Federal Register / Vol. 60, No. 5 / Monday, January 9, 1995 / Notices 2419

1 15 U.S.C. 78s(b)(1) (1988).

2 17 CFR 240.19b–4 (1992).

3 3D FCOs are cash-settled, European-style, cash/

spot FCO contracts on the German mark that trade

in one-week and two-week expirations. See

Securities Exchange Act Release No. 33732 (March

8, 1994), 59 FR 52337 (March 15, 1994).

4See Securities Exchange Act Release No. 34814

(October 7, 1994), 59 FR 52337 (October 17, 1994).

5Amendment No. 1 provides that if the 3D FCO

specialist is denied the Enhanced Parity Split

provided herein as a result of the periodic reviews

of specialist performance by the Foreign Currency

Option Committee, the specialist will be afforded

the ability to appeal that decision to the Exchange’s

Board of Governors pursuant to the procedures in

Article XI, Section 11–1 of the Exchange’s by-laws.

Amendment No. 1 also amends Rule 509(a) in order

to make that rule consistent with Rule 1014, which

was recently amended to expand the enhanced

parity split applicable to equity option specialists

to also include index option specialists. See Letter

from Michele Weisbaum, Associate General

Counsel, Phlx, to Brad Ritter, Senior Counsel, Office

of Market Supervision (‘‘OMS’’), Division of Market

Regulation (‘‘Division’’), Commission, dated

December 9, 1994 (‘‘Amendment No. 1’’).

6 In Amendment No. 2, the Exchange proposes to

amend the proposed language in Rule 1014(h), as

described herein, to clarify the manner in which

Enhanced Parity Split will be applied. See Letter

from Michele Weisbaum, Associate General

Counsel, Phlx, to Brad Ritter, Senior Counsel, OMS,

Division, Commission, dated December 23, 1994

(‘‘Amendment No. 2’’).

7 Id.

8Phlx Rule 1014(h) does not confer time priority

on customer orders (as compared to non-customer

orders) for 100 or more FCO contracts. Consistent

with this, the 3D FCO specialist will be entitled to

receive the full Enhanced Parity Split on parity

trades with customer orders for 100 or more FCO

contracts. Telephone conversation between Michele

Weisbaum, Associate General Counsel, Phlx, and

Brad Ritter, Senior Counsel, OMS, Division,

Commission, on December 8, 1994.

9See Amendment No. 1, supra note 5.

10 15 U.S.C. 78f(b)(5Z) (1988).

11See supra note 8.

12See Securities Exchange Act Release Nos.

34109 (May 25, 1994), 59 FR 28570 (June 2, 1994)

(providing an enhanced parity split for new equity

option specialist units trading newly listed option

classes) (‘‘Exchange Act Release No. 34109’’), 34606

(August 26, 1994), 59 FR 45741 (September 2, 1994)

(providing an enhanced parity split applying to

equity option specialists, other than new specialist

units, for certain assigned option classes), and

35028 (November 30, 1994), 59 FR 63151

(December 7, 1994) (expanding the enhanced parity

split in the foregoing orders to include index option

specialists as well as equity option specialists)

(‘‘Exchange Act Release No. 35028’’).

13See Exchange Act Release No. 34109, supra

note 12.

[Release No. 34–35177; International Series

Release No. 765; File No. SR–Phlx–94–42]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval of Amendment

Nos. 1 and 2 to the Proposed Rule

Change by the Philadelphia Stock

Exchange, Inc., Relating to an

Enhanced Parity Split for the Specialist

in the Cash/Spot German Mark Foreign

Currency Options

On August 15, 1994, 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 1994 (‘‘Act’’),1 and Rule 19b–4

thereunder,2 a proposed rule change to

provide an enhanced parity

participation (‘‘Enhanced Parity Split’’)

for the specialist trading cash/spot

German mark (‘‘3D’’) foreign currency

options (‘‘FCOs’’).3 Notice of the

Proposed rule change appeared in the

Federal Register on October 17, 1994.4

No comment letters were received on

the proposed rule change. The Exchange

subsequently filed Amendment No. 1 to

the proposal on December 9, 1994,5 and

Amendment No. 2 on December 23,

1994.6 This order approves the

Exchange’s proposal, as amended.

I. Description of the Proposal

The Exchange proposes to amend

Exchange Rule 1014(h) to adopt an

Enhanced Parity Split for the 3D FCO

specialist. Specifically, the 3D FCO

specialist will be entitled to receive

50% of the first 500 contracts in any

trade in which the 3d FCO specialist

and one or more crowd participants are

on parity, as defined in Exchange Rule

1014(h), with the remaining 250

contracts allocated on a pro rata basis to

the other crowd participants on parity.

