[Federal Register Volume 71, Number 142 (Tuesday, July 25, 2006)]
[Notices]
[Pages 42156-42158]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-11792]



[[Page 42156]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54174; File No. SR-Phlx-2006-40]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
and Amendment No. 1 Thereto Relating to Its Short Stock Interest, 
Dividend, and Merger Strategy Programs

July 19, 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 June 28, 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, II 
and III below, which items have been substantially prepared by Phlx. 
Phlx has designated the proposed rule change as one establishing or 
changing a due, fee, or other charge, pursuant to Section 
19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2) thereunder,\4\ 
which renders the proposal effective upon filing with the Commission. 
On July 18, 2006, the Exchange filed Amendment No. 1 to the proposed 
rule change.\5\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
    \5\ In Amendment No. 1, Phlx incorporated the proposed 
definitions of the terms ``short stock interest strategy,'' 
``dividend strategy,'' and ``merger strategy'' into its fee schedule 
and provided citations for the former definitions of ``dividend 
spread'' and``merger spread'' in the purpose section of the 
proposal.
---------------------------------------------------------------------------

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

    Phlx proposes to amend its schedule of fees to provide for a rebate 
of $0.08 per contract side for Registered Options Trader (``ROT'') 
executions and $0.07 per contract side for specialist executions made 
pursuant to a short stock interest strategy. In addition, the Exchange 
proposes to impose a fee cap of $1,000 on equity option transaction and 
comparison charges for short stock interest strategies executed on the 
same trading day in the same options class and to assess a $0.05 per 
contract side license fee for short stock interest strategies in 
connection with certain products that carry license fees. The Exchange 
is also proposing to amend its current definitions of dividend spread 
transactions and merger spread transactions and to add the new 
definitions for dividend, merger, and short stock interest strategies 
to its fee schedule.
    The text of the proposed rule change is available on Phlx's Web 
site at http://www.phlx.com, at the Office of the Secretary at Phlx, 
and at the Commission's Public Reference Room.

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, as 
amended, and discussed any comments it received on the proposal. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    a. Background. Currently, the Exchange provides a rebate for 
certain contracts executed in connection with transactions occurring as 
part of a dividend or merger strategy. Specifically, for those options 
contracts executed pursuant to a dividend or merger strategy, the 
Exchange rebates $0.08 per contract side for ROT executions and $0.07 
per contract side for specialist executions on the business day before 
the underlying stock's ex-date. The ex-date is the date on or after 
which a security is traded without a previously declared dividend or 
distribution.
    The net transaction and comparison charges after the rebate is 
applied are capped at $1,750 for merger strategies executed on the same 
trading day in the same options class and for dividend strategies on 
the same day in the same options class, except for a security with a 
declared dividend or distribution less than $0.25. In that instance, 
the net transaction and comparison charges after the rebate is applied 
are capped at $1,000 for dividend strategies on the same day in the 
same options class.\6\
---------------------------------------------------------------------------

    \6\ These fee caps are implemented after any applicable rebates 
are applied to ROT and specialist equity option transaction and 
comparison charges. See Securities Exchange Act Release No. 53529 
(March 21, 2006), 71 FR 15508 (March 28, 2006) (SR-Phlx-2006-16).
---------------------------------------------------------------------------

    A $0.05 per contract side license fee is imposed for dividend 
strategies in connection with certain products that carry license 
fees.\7\ The license fee is assessed on every transaction and is not 
subject to the $1,750 or $1,000 fee cap, nor does it count towards 
reaching the fee caps. The $1,000 and $1,750 fee caps and the $0.05 per 
contract side license fee are subject to a pilot program scheduled to 
expire on September 1, 2006.\8\
---------------------------------------------------------------------------

    \7\ For a complete list of these product symbols, see the 
Exchange's $60,000 Firm-Related Equity Option and Index Option Cap 
Fee Schedule.
    \8\ These fee caps are implemented after any applicable rebates 
are applied to ROT and specialist equity option transaction and 
comparison charges. See Securities Exchange Act Release No. 53529 
(March 21, 2006), 71 FR 15508 (March 28, 2006) (SR-Phlx-2006-16).
---------------------------------------------------------------------------

