Document ID: SEC-2012-0174-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2012-02-01T05:00Z

[Federal Register Volume 77, Number 21 (Wednesday, February 1, 2012)]
[Notices]
[Pages 5073-5079]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2202]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66257; File No. SR-Phlx-2012-11]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change Regarding Listing and Trading of PHLX 
FOREX Options\TM\

January 26, 2012.
    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 January 23, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing with the Securities and Exchange Commission 
(``Commission'') a proposal to

[[Page 5074]]

implement new Phlx Rules 1000C (Applicability of Rule 1000C Series--
PHLX FOREX Options\TM\) \3\; Rule 1001C (Definitions--PHLX FOREX 
Options); Rule 1002C (Series of PHLX FOREX Options Open for Trading); 
Rule 1003C (Obligations and Quote Spread Parameters Applicable to PHLX 
FOREX Options Specialists and Registered Options Traders); Rule 1004C 
(Bids And Offers of PHLX FOREX Options); Rule 1005C (Minimum Increments 
of PHLX FOREX Options); Rule 1006C (Closing Settlement Value of PHLX 
FOREX Options); Rule 1007C (FLEX--PHLX FOREX Options); \4\ Rule 1008C 
(Position Limits--PHLX FOREX Options); and Rule 1009C (Exercise 
Limits--PHLX FOREX Options) to: list and trade U.S. dollar-settled 
foreign currency (``foreign currency'') options known as PHLX FOREX 
Options on the British pound, the Swiss franc, the Canadian dollar, the 
Australian dollar, the New Zealand dollar, and the Euro.\5\
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    \3\ PHLX FOREX Options \TM\ is a trademark of NASDAQ OMX PHLX 
LLC.
    \4\ FLEX options are flexible exchange-traded options contracts 
that overlie index, equity, and currency securities. FLEX options 
provide investors with the ability to customize basic option 
features including size, expiration date, exercise style, and 
certain exercise prices. FLEX option trading is generally described 
in Rule 1079, which along with proposed Rule 1007C, is applicable to 
PHLX FOREX Options.
    \5\ The proposed PHLX FOREX Options would be listed on 
underlying currencies that also underlie foreign currency options 
(``FCOs,'' also known as World Currency Options or ``WCOs'') 
currently listed on the Exchange (e.g. the British pound, the Swiss 
franc, the Canadian dollar, the Australian Dollar, the New Zealand 
dollar, and the Euro). The product specifications for the current 
FCOs (WCOs), which are not altered by or as a result of this filing, 
may be found at http://www.nasdaqomxtrader.com/wco.
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    The Exchange also proposes to amend Phlx Option Floor Procedure 
Advices \6\ F-6 (Option Quote Parameters) and F-15 (Minor Infractions 
of Position/Exercise Limits and Hedge Exemptions) to properly harmonize 
Exchange Advices and rules.
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    \6\ Options Floor Procedure Advices (``OFPAs'' or Advices''), 
which may correspond to Exchange rules, contain the Exchange's minor 
rule plan (``MRP'' or ``Minor Rule Plan'') in respect of options 
trading. The Minor Rule Plan consists of Advices with preset fines, 
pursuant to Rule 19d-1(c) under the Act. 17 CFR 240.19d-1(c). The 
Exchange is not, by this filing, amending the fine schedule for any 
OFPA.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, 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 establish new Rules 
1000C through 1009C that would, in conjunction with current Exchange 
trading rules, allow listing and trading foreign exchange (also known 
as ``Forex'' or ``FX'') options on the British Pound, the Swiss Franc, 
the Canadian Dollar, the Australian Dollar, the New Zealand dollar 
(``PHLX FOREX Options''). The Exchange is also amending Advices F-6 and 
F-15 to harmonize Exchange Advices and rules.
    The primary difference between current WCOs or FCOs and proposed 
PHLX FOREX Options will be the pricing convention of PHLX FOREX Options 
based on the spot market prices for the underlying currencies. The 
proposed methodology or convention for pricing PHLX FOREX Options \7\ 
resembles the ``spot market pricing'' in use for currency futures and 
options on currency futures contracts \8\ on the same underlying 
currencies.\9\
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    \7\ See proposed Rule 1001C.
    \8\ A currency futures contract is a transferable futures 
contract that specifies the price at which a currency can be bought 
or sold at a future expiration date.
    \9\ CME Group Inc. (``CME'') lists and trades futures and 
options on futures contracts on many of the PHLX FOREX Options that 
are proposed to be listed and traded by the Exchange including the 
Australian dollar, the British pound, the Canadian dollar, and the 
Euro. Examples of settlement (closing) spot prices of futures 
contracts on these currencies (e.g. 1.0565 for the Euro) can be 
found at ftp://ftp.cmegroup.com/pub/settle/stlcur.
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Background

