[Federal Register Volume 77, Number 56 (Thursday, March 22, 2012)]
[Notices]
[Pages 16879-16883]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-6867]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66616; File No. SR-Phlx-2012-11]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Granting Approval of Proposed Rule Change Regarding the Listing and 
Trading of PHLX FOREX Options<SUP>TM</SUP>

March 16, 2012.

I. Introduction

    On January 23, 2012, NASDAQ OMX PHLX LLC (``Exchange'' or ``Phlx'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade U.S. dollar-settled foreign currency options known as 
PHLX FOREX Options on the British pound, the Swiss franc, the Canadian 
dollar, the Australian dollar, the New Zealand dollar, and the Euro 
(``PHLX FOREX Options''). The proposed rule change was published for 
comment in the Federal Register on February 1, 2012.\3\ The Commission 
received no comment letters on the proposed rule change. This order 
approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 66257 (January 26, 
2012), 77 FR 5073 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade foreign currency options 
known as PHLX FOREX Options on the British pound, the Swiss franc, the 
Canadian dollar, the Australian dollar, the New Zealand dollar, and the 
Euro. The proposal establishes new Rules 1000C through 1009C that 
would, in conjunction with current Exchange trading rules, allow 
listing and trading of PHLX FOREX Options. The Exchange also is 
amending Phlx Option Floor Procedure Advices F-6 \4\ and F-15 \5\ 
(``OFPAs or Advices'') to harmonize the Exchange Advices and the 
proposed PHLX FOREX Options rules.
---------------------------------------------------------------------------

    \4\ Specifically, the Exchange proposes to amend Advice F-6 to 
reflect ``expressed as'' pricing for maximum quotes spread 
parameters in light of bid and ask differentials. The Exchange notes 
that this change will harmonize Advice F-6 with its corresponding 
proposed rule 1003C, so that the same pricing is reflected in the 
rule and the Advice.
    \5\ The Exchange also proposes to amend Advice F-15, which 
discusses minor infractions of position/exercise limits and hedge 
exemptions, to reflect the addition of proposed Rules 1008C and 
1009C. The Exchange notes that this will harmonize Advice F-15 with 
its corresponding proposed Rules 1008C and 1009C, and thereby 
include minor violations of the proposed rules in the Exchange's 
Minor Rule Plan as reflected in the Advices.
---------------------------------------------------------------------------

    The proposal allows the listing and trading of PHLX FOREX Options 
on six of the same foreign currencies that underlie another type of 
foreign currency option that is currently listed and traded on the 
Exchange (referred to as either ``FCOs'' or World Currency Options, 
``WCOs''), including the British pound, the Swiss franc, the Canadian 
dollar, the Australian dollar, the New Zealand dollar, and the Euro.\6\ 
The proposal does not affect the continued listing and trading of FCOs 
on the Exchange, as PHLX FOREX Options will be eligible to list and 
trade in parallel to current FCOs.\7\
---------------------------------------------------------------------------

    \6\ The product specifications for the current FCOs can be found 
at http://www.nasdaqomxtrader.com/wco. The Exchange currently lists 
eleven FCOs that trade in the manual auction market as well as 
electronically. The currencies underlying these FCOs include: the 
Australian dollar, the British pound, the Canadian dollar, the Euro, 
the Japanese yen, the Mexican peso, the New Zealand dollar, the 
Norwegian krone, the South African rand, the Swedish krona, and the 
Swiss franc.
    \7\ However, Phlx proposes to amend the FCO rules in one respect 
to provide that, for purposes of determining position and exercise 
limits, FCO options will be aggregated with PHLX FOREX Options that 
are listed on the same underlying currency. See infra note 30.
---------------------------------------------------------------------------

    PHLX FOREX Options will be similar, and in many respects identical, 
to FCOs. As such, the proposed rules provide that the Exchange's 
existing rules and procedures will be applicable to PHLX FOREX Options, 
and the proposed PHLX FOREX Options rules will supplement existing 
rules. For example, PHLX FOREX Options will follow the rules that are 
currently applicable to FCOs that pertain to areas such as hours of 
trading, quoting and market making requirements, margin requirements, 
reporting options positions, filing trade information, and FLEX 
trading.\8\
---------------------------------------------------------------------------

