[Federal Register Volume 61, Number 178 (Thursday, September 12, 1996)]
[Notices]
[Pages 48198-48200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23313]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37635; File No. SR-Phlx-96-19]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval to Amendment No. 1 to Proposed Rule Change by the
Philadelphia Stock Exchange, Inc., To Establish a Firm Facilitation
Exemption
September 4, 1996.
I. Introduction
On June 3, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to establish a firm facilitation exemption \3\ for
all non-multiply-listed Exchange options by adding new Commentary .08
to Exchange Rule 1001 and new Commentary .02 to Exchange Rule 1001A.
The exemption would be available to equity and index options, including
customized options.\4\
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
\3\ The Commission notes that a facilitation trade is defined as
a transaction that involves crossing an order of a member firm's
public customer with an order for the member firm's proprietary
account.
\4\ See Securities Exchange Act Release No. 37048 (March 29,
1996), 61 FR 15549 (April 8, 1996) (File No. SR-Phlx-96-08).
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The proposed rule change appeared in the Federal Register on July
10, 1996.\5\ No comments were received on the proposed rule change. The
Phlx subsequently filed Amendment No. 1 to the proposed rule change on
July 26, 1996.\6\ This order approves the Phlx's proposal.
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\5\ See Securities Exchange Act Release No. 37398 (July 2,
1996), 61 FR 36410 (July 10, 1996).
\6\ In Amendment No.1, the Phlx amended its proposed rule filing
to: (1) require that a member organization submit to the Exchange's
Market Surveillance Department appropriate forms substantiating the
basis for the exemption within two business days or the time
specified by the Exchange when approval is granted on the basis of
verbal representations; (2) clarify that the proposal does not apply
to multiply-listed options; (3) add language prohibiting the use of
the exemption with respect to ``all or none'' or ``fill or kill''
orders; and (4) state that violations of the exemptive requirements,
absent reasonable justification or excuse, shall result, in addition
to any disciplinary action, in the withdrawal of the exemption, and
may form the basis for subsequent denial of an application for an
exemption under this rule. See letter from Gerald D. O'Connell,
Senior Vice President, Market Regulation and Trading Operations,
Phlx, to Matthew Morris, Office of Market Supervision, Division of
Market Regulation, Commission, dated July 26, 1996 (``Amendment No.
1'').
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II. Background and Description
The Phlx is proposing to establish a firm facilitation exemption
for all non-multiply-listed Exchange options. Under the proposal, the
procedures in Exchange Rule 1064(b) for crossing a customer order with
a firm facilitation order must be followed. Moreover, only after all
market participants in the trading crowd have been given a reasonable
opportunity to accept the terms, may the representing Floor Broker
cross all or any remaining part of such order in accordance with the
rule. According to the Phlx, the purpose of this procedure is to ensure
that the trading crowd cannot first facilitate the order before
resorting to a position limit exemption for the facilitating firm.
Thus, only after it is determined that the trading crowd will not fill
the order may the firm's customer order be crossed with the firm's
facilitation order pursuant to the exemption.
The Phlx notes that the firm facilitation provision will be in
addition to and separate from the standard limit, as well as other
exemptions available under Exchange position limit rules. For example,
if a member organization decides to facilitate customer orders in
[[Page 48199]]
ABC options, which is assumed not to be multiply-listed and also
assumed to have a 10,500 contract standard position limit, the member
organization may qualify for a firm facilitation exemption of up to
twice that limit (21,000 contracts), as well as an equity hedge
exemption of up to twice the standard limit (21,000 contracts), in
addition to the 10,500 contract standard limit. If both exemptions are
allowed, the facilitation firm may hold or control a combined position
of up to 52,500 ABC contracts on the same-side of the market.\7\
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\7\ In addition, exercise limits will continue to correspond to
position limits, such that investors may exercise the number of
contracts set forth as the position limit as well as those contracts
exempted by this proposal, during five consecutive business days.
See Exchange Rules 1002 and 1002A.
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The Phlx notes, however, that the firm facilitation exemption would
not presently extend to all options listed on the Exchange. Rather,
until coordinated intermarket procedures are developed, the firm
facilitation exemption will be extended only to non-multiply-listed
options.
