Document ID: SEC-2006-1418-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2006-11-02T05:00Z

[Federal Register: November 2, 2006 (Volume 71, Number 212)]
[Notices]               
[Page 64597-64603]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02no06-87]                         

[[Page 64597]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54652; International Series Release No. 1298; File No. 
SR-Phlx-2006-34]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendments No. 1 and 2 
Relating to U.S. Dollar-Settled Foreign Currency Options

 October 25, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, as amended (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on May 12, 2006, the Philadelphia Stock Exchange, 
Inc. (``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. On September 29, 2006, the Exchange filed Amendment No. 1,\3\ 
and on October 20, 2006, the Exchange filed Amendment No. 2.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to list U.S. dollar-settled foreign currency 
options (``FCOs'') on the British pound and the Euro (together, 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.\5\ The Exchange also proposes to 
amend a number of existing rules relating to U.S. dollar-settled FCOs, 
and to amend various rules to delete outdated references to the German 
mark, Italian lira, Spanish peseta and the French franc.
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    \5\ See Securities Exchange Act Release No. 49832 (June 8, 
2004), 69 FR 33442 (June 15, 2004) (SR-Phlx-2003-59).
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    The text of the proposed rule change, as amended, is available on 
the Exchange's Web site at http://www.phlx.com, at Phlx'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 Phlx included statements 
concerning the purpose of, and basis for, the proposed rule change, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. The text of these statements may be examined at the 
places specified in Item IV below. The Phlx 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    According to the Phlx, the purpose of the proposed rule change is 
to permit the Exchange to expand its product offerings and revitalize 
FCOs by listing and trading U.S. dollar-settled FCOs on the Currencies 
on Phlx XL.\6\ The contract specifications, including certain 
amendments to the Exchange's existing rules applicable to U.S. dollar-
settled FCOs, and the trading rules for these FCOs are discussed in 
detail below.\7\
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    \6\ The Exchange will file a proposed rule change with the 
Commission prior to listing U.S. dollar-settled options on any 
currencies other than the British pound and the Euro.
    \7\ Existing Phlx rules applicable to FCOs that are not proposed 
to be amended in this proposed rule change would remain in effect 
and would apply to both physical delivery FCOs and U.S. dollar-
settled FCOs, unless the rule specifically provides otherwise.
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i. Contract Specifications and Amendments to U.S. Dollar-Settled FCO 
Rules
    Background. The Exchange has listed and traded physical delivery 
FCOs issued by The Options Clearing Corporation (``OCC'') on a number 
of currencies since 1982.\8\ For a period of time during the 1990's the 
Exchange also listed and traded U.S. dollar-settled FCOs on the German 
mark and the Japanese yen.\9\ The U.S. dollar-settled FCOs were known 
and marketed as ``Dollar Denominated Delivery'' or ``3D'' FCOs. The 
U.S. dollar-settled FCOs were cash-settled, European-style options 
issued by OCC that allowed holders to receive U.S. dollars representing 
the difference between the current foreign exchange spot price \10\ and 
the exercise price of the option. Specifically, upon exercise of an in-
the-money U.S. dollar-settled FCO structured as a call, the holder 
received, 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.\11\ For a U.S. dollar-settled FCO 
structured as a put, the holder received 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. Unlike other Phlx-traded 
FCOs, U.S. dollar-settled FCOs that are in-the-money by any amount on 
the expiration date would be exercised automatically by OCC, while U.S. 
dollar-settled FCOs that are out-of-the-money at expiration would 
expire worthless.
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    \8\ Unlike U.S. dollar-settled FCOs, a physical delivery option 
on a foreign currency 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.
    \9\ The Exchange traded U.S. dollar-settled options on German 
marks beginning in September 1994. In its order approving German 
mark U.S. dollar-settled options, the Commission stated that, in the 
future, the listing of additional cash/spot (as they were then 
known) FCOs based on different foreign currencies would require 
separate 19b-4 filings with the Commission. See Securities Exchange 
Act Release No. 33732 (March 8, 1994), 59 FR 12023 (March 15, 1994). 
The Exchange commenced trading of U.S. dollar-settled options on the 
Japanese yen on February 24, 1997. See Securities Exchange Act 
Release No. 36505, International Series Release No. 889 (November 
22, 1995), 60 FR 61277 (November 29, 1995). U.S. dollar-settled 
German mark options were delisted on January 19, 1999. U.S. dollar-
settled Japanese yen options were delisted on August 23, 1999.
    \10\ The ``spot price'' with respect to an option contract on a 
FCO contract means the price for the sale of one foreign currency 
for another, quoted by various commercial banks in the interbank 
foreign exchange market for the sale of a single unit of such 
foreign currency for immediate delivery (which generally means 
delivery within two business days following the date on which the 
terms of such sale are agreed upon). See Phlx Rule 1000(b)(16).
    \11\ Phlx Rule 1044, Delivery and Payment, is proposed to be 
amended to provide that upon exercise of an in-the-money U.S. 
dollar-settled FCO structured as a call, the holder receives, 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, Phlx Rule 1044 provides that the holder 
receives 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.
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    Proposal. The Exchange now proposes to list and trade U.S. dollar-
settled FCOs on the Currencies on Phlx XL.\12\ The Exchange also 
proposes to