    \8\ See Exchange Rules 101, 1014, 721, 1003, 1053, and 1079, 
respectively. In its filing, the Exchange notes that other Exchange 
rules that are applicable to the trading of foreign currency options 
products include Rules 1006 (Other Restrictions on Exchange Options 
Transactions and Exercises); 1014 (Obligations and Restrictions 
Applicable to Specialists and Registered Options Traders); 1022 
(Securities Accounts and Orders of Specialists and Registered 
Options Traders); 1024 (Conduct of Accounts for Options Trading); 
1025 (Supervision of Accounts); 1027 (Discretionary Accounts); 1028 
(Confirmations); 1039 (Resolution Of Uncompared Trade); 1043 
(Allocation of Exercise Notices); 1044 (Delivery and Payment); 1045 
(Officers And Employees Restricted); 1047 (Trading Rotations, Halts 
and Suspensions); 1049 (Communications to Customers); 1063 
(Responsibilities of Floor Brokers); 1064 (Crossing, Facilitation 
and Solicited Orders); 1066 (Certain Types of Orders Defined); 1068 
(Execution of Multi-Part Orders); 1080 (Phlx XL and Phlx XL II); 
1083 (Order Protection; Locked and Crossed Markets); 1089 (Dealing 
Directly With Specialist and Registered Option Trader in Foreign 
Currency Options); and 1092 (Obvious Errors and Catastrophic 
Errors). See Notice, supra note 3, 77 FR at 5078.

---------------------------------------------------------------------------

[[Page 16880]]

    New Rule 1000C states that unless otherwise specified, the proposed 
rules in the Rule 1000C series of rules (``Rule 1000C Series'') are 
applicable only to PHLX FOREX Options. Further, Rule 1000C provides 
that except to the extent that specific rules in the Rule 1000C Series 
govern, or unless the context otherwise requires, the provisions of the 
Option Rules applicable to FCOs \9\ and of the By-Laws and all other 
Rules and Policies of the Board of Directors are applicable to the 
trading on the Exchange of PHLX FOREX Options.
---------------------------------------------------------------------------

    \9\ Exchange Option Rules 1000 et seq. and 1000A et seq.
---------------------------------------------------------------------------

    To minimize investor confusion, the Exchange has represented that 
it intends to engage in an educational effort to inform potential 
traders about the differences in the PHLX FOREX Options as compared to 
FCO products.\10\
---------------------------------------------------------------------------

    \10\ See Notice, supra note 3, 77 FR at 5075. For example, as 
discussed in the Exchange's filing, the pricing of PHLX FOREX 
Options and FCOs will be different in that the pricing of a Euro 
PHLX FOREX Option will resemble spot market pricing (e.g., 1.0031) 
while the pricing of a Euro FCO will resemble index option pricing 
(e.g., 100.31). See Notice, supra note 3, 77 FR at 5076. Further, 
the pricing symbology will be different in that PHLX FOREX Option 
prices would be stated out to four decimal places while FCOs are 
priced out to two places.
---------------------------------------------------------------------------

Pricing Convention

    In its filing, the Exchange noted that the primary difference 
between current FCOs and proposed PHLX FOREX Options will be the 
pricing convention of PHLX FOREX Options, which resembles the ``spot 
market pricing'' on the underlying currencies.\11\ This is the same 
convention that is used for currency futures and options on currency 
futures contracts on the same underlying currencies.\12\ Currently, the 
Exchange receives spot market prices for currencies underlying the FCOs 
from a data vendor, which at this time is SIX Telekurs,\13\ and 
converts such spot market prices to ``Exchange Spot Prices'' by 
applying an appropriate multiplier (e.g., 100 or 1000).\14\ The closing 
settlement value for FCO settlement purposes is the Exchange Spot Price 
at 12:00:00 Eastern Time (noon) on the last trading day prior to 
expiration.\15\ The Exchange currently generates a settlement value 
report for each underlying currency and publicly disseminates unique 
FCO symbols and settlement values in order to differentiate between 
live underlying markets and 12:00:00 noon FCO settlement prices.
---------------------------------------------------------------------------