Under the proposal, the facilitation exemption requires prior
approval from two Floor Officials and submission of a Firm Facilitation
Form.\8\ Although approval may be granted on the basis of verbal
representation, the facilitation firm is required to furnish to the
Market Surveillance Department, within two business days or such other
time period designated by the Exchange, appropriate forms
substantiating the basis for the exemption.\9\
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\8\ According to the Phlx, the purpose of the Firm Facilitation
Form is to detail the terms of the customer order and the resulting
facilitation, as well as to ensure compliance with the exemption. In
addition, pursuant to the existing requirements of Exchange Rule
1064(b), facilitation orders must be marked with an ``F'' prior to
executing facilitating trades. Lastly, Firm Facilitation Forms will
be made available at the Exchange's Surveillance Post.
\9\ The Exchange also notes that the facilitation firm need not
have the customer order in hand when requesting the exemption, as
long as the exemption is properly used to facilitate a customer
order pursuant to the rule. Because the provision states the
position ``will facilitate'' a customer order, a firm approaching
the limit may request an exemption prior to receiving an order, in
response to customer interest.
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Within five business days after the execution of a facilitation
exemption order, a facilitation firm must hedge all exempt option
positions that have not previously been liquidated, and furnished to
the Market Surveillance Department documentation reflecting the
resulting hedged positions. In meeting this requirement, and to ensure
fair and orderly markets, the facilitation firm must establish and
liquidate its own as well as its customer's option and stock positions
(or their equivalent) in an orderly fashion, and not in a manner
calculated to cause unreasonable price fluctuations or unwarranted
price changes.
In addition, a facilitation firm is not permitted to use the
facilitation exemption with a view toward taking advantage of any
differential in the price between a group of securities and an
overlying stock index option. According to the Phlx, this prohibition
against index arbitrage should prevent undue market impact on the
options or any underlying stock positions by preventing the increased
positions from being used in a leveraged manner. Moreover, to
facilitate surveillance and to ensure an accurate audit trail, the
facilitation firm is required to promptly provide to the Exchange any
information or documents requested concerning the exempted and hedged
positions, to furnish copies of the relevant order tickets to the
Market Surveillance Department on the day of execution, and to notify
the Exchange of any material change in the exempted options position or
the hedge.
The Exchange is also proposing several minor changes to its rules.
First, the introductory paragraph to Exchange Rule 1001 is to be
amended to list the 20,000 and 25,000 contract position limit tiers,
which were inadvertently omitted when Commentary .05(a) was amended to
adopt these limits.\10\ Second, Exchange Rule 1064(b) is to be amended
to eliminate the incorrect limitation to ``equity'' options, as this
provision applies to index options as well. Third, the equity option
hedge exemption contained in Commentary .07 to Exchange Rule 1001 is to
be amended to state that the exemption is available up to ``two times
above'' existing limits, as opposed to ``three times'' the limits, as
currently stated. The maximum size of the exemption is not being
changed, just rephrased in terms of the excess number of contracts
above the applicable position limit. In this manner, the provision will
be consistent with the index option hedge exemption of the Phlx as well
as other exchanges.\11\ Fourth, the equity option hedge exemption is to
be amended to state that it is separate from any other exemption
available under Exchange rules.
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\10\ See Securities Exchange Act Release No. 36409 (October 23,
1995), 60 FR 55399 (October 31, 1995) (File No. SR-Phlx-95-71).
\11\ See Phlx Rule 1001A, Commentary .01. See also CBOE Rule
4.11, Interpretations and Policies .04(b).
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III. Discussion
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, with the requirements of Section 6(b)(5).\12\ Specifically,
the Commission believes that the Phlx's proposal is reasonably designed
to accommodate the needs of investors and other market participants
without substantially increasing concerns regarding the potential for
manipulation and other trading abuses. The Commission also believes
that the proposed rule change has the potential to enhance the depth
and liquidity of the options market by providing Exchange members
greater flexibility in executing large customer orders. Accordingly, as
discussed below, the Commission believes that the rule proposal is
consistent with the requirements of Section 6(b)(5) that exchange rules
facilitate transactions in securities while continuing to further
investor protection and the public interest.
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\12\ 15 U.S.C. 78f(b)(5) (1988).
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The Phlx proposal contains several safeguards that will serve to
minimize any potential disruption or manipulation concerns. First, the
facilitation firm must receive approval from the Exchange prior to
executing facilitation trades. Although Exchange approval maybe granted
on the basis of verbal representations, the Commission believes that
trading abuses are unlikely because the facilitation firm is required
to furnish to the Exchange's Market Surveillance Department, within two
business days or such other time period designated by the Exchange,
forms and documentation substantiating the basis for the exemption.
