Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing and Order Granting Accelerated Approval to Proposed Rule Change as Modified by Amendments No. 1, 2, and 3 Thereto Relating to U.S. Dollar-Settled Foreign Currency Options, 78506-78511 [E6-22404]
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78506
Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Notices
notice thereof in the Federal Register.
As noted previously, the Commission
previously found that the listing and
trading of the iShares MSCI South
Africa on Amex and the others Shares
on NYSE is consistent with the Act. The
Commission presently is not aware of
any regulatory issue that should cause it
to revisit these earlier findings or would
preclude the trading of the Shares on
the Exchange pursuant to UTP.
Therefore, accelerating approval of this
proposal should benefit investors by
creating, without undue delay,
additional competition in the market for
the Shares.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,17 that the
proposed rule change (SR–NYSEArca–
2006–32) is approved on an accelerated
basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.18
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6–22402 Filed 12–28–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54989; International Series
Release No. 1299; File No. SR–Phlx–2006–
34]
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Notice of Filing and Order Granting
Accelerated Approval to Proposed
Rule Change as Modified by
Amendments No. 1, 2, and 3 Thereto
Relating to U.S. Dollar-Settled Foreign
Currency Options
December 21, 2006.
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I. Introduction
On May 12, 2006, 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 1934, as amended (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change relating to the listing and trading
of U.S. dollar-settled foreign currency
options (‘‘FCOs’’) on the British pound
and the Euro (together, the
‘‘Currencies’’). On September 29, 2006,
17 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(l).
2 17 CFR 240.19b–4.
18 17
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the Exchange filed Amendment No. 1,3
and on October 20, 2006, the Exchange
filed Amendment No. 2.4 The proposed
rule change, as amended, was published
for comment in the Federal Register on
November 2, 2006.5 The Commission
received no comments on the proposal.
On December 15, 2006, the Phlx filed
Amendment No. 3 to the proposed rule
change.6 This order provides notice of
the proposed rule change as modified by
Amendments No. 1, 2, and 3 and
approves the proposed rule change as
amended on an accelerated basis.7
II. Description of the Proposal
The Exchange proposes to list U.S.
dollar-settled FCOs 8 on the Currencies
and to adopt rules and rule amendments
to permit the trading of U.S. dollarsettled FCOs on the Exchange’s
electronic trading platform for options,
Phlx XL.9 The Exchange also proposes
to amend a number of other rules
applicable to U.S. dollar-settled FCOs,
and to delete outdated references to the
German mark, Italian lira, Spanish
peseta, and the French franc.10
A. Contract Specifications and
Amendments to FCO Rules
Background. U.S. dollar-settled FCOs
are cash-settled, European-style options
issued by The Options Clearing
Corporation (‘‘OCC’’) that allow holders
to receive U.S. dollars representing the
difference between the current foreign
exchange spot price and the exercise
price of the option. In contrast, a
physical delivery option on a foreign
currency, which the Exchange currently
3 See Form 19b–4 dated September 29, 2006
(‘‘Amendment No. 1’’). Amendment No. 1 replaced
the original filing in its entirety.
4 See Form 19b–4 dated October 20, 2006
(‘‘Amendment No. 2’’). Amendment No. 2 replaced
the Amendment No. 1 in its entirety.
5 See Securities Exchange Act Release No. 54652
(October 25, 2006), 71 FR 64597 (‘‘Notice’’).
6 See Partial Amendment dated December 15,
2006 (‘‘Amendment No. 3’’).
7 This order specifically approves the listing and
trading of U.S. dollar-settled FCOs on the British
pound and the Euro. The listing and trading of
additional U.S. dollar-settled FCOs on other foreign
currencies will require the Exchange to file
additional proposed rule changes on Form 19b–4.
8 The Exchange previously traded U.S. dollarsettled options on the German mark and the
Japanese yen beginning in September 1994 and
February 1997, respectively. See Securities
Exchange Act Release Nos. 33732 (March 8, 1994),
59 FR 12023 (March 15, 1994) and 36505
(November 22, 1995), 60 FR 61277 (November 29,
1995). U.S. dollar-settled German mark options and
Japanese yen options were delisted on January 19,
1999 and August 23, 1999, respectively.
9 See Securities Exchange Act Release No. 49832
(June 8, 2004), 69 FR 33442 (June 15, 2004) (SR–
Phlx–2003–59) (approving Phlx XL).
10 See Phlx Rules 722, 1000, 1001, 1009, 1014,
1033, 1034, 1069, 1079; and Options Floor
Procedure Advice B–7.
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lists and trades, gives its owner the right
to receive physical delivery (if it is a
call) or to make physical delivery (if it
is a put) of the underlying foreign
currency when the option is exercised.11
In addition, unlike other Phlx-traded
FCOs, U.S. dollar-settled FCOs will be
deemed to be exercised at expiration if
the exercise settlement value is at least
$1.00 per contract unless the clearing
member instructs OCC not to exercise
it.12
Delivery and Payment. Upon exercise
of an in-the-money U.S. dollar-settled
FCO structured as a call, the holder
would receive, from OCC, U.S. dollars
representing the difference between the
exercise strike price and the closing
settlement value of the U.S. dollarsettled FCO contract multiplied by the
number of units of currency covered by
the contract. Similarly, for a U.S. dollarsettled FCO structured as a put, the
holder would receive U.S. dollars
representing the excess of the exercise
price over the closing settlement value
of the U.S. dollar-settled FCO contract
multiplied by the number of units of
foreign currency covered by the
contract.13
Contract Size. The contract sizes of
the U.S. dollar-settled FCO contracts on
the Currencies would be 10,000 British
pounds and 10,000 Euros.14
Expirations. The Exchange proposes
to permit U.S. dollar-settled FCO
contracts to be listed with expirations
that are the same as the expirations
permitted for equity index options
pursuant to Phlx Rule 1101A, with the
exception of long term option series and
quarterly expiring FCOs which the
Exchange does not propose to list.15 The
Exchange anticipates that, at least
initially, it would list expirations at one,
two, three, six, and nine months, and
that the options would be on three of
the months from the March, June,
11 The Exchange has listed and traded physical
delivery FCOs issued by OCC on a number of
currencies since 1982. The Exchange’s existing,
physical delivery options on the Currencies would
not be affected by this proposal and would continue
to trade as they do today, by open outcry.
12 However, the normal expiration date exercise
procedures do not apply in circumstances in which
the fixing of the exercise settlement amount is
delayed beyond the last trading day before
expiration. See OCC Rule 2302 (setting forth the
expiration date exercise procedures), and Securities
Exchange Act Release No. 54395 (December 13,
2006) (order approving SR–OCC–2006–10).
13 See Phlx Rule 1044.
14 The contract sizes for the physical delivery
options on the Currencies are 31,250 British pounds
and 62,500 Euros.
15 See Phlx Rule 1012(a). The Exchange stated
that it does not anticipate listing FLEX U.S. dollarsettled foreign currency options at this time.
Currently, trades may be executed in certain FLEX
options on equities and equity indexes. See Phlx
Rule 1079.
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September, December cycle, plus two
additional near term months (five
months at all times).16 The expiration
date for the consecutive and cycle
month options would be 11:59 p.m.
Eastern Time on the Saturday
immediately following the third Friday
of the expiration month.17
Trading Hours. The Exchange
proposes to trade U.S. dollar-settled
FCOs from 9:30 a.m. to 4 p.m. Eastern
Time, Monday through Friday.18 These
trading hours differ from the trading
hours for the physical delivery FCO
contracts because the U.S. dollar-settled
FCOs would, unlike the Exchange’s
physical delivery FCOs, trade on Phlx
XL.19 An expiring U.S. dollar-settled
FCO contract would cease trading at
4:00 p.m. on the day prior to its
expiration day.20 Unlike trading in
physical delivery FCOs, trading in U.S.
dollar-settled FCOs would not close on
bank holidays.
Settlement Values; Dissemination of
Information. The closing settlement
value would be the day’s announced
Noon Buying Rate,21 as determined by
the Federal Reserve Bank of New York
on the trading day prior to the
expiration date.22 If the Noon Buying
Rate is not announced by 2 p.m. Eastern
Time, the closing settlement value
would be the most recently announced
Noon Buying Rate, unless the Exchange
determines to apply an alternative
closing settlement value as a result of
extraordinary circumstances. The
closing settlement value would not be
disseminated through the Options Price
Reporting Authority (‘‘OPRA’’), but
would be posted on the Exchange’s Web
16 By way of example, in September, the U.S.
dollar-settled FCOs would have the following
months listed: October, November, December,
March, and June.
17 See Phlx Rule 1000(b)(21).
18 See Phlx Rule 101.
19 Trading hours for the Exchange’s physical
delivery FCO contracts are from 2:30 a.m. to 2:30
p.m. Eastern Time, Monday through Friday.
Beginning December 1, 2006, the trading hours for
physical delivery FCOs on the Exchange will be
from 7:30 a.m. to 2:30 p.m. Eastern Time, Monday
through Friday. See Securities Exchange Act
Release No. 54802 (November 21, 2006), 71 FR 8875
(November 28, 2006) (Notice of Filing and
Immediate Effectiveness of SR–Phlx–2006–72).
20 The Exchange notes that in order to facilitate
trading of the U.S. dollar-settled FCOs on Phlx XL,
trading would be permitted to occur after the
settlement value is announced on the day prior to
expiration, as discussed below.
21 See Securities Exchange Act Release No. 52843
(November 28, 2005), 70 FR 72486 (December 5,
2005) (order granting accelerated approval of SR–
NYSE–2005–65).
22 See Phlx Rule 1057. If Friday is an Exchange
holiday, the closing settlement value for U.S. dollarsettled FCOs would be determined on the basis of
the Noon Buying Rate on the preceding trading day,
which would also be the last day of trading for the
expiring option.
