[Federal Register Volume 62, Number 230 (Monday, December 1, 1997)]
[Notices]
[Pages 63593-63595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31390]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39345; File No. SR-Phlx-97-35]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. To Adopt a Contingency
Market Maker System for Foreign Currency Options
November 21, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 17,
1997,\1\ 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 prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ The Exchange filed Amendment No. 1 to the proposed rule
filing on November 4, 1997, the substance of which is incorporated
into this notice. See letter from Philip H. Becker, Senior Vice
President, General Counsel and Chief Regulatory Officer, Phlx, to
Michael Walinskas, Senior Special Counsel, Market Regulation,
Commission, dated November 4, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Phlx proposes to adopt a contingency plan to trade foreign currency
options (``FCOs'') pursuant to a Market Maker System. The contingency
Market Maker System would provide a modified trading system to ensure
the continuity of FCO trading in the situation where a specialist unit
is not available. In summary, the contingency Market Maker System would
be contained in a new provision, Rule 1014(j), which states that
assigned ROTs will be responsible for making markets and honoring the
minimum guarantee (ten-
[[Page 63594]]
up) rule. Markets will be continuously disseminated and the
responsibility to provide customers with minimum size guarantee markets
pursuant to Rule 1033(a) shall apply. Assigned ROT participant
organizations would be required to be available from the opening of
trading on 50% of the trading days. An Exchange employee, assigned to
be the Quote Monitor, would handle certain specialist-type functions.
In addition, the proposed rule change amends Rule 1047, Commentary .01,
to state that, in accordance with the FCO market maker system, the
Quote Monitor is responsible for conducting trading rotations in the
FCOs utilizing the market maker system. Further, the proposed rule
change amends Rules 1017 and 1019 to clarify that orders would not be
entrusted to a specialist respecting the FCO market maker system.
Finally, the proposed rule change incorporates a disclaimer of
liability into the proposal as proposed paragraph (j)(ii) of Rule 1014.
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 self-regulatory organization
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 blow. The self-regulatory organization
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 Exchange has traded FCOs pursuant to a specialist system since
1982. Earlier this year, due to the resignation of a specialist unit in
that FCO, the Exchange determined to delist options on the European
Currency Unit (``EUC''), only offering such options pursuant to its
customized facility under Rule 1069.\2\ This situation prompted a
review of the specialist system on the FCO trading floor and
recognition that ensuring the continuity of FCO trading where a
specialist cannot be promptly replaced may require a different system.
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\2\ See Securities Exchange Act Release No. 38764 (June 24,
1997), 62 FR 35535 (July 1, 1997) (SR-Phlx-97-26). The proposal at
hand is not intended to replace SR-Phlx-97-26, such that FCOs on the
ECU would continue to be available only on a customized basis,
pursuant to Rule 1069.
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Thus, the purpose of this proposal is to adopt rules and procedures
to govern situations where a specialist resigns from that function and
no replacement specialist unit is immediately available for a
particular FCO. As such, the proposal is a contingency plan, not
intended as a permanent method of trading FCOs. As a contingency plan,
it would be implemented until a specialist unit becomes available or
the Exchange determined to take other action, such as request permanent
approval of the market maker system or delist that FCO. Because the
Phlx Board of Governors has already approved this proposal, the
contingency plan would be implemented upon approval by the FCO
Committee once the contingency occurs, or, depending upon the immediacy
and circumstances, the chairperson of that Committee or their designee.
In crafting this FCO contingency plan, the Exchange considered various
methods of trading options, including the lead and primary market maker
systems of other exchanges. The Exchange determined that such systems
were intended for new products that required incentives for long-term
commitment of time, personnel and capital, and are thus not appropriate
for FCOs. Instead, the Exchange has determined to implement a pure
market maker system. Thus, according to the Exchange, issues of trade
allocation, book allocation or additional capital are not raised by the
proposal, because existing ROTs would be acting as market makers under
the proposal.
Currently, all ROTs on the foreign currency options floor are
considered to be assigned in all FCOs. As such, no minimum number of
ROTs is required for the proposed market maker system. Once the market
maker system is implemented in a given situation, all assigned ROTs
would be required to participate. To further assure adequate market
maker participation, the proposal requires that assigned ROTs'
participant organizations will be subject to an additional requirement
of availability from the opening of trading on 50% of trading days. The
Exchange intends to establish procedures requiring at least one ROT
from each participant organization to be present throughout the trading
day for 50% of the trading days during a specified period, thereby
ensuring a minimum level of ROT presence on every trading day.
Surveillance of this requirement would consist of a sign-in procedure
in the trading crowd, with the Quote Monitor maintaining a log for
Surveillance Department review. Failure to comply with this requirement
would be considered a violation of proposed Rule 1014(j). In addition,
floor brokers will be required to ensure the presence of an ROT in the
trading crowd, pursuant to Rule 1063. Further, ROTs can be called into
the crowd pursuant to Rule 1014 (b) and (c), and failure to honor such
a request may result in disciplinary action.
ROTs will have market making responsibilities to replace certain
specialist functions, such as updating markets and the components to
pricing models. As ten-up markets would remain in effect, if the best
bid/offer is established by someone other than an ROT and is not for at
least ten contracts, participation for the additional contracts needed
to meet the minimum ten contract requirement would be supplied at that
same price by the assigned ROT(s). Thus, the essence of the proposed
Market Maker System is ROT responsibility.