All contracts in excess of 500 will be

allocated on a pro rata basis among the

specialist and the other crowd

participants on parity.7

The Exchange represents that

customers with orders for less than 100

contracts will not be disadvantaged by

this proposal. Specifically, Rule

1014(h)(i) provides that all bids/offers of

customer accounts for under 100

contracts have time priority over noncustomer accounts and, therefore, the

Enhanced Parity Split will not apply to

customer bids/offers for fewer than 100

contracts.8

The purpose of the proposed

Enhanced Parity Split, according to the

Phlx, is to encourage the 3D FCO

specialist to make deeper markets in

order to attract order flow to the

Exchange. At the end of the first year,

the Foreign Currency Option Committee

(‘‘Committee’’) will conduct a review of

the performance of the 3D FCO

specialist and additional reviews will be

conducted by the Committee every six

months thereafter. If the Committee

elects to terminate the Enhanced Parity

Split for the 3D FCO specialist as result

of one of these regular reviews, the

specialist will be afforded the ability to

appeal that decision to the Board of

Governors of the Exchange pursuant to

the procedures in Article XI, Section

11–1 of the Exchange’s by-laws.9

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange, and, in particular, the

requirements of Section 6(b)(5) 10 in that

the proposal is designed to promote just

and equitable principles of trade, to

prevent fraudulent and manipulative

acts and practices, and to protect

investors and the public interest.

Specifically, the Commission finds that

the proposal may serve to remove

impediments to and perfect the

mechanism of a free and open market by

encouraging the 3D FCO specialist to

maintain tight markets in order to attract

order flow to the Exchange. Further, the

proposed rule change provides that the

Enhanced Parity Split will not

disadvantage customer orders for fewer

than 100 contracts that are on parity

with the 3d FCO specialist.11

The Commission notes that several

Exchange proposals implementing

enhanced parity splits for equity and

index option specialist have recently

been approved by the Commission.12 As

discussed in connection with those

approval orders, specialists, including

the 3D FCO specialist, have

responsibilities that other crowd

participants do not share, such as the

staff costs associated with continually

updating and disseminating quotes.13

As a result, the Commission believes it

is reasonable for the Exchange to grant

certain advantages to specialists, such as

the Enhanced Parity Split proposed

herein, in order to attract and retain

well capitalized specialists at the

Exchange. As a result, as long as these

advantages do not unreasonably restrain

competition and do not harm investors,

the Commission believes that the

granting of such benefits to specialists,

in general, is within the business

judgment of the Exchange. Therefore,

even though the proposed rule change

could arguably have some negative

impact on other crowd participants,

other than customers with orders for

less than 100 contracts, for the reasons

stated above, the Commission believes

the proposal is consistent with the Act.

Furthermore, the Commission

believes that: (1) The review procedures

proposed by the Exchange, as discussed

above, adequately ensure that the 3D

FCO specialist will receive the benefit of

the Enhanced Parity Split only if the

specialist satisfies its obligations and

responsibilities pursuant to Exchange

rules; and (2) in cases where the 3D FCO

specialist is found to no longer be
2420 Federal Register / Vol. 60, No. 5 / Monday, January 9, 1995 / Notices

14The Enhanced Parity Split will have a negative

impact on customer orders for 100 or more

contracts only where the customer is on parity with

the 3D FCO specialist and one or more other crowd

participants. In cases where only a customer and

the 3D FCO specialist are on parity, the Enhanced

Parity Split will have no effect. See Amendment

No. 2, supra note 6.

15See Phlx Rule 1014 (h) (i).

16See supra note 12. The Commission notes that

equity and index options traded at the Exchange are

assigned to specialists by the Exchange’s Allocation

Committee and that the Exchange’s by-laws provide

specific procedures regarding appeals of decisions

by the Allocation Committee. See Phlx By-laws,

Article XI, Section 11–1(c). Under this proposal,

however, the FCO Committee will be making the

determination to deny the Enhanced Parity Split to

the 3D FCO specialist. As a result, the appeals

process pursuant to this proposal will vary,

procedurally, from that available to equity and

index option specialists who are denied the

enhanced parity splits available to those specialists.

See Phlx By-laws, Article XI, Section 11–1(a).

Telephone conversation between Michele

Weisbaum, Associate General Counsel, Phlx, and

Brad Ritter, Senior Counsel, OMS, Division,

Commission, on December 8, 1994. Despite the

procedural differences, the Commission believes

that the appeal rights available to the 3D FCO

specialist, as proposed herein, provide adequate

due process protection to the 3D FCO specialist.

