[Federal Register Volume 71, Number 250 (Friday, December 29, 2006)]
[Notices]
[Pages 78506-78511]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-22404]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54989; International Series Release No. 1299; File No. 
SR-Phlx-2006-34]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval to Proposed 
Rule Change as Modified by Amendments No. 1, 2, and 3 Thereto Relating 
to U.S. Dollar-Settled Foreign Currency Options

December 21, 2006.

I. Introduction

    On May 12, 2006, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934, as amended (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to the listing and 
trading of U.S. dollar-settled foreign currency options (``FCOs'') on 
the British pound and the Euro (together, the ``Currencies''). On 
September 29, 2006, the Exchange filed Amendment No. 1,\3\ and on 
October 20, 2006, the Exchange filed Amendment No. 2.\4\ The proposed 
rule change, as amended, was published for comment in the Federal 
Register on November 2, 2006.\5\ The Commission received no comments on 
the proposal. On December 15, 2006, the Phlx filed Amendment No. 3 to 
the proposed rule change.\6\ This order provides notice of the proposed 
rule change as modified by Amendments No. 1, 2, and 3 and approves the 
proposed rule change as amended on an accelerated basis.\7\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4 dated September 29, 2006 (``Amendment No. 
1''). Amendment No. 1 replaced the original filing in its entirety.
    \4\ See Form 19b-4 dated October 20, 2006 (``Amendment No. 2''). 
Amendment No. 2 replaced the Amendment No. 1 in its entirety.
    \5\ See Securities Exchange Act Release No. 54652 (October 25, 
2006), 71 FR 64597 (``Notice'').
    \6\ See Partial Amendment dated December 15, 2006 (``Amendment 
No. 3'').
    \7\ This order specifically approves the listing and trading of 
U.S. dollar-settled FCOs on the British pound and the Euro. The 
listing and trading of additional U.S. dollar-settled FCOs on other 
foreign currencies will require the Exchange to file additional 
proposed rule changes on Form 19b-4.
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange proposes to list U.S. dollar-settled FCOs \8\ on the 
Currencies and to adopt rules and rule amendments to permit the trading 
of U.S. dollar-settled FCOs on the Exchange's electronic trading 
platform for options, Phlx XL.\9\ The Exchange also proposes to amend a 
number of other rules applicable to U.S. dollar-settled FCOs, and to 
delete outdated references to the German mark, Italian lira, Spanish 
peseta, and the French franc.\10\
---------------------------------------------------------------------------

    \8\ The Exchange previously traded U.S. dollar-settled options 
on the German mark and the Japanese yen beginning in September 1994 
and February 1997, respectively. See Securities Exchange Act Release 
Nos. 33732 (March 8, 1994), 59 FR 12023 (March 15, 1994) and 36505 
(November 22, 1995), 60 FR 61277 (November 29, 1995). U.S. dollar-
settled German mark options and Japanese yen options were delisted 
on January 19, 1999 and August 23, 1999, respectively.
    \9\ See Securities Exchange Act Release No. 49832 (June 8, 
2004), 69 FR 33442 (June 15, 2004) (SR-Phlx-2003-59) (approving Phlx 
XL).
    \10\ See Phlx Rules 722, 1000, 1001, 1009, 1014, 1033, 1034, 
1069, 1079; and Options Floor Procedure Advice B-7.
---------------------------------------------------------------------------

A. Contract Specifications and Amendments to FCO Rules

    Background. U.S. dollar-settled FCOs are cash-settled, European-
style options issued by The Options Clearing Corporation (``OCC'') that 
allow holders to receive U.S. dollars representing the difference 
between the current foreign exchange spot price and the exercise price 
of the option. In contrast, a physical delivery option on a foreign 
currency, which the Exchange currently lists and trades, gives its 
owner the right to receive physical delivery (if it is a call) or to 
make physical delivery (if it is a put) of the underlying foreign 
currency when the option is exercised.\11\ In addition, unlike other 
Phlx-traded FCOs, U.S. dollar-settled FCOs will be deemed to be 
exercised at expiration if the exercise settlement value is at least 
$1.00 per contract unless the clearing member instructs OCC not to 
exercise it.\12\
---------------------------------------------------------------------------

    \11\ The Exchange has listed and traded physical delivery FCOs 
issued by OCC on a number of currencies since 1982. The Exchange's 
existing, physical delivery options on the Currencies would not be 
affected by this proposal and would continue to trade as they do 
today, by open outcry.
    \12\ However, the normal expiration date exercise procedures do 
not apply in circumstances in which the fixing of the exercise 
settlement amount is delayed beyond the last trading day before 
expiration. See OCC Rule 2302 (setting forth the expiration date 
exercise procedures), and Securities Exchange Act Release No. 54395 
(December 13, 2006) (order approving SR-OCC-2006-10).
---------------------------------------------------------------------------

