of the Disabled 
Exchange selected by the Disabled Exchange to the extent the Phlx can 
accommodate members of the Disabled Exchange in the capacity of 
temporary members of Phlx. Any member of a Disabled Exchange granted 
temporary access to conduct business on the Phlx under this paragraph 
shall only be permitted (i) to act in those Phlx capacities that are 
authorized by the Phlx and that are comparable to capacities in which 
the temporary member has been authorized to act on the Disabled 
Exchange and (ii) to trade in those options in which the temporary 
member is authorized to trade on the Disabled Exchange. The Phlx may 
allocate such options to a Phlx specialist in advance of a Disabling 
Event, without utilizing the allocation process under Phlx Rule 506, to 
enable the Phlx to quickly list such options upon the occurrence of a 
Disabling Event.
    (B) Any class of options listed by the Phlx pursuant to paragraph 
(b)(ii)(A) that does not satisfy the listing and maintenance criteria 
under Phlx Rules 1009 and 1010 will be subject, upon listing by the 
Phlx, to delisting (and, thus, restrictions on opening new series, and 
engaging in opening transactions in those series with open interest, as 
may be provided in Phlx rules).
    (c) Member Obligations.
    (i) Temporary Members of a Disabled Exchange
    (A) A Phlx member acting as a temporary member of the Disabled 
Exchange pursuant to paragraph (b)(i)(D) shall be subject to, and 
obligated to comply with, the rules that govern the operation of the 
facility of the Disabled Exchange at Phlx to the extent applicable 
during the period of such trading. Additionally, (1) such Phlx member 
shall be deemed to have satisfied, and the Disabled Exchange has agreed 
to waive specific compliance with, rules governing or applying to the 
maintenance of a person's or a firm's status as a member of the 
Disabled Exchange, including all dues, fees and charges imposed 
generally upon members of the Disabled Exchange based on their status 
as such; (2) such Phlx member shall have none of the rights of a member 
of the Disabled Exchange except the right to conduct business on the 
facility of the Disabled Exchange at Phlx to the extent described in 
this Rule; (3) the member organization associated with such Phlx 
member, if any, shall be responsible for all obligations arising out of 
that Phlx member's activities on or relating to the Disabled Exchange; 
and (4) the clearing member of such Phlx member shall guarantee and 
clear the transactions of such Phlx member on the Disabled Exchange.
    (B) A member of a Back-up Exchange acting in the capacity of a 
temporary member of Phlx pursuant to paragraph (a)(i)(F) shall be 
subject to, and obligated to comply with, the rules that govern the 
operation of the facility of Phlx at the Back-up Exchange, including 
Phlx rules to the extent applicable during the period of such trading. 
Additionally, (1) such temporary member shall be deemed to have 
satisfied, and Phlx will waive specific compliance with, rules 
governing or applying to the maintenance of a person's or a firm's 
status as a member of Phlx, including all dues, fees and charges 
imposed generally upon Phlx members based on their status as such; (2) 
such temporary member shall have none of the rights of a Phlx member 
except the right to conduct business on the facility of Phlx

[[Page 30174]]