[[Page 64598]]

amend a number of rules applicable to U.S. dollar-settled FCOs 
generally, including the U.S. dollar-settled FCOs on the Currencies, as 
well as any other U.S. dollar-settled FCOs that the Exchange may list 
in the future.
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    \12\ 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. The Exchange notes, 
however, that positions in the U.S. dollar-settled FCOs would be 
aggregated with positions in the physical delivery contracts for 
purposes of position and exercise limits, as discussed further 
below.
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    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.\13\
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    \13\ The contract sizes for the physical delivery options on the 
Currencies are 31,250 British pounds and 62,500 Euros.
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    Expirations. The Exchange proposes to amend Phlx Rule 1012(a) by 
limiting the applicability of paragraph (ii) to physical delivery FCOs, 
by renumbering paragraph (iii) as paragraph (iv), and by adding new 
paragraph (iii) to provide that U.S. dollar-settled FCO contracts may 
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. The Exchange does not anticipate 
listing FLEX U.S. dollar-settled foreign currency options at this 
time.\14\
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    \14\ Currently, trades may be executed in certain FLEX options 
on equities and equity indexes. See Phlx Rule 1079.
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    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, 
September, December cycle, plus two additional near term months (five 
months at all times).\15\ 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 pursuant 
to Phlx Rule 1000(b)(21), ``Expiration date,'' as proposed to be 
amended.
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    \15\ By way of example, in September, the U.S. dollar-settled 
FCOs would have the following months listed: October, November, 
December, March, and June.
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    Trading Symbols. The Exchange expects that the symbols for options 
on the British Pound and on the Euro would be as follows:

British Pound Trading Symbol--XDB
British Pound Wrap Symbol--BJF

British Pound Settlement Value Symbol--BIJ
British Pound Strike Symbol--BJR
British Pound Wrap Strike Symbol--BVA
Euro Trading Symbol--XDE
Euro Wrap Symbol--EAE
Euro Settlement Value Symbol--EDY
Euro Strike Symbol--EPA
Euro Wrap Strike Symbol--EAY

    Trading Hours. Phlx Rule 101, Hours of Business, would be amended 
to provide that U.S. dollar-settled FCOs would trade from 9:30 a.m. to 
4 p.m. Eastern Time, Monday through Friday. 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 in much the same way that stock index 
options currently trade.\16\ The expiring U.S. dollar-settled FCO 
contract would cease trading at 4 p.m. on the day prior to its 
expiration day.\17\ Unlike trading in physical delivery FCOs, trading 
in U.S. dollar-settled FCOs would not close on bank holidays. If Friday 
is an Exchange holiday, the settlement value for U.S. dollar-settled 
FCOs would be determined on the basis of the Noon Buying Rate \18\ on 
the preceding trading day, which would also be the last day of trading 
for the expiring option.
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    \16\ 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.
    \17\ 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.
    \18\ The Exchange notes that the Commission has recently 
approved listing standards for securities issued by a trust that 
represent investors' discrete identifiable and undivided beneficial 
ownership interests in non-U.S. currency deposited into the trust. 
The trust utilizes the Noon Buying Rate for the calculation of the 
Net Asset Value of the trust. 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).
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    Settlement Values. The Exchange proposes to change the method of 
determining the closing settlement value for U.S. dollar-settled FCOs. 
Phlx Rule 1057 would be revised to provide that the closing settlement 
value would be the day's announced Noon Buying Rate as determined by 
the Federal Reserve Bank of New York on the trading day prior to the 
expiration date. 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.\19\ 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 to access 
the settlement value. The Exchange would 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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    \19\ Id.
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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. The 
position limits 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, Phlx 
Rule 1001, Position Limits, would be amended to provide that each Euro 
U.S. dollar-settled option contract would count as one-sixth of a 
contract for purposes of position and exercise limits.\20\ 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.\21\ The other aggregation principles in Phlx Rule 1001 would 
continue to apply.
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    \20\ 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.
    \21\ 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.\22\ 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.\23\ New strikes may be added

