Document ID: SEC-2007-0518-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2007-04-06T04:00Z

[Federal Register: April 6, 2007 (Volume 72, Number 66)]
[Notices]               
[Page 17212-17215]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06ap07-95]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55552; File No. SR-Phlx-2006-87]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change, and Amendment Nos. 1 and 2 
Thereto, Relating to Options Exchange Officials

March 29, 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 December 14, 2006, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change. On February 23, 2007, the 
Exchange filed Amendment No.1 to the proposed rule change. On March 15, 
2007, the Exchange filed Amendment No. 2 to the proposed rule change. 
The proposed rule change is described in Items I, II, and III, below, 
which Items have been prepared substantially by the Phlx. 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)(1).
    \2\ 17 CFR 240.19b-4.
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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 various rules related to dispute 
resolution, requests for relief from the requirements of certain rules, 
trading halts and order and decorum, by transferring the 
responsibilities from Exchange Floor Officials \3\ to a new category of 
Exchange staff that would be known as an Options Exchange Official 
(``OEO''), as described more fully below. OEOs would replace, and 
assume all authority and responsibility currently handled by, Floor 
Officials. Thus, Floor Officials would cease to exist on the Exchange.
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    \3\ See Exchange By-Law Article VIII.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.phlx.com, at the Phlx, 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 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 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to establish a new 
category of Exchange staff, the OEO.\4\ The purpose of Amendment No. 1, 
which replaces the previous filing in its entirety, is to clarify that 
OEOs would replace, and assume all authority and responsibility 
currently handled by, Floor Officials, and to make other technical 
amendments to the previously submitted rule text. Amendment No. 2

[[Page 17213]]

