[Federal Register Volume 60, Number 96 (Thursday, May 18, 1995)]
[Notices]
[Pages 26754-26756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12259]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35710; File No. SR-Phlx-95-14]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 of Proposed Rule Change by the Philadelphia
Stock Exchange, Inc., Relating to Extension of Market Marker Margin
Treatment to Certain Market Marker Orders Entered From Off the Trading
Floor
May 12, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 1, 1995, 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 Exchange. The
Exchange subsequently filed Amendment No. 1 on April 3, 1995.\3\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange proposes to require Phlx
ROTs to execute at least 75% of their quarterly trades in-assigned
options for purposes of receiving market maker margin treatment for
off-floor orders. The Exchange originally proposed to require an ROT
to trade at least 50% of his quarterly contract volume in-assigned
options. In addition, Amendment No. 1 states that Phlx proposes to
delete the fine schedules under the minor rule plan originally
proposed to address violations of the heightened trading
requirements, because violations of this program are to be reviewed
directly by the Business Conduct Committee and are not to be treated
as minor rule plan violations. Finally, Phlx proposes to clarify
that the phrase ``may exempt one or more classes of options from
this calculation'' in Commentary .01 to Phlx Rule 1014, is intended
to mean that certain options may not be eligible for off-floor
market maker treatment, consistent with the approved provisions of
the other exchanges. See Letter from Gerald O'Connell, First Vice
President, Phlx, to Michael Walinskas, Branch Chief, Office of
Market Supervision (``OMS``), Division of Market Regulation
(``Market Regulation''), Commission , dated March 29, 1995
(``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange, pursuant to Rule 19b-4 of the Act, proposes to amend
Phlx Rule 1014, Commentary .01, to extend market maker margin treatment
to opening orders entered by Phlx Registered Options Traders (``ROTs'')
from off the Exchange floor, provided that the greater of 1,000
contracts or 80% of ROT's total transactions on the Exchange in a
calendar quarter are executed in person, and not through the use of
orders. Phlx ROTs would also be required to execute at least 75% of
their quarterly contract volume in assigned options.\4\ In addition,
the proposal requires that all off-floor orders for which an ROT
receives market maker treatment be consistent with such ROT's duty to
maintain fair and orderly markets, and, in general, be effected for the
purposes of hedging, reducing risk of, or rebalancing open positions of
the ROT.
\4\ See Amendment No. 1, supra note 3.
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Corresponding amendments to five Floor Procedure Advices
(``Advices''), which are administered pursuant to the Exchange's minor
rule violation enforcement and reporting plan,\5\ are also proposed: B-
3, Trading Requirements; B-4, Phlx ROTs Entering Orders from On-Floor
and Off-Floor for Execution of the Exchange; B-8, Use of Floor Brokers;
B-12, Phlx ROTs and Specialist Entering Orders for Execution on Other
Exchanges in Multiply Traded Options; and C-3, Handling Orders of Phlx
ROTs and Other Registered Options Market Makers.
\5\ The Phlx's minor rule violation enforcement and reporting
plan (``minor rule plan''), codified in Phlx Rule 970, contains
floor procedure advices with accompanying fine schedules. Rule 19d-
1(c)(2) authorizes national securities exchanges to adopt minor rule
violation plans for summary discipline and abbreviated reporting;
Rule 19d-1(c)(1) requires prompt filing with the Commission of any
final disciplinary actions. However, minor rule violations not
exceeding $2,500 are deemed not final, thereby permitting periodic,
as opposed to immediate reporting. Although the Exchange is
proposing to amend several advices, only Advice C-3 will contain a
minor rule plan fine; hence, the Exchange hereby proposes to amend
its minor rule plan by incorporating the proposed changes to Advice
C-3.
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First, a new paragraph (b) to Advice B-3, with a separate fine
schedule for violations, would contain the heightened trading
requirement to receive limited market maker margin treatment for off-
floor orders. Violations of Advice B-3(b) would not be subject to a
minor rule plan citation and fine, but would be reviewed directly by
the Exchange's Business Conduct Committee pursuant to Phlx Rule 960
governing disciplinary proceedings.
In addition, an exception from the general prohibition against
placing off-floor orders in market maker accounts would be added to
Advice B-4 to permit the proposed treatment for off-floor orders. In
order to incorporate this proposal into the Floor Procedure Advice
handbook, Advice B-4 would generally parallel the proposed provision in
Commentary .01. In addition, Advice B-4 would require an ROT to
disclose to a Floor Broker, among other things, that he is entering an
off-floor order for his market maker account. Entering an off-floor
order in violation of the proposed new paragraph in Advice B-4 would be
subject to full disciplinary proceedings and reviewed by the Exchange's
Business Conduct Committee.