[[Page 64599]]

during the life of the option in accordance with Phlx Rule 
1012(a)(iii).\24\ New Commentary Section .06 would be added to Phlx 
Rule 1012 to specify that strike prices on the Euro and British pound 
cash-settled option would be listed at half-cent intervals. Text 
regarding the setting of exercise prices is being moved from paragraph 
(ii) to new Commentary Section .07 because it would be applicable not 
only to physical delivery FCOs but to U.S. dollar-settled FCOs as well. 
Options Floor Procedure Advice F-18, Expiration Month and Strike 
Prices--Selective Quoting Facility, is proposed to be amended to limit 
its applicability (including applicability of the Selective Quoting 
Facility) to physical delivery FCOs.\25\
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    \22\ To determine foreign currency spot prices, the Exchange 
receives contributor bank quotes from a vendor in real-time and 
takes the average of the various quotes.
    \23\ To facilitate trading on Phlx XL, 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 (see below for a fuller discussion of minimum increments 
and maximum quote spreads). 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. Bids could be made 
$1.0045, expressed as $100.45, $1.0040, expressed as $100.40, and so 
forth. Offers could be made at $1.0055, expressed as $100.55, at 
$1.0060, expressed as $100.60, and so forth. Maximum quote spread 
parameters would be $.0025, expressed as $.25. Thus, a market maker 
could bid $1.0030, expressed as $100.30, and offer at $1.0055, 
expressed as $100.55. Prior to commencement of trading of U.S. 
dollar-settled options on the Currencies as proposed herein, the 
Exchange intends to issue an informational memorandum to members and 
member organizations which explains this strike price and quoting 
convention.
    \24\ Phlx Rule 1012(a)(iv) provides in part that ``[a]dditional 
series of options of the same class may be opened for trading on the 
Exchange as the market price of the underlying stock or Exchange-
Traded Fund Share or the underlying foreign currency, as the case 
may be, moves substantially from the initial exercise price or 
prices.'' 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.
    \25\ The selective quoting facility establishes criteria to 
determine whether the bid/ask quotation for each FCO series is 
eligible for transmission to OPRA for off-floor dissemination to 
securities data vendors. When the Exchange designates a particular 
foreign currency option series as a ``non-update strike,'' its 
quotes are not made available for continuous dissemination to the 
public throughout the trading day. See Phlx Rule 1012, Commentary 
.04. The selective quoting facility, implemented in 1994, was 
intended to reduce the number of strike prices continuously being 
updated and disseminated, thus resulting in more timely and accurate 
foreign currency options quote displays. As noted above, however, 
the selective quoting facility would be limited to physical delivery 
FCOs and would not apply to U.S. dollar-settled FCOs.
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    Bids and Offers--Premium. Under Phlx Rule 1033, Bids and Offers--
Premium, 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. However, the first two decimal places would be 
omitted from all bid and offer quotations for the British pound and for 
the Euro. Therefore, for example, a bid of .50 for an option contract 
on the Euro would represent a bid to pay .005 per Euro--i.e., a bid of 
$50.00--for an option contract having a unit of trading of 10,000 
Euros. Phlx Rule 1034(a) would be revised to provide that the minimum 
increment for U.S. dollar-settled FCOs quoting under $3.00 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.\26\ The 
minimum increment for U.S. dollar-settled FCOs quoting at $3.00 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.\27\
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    \26\ By way of example, if the spot price of the Euro is at 
$1.0255 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 profit would be $.0020 multiplied by 10,000 
Euros (the size of the contract) for a total of $20.00.
    \27\ The Exchange has determined to set the minimum quoting 
increment at $.0005 (expressed as $.05) per Euro for the U.S. 
dollar-settled FCOs rather than at the $.0001 (expressed as $.01) 
per Euro minimum quoting increment that currently applies to the 
Exchange's physical delivery FCOs because the Phlx XL trading system 
would not accommodate quoting in increments of $.0001 (expressed as 
$.01, or otherwise). So, for example, while a bid of $.0075 per Euro 
in the physical delivery FCO can be improved by quoting at $.0076, a 
bid of $.0075 per Euro in the U.S. dollar-settled FCO can only be 
improved by quoting no less than $.0080. The minimum increment per 
contract in the physical delivery Euro option, if it were the same 
size as the U.S. dollar-settled Euro option, would thus be $1.00 
($.0001 multiplied by the contract size of 10,000 Euros), while the 
minimum increment per contract in the U.S. dollar-settled contract 
would be $5.00 ($.0005 multiplied by the contract size of 10,000 
Euros).
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    Margin. 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, Margin Accounts, Commentary .16.\28\ 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 Commentary .16 
to Phlx Rule 722.
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    \28\ 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 (``Extreme Outlier Test'').
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ii. Phlx XL Trading Rules for U.S. Dollar-Settled FCOs
    As noted above, the Exchange is proposing that U.S. dollar-settled 
FCOs trade on Phlx XL, the Exchange's electronic trading platform for 
options. Currently, all Phlx equity and equity index options also trade 
on Phlx XL. According to the Exchange, Phlx XL enables market makers to 
electronically deliver streaming quotes on or off the floor, producing 
tighter and deeper markets. Additionally, the Exchange believes that 
trading U.S. dollar-settled FCOs on Phlx XL would enable the Exchange 
to improve electronic access for customers, broker dealers and market 
makers while leveraging the advantages of a floor-based environment. 
Options order-flow providing firms would be able to direct their U.S. 
dollar-settled FCO orders to the Exchange liquidity provider of their 
choice under the Exchange's directed order flow program. Exchange 
specialists, on-floor market makers known as Streaming Quote Traders 
(``SQTs''),\29\ and remote market makers known as Remote Streaming 
Quote Traders (``RSQTs'') \30\ who stream their