    Delivery and Payment. Upon exercise of an in-the-money U.S. dollar-
settled FCO structured as a call, the holder would receive, from OCC, 
U.S. dollars representing the difference between the exercise strike 
price and the closing settlement value of the U.S. dollar-settled FCO 
contract multiplied by the number of units of currency covered by the 
contract. Similarly, for a U.S. dollar-settled FCO structured as a put, 
the holder would receive U.S. dollars representing the excess of the 
exercise price over the closing settlement value of the U.S. dollar-
settled FCO contract multiplied by the number of units of foreign 
currency covered by the contract.\13\
---------------------------------------------------------------------------

    \13\ See Phlx Rule 1044.
---------------------------------------------------------------------------

    Contract Size. The contract sizes of the U.S. dollar-settled FCO 
contracts on the Currencies would be 10,000 British pounds and 10,000 
Euros.\14\
---------------------------------------------------------------------------

    \14\ The contract sizes for the physical delivery options on the 
Currencies are 31,250 British pounds and 62,500 Euros.
---------------------------------------------------------------------------

    Expirations. The Exchange proposes to permit U.S. dollar-settled 
FCO contracts to be listed with expirations that are the same as the 
expirations permitted for equity index options pursuant to Phlx Rule 
1101A, with the exception of long term option series and quarterly 
expiring FCOs which the Exchange does not propose to list.\15\ The 
Exchange anticipates that, at least initially, it would list 
expirations at one, two, three, six, and nine months, and that the 
options would be on three of the months from the March, June,

[[Page 78507]]

September, December cycle, plus two additional near term months (five 
months at all times).\16\ The expiration date for the consecutive and 
cycle month options would be 11:59 p.m. Eastern Time on the Saturday 
immediately following the third Friday of the expiration month.\17\
---------------------------------------------------------------------------

    \15\ See Phlx Rule 1012(a). The Exchange stated that it does not 
anticipate listing FLEX U.S. dollar-settled foreign currency options 
at this time. Currently, trades may be executed in certain FLEX 
options on equities and equity indexes. See Phlx Rule 1079.
    \16\ By way of example, in September, the U.S. dollar-settled 
FCOs would have the following months listed: October, November, 
December, March, and June.
    \17\ See Phlx Rule 1000(b)(21).
---------------------------------------------------------------------------

    Trading Hours. The Exchange proposes to trade U.S. dollar-settled 
FCOs from 9:30 a.m. to 4 p.m. Eastern Time, Monday through Friday.\18\ 
These trading hours differ from the trading hours for the physical 
delivery FCO contracts because the U.S. dollar-settled FCOs would, 
unlike the Exchange's physical delivery FCOs, trade on Phlx XL.\19\ An 
expiring U.S. dollar-settled FCO contract would cease trading at 4:00 
p.m. on the day prior to its expiration day.\20\ Unlike trading in 
physical delivery FCOs, trading in U.S. dollar-settled FCOs would not 
close on bank holidays.
---------------------------------------------------------------------------

    \18\ See Phlx Rule 101.
    \19\ Trading hours for the Exchange's physical delivery FCO 
contracts are from 2:30 a.m. to 2:30 p.m. Eastern Time, Monday 
through Friday. Beginning December 1, 2006, the trading hours for 
physical delivery FCOs on the Exchange will be from 7:30 a.m. to 
2:30 p.m. Eastern Time, Monday through Friday. See Securities 
Exchange Act Release No. 54802 (November 21, 2006), 71 FR 8875 
(November 28, 2006) (Notice of Filing and Immediate Effectiveness of 
SR-Phlx-2006-72).
    \20\ The Exchange notes that in order to facilitate trading of 
the U.S. dollar-settled FCOs on Phlx XL, trading would be permitted 
to occur after the settlement value is announced on the day prior to 
expiration, as discussed below.
---------------------------------------------------------------------------

    Settlement Values; Dissemination of Information. The closing 
settlement value would be the day's announced Noon Buying Rate,\21\ as 
determined by the Federal Reserve Bank of New York on the trading day 
prior to the expiration date.\22\ If the Noon Buying Rate is not 
announced by 2 p.m. Eastern Time, the closing settlement value would be 
the most recently announced Noon Buying Rate, unless the Exchange 
determines to apply an alternative closing settlement value as a result 
of extraordinary circumstances. The closing settlement value would not 
be disseminated through the Options Price Reporting Authority 
(``OPRA''), but would be posted on the Exchange's Web site, where it 
would be publicly available to all visitors to the Exchange's Web site 
on an equal basis, without the need to enter any kind of password. The 
Exchange has represented that it will not disclose the settlement value 
to any person or group of persons other than employees of the Exchange 
who need to know, prior to posting the value on the Exchange's Web 
site.
---------------------------------------------------------------------------