    The Exchange listed and traded physical delivery FCOs from 1982 
through early 2007 through open outcry.\10\ In 2004, the Exchange's 
options trading platform, Phlx XL, was approved for options trading; 
\11\ this allowed options on foreign currencies to be traded 
electronically as well as manually. In January 2007, the Exchange 
listed and began trading cash-settled FCOs on the British pound and the 
Euro.\12\ In July 2007, the Exchange listed and began trading FCOs on 
the Australian dollar, Canadian dollar, Swiss franc, and Japanese 
yen.\13\ In June 2009, the Exchange received approval to list ten 
additional FCOs (WCOs) and to change their pricing convention so that 
it was similar to the pricing convention used for index options by 
adding multipliers to spot currency prices.\14\
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    \10\ The last physical delivery FCOs that were listed on the 
Exchange were traded out or expired by March 2007.
    \11\ See Securities Exchange Act Release No. 49832 (June 8, 
2004), 69 FR 33442 (June 15, 2004) (SR-Phlx-2003-59) (approving Phlx 
XL). See also Release No. 59995 (May 28, 2009) SR-Phlx-2009-32 
(approving Phlx XL II, the Exchange's new electronic trading 
platform).
    \12\ See Securities Exchange Act Release No. 54989 (December 21, 
2006), 71 FR 78506 (December 29, 2006) (SR-Phlx-2006-34). In 
approving the listing and trading of FCOs on the British pound and 
the Euro, the approval order stated that the listing and trading of 
additional FCOs on other foreign currencies will require the 
Exchange to file additional proposed rule changes on Form 19b-4.
    \13\ See Securities Exchange Act Release No. 56034 (July 10, 
2007), 72 FR 38853 (July 16, 2007) (SR-Phlx-2007-34).
    \14\ The ten additional FCOs (WCOs) approved for listing and 
trading were the Mexican peso, the Brazilian real, the Chinese yuan 
(also known as the renminbi), the Danish krone, the New Zealand 
dollar, the Norwegian krone, the Russian ruble, the South African 
rand, the South Korean won, and the Swedish krona See Securities 
Exchange Act Release No. 60169 (June 24, 2009), 74 FR 31782 (July 2, 
2009) (SR-Phlx-2009-40) (approval order). This filing also deleted 
all reference to customized FCOs, which had ceased being traded on 
the Exchange. See also supra note 10.
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    The Exchange currently lists eleven FCOs (WCOs).\15\ These options 
trade in the manual auction market as well as electronically.
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    \15\ The currencies underlying these FCOs (WCOs) include: the 
Australian dollar, the British pound, the Canadian dollar, the Euro, 
the Japanese yen, the Mexican peso, the New Zealand dollar, the 
Norwegian krone, the South African rand, the Swedish krona, and the 
Swiss franc.
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    This proposal allows the Exchange to list and trade PHLX FOREX 
Options on six of the same foreign currencies that underlie foreign 
currency options (FCOs or WCOs) that are currently traded on the 
Exchange, namely the British pound, the Swiss franc, the Canadian 
dollar, the Australian dollar, the New Zealand dollar, and the Euro. 
The proposal allows PHLX FOREX Options to be listed and traded in 
parallel to current FCOs (WCOs) and in a similar manner, by using the 
proposed PHLX FOREX Option rules in conjunction with existing Exchange 
rules and processes for foreign currency options (FCOs or WCOs). The 
proposal does not affect the continued listing and trading