Certain specialist-type functions would be handled by the Quote
Monitor, who would be an Exchange employee. Other options exchanges
utilize exchange employees for similar functions.\3\ The Exchange
believes that the use of a Quote Monitor is appropriate and should
facilitate disseminating firm markets in affected FCOs. The Quote
Monitor would be responsible for establishing, monitoring, and updating
FCO markets under the market maker system. The Quote Monitor would
maintain the Auto-Quote System with input from the assigned ROTs, which
shall automatically update these FCO markets, based on the spot value
of the underlying foreign currency and the pricing model selected by
the assigned ROTs in that FCO, pursuant to a procedure established by
the Exchange. The Quote Monitor would be responsible for regularly
requesting market quotations, as well as updated components to the
relevant pricing model, such as interest rates and volatility levels,
from assigned ROTs. Assigned ROTs would be required to voice markets in
these FCOs in a loud and audible manner and update those markets, as
well as other components relevant to the pricing model. The Quote
Monitor would staff this position during all trading hours. The number
of Quote Monitors will vary depending on the number of FCOs trading
pursuant to the proposed Market Maker System. The Quote Monitor would
also post bids and offers as instructed loudly and audibly by Floor
Brokers. The Floor Broker would be responsible for the posted bid/
[[Page 63595]]
offer until he or she had properly informed the Quote Monitor that it
is withdrawn. The Floor Broker responsibilities applicable to markets
maintained by the Quote Monitor are included in Rule 1063(e).
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\3\ See e.g., CBOE Rule 7.1.
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The implementation of the proposed market maker system would result
in elimination of the specialist or limit order book, as the Quote
Monitor's responsibilities would be directed at monitoring markets but
not holding orders. Currently, FCO specialists maintain a specialist
limit order book. Generally, smaller customer orders are placed on the
book, but the book is not limited to customer orders. Depending upon
the option and the market conditions, an FCO book's content varies.
Orders on the book at the time of the implementation of the market
maker system would be canceled, and could be re-entered for
representation by floor brokers. The Exchange would announce the
required cancellation of such orders by memorandum to FCO
participants.\4\
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\4\ This procedure is similar to the current procedure used for
equity index options when there is a change in contract terms or a
transfer of the book. See Floor Procedure Advice A-6.
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The Exchange has been informed of a decreased use in the book. The
Exchange believes this decreased use is a result of decreased FCO
volume, increased costs and the more institutional nature of FCO
trading. All of these factors were taken into account when determining
to eliminate the book. The Exchange acknowledges that eliminating the
book is a departure from the procedures of other exchanges employing a
market maker system, who generally utilize an exchange employee to
operate the book. Although the Exchange considered this approach, it
was determined that venturing into the business of operating a limit
order book was not appropriate for the Exchange to do on a sudden,
contingency basis in light of both the liability as well as operational
and staffing burdens. The Exchange also cites to the institutional
nature FCO trading, including larger sizes, which diminishes reliance
on the limit order book. Certain FLEX products currently trading on
other exchanges do not offer a limit order book, in view of the
institutional nature of FLEX options. In fact, FCO customized options,
pursuant to Phlx Rule 1069, trade without a specialist or limit order
book. The Exchange believes that this experience, coupled with the need
for quick implementation of the contingency plan in order to provide a
continuous auction market for FCOs, despite the absence of a
specialist, outweighs the benefits of providing a limit order book.
Because the proposal replaces the specialist system with a market
maker system, the Exchange proposes to amend certain other rules to
clarify that a specialist's traditional responsibilities would not
apply under the proposal. For instance, for purposes of Rule 1047,
Trading Rotations, Halts and Suspensions, Commentary .01, new paragraph
(e) would state that, in accordance with the FCO Market Maker System as
defined in Rule 1014(j), the Quote Monitor is responsible for
conducting trading rotations in those foreign currency options
utilizing the Market Maker System. In addition, Rules 1017 and 1019
would clarify that orders would not be entrusted to a specialist
respecting the FCO Market Maker System, as defined in Rule 1014(j).
Because the proposed Quote Monitor functions would involve a new
type of activity by Exchange employees, a disclaimer of liability is
incorporated into the provision as paragraph (j)(ii). Specifically, in
no event shall the Exchange be liable to any person or organization or
to its members, participants, member organizations or participant
organizations (hereinafter referred to collectively as ``members'') or
persons associated therewith for any loss, (including any indirect or
consequential loss), expense, damages or claims arising out of any
errors or omissions in the collection and dissemination of any foreign
currency options quotations by a Quote Monitor.
The Complete text of the proposed rule change is available at the
Commission and at the office of the Exchange.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \5\ in general, and in particular, with Section
6(b)(5),\6\ in that it is designed to promote just and equitable
principles of trade, remove impediments to and perfect the mechanism of
a free and open market, as well as to protect investors and the public
interest, by providing a contingency plan for the trading of FCOs
without an assigned specialist unit.
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\5\ 15 U.S.C. 78f(b).
\6\ 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 will
impose any inappropriate burden on competition.
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 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 self-regulatory organization consents, the Commission will:
(A) By order approve the 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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 Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-Phlx-97-35 and
should be submitted by December 22, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-31390 Filed 11-28-97; 8:45 am]
BILLING CODE 8010-01-M