Second, a facilitation firm must, within five business days after
the execution of a facilitation exemption order, hedge all exempt
options positions that have not previously been liquidated, and furnish
to the Exchange's Market Surveillance Department documentation
reflecting the resulting hedging positions. In meeting this
requirement, the facilitation firm must liquidate and establish its
customer's and its own options and stock positions (or their
equivalent) in an orderly fashion, and not in a manner calculated to
cause unreasonable price fluctuations or unwarranted price changes. In
addition, a facilitation firm is not permitted to use the facilitation
exemption for the purpose of engaging in index arbitrage.
[[Page 48200]]
The Commission believes that these requirements will help to ensure
that the facilitation exemption will not have an undue market impact on
the options or any underlying stock positions.
Third, the facilitation firm is required to promptly provide to the
Exchange any information or documents requested concerning the exempted
options positions and the positions hedging them, as well as to
promptly notify the Exchange of any material change in the exempted
options positions or the hedge.
Fourth, neither the member's nor the customer's order may be
contingent on ``all or none'' or ``fill or kill'' instructions, and the
orders may not be executed until the procedures in Exchange Rule
1064(b) have been satisfied and crowd members have been given a
reasonable time to participate in the trade.
Fifth, in no event may the aggregate exempted position exceed two
times the applicable standard limit, in addition to the standard
position limit.\13\
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\13\ The Commission notes, however, that the firm facilitation
exemption is in addition to any other exemption available under the
Exchange's rules.
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Sixth, the facilitation firm may not increase the exempted options
position once it is liquidated, unless approval from the Exchange is
again received pursuant to a reapplication.
In summary, the Commission believes that the safeguards built into
the facilitation exemption process discussed above should serve to
minimize the potential for disruption and manipulation, while at the
same time benefiting market participants by allowing member firms
greater flexibility to facilitate large customer orders. This structure
substantially mirrors the firm facilitation exemption processes that
were recently approved for other option exchanges.\14\ Accordingly, the
Commission believes it is appropriate to extend the benefits of a firm
facilitation exemption to non-multiply-listed Phlx options.
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\14\ See Securities Exchange Act Release Nos. 36964 (March 13,
1996), 61 FR 11453 (March 20, 1996) (File No. SR-CBOE-95-68); 37178
(May 8, 1996), 61 FR 24523 (May 15, 1996) (File No. SR-PSE-96-10);
37179 (May 8, 1996), 61 FR 24520 (May 15, 1996) (File No. SR-Amex-
96-11).
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In addition, because the other minor rule changes that the Exchange
is proposing will make the Phlx's rules clearer and are non-substantive
in nature, the Commission believes that they are consistent with
Section 6(b)(5) of the Act.
The Commission finds good cause to approve Amendment No. 1 to the
proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register.
Specifically, Amendment No. 1 conforms the Exchange's firm facilitation
exemption to the relief recently approved for the other options
exchanges. Accelerated approval of the proposed rule change will
thereby provide for the desired uniformity of the exchanges' position
limit exemptions. Any other course of action could lead to unnecessary
investor confusion. In addition, the Chicago Board Options Exchange's
proposal was noticed for the entire twenty-one day comment period and
generated no responses.\15\ Accordingly, the Commission believes that
it is consistent with Sections 6(b)(5) and 19(b)(2) of the Act to
approve Amendment No. 1 to the proposed rule change on an accelerated
basis.
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\15\ Id.
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Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1 to the rule proposal. Persons
making written submissions should file 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 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 at the Commission's Public
Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies
of such filing also will be available for inspection and copying at the
principal office of the Phlx. All submissions should refer to File No.
SR-Phlx-96-19 and should be submitted by October 3, 1996.
IV. Conclusion
For the foregoing reasons, the Commission finds that the Phlx's
proposal to establish a firm facilitation exemption, as well as the
other non-substantive changes to the Phlx's rules, are consistent with
the requirements of the Act and the rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) \16\ of the
Act, that the proposed rule change (File No. SR-Phlx-96-19), as
amended, is hereby approved.
\16\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23313 Filed 9-11-96; 8:45 am]
BILLING CODE 8010-01-M