[[Page 5075]]

of FCOs or WCOs on the Exchange. Moreover, to minimize investor 
confusion during such time, if any, that PHLX FOREX Options and FCOs 
(WCOs) are traded on the Exchange in parallel on the same underlying 
currencies, the Exchange intends to engage in an educational effort to 
inform potential traders and investors about the differences in the 
PHLX FOREX Options and FCO (WCO) products.\16\
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    \16\ For example, as discussed in the filing the pricing of PHLX 
FOREX Options and FCOs (WCOs) would be different in that the pricing 
of a Euro PHLX FOREX Option would resemble spot market pricing (e.g. 
1.0031) while the pricing of a Euro FCO (WCO) would resemble index 
option pricing (e.g. 100.31). And, the pricing symbology would be 
different in that PHLX FOREX Option prices would be reflected to 
four decimal places and FCOs (WCOs) prices to two places.
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    PHLX FOREX Options listed by the Exchange would, like WCOs or FCOs, 
be cleared by The Options Clearing Corporation (``OCC'') \17\ and would 
be European style.\18\ Upon exercise, holders of options contracts 
would receive U.S. dollars representing the difference between the 
exchange rate and the exercise price of the option,\19\ which would be 
multiplied by the units of currency \20\ in each PHLX FOREX Option 
contract. For example, upon exercise of an in-the-money PHLX FOREX 
Options call option, the holder would receive from OCC U.S. dollars 
representing the difference between the exercise price and the closing 
settlement value of the cash-settled option contract multiplied by the 
units of currency. Upon exercise of an in-the-money PHLX FOREX Options 
put option, the holder would receive from OCC U.S. dollars representing 
the excess of the exercise price over the closing settlement value of 
the cash-settled option contract multiplied by the units of currency. 
Additionally, PHLX FOREX Options that are in-the-money by any amount on 
the expiration date would be exercised automatically by OCC, while PHLX 
FOREX Options that are out-of-the-money on the expiration date would 
expire worthless.
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    \17\ See Securities Exchange Act Release No. 54935 (December 13, 
2006), 71 FR 76417 (December 20, 2006) (SR-OCC-2006-10) (proposing 
to amend OCC's by-laws and rules to accommodate the clearance and 
settlement of the Exchange's WCOs or FCOs).
    \18\ Unlike American style options, European style options may 
be exercised only on the day that they expire.
    \19\ Proposed Rule 1006C.
    \20\ Each PHLX FOREX Option contract for the six currencies 
discussed in this filing would, like each WCO or FCO contract, have 
10,000 units of currency. The product specifications for the new 
PHLX FOREX Options may be found at http://www.nasdaqomxtrader.com/wco.
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The Proposal

    The changes proposed herein regarding the methodology or convention 
of pricing PHLX FOREX Options would, as noted, closely resemble the 
``spot market pricing'' that has been in use for decades for futures 
and options on futures contracts on the currencies that underlie PHLX 
FOREX Options. The Exchange receives spot market prices for currencies 
underlying the FCOs (WCOs) from a data vendor, which at this time is 
SIX Telekurs,\21\ and converts such spot market prices to Exchange Spot 
Prices by applying an appropriate multiplier (e.g. 100 or 1000).\22\ 
Currently, the closing settlement value for FCO (WCO) settlement 
purposes is the Exchange Spot Price at 12:00:00 Eastern Time (noon) on 
the last trading day prior to expiration.\23\ The Exchange currently 
generates a settlement value report for each underlying currency; and 
publicly disseminates unique FCO (WCO) trading symbols and settlement 
values in order to differentiate between live underlying markets and 
12:00:00 noon FCO (WCO) settlement prices.
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    \21\ SIX Telekurs specializes in the procurement, processing and 
distribution of international financial information for investment 
advisory services, fund administration, portfolio management, 
financial analysis and securities administration. SIX Telekurs 
collects data directly from hundreds of contributors and exchanges 
as well as more than thirty (30) worldwide contributing banks. This 
data is, as discussed, the basis for the foreign currency spot 
market prices that SIX Telekurs provides to the Exchange.
    The Exchange notes that spot market prices for currencies 
underlying PHLX FOREX Options are also calculated by other entities 
and available to investors from other sources such as market data 
vendors Bloomberg, Reuters, and Thomson. Investors can also get spot 
market prices for free from sources such as http://finance.yahoo.com/ and http://www.allstocks.com/1bigcharts.htm; as 
well as from brokers with whom investors have a trading account.
    \22\ For a definition of Exchange Spot Price, see Rule 
1000(b)16.
    The International Securities Exchange, LLC (``ISE'') similarly 
applies multipliers to its cash-settled rate-modified currency 
options (which are not fungible with Phlx's WCOs or FCOs) so that 
they tend to look like the prices of index and other options. See 
Exchange Act Release No. 55575 (April 3, 2007), 72 FR 17963 (April 
10, 2007) (SR-ISE-2006-59).
    \23\ See Rule 1057.
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    For PHLX FOREX Options, however, the Exchange will not use Exchange 
Spot Prices for settlement (or any other) purpose. Instead, the 
Exchange will use the spot market prices that it receives from SIX 
Telekurs or another data vendor at 12:00:00 Eastern Time (noon) on the 
last trading day prior to expiration to calculate settlement values--
but will not apply any multiplier as it does for FCOs (WCOs).\24\ These 
PHLX FOREX Option settlement values will be, similarly to FCOs (WCOs), 
publicly disseminated with unique trading symbols to differentiate 
between live underlying markets and 12:00:00 Eastern Time (noon) PHLX 
FOREX Option settlement prices. Except for applying multipliers for FCO 
(WCO) settlement values, the settlement value methodologies will 
largely be similar for PHLX FOREX Options and FCOs (WCOs). As an 
example, the July 2012 settlement value of a PHLX FOREX Option on the 
Euro may be $1.4338 based on the spot market price of the underlying 
currency; whereas the July 2012 settlement value price of a WCO (FCO) 
on the Euro may be $143.38 based on the application of a 100 multiplier 
to the similar spot market price.
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    \24\ Proposed Rule 1006C.
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    PHLX FOREX Options will, as discussed, be similar--and in many 
respects identical--to FCOs (WCOs) and will trade in a like fashion. As 
such, in the proposed rules the Exchange initially sets forth the 
principle that its existing rules and procedures would be applicable to 
PHLX FOREX Options and the proposed PHLX FOREX Options rules would 
supplement existing rules. Specifically, new Rule 1000C states that 
unless otherwise specified, the proposed rules in the Rule1000C series 
of rules (``Rule 1000C Series'') are applicable only to PHLX FOREX 
Options. Rule 1000C states that except to the extent that specific 
rules in the Rule 1000C Series govern, or unless the context otherwise 
requires, the provisions of the Option Rules applicable to foreign 
currency options \25\ and of the By-Laws \26\ and all other Rules and 
Policies of the Board of Directors \27\ are applicable to the trading 
on the Exchange of PHLX FOREX Options.
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    \25\ Option Rules 1000 et seq. and 1000A et seq.
    \26\ By-Laws Articles I to VII.
    \27\ Rules of the Exchange Rule 1 et seq. and Options Floor 
Procedure Advices.
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Definitions