    \11\ See Notice, supra note 3, 77 FR at 5074. See also proposed 
Exchange Rule 1001C.
    \12\ A currency futures contract is a transferable futures 
contract that specifies the price at which a currency can be bought 
or sold at a future expiration date. CME Group Inc. lists and trades 
futures and options on futures contracts on many of the same 
currencies that the Exchange is proposing for PHLX FOREX Options, 
including the Australian dollar, the British pound, the Canadian 
dollar, and the Euro. Examples of settlement (closing) spot prices 
of futures contracts on these currencies can be found at ftp://ftp.cmegroup.com/pub/settle/stlcur.
    \13\ According to the Exchange, SIX Telekurs specializes in the 
procurement, processing and distribution of international financial 
information for investment advisory services, fund administration, 
portfolio management, financial analysis and securities 
administration. SIX Telekurs collects data directly from hundreds of 
contributors and exchanges as well as more than thirty (30) 
worldwide contributing banks. See Notice, supra note 3, 77 FR at 
5075. This data serves as the basis for the foreign currency spot 
market prices that SIX Telekurs provides to the Exchange.
    The Exchange notes that spot market prices for currencies 
underlying PHLX FOREX Options are also calculated by other entities 
and available to investors from other sources such as market data 
vendors Bloomberg, Reuters, and Thomson. Investors can also get spot 
market prices for free from sources such as http://finance.yahoo.com/; as well as from brokers with whom investors have 
a trading account. See Notice, supra note 3, 77 FR at 5075.
    \14\ For a definition of Exchange Spot Price, see Rule 
1000(b)16.
    The International Securities Exchange, LLC (``ISE'') similarly 
applies multipliers to its cash-settled rate-modified currency 
options (which are not fungible with Phlx's FCOs) so that they tend 
to look like the prices of index and other options. See Securities 
Exchange Act Release No. 55575 (April 3, 2007), 72 FR 17963 (April 
10, 2007) (SR-ISE-2006-59).
    \15\ See Exchange Rule 1057.
---------------------------------------------------------------------------

    Unlike FCOs, the proposed PHLX FOREX Options will not use the 
modified ``Exchange Spot Prices'' for settlement purposes. Instead, the 
Exchange will use the spot market prices that it receives from its data 
vender (i.e., SIX Telekurs) at 12:00:00 Eastern Time (noon) on the last 
trading day prior to expiration to calculate settlement values. In 
other words, the Exchange will not apply a multiplier to the spot price 
for FOREX Options as it does for FCOs.\16\ PHLX FOREX Option settlement 
values will be, similarly to FCOs, publicly disseminated with unique 
symbols to differentiate between live underlying markets and 12:00:00 
Eastern Time (noon) PHLX FOREX Option settlement prices. Except for 
applying multipliers for FCO settlement values, the settlement value 
methodologies will largely be similar for PHLX FOREX Options and FCOs.
---------------------------------------------------------------------------

    \16\ See Proposed Exchange Rule 1006C. For example, the July 
2012 settlement value of a PHLX FOREX Option on the Euro may be 
$1.4338 based on the spot market price of the underlying currency; 
whereas the July 2012 settlement value price of a FCO on the Euro 
may be $143.38 based on the application of a 100 multiplier to the 
similar spot market price.
---------------------------------------------------------------------------

    Similar to FCOs, PHLX FOREX Options listed by the Exchange will be 
European-style exercise.\17\ Upon exercise, holders of options 
contracts would receive U.S. dollars representing the difference 
between the exchange rate and the exercise price of the option, which 
would be multiplied by the units of currency in each PHLX FOREX Option 
contract.\18\ Additionally, PHLX FOREX Options that are in-the-money by 
any amount on the expiration date would be exercised automatically by 
OCC, while PHLX FOREX Options that are out-of-the-money on the 
expiration date would expire worthless. The Exchange anticipates that 
PHLX FOREX Options will be cleared by The Options Clearing Corporation 
(``OCC'').\19\
---------------------------------------------------------------------------

    \17\ Unlike American style options, European style options may 
be exercised only on the day that they expire.
    \18\ See Proposed Exchange Rule 1006C. Each PHLX FOREX Option 
contract for the six currencies discussed in this filing would, like 
each FCO contract, have 10,000 units of currency. The product 
specifications for the new PHLX FOREX Options may be found at http://www.nasdaqomxtrader.com/wco.
    \19\ The Exchange's FCOs are cleared by OCC. See Securities 
Exchange Act Release No. 54935 (December 13, 2006), 71 FR 76417 
(December 20, 2006) (SR-OCC-2006-10) (order approving amendments to 
OCC's by-laws and rules to accommodate the clearance and settlement 
of the Exchange's FCOs).
---------------------------------------------------------------------------

