[Federal Register Volume 60, Number 5 (Monday, January 9, 1995)]
[Notices]
[Pages 2419-2420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-428]
[[Page 2419]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35177; International Series Release No. 765; File No.
SR-Phlx-94-42]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment Nos. 1 and 2 to the Proposed Rule Change by the Philadelphia
Stock Exchange, Inc., Relating to an Enhanced Parity Split for the
Specialist in the Cash/Spot German Mark Foreign Currency Options
On August 15, 1994, 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 1994 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to provide an enhanced parity
participation (``Enhanced Parity Split'') for the specialist trading
cash/spot German mark (``3D'') foreign currency options (``FCOs'').\3\
Notice of the Proposed rule change appeared in the Federal Register on
October 17, 1994.\4\ No comment letters were received on the proposed
rule change. The Exchange subsequently filed Amendment No. 1 to the
proposal on December 9, 1994,\5\ and Amendment No. 2 on December 23,
1994.\6\ This order approves the Exchange's proposal, as amended.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1992).
\3\3D FCOs are cash-settled, European-style, cash/spot FCO
contracts on the German mark that trade in one-week and two-week
expirations. See Securities Exchange Act Release No. 33732 (March 8,
1994), 59 FR 52337 (March 15, 1994).
\4\See Securities Exchange Act Release No. 34814 (October 7,
1994), 59 FR 52337 (October 17, 1994).
\5\Amendment No. 1 provides that if the 3D FCO specialist is
denied the Enhanced Parity Split provided herein as a result of the
periodic reviews of specialist performance by the Foreign Currency
Option Committee, the specialist will be afforded the ability to
appeal that decision to the Exchange's Board of Governors pursuant
to the procedures in Article XI, Section 11-1 of the Exchange's by-
laws. Amendment No. 1 also amends Rule 509(a) in order to make that
rule consistent with Rule 1014, which was recently amended to expand
the enhanced parity split applicable to equity option specialists to
also include index option specialists. See Letter from Michele
Weisbaum, Associate General Counsel, Phlx, to Brad Ritter, Senior
Counsel, Office of Market Supervision (``OMS''), Division of Market
Regulation (``Division''), Commission, dated December 9, 1994
(``Amendment No. 1'').
\6\In Amendment No. 2, the Exchange proposes to amend the
proposed language in Rule 1014(h), as described herein, to clarify
the manner in which Enhanced Parity Split will be applied. See
Letter from Michele Weisbaum, Associate General Counsel, Phlx, to
Brad Ritter, Senior Counsel, OMS, Division, Commission, dated
December 23, 1994 (``Amendment No. 2'').
---------------------------------------------------------------------------
I. Description of the Proposal
The Exchange proposes to amend Exchange Rule 1014(h) to adopt an
Enhanced Parity Split for the 3D FCO specialist. Specifically, the 3D
FCO specialist will be entitled to receive 50% of the first 500
contracts in any trade in which the 3d FCO specialist and one or more
crowd participants are on parity, as defined in Exchange Rule 1014(h),
with the remaining 250 contracts allocated on a pro rata basis to the
other crowd participants on parity. All contracts in excess of 500 will
be allocated on a pro rata basis among the specialist and the other
crowd participants on parity.\7\
\7\Id.
---------------------------------------------------------------------------
The Exchange represents that customers with orders for less than
100 contracts will not be disadvantaged by this proposal. Specifically,
Rule 1014(h)(i) provides that all bids/offers of customer accounts for
under 100 contracts have time priority over non-customer accounts and,
therefore, the Enhanced Parity Split will not apply to customer bids/
offers for fewer than 100 contracts.\8\
\8\Phlx Rule 1014(h) does not confer time priority on customer
orders (as compared to non-customer orders) for 100 or more FCO
contracts. Consistent with this, the 3D FCO specialist will be
entitled to receive the full Enhanced Parity Split on parity trades
with customer orders for 100 or more FCO contracts. Telephone
conversation between Michele Weisbaum, Associate General Counsel,
Phlx, and Brad Ritter, Senior Counsel, OMS, Division, Commission, on
December 8, 1994.
