[Federal Register Volume 71, Number 141 (Monday, July 24, 2006)]
[Notices]
[Pages 41853-41856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-11682]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54158; File No. SR-Phlx-2006-17]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change and Amendment Nos. 1 and 2 Thereto Relating to Listing 
Standards for Broad-Based Index Options

July 17, 2006.
    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 March 1, 2006, 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 and 
II below, which Items have been prepared by the Phlx. On April 12, 
2006, the Phlx filed Amendment No. 1 to the proposed rule change.\3\ On 
July 14, 2006, the Phlx filed Amendment No. 2 to the proposed rule 
change.\4\ The

[[Page 41854]]

Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons and is 
approving the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \4\ In Amendment No. 2, the Phlx made technical and clarifying 
changes to the proposal.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Phlx Rules 1000A (Applicability and 
Definitions), 1001A (Position Limits) and 1009A (Designation of the 
Index) to adopt ``generic'' listing standards pursuant to Rule 19b-4(e) 
under the Act \5\ and position limits for broad-based index options. 
The text of the proposed rule change is available on the Phlx's Web 
site (http://www.phlx.com), at the Phlx's Office of the Secretary and 
at the Commission's Public Reference Room.
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    \5\ 17 CFR 240.19b-4(e).
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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 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 III below. The 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 Phlx proposes to adopt Phlx Rule 1009A(d) to establish initial 
listing standards for broad-based index options. The proposal will 
allow the Phlx to list and trade, pursuant to Rule 19b-4(e) under the 
Act,\6\ broad-based index options that meet the listing standards in 
Phlx Rule 1009A(d). The listing standards require, among other things, 
that the underlying index be broad-based, as defined in Phlx Rule 
1000A(b)(11); \7\ that options on the index be a.m.-settled; that the 
index be capitalization-weighted, price-weighted, modified 
capitalization-weighted, or equal dollar-weighted; and that the index 
be comprised of at least 50 securities, all of which must be ``NMS 
stocks,'' as defined in Rule 600 of Regulation NMS.\8\ In addition, 
Phlx Rule 1009A(d) requires that the index's component securities meet 
certain minimum market capitalization and average daily trading volume 
requirements; that no single component account for more than 10% of the 
weight of the index and that the five highest weighted components 
represent no more than 33% of the weight of the index; that the index 
value be widely disseminated at least every 15 seconds; and that the 
Phlx have written surveillance procedures in place with respect to the 
index options. Phlx Rule 1009A(d) also provides that non-U.S. index 
components that are not subject to a comprehensive surveillance sharing 
agreement between the Phlx and the primary market(s) trading the index 
components may comprise no more than 20% of the weight of the index. 
The Phlx represents that its surveillance procedures are adequate to 
properly monitor the trading of broad-based index options and that it 
intends to apply its existing surveillance procedures for index options 
to monitor trading in broad-based index options listed pursuant to Phlx 
Rule 1009A(d). Additionally, the Exchange must reasonably believe that 
it has adequate system capacity to support the trading of any index 
options listed pursuant to Phlx Rule 1000A(d).
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    \6\ 17 CFR 240.19b-4(e).
    \7\ The Exchange is also proposing to amend Phlx Rule 1000A to 
clarify the definitions of broad-based (market) indexes as well as 
narrow-based (industry) indexes.
    \8\ Rule 600 of Regulation NMS defines an ``NMS stock'' to mean 
``any NMS security other than an option.'' An ``NMS security'' is 
``any security or class of securities for which transaction reports 
are collected, processed, and made available pursuant to an 
effective transaction reporting plan, or an effective national 
market system plan for reporting transactions in listed options.'' 
See 17 CFR 242.600.
    For purposes of consistency, the Exchange is also proposing to 
amend Phlx Rule 1009A(b)(8), which indicates conditions that an 
underlying index must satisfy for the Exchange to list narrow-based 
index options pursuant to the generic Rule 19b-4(e) listing 
standards, to reference ``NMS stock'' as defined in Rule 600 of 
Regulation NMS under the Act.
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    The Phlx also proposes to adopt Phlx Rule 1009A(e), which 
establishes maintenance standards for broad-based index options listed 
pursuant to Phlx Rule 1009A(d). In addition, the Phlx proposes to amend 
Phlx Rule 1001A(a) to establish a position limit of 25,000 contracts on 
the same side of the market for broad-based index options listed 
pursuant to Phlx Rule 1009A(d).
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\9\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\10\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
prevent fraudulent and manipulative acts, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general to protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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 burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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. 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-2006-17 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2006-17. 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

[[Page 41855]]

the Commission's Public Reference Room. Copies of such 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-2006-17 and should be submitted on or before August 14, 2006.