[[Page 64600]]

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, would also be eligible to participate in the Exchange's 
enhanced specialist participation programs which provide a type of 
exception to the Exchange's parity rules, allocating to the specialist 
a greater than equal share of the portion of an order that is divided 
among the specialist and any ``controlled accounts'' (i.e., any account 
controlled by or under common control with a broker-dealer, such as a 
specialist or an SQT) that are on parity.\31\ By contrast, priority and 
parity rules for options on physical delivery foreign currency options 
are set forth in Phlx Rule 1014(h), which generally is a price-time 
priority rule without regard to account types. Once a bid or offer in 
physical delivery FCOs establishes priority, no bid-offer may gain 
parity at that price during that trading session until at least ten 
percent of the size of the previous bid-offer or 100 contracts, 
whichever is greater, trades.
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    \29\ An SQT is an ROT who has received permission from the 
Exchange to generate and submit option quotations electronically 
through AUTOM in eligible options to which such SQT is assigned. An 
SQT may only submit such quotations while such SQT is physically 
present on the floor of the Exchange. See Exchange Rule 
1014(b)(ii)(A).
    \30\ An RSQT is an ROT that is a member or member organization 
with no physical trading floor presence who has received permission 
from the Exchange to generate and submit option quotations 
electronically through AUTOM in eligible options to which such RSQT 
has been assigned. An RSQT may only submit such quotations 
electronically from off the floor of the Exchange. See Exchange Rule 
1014(b)(ii)(B).
    \31\ 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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    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 as well.\32\ In general, the Exchange 
proposes to make the necessary rule changes to permit U.S. dollar-
settled FCOs to trade much in the same manner as equity index options, 
which are also U.S. dollar-settled products.\33\
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    \32\ Phlx Rule 1080(k) provides that the Options Committee may, 
on an issue-by-issue basis, determine the specific issues in which 
SQTs may generate and submit option quotations if such SQT is 
physically present on the Exchange floor, and RSQTs may generate and 
submit option quotations from off the floor of the Exchange, 
electronically. Such issues shall be known as ``Streaming Quote 
Options.'' As noted above, however, the Exchange's current physical 
delivery FCOs would continue to trade as they do today. They would 
not be migrated to Phlx XL, and the trading rules which the Exchange 
is proposing to amend today to govern trading of U.S. dollar-settled 
FCOs on Phlx XL would not apply to physical delivery FCOs.
    \33\ In the event of system wide trading halts in equity and 
equity index options required by Exchange Rule 133 (the ``circuit 
breaker'' rule), Trading Halts Due to Extraordinary Market 
Volatility, trading in U.S. dollar-settled FCO also would be halted.
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    Phlx Rule 1080, Philadelphia Stock Exchange Automated Options 
Market (AUTOM) and Automatic Execution System (AUTO-X), would be 
amended to include U.S. dollar-settled FCOs as a product that may be 
traded on Phlx XL as a Streaming Quote Option. In contrast, physical 
delivery FCOs have always traded on the Exchange by open outcry only, 
without automated order delivery or execution (as have 3D FCOs in the 
past). Instead, floor brokers accept and execute orders. In addition, 
the limit order book is manually maintained by the specialist, rather 
than electronically like on Phlx XL. Though physical delivery FCOs 
would continue to trade by open outcry, U.S. dollar-settled FCOs would 
now trade on Phlx XL. Like equity options and equity index options, 
