Document ID: SEC-2007-0271-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2007-02-23T05:00Z

[Federal Register: February 23, 2007 (Volume 72, Number 36)]
[Notices]               
[Page 8238-8240]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23fe07-109]                         

[[Page 8238]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55301; File No. SR-Phlx-2007-08]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Permit the Listing and Trading of Quarterly Options Series

February 15, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 9, 2007, the Philadelphia Stock Exchange, Inc. 
(``Exchange'' or ``Phlx'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been substantially prepared by 
the Exchange. Phlx has designated this proposal as noncontroversial 
under Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) 
thereunder,\4\ which renders the proposed rule change effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend its rules, including Rule 1000 
(``Applicability, Definitions and References''), Rule 1012 (``Series of 
Options Open for Trading''), Rule 1000A (``Applicability and 
Definitions''), Rule 1001A (``Position Limits''), and Rule 1101A 
(``Terms of Option Contracts''), to permit the listing and trading of 
options series that may be opened for trading on any business day and 
expire at the close of business on the last business day of a calendar 
quarter (``Quarterly Options'' or ``Quarterly Options Series''). The 
pilot will commence the day the Exchange first initiates trading in a 
Quarterly Options Series and will continue through July 24, 2007 (the 
``Phlx Pilot'').\5\
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    \5\ The Phlx proposal is substantially similar to a proposal by 
the American Stock Exchange LLC to list Quarterly Options Series on 
a pilot basis through July 24, 2007. See Securities Exchange Act 
Release No. 54137 (July 12, 2006), 71 FR 41283 (July 20, 2006) (SR-
Amex-2006-67) (notice of filing and immediate effectiveness). The 
Commission has approved a substantially similar Quarterly Options 
Series pilot on behalf of the International Securities Exchange. See 
Securities Exchange Act Release No. 54113 (July 7, 2006), 71 FR 
39694 (July 13, 2006) (SR-ISE-2006-24) (order approving proposal). 
In addition, the Chicago Board Options Exchange and NYSE Arca have 
also filed substantially similar proposals. See Securities Exchange 
Act Release Nos. 54123 (July 11, 2006), 71 FR 40558 (July 17, 2006) 
(SR-CBOE-2006-65) (notice of filing and immediate effectiveness) and 
54166 (July 18, 2006), 71 FR 42151 (July 25, 2006) (SR-NYSEArca-
2006-45) (notice of filing and immediate effectiveness). The Phlx 
proposal also incorporates certain changes made by CBOE to its 
version of the Quarterly Options Series pilot (e.g., limiting 
Quarterly Options Series to five strike prices above or below the 
value of an index). See Securities Exchange Act Release No. 54762 
(November 16, 2006), 71 FR 67663 (November 22, 2006) (SR-CBOE-2006-
93) (order approving proposal).
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    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.phlx.com/exchange/phlx_rule_fil.html), at the 

Exchange's principal office, and at the Commission's Public Reference 
Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend the Exchange's 
Rules, including Phlx Rules 1000, 1012, 1000A, 1001A, and 1101A, to 
establish the Phlx Pilot, which would accommodate the listing of 
Quarterly Options Series that would expire at the close of business on 
the last business day of a calendar quarter.\6\
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    \6\ In 1994, the Exchange was granted SEC approval to list and 
trade narrow-based index options that expire at the end of each 
quarter on several Exchange indexes: Gold and Silver (symbol 
``XAU''); Utility (``UTY''); Bank (``BKX''); National Over-the-
Counter (``XOC''); and Value Line (``VLE''). See Securities Exchange 
Act Release No. 34234 (June 17, 1994), 59 FR 32729 (June 24, 1994) 
(SR-Phlx-93-45). These proved to be of limited use as quarterly 
options and in fact the three remaining options (XAU, UTY, and BKX) 
are currently listed and trading only on monthly expiration cycles.
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    Quarterly Options Series could be opened on any approved options 
class \7\ on a business day (``Quarterly Options Opening Date'') and 
would expire at the close of business on the last business day of a 
calendar quarter (``Quarterly Options Expiration Date''). The Exchange 
would list series that expire at the end of the calendar quarters of 
this calendar year.
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    \7\ Quarterly Options Series may be opened in options on indexes 
or options on ETFs that satisfy the applicable listing criteria 
under Phlx rules.
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    Quarterly Options Series listed on approved options classes would 
be P.M.-settled and, in all other respects, would settle in the same 
manner as do the monthly expiration series in the same options class.
    The proposed rule change would allow the Exchange to open up to 
five currently listed options classes that are options on exchange 
traded funds (``ETFs''). The strike price for each series would be 
fixed at a price per share, with at least two strike prices above and 
two strike prices below the approximate value of the underlying 
security at about the time that a Quarterly Options Series is opened 
for trading on the Exchange. The Exchange may list strike prices for a 
Quarterly Options Series on ETFs that are within $5 from the closing 
price of the underlying security on the preceding trading day.
    With respect to Quarterly Options Series based on an underlying 
index, the proposed rule change would allow the Exchange to list not 
more than five strike prices above and not more than five strike prices 
below the value of the underlying index. The Exchange may list 
additional Quarterly Options Series strike prices on indexes above the 
value of the underlying index provided that the total number of strike 
prices above the value of the underlying index is no greater than five. 
Similarly, the Exchange may list additional Quarterly Options Series 
strike prices on indexes below the value of the underlying index 
provided that the total number of strike prices below the value of the 
underlying index is no greater than five.
    The proposal would permit the Exchange to open for trading 
additional Quarterly Options Series of the same class when the Exchange 
deems it necessary to maintain an orderly market, to meet customer 
demand, or when the current market price of the underlying security or 
index moves substantially from the exercise prices of those Quarterly 
Options Series that already have been opened for trading on the 
Exchange. In addition, the exercise price of each Quarterly Options 
Series on an underlying index would be required to be reasonably 
related to the current index value of the index at or about the time 
such series of options were first opened for trading on the Exchange. 
For purposes of the Phlx