at the Back-up Exchange to the extent described in this Rule; (3) the 
member organization associated with such temporary member, if any, 
shall be responsible for all obligations arising out of that temporary 
member's activities on or relating to Phlx; and (4) the clearing member 
of such temporary member shall guarantee and clear the transactions on 
Phlx of such temporary member.
    (ii) Temporary Members of the Backup Exchange
    (A) A Phlx member acting in the capacity of a temporary member of 
the Back-up Exchange pursuant to paragraph (a)(ii)(B) shall be subject 
to, and obligated to comply with, the rules of the Back-up Exchange 
that are applicable to the Back-up Exchange's own members. 
Additionally, (1) such Phlx member shall be deemed to have satisfied, 
and the Back-up Exchange has agreed to waive specific compliance with, 
rules governing or applying to the maintenance of a person's or a 
firm's status as a member of the Back-up Exchange, including all dues, 
fees and charges imposed generally upon members of the Back-up Exchange 
based on their status as such, (2) such Phlx member shall have none of 
the rights of a member of the Back-up Exchange except the right to 
conduct business on the Back-up Exchange to the extent described in 
this Rule; (3) the member organization associated with such Phlx 
member, if any, shall be responsible for all obligations arising out of 
that Phlx member's activities on or relating to the Back-up Exchange; 
(4) the clearing member of such Phlx member shall guarantee and clear 
the transactions of such Phlx member on the Back-up Exchange; and (5) 
such Phlx member shall only be permitted (x) to act in those capacities 
on the Back-up Exchange that are authorized by the Back-up Exchange and 
that are comparable to capacities in which the Phlx member has been 
authorized to act on Phlx, and (y) to trade in those options in which 
the Phlx member is authorized to trade on Phlx.
    (B) A member of a Disabled Exchange acting in the capacity of a 
temporary member of Phlx pursuant to paragraph (b)(ii)(A) shall be 
subject to, and obligated to comply with, Phlx rules that are 
applicable to Phlx's own members. Additionally, (1) such temporary 
member shall be deemed to have satisfied, and Phlx will waive specific 
compliance with, rules governing or applying to the maintenance of a 
person's or a firm's status as a member of Phlx, including all dues, 
fees and charges imposed generally upon Phlx members based on their 
status as such; (2) such temporary member shall have none of the rights 
of a Phlx member except the right to conduct business on Phlx to the 
extent described in this Rule; (3) the member organization associated 
with such temporary member, if any, shall be responsible for all 
obligations arising out of that temporary member's activities on or 
relating to Phlx; (4) the clearing member of such temporary member 
shall guarantee and clear the transactions of such temporary member on 
the Phlx; and (5) such temporary member shall only be permitted (x) to 
act in those Phlx capacities that are authorized by Phlx and that are 
comparable to capacities in which the temporary member has been 
authorized to act on the Disabled Exchange, and (y) to trade in those 
option classes in which the temporary member is authorized to trade on 
the Disabled Exchange.
    (d) Member Proceedings.
    (i) If the Phlx initiates an enforcement proceeding with respect to 
the trading during a back-up period of the singly or multiply listed 
options of the Disabled Exchange by a temporary member of the Phlx or 
the exclusively listed options of the Disabled Exchange by a member of 
the Disabled Exchange (other than a Phlx member who is a temporary 
member of the Disabled Exchange), and such proceeding is in process 
upon the conclusion of the backup period, the Phlx may transfer 
responsibility for such proceeding to the Disabled Exchange following 
the conclusion of the backup period. Arbitration of any disputes with 
respect to any trading during a backup period of singly or multiply 
listed options of the Disabled Exchange or of exclusively listed 
options of the Disabled Exchange on the Disabled Exchange's facility at 
the Phlx will be conducted in accordance with Phlx rules, unless the 
parties to an arbitration agree that it shall be conducted in 
accordance with Phlx rules.
    (ii) If the Backup Exchange initiates an enforcement proceeding 
with respect to the trading during a backup period of Phlx singly or 
multiply listed options by a temporary member of the Backup Exchange or 
Phlx exclusively listed options by a Phlx member (other than a member 
of the Backup Exchange who is a temporary member of the Phlx), and such 
proceeding is in process upon the conclusion of the backup period, the 
Backup Exchange may transfer responsibility for such proceeding to the 
Phlx following the conclusion of the backup period. Arbitration of any 
disputes with respect to any trading during a backup period of Phlx 
singly or multiply listed options on the Backup Exchange or of Phlx 
exclusively listed options on the facility of the Phlx at the Backup 
Exchange will be conducted in accordance with the rules of the Backup 
Exchange, unless the parties to an arbitration agree that it shall be 
conducted in accordance with Phlx rules.
    (e) Member Preparations.
    Phlx members are required to take appropriate actions as instructed 
by the Exchange to accommodate Phlx's backup trading arrangements.
* * * * *

SUMMARY OF EQUITY OPTION CHARGES (p. 1/6)

OPTION COMPARISON CHARGE (Applicable to All Trades--Except Specialist 
Trades) [Psi]
    Remainder unchanged.
OPTION TRANSACTION CHARGE [Psi]
    Remainder unchanged.
* * * * *

SUMMARY OF EQUITY OPTION CHARGES (p. 3/6)