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site, where it would be publicly
available to all visitors to the Exchange’s
Web site on an equal basis, without the
need to enter any kind of password. The
Exchange has represented that it will
not disclose the settlement value to any
person or group of persons other than
employees of the Exchange who need to
know, prior to posting the value on the
Exchange’s Web site.
Position and Exercise Limits. For
purposes of position and exercise limits,
positions in U.S. dollar-settled FCO
contracts would be aggregated with
positions in the physical delivery
contracts. In addition, position and
exercise limits for the U.S. dollar-settled
FCOs would be the same as the position
and exercise limits for the physical
delivery contracts pursuant to Phlx
Rules 1001 and 1002. However, each
Euro U.S. dollar-settled option contract
would count as one-sixth of a contract
for purposes of position and exercise
limits.23 Similarly, each British pound
U.S. dollar-settled option contract
would count as one-third of a contract
for purposes of position and exercise
limits.24 The other aggregation
principles in Phlx Rule 1001 would
continue to apply.
Strike Prices. The Exchange proposes
to initially list exercise strike prices for
each expiration around the current spot
price at half-cent ($.005) intervals up to
five percent on each side.25 Thus, if the
spot price initially were at 1.0000, the
Exchange would list strikes in $.005
intervals up to 1.0500 and down to
.9500 for a total of twenty-one strike
prices available for trading. The
Exchange would not list any strike
prices at intervals other than these $.005
intervals.26 As the spot price for U.S.
23 See Phlx Rule 1001. According to the
Exchange, each U.S. dollar-settled Euro option
contract would be treated as one-sixth of a contract
for position and exercise limit purposes because the
cash-settled Euro option contract is roughly onesixth of the size of the physical delivery contract.
24 The cash-settled British pound option contract
is roughly one-third of the size of the physical
delivery contract.
25 According to the Exchange, the Exchange
receives contributor bank quotes from a vendor in
real-time and takes the average of the various
quotes, to determine the foreign currency spot
price.
26 See proposed Commentary Section .06 to Phlx
Rule 1012.
Strike prices would be expressed without
reference to the first two decimal places. Minimum
quoting increments and maximum quote spreads
would also reflect this convention, as reflected in
note 28, infra, and accompanying text.
For example, assuming that the actual spot value
of the Euro is $1.00, a strike could be listed at
$1.0050 and would be expressed as $100.50.
Similarly, the minimum quoting increment would
be $.0005 (expressed as $.05), if the bid is less than
$.0300 (expressed as $3.00), or $.0010 (expressed as
$.10), if the bid equals or exceeds $.0300 (expressed
as $3.00). Bids could be made at $.0330 (expressed
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78507
dollar settled FCO moves, the Exchange
would list new strike prices that, at the
time of listing, do not exceed the spot
price by more than 5% and are not less
than the spot price by 5%. For example,
if at the time of initial listing the spot
price of the Euro is at 1.0000, the strike
prices the Exchange would list would be
.9500 to 1.0500. If the spot price then
moves to 1.0500, the Exchange may list
additional strikes at the following
prices: 1.0550 to 1.1000. In that event,
the Exchange would delist any
previously-listed series outside of the
current ten percent band that have no
open interest. In addition, new strikes
may be added during the life of the
option in accordance with Phlx Rule
1012.27
Bids and Offers—Premium. Under
Phlx Rule 1033, bids and offers in U.S.
dollar-settled FCOs on the Currencies
must be made in terms of U.S. dollars
per unit of the underlying foreign
currency. The minimum increment for
U.S. dollar-settled FCOs quoting under
$.0300 would be $.0005 per unit of the
foreign currency, expressed as .05 per
unit of the foreign currency, which
equals a $5.00 minimum increment per
contract consisting of 10,000 Euros or
10,000 British pounds. The minimum
increment for U.S. dollar-settled FCOs
quoting at $.0300 or higher would be
$.0010 per unit of the foreign currency,
expressed as .10 per unit of the foreign
currency, which equals a $10.00
minimum increment per contract
consisting of 10,000 Euros or 10,000
British pounds.28
as $3.30), at $.0340 (expressed as $3.40), and so
forth. Offers could be made at $.0350 (expressed as
$3.50), at $.0360 (expressed as $ 3.60), and so forth.
Maximum quote spread parameters for bids and
offers made in open outcry would range from
$.0025 (expressed as $.25), to $.0100 (expressed as
$1.00), depending upon the size of the prevailing
bid. Thus, a market maker could bid $.0330
(expressed as $3.30) and offer $.0370 (expressed as
$ 3.70). (Following open rotation, however, quotes
may be made electronically with a difference not to
exceed $.0500 (expressed as $5.00) between the bid
and the offer regardless of the price of the bid). See
Amendment No. 3, supra note 6, and infra note 28.
Prior to commencement of trading of U.S. dollarsettled options on the Currencies, the Exchange
intends to issue an informational memorandum to
members and member organizations which explains
this strike price and quoting convention.
27 See Phlx 1012(a)(iv).
28 See Phlx Rule 1034(a). By way of example, if
the spot price of the Euro is at $1.2550 and an
investor purchases the December Euro $1.2500
(expressed as $125.00) Call at a premium of $.0075
(expressed as $.75) and then sells the December
Euro $1.2500 Call at a premium of $.0095
(expressed as $.95), the investor’s profit would be
$.0020 per Euro. The investor’s total profit would
be $.0020 per Euro multiplied by 10,000 Euros (the
size of the contract) for a total of $20.00.
Amendment No. 3 corrected a technical error in the
use of the quoting convention in Phlx Rule 1034(a).
Amendment No. 3 also revised an example in note
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Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Notices
Margin Requirements. The U.S.
dollar-settled FCOs would have the
same customer margin requirements as
are provided for the existing FCOs
pursuant to Phlx Rule 722, Commentary
.16.29 The Exchange calculates the
margin requirements for each foreign
currency underlying U.S. dollar-settled
FCO separately, rather than determining
one margin level for all foreign
currencies based upon the historical
pricing information for all foreign
currencies together. The Exchange
informs members and the public of the
margin levels for each currency option
immediately following the quarterly
reviews described in Phlx Rule 722,
Commentary .16.
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B. Surveillance
The Phlx will integrate U.S. dollarsettled FCOs into existing Phlx market
surveillance programs for equity and
index options, as well as for physical
delivery foreign currency options, and
intends to apply those same program
procedures to the U.S. dollar-settled
23 of the Notice to: (1) Reflect that the minimum
increment when the bid equals or exceeds $.0300
(expressed as $3.00) is $.0010 (expressed as 10
cents), not $.0005 (expressed as 5 cents), as the
example erroneously implied as originally drafted,
(2) reduce the size of the bid in the example from
an unrealistic $1.00 (expressed as $100.00) range to
a more realistic $.0300 (expressed as $3.00) range
while continuing to illustrate the same underlying
concepts, and (3) note that the maximum quote
spread parameters do vary depending on the size
of the prevailing bid and whether the bid/offer is
made on Phlx XL as opposed to open outcry. See
Amendment No. 3, supra note 6.
29 Pursuant to Phlx Rule 722, Commentary .16,
the Exchange calculates the margin requirement for
customers that assume short FCO positions by
adding a percentage of the current market value of
the underlying foreign currency contract to the
option premium price less an adjustment for the
out-of-the-money amount of the option contract. On
a quarterly calendar basis, the Exchange reviews
five-day price changes over the preceding three-year
period for each underlying currency and sets the
add-on percentage at a level which would have
covered those price changes at least 97.5% of the
time (the ‘‘confidence level’’). If the results of
subsequent reviews show that the current margin
level provides a confidence level below 97%, the
Exchange increases the margin requirement for that
individual currency up to a 98% confidence level.
If the confidence level is between 97% and 97.5%,
the margin level would remain the same but would
be subject to monthly follow-up reviews until the
confidence level exceeds 97.5% for two consecutive
months. If during the course of the monthly followup reviews, the confidence level drops below 97%,
the margin level is increased to a 98% level and if
it exceeds 97.5% for two consecutive months, the
currency is taken off monthly reviews and is put
back on the quarterly review cycle. If the currency
exceeds 98.5%, the margin level is reduced to a
98% confidence level during the most recent three
year period. Finally, in order to account for large
price movements outside the established margin
level, if the quarterly review shows that the
currency had a price movement, either positive or
negative, greater than two times the margin level
during the most recent three year period, the margin
requirement is set at a level to meet a 99%
confidence level.
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18:15 Dec 28, 2006
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FCOs. The Exchange represents that
these surveillance programs for U.S.
dollar-settled FCOs will be adequate to
monitor exchange trading of U.S. dollar
settled FCOs and detect violation of
exchange rules, thereby deterring
manipulation.30
Futures on the British pound and the
Euro, as well as options on such futures
are traded on the Chicago Mercantile
Exchange (‘‘CME’’) (both exchange pit
trading and GLOBEX trading). Euro
Currency Trust Shares and British
Pound Sterling Shares trade on the New
York Stock Exchange (‘‘NYSE’’) and on
NYSE Arca. The Exchange represented
that, to the best of the Exchange’s
knowledge, these U.S. markets are the
primary trading markets in the world for
exchange-traded futures, options on
futures and trust shares on these
currencies. The Exchange also
represented that it may obtain trading
information via the Intermarket
Surveillance Group (‘‘ISG’’) from other
exchanges who are members or affiliates
of the ISG. Specifically, the Phlx can
obtain such information from the NYSE
and NYSE Arca in connection with
shares of the Euro Currency Trust and
the CurrencySharesTM British Pound
Sterling Trust trading on the NYSE and
NYSE Arca, and from the CME and
London International Financial Futures
Exchange (‘‘LIFFE’’) in connection with
Euro and Pound futures trading on those
exchanges.31
In addition, the Phlx represented that
it is able to obtain information regarding
trading in the Euro Currency Trust
Shares, British Pound Sterling Shares,
Euro and British Pound options, and
Euro and British Pound futures and
options on futures through Phlx
members, in connection with such
members’ proprietary or customer trades
which they effect on any relevant
market.32 Pursuant to Phlx Rule 1022,
specialists and Registered Options
Traders (‘‘ROTs’’) are required to
identify all accounts maintained for
foreign currency trading in which the
specialist or ROT engages in trading
activity or over which he exercises
investment discretion, and no specialist
or ROT may engage in foreign currency
trading in any account not reported
pursuant to the rule. Phlx Rule 1022
also requires every specialist and ROT
to make available to the Phlx upon
request all books, records and other
information relating to transactions for
their own account or accounts of
30 See
Amendment No. 3, supra notes 6 and 28.
and NYSE Arca are members of ISG.