Advice B-8 is proposed to be amended by limiting its application to
the use of floor brokers while an ROT is on the trading floor.
Otherwise, an ROT entering an order from off-floor could not comply
with the requirement to initial the order ticket.
Advice B-12 governs Phlx traders entering orders in multiply traded
options onto another exchange, currently requiring such orders to be
entered while the trader is on the Phlx floor. Because off-floor orders
for a market maker account will become permissible, Advice B-12 is
proposed to be amended to permit the entry of off-floor orders for
execution on another exchange in multiply traded options. Such orders,
entered pursuant to Rule 1014, Commentary .01, must otherwise comply
with the requirements of Advice B-12, including ``clearing the Phlx
crowd.''
Lastly, Advice C-3 would be amended to require Floor Brokers to
mark an order ticket with the letter ``P'' if an ROT indicates that an
off-floor order is to be entered into his market maker account. Fines
for violations of Advice C-3 would be administered pursuant to the
Exchange's minor rule plan. This proposal would apply to ROTs on both
the options floor (equity options and index options) as well as the
foreign currency options floor. The text of the proposed rule change is
available at the Office of the Secretary, the Exchange, and at the
Commission.
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 Exchange included statements
concerning the purpose of and basis for [[Page 26755]] the proposed
rule change. The text of these statements may be examined at the places
specified in Item IV below. The Exchange has prepared summaries, set
forth in Section (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
Generally, a trade for the account of a specialist or ROT receives
market maker, or good faith, margin,\6\ as well as favorable capital
treatment,\7\ due to the affirmative and negative market making
obligations \8\ imposed on such floor traders by Exchange and
Commission rules. Further, Rule 1014, Commentary .01 states that ROTs
are considered ``specialists'' for the purposes of the Act and the
rules thereunder, which includes capital and margin rules, respecting
option transactions initiated and effected by the ROT on the floor in
the capacity of an ROT. Accordingly, transactions initiated on-floor by
Phlx ROTs receive this favorable margin treatment. Off-floor opening
\9\ market maker transactions currently may not qualify for favorable
margin treatment under Exchange rules, even if such orders are entered
to adjust or hedge the risk of an ROT's positions resulting from on-
floor market making activity.
\6\ Regulation T of the Federal Reserve Board, Section 220.12.
\7\ SEC Rule 15c3-1(b)(1).
\8\ See e.g., Phlx Rule 1014 (a) and (c).
\9\ Closing transactions do not give rise to issues of margin
and capital treatment, because such positions merely reduce or
eliminate existing positions.
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The purpose of the proposed rule change is to extend market maker
margin treatment to certain off-floor orders in all Phlx options. A new
provision in Rule 1014, Commentary .01 is required, as well as
amendments to various advices impacted by the proposal.
The Exchange believes that because an ROT cannot effectively adjust
his positions, or hedge and otherwise reduce the risk of his opening
transactions, from off the Phlx trading floor without incurring a
significant economic penalty, such ROTs must either be physically
present on the Exchange floor or face significant risks of adverse
market movements when they must necessarily be absent from the trading
floor.\10\ Because of these costs and risks, the Exchange believes that
Phlx ROTs may be prevented from effectively discharging their market
making obligations and may be exposed to unacceptable levels of risk.
\10\ Certain off-floor orders may be considered on-floor orders.
see Phlx Rule 1014, Commentary .08.
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Accordingly, the proposed rule change is intended to accommodate
the occasional needs of ROTs to adjust or hedge positions in their
market maker accounts at times when they are not physically present on
the trading floor. The Phlx believes the proposed rule change does so
without diluting the requirement that such ROT's trading activity must
nevertheless fulfill their market making obligations, including
contributing to the maintenance of a fair and orderly market on the
Exchange.
Phlx Rule 1014, Commentary .03 and Floor Procedure Advice
(``Advice'') B-3 currently require ROTs to effect at least 50% of their
quarterly contract volume in assigned options. Further, ROTs are
required to execute in person and not through the use of orders the
greater of 1,000 contracts or 50% of their quarterly contract volume,
pursuant to Advice B-3 and Rule 1014(b), Commentary .13. At this time,
the Exchange is proposing to amend Rule 1014 to allow ROTs who meet a
more stringent in-person, and in-assigned options requirement to
receive market maker margin and capital treatment for opening off-floor
orders. This proposal does not affect the above-referenced requirement
that, notwithstanding an ROT's desire to qualify for favorable margin
treatment for off-floor trading, an ROT remains obligated pursuant to
Advice B-3 to trade (1) in-person, and not through the use of orders,
the greater of 1,000 contracts or 50% of their total transactions each
quarter, and (2) at least 50% of their quarterly contract volume in
assigned options.