REAL-TIME RISK MANAGEMENT FEE [Psi]
    Remainder unchanged.
EQUITY OPTION PAYMENT FOR ORDER FLOW FEES* [Psi]
    Remainder unchanged.
    See Appendix A for additional fees.
    *Assessed on transactions resulting from customer orders, subject 
to a 500-contract cap, per individual cleared side of transaction
* * * * *
    [Psi] If Phlx exclusively listed options are traded at Phlx's 
facility on a Back-up Exchange pursuant to Phlx Rule 99, the Back-up 
Exchange has agreed to apply the per contract fees in this fee schedule 
to such transactions. If any other Phlx listed options are traded on 
the Back-up Exchange (such as Phlx singly listed options) pursuant to 
Phlx Rule 99, the fee schedule of the Back-up Exchange shall apply to 
such trades.
    If the exclusively listed options of a Disabled Exchange are traded 
on the Disabled Exchange's facility at Phlx pursuant to Phlx Rule 99, 
Phlx will apply the per contract fees in the fee schedule of the 
Disabled Exchange to such transactions. If any other options classes of 
the Disabled Exchange are traded on Phlx (such as singly listed options 
of the Disabled Exchange) pursuant to Phlx Rule 99, the fees set forth 
in the Phlx fee schedule shall apply to such trades.

Remainder of Summary of Equity Options Charges: Unchanged

* * * * *

[[Page 30175]]

SUMMARY OF INDEX OPTION AND FXI OPTIONS CHARGES (p. 1/1)

OPTION COMPARISON CHARGE (Applicable to All Trades--Except Specialist 
Trades) [Psi]
    Remainder unchanged.
OPTION TRANSACTION CHARGE [Psi]
    Remainder unchanged.
OPTION FLOOR BROKERAGE ASSESSMENT
    Remainder unchanged.
REAL-TIME RISK MANAGEMENT FEE [Psi]
    Remainder unchanged.
    See Appendix A for additional fees.
* * * * *
    [Psi] If Phlx exclusively listed options are traded at Phlx's 
facility on a Back-up Exchange pursuant to Phlx Rule 99, the Back-up 
Exchange has agreed to apply the per contract fees in this fee schedule 
to such transactions. If any other Phlx listed options are traded on 
the Back-up Exchange (such as Phlx singly listed options) pursuant to 
Phlx Rule 99, the fee schedule of the Back-up Exchange shall apply to 
such trades.
    If the exclusively listed options of a Disabled Exchange are traded 
on the Disabled Exchange's facility at Phlx pursuant to Phlx Rule 99, 
Phlx will apply the per contract fees in the fee schedule of the 
Disabled Exchange to such transactions. If any other options classes of 
the Disabled Exchange are traded on Phlx (such as singly listed options 
of the Disabled Exchange) pursuant to Phlx Rule 99, the fees set forth 
in the Phlx fee schedule shall apply to such trades.

Remainder of Fee Schedule: Unchanged

* * * * *

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 Phlx included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, 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 Phlx has prepared summaries, set forth 
in sections A, B, and C below, of the most significant aspects of such 
statements.

B. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
a. Introduction
    The Exchange proposes to adopt new Rule 99, Backup Trading 
Arrangements, which would govern the arrangements with one or more 
other exchanges (each a ``Back-up Exchange'') to permit Phlx and its 
members to use a portion of a Back-up Exchange's facilities to conduct 
the trading of Phlx exclusively listed options \7\ in the event of a 
Disabling Event, and similarly will permit Phlx to provide trading 
facilities at Phlx for another exchange's exclusively listed options if 
that exchange (a ``Disabled Exchange'') is prevented from trading due 
to a Disabling Event. Proposed Rule 99 would also permit Phlx to enter 
into arrangements with a Back-up Exchange to provide for the listing 
and trading of Phlx singly listed options \8\ by the Back-up Exchange 
if Phlx's facility becomes disabled, and conversely provide for the 
listing and trading by Phlx of the singly listed options of a Disabled 
Exchange.
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    \7\ Paragraph (a)(i)(A) of proposed Rule 99 would define the 
term ``exclusively listed option'' as an option that is listed 
exclusively by an exchange (because the exchange has an exclusive 
license to use, or has proprietary rights in, the interest 
underlying the option).
    \8\ For purposes of proposed Phlx Rule 99, the term ``singly 
listed option'' means an option that is not an ``exclusively listed 
option'' but that is listed by an exchange and not by any other 
national securities exchange.
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    To accord with the provisions of its new Rule 99 and negotiated 
back-up trading arrangements, Phlx also proposes changes to its fee 
schedule relative to the fees that shall apply to transactions in the 
options of a Disabled Exchange executed on a Back-up Exchange.
b. Background
    The back-up trading arrangements contemplated by proposed Rule 99 
represent Phlx's immediate plan to ensure that Phlx's exclusively 
listed and singly listed options will have a trading venue if a 
catastrophe renders its primary facility inaccessible or inoperable. 
The Commission has suggested measures that Phlx should undertake to 
expedite reopening of Phlx's exclusively listed securities if a 
catastrophic event prevents trading at Phlx for an extended period of 
time.\9\ Proposed Rule 99 would permit Phlx to enter into back-up 
trading arrangements with other exchanges that would address the 
measures suggested by the Commission.
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    \9\ See letter from Annette L. Nazareth, Director, Division of 
Market Regulation, Commission, to Meyer S. Frucher, Chairman and 
Chief Executive Officer, Phlx, dated April 17, 2003. Comparable 
letters were also sent to other exchanges.
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    In September 2003, Phlx entered into separate Memoranda of 
Understanding with the American Stock Exchange LLC (``Amex'') and CBOE 
to memorialize their mutual understanding to work together to develop 
bilateral back-up trading arrangements in the event that trading is 
prevented at one of the exchanges due to a Disabling Event. Since then, 
Phlx has been working with each of these exchanges to put in place 
written agreements outlining essential commercial terms with respect to 
the arrangements as well as operational plans that describe the 
operational and logistical aspects of the arrangements.
    Phlx and CBOE have signed an agreement relative to back-up trading 
arrangements and are in the process of completing the operational plan 
and systems testing for those arrangements. The Exchange submitted a 
copy of this agreement as Exhibit 3.A to its Form 19b-4 for the rule 
change proposal, together with a copy of a first amendment to the 
agreement as Exhibit 3.B.\10\
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    \10\ These exhibits are available for viewing on the 
Commission's Web site, www.sec.gov/rules/sro.shtml, and at the 
Exchange and the Commission.
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c. Proposed Rule 99
    The Exchange proposes to adopt Rule 99 to make effective its back-
up trading arrangements with other exchanges.

If Phlx Is the Disabled Exchange

    Section (a) of proposed Rule 99 describes the back-up trading 
arrangements that would apply if Phlx were the Disabled Exchange. Under 
proposed paragraph (a)(i)(B), the facility of the Back-up Exchange used 
by Phlx to trade some or all of Phlx's exclusively listed options will 
be deemed to be a facility of Phlx, and such option classes shall trade 
as listings of Phlx. This approach of deeming a portion of the Back-up 
Exchange's facilities to be a facility of the Disabled Exchange is an 
approach approved by the Commission in previous emergency 
situations.\11\
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    \11\ The Commission approved a similar approach when options 
listed on the Pacific Stock Exchange were physically moved to other 
exchanges in October 1989 due to an earthquake (See Exchange Act 
Release No. 27365 (October 19, 1989), 54 FR 43511 (October 25, 1989) 
(SR-Amex-89-26; SR-CBOE-89-21; SR-PSE-89-28; SR-Phlx-89-52)), and 
when Dell options were relocated from Phlx to Amex on a temporary 
basis in June 1998 (See Exchange Act Release No. 40088 (June 12, 
1998), 63 FR 33426 (June 18, 1998) (SR-Phlx-98-25)).
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    Since the trading of Phlx exclusively listed options will be 
conducted using the systems of the Back-up Exchange,

[[Page 30176]]