CME and LIFFE are affiliate members of ISG.
32 See Equity Floor Procedure Advice F–8 and
Options Floor Procedure F–8, Failure to Comply
with an Exchange Inquiry.
31 NYSE
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associated persons with respect to the
foreign currency underlying U.S. dollarsettled FCOs, including transactions in
the cash market as well as the futures,
options and options on futures markets.
An amendment to Phlx Rule 1022(d)
would also add transactions in ‘‘other
foreign currency derivatives’’ to the list
of currency related transactions with
respect to which specialists and ROTs
must provide information to the
Exchange.
C. Trading on Phlx XL
The Exchange proposes that U.S.
dollar-settled FCOs trade on Phlx XL,
the Exchange’s electronic trading
platform for options. In this regard, the
Exchange proposes to amend a number
of rules that currently govern the trading
of equity and equity index options that
trade as ‘‘Streaming Quote Options’’ on
Phlx XL to extend the coverage of those
rules to U.S. dollar-settled FCOs and to
include U.S. dollar-settled FCOs as a
product that may be traded on Phlx XL
as a Streaming Quote Option.33
Exchange specialists, on-floor market
makers known as Streaming Quote
Traders (‘‘SQTs’’),34 and remote market
makers known as Remote Streaming
Quote Traders (‘‘RSQTs’’) 35 who stream
their U.S. dollar-settled FCO quotes to
the Exchange would be eligible to
participate in the directed order flow
program. Specialists in U.S. dollarsettled FCOs, like specialists in equity
and equity index options, also would be
eligible to participate in the Exchange’s
enhanced specialist participation
programs.36
Obligations and Restrictions. U.S.
dollar-settled FCOs would trade in the
same general manner as equity index
options,37 which are also U.S. dollarsettled products.38 In this regard, Phlx
Rule 1014 is being amended to make
33 See
Phlx Rule 1080.
Phlx Rule 1014(b)(ii)(A).
35 See Phlx Rule 1014(b)(ii)(B).
36 The Exchange currently has several Enhanced
Specialist Participation programs, embodied in Phlx
Rule 1014(g). These programs establish specified
percentages as the Enhanced Specialist
Participation, depending on the category of option.
Currently, the specialist in physical delivery FCOs
is not entitled to a ‘‘specialist enhancement,’’
although such a program was once in effect.
37 However, Phlx Rule 1080, Commentary .01, is
being revised to reflect that the Auto-Quote system
applies to equity and equity index options, but not
to U.S. dollar-settled FCOs. The Exchange’s AutoQuote system incorporates pricing model data,
which generate automatic pricing of option series
based on a number of factors, including the value
of the underlying stock.
38 See Phlx Rules 1014 and 1080. Conforming
changes are being made to Options Floor Procedure
Advices B–6, Priority of Options Orders for Equity
Options and Index Options by Account Type, B–7,
Time Priority of Bids/Offers in Foreign Currency
Options, and F–6, Option Quote Parameters.
34 See
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clear that the obligations and
restrictions applicable to specialists and
ROTs trading equity index options now
generally would apply to specialists and
ROTs in U.S. dollar-settled FCOs.39 In
addition, under the amendments to Phlx
Rule 1014, specialists and ROTs in U.S.
dollar-settled FCOs, like specialists in
physical delivery FCOs, would be
subject to rules relating to bid/ask
differentials and other affirmative
market making obligations and
restrictions 40 but those rules with
respect to U.S. dollar-settled FCOs
would track rules currently applicable
to equity options, in order to facilitate
trading on the Phlx XL system by the
system’s current users who are
accustomed to the existing bid/ask
differentials applicable to equity
options.41
In addition, the Exchange proposes to
amend Phlx Rule 1063 and Options
Floor Procedure Advice C–2 to provide
that the Floor Broker Management
System currently employed with respect
to equity and equity index options
would also be required to be used for
U.S. dollar-settled FCOs.42
Openings. Phlx Rule 1017 governs the
Exchange’s fully automated opening
system for options traded on Phlx XL.43
39 However, Phlx Rule 1014(c)(i)(B), which
provides for a maximum option price change with
exceptions based upon the price of the underlying
security, would not apply to U.S. dollar-settled
FCOs. The Exchange does not have a maximum
option price change rule that applies to physical
delivery FCOs and is not proposing a maximum
option price change rule for U.S. dollar-settled
FCOs.
40 However, Phlx Rule 1014(c)(i)(B), which
provides for a maximum option price change with
exceptions based upon the price of the underlying
security, would not apply to U.S. dollar-settled
FCOs.
41 Other amendments to Phlx Rule 1014 would
make clear that current provisions on priority/
parity and bid/ask differentials that apply to FCO
contracts would be limited to physical delivery
FCOs. See paragraphs (c)(ii) and (h), and
Commentary .16 of Phlx Rule 1014. Similarly,
options Floor Procedure Advice F–17, relating to
trades to be effected in the trading pit, is being
amended so that it applies only to physical delivery
FCOs, because U.S. dollar-settled FCOs will trade
on Phlx XL.
42 The Options Floor Broker Management System
is a component of AUTOM designed to enable Floor
Brokers and/or their employees to enter, route and
report transactions stemming from options orders
received on the Exchange. The Options Floor
Broker Management System also is designed to
establish an electronic audit trail for options orders
represented and executed by Floor Brokers on the
Exchange. See Phlx Rule 1080, Commentary .06.
43 For a description of the automated opening
system, see Securities Exchange Act Release Nos.
52667 (October 25, 2005), 70 FR 65953 (November
1, 2005) (SR–Phlx–2005–25), and 53242 (February
7, 2006), 71 FR 7604 (February 13, 2006) (SR-Phlx2006–11). The Exchange also is making a technical
change to clarify the application of Phlx Rule 1017
to index options by inserting reference to
‘‘underlying securities constituting 100% of the
index value.’’ The rule currently refers to the
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18:15 Dec 28, 2006
Jkt 211001
Phlx Rule 1017 is being amended to
reflect that U.S. dollar-settled FCOs
would be opened using the automated
opening system, subject to certain
adjustments to current processes
because FCO openings, unlike openings
of equity and index options, would not
depend upon the opening of trading in
an underlying cash market.44 More
specifically, Phlx Rule 1017 would
provide that Phlx XL would accept
orders and quotes in U.S. dollar-settled
FCOs beginning no later than one hour
before market opening, and that the
specialist assigned in the particular U.S.
dollar-settled FCO must enter opening
quotes not later than 30 seconds after
market opening.45 It would provide that
in certain circumstances an anticipated
opening price would be calculated if the
quotes of at least two Phlx XL
participants have been submitted within
two minutes of market opening (or such
shorter time as determined by the FCO
Committee and disseminated to
membership via Exchange circular).
Finally, it would provide that the
system would not open a series of U.S.
dollar-settled FCOs if the opening price
is not within an acceptable range (as
determined by the FCO Committee and
announced to Exchange members and
member organizations by way of
Exchange circular).
Block Trades. In addition, the block
trade procedures in Phlx Rule 1016 are
limited to physical delivery FCOs.
According to the Exchange, the block
trading rule currently enables market
participants to execute large-size FCO
orders in an orderly fashion at a price
that may not be the best bid or offer for
that particular FCO, but is the best price
available for executing a block trade in
such FCO. To take advantage of the
block execution procedure, Phlx Rule
1016 requires a floor broker with a block
order to quote the market in a particular
FCO, announce that a block quotation
for a specified number of contracts over
1,000 is sought, and ascertain from the
trading crowd the best price at which
the entire order can be executed. The
Exchange believes that trading of U.S.
dollar-settled FCOs on Phlx XL by SQTs
and RSQTs who stream quotes into the
system makes execution of block trades
pursuant to the procedures required by
Phlx Rule 1016 impractical.
opening of the ‘‘underlying security,’’ which makes
sense with respect to equity options, but not index
options.
44 See Phlx Rule 1017. In addition, the Exchange
is making conforming changes to Options Floor
Procedure Advices A–12 and A–14.
45 Market opening, as with equity and equity
index options, is normally at 9:30 a.m. Eastern
Time.
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Frm 00115
Fmt 4703
Sfmt 4703
78509
Customized Foreign Currency
Options. Phlx Rule 1069 is being
amended to limit the applicability of the
rule to physical delivery FCOs so that
U.S. dollar-settled FCOs would not be
eligible to trade on a customized basis.
Foreign Currency Options Committee.