makes clarifying changes to the purpose section and technical 
corrections to the proposed rule text.
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    \4\ OEO jurisdiction would be limited to the Exchange's options 
trading floor and systems. While acting in a similar capacity to 
Equity Exchange Officials, OEOs would not share any responsibilities 
or authority with Equity Exchange Officials. See Securities Exchange 
Act Release No. 54538 (September 28, 2006), 71 FR 59184 (October 6, 
2006) (SR-Phlx-2006-43) (Order approving the Exchange's new 
electronic equity trading system, XLE).
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    Pursuant to Exchange By-Law Article VIII, Floor Officials, as 
designees \5\ of the Chairpersons of the Options Committee,\6\ and 
Foreign Currency Options Committee,\7\ respectively, are authorized to 
administer the provisions of Exchange By-Laws and Rules of the Exchange 
pertaining to the respective trading floors and the immediately 
adjacent premises of the Exchange. They may impose penalties, as 
applicable, for breaches of their rules or regulations relating to 
order, decorum, health, safety and welfare on the respective trading 
floors. Additionally, they may rule to nullify, or adjust the terms of, 
executed trades under specific and limited conditions contained in 
Exchange rules, and may grant relief from certain requirements of on-
floor members and member organizations if authorized to do so by rule.
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    \5\ The designees of the respective floor Committee chairpersons 
are generally members of the respective committees and subcommittees 
thereof.
    \6\ The Options Committee has general supervision of the 
dealings of members on the options trading floor. See Exchange By-
Law Article X, Section 10-20.
    \7\ The Foreign Currency Options Committee has general 
supervision of the dealings of members on the foreign currency 
options trading floor. See Exchange By-Law Article X, Section 10-17.
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    As described more fully below, in some instances an OEO would 
assume responsibilities of Exchange staff, particularly in the 
situation where certain current Floor Official decisions require 
concurrence of a Market Surveillance officer. In other instances, one 
single OEO would be authorized to rule on matters that currently 
require a decision from two Floor Officials. The current process for 
the review of, or appeal from, from Floor Official decisions \8\ 
(which, under the proposal would become OEO decisions) and the role of 
the Exchange's Referee \9\ would be unchanged.
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    \8\ See Exchange Rule 124(d).
    \9\ The Referee is an Exchange employee or independent 
contractor who is appointed by the Exchange's Board of Governors on 
the recommendation of the Audit Committee to review Floor Official 
rulings concerning the nullification and adjustment of transactions 
in accordance with Rule 124(d), and to act in the capacity of a 
Floor Official respecting initial rulings concerning requests for 
relief from the requirements of certain Exchange Rules. See Exchange 
Rule 124, Commentary .02.
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    Definition of OEO. Currently, Floor Officials appointed by the 
respective floor committee chairs, are Exchange members. Under proposed 
Rule 1(pp), an OEO would be defined as an Exchange staff member or 
contract employee designated as such by the Exchange's Chief Regulatory 
Officer (``CRO''). A list of individual OEOs would be displayed on the 
Exchange website, and would be maintained and updated each time a name 
is added to, or deleted from, the list of OEOs. The Exchange's Referee 
would be responsible for maintaining and updating such list. In the 
event no OEO is available to rule on a particular matter, the CRO or 
his/her designee would be required to rule on such matter. OEOs would 
be located on the Exchange's options trading floor and report to the 
CRO.
    OEOs would be members of the Exchange's regulatory staff, including 
the on-floor surveillance staff, who have sufficient expertise to act 
in the capacity of an OEO as determined by the CRO. This could include 
existing Exchange regulatory staff, new hires, or contract employees.
    Under the proposal, the Referee may act in the capacity of an OEO 
respecting initial rulings concerning requests for relief from the 
requirements of certain enumerated Exchange rules,\10\ since such 
rulings are final and not appealable. The Referee could not, however, 