proposed paragraph (a)(i)(C) provides that the trading of Phlx 
exclusively listed options on Phlx's facility at the Back-up Exchange 
would be conducted in accordance with the rules of the Back-up 
Exchange, except that (i) such trading would be subject to Phlx rules 
with respect to doing business with the public, margin requirements, 
net capital requirements, listing requirements and position limits. In 
addition, Phlx and the Back-up Exchange may agree that other Phlx rules 
will apply to such trading.\12\ The Back-up Exchange rules that govern 
trading on Phlx's facility at the Back-up Exchange would be deemed to 
be Phlx rules for purposes of such trading.
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    \12\ As stated above, Phlx's back-up trading arrangements with 
CBOE contemplate that the operation of the Disabled Exchange's 
facility at the Back-up Exchange will be conducted in accordance 
with the rules of the Back-up Exchange except that (i) the rules of 
the Disabled Exchange will apply with respect to doing business with 
the public, margin requirements, net capital requirements and 
listing requirements, and (ii) the members of the Disabled Exchange 
that are trading on the facility of the Disabled Exchange at the 
Back-up Exchange (not including members of the Back-up Exchange who 
become temporary members of the Disabled Exchange) will be subject 
to the rules of the Disabled Exchange governing or applying to the 
maintenance of a person's or a firm's status as a member of the 
Disabled Exchange.
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    Proposed paragraph (a)(i)(D) reflects that the Back-up Exchange has 
agreed to perform the related regulatory functions with respect to 
trading of Phlx exclusively listed options on Phlx's facility at the 
Back-up Exchange, in each case except as Phlx and the Back-up Exchange 
may specifically agree otherwise. The Back-up Exchange and Phlx will 
coordinate with each other regarding surveillance and enforcement 
respecting such trading. Phlx would retain the ultimate legal 
responsibility for the performance of its self-regulatory obligations 
with respect to Phlx's facility at the Back-up Exchange.
    Under proposed paragraph (a)(i)(E), if the Back-up Exchange is 
unable to accommodate all Phlx members that desire to trade on Phlx's 
facility at the Back-up Exchange, Phlx would have the right to 
determine which members would be eligible to trade at that facility by 
considering factors such as whether the member is the specialist in the 
applicable product(s), the number of contracts traded by the member in 
the applicable product(s), market performance, and other factors 
relating to a member's contribution to the market in the applicable 
product(s).
    Under proposed paragraph (a)(1)(F), members of the Back-up Exchange 
would not be authorized to trade in any Phlx exclusively listed 
options, except that (i) Phlx may deputize willing floor brokers of the 
Back-up Exchange as temporary Phlx members to permit them to execute 
orders as brokers in Phlx exclusively listed options traded on Phlx's 
facility at the Back-up Exchange,\13\ and (ii) the Back-up Exchange has 
agreed that it will, at the instruction of Phlx, select members of the 
Back-up Exchange that are willing to be deputized by Phlx as temporary 
Phlx members authorized to trade Phlx exclusively listed options on 
Phlx's facility at the Back-up Exchange for such period of time 
following a Disabling Event as Phlx determines to be appropriate, and 
Phlx may deputize such members of the Back-up Exchange as temporary 
Phlx members for that purpose. The second of the foregoing exceptions 
would permit members of the Back-up Exchange to trade Phlx exclusively 
listed options on the Phlx facility on the Back-up Exchange if, for 
example, circumstances surrounding a Disabling Event result in Phlx 
members being delayed in arriving at the Back-up Exchange in time for 
prompt resumption of trading.
---------------------------------------------------------------------------

    \13\ The exchanges that acted as Back-up Exchanges in the 
emergency situations noted above also deputized floor brokers in 
this manner. See supra note 11.
---------------------------------------------------------------------------

    Section (a)(ii) of the proposed rule provides for the continued 
trading of Phlx singly listed options at a Back-up Exchange in the 
event of a Disabling Event at Phlx. Proposed paragraph (a)(ii)(B) 
provides that Phlx may enter into arrangements with a Back-up Exchange 
under which the Back-up Exchange will agree, in the event of a 
Disabling Event, to list for trading options that are then singly 
listed only by Phlx. Such options would trade on the Back-up Exchange 
as listings of the Back-up Exchange and in accordance with the rules of 
the Back-up Exchange.
    Phlx singly listed options would be traded by members of the Back-
up Exchange and by Phlx members selected by Phlx to the extent the 
Back-up Exchange can accommodate Phlx members in the capacity of 
temporary members of the Back-up Exchange. If the Back-up Exchange is 
unable to accommodate all Phlx members that desire to trade Phlx singly 
listed options at the Back-up Exchange, Phlx may determine which 
members woud be eligible to trade such options at the Back-up Exchange 
by considering the same factors used to determine which Phlx members 
are eligible to trade Phlx exclusively listed options at the Phlx 
facility at the Back-up Exchange.
    Under proposed paragraph (a)(ii)(C), any such option listed by the 
Back-up Exchange that does not satisfy the standard listing and 
maintenance criteria of the Back-up Exchange would be subject, upon 
listing by the Back-up Exchange, to delisting (and, thus, restrictions 
on opening new series, and engaging in opening transactions in those 
series with open interest, as may be provided in the rules of the Back-
up Exchange).