U.S. dollar-settled FCOs would trade on Phlx XL beginning at 9:30 a.m. 
through the end of the trading day at 4 p.m. The text of Phlx Rule 1080 
would be amended to provide that U.S. dollar-settled FCOs would 
generally trade in the same manner as an equity option or an index 
option.\34\ The proposed amendments reflect that the Foreign Currency 
Options Committee would have decision-making authority in certain 
instances with respect to these new products (rather than the Options 
Committee, which oversees the trading of equity and equity index 
options on Phlx XL). Conforming changes are proposed to Options Floor 
Procedure Advice A-13, Auto-Execution Engagement/Disengagement 
Responsibility.
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    \34\ The Exchange's Equity Options AutoQuote System is an 
options price quote calculator and quote generator used by 
specialists in equity options. It incorporates pricing model data, 
which generate automatic pricing of option series based on a number 
of factors, including the value of the underlying stock. The 
Exchange would not provide an autoquote system for specialists in 
U.S. dollar-traded FCOs trading on Phlx XL. Rule 1080, Commentary 
.01, would be revised to reflect that the Auto-Quote system applies 
to equity and equity index options, but not to U.S. dollar-settled 
FCOs. Options Floor Procedure Advice F-17, FCO Trades to be Effected 
in the Pit, is proposed to be amended so that it applies only to 
physical delivery FCOs.
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    Phlx Rule 1014, Obligations and Restrictions Applicable to 
Specialists and Registered Options Traders, would be amended to make 
clear that the obligations and restrictions applicable to specialists 
and registered options traders (``ROTs'') trading equity index options 
now would generally apply to specialists and ROTs in U.S. dollar-
settled FCOs.\35\ Currently, some of those same obligations, such as, 
for example, bid/ask differentials and affirmative market making 
obligations and restrictions, apply to the trading of physical delivery 
FCOs. Though specialists and ROTs in physical delivery FCOs would 
remain subject to these obligations and restrictions, specialists and 
ROTs in U.S. dollar-settled FCOs would now be subject to obligations 
and restrictions similar to those that apply to equity and equity index 
option specialists and ROTs. For example, while Phlx Rule 1014(c)(ii) 
prescribes bid/ask differentials for specialists and ROTs in physical 
delivery FCOs, Phlx Rule 1014(c)(i), as revised, would prescribe the 
bid/ask differentials for both equity options (in subsection (a)) and 
U.S. dollar-settled FCOs (in subsection (b)). The bid/ask differentials 
for equity options and the bid/ask differentials for U.S. dollar-
settled FCOs, as expressed, would be the same.\36\ The bid/ask 
differential rules for U.S. dollar-settled FCOs would be amended to 
resemble those 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.
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    \35\ 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.
    \36\ See Phlx Rule 1034, Minimum Increments, which would be 
amended to require the first two decimal places to be disregarded in 
expressing quotes for U.S. dollar-settled options on the Euro and 
the British pound.
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    Like Phlx Rule 1080, Phlx Rule 1014 would be amended to reflect 
that the Foreign Currency Options Committee would have decision-making 
authority in certain instances with respect to these new products. 
Proposed amendments to Phlx Rule 1014 also would limit existing 
provisions of Phlx Rule 1014 currently applicable to FCO contracts to 
physical delivery FCOs. Conforming changes are proposed 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.
    Phlx Rule 1016, Block Transactions in Foreign Currency Options, 
would be revised to limit block trades to physical delivery FCOs. 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.