rule in the capacity of an OEO concerning, for example, a nullified or 
adjusted trade resulting from trading dispute or an obvious error, 
because the Referee would have a conflict of interest in ruling on an 
appeal from his or her own decision to nullify or adjust such a 
trade.\11\
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    \10\ See proposed Exchange Rule 124, Commentary .02(a). 
Telephone conversation on March 19, 2007, between Richard Rudolph, 
Vice President and Counsel, Phlx and Jennifer Dodd, Special Counsel, 
Division of Market Regulation, Commission (``Telephone 
Conversation'').
    \11\ See proposed Exchange Rule 124, Commentary .01. Telephone 
Conversation.
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    Nullification and Adjustment of Transactions. Currently, Exchange 
Floor Officials are authorized to rule on trading disputes occurring on 
the options trading floor, which could result in the adjustment or 
nullification of executed transactions.\12\ Floor Officials are also 
currently authorized to nullify or adjust executed transactions in the 
case of an obvious error as defined in the Exchange's rules.\13\ Such 
rulings can be appealed to the Referee for review. The Referee may 
uphold, modify, or overturn the ruling. The decision of the Referee 
concerning these types of rulings is final and may not be appealed to 
the Exchange's Board of Governors.
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    \12\ See Exchange Rule 124. One Floor Official may adjust the 
terms of a transaction in a dispute; two Floor Officials must 
determine to nullify a transaction in such a situation.
    \13\ See Exchange Rule 1092. Two Floor Officials must determine 
that an obvious error (as defined in the rule) occurred in order to 
nullify a transaction.
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    OEOs would replace Floor Officials respecting initial rulings on 
adjustment or nullification of transactions. One OEO may adjust a 
transaction, and the Exchange proposes to require only one OEO to 
nullify a transaction as well.\14\ The Exchange believes that this 
should expedite the decision making process for the nullification of 
transactions. As stated above, such rulings would continue to be 
appealable to the Referee.
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    \14\ Currently, Exchange rules require two Floor Officials to 
nullify a transaction. See Exchange Rule 124(a). See also Exchange 
Rule 1092(e)(ii)(B). The instant proposal would require one OEO to 
nullify a transaction.
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    Initial Requests for Relief. Floor Officials and, in some instances 
the Referee, are currently authorized to rule on initial requests for 
relief from the requirements of certain rules, including, without 
limitation, quote spread parameters,\15\ and disengagement of Exchange 
automatic execution systems under extraordinary circumstances.\16\ Such 
rulings are final and may not be appealed to the Board.
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    \15\ Relief from the established bid/ask differentials may be 
granted upon the receipt of an approval of two Floor Officials. See 
OFPA F-6.
    \16\ See Exchange Rule 1080(e).
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    Similarly, the proposal would authorize OEOs to replace Floor 
Officials and to make initial rulings concerning requests for relief 
from the requirements of other Exchange Rules. For example, the 
proposal would authorize OEOs to rule on requests for relief from 
Exchange rules relating to: (i) Bid/ask differentials pursuant to 
Exchange Rule 1014(c) and Options Floor Procedure Advice (``OFPA'') F-
6; (ii) disengagement of Exchange automatic execution systems pursuant 
to Exchange Rule 1080(e) and OFPA A-13; (iii) the determination that 
quotes in options on the Exchange or another market or markets are 
subject to relief from the firm quote requirement pursuant to Exchange 
Rule 1080(c)(i); and (iv) trading halts, openings and re-openings 
pursuant to Rules 1017, 1047 and 1047A and OFPAs A-12, A-14 and G-2.
    Rule 1014(c) and OFPA F-6 set forth the maximum allowable bid/ask 
differentials, or quote widths, that may be disseminated by specialists 
and ROTs on the Exchange, depending on the price of the series to be 
quoted. The Exchange believes that these requirements can have the 
unintended consequence of requiring those making markets to quote at 
prices that are unnecessarily narrow, thereby exposing them to great 
risk if markets move quickly.\17\ Two Floor Officials may