Phlx Rules 1014 and 1080 and Options
Floor Procedure Advice A–13 is being
amended to provide that the Foreign
Currency Options Committee would
have decision-making authority in
certain instances with respect to U.S.
dollar-settled FCOs (rather than the
Options Committee, which oversees the
trading of equity and equity index
options on Phlx XL). In addition, the
Phlx is deleting the words ‘‘on-floor’’
from the term ‘‘on-floor Governor’’ in
Phlx Rule 1014(g), because the ‘‘on-floor
Governor’’ category has previously been
eliminated from the Exchange’s bylaws.46
D. Customer Protection
Exchange rules designed to protect
public customers trading in FCOs would
apply to U.S. dollar-settled FCOs on the
Currencies. Specifically, Phlx Rule
1024(b) prohibits members from
accepting a customer order to purchase
or write a U.S. dollar-settled FCO unless
such customer’s account has been
specially approved in writing by a
designated Foreign Currency Options
Principal of the member for transactions
in FCOs. Additionally, Phlx Rule 1026
is designed to ensure that options,
including U.S. dollar-settled FCOs, are
sold only to customers capable of
evaluating and bearing the risks
associated with trading in the
instruments. Finally, under Phlx Rule
1027, members are permitted to exercise
discretionary power with respect to
trading U.S. dollar-settled FCOs in a
customer’s account only if the member
has received prior written authorization
from the customer and the account has
been accepted in writing by a
designated Foreign Currency Options
Principal. In addition, the Foreign
Currency Options Principal or a
Registered Options Principal must
approve and initial each discretionary
U.S. dollar-settled FCO on the day the
order is entered.47 Phlx Rule 1025
relating to the supervision of accounts,
Phlx Rule 1028 relating to
confirmations, and Phlx Rule 1029
relating to delivery of options disclosure
documents also would apply to trading
in U.S. dollar-settled FCOs.
46 See
47 See
E:\FR\FM\29DEN1.SGM
Amendment No. 3, supra notes 6 and 28.
Phlx Rule 1027.
29DEN1
78510
Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Notices
III. Commission Finding and
Conclusions
After careful consideration, the
Commission finds that the proposed
rule change, as amended, is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.48 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,49 which requires that
an exchange have rules designed, among
other things, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
A. Settlement Value and Dissemination
of Information
The Commission believes that
sufficient venues exist for obtaining
reliable information on the Currencies
so that investors in U.S. dollar-settled
FCOs can monitor the underlying spot
market in the Currencies. The
Commission also believes that the
Phlx’s procedures and the competitive
nature of the spot market for the
Currencies should help to ensure that
the settlement values for U.S. dollarsettled FCO contracts will accurately
reflect the spot price for foreign
currencies. Finally, the closing
settlement value, which will be the
Noon Buying Rate on the trading day
prior to expiration,50 would be posted
on the Exchange’s Web site, where it
would be publicly available to all
visitors on an equal basis, without the
need to enter any kind of password.
pwalker on PROD1PC69 with NOTICES
B. Customer Protection
The Commission believes that a
regulatory system designed to protect
public customers must be in place
before the trading of sophisticated
financial instruments, such as U.S.
dollar-settled FCOs on the Currencies,
can commence on a national securities
exchange. The Commission believes this
goal has been satisfied by the
application of Phlx customer protection
rules for FCOs to U.S. dollar-settled
FCOs.
48 In approving this rule change, the Commission
notes that it has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
49 15 U.S.C. 78f(b)(5).
50 If the Noon Buying Rate is not announced by
2 p.m. Eastern Time, the closing settlement value
would be the most recently announced Noon
Buying Rate, unless the Exchange determines to
apply an alternative closing settlement value as a
result of extraordinary circumstances.
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18:15 Dec 28, 2006
Jkt 211001
C. Surveillance
F. Other Rules
The Commission notes that the Phlx
will integrate U.S. dollar-settled FCOs
into existing Phlx market surveillance
market programs for equity and index
options, as well as for physical delivery
foreign currency options, and that the
Phlx intends to apply those same
program procedures to the U.S. dollarsettled FCOs. The Commission also
notes that Phlx Rule 1022, Equity Floor
Procedure Advice F–8, and Options
Floor Procedure F–8, as amended to
include transactions in ‘‘other foreign
currency derivatives,’’ provide Phlx
with the authority to obtain information
regarding trading in the Euro Currency
Trust Shares, British Pound Sterling
Shares, Euro and British Pound options,
and Euro and British Pound futures and
options on futures through Phlx
members, in connection with such
members’ proprietary or customer trades
which they effect on any relevant
market. In addition, the Phlx may obtain
trading information via the ISG from
other exchanges who are members or
affiliates of the ISG. Specifically, the
Phlx can obtain such information from
the NYSE and NYSE Arca in connection
with shares of the Euro Currency Trust
and the CurrencySharesTM British
Pound Sterling Trust trading on the
NYSE and NYSE Arca, and from the
CME and LIFFE in connection with
Euro and Pound futures trading on those
exchanges. The Commission believes
that these rules provide the Phlx with
the tools necessary to adequately surveil
trading in the Securities.
The Commission believes that the
other rule changes proposed by the Phlx
to accommodate the trading of U.S.
dollar-settled FCOs are consistent with
the Act. First, the Commission believes
it is reasonable for the Phlx to initially
list exercise strike prices for each
expiration around the current spot price
at half-cent ($0.005) intervals up to five
percent on each side.52 The Commission
notes that the Phlx has represented that
it has the system capacity to support the
additional quotations and messages that
will result from listing options on U.S.
dollar settled FCOs.53
Finally, the Commission believes that
it is consistent with the Act for the
Exchange to establish the minimum
trading increment for U.S. dollar-settled
FCOs at $.0005 (expressed as $.05) per
unit of the foreign currency for U.S.
dollar-settled FCOs quoted at less than
$.0300 (expressed as $3.00), and at
$.0010 (expressed as $.10) per unit of
the foreign currency for U.S. dollarsettled FCOs quoted at $.0300
(expressed as $3.00) or higher.
D. Position and Exercise Limits
As noted above, U.S. dollar-settled
FCO contracts will be aggregated with
physical delivery contracts for position
and exercise limit purposes. The
Commission believes that aggregation of
U.S. dollar-settled FCOs with the
physical delivery contracts for position
and exercise limit purposes is prudent
and minimizes concerns regarding
manipulations or disruptions of the
markets for U.S. dollar-settled FCO
contracts and physical delivery
contracts.
E. Trading on Phlx XL
The Commission believes that the
trading of U.S. dollar-settled FCOs on
Phlx XL is consistent with the Act. The
rules that currently govern the trading of
equity and equity index options that
trade as ‘‘Streaming Quote Options’’ on
Phlx would be extended to include U.S.
dollar-settled FCOs.51
51 See
supra notes 33 to 42 and accompanying
text.
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Fmt 4703
Sfmt 4703
G. Accelerated Approval
Pursuant to Section 19(b)(2) of the
Act, the Commission finds good cause
to approve the proposal, as amended,
prior to the thirtieth day after the
amended proposal is published for
comment in the Federal Register.
Amendment No. 3 clarifies the proposed
rule change with respect to the Phlx
quoting convention, deletes outdated
references to ‘‘on-floor Governor’’ in
Phlx Rule 1014, and contains Phlx
representations with regard to the Phlx
surveillance procedures. Accordingly,
the Commission finds good cause to
accelerate approval of the amended
proposal prior to the thirtieth day after
publication in the Federal Register.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning Amendment No.
3, including whether Amendment No. 3
is consistent with the Act. Comments
may be submitted by any of the
following methods:
52 When listing additional strikes, the
Commission expects the Exchange to consider
whether the listing of such strikes will be consistent
with the maintenance of a fair and orderly market.
53 See Letter, dated October 11, 2006, from
Thomas A. Whitman, Senior Vice President, Phlx,
to Elizabeth King, Associate Director, Division of
Market Regulation (‘‘Division’’), Commission,
Heather Seidel, Senior Special Counsel, Division,
Commission, and David Hsu, Special Counsel,
Division, Commission.
E:\FR\FM\29DEN1.SGM
29DEN1
Federal Register / Vol. 71, No. 250 / Friday, December 29, 2006 / Notices
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–Phlx–2006–34 on the
subject line.
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–Phlx–2006–34. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). 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 in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of Phlx. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–Phlx–2006–34 and should
be submitted on or before January 19,
2007.
pwalker on PROD1PC69 with NOTICES
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,54 that the
proposed rule change (SR–Phlx–2006–
34), as modified by Amendments No. 1,
2, and 3, be, and it hereby is, approved
on an accelerated basis.
U.S.C. 78s(b)(2).
VerDate Aug<31>2005
18:15 Dec 28, 2006
BILLING CODE 8011–01–P
SOCIAL SECURITY ADMINISTRATION
Paper Comments
54 15
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.55
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6–22404 Filed 12–28–06; 8:45 am]
[Document No. SSA–2006–0110]
The Ticket to Work and Work
Incentives Advisory Panel Meeting
AGENCY:
ACTION:
Notice of teleconference.
January 10, 2007—2 p.m. to 4
p.m. Eastern Daylight Savings Time.
Ticket to Work and Work Incentives
Advisory Panel Conference Call. Call-in
number: 1–888–790–4158. Pass code:
PANEL TELECONFERENCE. Leader/
Host: Berthy De la Rosa-Aponte.
SUPPLEMENTARY INFORMATION: Type of
meeting: On January 10, 2007, the
Ticket to Work and Work Incentives
Advisory Panel (the ‘‘Panel’’) will hold
a teleconference. This teleconference
meeting is open to the public.
Purpose: In accordance with section
10(a)(2) of the Federal Advisory
Committee Act, the Social Security
Administration (SSA) announces this
teleconference meeting of the Ticket to
Work and Work Incentives Advisory
Panel. Section 101(f) of Public Law 106–
170 establishes the Panel to advise the
President, the Congress, and the
Commissioner of SSA on issues related
to work incentive programs, planning,
and assistance for individuals with
disabilities as provided under section
101(f)(2)(A) of the Act. The Panel is also
to advise the Commissioner on matters
specified in section 101(f)(2)(B) of that
Act, including certain issues related to
the Ticket to Work and Self-Sufficiency
Program established under section
101(a).