---------------------------------------------------------------------------
The purpose of the proposed Enhanced Parity Split, according to the
Phlx, is to encourage the 3D FCO specialist to make deeper markets in
order to attract order flow to the Exchange. At the end of the first
year, the Foreign Currency Option Committee (``Committee'') will
conduct a review of the performance of the 3D FCO specialist and
additional reviews will be conducted by the Committee every six months
thereafter. If the Committee elects to terminate the Enhanced Parity
Split for the 3D FCO specialist as result of one of these regular
reviews, the specialist will be afforded the ability to appeal that
decision to the Board of Governors of the Exchange pursuant to the
procedures in Article XI, Section 11-1 of the Exchange's by-laws.\9\
\9\See Amendment No. 1, supra note 5.
---------------------------------------------------------------------------
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5)\10\ in that the
proposal is designed to promote just and equitable principles of trade,
to prevent fraudulent and manipulative acts and practices, and to
protect investors and the public interest. Specifically, the Commission
finds that the proposal may serve to remove impediments to and perfect
the mechanism of a free and open market by encouraging the 3D FCO
specialist to maintain tight markets in order to attract order flow to
the Exchange. Further, the proposed rule change provides that the
Enhanced Parity Split will not disadvantage customer orders for fewer
than 100 contracts that are on parity with the 3d FCO specialist.\11\
\10\15 U.S.C. 78f(b)(5Z) (1988).
\11\See supra note 8.
---------------------------------------------------------------------------
The Commission notes that several Exchange proposals implementing
enhanced parity splits for equity and index option specialist have
recently been approved by the Commission.\12\ As discussed in
connection with those approval orders, specialists, including the 3D
FCO specialist, have responsibilities that other crowd participants do
not share, such as the staff costs associated with continually updating
and disseminating quotes.\13\ As a result, the Commission believes it
is reasonable for the Exchange to grant certain advantages to
specialists, such as the Enhanced Parity Split proposed herein, in
order to attract and retain well capitalized specialists at the
Exchange. As a result, as long as these advantages do not unreasonably
restrain competition and do not harm investors, the Commission believes
that the granting of such benefits to specialists, in general, is
within the business judgment of the Exchange. Therefore, even though
the proposed rule change could arguably have some negative impact on
other crowd participants, other than customers with orders for less
than 100 contracts, for the reasons stated above, the Commission
believes the proposal is consistent with the Act.
\12\See Securities Exchange Act Release Nos. 34109 (May 25,
1994), 59 FR 28570 (June 2, 1994) (providing an enhanced parity
split for new equity option specialist units trading newly listed
option classes) (``Exchange Act Release No. 34109''), 34606 (August
26, 1994), 59 FR 45741 (September 2, 1994) (providing an enhanced
parity split applying to equity option specialists, other than new
specialist units, for certain assigned option classes), and 35028
(November 30, 1994), 59 FR 63151 (December 7, 1994) (expanding the
enhanced parity split in the foregoing orders to include index
option specialists as well as equity option specialists) (``Exchange
Act Release No. 35028'').
\13\See Exchange Act Release No. 34109, supra note 12.
---------------------------------------------------------------------------
Furthermore, the Commission believes that: (1) The review
procedures proposed by the Exchange, as discussed above, adequately
ensure that the 3D FCO specialist will receive the benefit of the
Enhanced Parity Split only if the specialist satisfies its obligations
and responsibilities pursuant to Exchange rules; and (2) in cases where
the 3D FCO specialist is found to no longer be [[Page 2420]] eligible
for the Enhanced Parity Split, the appeals procedures proposed by the
Exchange adequately protect the due process rights of the specialist.
The Commission believes that these criteria balance the competing
interests of the Exchange and the 3D FCO specialist by ensuring regular
review of specialist performance and that the specialist's due process
rights are protected in cases where the Committee makes a determination
that the Enhanced Parity Split should be denied.