Opening and Adding New PHLX FOREX Options

    The Exchange proposes Rule 1002C regarding the series of underlying 
PHLX FOREX Options that may be opened for trading after a particular 
class of PHLX FOREX Option has been approved for listing and trading on 
the Exchange. Specifically, the Exchange proposes that, at the 
commencement of trading on the Exchange of a particular class of PHLX 
FOREX Options, the Exchange will open a minimum of one expiration month 
and series for each class of options open for trading on the 
Exchange.\20\ The exercise price of each series of PHLX FOREX Options 
opened for trading on the Exchange will be fixed in terms of U.S. 
dollars per unit of the underlying currency at a price per

[[Page 16881]]

unit which is reasonably close to the current spot market price of the 
underlying foreign currency in the foreign exchange market at or before 
the time such series of options is first opened for trading on the 
Exchange. The Exchange notes that this is the same as the procedure for 
opening initial months and series and fixing expiration terms of equity 
options and index options on the Exchange.\21\
---------------------------------------------------------------------------

    \20\ The Exchange notes that it currently intends to open two 
quarterly and two additional near-term months. See Notice, supra 
note 3, 77 FR at 5076.
    \21\ See id.
---------------------------------------------------------------------------

    Regarding additional series of options, proposed Rule 1002C states 
that additional series of PHLX FOREX Options of the same class may be 
opened for trading on the Exchange when the Exchange deems it necessary 
to maintain an orderly market, to meet customer demand or when the 
market price of the underlying stock moves more than five strike prices 
from the initial exercise price or prices.\22\ Regarding long-term 
options, the proposed rule provides that with respect to any class of 
PHLX FOREX Options series the Exchange may list options having up to 
thirty-nine months from the time they are listed until expiration (with 
up to six additional expiration months).\23\ Strike price interval, 
bid/ask differential and continuity rules will not apply to such 
options series until the time to expiration is less than nine 
months.\24\ In addition, the Exchange is proposing to allow PHLX FOREX 
Options to be eligible for FLEX trading. \25\
---------------------------------------------------------------------------

    \22\ Proposed subsection (a)(ii) to Exchange Rule 1002C states 
further: The opening of a new series of options shall not affect the 
series of options of the same class previously opened. New series of 
options on an individual stock may be added until the beginning of 
the month in which the options contract will expire. Due to unusual 
market conditions, the Exchange, in its discretion, may add a new 
series of PHLX FOREX Options until five (5) business days prior to 
expiration.
    \23\ See Proposed Exchange Rule 1002C(a)(iii).
    \24\ See id.
    \25\ Specifically, proposed Exchange Rule 1007C provides that 
the FLEX procedures set forth in Rule 1079 in respect of FCOs will 
also be applicable to PHLX FOREX Options. Rule 1079 deals with the 
process of listing and trading FLEX equity, index, and FCOs on the 
Exchange. The rule states that FLEX options are available for FCOs 
and discusses, among other things: opening FLEX options trading 
through the Request-for-Quote (``RFQ'') process; quotes responsive 
to RFQs; trading parameters and procedures; and position and 
exercise limits for FLEX options.
---------------------------------------------------------------------------

Strike Prices

    Pursuant to proposed Rule 1002C, the Exchange could initially list 
exercise strike prices for a PHLX FOREX Option within a 40% band around 
the current spot market price for the underlying currency, with such 
options listed at $.0050 intervals. As the spot market moves, the 
Exchange may list new strike prices that, at the time of listing, do 
not exceed the spot market by more than 20 percent and are not less 
than the spot market by more than 20 percent (i.e., within the 40% 
band).\26\
---------------------------------------------------------------------------

    \26\ For example, if at the time of initial listing, the spot 
market of the Euro is at $1.000 the strike prices the Exchange would 
list for the PHLX FOREX Option will be $.800 to $1.20 in $.0050 
intervals. If the spot market then moves to $1.3050, the Exchange 
may list additional strikes at the following prices in $.0050 
intervals: $1.045 to $1.565.
---------------------------------------------------------------------------