    \21\ See Securities Exchange Act Release No. 52843 (November 28, 
2005), 70 FR 72486 (December 5, 2005) (order granting accelerated 
approval of SR-NYSE-2005-65).
    \22\ See Phlx Rule 1057. If Friday is an Exchange holiday, the 
closing settlement value for U.S. dollar-settled FCOs would be 
determined on the basis of the Noon Buying Rate on the preceding 
trading day, which would also be the last day of trading for the 
expiring option.
---------------------------------------------------------------------------

    Position and Exercise Limits. For purposes of position and exercise 
limits, positions in U.S. dollar-settled FCO contracts would be 
aggregated with positions in the physical delivery contracts. In 
addition, position and exercise limits for the U.S. dollar-settled FCOs 
would be the same as the position and exercise limits for the physical 
delivery contracts pursuant to Phlx Rules 1001 and 1002. However, each 
Euro U.S. dollar-settled option contract would count as one-sixth of a 
contract for purposes of position and exercise limits.\23\ Similarly, 
each British pound U.S. dollar-settled option contract would count as 
one-third of a contract for purposes of position and exercise 
limits.\24\ The other aggregation principles in Phlx Rule 1001 would 
continue to apply.
---------------------------------------------------------------------------

    \23\ See Phlx Rule 1001. According to the Exchange, each U.S. 
dollar-settled Euro option contract would be treated as one-sixth of 
a contract for position and exercise limit purposes because the 
cash-settled Euro option contract is roughly one-sixth of the size 
of the physical delivery contract.
    \24\ The cash-settled British pound option contract is roughly 
one-third of the size of the physical delivery contract.
---------------------------------------------------------------------------

    Strike Prices. The Exchange proposes to initially list exercise 
strike prices for each expiration around the current spot price at 
half-cent ($.005) intervals up to five percent on each side.\25\ Thus, 
if the spot price initially were at 1.0000, the Exchange would list 
strikes in $.005 intervals up to 1.0500 and down to .9500 for a total 
of twenty-one strike prices available for trading. The Exchange would 
not list any strike prices at intervals other than these $.005 
intervals.\26\ As the spot price for U.S. dollar settled FCO moves, the 
Exchange would list new strike prices that, at the time of listing, do 
not exceed the spot price by more than 5% and are not less than the 
spot price by 5%. For example, if at the time of initial listing the 
spot price of the Euro is at 1.0000, the strike prices the Exchange 
would list would be .9500 to 1.0500. If the spot price then moves to 
1.0500, the Exchange may list additional strikes at the following 
prices: 1.0550 to 1.1000. In that event, the Exchange would delist any 
previously-listed series outside of the current ten percent band that 
have no open interest. In addition, new strikes may be added during the 
life of the option in accordance with Phlx Rule 1012.\27\
---------------------------------------------------------------------------

    \25\ According to the Exchange, the Exchange receives 
contributor bank quotes from a vendor in real-time and takes the 
average of the various quotes, to determine the foreign currency 
spot price.
    \26\ See proposed Commentary Section .06 to Phlx Rule 1012.
    Strike prices would be expressed without reference to the first 
two decimal places. Minimum quoting increments and maximum quote 
spreads would also reflect this convention, as reflected in note 28, 
infra, and accompanying text.
    For example, assuming that the actual spot value of the Euro is 
$1.00, a strike could be listed at $1.0050 and would be expressed as 
$100.50. Similarly, the minimum quoting increment would be $.0005 
(expressed as $.05), if the bid is less than $.0300 (expressed as 
$3.00), or $.0010 (expressed as $.10), if the bid equals or exceeds 
$.0300 (expressed as $3.00). Bids could be made at $.0330 (expressed 
as $3.30), at $.0340 (expressed as $3.40), and so forth. Offers 
could be made at $.0350 (expressed as $3.50), at $.0360 (expressed 
as $ 3.60), and so forth. Maximum quote spread parameters for bids 
and offers made in open outcry would range from $.0025 (expressed as 
$.25), to $.0100 (expressed as $1.00), depending upon the size of 
the prevailing bid. Thus, a market maker could bid $.0330 (expressed 
as $3.30) and offer $.0370 (expressed as $ 3.70). (Following open 
rotation, however, quotes may be made electronically with a 
difference not to exceed $.0500 (expressed as $5.00) between the bid 
and the offer regardless of the price of the bid). See Amendment No. 
3, supra note 6, and infra note 28.
    Prior to commencement of trading of U.S. dollar-settled options 
on the Currencies, the Exchange intends to issue an informational 
memorandum to members and member organizations which explains this 
strike price and quoting convention.
    \27\ See Phlx 1012(a)(iv).
---------------------------------------------------------------------------