    b. Proposal. Phlx proposes to amend its schedule of fees to provide 
for a rebate of $0.08 per contract side for ROT executions and $0.07 
per contract side for specialist executions made pursuant to a short 
stock interest strategy. The Exchange proposes to define a short stock 
interest strategy as ``transactions done to achieve a short stock 
interest arbitrage involving the purchase, sale and exercise of in-the-
money options of the same class.''
    In addition, the Exchange proposes to impose a fee cap of $1,000 on 
equity option transaction and comparison charges for short stock 
interest strategies executed on the same trading day in the same 
options class. Similar to the fee caps currently in effect in 
connection with dividend and merger spread transactions,\9\ the fee cap 
will be implemented after any applicable rebates are applied to ROT and 
specialist equity option transaction and comparison charges.
    In addition, the Exchange is proposing to assess a $0.05 per 
contract side license fee for short stock interest strategies in 
connection with certain products that carry license fees.\10\ The 
applicable license fee will be assessed on every transaction and will 
not be subject to the $1,000 fee cap, nor will it count towards 
reaching the $1,000 fee cap.
---------------------------------------------------------------------------

    \9\ See Id.
    \10\ For a complete list of these product symbols, see the 
Exchange's $60,000 Firm-Related Equity Option and Index Option Cap 
Fee Schedule.
---------------------------------------------------------------------------

    The short stock interest strategy rebate, $1,000 fee cap and $0.05 
per contract side license fee would be effective beginning with trades 
settling on or after July 1, 2006. The short stock interest strategy 
$1,000 fee cap and $0.05 per contract side license fee

[[Page 42157]]

would remain in effect as a pilot program that is scheduled to expire 
on September 1, 2006.\11\ Consistent with the current rebate program 
for dividend and merger strategies,\12\ any rebate request forms for 
short stock interest strategies would have to be submitted to the 
Exchange three business days following the end of the previous month.
---------------------------------------------------------------------------

    \11\ The proposed pilot program will be in effect for the same 
time period as the $1,000 and $1,750 fee caps and the $0.05 per 
contract side license fee that is scheduled to expire on September 
1, 2006. See Securities Exchange Act Release No. 53529 (March 21, 
2006), 71 FR 15508 (March 28, 2006) (SR-Phlx-2006-16).
    \12\ See Securities Exchange Act Release No. 53094 (January 10, 
2006), 71 FR 2975 (January 18, 2006) (SR-Phlx-2005-75).
---------------------------------------------------------------------------

    The Exchange is also proposing to amend its current definitions of 
dividend spread transactions and merger spread transactions 
(hereinafter referred to as ``dividend strategy,'' ``merger strategy,'' 
or ``dividend and merger strategies,'' as applicable) and update its 
fee schedule accordingly.
    First, the Exchange proposes to amend the definitions of dividend 
and merger strategies in order to clarify that transactions done to 
achieve a dividend or merger arbitrage do not necessarily need to be 
``spreads'' in order to qualify for the fee cap and rebate program 
currently in effect. It is the Exchange's understanding that each of 
these strategies can be achieved either by purchasing and selling the 
same option series or different options series. Accordingly, as 
explained in further detail below, the Exchange proposes to revise each 
definition to refer to each strategy as a ``strategy'' instead of as a 
``spread'' and to change each definition in certain respects to make 
clear that transactions done to achieve a dividend or merger arbitrage 
that involve only one options series may also qualify for the above-
referenced fee cap and rebate.
    Second, the Exchange is proposing changes to the definition of each 
strategy to better reflect the similarities between the strategies. 
Dividend and merger strategies are strategies that have similar 
economic risks and are executed in similar ways. Each definition would 
be clarified to reflect that each strategy involves the ``purchase, 
sale and exercise'' of options. Each definition would also be clarified 
to reflect that the options involved must be of the ``same class.''
    The Exchange currently defines a dividend strategy for purposes of 
the rebate and fee cap as ``any trade done within a defined time frame 
pursuant to a strategy in which a dividend arbitrage can be achieved 
between any two deep-in-the-money options.'' \13\ The Exchange proposes 
to change ``dividend spread'' to ``dividend strategy,'' and proposes to 
define a dividend strategy as ``transactions done to achieve a dividend 
arbitrage involving the purchase, sale and exercise of in-the-money 
options of the same class, executed prior to the date on which the 
underlying stock goes ex-dividend.'' The word ``two'' is not included 
in the new definition so that transactions involving only a single 
options series that are done to achieve a dividend arbitrage may also 
qualify for the fee cap and rebate. The word ``deep'' is also not 
included in the new definition because the options used do not 
necessarily need to be deep-in-the-money options and also because of 
the difficulty in defining what constitutes ``deep'' in-the-money. The 
definition is clarified by making explicit two requirements: the 
options must be of the same class and the transactions must be effected 
on the day prior to the date on which the underlying stock goes ex-
dividend.
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release Nos. 53094 (January 10, 
2006), 71 FR 2975 (January 18, 2006) (SR-Phlx-2005-75) and 51596 
(April 21, 2005), 70 FR 22381 (April 29, 2005) (SR-Phlx-2005-19).
---------------------------------------------------------------------------