[[Page 8239]]

Pilot, the term ``reasonably related to the current index value of the 
underlying index'' means that the exercise price is within 30 per cent 
of the current index value. The Exchange would also be permitted to 
open for trading additional Quarterly Options Series on an underlying 
index that are more than 30 per cent away from the current index value, 
provided that demonstrated customer interest exists for such series, as 
expressed by institutional, corporate, or individual customers or their 
brokers.\8\ Market-makers trading for their own account shall not be 
considered when determining customer interest under this provision.
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    \8\ The ``within 30 per cent'' requirement is proposed 
specifically for the Phlx Pilot and is not otherwise in the 
Exchange's options rules. See Rule 1000 et seq.
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    Because monthly options series expire on the third Friday of their 
expiration month, a Quarterly Options Series (which would expire on the 
last business day of the quarter) could never expire in the same week 
in which a monthly options series in the same class expires. That is 
not the case, however, for Short Term Option Series. Quarterly Options 
Series and Short Term Option Series on the same options class could 
potentially expire concurrently under the proposal.\9\ Therefore, to 
avoid any confusion in the marketplace, the proposal stipulates that 
the Exchange may not list a Short Term Option Series that expires at 
the end of the day on the same day as a Quarterly Options Series in the 
same class expires. In other words, the proposed rules would not permit 
the Exchange to list a P.M.-settled Short Term Option Series on an ETF 
or an index that would expire on a Friday that is the last business day 
of a calendar quarter if a Quarterly Options Series on that ETF or 
index were scheduled to expire on that day.
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    \9\ The Exchange does not currently have any Short Term Option 
Series listed for trading but believes it is prudent to leave the 
Short Term Option concept in its proposed rule text so that all of 
the quarterly option pilots are similar.
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    The proposed rules would, however, permit the Exchange to list an 
A.M.-settled Short Term Option Series and a P.M.-settled Quarterly 
Options Series in the same options class that both expire on the same 
day (i.e., on a Friday that is the last business day of the calendar 
quarter). The Exchange believes that the concurrent listing of an A.M.-
settled Short Term Option Series and a P.M.-settled Quarterly Options 
Series on the same underlying ETF or index that expire on the same day 
would not tend to cause the same confusion as would P.M.-settled short 
term and quarterly series in the same options class and would provide 
investors with an additional hedging mechanism.
    Additionally, the interval between strike prices on Quarterly 
Options Series would be the same as the interval for strike prices for 
series in the same options class that expires in accordance with the 
normal monthly expiration cycles.
    The Exchange believes that Quarterly Options Series would provide 
investors with a flexible and valuable tool to manage risk exposure, 
minimize capital outlays, and be more responsive to the timing of 
events affecting the securities that underlie option contracts. At the 
same time, the Exchange is cognizant of the need to be cautious in 
introducing a product that can increase the number of outstanding 
strike prices. For that reason, the Exchange is proposing a limited 
pilot program for Quarterly Options Series. Under the terms of the Phlx 
Pilot, the Exchange could select up to five option classes on which 
Quarterly Options Series may be opened on any Quarterly Options Opening 
Date. The Exchange would also be allowed to list those Quarterly 
Options Series on any options class that is selected by another 
securities exchange with a similar Pilot Program under its rules. The 
Exchange believes that limiting the number of options classes in which 
Quarterly Options Series may be opened would help to ensure that the 
addition of the new series through the Phlx Pilot will have only a 
negligible impact on the Exchange's and the Option Price Reporting 
Authority's (``OPRA'') quoting capacity. Also, limiting the term of the 
Pilot Program to a finite period will allow the Exchange and the 
Commission to determine whether the program should be extended, 
expanded, and/or made permanent.
    If the Exchange were to propose an extension or an expansion of the 
pilot, or were to propose to make the Phlx Pilot permanent, along with 
any filing proposing such amendments, the Exchange would submit a Phlx 
Pilot report (``Report'') that would provide an analysis of the pilot 
program covering the entire period during which the Phlx Pilot was in 
effect. The Report would include, at a minimum: (1) Data and written 
analysis on the open interest and trading volume in the classes for 
which Quarterly Options Series were opened; (2) an assessment of the 
appropriateness of the options classes selected for the Phlx Pilot; (3) 
an assessment of the impact of the Phlx Pilot on the capacity of Phlx, 
OPRA, and on market data vendors (to the extent data from market data 
vendors is available); (4) any capacity problems or other problems that 
arose during the operation of the Phlx Pilot and how Phlx addressed 
such problems; (5) any complaints that the Phlx received during the 
operation of the Phlx Pilot and how the Phlx addressed them; and (6) 
any additional information that would assist in assessing the operation 
of the Phlx Pilot. The Report must be submitted to the Commission at 
least 60 days prior to the expiration date of the Phlx Pilot.
    Alternatively, at the end of the Phlx Pilot, if the Exchange 
determines not to propose an extension or an expansion of the Phlx 
Pilot, or if the Commission determines not to extend or expand the Phlx 
Pilot, the Exchange would no longer list any additional Quarterly 
Options Series and would limit all existing open interest in Quarterly 
Options Series to closing transactions only.
    Finally, the Exchange represents that it has the necessary systems 
capacity to support new options series that will result from the 
introduction of Quarterly Options Series.
2. Statutory Basis
    The Exchange believes that its proposal to list and trade Quarterly 
Options Series will satisfy institutional demand for such options and 
provide additional flexibility and risk management and hedging tools to 
investors. For these reasons, the Exchange believes that the proposed 
rule change is consistent with Section 6(b) of the Act \10\ in general, 
and furthers the objectives of Section 6(b)(5) of the Act \11\ in 
particular, in that it is designed 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 to protect 
investors and the public interest.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78 f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were either solicited or received.