    Bids and Offers--Premium. Under Phlx Rule 1033, bids and offers in 
U.S. dollar-settled FCOs on the Currencies must be made in terms of 
U.S. dollars per unit of the underlying foreign currency. The minimum 
increment for U.S. dollar-settled FCOs quoting under $.0300 would be 
$.0005 per unit of the foreign currency, expressed as .05 per unit of 
the foreign currency, which equals a $5.00 minimum increment per 
contract consisting of 10,000 Euros or 10,000 British pounds. The 
minimum increment for U.S. dollar-settled FCOs quoting at $.0300 or 
higher would be $.0010 per unit of the foreign currency, expressed as 
.10 per unit of the foreign currency, which equals a $10.00 minimum 
increment per contract consisting of 10,000 Euros or 10,000 British 
pounds.\28\
---------------------------------------------------------------------------

    \28\ See Phlx Rule 1034(a). By way of example, if the spot price 
of the Euro is at $1.2550 and an investor purchases the December 
Euro $1.2500 (expressed as $125.00) Call at a premium of $.0075 
(expressed as $.75) and then sells the December Euro $1.2500 Call at 
a premium of $.0095 (expressed as $.95), the investor's profit would 
be $.0020 per Euro. The investor's total profit would be $.0020 per 
Euro multiplied by 10,000 Euros (the size of the contract) for a 
total of $20.00. Amendment No. 3 corrected a technical error in the 
use of the quoting convention in Phlx Rule 1034(a). Amendment No. 3 
also revised an example in note 23 of the Notice to: (1) Reflect 
that the minimum increment when the bid equals or exceeds $.0300 
(expressed as $3.00) is $.0010 (expressed as 10 cents), not $.0005 
(expressed as 5 cents), as the example erroneously implied as 
originally drafted, (2) reduce the size of the bid in the example 
from an unrealistic $1.00 (expressed as $100.00) range to a more 
realistic $.0300 (expressed as $3.00) range while continuing to 
illustrate the same underlying concepts, and (3) note that the 
maximum quote spread parameters do vary depending on the size of the 
prevailing bid and whether the bid/offer is made on Phlx XL as 
opposed to open outcry. See Amendment No. 3, supra note 6.

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

[[Page 78508]]

    Margin Requirements. The U.S. dollar-settled FCOs would have the 
same customer margin requirements as are provided for the existing FCOs 
pursuant to Phlx Rule 722, Commentary .16.\29\ The Exchange calculates 
the margin requirements for each foreign currency underlying U.S. 
dollar-settled FCO separately, rather than determining one margin level 
for all foreign currencies based upon the historical pricing 
information for all foreign currencies together. The Exchange informs 
members and the public of the margin levels for each currency option 
immediately following the quarterly reviews described in Phlx Rule 722, 
Commentary .16.
---------------------------------------------------------------------------

    \29\ Pursuant to Phlx Rule 722, Commentary .16, the Exchange 
calculates the margin requirement for customers that assume short 
FCO positions by adding a percentage of the current market value of 
the underlying foreign currency contract to the option premium price 
less an adjustment for the out-of-the-money amount of the option 
contract. On a quarterly calendar basis, the Exchange reviews five-
day price changes over the preceding three-year period for each 
underlying currency and sets the add-on percentage at a level which 
would have covered those price changes at least 97.5% of the time 
(the ``confidence level''). If the results of subsequent reviews 
show that the current margin level provides a confidence level below 
97%, the Exchange increases the margin requirement for that 
individual currency up to a 98% confidence level. If the confidence 
level is between 97% and 97.5%, the margin level would remain the 
same but would be subject to monthly follow-up reviews until the 
confidence level exceeds 97.5% for two consecutive months. If during 
the course of the monthly follow-up reviews, the confidence level 
drops below 97%, the margin level is increased to a 98% level and if 
it exceeds 97.5% for two consecutive months, the currency is taken 
off monthly reviews and is put back on the quarterly review cycle. 
If the currency exceeds 98.5%, the margin level is reduced to a 98% 
confidence level during the most recent three year period. Finally, 
in order to account for large price movements outside the 
established margin level, if the quarterly review shows that the 
currency had a price movement, either positive or negative, greater 
than two times the margin level during the most recent three year 
period, the margin requirement is set at a level to meet a 99% 
confidence level.
---------------------------------------------------------------------------

B. Surveillance

    The Phlx will integrate U.S. dollar-settled FCOs into existing Phlx 
market surveillance programs for equity and index options, as well as 
for physical delivery foreign currency options, and intends to apply 
those same program procedures to the U.S. dollar-settled FCOs. The 
Exchange represents that these surveillance programs for U.S. dollar-
settled FCOs will be adequate to monitor exchange trading of U.S. 
dollar settled FCOs and detect violation of exchange rules, thereby 
deterring manipulation.\30\
---------------------------------------------------------------------------

    \30\ See Amendment No. 3, supra notes 6 and 28.
---------------------------------------------------------------------------

