[Federal Register Volume 73, Number 130 (Monday, July 7, 2008)]
[Notices]
[Pages 38487-38489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-15198]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58045; File No. SR-Phlx-2007-33]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change, as Modified by Amendment Nos. 
1 Thereto and 2, Relating to Margining

June 26, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 \2\ thereunder, notice 
is hereby given that on April 5, 2007, 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. On July 31, 2007, Phlx filed Amendment No. 1 to the 
proposed rule change. On May 19, 2008, Phlx filed Amendment No. 2 to 
the proposed rule change.\3\ 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    \3\ Amendment No. 2 replaced and superseded the original filing 
and Amendment No. 1 in their entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend its rules to streamline and make more 
efficient its margin rules and procedures by: (1) Adding a new section 
to Rule 721 (Proper and Adequate Margin) requiring

[[Page 38488]]

each member to indicate in writing to the Exchange that such member 
shall be bound by the initial and maintenance margin requirements of 
either the Chicago Board Options Exchange (``CBOE'') or New York Stock 
Exchange (``NYSE''); and (2) eliminating Rules 724 (Guaranteed 
Accounts) and 725 (Daily Record of Required Margin). The Exchange also 
proposes to significantly shorten Rules 723 (Day Trading and 
Prohibition on Free-Riding in Cash Accounts) and 722 (Margin Accounts) 
to eliminate redundant language while retaining those margin 
requirements that are unique to current Exchange margin rules.
    The text of the proposed rule change is available on the Exchange's 
Web site at Phlx's principal office, the Commission's public reference 
room, and http://www.phlx.com.