Bids and Offers and Minimum Trading Increments

    The quote spread parameters (or bid/ask differentials) with respect 
to PHLX FOREX Options are found in subsection (a) of Rule 1003C, which 
is applicable to PHLX FOREX Options specialists and Registered Options 
Traders (``ROTs''). In subsection (a), the Exchange proposes to use the 
spot market price convention but move the decimal point two places to 
the right so that a bid and/or offer differential of $.0025 would be 
``expressed as'' $.25 for trading purposes.\27\ Regarding electronic 
quotations, the Exchange proposes to state in subsection (b) to Rule 
1003C that PHLX FOREX Options may be quoted electronically with a 
difference not to exceed $.0500 (expressed as $5.00) between the bid 
and offer regardless of the price of the bid.\28\ The Exchange believes 
that because such proposed ``expressed as'' price demarcations are 
similar to how prices are now expressed for equity options, it would be 
easier for PHLX FOREX Options participants to use the expressed as 
pricing for trading purposes.\29\
---------------------------------------------------------------------------

    \27\ Proposed subsection (a) to Exchange Rule 1003C states in 
full: with respect to all PHLX FOREX Options, bidding and/or 
offering so as to create differences of no more than $.0025 
(expressed as $.25) between the bid and the offer for each option 
contract for which the prevailing bid is less than $.0200 (expressed 
as $2.00); no more than $.0040 (expressed as $.40) where the 
prevailing bid is $.0200 (expressed as $2.00) or more but less than 
$.0500 (expressed as $5.00); no more than $.0050 (expressed as $.50) 
where the prevailing bid is $.0500 (expressed as $5.00) or more but 
less than $.1000 (expressed as $10.00); no more than $.0080 
(expressed as $.80) where the prevailing bid is $.1000 (expressed as 
$10.00) or more but less than $.2000 (expressed as $20.00); and no 
more than $.0100 (expressed as $1.00) where the prevailing bid is 
$.2000 (expressed as $20.00).
    \28\ Proposed subsection (b) to Exchange Rule 1003C states 
further: the bid/ask differentials set forth in this subparagraph 
(b) only applies to electronic quotations and only following the 
opening rotation in each security (i.e., the bid/ask differentials 
specified in sub-paragraph (a) above shall apply during opening 
rotation). Quotations provided in open outcry may not be made with 
bid/ask differentials set forth in this subparagraph (b) and instead 
must comply with the legal bid/ask differential requirements 
described in sub-paragraph (a) above and not in this sub-paragraph 
(b).
    \29\ See Notice, supra note 3, at 5076. As an example, the 
Exchange states that it would be unwieldy for a trader in a crowd to 
have to announce that he is improving a price by .0010 (one tenth of 
a penny). The ``expressed as'' price would allow the trader to 
announce that he is improving the price by ten cents or a dime. See 
id. at n.32.
---------------------------------------------------------------------------

    Proposed Rule 1004C regarding bids and offers of PHLX FOREX Options 
states that except as provided in paragraph (b) and (c) of that Rule 
(contract adjustments and spread type priority), all bids or offers 
made on the Exchange floor for PHLX FOREX Option contracts shall be 
expressed in terms of U.S. dollars per unit of the underlying foreign 
currency. The example given in the rule is that a bid of ``.0325'' 
(which would be expressed as ``$3.25'') for a premium on a $1.70 strike 
price option on the British pound would represent a bid to pay $325 per 
option contract.
    The minimum trading increment for PHLX FOREX Options is set forth 
in proposed Rule 1005C. For the six currencies that the Exchange 
proposes to list, the minimum increment would be $.0001, expressed as 
$.01. Subsection (b) adds that different, higher, minimum increments 
may be fixed by the Exchange for option contracts of a particular 
series of PHLX FOREX Options, which information would be posted on the 
Exchange's Web site.

Position and Exercise Limits

    Proposed Rule 1008C establishes that the new PHLX FOREX Options on 
the British pound, the Swiss franc, the Canadian dollar, the Australian 
dollar, the New Zealand dollar, and the Euro, will each have a position 
limit of 1,200,000 contracts. The proposed rule also establishes that 
if a PHLX FOREX Option and an FCO are listed on the same underlying 
currency (e.g., a Euro PHLX FOREX Option and a Euro FCO), then the 
positions in each option on the same underlying currency will be 
aggregated for purposes of determining compliance with the applicable 
position limit.\30\ Proposed Rule 1009C establishes that the exercise 
limits for options on PHLX FOREX Options will be equivalent to the 
position limits prescribed in Rule 1008C.
---------------------------------------------------------------------------

    \30\ See also proposed change to Exchange Rule 1001 Commentary 
.05 (c)(iv) (describing the aggregation provision for purposes of 
determining compliance with position limits for FCO options).
---------------------------------------------------------------------------

