[Federal Register Volume 60, Number 134 (Thursday, July 13, 1995)]
[Notices]
[Pages 36172-36173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17204]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35943; File No. SR-Phlx-95-05]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to the
Response Period for Customized Foreign Currency Options
July 7, 1995.
On February 21, 1995, the Philadelphia Stock Exchange, Inc.
(``Phlx'' or ``Exchange''), pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change to eliminate the response
period and the special parity rules that apply following a request for
quote (``RFQ'') for a customized foreign currency option (``FCO'').
Notice of the proposal appeared in the Federal Register on April 24,
1995.\3\ No comment letters were received on the proposed rule change.
This order approves the Phlx proposal.
\1\ 15 U.S.C. 73s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ See Securities Exchange Act Release no. 35615 (April 17,
1995), 60 FR 20133.
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The purpose of the proposed rule change is to amend Exchange Rule
1069(b) in order to eliminate both the response period permitted
following an RFQ for a customized FCO and the special parity rules for
assigned Registered Options Traders (``ROTs'') that apply during that
response period.\4\ Currently, when a participant submits an RFQ, any
other participant may request a preset response time.\5\ Once the
response period has been invoked, a trade may occur prior to the end of
the response period only if at least two assigned ROTs respond to the
RFQ.
\4\ The proposal also adopts Floor Procedure Advice F-20
(Quoting and Trading Customized Foreign Currency Options) which will
parallel the provisions in Exchange Rule 1069(b), as amended.
\5\ The response period was initially set by the Exchange's FCO
Committee at two minutes for simple strike options, five minutes for
simple spreads, inverses, and cross-rates, and eight minutes for
options strategies involving more than three legs. The FCO Committee
shortened the response period to one minute for all types of RFQs
for customized FCOs on January 16, 1995, effective at the opening on
January 17, 1995.
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The special parity provisions in Rule 1069 provide that any
assigned ROT who enters a responsive quote that is improved upon during
the response time by another participant is entitled to participate on
a parity basis with that other participant by announcing immediately
thereafter, and prior to the execution of the order, that he or she is
matching the best bid or offer. This ability to match is available to
assigned ROTs until the execution of the trade or the end of the
response time period, whichever occurs first.
The Phlx now proposes to amend Rule 1069 to eliminate the response
time period and the special parity provisions. As a result, the
Exchange represents that customized FCOs would trade more like other
FCOs listed on the Exchange in that trades would be executable as soon
as any responsive quote \6\ is made and the Exchange's existing parity
and priority provisions in Phlx Rule 1014(h) would apply.
\6\ See infra note 8.
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder
[[Page 36173]]
applicable to a national securities exchange, and, in particular, the
requirements of Section 6(b)(5).\7\ Specifically, the Commission
believes the proposal may attract additional customized FCO
transactions to the Exchange, particularly crossing transactions \8\
that are currently executed in the over-the-counter (``OTC'') market.
As the Commission stated in approving the listing of customized FCOs by
the Exchange, the benefits of trading on an exchange versus OTC trading
include, but are not limited to, a centralized market, posted
transparent market quotations and transaction reporting, parameters and
procedures for clearance and settlement, and the guarantee of The
Options Clearing Corporation as the issuer of all customized FCOs
listed on the Exchange.\9\ Even though eliminating the response time
period may reduce some of the opportunity for price improvement that is
currently available for customized FCOs traded on the Exchange,\10\ the
structure currently in place for the trading of customized FCOs, which
the Commission has found to be consistent with the Act,\11\ will
otherwise remain unchanged.
\7\ 15 U.S.C. 78f(b)(5) (1988).
\8\ A crossing transaction is one in which the same broker acts
as agent in both sides of a trade. As applied to customized FCOs,
Phlx's crossing rules (see Phlx Rule 1064) provide that a
participant may cross orders by submitting an RFQ in which he
announces his intention to cross and his market for the transaction.
After providing an opportunity for responsive bids and offers to be
made, he may then execute the cross by improving the best bid or
offer by the minimum fractional change and announcing the quantity
and price for the transaction. Telephone conversation between
Michele Weisbaum, Associate General Counsel, Phlx, and Brad Ritter,
Senior Counsel, Division of Market Regulation, Commission, on July
5, 1995.
\9\ See Securities Exchange Act Release No. 34925 (November 1,
1994), 59 FR 55720 (November 8, 1994) (``Exchange Act Release No.
34925'').
\10\ Phlx's parity and priority provisions in Rule 1014(h) will
apply to transactions in customized FCOs. For crossing transactions,
however, by eliminating the response time period, the Commission
recognizes that the opportunity for other participants to better the
market will be diminished. See supra note 8.
\11\ See Exchange Act Release No. 34925, supra note 9.
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In this regard, the proposal effectively alters the trading
structure of customized FCOs in a manner making it more similar to the
trading of regular FCOs listed by the Exchange. As a result, the
Commission believes that the proposal does not raise any significant
regulatory concerns that have not been previously addressed by the Phlx
and the Commission in connection with the trading of regular FCOs.
Finally, the Exchange stated in its proposal that the response
period and the attendant parity rules were intended to assure that the
floor traders, who the Phlx believes are crucial to providing liquidity
to the marketplace, were not placed at a disadvantage to the off-floor
traders. The Exchange represents, however, that the level of trading in
customized FCOs has not provided sufficient activity to determine
whether this concern is valid. The Exchange believes, however, that as
additional trading history for customized FCOs develops, it will be in
a better position to monitor the trading activity in customized FCOs to
ensure that no material competitive disparity is actually occurring.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\12\ that the proposed rule change (File No. SR-Phlx-95-05) is
approved.
\12\ 15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
\13\ 17 CFR 200.30-3(a)(12) (1944).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-17204 Filed 7-12-95; 8:45 am]
BILLING CODE 8010-01-M