If Phlx Is the Back-up Exchange

    Section (b) of proposed Rule 99 describes the back-up trading 
arrangements that would apply if Phlx were the Back-up Exchange. In 
general, the provisions in Section (b) are the converse of the 
provisions in Section (a). With respect to the exclusively listed 
options of the Disabled Exchange, the facility of Phlx used by the 
Disabled Exchange to trade some or all of the Disabled Exchange's 
exclusively listed options would be deemed to be a facility of the 
Disabled Exchange, and such options would trade as listings of the 
Disabled Exchange. Trading of the Disabled Exchange's exclusively 
listed options on the Disabled Exchange's facility at Phlx would be 
conducted in accordance with Phlx rules, except that (i) such trading 
would be subject to the Disabled Exchange's rules with respect to doing 
business with the public, margin requirements, net capital 
requirements, listing requirements, and position limits, and (ii) 
members of the Disabled Exchange that are trading on the Disabled 
Exchange's facility at Phlx (not including Phlx members who become 
temporary members of the Disabled Exchange pursuant to paragraph 
(b)(i)(D)) would be subject to the rules of the Disabled Exchange 
governing or applying to the maintenance of a person's or a firm's 
status as a member of the Disabled Exchange. In addition, the Disabled 
Exchange and Phlx may agree that other Disabled Exchange rules will 
apply to such trading.
    Section (b)(ii) describes the arrangements applicable to trading of 
the Disabled Exchange's singly listed options at Phlx, and is the 
converse of Section (a)(ii). One difference is the last sentence in 
paragraph (b)(ii)(A), which provides that Phlx may allocate singly 
listed option classes of the Disabled Exchange to a Phlx Specialist in 
advance of a Disabling Event, without utilizing the allocation process 
under Phlx Rule 506, to enable Phlx to quickly list such option classes 
upon the occurrence of a Disabling Event.

Member Obligations

    Section (c) describes the obligations of members and member 
organizations with respect to the trading by

[[Page 30177]]

``temporary members'' on the facilities of another exchange pursuant to 
Rule 99. Section (c)(i) sets forth the obligations applicable to Phlx 
members who act in the capacity of temporary members of the Disabled 
Exchange on the facility of the Disabled Exchange at the Back-up 
Exchange.
    Section (c)(i) provides that a Phlx member acting as a temporary 
member of the Disabled Exchange would be subject to, and obligated to 
comply with, the rules that govern the operation of the facility of the 
Disabled Exchange at Phlx. This would include the rules of the Disabled 
Exchange to the extent applicable during the period of such trading, 
including the rules of the Disabled Exchange limiting its liability for 
the use of its facilities that apply to members of the Disabled 
Exchange. Additionally, (1) such Phlx member acting as a temporary 
member of the Disabled Exchange would be deemed to have satisfied, and 
the Disabled Exchange has agreed to waive specific compliance with, 
rules governing or applying to the maintenance of a person's or a 
firm's status as a member of the Disabled Exchange, including all dues, 
fees and charges imposed generally upon members of the Disabled 
Exchange based on their status as such; (2) such Phlx member acting as 
a temporary member of the Disabled Exchange would have none of the 
rights of a member of the Disabled Exchange except the right to conduct 
business on the facility of the Disabled Exchange at the Back-up 
Exchange to the extent described in the Rule; (3) the member 
organization associated with such Phlx member acting as a temporary 
member of the Disabled Exchange, if any, would be responsible for all 
obligations arising out of that Phlx member's activities on or relating 
to the Disabled Exchange, and (4) the clearing member of such Phlx 
member would guarantee and clear the transactions of such temporary 
member on the Disabled Exchange.
    Section (c)(ii) sets forth the obligations applicable to Phlx 
members who act in the capacity of temporary members of the Back-up 
Exchange for the purpose of trading singly and multiply listed options 
of the Disabled Exchange. Such Phlx members would be subject to, and 
obligated to comply with, the rules of the Back-up Exchange that are 
applicable to the Back-up Exchange's own members, including the rules 
of the Back-up Exchange limiting its liability for the use of its 
facilities that apply to members of the Back-up Exchange. Phlx members 
who act in the capacity of temporary members of the Back-up Exchange 
have the same obligations as those set forth in Section (c)(i) that 
apply to temporary members of the Disabled Exchange, except that, in 
addition, Phlx members who act in the capacity of temporary members of 
the Back-up Exchange would only be permitted (1) to act in those 
capacities on the Back-up Exchange that are authorized by the Back-up 
Exchange and that are comparable to capacities in which the temporary 
member has been authorized to act on the Disabled Exchange, and (2) to 
trade in those options in which the temporary member is authorized to 
trade on the Disabled Exchange.