    Futures on the British pound and the Euro, as well as options on 
such futures are traded on the Chicago Mercantile Exchange (``CME'') 
(both exchange pit trading and GLOBEX trading). Euro Currency Trust 
Shares and British Pound Sterling Shares trade on the New York Stock 
Exchange (``NYSE'') and on NYSE Arca. The Exchange represented that, to 
the best of the Exchange's knowledge, these U.S. markets are the 
primary trading markets in the world for exchange-traded futures, 
options on futures and trust shares on these currencies. The Exchange 
also represented that it may obtain trading information via the 
Intermarket Surveillance Group (``ISG'') from other exchanges who are 
members or affiliates of the ISG. Specifically, the Phlx can obtain 
such information from the NYSE and NYSE Arca in connection with shares 
of the Euro Currency Trust and the CurrencySharesTM British 
Pound Sterling Trust trading on the NYSE and NYSE Arca, and from the 
CME and London International Financial Futures Exchange (``LIFFE'') in 
connection with Euro and Pound futures trading on those exchanges.\31\
---------------------------------------------------------------------------

    \31\ NYSE and NYSE Arca are members of ISG. CME and LIFFE are 
affiliate members of ISG.
---------------------------------------------------------------------------

    In addition, the Phlx represented that it is able to obtain 
information regarding trading in the Euro Currency Trust Shares, 
British Pound Sterling Shares, Euro and British Pound options, and Euro 
and British Pound futures and options on futures through Phlx members, 
in connection with such members' proprietary or customer trades which 
they effect on any relevant market.\32\ Pursuant to Phlx Rule 1022, 
specialists and Registered Options Traders (``ROTs'') are required to 
identify all accounts maintained for foreign currency trading in which 
the specialist or ROT engages in trading activity or over which he 
exercises investment discretion, and no specialist or ROT may engage in 
foreign currency trading in any account not reported pursuant to the 
rule. Phlx Rule 1022 also requires every specialist and ROT to make 
available to the Phlx upon request all books, records and other 
information relating to transactions for their own account or accounts 
of associated persons with respect to the foreign currency underlying 
U.S. dollar-settled FCOs, including transactions in the cash market as 
well as the futures, options and options on futures markets. An 
amendment to Phlx Rule 1022(d) would also add transactions in ``other 
foreign currency derivatives'' to the list of currency related 
transactions with respect to which specialists and ROTs must provide 
information to the Exchange.
---------------------------------------------------------------------------

    \32\ See Equity Floor Procedure Advice F-8 and Options Floor 
Procedure F-8, Failure to Comply with an Exchange Inquiry.
---------------------------------------------------------------------------

C. Trading on Phlx XL

    The Exchange proposes that U.S. dollar-settled FCOs trade on Phlx 
XL, the Exchange's electronic trading platform for options. In this 
regard, the Exchange proposes to amend a number of rules that currently 
govern the trading of equity and equity index options that trade as 
``Streaming Quote Options'' on Phlx XL to extend the coverage of those 
rules to U.S. dollar-settled FCOs and to include U.S. dollar-settled 
FCOs as a product that may be traded on Phlx XL as a Streaming Quote 
Option.\33\ Exchange specialists, on-floor market makers known as 
Streaming Quote Traders (``SQTs''),\34\ and remote market makers known 
as Remote Streaming Quote Traders (``RSQTs'') \35\ who stream their 
U.S. dollar-settled FCO quotes to the Exchange would be eligible to 
participate in the directed order flow program. Specialists in U.S. 
dollar-settled FCOs, like specialists in equity and equity index 
options, also would be eligible to participate in the Exchange's 
enhanced specialist participation programs.\36\
---------------------------------------------------------------------------

    \33\ See Phlx Rule 1080.
    \34\ See Phlx Rule 1014(b)(ii)(A).
    \35\ See Phlx Rule 1014(b)(ii)(B).
    \36\ The Exchange currently has several Enhanced Specialist 
Participation programs, embodied in Phlx Rule 1014(g). These 
programs establish specified percentages as the Enhanced Specialist 
Participation, depending on the category of option. Currently, the 
specialist in physical delivery FCOs is not entitled to a 
``specialist enhancement,'' although such a program was once in 
effect.
---------------------------------------------------------------------------

    Obligations and Restrictions. U.S. dollar-settled FCOs would trade 
in the same general manner as equity index options,\37\ which are also 
U.S. dollar-settled products.\38\ In this regard, Phlx Rule 1014 is 
being amended to make

[[Page 78509]]

clear that the obligations and restrictions applicable to specialists 
and ROTs trading equity index options now generally would apply to 
specialists and ROTs in U.S. dollar-settled FCOs.\39\ In addition, 
under the amendments to Phlx Rule 1014, specialists and ROTs in U.S. 
dollar-settled FCOs, like specialists in physical delivery FCOs, would 
be subject to rules relating to bid/ask differentials and other 
affirmative market making obligations and restrictions \40\ but those 
rules with respect to U.S. dollar-settled FCOs would track rules 
currently applicable to equity options, in order to facilitate trading 
on the Phlx XL system by the system's current users who are accustomed 
to the existing bid/ask differentials applicable to equity options.\41\
---------------------------------------------------------------------------