17See Exchange Act Release No. 35028, supra

note 12.

18 15 U.S.C. 78s(b)(2) (1988).

19 17 CFR 200.30–3(a)(12) (1993).

1 In Amendment No. 1, the Exchange requested

accelerated approval of the proposed rule change.

See Letter from Edith Hallahan, Special Counsel,

Phlx, to Michael Walinskas, Branch Chief, Office of

Market Supervision (‘‘OMS’’), Division of Market

Regulation (‘‘Division’’), Commission, dated

December 1, 1994 (‘‘Amendment No. 1’’).

eligible for the Enhanced Parity Split,

the appeals procedures proposed by the

Exchange adequately protect the due

process rights of the specialist. The

Commission believes that these criteria

balance the competing interests of the

Exchange and the 3D FCO specialist by

ensuring regular review of specialist

performance and that the specialist’s

due process rights are protected in cases

where the Committee makes a

determination that the Enhanced Parity

Split should be denied.

Finally, the Commission notes that

even though the Enhanced Parity Split

will have a negative impact, in certain

circumstances,14 on customer orders for

more than 100 contracts, the

Commission believes that this does not

raise significant regulatory concerns in

the context of the 3D FCO market. The

FCO market, in general, is dominated by

institutions and sophisticated corporate

investors who typically trade in large

numbers of FCO contracts, i.e., 100

contracts or more at a time. The

Commission believes that noninstitutional investors who participate

in the FCO market generally enter into

transactions for far fewer contracts. The

Exchange’s rules, as approved by the

Commission, already acknowledge this

distinction by affording time priority for

trades that would otherwise be on parity

only for customer orders for fewer than

100 contracts.15 As a result, because the

negative impact of the rule on customers

will be limited substantially to

institutions and sophisticated corporate

FCO investors trading 3D FCOs, the

Commission believes that the benefits of

the proposal discussed above outweigh

the negative impact of the rule change

on this class of FCO customers.

The Commission finds good cause for

approving Amendment Nos. 1 and 2 to

the proposed rule change prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register in order to allow

the 3D FCO specialist to begin receiving

the benefits of the Enhanced Parity Split

without delay. The Commission notes

that the appeal procedures provided in

Amendment No. 1 are consistent with

those available to equity and index

option specialists who are denied the

enhanced parity participation available

to those specialists pursuant to prior

Commission approval orders.16 Further,

the Commission finds that the proposal

in Amendment No. 1 to Rule 503 merely

makes this rule consistent with Rule

1014 and therefore does not raise any

regulatory issues that were not

addressed when Rule 1014 was

amended.17 Finally, Amendment No. 2

merely clarifies the manner in which

the Enhanced Parity Split will be

applied. Accordingly, the Commission

believes that Amendment No. 2 should

serve to minimize the potential for

confusion regarding the application of

the proposed rule change.

Based on the foregoing, the

Commission believes it is consistent

with Section 6(b)(5) of the Act to

approve Amendment Nos. 1 and 2 to the

Phlx’s proposal on an accelerated basis.

Interested persons are invited to

submit written data, views and

arguments concerning Amendment Nos.

1 and 2. Persons making written

submissions should fix six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, NW., Washington, DC 20549.

Copies of the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are file 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

Section, 450 Fifth Street, NW.,

Washington, DC. Copies of such filing

will also be available for inspection and

copying at the principal office of the

Phlx. All submissions should refer to

the File No. SR–Phlx–94–42 and should

be submitted by January 30, 1995.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,18 that the

proposed rule change (SR–Phlx–94–42),

as amended, is hereby approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.19

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–428 Filed 1–6–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35183; File No. SR–Phlx–

94–41]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of a Proposed

Rule Change and Amendment No. 1 to

the Proposed Rule Change by the

Philadelphia Stock Exchange, Inc.,

Relating to an Extension of the

Automated Options Market (‘‘AUTOM’’)

Pilot Program

December 30, 1994.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on November 21,

1994, the Philadelphia Stock Exchange,

Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with

the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

the proposed rule change as described

in Items I and II below, which items

have been prepared by the Exchange.

The Exchange subsequently filed

Amendment No. 1 to the proposal on

December 1, 1994.1 The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Phlx proposes to extend the

Exchange’s Automated Options Market

(‘‘AUTOM’’) pilot program until

December 31, 1995. The text of the

proposal is available at the Office of the

Secretary, the Phlx, and the

Commission.