[[Page 17214]]

currently grant relief from these differentials during times of peak 
market activity where options markets and/or the market for securities 
underlying the option move quickly. Under the proposal, one OEO would 
be authorized to make such a ruling. The Exchange believes that this 
should expedite the process for granting or denying such relief by 
reducing the number of persons required to participate in such a 
ruling.
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    \17\  See, e.g., Securities Exchange Act Release No. 50728 
(November 23, 2004), 69 FR 69982 (December 1, 2004) (SR-Phlx-2004-
74) (Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change and Amendment No. 1 by the Philadelphia Stock Exchange, Inc. 
Relating to $5 Bid/Ask Differentials).
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    Openings. Currently, the Exchange provides an automated opening 
system for options; however, two Floor Officials may direct the manual 
opening of the affected series where necessary to ensure a fair and 
orderly market.\18\ For example, two Floor Officials may authorize the 
opening of a series at a price that falls outside of the Exchange's 
established parameters \19\ where necessary to ensure a fair and 
orderly market.
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    \18\ See Exchange Rule 1017(f).
    \19\ See Exchange Rule 1017(e)(ii).
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    The Exchange proposes to replace the two Floor Officials with a 
single OEO, who would have the same authority described above 
concerning openings. The purpose of this provision is to expedite the 
approval process for manual openings on the Exchange, thereby enabling 
the Exchange to open the particular series as quickly as possible.
    Trading Halts, Rotations, and Re-Openings Following a Trading Halt. 
Currently, two Floor Officials, with the concurrence of a Market 
Surveillance officer, are currently authorized to rule on trading 
halts, rotations and re-openings following a trading halt.\20\ The 
Exchange proposes to amend the rules so that one OEO could make such a 
ruling. Further, the Exchange proposes to delete the provisions from 
the rules requiring the concurrence of a Market Surveillance officer in 
rulings concerning trading halts and re-openings following a trading 
halt. The purpose of this deletion is to avoid unnecessary delays in 
locating and informing a Market Surveillance officer of a situation 
requiring a halt (such as a halt in trading in the underlying security) 
while volatile market activity continues. The Exchange believes that 
the timeliness of such a ruling is critical in such situations, because 
customers and other market participants could be subject to 
immeasurable risk during the time period between the occurrence of an 
event requiring a halt or re-opening and the time the decision is made 
and trading is actually halted. Thus, one OEO could make a prompt 
ruling without unnecessary delay.
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    \20\ See Exchange Rules 1047 and 1047A. See also, OFPA G-2.
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    Order and Decorum. Currently, a Floor Official may impose on 
members, member organizations, participants, participant organizations 
and their associated persons, fines for breaches of regulations that 
relate to administration of order, decorum, health, safety and welfare 
on the Exchange.\21\ Under the proposal, OEOs would have this 
authority. Currently, two Floor Officials may refer such a matter to 
the Exchange's Business Conduct Committee (``BCC'').\22\ Under the 
proposal, OEOs would have this authority, and one OEO could refer such 
a matter to the BCC.
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    \21\ See Exchange Rule 60.
    \22\ The Business Conduct Committee has exclusive jurisdiction 
to (i) monitor compliance with the Exchange Act, the rules and 
regulations thereunder, the By-Laws and rules of the Exchange or any 
interpretation thereof, and the rules, regulations, resolutions and 
stated policies of the Board of Governors or any committee of the 
Exchange, by Members, participants, Member Organizations and 
participant organizations and persons associated with any such 
persons or organizations; (ii) examine into the business conduct and 
financial condition of Members, participants, Member Organizations 
and participant organizations and persons associated with any such 
persons or organizations; and (iii) authorize the initiation of any 
disciplinary actions or proceedings brought by the Exchange. See 
Exchange By-Law Article X, Section 10-11.
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    Currently, two Floor Officials and an officer of the Exchange may 
exclude a member, participant, and any associated person of member 
organizations and participant organizations from the trading floor for 
breaches of regulations that relate to administration of order, 
decorum, health, safety and welfare on the Exchange that occurred on 
the trading floor or on the premises immediately adjacent to the 
trading floor if they pose an immediate threat to the safety of persons 
or property, are seriously disrupting Exchange operations, or are in 
possession of a firearm.\23\ The Exchange proposes to authorize one OEO 
and an officer of the Exchange to do so.
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    \23\ See Exchange Rule 60(b)(i).
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    Finally, the Exchange proposes a housekeeping amendment to OFPA F-
27, to delete the term ``Floor Procedure Committee,'' because that 
committee no longer exists on the Exchange.\24\
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    \24\ See Securities Exchange Act Release No. 54538 (September 
28, 2006), 71 FR 59184 (October 6, 2006) (SR-Phlx-2006-43).
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    The Exchange believes that replacing Floor Officials with OEOs 
should result in a more neutral, efficient and streamlined process for 
the resolution of disputes on the Exchange, together with an expedited 
process through which the Exchange may rule on matters currently 
handled by Floor Officials, including the determination to nullify and 
adjust transactions; to halt and re-open options series for trading; to 
conduct manual openings where necessary in the interest of a fair and 
orderly market; to process requests for relief from the requirements of 
certain rules; and to more efficiently maintain order and decorum on 
the Exchange's options trading floor and surrounding areas.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \25\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \26\ 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, in general to protect investors and the public 
interest, by establishing and authorizing neutral OEOs to rule on 
matters such as trading disputes, requests for relief, openings, 
trading halts and reopenings, and to efficiently maintain order and 
decorum on the options trading floor. The Exchange further believes 
that the proposal is consistent with Section 6(b)(1) \27\ of the Act in 
that the proposal is designed to enable the Exchange to continue to 
comply, and to enforce compliance by its members and persons associated 
with its members, with provisions of the Act, the rules and regulations 
thereunder, and the rules of the Exchange.
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    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
    \27\ 15 U.S.C. 78f(b)(1).
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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.

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

[[Page 17215]]

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 Phlx 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-2006-87 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-2006-87. 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 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 the filing 
also will be available for inspection and copying at the principal 
office of the 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-2006-87 and should be submitted on or before April 27, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-6496 Filed 4-5-07; 8:45 am]

BILLING CODE 8010-01-P