    \37\ However, Phlx Rule 1080, Commentary .01, is being revised 
to reflect that the Auto-Quote system applies to equity and equity 
index options, but not to U.S. dollar-settled FCOs. The Exchange's 
Auto-Quote system incorporates pricing model data, which generate 
automatic pricing of option series based on a number of factors, 
including the value of the underlying stock.
    \38\ See Phlx Rules 1014 and 1080. Conforming changes are being 
made to Options Floor Procedure Advices B-6, Priority of Options 
Orders for Equity Options and Index Options by Account Type, B-7, 
Time Priority of Bids/Offers in Foreign Currency Options, and F-6, 
Option Quote Parameters.
    \39\ However, Phlx Rule 1014(c)(i)(B), which provides for a 
maximum option price change with exceptions based upon the price of 
the underlying security, would not apply to U.S. dollar-settled 
FCOs. The Exchange does not have a maximum option price change rule 
that applies to physical delivery FCOs and is not proposing a 
maximum option price change rule for U.S. dollar-settled FCOs.
    \40\ However, Phlx Rule 1014(c)(i)(B), which provides for a 
maximum option price change with exceptions based upon the price of 
the underlying security, would not apply to U.S. dollar-settled 
FCOs.
    \41\ Other amendments to Phlx Rule 1014 would make clear that 
current provisions on priority/parity and bid/ask differentials that 
apply to FCO contracts would be limited to physical delivery FCOs. 
See paragraphs (c)(ii) and (h), and Commentary .16 of Phlx Rule 
1014. Similarly, options Floor Procedure Advice F-17, relating to 
trades to be effected in the trading pit, is being amended so that 
it applies only to physical delivery FCOs, because U.S. dollar-
settled FCOs will trade on Phlx XL.
---------------------------------------------------------------------------

    In addition, the Exchange proposes to amend Phlx Rule 1063 and 
Options Floor Procedure Advice C-2 to provide that the Floor Broker 
Management System currently employed with respect to equity and equity 
index options would also be required to be used for U.S. dollar-settled 
FCOs.\42\
---------------------------------------------------------------------------

    \42\ The Options Floor Broker Management System is a component 
of AUTOM designed to enable Floor Brokers and/or their employees to 
enter, route and report transactions stemming from options orders 
received on the Exchange. The Options Floor Broker Management System 
also is designed to establish an electronic audit trail for options 
orders represented and executed by Floor Brokers on the Exchange. 
See Phlx Rule 1080, Commentary .06.
---------------------------------------------------------------------------

    Openings. Phlx Rule 1017 governs the Exchange's fully automated 
opening system for options traded on Phlx XL.\43\ Phlx Rule 1017 is 
being amended to reflect that U.S. dollar-settled FCOs would be opened 
using the automated opening system, subject to certain adjustments to 
current processes because FCO openings, unlike openings of equity and 
index options, would not depend upon the opening of trading in an 
underlying cash market.\44\ More specifically, Phlx Rule 1017 would 
provide that Phlx XL would accept orders and quotes in U.S. dollar-
settled FCOs beginning no later than one hour before market opening, 
and that the specialist assigned in the particular U.S. dollar-settled 
FCO must enter opening quotes not later than 30 seconds after market 
opening.\45\ It would provide that in certain circumstances an 
anticipated opening price would be calculated if the quotes of at least 
two Phlx XL participants have been submitted within two minutes of 
market opening (or such shorter time as determined by the FCO Committee 
and disseminated to membership via Exchange circular). Finally, it 
would provide that the system would not open a series of U.S. dollar-
settled FCOs if the opening price is not within an acceptable range (as 
determined by the FCO Committee and announced to Exchange members and 
member organizations by way of Exchange circular).
---------------------------------------------------------------------------

    \43\ For a description of the automated opening system, see 
Securities Exchange Act Release Nos. 52667 (October 25, 2005), 70 FR 
65953 (November 1, 2005) (SR-Phlx-2005-25), and 53242 (February 7, 
2006), 71 FR 7604 (February 13, 2006) (SR-Phlx-2006-11). The 
Exchange also is making a technical change to clarify the 
application of Phlx Rule 1017 to index options by inserting 
reference to ``underlying securities constituting 100% of the index 
value.'' The rule currently refers to the opening of the 
``underlying security,'' which makes sense with respect to equity 
options, but not index options.
    \44\ See Phlx Rule 1017. In addition, the Exchange is making 
conforming changes to Options Floor Procedure Advices A-12 and A-14.
    \45\ Market opening, as with equity and equity index options, is 
normally at 9:30 a.m. Eastern Time.
---------------------------------------------------------------------------