[[Page 8240]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange believes that the foregoing proposed rule change may 
take effect upon filing with the Commission pursuant to Section 
19(b)(3)(A) of the Act \12\ and subparagraph (f)(6)(iii) of Rule 19b-4 
thereunder \13\ because the foregoing proposed rule change (i) Does not 
significantly affect the protection of investors or the public 
interest; (ii) does not impose any significant burden on competition; 
and (iii) does not become operative for 30 days from the date on which 
it was filed, or such shorter time as the Commission may designate, if 
consistent with the protection of investors and the public 
interest.\14\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ The Exchange provided the Commission with pre-filing notice 
of the proposal, as required by Rule 19b-4(f)(6)(iii).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to waive the operative 
delay if such action is consistent with the protection of investors and 
the public interest. The Exchange has requested that the Commission 
waive the 30-day operative delay and designate the proposed rule change 
immediately operative, so that the Exchange can have quarterly options 
pilot rules that are similar to that of other options exchanges. The 
Exchange believes that waiving the 30-day operative delay is consistent 
with the protection of investors and the public interest.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
The Commission notes that the proposal is substantially identical to 
the CBOE's pilot program for quarterly option series, previously 
published for comment \15\ and approved by the Commission,\16\ and is 
substantially similar to existing pilot programs currently in place at 
other SROs.\17\ Thus, Phlx's proposal raises no new issues of 
regulatory concern. Moreover, waiving the operative delay will allow 
Phlx to immediately compete with other exchanges that list and trade 
quarterly options under similar programs, and consequently will benefit 
the public. Therefore, the Commission has determined to waive the 30-
day delay and allow the proposed rule change to become operative upon 
filing.\18\
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    \15\ See Securities Exchange Act Release Nos. 54123 (July 11, 
2006), 71 FR 40558 (July 17, 2006) (SR-CBOE-2006-65) (notice of 
filing and immediate effectiveness for CBOE's quarterly option 
series pilot program).
    \16\ See Securities Exchange Act Releases No. 54762 (November 
16, 2006), 71 FR 67663 (November 22, 2006) (SR-CBOE-2006-93) (order 
approving certain amendments to CBOE's quarterly option series pilot 
program).
    \17\ See supra note 5.
    \18\ For purposes only of waiving the operative delay of this 
proposal, the Commission notes that it has considered the proposed 
rule's impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File No. SR-Phlx-2007-08 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2007-08. 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 Commissions Internet Web site (http://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 the 
Exchange. 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-2007-08 and should be submitted on or before March 16, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-3070 Filed 2-22-07; 8:45 am]

BILLING CODE 8010-01-P