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

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\11\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\12\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest.
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    \11\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    To list options on a particular broad-based index, the Phlx 
currently must file a proposed rule change with the Commission pursuant 
to Section 19(b)(1) of the Act and Rule 19b-4 thereunder. However, Rule 
19b-4(e) provides that the listing and trading of a new derivative 
securities product by a self-regulatory organization (``SRO'') will not 
be deemed a proposed rule change pursuant to Rule 19b-4(c)(1) if the 
Commission has approved, pursuant to Section 19(b) of the Act, the 
SRO's trading rules, procedures, and listing standards for the product 
class that would include the new derivative securities product, and the 
SRO has a surveillance program for the product class.
    As described more fully above, the Phlx proposes to establish 
listing standards for broad-based index options. The Commission's 
approval of the Phlx's listing standards for broad-based index options 
will allow options that satisfy the listing standards to begin trading 
pursuant to Rule 19b-4(e), without constituting a proposed rule change 
within the meaning of Section 19(b) of the Act and Rule 19b-4, for 
which notice and comment and Commission approval is necessary.\13\ The 
Phlx's ability to rely on Rule 19b-4(e) to list broad-based index 
options that meet the requirements of Phlx Rule 1009A(d) potentially 
reduces the time frame for bringing these securities to the market, 
thereby promoting competition and making new broad-based index options 
available to investors more quickly.
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    \13\ When relying on Rule 19b-4(e), the SRO must submit Form 
19b-4(e) to the Commission within five business days after the SRO 
begins trading the new derivative securities product. See Securities 
Exchange Act Release No. 40761 (December 8, 1998), 63 FR 70952 
(December 22, 1998) (File No. S7-13-98).
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    The Commission notes that the Phlx has represented that it has 
adequate trading rules, procedures, listing standards, and surveillance 
program for broad-based index options. Phlx's existing index option 
trading rules and procedures will apply to broad-based index options 
listed pursuant to Phlx Rule 1009A(d). Other existing Phlx rules, 
including provisions addressing sales practices and margin 
requirements, also will apply to these options. In addition, the Phlx 
proposes to establish position and exercise limits of 25,000 contracts 
on the same side of the market for broad-based index options listed 
pursuant to Phlx Rule 1009A(d).\14\ The Commission believes that the 
proposed position and exercise limits should serve to minimize 
potential manipulation concerns.
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    \14\ Under Phlx Rule 1002A, exercise limits for index option 
contracts are equivalent to the position limits described in Phlx 
Rule 1001A.
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    The Phlx represents that its surveillance procedures are adequate 
to properly monitor the trading of broad-based index options and that 
it intends to apply its existing surveillance procedures for index 
options to monitor trading in broad-based index options listed pursuant 
to Phlx Rule 1009A(d). In addition, because Phlx Rule 1009A(d) requires 
that each component of an index be an ``NMS stock,'' as defined in Rule 
600 of Regulation NMS under the Act, each index component must trade on 
a registered national securities exchange or through Nasdaq.\15\ 
Accordingly, the Phlx will have access to information concerning 
trading activity in the component securities of an underlying index 
through the Intermarket Surveillance Group (``ISG'').\16\ Phlx Rule 
1009A(d) also provides that non-U.S. index components that are not 
subject to a comprehensive surveillance sharing agreement between the 
Phlx and the primary market(s) trading the index components may 
comprise no more than 20% of the weight of the index.\17\ The 
Commission believes that these requirements will help to ensure that 
the Phlx has the ability to monitor trading in broad-based index 
options listed pursuant to Phlx Rule 1009A(d) and in the component 
securities of the underlying indexes.
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    \15\ Recently, the Commission approved The NASDAQ Stock Market 
LLC's application to become a registered national securities 
exchange. See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006). At the time of the 
Commission's consideration of this matter, The NASDAQ Stock Market 
is still operating as a subsidiary of the National Association of 
Securities Dealers (``NASD''), a registered national securities 
association.
    \16\ The ISG was formed on July 14, 1983, to, among other 
things, coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets. 
All of the registered national securities exchanges and NASD are 
members of the ISG. In addition, futures exchanges and non-U.S. 
exchanges and associations are affiliate members of the ISG.
    \17\ However, such non-U.S. index components, as ``NMS stocks,'' 
would be registered under Section 12 of the Act and listed and 
traded on a national securities exchange or Nasdaq, where there is 
last sale reporting.
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    The Commission believes that the requirements in Phlx Rule 1009A(d) 
regarding, among other things, the minimum market capitalization, 
trading volume, and relative weightings of an underlying index's 
component stocks are designed to ensure that the markets for the 
index's component stocks are adequately capitalized and sufficiently 
liquid, and that no one stock dominates the index. In addition, Phlx 
Rule 1009A(d) requires that the underlying index be ``broad-based,'' as 
defined in Phlx Rule 1000A(b)(11).\18\ The Commission believes that 
these requirements minimize the potential for manipulating the 
underlying index.
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    \18\ Phlx Rule 1000A(b)(11) defines ``broad-based index'' to 
mean ``an index designed to be representative of a stock market as a 
whole or of a range of companies in unrelated industries.''
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    The Commission believes that the requirement in Phlx Rule 1009A(d) 
that the current index value be widely disseminated at least once every 
15 seconds by one or more major market data vendors \19\ during the 
time an index option trades on the Phlx should provide transparency 
with respect to current index values and contribute to the transparency 
of the market for