    PHLX FOREX Options are defined in Rule 1001C. Specifically, 
Subsection (a)(1) states that the term ``PHLX FOREX Option'' means: (i) 
A U.S. dollar-settled foreign currency option contract, (ii) on the 
standard unit of an underlying currency (discussed below) that is the 
official medium of exchange of a sovereign government including the 
United States Government (e.g., the British pound, the Swiss franc, the 
Canadian dollar, the Australian dollar, the New Zealand dollar, or the 
Euro). This is identical to current WCO or FCO

[[Page 5076]]

options.\28\ However, subsection (iii) also states that a PHLX FOREX 
Option will use the spot market price of the underlying currency for 
pricing and for settlement. This third characteristic of PHLX FOREX 
Options represents the crucial difference between PHLX FOREX Options 
and WCOs or FCOs: The pricing of PHLX FOREX Options (whether intra-day, 
end of day, or settlement pricing) will be based on the relevant 
underlying currency and will therefore resemble the spot market pricing 
of futures on the relevant underlying currency--without application of 
a multiplier as for WCOs or FCOs. As a result, where the price for Euro 
PHLX FOREX Options might read 1.4732, the Exchange Spot Market Price 
for Euro WCOs or FCOs might read 147.32.
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    \28\ Rule 1000(b)(13).
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    The term ``unit of underlying foreign currency'' in respect of PHLX 
FOREX Options is defined in subsection (a)(2) of Rule 1001C to mean a 
single unit of the foreign currency. This is identical to the 
definition of underlying currency for WCOs or FCOs. Thus, a unit of 
currency underlying a Euro PHLX FOREX Options or a British Pound PHLX 
FOREX Options would be one Euro or one British pound, respectively.