Closing Settlement Value

    PHLX FOREX Options will use a closing settlement value methodology 
that is identical to what is currently being used for FCOs with one 
distinction--calculating settlement value for PHLX FOREX Options will 
use

[[Page 16882]]

the spot market price, whereas FCOs currently use the modified Exchange 
Spot Price. Accordingly, proposed Rule 1006C provides that the closing 
settlement value for PHLX FOREX Options and for FLEX PHLX FOREX Options 
shall be the spot market price at 12:00:00 Eastern Time (noon) on the 
last trading day prior to expiration unless the Exchange determines to 
apply an alternative closing settlement value as a result of 
extraordinary circumstances.\31\ The rule states that, like with FCOs, 
PHLX FOREX Options will be settled in U.S. dollars per unit of 
underlying currency, and the Exchange will disseminate the closing 
settlement value through one or more major market data vendors. The 
rule also indicates that the disclaimer of liability that is applicable 
to FCOs is likewise applicable to PHLX FOREX Options. In addition, the 
Exchange states that it will disseminate PHLX FOREX Option closing 
settlement values on its Web site.\32\
---------------------------------------------------------------------------

    \31\ Similar to FCOs, the expiration date for PHLX FOREX Options 
would be the Saturday following the third Friday of the expiration 
month, and the last trading day would be the third Friday of the 
expiration month.
    \32\ See Notice, supra note 3, 77 FR at 5078.
---------------------------------------------------------------------------

Systems Capacity and Surveillance

    The Exchange represents in its filing that it has the necessary 
systems capacity to support new options series that will result from 
the introduction of PHLX FOREX Options on the Exchange.\33\ The 
Exchange also represents that it has an adequate surveillance program 
in place for trading PHLX FOREX Options, and noted that it will apply 
the same surveillance program to PHLX FOREX Options that it uses for 
FCOs.\34\
---------------------------------------------------------------------------

    \33\ See id.
    \34\ See id.
---------------------------------------------------------------------------

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \35\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\36\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\37\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, 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.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78f.
    \36\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As discussed above, the proposed PHLX FOREX Options are similar to 
Phlx's existing FCO options, which the Commission approved in 2007.\38\ 
In the areas where the two products and the corresponding rules are 
identical, the Commission continues to believe that such provisions are 
consistent with the Act. The contract specifications that are unique to 
the proposed PHLX FOREX Options are discussed below.
---------------------------------------------------------------------------

    \38\ See Securities Exchange Act Release No. 54989 (December 21, 
2006), 71 FR 78506 (December 29, 2006) (SR-Phlx-2006-34) (FCO 
Approval Order).
---------------------------------------------------------------------------

    The Commission believes that any potential concerns regarding 
investor confusion between the two products should be mitigated by the 
Exchange's undertaking to engage in an educational outreach effort to 
inform potential traders about the differences between the new PHLX 
FOREX Options and the existing FCO products.\39\ Further, PHLX FOREX 
Options will have their own ticker symbols and the applicable 
settlement values will be disseminated with unique symbols to 
differentiate these products from FCO options based on the same 
underlying currency.
---------------------------------------------------------------------------

    \39\ See Notice, supra note 3, 77 FR at 5075.
---------------------------------------------------------------------------

A. Settlement Value and Dissemination of Information

    The Commission notes that the primary difference between current 
FCOs and proposed PHLX FOREX Options is that the pricing convention of 
PHLX FOREX Options will be based on the spot market prices for the 
underlying currencies. As noted above, to calculate settlement values, 
the Exchange will use the spot market prices that it receives from SIX 
Telekurs or another data vendor at 12 Eastern Time on the last trading 
day prior to expiration, but will not apply any multiplier as it does 
for FCOs. The Commission believes that the proposed closing settlement 
value methodology for PHLX FOREX Options is substantially similar to 
the methodology used for FCOs, despite the absence of a modifier for 
the former, and therefore it does not raise any new regulatory issues.
    Further, the Commission believes that sufficient venues exist for 
obtaining reliable information on the underlying currencies so that 
investors in PHLX FOREX Options can monitor the underlying spot market 
in the underlying currencies.\40\ 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 PHLX 
FOREX Options will accurately reflect the spot price for foreign 
currencies. Finally, the closing settlement value will be publicly 
disseminated by Phlx. Accordingly, the proposed rules are designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \40\ The Commission notes that the Exchange stated in the Notice 
that, in addition to spot market prices provided by SIX Telekurs, 
spot market prices are available from other sources such as 
Bloomberg, Reuters, and Thompson and available from free sources 
such as http://finance.yahoo.com/. See Notice, supra note 3, 77 FR 
at 5075.
---------------------------------------------------------------------------