[[Page 41856]]

broad-based index options. In addition, the Commission believes, as it 
has noted in other contexts, that the requirement in Phlx Rule 1009A(d) 
that an index option be settled based on the opening prices of the 
index's component securities, rather than on closing prices, could help 
to reduce the potential impact of expiring index options on the market 
for the index's component securities.\20\
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    \19\ The Phlx stated that `` `[m]ajor market data vendor' for 
the purposes of Phlx Rule 1009A(d)(11) includes, but is not limited 
to, the Options Price Reporting Authority, the Consolidated Tape 
Association (administers the Consolidated Tape and Consolidated 
Quotation Plans), Nasdaq Index Dissemination Service, and securities 
information vendors such as Bloomberg and Reuters.''
    \20\ See, e.g., Securities Exchange Act Release No. 30944 (July 
21, 1992), 57 FR 33376 (July 28, 1992) (order approving a Chicago 
Board Options Exchange, Incorporated (``CBOE'') proposal to 
establish opening price settlement for S&P 500 Index options).
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    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the 30th day after the date of publication 
of the notice of filing in the Federal Register. The Exchange has 
requested accelerated approval of the proposed rule change. The 
proposal implements listing and maintenance standards and position and 
exercise limits for broad-based index options substantially identical 
to those recently approved for the International Securities Exchange, 
Inc., the American Stock Exchange LLC and the CBOE.\21\ The Commission 
does not believe that the Exchange's proposal raises any novel 
regulatory issues. Therefore, the Commission finds good cause, 
consistent with Section 19(b)(2) of the Act,\22\ to approve the 
proposed rule change, as amended, on an accelerated basis.
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    \21\ See Securities Exchange Act Release Nos. 52578 (October 7, 
2005), 70 FR 60590 (October 18, 2005) (SR-ISE-2005-27); 52781 
(November 16, 2005), 70 FR 70898 (November 23, 2005) (SR-Amex-2005-
069); and 53266 (February 9, 2006), 71 FR 8321 (February 16, 2006) 
(SR-CBOE-2005-59).
    \22\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-Phlx-2006-17), as amended, 
is hereby approved on an accelerated basis.
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    \23\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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 Nancy M. Morris,
 Secretary.
[FR Doc. E6-11682 Filed 7-21-06; 8:45 am]
BILLING CODE 8010-01-P