The interested public is invited to
listen to the teleconference by calling
the phone number listed above. Public
testimony will be taken from 3:30 p.m.
until 4 p.m. Eastern Standard Time. You
must be registered to give public
comment. Contact information is given
at the end of this notice.
Agenda: The full agenda for the
meeting will be posted on the Internet
at https://www.ssa.gov/work/panel at
least one week before the starting date
or can be received, in advance,
electronically or by fax upon request.
DATES:
55 17
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Social Security Administration
(SSA).
PO 00000
CFR 200.30–3(a)(12).
Frm 00117
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Sfmt 4703
78511
Contact Information: Records are kept
of all proceedings and will be available
for public inspection by appointment at
the Panel office. Anyone requiring
information regarding the Panel should
contact the staff by:
• Mail addressed to the Social
Security Administration, Ticket to Work
and Work Incentives Advisory Panel
Staff, 400 Virginia Avenue, SW., Suite
700, Washington, DC 20024. Telephone
contact with Tinya White-Taylor at
(202) 358–6430.
• Fax at (202) 358–6440.
• Email to TWWIIAPanel@ssa.gov.
• To register for the public comment
portion of the meeting please contact
Tinya White-Taylor by calling (202)
358–6430 or by e-mail to tinya.whitetaylor@ssa.gov.
Dated: December 18, 2006.
Chris Silanskis,
Designated Federal Officer.
[FR Doc. E6–22433 Filed 12–28–06; 8:45 am]
BILLING CODE 4191–02–P
DEPARTMENT OF TRANSPORTATION
National Highway Traffic Safety
Administration
[Docket No. NHTSA 2006–25903; Notice 2]
BMW of North America, LLC, Grant of
Petition for Decision of
Inconsequential Noncompliance
BMW of North America, LLC (BMW)
has determined that certain vehicles
that it produced in 2005 and 2006 do
not comply with S4.5.1(b)(3) and
S4.5.1(e)(3) of 49 CFR 571.208, Federal
Motor Vehicle Safety Standard (FMVSS)
No. 208, ‘‘Occupant crash protection.’’
Pursuant to 49 U.S.C. 30118(d) and
30120(h), BMW has petitioned for a
determination that this noncompliance
is inconsequential to motor vehicle
safety and has filed an appropriate
report pursuant to 49 CFR Part 573,
‘‘Defect and Noncompliance Reports.’’
Notice of receipt of a petition was
published, with a 30-day comment
period, on October 2, 2006, in the
Federal Register (71 FR 58048). NHTSA
received no comments.
Affected are a total of approximately
27,975 model year 2006 BMW X5
vehicles produced between September
1, 2005 and June 28, 2006. The affected
vehicles were produced according to
FMVSS No. 208 S14, the advanced air
bag requirements including air bag
suppression and telltale. However, the
affected vehicles were not equipped
with the corresponding warning labels,
specifically the FMVSS No. 208
S4.5.1(b)(3) sun visor label identified in
E:\FR\FM\29DEN1.SGM
29DEN1
]]>Agencies
[Federal Register Volume 71, Number 250 (Friday, December 29, 2006)]
[Notices]
[Pages 78506-78511]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-22404]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54989; International Series Release No. 1299; File No.
SR-Phlx-2006-34]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval to Proposed
Rule Change as Modified by Amendments No. 1, 2, and 3 Thereto Relating
to U.S. Dollar-Settled Foreign Currency Options
December 21, 2006.
I. Introduction
On May 12, 2006, 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 1934, as amended (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change relating to the listing and
trading of U.S. dollar-settled foreign currency options (``FCOs'') on
the British pound and the Euro (together, the ``Currencies''). On
September 29, 2006, the Exchange filed Amendment No. 1,\3\ and on
October 20, 2006, the Exchange filed Amendment No. 2.\4\ The proposed
rule change, as amended, was published for comment in the Federal
Register on November 2, 2006.\5\ The Commission received no comments on
the proposal. On December 15, 2006, the Phlx filed Amendment No. 3 to
the proposed rule change.\6\ This order provides notice of the proposed
rule change as modified by Amendments No. 1, 2, and 3 and approves the
proposed rule change as amended on an accelerated basis.\7\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(l).
\2\ 17 CFR 240.19b-4.
\3\ See Form 19b-4 dated September 29, 2006 (``Amendment No.
1''). Amendment No. 1 replaced the original filing in its entirety.
\4\ See Form 19b-4 dated October 20, 2006 (``Amendment No. 2'').
Amendment No. 2 replaced the Amendment No. 1 in its entirety.
\5\ See Securities Exchange Act Release No. 54652 (October 25,
2006), 71 FR 64597 (``Notice'').
\6\ See Partial Amendment dated December 15, 2006 (``Amendment
No. 3'').
\7\ This order specifically approves the listing and trading of
U.S. dollar-settled FCOs on the British pound and the Euro. The
listing and trading of additional U.S. dollar-settled FCOs on other
foreign currencies will require the Exchange to file additional
proposed rule changes on Form 19b-4.
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposes to list U.S. dollar-settled FCOs \8\ on the
Currencies and to adopt rules and rule amendments to permit the trading
of U.S. dollar-settled FCOs on the Exchange's electronic trading
platform for options, Phlx XL.\9\ The Exchange also proposes to amend a
number of other rules applicable to U.S. dollar-settled FCOs, and to
delete outdated references to the German mark, Italian lira, Spanish
peseta, and the French franc.\10\
---------------------------------------------------------------------------
\8\ The Exchange previously traded U.S. dollar-settled options
on the German mark and the Japanese yen beginning in September 1994
and February 1997, respectively. See Securities Exchange Act Release
Nos. 33732 (March 8, 1994), 59 FR 12023 (March 15, 1994) and 36505
(November 22, 1995), 60 FR 61277 (November 29, 1995). U.S. dollar-
settled German mark options and Japanese yen options were delisted
on January 19, 1999 and August 23, 1999, respectively.
\9\ See Securities Exchange Act Release No. 49832 (June 8,
2004), 69 FR 33442 (June 15, 2004) (SR-Phlx-2003-59) (approving Phlx
XL).
\10\ See Phlx Rules 722, 1000, 1001, 1009, 1014, 1033, 1034,
1069, 1079; and Options Floor Procedure Advice B-7.
---------------------------------------------------------------------------
A. Contract Specifications and Amendments to FCO Rules
Background. U.S. dollar-settled FCOs are cash-settled, European-
style options issued by The Options Clearing Corporation (``OCC'') that
allow holders to receive U.S. dollars representing the difference
between the current foreign exchange spot price and the exercise price
of the option. In contrast, a physical delivery option on a foreign
currency, which the Exchange currently lists and trades, gives its
owner the right to receive physical delivery (if it is a call) or to
make physical delivery (if it is a put) of the underlying foreign
currency when the option is exercised.\11\ In addition, unlike other
Phlx-traded FCOs, U.S. dollar-settled FCOs will be deemed to be
exercised at expiration if the exercise settlement value is at least
$1.00 per contract unless the clearing member instructs OCC not to
exercise it.\12\
---------------------------------------------------------------------------
\11\ The Exchange has listed and traded physical delivery FCOs
issued by OCC on a number of currencies since 1982. The Exchange's
existing, physical delivery options on the Currencies would not be
affected by this proposal and would continue to trade as they do
today, by open outcry.
\12\ However, the normal expiration date exercise procedures do
not apply in circumstances in which the fixing of the exercise
settlement amount is delayed beyond the last trading day before
expiration. See OCC Rule 2302 (setting forth the expiration date
exercise procedures), and Securities Exchange Act Release No. 54395
(December 13, 2006) (order approving SR-OCC-2006-10).
---------------------------------------------------------------------------
Delivery and Payment. Upon exercise of an in-the-money U.S. dollar-
settled FCO structured as a call, the holder would receive, from OCC,
U.S. dollars representing the difference between the exercise strike
price and the closing settlement value of the U.S. dollar-settled FCO
contract multiplied by the number of units of currency covered by the
contract. Similarly, for a U.S. dollar-settled FCO structured as a put,
the holder would receive U.S. dollars representing the excess of the
exercise price over the closing settlement value of the U.S. dollar-
settled FCO contract multiplied by the number of units of foreign
currency covered by the contract.\13\
---------------------------------------------------------------------------
\13\ See Phlx Rule 1044.
---------------------------------------------------------------------------
Contract Size. The contract sizes of the U.S. dollar-settled FCO
contracts on the Currencies would be 10,000 British pounds and 10,000
Euros.\14\
---------------------------------------------------------------------------
\14\ The contract sizes for the physical delivery options on the
Currencies are 31,250 British pounds and 62,500 Euros.
---------------------------------------------------------------------------
Expirations. The Exchange proposes to permit U.S. dollar-settled
FCO contracts to be listed with expirations that are the same as the
expirations permitted for equity index options pursuant to Phlx Rule
1101A, with the exception of long term option series and quarterly
expiring FCOs which the Exchange does not propose to list.\15\ The
Exchange anticipates that, at least initially, it would list
expirations at one, two, three, six, and nine months, and that the
options would be on three of the months from the March, June,
[[Page 78507]]
September, December cycle, plus two additional near term months (five
months at all times).\16\ The expiration date for the consecutive and
cycle month options would be 11:59 p.m. Eastern Time on the Saturday
immediately following the third Friday of the expiration month.\17\
---------------------------------------------------------------------------
\15\ See Phlx Rule 1012(a). The Exchange stated that it does not
anticipate listing FLEX U.S. dollar-settled foreign currency options
at this time. Currently, trades may be executed in certain FLEX
options on equities and equity indexes. See Phlx Rule 1079.