Finally, the Commission notes that even though the Enhanced Parity
Split will have a negative impact, in certain circumstances,\14\ on
customer orders for more than 100 contracts, the Commission believes
that this does not raise significant regulatory concerns in the context
of the 3D FCO market. The FCO market, in general, is dominated by
institutions and sophisticated corporate investors who typically trade
in large numbers of FCO contracts, i.e., 100 contracts or more at a
time. The Commission believes that non-institutional investors who
participate in the FCO market generally enter into transactions for far
fewer contracts. The Exchange's rules, as approved by the Commission,
already acknowledge this distinction by affording time priority for
trades that would otherwise be on parity only for customer orders for
fewer than 100 contracts.\15\ As a result, because the negative impact
of the rule on customers will be limited substantially to institutions
and sophisticated corporate FCO investors trading 3D FCOs, the
Commission believes that the benefits of the proposal discussed above
outweigh the negative impact of the rule change on this class of FCO
customers.
\14\The Enhanced Parity Split will have a negative impact on
customer orders for 100 or more contracts only where the customer is
on parity with the 3D FCO specialist and one or more other crowd
participants. In cases where only a customer and the 3D FCO
specialist are on parity, the Enhanced Parity Split will have no
effect. See Amendment No. 2, supra note 6.
\15\See Phlx Rule 1014 (h) (i).
---------------------------------------------------------------------------
The Commission finds good cause for approving Amendment Nos. 1 and
2 to the proposed rule change prior to the thirtieth day after the date
of publication of notice of filing thereof in the Federal Register in
order to allow the 3D FCO specialist to begin receiving the benefits of
the Enhanced Parity Split without delay. The Commission notes that the
appeal procedures provided in Amendment No. 1 are consistent with those
available to equity and index option specialists who are denied the
enhanced parity participation available to those specialists pursuant
to prior Commission approval orders.\16\ Further, the Commission finds
that the proposal in Amendment No. 1 to Rule 503 merely makes this rule
consistent with Rule 1014 and therefore does not raise any regulatory
issues that were not addressed when Rule 1014 was amended.\17\ Finally,
Amendment No. 2 merely clarifies the manner in which the Enhanced
Parity Split will be applied. Accordingly, the Commission believes that
Amendment No. 2 should serve to minimize the potential for confusion
regarding the application of the proposed rule change.
\16\See supra note 12. The Commission notes that equity and
index options traded at the Exchange are assigned to specialists by
the Exchange's Allocation Committee and that the Exchange's by-laws
provide specific procedures regarding appeals of decisions by the
Allocation Committee. See Phlx By-laws, Article XI, Section 11-1(c).
Under this proposal, however, the FCO Committee will be making the
determination to deny the Enhanced Parity Split to the 3D FCO
specialist. As a result, the appeals process pursuant to this
proposal will vary, procedurally, from that available to equity and
index option specialists who are denied the enhanced parity splits
available to those specialists. See Phlx By-laws, Article XI,
Section 11-1(a). Telephone conversation between Michele Weisbaum,
Associate General Counsel, Phlx, and Brad Ritter, Senior Counsel,
OMS, Division, Commission, on December 8, 1994. Despite the
procedural differences, the Commission believes that the appeal
rights available to the 3D FCO specialist, as proposed herein,
provide adequate due process protection to the 3D FCO specialist.
\17\See Exchange Act Release No. 35028, supra note 12.
---------------------------------------------------------------------------
Based on the foregoing, the Commission believes it is consistent
with Section 6(b)(5) of the Act to approve Amendment Nos. 1 and 2 to
the Phlx's proposal on an accelerated basis.
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 1 and 2. Persons making written
submissions should fix six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
file 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 Section, 450 Fifth Street,
NW., Washington, DC. Copies of such filing will also be available for
inspection and copying at the principal office of the Phlx. All
submissions should refer to the File No. SR-Phlx-94-42 and should be
submitted by January 30, 1995.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-Phlx-94-42), as amended, is
hereby approved.
\18\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
\19\17 CFR 200.30-3(a)(12) (1993).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-428 Filed 1-6-95; 8:45 am]
BILLING CODE 8010-01-M