    The Exchange currently defines a merger strategy for purposes of 
the fee cap and rebate as a ``transaction executed pursuant to a merger 
spread strategy involving the simultaneous purchase and sale of options 
of the same class and expiration date, but with different strike 
prices, followed by the exercise of the resulting long options 
position, each executed prior to the date on which shareholders of 
record are required to elect their respective form of consideration, 
i.e., cash or stock.'' \14\ The Exchange proposes to change ``merger 
spread'' to ``merger strategy,'' and proposes to define a merger 
strategy as ``transactions done to achieve a merger arbitrage involving 
the purchase, sale and exercise of options of the same class and 
expiration date, executed prior to the date on which shareholders of 
record are required to elect their respective form of consideration, 
i.e., cash or stock.'' The proposed definition does not include the 
words ``but with different strike prices'' so that transactions 
involving only a single options series that are done to achieve a 
merger arbitrage may also qualify for the fee cap and rebate. The word 
``simultaneous'' is also not included in the new definition because the 
purchase and sale transactions do not necessarily need to be executed 
simultaneously.
---------------------------------------------------------------------------

    \14\ Id.
---------------------------------------------------------------------------

    The Exchange represents that the purpose of the proposed rule 
change is to attract additional order flow to the Exchange. The 
Exchange believes that implementing a rebate and fee cap for short 
stock interest spread strategies, similar to the rebates and fee caps 
currently in place for dividend and merger strategy strategies, should 
increase the Exchange's ability to compete with other options exchanges 
for order flow in connection with this options strategy.\15\
---------------------------------------------------------------------------

    \15\ Other options exchanges currently allow for reduced and/or 
capped fees for short interest spread transactions. See Securities 
Exchange Act Release Nos. 53172 (January 24, 2006), 71 FR 5093 
(January 31, 2006) (SR-CBOE-2006-07); 53412 (March 3, 2006), 71 FR 
12752 (March 13, 2006) (SR-CBOE-2006-20); 53413 (March 3, 2006), 71 
FR 13202 (March 14, 2006) (SR-PCX-2006-06); and 53415 (March 3, 
2006), 71 FR 12745 (March 13, 2006) (SR-Amex-2006-10).
---------------------------------------------------------------------------

    The Exchange also represents that the purpose of amending the 
definitions of dividend strategies and merger strategies is to add 
clarity and to make the definitions more consistent with each other and 
with the proposed definition of short stock interest strategies, which 
should in turn, reflect the similarities among the strategies.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\16\ in general, and Section 
6(b)(4),\17\ in particular, in that it is an equitable allocation of 
reasonable fees and other charges among its members.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that proposed rule change, as 
amended, 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change, as amended, has become effective 
pursuant to Section 19(b)(3)(A)(ii) of the Act \18\ and subparagraph 
(f)(2) of Rule 19b-4 thereunder \19\ because it establishes or changes 
a due, fee, or other charge. At any time within 60 days of the filing 
of the proposed rule change, the

[[Page 42158]]

Commission may summarily abrogate such 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.\20\
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \19\ 17 CFR 240.19b-4(f)(2).
    \20\ The effective date of the original proposed rule change is 
June 28, 2006, the date of the original filing, and the effective 
date of Amendment No. 1 is July 18, 2006, the filing date of the 
amendment. For purposes of calculating the 60-day abrogation period 
within which the Commission may summarily abrogate the proposed rule 
change, as amended, under Section 19(b)(3)(C) of the Act, the 
Commission considers the period to commence on July 18, 2006, the 
date on which the Exchange submitted Amendment No. 1. See 15 U.S.C. 
78s(b)(3)(C).
---------------------------------------------------------------------------

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-2006-40 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-2006-40. 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 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-2006-40 and should be submitted on or before August 15, 2006.
---------------------------------------------------------------------------

    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-11792 Filed 7-24-06; 8:45 am]
BILLING CODE 8010-01-P