\16\ By way of example, in September, the U.S. dollar-settled
FCOs would have the following months listed: October, November,
December, March, and June.
\17\ See Phlx Rule 1000(b)(21).
---------------------------------------------------------------------------
Trading Hours. The Exchange proposes to trade U.S. dollar-settled
FCOs from 9:30 a.m. to 4 p.m. Eastern Time, Monday through Friday.\18\
These trading hours differ from the trading hours for the physical
delivery FCO contracts because the U.S. dollar-settled FCOs would,
unlike the Exchange's physical delivery FCOs, trade on Phlx XL.\19\ An
expiring U.S. dollar-settled FCO contract would cease trading at 4:00
p.m. on the day prior to its expiration day.\20\ Unlike trading in
physical delivery FCOs, trading in U.S. dollar-settled FCOs would not
close on bank holidays.
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\18\ See Phlx Rule 101.
\19\ Trading hours for the Exchange's physical delivery FCO
contracts are from 2:30 a.m. to 2:30 p.m. Eastern Time, Monday
through Friday. Beginning December 1, 2006, the trading hours for
physical delivery FCOs on the Exchange will be from 7:30 a.m. to
2:30 p.m. Eastern Time, Monday through Friday. See Securities
Exchange Act Release No. 54802 (November 21, 2006), 71 FR 8875
(November 28, 2006) (Notice of Filing and Immediate Effectiveness of
SR-Phlx-2006-72).
\20\ The Exchange notes that in order to facilitate trading of
the U.S. dollar-settled FCOs on Phlx XL, trading would be permitted
to occur after the settlement value is announced on the day prior to
expiration, as discussed below.
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Settlement Values; Dissemination of Information. The closing
settlement value would be the day's announced Noon Buying Rate,\21\ as
determined by the Federal Reserve Bank of New York on the trading day
prior to the expiration date.\22\ If the Noon Buying Rate is not
announced by 2 p.m. Eastern Time, the closing settlement value would be
the most recently announced Noon Buying Rate, unless the Exchange
determines to apply an alternative closing settlement value as a result
of extraordinary circumstances. The closing settlement value would not
be disseminated through the Options Price Reporting Authority
(``OPRA''), but would be posted on the Exchange's Web site, where it
would be publicly available to all visitors to the Exchange's Web site
on an equal basis, without the need to enter any kind of password. The
Exchange has represented that it will not disclose the settlement value
to any person or group of persons other than employees of the Exchange
who need to know, prior to posting the value on the Exchange's Web
site.
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\21\ See Securities Exchange Act Release No. 52843 (November 28,
2005), 70 FR 72486 (December 5, 2005) (order granting accelerated
approval of SR-NYSE-2005-65).
\22\ See Phlx Rule 1057. If Friday is an Exchange holiday, the
closing settlement value for U.S. dollar-settled FCOs would be
determined on the basis of the Noon Buying Rate on the preceding
trading day, which would also be the last day of trading for the
expiring option.
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Position and Exercise Limits. For purposes of position and exercise
limits, positions in U.S. dollar-settled FCO contracts would be
aggregated with positions in the physical delivery contracts. In
addition, position and exercise limits for the U.S. dollar-settled FCOs
would be the same as the position and exercise limits for the physical
delivery contracts pursuant to Phlx Rules 1001 and 1002. However, each
Euro U.S. dollar-settled option contract would count as one-sixth of a
contract for purposes of position and exercise limits.\23\ Similarly,
each British pound U.S. dollar-settled option contract would count as
one-third of a contract for purposes of position and exercise
limits.\24\ The other aggregation principles in Phlx Rule 1001 would
continue to apply.
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\23\ See Phlx Rule 1001. According to the Exchange, each U.S.
dollar-settled Euro option contract would be treated as one-sixth of
a contract for position and exercise limit purposes because the
cash-settled Euro option contract is roughly one-sixth of the size
of the physical delivery contract.
\24\ The cash-settled British pound option contract is roughly
one-third of the size of the physical delivery contract.
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Strike Prices. The Exchange proposes to initially list exercise
strike prices for each expiration around the current spot price at
half-cent ($.005) intervals up to five percent on each side.\25\ Thus,
if the spot price initially were at 1.0000, the Exchange would list
strikes in $.005 intervals up to 1.0500 and down to .9500 for a total
of twenty-one strike prices available for trading. The Exchange would
not list any strike prices at intervals other than these $.005
intervals.\26\ As the spot price for U.S. dollar settled FCO moves, the
Exchange would list new strike prices that, at the time of listing, do
not exceed the spot price by more than 5% and are not less than the
spot price by 5%. For example, if at the time of initial listing the
spot price of the Euro is at 1.0000, the strike prices the Exchange
would list would be .9500 to 1.0500. If the spot price then moves to
1.0500, the Exchange may list additional strikes at the following
prices: 1.0550 to 1.1000. In that event, the Exchange would delist any
previously-listed series outside of the current ten percent band that
have no open interest. In addition, new strikes may be added during the
life of the option in accordance with Phlx Rule 1012.\27\
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\25\ According to the Exchange, the Exchange receives
contributor bank quotes from a vendor in real-time and takes the
average of the various quotes, to determine the foreign currency
spot price.
\26\ See proposed Commentary Section .06 to Phlx Rule 1012.
Strike prices would be expressed without reference to the first
two decimal places. Minimum quoting increments and maximum quote
spreads would also reflect this convention, as reflected in note 28,
infra, and accompanying text.
For example, assuming that the actual spot value of the Euro is
$1.00, a strike could be listed at $1.0050 and would be expressed as
$100.50. Similarly, the minimum quoting increment would be $.0005
(expressed as $.05), if the bid is less than $.0300 (expressed as
$3.00), or $.0010 (expressed as $.10), if the bid equals or exceeds
$.0300 (expressed as $3.00). Bids could be made at $.0330 (expressed
as $3.30), at $.0340 (expressed as $3.40), and so forth. Offers
could be made at $.0350 (expressed as $3.50), at $.0360 (expressed
as $ 3.60), and so forth. Maximum quote spread parameters for bids
and offers made in open outcry would range from $.0025 (expressed as
$.25), to $.0100 (expressed as $1.00), depending upon the size of
the prevailing bid. Thus, a market maker could bid $.0330 (expressed
as $3.30) and offer $.0370 (expressed as $ 3.70). (Following open
rotation, however, quotes may be made electronically with a
difference not to exceed $.0500 (expressed as $5.00) between the bid
and the offer regardless of the price of the bid). See Amendment No.
3, supra note 6, and infra note 28.
Prior to commencement of trading of U.S. dollar-settled options
on the Currencies, the Exchange intends to issue an informational
memorandum to members and member organizations which explains this
strike price and quoting convention.
\27\ See Phlx 1012(a)(iv).
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Bids and Offers--Premium. Under Phlx Rule 1033, bids and offers in
U.S. dollar-settled FCOs on the Currencies must be made in terms of
U.S. dollars per unit of the underlying foreign currency. The minimum
increment for U.S. dollar-settled FCOs quoting under $.0300 would be
$.0005 per unit of the foreign currency, expressed as .05 per unit of
the foreign currency, which equals a $5.00 minimum increment per
contract consisting of 10,000 Euros or 10,000 British pounds. The
minimum increment for U.S. dollar-settled FCOs quoting at $.0300 or
higher would be $.0010 per unit of the foreign currency, expressed as
.10 per unit of the foreign currency, which equals a $10.00 minimum
increment per contract consisting of 10,000 Euros or 10,000 British
pounds.\28\
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\28\ See Phlx Rule 1034(a). By way of example, if the spot price
of the Euro is at $1.2550 and an investor purchases the December
Euro $1.2500 (expressed as $125.00) Call at a premium of $.0075
(expressed as $.75) and then sells the December Euro $1.2500 Call at
a premium of $.0095 (expressed as $.95), the investor's profit would
be $.0020 per Euro. The investor's total profit would be $.0020 per
Euro multiplied by 10,000 Euros (the size of the contract) for a
total of $20.00. Amendment No. 3 corrected a technical error in the
use of the quoting convention in Phlx Rule 1034(a). Amendment No. 3
also revised an example in note 23 of the Notice to: (1) Reflect
that the minimum increment when the bid equals or exceeds $.0300
(expressed as $3.00) is $.0010 (expressed as 10 cents), not $.0005
(expressed as 5 cents), as the example erroneously implied as
originally drafted, (2) reduce the size of the bid in the example
from an unrealistic $1.00 (expressed as $100.00) range to a more
realistic $.0300 (expressed as $3.00) range while continuing to
illustrate the same underlying concepts, and (3) note that the
maximum quote spread parameters do vary depending on the size of the
prevailing bid and whether the bid/offer is made on Phlx XL as
opposed to open outcry. See Amendment No. 3, supra note 6.
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[[Page 78508]]
Margin Requirements. The U.S. dollar-settled FCOs would have the
same customer margin requirements as are provided for the existing FCOs
pursuant to Phlx Rule 722, Commentary .16.\29\ The Exchange calculates
the margin requirements for each foreign currency underlying U.S.
dollar-settled FCO separately, rather than determining one margin level
for all foreign currencies based upon the historical pricing
information for all foreign currencies together. The Exchange informs
members and the public of the margin levels for each currency option
immediately following the quarterly reviews described in Phlx Rule 722,
Commentary .16.