[[Page 64601]]

The procedure permits this limited exception to the existing priority 
and precedence rules of the Exchange while continuing to protect 
smaller customer orders and orders that constitute the ``best market'' 
or best bid or offer. However, in order 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. Trading of U.S. dollar-settled FCOs 
on Phlx XL by SQTs and RSQTs which stream quotes into the system makes 
execution of block trades pursuant to the procedures required by Phlx 
Rule 1016 impractical for that product.\37\ Phlx Rule 1017, Openings in 
Options, governs the Exchange's fully automated opening system for 
options traded on Phlx XL as part of the Phlx XL system.\38\ Phlx Rule 
1017 is proposed to be 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.\39\ Currently, openings in FCOs 
have been conducted pursuant to Phlx Rule 1047, Commentary .01, 
utilizing one of the types of trading rotations listed there. 
Specifically, in addition to consulting his pricing and quotation 
tools, the specialist manually checks the limit order book and with 
floor brokers, and then opens each FCO for trading and sends out 
opening quotes in each series, which may include executing opening 
trades. Though physical delivery FCO will continue to open in this 
fashion, U.S. dollar-settled FCO would now open largely in the same way 
as equity and equity index options. 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.\40\ 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), as opposed to 
within two minutes of the opening trade or quote on the primary market 
for the underlying security, as is the case for equity options. 
Finally, it would provide that the system would not open a series of 
U.S. dollar-settled FCO 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). 
In addition, Phlx Rule 1017 would be amended to clarify its application 
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. Conforming changes 
are proposed to Options Floor Procedure Advices A-12, Opening 
Rotations, and A-14, Equity Option and Index Option Opening Parameters. 
Phlx Rule 1063, Responsibilities of Floor Brokers, is being amended 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 FCO.\41\ As amended, the rule would limit 
the ``electronic audit trail'' procedures currently applicable to FCOs 
to physical delivery FCOs only. Conforming changes are proposed to 
Options Floor Procedure Advice C-2, Options Floor Broker Management 
System.
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    \37\ However, Phlx Rule 1033(a)(ii), which would apply to U.S. 
dollar-settled FCOs, provides in relevant part that ``[i]n response 
to a floor broker's solicitation of a single bid or offer, the 
members of a trading crowd (including the specialist and ROTs) may 
discuss, negotiate and agree upon the price or prices at which an 
order of a size greater than the AUTO-X guarantee can be executed at 
that time, or the number of contracts that could be executed at a 
given price or prices * * *.''
    \38\ 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).
    \39\ Currently, with respect to automated openings in an 
Industry or Market Index conducted pursuant to Phlx Rule 1017, the 
specialist may engage the automated opening system to open such 
options when underlying securities representing 50% of the current 
index value of all the securities underlying the index have opened 
for trading on the primary market. The system automatically opens 
all index options when underlying securities representing 100% of 
the current index value of all the securities underlying the index 
have opened for trading on the primary market. Because the spot 
foreign currency market, on the other hand, has no opening on a 
primary market, the rules for automated opening of U.S. dollar-
settled FCOs would differ from those governing equity index option 
openings.
    \40\ Market opening, as with equity and equity index options, is 
normally at 9:30 a.m. Eastern Time.
    \41\ 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, 
such that the audit trial provides an accurate, time-sequenced 
record of electronic and other orders, quotations and transactions 
on the Exchange, beginning with the receipt of an order by the 
Exchange, and further documenting the life of the order through the 
process of execution, partial execution, or cancellation of that 
order. See Phlx Rule 1080, Commentary .06.
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    Phlx Rule 1069, Customized Foreign Currency Options, is proposed to 
be revised to limit applicability of the rule to physical delivery FCO. 
U.S. dollar settled FCOs would not be eligible to trade on a customized 
basis.
    Futures on the British pound and the Euro, as well as options on 
such futures are traded on the CME (both exchange pit trading and 
GLOBEX trading). Euro Currency Trust Shares and British Pound Sterling 
Shares trade on 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 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.\42\ The Phlx 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 CurrencyShares\TM\ 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.\43\ Additionally, pursuant to Phlx Rule 1022, 
Securities Accounts and Orders of Specialists and Registered Options 
Traders, specialists and 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