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 IV 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 purpose of the proposed rule change is to streamline Phlx 
margin rules by requiring member organizations to elect in writing that 
they shall follow the margin rules of CBOE or NYSE, which should 
eliminate unnecessary or duplicative margin requirements. At the same 
time, the Exchange proposes to retain those margin provisions that are 
unique to current Exchange margin rules, particularly those pertaining 
to foreign currency options, which only trade on Phlx. The proposal 
will also make portfolio margining available to Exchange members.\4\
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    \4\ The Exchange believes that the portfolio margin rules noted 
herein most likely will be used by Phlx clearing firm members for 
which the Exchange is not the designated examining authority (DEA). 
The Phlx does not, at this time, intend to approve member firms for 
which it is the DEA to engage in portfolio margining.
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    The Exchange's current margin requirements are embodied in its 
Rules 721 through 725, with the bulk of them in Rule 722. The proposal 
would require member organizations to elect, via written notice to the 
Exchange, to use and follow the margin rules of either CBOE or NYSE as 
they are in effect from time to time (known as the ``elected margin 
rules''). This would allow the Exchange to drastically reduce the 
length of Rule 722 while retaining those margin concepts that are not 
covered by the elected margin rules, such as Miscellaneous Securities 
options,\5\ currency pairs, and free-riding. Rule 722 as amended would 
specifically require that once an Exchange member organization elects 
to follow the margin rules of either CBOE or NYSE, it shall be bound to 
comply with such elected margin rules, as applicable, as though they 
were part of the Exchange's margin rules.
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    \5\ Miscellaneous Securities include cross rate currencies and 
cash index participations as defined in proposed Rule 722.
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    The election of appropriate margin rules enables the Exchange to 
eliminate Rules 724 and 725 because the topics of those rules--
guaranteed accounts and daily record of required margin, respectively--
are covered in the elected margin rules and retention of 724 and 725 
would therefore be duplicative.\6\ The Exchange likewise proposes to 
shorten Rule 723 by retaining the unique prohibition on free-riding 
while eliminating the duplicative day-trading margin language. The 
language proposed to be deleted duplicates similar provisions in CBOE 
Rule 12.3 and NYSE Rule 431.
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    \6\ See CBOE Rules 12.4 and 12.12, and NYSE Rules 431 and 432. 
With the creation of the Financial Industry Regulatory Authority 
(``FINRA'') through the consolidation of NASD and the member 
regulation, enforcement and arbitration operations of the NYSE, NYSE 
Rules 431 and 432 are now part of the FINRA rulebook which currently 
consists of both NASD Rules and certain NYSE Rules that FINRA has 
incorporated (Incorporated NYSE Rules). See http://www.finra.org/RulesRegulation/FINRARules/index.htm.
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    The elected margin rules contain the portfolio margin pilot 
programs that were initiated by CBOE and NYSE in 2005 and are currently 
codified in their margin rules (the ``Pilots'').\7\ As stated above, 
the Exchange believes that the portfolio margin rules noted herein most 
likely will be used by Phlx clearing firm members for which the 
Exchange is not the designated examining authority (``DEA'').
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    \7\ See Exchange Act Release Nos. 52032 (July 14, 2005), 70 FR 
42118 (July 21, 2005) (SR-CBOE-2002-03); and 52031 (July 14, 2005), 
70 FR 42130 (July 21, 2005) (SR-NYSE-2002-19). The Exchange notes 
that the OCC has amended its rules and by-laws to accommodate the 
Pilots. See, e.g., Exchange Act Release No. 52030 (July 14, 2005), 
70 FR 42405 (July 22, 2005) (SR-OCC-2003-04) (establishes new OCC 
``customers' lien account'' for customers of clearing members that 
are margined on a portfolio risk basis or pursuant to a cross-
margining arrangement in accordance with exchange rules). See also 
infra note 8.
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    Whereas current Phlx Rule 722 requires that margin must be 
calculated using fixed percentages, on a position-by-position basis, 
the Pilots permit a broker-dealer to calculate customer margin 
requirements by grouping all eligible products in an account(s) based 
on the same index or issuer into a single portfolio. Products eligible 
for margining according to the portfolio margining methodology of the 
Pilots include listed, broad-based, and market index options, index 
warrants, futures, futures options and related exchange-traded funds. 
The Pilots were subsequently extended and modified by expanding the 
scope of products eligible for portfolio margining to include margin 
equity securities, unlisted derivatives, listed options and securities 
futures.\8\
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    \8\ See Exchange Act Release Nos. 56107 (July 19, 2007), 72 FR 
41377 (July 27, 2007) (SR-NYSE-2007-56); 56109 (July 19, 2007), 72 
FR 41365 (July 27, 2007) (SR-CBOE-2007-75); and 56108 (July 19, 
2007), 72 FR 41375 (July 27, 2007) (SR-NASD-2007-045) (orders 
extending the Pilots until July 31, 2008). See also Exchange Act 
Release No. 54918 (December 12, 2006), 71 FR 75790 (December 18, 
2006) (SR-NYSE-2006-13); Exchange Act Release No. 54919 (December 
12, 2006), 71 FR 75781 (December 18, 2006) (SR-CBOE 2006-14); and 
Exchange Act Release No. 54125 (July 11, 2006), 71 FR 40766 (July 
18, 2006) (SR-NYSE-2005-93) (orders expanding the scope of products 
eligible for portfolio margining). The Exchange could have adopted 
the Pilots and relevant updates piecemeal but instead has determined 
to incorporate them by adopting the margin rules of CBOE and NYSE as 
described herein.
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    This proposal to incorporate CBOE or NYSE margin rules is similar 
to the approach used by the International Securities Exchange (``ISE'') 
and the Boston Options Exchange (``BOX'') requiring their members to 
elect and follow CBOE or NYSE margin rules and incorporating such rules 
by reference into their own rules.\9\ The Exchange believes that the 
proposal to have its members elect appropriate CBOE or NYSE margin 
rules, in conjunction with retaining the needed portions of the 
Exchange's current margin rules, should enable it to maximize and 
maintain its competitive position among options exchanges to the 
benefit of investors.
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    \9\ See Exchange Act Release Nos. 48355 (August 22, 2003), 68 FR 
50813 (August 22, 2003) (SR-BSE-2002-15); and 49260 (February 14, 
2004), 69 FR 8500 (February 24, 2004) (approval, among other things, 
of ISE rule incorporating CBOE and NYSE margin rules). The Exchange 
has, under separate cover, submitted a letter seeking an exemption 
under Section 36 of the Act from the rule filing procedures of 
Section 19(b) of the Act with respect to changes to the proposed 
incorporated CBOE and NYSE margin rules going forward. See generally 
Exchange Act Release No. 49260.

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[[Page 38489]]

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \10\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \11\ in particular, in that it is designed 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, by streamlining its margin rules commensurate with industry 
practice.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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, as 
amended, will impose any burden on competition 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

    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 Exchange 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-2007-33 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2007-33. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. 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-2007-33 and should be 
submitted on or before July 28, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-15198 Filed 7-3-08; 8:45 am]
BILLING CODE 8010-01-P