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\29\ Pursuant to Phlx Rule 722, Commentary .16, the Exchange
calculates the margin requirement for customers that assume short
FCO positions by adding a percentage of the current market value of
the underlying foreign currency contract to the option premium price
less an adjustment for the out-of-the-money amount of the option
contract. On a quarterly calendar basis, the Exchange reviews five-
day price changes over the preceding three-year period for each
underlying currency and sets the add-on percentage at a level which
would have covered those price changes at least 97.5% of the time
(the ``confidence level''). If the results of subsequent reviews
show that the current margin level provides a confidence level below
97%, the Exchange increases the margin requirement for that
individual currency up to a 98% confidence level. If the confidence
level is between 97% and 97.5%, the margin level would remain the
same but would be subject to monthly follow-up reviews until the
confidence level exceeds 97.5% for two consecutive months. If during
the course of the monthly follow-up reviews, the confidence level
drops below 97%, the margin level is increased to a 98% level and if
it exceeds 97.5% for two consecutive months, the currency is taken
off monthly reviews and is put back on the quarterly review cycle.
If the currency exceeds 98.5%, the margin level is reduced to a 98%
confidence level during the most recent three year period. Finally,
in order to account for large price movements outside the
established margin level, if the quarterly review shows that the
currency had a price movement, either positive or negative, greater
than two times the margin level during the most recent three year
period, the margin requirement is set at a level to meet a 99%
confidence level.
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B. Surveillance
The Phlx will integrate U.S. dollar-settled FCOs into existing Phlx
market surveillance programs for equity and index options, as well as
for physical delivery foreign currency options, and intends to apply
those same program procedures to the U.S. dollar-settled FCOs. The
Exchange represents that these surveillance programs for U.S. dollar-
settled FCOs will be adequate to monitor exchange trading of U.S.
dollar settled FCOs and detect violation of exchange rules, thereby
deterring manipulation.\30\
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\30\ See Amendment No. 3, supra notes 6 and 28.
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Futures on the British pound and the Euro, as well as options on
such futures are traded on the Chicago Mercantile Exchange (``CME'')
(both exchange pit trading and GLOBEX trading). Euro Currency Trust
Shares and British Pound Sterling Shares trade on the New York Stock
Exchange (``NYSE'') and on NYSE Arca. The Exchange represented that, to
the best of the Exchange's knowledge, these U.S. markets are the
primary trading markets in the world for exchange-traded futures,
options on futures and trust shares on these currencies. The Exchange
also represented that it may obtain trading information via the
Intermarket Surveillance Group (``ISG'') from other exchanges who are
members or affiliates of the ISG. Specifically, the Phlx can obtain
such information from the NYSE and NYSE Arca in connection with shares
of the Euro Currency Trust and the CurrencySharesTM British
Pound Sterling Trust trading on the NYSE and NYSE Arca, and from the
CME and London International Financial Futures Exchange (``LIFFE'') in
connection with Euro and Pound futures trading on those exchanges.\31\
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\31\ NYSE and NYSE Arca are members of ISG. CME and LIFFE are
affiliate members of ISG.
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In addition, the Phlx represented that it is able to obtain
information regarding trading in the Euro Currency Trust Shares,
British Pound Sterling Shares, Euro and British Pound options, and Euro
and British Pound futures and options on futures through Phlx members,
in connection with such members' proprietary or customer trades which
they effect on any relevant market.\32\ Pursuant to Phlx Rule 1022,
specialists and Registered Options Traders (``ROTs'') are required to
identify all accounts maintained for foreign currency trading in which
the specialist or ROT engages in trading activity or over which he
exercises investment discretion, and no specialist or ROT may engage in
foreign currency trading in any account not reported pursuant to the
rule. Phlx Rule 1022 also requires every specialist and ROT to make
available to the Phlx upon request all books, records and other
information relating to transactions for their own account or accounts
of associated persons with respect to the foreign currency underlying
U.S. dollar-settled FCOs, including transactions in the cash market as
well as the futures, options and options on futures markets. An
amendment to Phlx Rule 1022(d) would also add transactions in ``other
foreign currency derivatives'' to the list of currency related
transactions with respect to which specialists and ROTs must provide
information to the Exchange.
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\32\ See Equity Floor Procedure Advice F-8 and Options Floor
Procedure F-8, Failure to Comply with an Exchange Inquiry.
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C. Trading on Phlx XL
The Exchange proposes that U.S. dollar-settled FCOs trade on Phlx
XL, the Exchange's electronic trading platform for options. In this
regard, the Exchange proposes to amend a number of rules that currently
govern the trading of equity and equity index options that trade as
``Streaming Quote Options'' on Phlx XL to extend the coverage of those
rules to U.S. dollar-settled FCOs and to include U.S. dollar-settled
FCOs as a product that may be traded on Phlx XL as a Streaming Quote
Option.\33\ Exchange specialists, on-floor market makers known as
Streaming Quote Traders (``SQTs''),\34\ and remote market makers known
as Remote Streaming Quote Traders (``RSQTs'') \35\ who stream their
U.S. dollar-settled FCO quotes to the Exchange would be eligible to
participate in the directed order flow program. Specialists in U.S.
dollar-settled FCOs, like specialists in equity and equity index
options, also would be eligible to participate in the Exchange's
enhanced specialist participation programs.\36\
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\33\ See Phlx Rule 1080.
\34\ See Phlx Rule 1014(b)(ii)(A).
\35\ See Phlx Rule 1014(b)(ii)(B).
\36\ The Exchange currently has several Enhanced Specialist
Participation programs, embodied in Phlx Rule 1014(g). These
programs establish specified percentages as the Enhanced Specialist
Participation, depending on the category of option. Currently, the
specialist in physical delivery FCOs is not entitled to a
``specialist enhancement,'' although such a program was once in
effect.
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Obligations and Restrictions. U.S. dollar-settled FCOs would trade
in the same general manner as equity index options,\37\ which are also
U.S. dollar-settled products.\38\ In this regard, Phlx Rule 1014 is
being amended to make
[[Page 78509]]
clear that the obligations and restrictions applicable to specialists
and ROTs trading equity index options now generally would apply to
specialists and ROTs in U.S. dollar-settled FCOs.\39\ In addition,
under the amendments to Phlx Rule 1014, specialists and ROTs in U.S.
dollar-settled FCOs, like specialists in physical delivery FCOs, would
be subject to rules relating to bid/ask differentials and other
affirmative market making obligations and restrictions \40\ but those
rules with respect to U.S. dollar-settled FCOs would track rules
currently applicable to equity options, in order to facilitate trading
on the Phlx XL system by the system's current users who are accustomed
to the existing bid/ask differentials applicable to equity options.\41\
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\37\ However, Phlx Rule 1080, Commentary .01, is being revised
to reflect that the Auto-Quote system applies to equity and equity
index options, but not to U.S. dollar-settled FCOs. The Exchange's
Auto-Quote system incorporates pricing model data, which generate
automatic pricing of option series based on a number of factors,
including the value of the underlying stock.
\38\ See Phlx Rules 1014 and 1080. Conforming changes are being
made to Options Floor Procedure Advices B-6, Priority of Options
Orders for Equity Options and Index Options by Account Type, B-7,
Time Priority of Bids/Offers in Foreign Currency Options, and F-6,
Option Quote Parameters.
\39\ However, Phlx Rule 1014(c)(i)(B), which provides for a
maximum option price change with exceptions based upon the price of
the underlying security, would not apply to U.S. dollar-settled
FCOs. The Exchange does not have a maximum option price change rule
that applies to physical delivery FCOs and is not proposing a
maximum option price change rule for U.S. dollar-settled FCOs.
\40\ However, Phlx Rule 1014(c)(i)(B), which provides for a
maximum option price change with exceptions based upon the price of
the underlying security, would not apply to U.S. dollar-settled
FCOs.
\41\ Other amendments to Phlx Rule 1014 would make clear that
current provisions on priority/parity and bid/ask differentials that
apply to FCO contracts would be limited to physical delivery FCOs.
See paragraphs (c)(ii) and (h), and Commentary .16 of Phlx Rule
1014. Similarly, options Floor Procedure Advice F-17, relating to
trades to be effected in the trading pit, is being amended so that
it applies only to physical delivery FCOs, because U.S. dollar-
settled FCOs will trade on Phlx XL.
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In addition, the Exchange proposes to amend Phlx Rule 1063 and
Options Floor Procedure Advice C-2 to provide that the Floor Broker
Management System currently employed with respect to equity and equity
index options would also be required to be used for U.S. dollar-settled
FCOs.\42\
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\42\ The Options Floor Broker Management System is a component
of AUTOM designed to enable Floor Brokers and/or their employees to
enter, route and report transactions stemming from options orders
received on the Exchange. The Options Floor Broker Management System
also is designed to establish an electronic audit trail for options
orders represented and executed by Floor Brokers on the Exchange.
See Phlx Rule 1080, Commentary .06.
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Openings. Phlx Rule 1017 governs the Exchange's fully automated
opening system for options traded on Phlx XL.\43\ Phlx Rule 1017 is
being amended to reflect that U.S. dollar-settled FCOs would be opened
using the automated opening system, subject to certain adjustments to
current processes because FCO openings, unlike openings of equity and
index options, would not depend upon the opening of trading in an
underlying cash market.\44\ More specifically, Phlx Rule 1017 would
provide that Phlx XL would accept orders and quotes in U.S. dollar-
settled FCOs beginning no later than one hour before market opening,
and that the specialist assigned in the particular U.S. dollar-settled
FCO must enter opening quotes not later than 30 seconds after market
opening.\45\ It would provide that in certain circumstances an
anticipated opening price would be calculated if the quotes of at least
two Phlx XL participants have been submitted within two minutes of
market opening (or such shorter time as determined by the FCO Committee
and disseminated to membership via Exchange circular). Finally, it
would provide that the system would not open a series of U.S. dollar-
settled FCOs if the opening price is not within an acceptable range (as
determined by the FCO Committee and announced to Exchange members and
member organizations by way of Exchange circular).