    Block Trades. In addition, the block trade procedures in Phlx Rule 
1016 are limited to physical delivery FCOs. According to the Exchange, 
the block trading rule currently enables market participants to execute 
large-size FCO orders in an orderly fashion at a price that may not be 
the best bid or offer for that particular FCO, but is the best price 
available for executing a block trade in such FCO. To take advantage of 
the block execution procedure, Phlx Rule 1016 requires a floor broker 
with a block order to quote the market in a particular FCO, announce 
that a block quotation for a specified number of contracts over 1,000 
is sought, and ascertain from the trading crowd the best price at which 
the entire order can be executed. The Exchange believes that trading of 
U.S. dollar-settled FCOs on Phlx XL by SQTs and RSQTs who stream quotes 
into the system makes execution of block trades pursuant to the 
procedures required by Phlx Rule 1016 impractical.
    Customized Foreign Currency Options. Phlx Rule 1069 is being 
amended to limit the applicability of the rule to physical delivery 
FCOs so that U.S. dollar-settled FCOs would not be eligible to trade on 
a customized basis.
    Foreign Currency Options Committee. Phlx Rules 1014 and 1080 and 
Options Floor Procedure Advice A-13 is being amended to provide that 
the Foreign Currency Options Committee would have decision-making 
authority in certain instances with respect to U.S. dollar-settled FCOs 
(rather than the Options Committee, which oversees the trading of 
equity and equity index options on Phlx XL). In addition, the Phlx is 
deleting the words ``on-floor'' from the term ``on-floor Governor'' in 
Phlx Rule 1014(g), because the ``on-floor Governor'' category has 
previously been eliminated from the Exchange's by-laws.\46\
---------------------------------------------------------------------------

    \46\ See Amendment No. 3, supra notes 6 and 28.
---------------------------------------------------------------------------

D. Customer Protection

    Exchange rules designed to protect public customers trading in FCOs 
would apply to U.S. dollar-settled FCOs on the Currencies. 
Specifically, Phlx Rule 1024(b) prohibits members from accepting a 
customer order to purchase or write a U.S. dollar-settled FCO unless 
such customer's account has been specially approved in writing by a 
designated Foreign Currency Options Principal of the member for 
transactions in FCOs. Additionally, Phlx Rule 1026 is designed to 
ensure that options, including U.S. dollar-settled FCOs, are sold only 
to customers capable of evaluating and bearing the risks associated 
with trading in the instruments. Finally, under Phlx Rule 1027, members 
are permitted to exercise discretionary power with respect to trading 
U.S. dollar-settled FCOs in a customer's account only if the member has 
received prior written authorization from the customer and the account 
has been accepted in writing by a designated Foreign Currency Options 
Principal. In addition, the Foreign Currency Options Principal or a 
Registered Options Principal must approve and initial each 
discretionary U.S. dollar-settled FCO on the day the order is 
entered.\47\ Phlx Rule 1025 relating to the supervision of accounts, 
Phlx Rule 1028 relating to confirmations, and Phlx Rule 1029 relating 
to delivery of options disclosure documents also would apply to trading 
in U.S. dollar-settled FCOs.
---------------------------------------------------------------------------

    \47\ See Phlx Rule 1027.

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

[[Page 78510]]

III. Commission Finding and Conclusions

    After careful consideration, 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.\48\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\49\ 
which requires that an exchange have rules designed, among other 
things, 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.
---------------------------------------------------------------------------

    \48\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \49\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

A. Settlement Value and Dissemination of Information

    The Commission believes that sufficient venues exist for obtaining 
reliable information on the Currencies so that investors in U.S. 
dollar-settled FCOs can monitor the underlying spot market in the 
Currencies. The Commission also believes that the Phlx's procedures and 
the competitive nature of the spot market for the Currencies should 
help to ensure that the settlement values for U.S. dollar-settled FCO 
contracts will accurately reflect the spot price for foreign 
currencies. Finally, the closing settlement value, which will be the 
Noon Buying Rate on the trading day prior to expiration,\50\ would be 
posted on the Exchange's Web site, where it would be publicly available 
to all visitors on an equal basis, without the need to enter any kind 
of password.
---------------------------------------------------------------------------

    \50\ If the Noon Buying Rate is not announced by 2 p.m. Eastern 
Time, the closing settlement value would be the most recently 
announced Noon Buying Rate, unless the Exchange determines to apply 
an alternative closing settlement value as a result of extraordinary 
circumstances.
---------------------------------------------------------------------------

B. Customer Protection

    The Commission believes that a regulatory system designed to 
protect public customers must be in place before the trading of 
sophisticated financial instruments, such as U.S. dollar-settled FCOs 
on the Currencies, can commence on a national securities exchange. The 
Commission believes this goal has been satisfied by the application of 
Phlx customer protection rules for FCOs to U.S. dollar-settled FCOs.