B. Surveillance

    The Commission notes that the Phlx will integrate PHLX FOREX 
Options into existing Phlx market surveillance market programs for 
FCOs. Phlx has represented that it has an adequate surveillance program 
in place for the trading of FCOs and believes that such program will be 
adequate for the surveillance of PHLX FOREX Options.\41\ In addition, 
Phlx will have the ability to obtain trading information via the 
Intermarket Surveillance Group (``ISG'') from other exchanges who are 
members or affiliates of the ISG.\42\ Accordingly, the Commission 
believes that Phlx has access to the tools necessary to adequately 
surveil trading in these options.
---------------------------------------------------------------------------

    \41\ See Notice, supra note 3, 77 FR at 5078.
    \42\ The Exchange is a member of the ISG under the Intermarket 
Surveillance Group Agreement, which was modernized in 2008, and may 
obtain trading information via the ISG from other exchanges who are 
members or affiliates of the ISG. The members of the ISG include all 
of the U.S. registered stock and options markets. The ISG members 
work together to coordinate surveillance and investigative 
information sharing in the stock and options markets. In addition, 
the major futures exchanges are affiliated members of the ISG, which 
allows for the sharing of surveillance information for potential 
intermarket trading abuses. See id.
---------------------------------------------------------------------------

C. Position and Exercise Limits

    Phlx proposes a position limit of 1,200,000 contracts for PHLX 
FOREX Options in the underlying currencies proposed in this filing, 
namely the British pound, the Swiss franc, the Canadian dollar, the 
Australian dollar, the New Zealand dollar, and the Euro. The Commission 
notes that this position limit is consistent with the current position 
limit for FCOs on Euros.\43\ The Commission further notes that the 
Exchange has provided data evidencing

[[Page 16883]]

the liquidity of the markets for these six currencies. Specifically, 
the Exchange has represented that the six major foreign currencies that 
underlie PHLX FOREX Options are all within the top ten most traded 
foreign currencies in the world, and represent a 72.9% share of the 
daily market turnover (excluding U.S. dollars).\44\ Accordingly, the 
Commission believes that the proposed position limits are consistent 
with the Act.
---------------------------------------------------------------------------

    \43\ See Exchange Rules 1001 and 1002.
    \44\ See Notice, supra note 3, 77 FR at 5077.
---------------------------------------------------------------------------

    Further, PHLX FOREX Options contracts will be aggregated with FCO 
contracts for position and exercise limit purposes. The Commission 
believes that aggregation of PHLX FOREX Options contracts with FCOs on 
the same underlying currency for purposes of position and exercise 
limits is appropriate and designed to address concerns with the 
potential for manipulation or disruptions of the markets for PHLX FOREX 
Options contracts and FCOs.

D. Other Rules

    The Commission believes that the other rule changes proposed by the 
Phlx to accommodate the trading of PHLX FOREX Options are consistent 
with the Act. First, the Commission believes that the procedure for 
opening initial months and series and setting expiration terms is 
appropriate and consistent with the Exchange's rules for equity and 
index options on the Exchange.\45\ Specifically, the Exchange will open 
a minimum of one expiration month and series for each class of options 
open for trading on the Exchange, and the exercise price will be fixed 
at a price that is reasonably close to the current spot market price of 
the underlying foreign currency at or before the time such series of 
options is first opened for trading.
---------------------------------------------------------------------------

    \45\ See Exchange Rules 1012 and 1101A.
---------------------------------------------------------------------------

    Further, the Commission believes it is reasonable for the Phlx to 
initially list exercise strike prices within a 40 percent band around 
the current spot market price for an underlying currency for a PHLX 
FOREX Option. The Commission also believes that it is consistent with 
the Act for the Exchange to establish the proposed minimum trading 
increments for PHLX FOREX Options. The Commission notes that the Phlx 
has represented that it has the systems capacity to support the 
additional quotations and messages that will result from listing 
options on PHLX FOREX Options.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\46\ that the proposed rule change (SR-Phlx-2012-11) be, and hereby 
is, approved.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
---------------------------------------------------------------------------

    \47\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-6867 Filed 3-21-12; 8:45 am]
BILLING CODE 8011-01-P