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\43\ For a description of the automated opening system, see
Securities Exchange Act Release Nos. 52667 (October 25, 2005), 70 FR
65953 (November 1, 2005) (SR-Phlx-2005-25), and 53242 (February 7,
2006), 71 FR 7604 (February 13, 2006) (SR-Phlx-2006-11). The
Exchange also is making a technical change to clarify the
application of Phlx Rule 1017 to index options by inserting
reference to ``underlying securities constituting 100% of the index
value.'' The rule currently refers to the opening of the
``underlying security,'' which makes sense with respect to equity
options, but not index options.
\44\ See Phlx Rule 1017. In addition, the Exchange is making
conforming changes to Options Floor Procedure Advices A-12 and A-14.
\45\ Market opening, as with equity and equity index options, is
normally at 9:30 a.m. Eastern Time.
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Block Trades. In addition, the block trade procedures in Phlx Rule
1016 are limited to physical delivery FCOs. According to the Exchange,
the block trading rule currently enables market participants to execute
large-size FCO orders in an orderly fashion at a price that may not be
the best bid or offer for that particular FCO, but is the best price
available for executing a block trade in such FCO. To take advantage of
the block execution procedure, Phlx Rule 1016 requires a floor broker
with a block order to quote the market in a particular FCO, announce
that a block quotation for a specified number of contracts over 1,000
is sought, and ascertain from the trading crowd the best price at which
the entire order can be executed. The Exchange believes that trading of
U.S. dollar-settled FCOs on Phlx XL by SQTs and RSQTs who stream quotes
into the system makes execution of block trades pursuant to the
procedures required by Phlx Rule 1016 impractical.
Customized Foreign Currency Options. Phlx Rule 1069 is being
amended to limit the applicability of the rule to physical delivery
FCOs so that U.S. dollar-settled FCOs would not be eligible to trade on
a customized basis.
Foreign Currency Options Committee. Phlx Rules 1014 and 1080 and
Options Floor Procedure Advice A-13 is being amended to provide that
the Foreign Currency Options Committee would have decision-making
authority in certain instances with respect to U.S. dollar-settled FCOs
(rather than the Options Committee, which oversees the trading of
equity and equity index options on Phlx XL). In addition, the Phlx is
deleting the words ``on-floor'' from the term ``on-floor Governor'' in
Phlx Rule 1014(g), because the ``on-floor Governor'' category has
previously been eliminated from the Exchange's by-laws.\46\
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\46\ See Amendment No. 3, supra notes 6 and 28.
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D. Customer Protection
Exchange rules designed to protect public customers trading in FCOs
would apply to U.S. dollar-settled FCOs on the Currencies.
Specifically, Phlx Rule 1024(b) prohibits members from accepting a
customer order to purchase or write a U.S. dollar-settled FCO unless
such customer's account has been specially approved in writing by a
designated Foreign Currency Options Principal of the member for
transactions in FCOs. Additionally, Phlx Rule 1026 is designed to
ensure that options, including U.S. dollar-settled FCOs, are sold only
to customers capable of evaluating and bearing the risks associated
with trading in the instruments. Finally, under Phlx Rule 1027, members
are permitted to exercise discretionary power with respect to trading
U.S. dollar-settled FCOs in a customer's account only if the member has
received prior written authorization from the customer and the account
has been accepted in writing by a designated Foreign Currency Options
Principal. In addition, the Foreign Currency Options Principal or a
Registered Options Principal must approve and initial each
discretionary U.S. dollar-settled FCO on the day the order is
entered.\47\ Phlx Rule 1025 relating to the supervision of accounts,
Phlx Rule 1028 relating to confirmations, and Phlx Rule 1029 relating
to delivery of options disclosure documents also would apply to trading
in U.S. dollar-settled FCOs.
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\47\ See Phlx Rule 1027.
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[[Page 78510]]
III. Commission Finding and Conclusions
After careful consideration, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange.\48\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\49\
which requires that an exchange have rules designed, among other
things, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest.
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\48\ In approving this rule change, the Commission notes that it
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\49\ 15 U.S.C. 78f(b)(5).
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A. Settlement Value and Dissemination of Information
The Commission believes that sufficient venues exist for obtaining
reliable information on the Currencies so that investors in U.S.
dollar-settled FCOs can monitor the underlying spot market in the
Currencies. The Commission also believes that the Phlx's procedures and
the competitive nature of the spot market for the Currencies should
help to ensure that the settlement values for U.S. dollar-settled FCO
contracts will accurately reflect the spot price for foreign
currencies. Finally, the closing settlement value, which will be the
Noon Buying Rate on the trading day prior to expiration,\50\ would be
posted on the Exchange's Web site, where it would be publicly available
to all visitors on an equal basis, without the need to enter any kind
of password.
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\50\ If the Noon Buying Rate is not announced by 2 p.m. Eastern
Time, the closing settlement value would be the most recently
announced Noon Buying Rate, unless the Exchange determines to apply
an alternative closing settlement value as a result of extraordinary
circumstances.
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B. Customer Protection
The Commission believes that a regulatory system designed to
protect public customers must be in place before the trading of
sophisticated financial instruments, such as U.S. dollar-settled FCOs
on the Currencies, can commence on a national securities exchange. The
Commission believes this goal has been satisfied by the application of
Phlx customer protection rules for FCOs to U.S. dollar-settled FCOs.
C. Surveillance
The Commission notes that the Phlx will integrate U.S. dollar-
settled FCOs into existing Phlx market surveillance market programs for
equity and index options, as well as for physical delivery foreign
currency options, and that the Phlx intends to apply those same program
procedures to the U.S. dollar-settled FCOs. The Commission also notes
that Phlx Rule 1022, Equity Floor Procedure Advice F-8, and Options
Floor Procedure F-8, as amended to include transactions in ``other
foreign currency derivatives,'' provide Phlx with the authority to
obtain information regarding trading in the Euro Currency Trust Shares,
British Pound Sterling Shares, Euro and British Pound options, and Euro
and British Pound futures and options on futures through Phlx members,
in connection with such members' proprietary or customer trades which
they effect on any relevant market. In addition, the Phlx may obtain
trading information via the ISG from other exchanges who are members or
affiliates of the ISG. Specifically, the Phlx can obtain such
information from the NYSE and NYSE Arca in connection with shares of
the Euro Currency Trust and the CurrencySharesTM British
Pound Sterling Trust trading on the NYSE and NYSE Arca, and from the
CME and LIFFE in connection with Euro and Pound futures trading on
those exchanges. The Commission believes that these rules provide the
Phlx with the tools necessary to adequately surveil trading in the
Securities.
D. Position and Exercise Limits
As noted above, U.S. dollar-settled FCO contracts will be
aggregated with physical delivery contracts for position and exercise
limit purposes. The Commission believes that aggregation of U.S.
dollar-settled FCOs with the physical delivery contracts for position
and exercise limit purposes is prudent and minimizes concerns regarding
manipulations or disruptions of the markets for U.S. dollar-settled FCO
contracts and physical delivery contracts.
E. Trading on Phlx XL
The Commission believes that the trading of U.S. dollar-settled
FCOs on Phlx XL is consistent with the Act. The rules that currently
govern the trading of equity and equity index options that trade as
``Streaming Quote Options'' on Phlx would be extended to include U.S.
dollar-settled FCOs.\51\
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\51\ See supra notes 33 to 42 and accompanying text.
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F. Other Rules
The Commission believes that the other rule changes proposed by the
Phlx to accommodate the trading of U.S. dollar-settled FCOs are
consistent with the Act. First, the Commission believes it is
reasonable for the Phlx to initially list exercise strike prices for
each expiration around the current spot price at half-cent ($0.005)
intervals up to five percent on each side.\52\ The Commission notes
that the Phlx has represented that it has the system capacity to
support the additional quotations and messages that will result from
listing options on U.S. dollar settled FCOs.\53\
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\52\ When listing additional strikes, the Commission expects the
Exchange to consider whether the listing of such strikes will be
consistent with the maintenance of a fair and orderly market.
\53\ See Letter, dated October 11, 2006, from Thomas A. Whitman,
Senior Vice President, Phlx, to Elizabeth King, Associate Director,
Division of Market Regulation (``Division''), Commission, Heather
Seidel, Senior Special Counsel, Division, Commission, and David Hsu,
Special Counsel, Division, Commission.
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Finally, the Commission believes that it is consistent with the Act
for the Exchange to establish the minimum trading increment for U.S.
dollar-settled FCOs at $.0005 (expressed as $.05) per unit of the
foreign currency for U.S. dollar-settled FCOs quoted at less than
$.0300 (expressed as $3.00), and at $.0010 (expressed as $.10) per unit
of the foreign currency for U.S. dollar-settled FCOs quoted at $.0300
(expressed as $3.00) or higher.
G. Accelerated Approval
Pursuant to Section 19(b)(2) of the Act, the Commission finds good
cause to approve the proposal, as amended, prior to the thirtieth day
after the amended proposal is published for comment in the Federal
Register. Amendment No. 3 clarifies the proposed rule change with
respect to the Phlx quoting convention, deletes outdated references to
``on-floor Governor'' in Phlx Rule 1014, and contains Phlx
representations with regard to the Phlx surveillance procedures.
Accordingly, the Commission finds good cause to accelerate approval of
the amended proposal prior to the thirtieth day after publication in
the Federal Register.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 3, including whether Amendment No. 3
is consistent with the Act. Comments may be submitted by any of the
following methods:
[[Page 78511]]
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-Phlx-2006-34 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2006-34. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/
sro.shtml). 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 in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of Phlx. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make available publicly. All submissions should refer to File Number
SR-Phlx-2006-34 and should be submitted on or before January 19, 2007.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\54\ that the proposed rule change (SR-Phlx-2006-34), as modified
by Amendments No. 1, 2, and 3, be, and it hereby is, approved on an
accelerated basis.
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\54\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\55\
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\55\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6-22404 Filed 12-28-06; 8:45 am]
BILLING CODE 8011-01-P