C. Surveillance

    The Commission notes that the Phlx will integrate U.S. dollar-
settled FCOs into existing Phlx market surveillance market programs for 
equity and index options, as well as for physical delivery foreign 
currency options, and that the Phlx intends to apply those same program 
procedures to the U.S. dollar-settled FCOs. The Commission also notes 
that Phlx Rule 1022, Equity Floor Procedure Advice F-8, and Options 
Floor Procedure F-8, as amended to include transactions in ``other 
foreign currency derivatives,'' provide Phlx with the authority to 
obtain information regarding trading in the Euro Currency Trust Shares, 
British Pound Sterling Shares, Euro and British Pound options, and Euro 
and British Pound futures and options on futures through Phlx members, 
in connection with such members' proprietary or customer trades which 
they effect on any relevant market. In addition, the Phlx may obtain 
trading information via the ISG from other exchanges who are members or 
affiliates of the ISG. Specifically, the Phlx can obtain such 
information from the NYSE and NYSE Arca in connection with shares of 
the Euro Currency Trust and the CurrencySharesTM British 
Pound Sterling Trust trading on the NYSE and NYSE Arca, and from the 
CME and LIFFE in connection with Euro and Pound futures trading on 
those exchanges. The Commission believes that these rules provide the 
Phlx with the tools necessary to adequately surveil trading in the 
Securities.

D. Position and Exercise Limits

    As noted above, U.S. dollar-settled FCO contracts will be 
aggregated with physical delivery contracts for position and exercise 
limit purposes. The Commission believes that aggregation of U.S. 
dollar-settled FCOs with the physical delivery contracts for position 
and exercise limit purposes is prudent and minimizes concerns regarding 
manipulations or disruptions of the markets for U.S. dollar-settled FCO 
contracts and physical delivery contracts.

E. Trading on Phlx XL

    The Commission believes that the trading of U.S. dollar-settled 
FCOs on Phlx XL is consistent with the Act. The rules that currently 
govern the trading of equity and equity index options that trade as 
``Streaming Quote Options'' on Phlx would be extended to include U.S. 
dollar-settled FCOs.\51\
---------------------------------------------------------------------------

    \51\ See supra notes 33 to 42 and accompanying text.
---------------------------------------------------------------------------

F. Other Rules

    The Commission believes that the other rule changes proposed by the 
Phlx to accommodate the trading of U.S. dollar-settled FCOs are 
consistent with the Act. First, the Commission believes it is 
reasonable for the Phlx to initially list exercise strike prices for 
each expiration around the current spot price at half-cent ($0.005) 
intervals up to five percent on each side.\52\ The Commission notes 
that the Phlx has represented that it has the system capacity to 
support the additional quotations and messages that will result from 
listing options on U.S. dollar settled FCOs.\53\
---------------------------------------------------------------------------

    \52\ When listing additional strikes, the Commission expects the 
Exchange to consider whether the listing of such strikes will be 
consistent with the maintenance of a fair and orderly market.
    \53\ See Letter, dated October 11, 2006, from Thomas A. Whitman, 
Senior Vice President, Phlx, to Elizabeth King, Associate Director, 
Division of Market Regulation (``Division''), Commission, Heather 
Seidel, Senior Special Counsel, Division, Commission, and David Hsu, 
Special Counsel, Division, Commission.
---------------------------------------------------------------------------

    Finally, the Commission believes that it is consistent with the Act 
for the Exchange to establish the minimum trading increment for U.S. 
dollar-settled FCOs at $.0005 (expressed as $.05) per unit of the 
foreign currency for U.S. dollar-settled FCOs quoted at less than 
$.0300 (expressed as $3.00), and at $.0010 (expressed as $.10) per unit 
of the foreign currency for U.S. dollar-settled FCOs quoted at $.0300 
(expressed as $3.00) or higher.

G. Accelerated Approval

    Pursuant to Section 19(b)(2) of the Act, the Commission finds good 
cause to approve the proposal, as amended, prior to the thirtieth day 
after the amended proposal is published for comment in the Federal 
Register. Amendment No. 3 clarifies the proposed rule change with 
respect to the Phlx quoting convention, deletes outdated references to 
``on-floor Governor'' in Phlx Rule 1014, and contains Phlx 
representations with regard to the Phlx surveillance procedures. 
Accordingly, the Commission finds good cause to accelerate approval of 
the amended proposal prior to the thirtieth day after publication in 
the Federal Register.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 3, including whether Amendment No. 3 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

[[Page 78511]]

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-2006-34 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2006-34. 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-2006-34 and should be submitted on or before January 19, 2007.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\54\ that the proposed rule change (SR-Phlx-2006-34), as modified 
by Amendments No. 1, 2, and 3, be, and it hereby is, approved on an 
accelerated basis.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\55\
---------------------------------------------------------------------------

    \55\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E6-22404 Filed 12-28-06; 8:45 am]
BILLING CODE 8011-01-P