[[Page 64602]]

specialist or ROT may engage in foreign currency trading in any account 
not reported pursuant to the rule. Further, Phlx Rule 1022 provides 
that every specialist and ROT must 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. Phlx Rule 1022(d) is proposed 
to be amended to 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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    \42\ See Equity Floor Procedure Advice F-8 and Options Floor 
Procedure F-8, Failure to Comply with an Exchange Inquiry.
    \43\ NYSE and NYSE Arca are members of ISG. CME and LIFFE are 
affiliate members of ISG.
---------------------------------------------------------------------------

    Exchange rules designed to protect public customers trading in FCOs 
would apply. Specifically, under paragraph (b) of Phlx Rule 1024, 
``Conduct of Accounts Open for Trading,'' members are prohibited 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, 
``Suitability,'' is designed to ensure that options, including U.S. 
dollar-settled FCO, are sold only to customers capable of evaluating 
and bearing the risks associated with trading in the instruments. 
Finally, under Phlx Rule 1027, ``Discretionary Accounts,'' 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, under Phlx Rule 1027, 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.\44\ Phlx Rules 1025, Supervision of Accounts, 1026, 
Suitability, 1028, Confirmations, and 1029, Delivery of Options 
Disclosure Documents, also would apply to trading in U.S. dollar-
settled FCO.
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    \44\ See supra note 8.
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    Finally, the Exchange represents that it has adequate systems 
capacity to process quotations and trades in the proposed U.S. dollar-
settled FCO.
iii. Deletion of Outdated References to the German Mark, the French 
Franc, the Spanish Peseta and the Italian Lira
    Finally, as a housekeeping matter, the Exchange proposes to delete 
outdated references to the German mark, the Italian lira, the Spanish 
peseta and the French franc from a number of Exchange rules regarding 
FCOs that were once listed on those currencies.\45\ In that regard, the 
Exchange is proposing to amend Phlx Rule 722, Margin Accounts; Phlx 
Rule 1000, Applicability, Definitions and References; Phlx Rule 1001, 
Position Limits; Phlx Rule 1009, Criteria for Underlying Securities; 
Phlx Rule 1014, Obligations and Restrictions Applicable to Specialists 
and Registered Options Traders; Phlx Rule 1033, Bids And Offers--
Premium; Phlx Rule 1034, Minimum Increments; Phlx Rule 1069, Customized 
Foreign Currency Options; Phlx Rule 1079, FLEX Index and Equity 
Options; and Options Floor Procedure Advice B-7, Time Priority of Bids/
Offers in Foreign Currency Options.
---------------------------------------------------------------------------

    \45\ On January 1, 1999, the European Union introduced the Euro 
which replaced the national currencies of a number of countries 
including Germany, Italy, Spain and France that qualified for 
inclusion in European Monetary Union. On January 1, 1999, these 
countries began to use the Euro along with their existing currencies 
(``legacy currencies''). At that point, the legacy currencies became 
units of the Euro and continued to constitute legal tender in their 
respective countries of origin until 2002. In 2002, the legacy 
currencies ceased to be units of the Euro, and the Euro became the 
sole medium of exchange of the participating member states. The Phlx 
began trading the Euro FCO in January 1999. See Securities Exchange 
Act Release No. 40953 (January 15, 1999), 64 FR 3734 (January 25, 
1999) (SR-Phlx-99-01).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \46\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \47\ in particular, in that it is designed to 
promote just and equitable principles of trade; to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and 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 by providing 
FCO users who do not necessarily need to exchange currency at 
settlement with an alternative U.S. dollar-settled FCO in an electronic 
trading venue.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78f(b).
    \47\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will impose no 
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

    The Exchange has neither solicited nor received comments on this 
proposal.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 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 (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent

[[Page 64603]]

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 November 24, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\48\
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    \48\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-18451 Filed 11-1-06; 8:45 am]

BILLING CODE 8011-01-P