Under the proposal, Phlx ROTs would receive market maker margin
treatment for orders entered from off-floor in limited circumstances.
Such ROTs would be required to execute in person, and not through the
use of orders, the greater of 1,000 contracts or 80% of such ROT's
total transactions that quarter. In addition, such off-floor orders
must be effected for the purpose of hedging, reducing risk of,
rebalancing or liquidating open positions of the ROT. Phlx ROTs would
also be required to execute at least 75% of his quarterly contract
volume in assigned options.\11\ The Exchange notes that ROTs who fail
to comply with the proposed requirements in Rule 1014, Commentary .01,
shall be subject to disciplinary proceedings under Phlx Rule 960.
\11\ See Amendment No. 1, supra note 3.
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In addition to the proposed amendment to Commentary .01 of Rule
1014, the Exchange proposes to amend five Phlx floor procedure advices
to cover such off-floor market maker orders. First, new paragraph (b)
of Advice B-3 would effectuate the proposed provisions of Commentary
.01 by referencing the heightened trading requirement in order to
receive favorable margin treatment for off-floor orders. Accordingly,
entering an off-floor order for a market maker account without
compliance with the ``1,000 contracts or 80%'' requirement shall result
in a Rule 960 disciplinary proceeding, which is separate from any
violation of Advice B-3(a), which is administered pursuant to the
Exchange's minor rule plan.
Second, Advice B-4 is proposed to be amended to create an exception
to the prohibition against entering off-floor orders into a market
maker account. Generally, Advice B-4 would restate the provisions of
Commentary .01 to Rule 1014 that an ROT who has executed the greater of
1,000 contracts or 80% of his total transactions in a calendar quarter
in person may enter opening transactions from off the floor on limited
occasions for his market maker account if such transactions are for the
purpose of hedging, reducing risk of, rebalancing, or liquidating open
positions.
Third, by amending the title of Advice B-8, the Phlx intends to
limit its effect to situations where an ROT uses a Floor Broker while
the ROT is on the Phlx Floor. Because ROTs cannot currently enter off-
floor opening orders into a market maker account, the language of this
advice presumes that the ROT is on the floor, and, hence, able to
comply with the requirements of initialing the order ticket. Because
this proposal would permit entering opening orders from off-floor and
because an ROT who is off-floor cannot initial and time stamp a ticket,
Advice B-8 would now expressly apply, as reflected in the new title,
only to on-floor situations. Nevertheless, the requirement that an ROT
state whether an order is opening or closing appears in Advice B-4, and
the Floor Broker must time stamp the order pursuant to Advice C-2.
Thus, off-floor orders should be appropriately designated and handled,
despite the inapplicability of Advice B-8.
Fourth, Advice B-12 is proposed to be amended to clarify the margin
treatment of orders sent to another exchange in a multiply traded
option. Although such orders must currently be initiated from the Phlx
floor and must clear the Phlx crowd, the proposed changes would permit
off-floor orders to be sent to another exchange. Such orders must
nevertheless clear the Phlx crowd. The purpose of this change is to
treat orders in multiply traded options, whether
[[Page 26756]] originating from on or off-floor, the same way for
margin purposes, extending limited market maker treatment.
Lastly, Advice C-3 is proposed to be amended to incorporate this
extension of specialist margin treatment into the advice enumerating
Floor Broker responsibilities. Specifically, Floor Brokers would be
required to mark floor tickets where an ROT has indicated that the
order is for his market maker account with the letter ``P''. A fine for
violations would be administered pursuant to the Exchange's minor rule
plan. The Exchange believes that this should assist its surveillance
efforts respecting market maker margin for off-floor orders.
The Phlx believes that the proposed rule change is consistent with
Section 6 of the Act in general, and in particular, with Section
6(b)(5), in that it is designed to promote just and equitable
principles of trade and to protect investors and the public interest.
Specifically, the Phlx believes that the proposal should increase the
extent to which ROT trades contribute to liquidity and to the
maintenance of the fair and orderly market on the Exchange by providing
for a greater degree of in-person trading by ROTs and by enabling such
ROTs to better manage the risk of their market making activities.
Likewise, the Phlx believes that the corresponding amendments to Phlx
advices are intended to incorporate specialist margin treatment for
off-floor orders into the provisions governing trading requirements,
ROTs entering orders, and Floor Broker responsibilities, consistent
with Section 6(b)(5).
(B) Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any 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 solicited or received with respect to the
proposed rule change.
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 Phlx 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street NW., 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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Section, 450 Fifth Street NW.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the Phlx. All
submissions should refer to File No. SR-Phlx-95-14 and should be
submitted by June 8, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
\12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 95-12259 Filed 5-17-95; 8:45 am]
BILLING CODE 8010-01-M