Member Proceedings

    As noted above, proposed Rule 99 provides that the rules of the 
Back-up Exchange shall apply to the trading of the singly and multiply 
listed options of the Disabled Exchange traded on the Back-up 
Exchange's facilities, and (with certain limited exceptions) the 
trading of exclusively listed options of the Disabled Exchange traded 
on the facility of the Disabled Exchange at the Back-up Exchange. The 
Back-up Exchange will perform the related regulatory functions with 
respect to such trading (except as the Back-up Exchange and the 
Disabled Exchange may specifically agree otherwise).
    Section (d) of proposed Rule 99 provides that if a Backup Exchange 
initiates an enforcement proceeding with respect to the trading during 
a backup period of singly or multiply listed securities of the Disabled 
Exchange by a temporary member of the Backup Exchange or exclusively 
listed securities of the Disabled Exchange by a member of the Disabled 
Exchange (other than a member of the Backup Exchange who is a temporary 
member of the Disabled Exchange), and such proceeding is in process 
upon the conclusion of the backup period, the Backup Exchange may 
transfer responsibility for such proceeding to the Disabled Exchange 
following the conclusion of the backup period. This approach to the 
exercise of enforcement jurisdiction is also consistent with past 
precedent.\14\
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    \14\ See supra note 11.
---------------------------------------------------------------------------

    With respect to arbitration jurisdiction, proposed Section (d) 
provides that arbitration of any disputes with respect to any trading 
during a backup period of singly or multiply listed securities of the 
Disabled Exchange or of exclusively listed securities of the Disabled 
Exchange on the Disabled Exchange's facility at the Backup Exchange 
will be conducted in accordance with the rules of the Backup Exchange, 
unless the parties to an arbitration agree that it shall be conducted 
in accordance with the rules of the Disabled Exchange.
    The purpose of these provisions is to permit a Backup Exchange to 
confer its temporary enforcement jurisdiction over a member or member 
organization of the Disabled Exchange back to the Disabled Exchange 
once the backup period has expired.

Member Preparations

    To ensure that members are prepared to implement Phlx's back-up 
trading arrangements, proposed Section (e) of Proposed Rule 99 requires 
Phlx members to take appropriate actions as instructed by Phlx to 
accommodate Phlx's back-up trading arrangements.
d. Fee Schedule
    The Exchange proposes to add a footnote to its Fee Schedule to 
inform its members regarding what fees will apply to transactions in 
the listed options of a Disabled Exchange effected on a Backup Exchange 
under Rule 99. The footnote provides that if Phlx is the Disabled 
Exchange, the Backup Exchange will apply the per contract and per 
contract side fees in the Phlx fee schedule to transactions in Phlx 
exclusively listed options traded on the Phlx facility on the Backup 
Exchange.\15\ If any other Phlx listed options are traded on the Backup 
Exchange (such as Phlx singly listed options) pursuant to Phlx Rule 99, 
the fee schedule of the Backup Exchange shall apply to such trades. The 
footnote contains a second paragraph stating the converse if Phlx is 
the Backup Exchange under Rule 99.
---------------------------------------------------------------------------

    \15\ When Phlx Dell options relocated to Amex in June 1998, Phlx 
fees applied to transactions in Dell options on the Amex. See supra 
note 11.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange states that the proposed rule change is intended to 
ensure that Phlx's exclusively listed and singly listed products will 
have a trading venue in the event that trading at Phlx is prevented due 
to a Disabling Event, thus minimizing potential disruptions for the 
markets and investors under those circumstances. The Exchange thus 
believes that the proposed rule change is consistent with Section 6(b) 
of the Act \16\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \17\ in particular, in that it is designed to 
perfect the mechanisms of a free and open market and to protect 
investors and the public interest.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).

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[[Page 30178]]

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

    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 self-regulatory organization 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, including whether the proposed rule 
change, as amended, 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-2004-65 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-2004-65. 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 Room. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the 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-2004-65 and should be submitted on or before June 
15, 2005.

    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. E5-2637 Filed 5-24-05; 8:45 am]
BILLING CODE 8010-01-P