Opening and Adding New PHLX FOREX Options

    The Exchange proposes Rule 1002C regarding the series of underlying 
PHLX FOREX Options that may be opened for trading after a particular 
class of PHLX FOREX Option has been approved for listing and trading on 
the Exchange. Specifically, the Exchange proposes subsection (a)(i) 
stating that at the commencement of trading on the Exchange of a 
particular class of PHLX FOREX Options, the Exchange will open a 
minimum of one expiration month and series for each class of options 
open for trading on the Exchange.\29\ The exercise price of each series 
of PHLX FOREX Options opened for trading on the Exchange will be fixed 
in terms of U.S. dollars per unit of the underlying currency at a price 
per unit which is reasonably close to the current spot market price of 
the underlying foreign currency in the foreign exchange market at or 
before the time such series of options is first opened for trading on 
the Exchange. This is the same as the procedure for opening initial 
months and series and fixing expiration terms of equity options and 
index options on the Exchange, and continues the process of harmonizing 
exchange rules in the listing area.\30\
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    \29\ The Exchange notes that it currently intends to open two 
quarterly and two additional near-term months.
    \30\ For recent proposals harmonizing Exchange rule provisions 
regarding opening and adding equity and index options, see 
Securities Exchange Act Release Nos. 64741 (June 24, 2011), 76 FR 
38444 (June 30, 2011) (SR-Phlx-2011-65) (order approving); 63700 
(January 11, 2011), 76 FR 2931 (January 18, 2011) (SR-Phlx-2011-04) 
(notice of filing and immediate effectiveness; and 57478 (March 12, 
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and NASDAQ-
2007-080) (order approving). The Exchange notes that the opening of 
FCOs (WCOs) has not yet been harmonized to the one month one series 
standard.
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    Regarding additional series of options, proposed subsection (a)(ii) 
to Rule 1002C states that additional series of PHLX FOREX Options of 
the same class may be opened for trading on the Exchange when the 
Exchange deems it necessary to maintain an orderly market, to meet 
customer demand or when the market price of the underlying stock moves 
more than five strike prices from the initial exercise price or 
prices.\31\ Regarding long-term options, proposed subsection (a)(iii) 
states that with respect to any class of PHLX FOREX Options series the 
Exchange may list options having up to thirty-nine months from the time 
they are listed until expiration (with up to six additional expiration 
months). Strike price interval, bid/ask differential and continuity 
rules shall not apply to such options series until the time to 
expiration is less than nine months.
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    \31\ Proposed subsection (a)(ii) to Rule 1002C states further: 
The opening of a new series of options shall not affect the series 
of options of the same class previously opened. New series of 
options on an individual stock may be added until the beginning of 
the month in which the options contract will expire. Due to unusual 
market conditions, the Exchange, in its discretion, may add a new 
series of PHLX FOREX Options until five (5) business days prior to 
expiration.
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Pricing of PHLX FOREX Options

    Proposed subsection (b) of Rule 1002C states that for each 
expiration of PHLX FOREX Options, the Exchange may initially list 
exercise strike prices within a 40 percent band around the current spot 
market price for an underlying currency for a PHLX FOREX Option (known 
as the ``spot market''). These options could be listed at $.0050 
intervals. As the spot market moves, the Exchange may list new strike 
prices that, at the time of listing, do not exceed the spot market by 
more than 20 percent and are not less than the spot market by more than 
20 percent (commensurate with the 40 percent band). For example, if at 
the time of initial listing, the spot market of the Euro is at $1.000 
the strike prices the Exchange would list for the PHLX FOREX Option 
will be $.800 to $1.20 in $.0050 intervals. If the spot market then 
moves to $1.3050, the Exchange may list additional strikes at the 
following prices in $.0050 intervals: $1.045 to $1.565. The spot market 
pricing convention is reflected in other proposed rules.
    The quote spread parameters (or bid/ask differentials) with respect 
to PHLX FOREX Options are noted in subsection (a) of Rule 1003C, which 
is applicable to PHLX FOREX Options specialists and Registered Options 
Traders (``ROTs''). In subsection (a), the Exchange proposes to use the 
spot market price convention but move the decimal point two places to 
the right so that a bid and/or offer differential of $.0025 would be 
``expressed as'' $.25 for trading purposes.\32\ Regarding electronic 
quotations, the Exchange proposes to state in subsection (b) to Rule 
1003C that PHLX FOREX Options may be quoted electronically with a 
difference not to exceed $.0500 (expressed as $5.00) between the bid 
and offer regardless of the price of the bid.\33\ The Exchange believes 
that because such proposed ``expressed as'' price demarcations are 
similar to how prices are now expressed for equity options, it would be 
easier for PHLX FOREX Options participants to use the expressed as 
pricing for trading purposes.\34\ ``Expressed as'' pricing is used in 
several other proposed PHLX FOREX Option rules.
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    \32\ Proposed subsection (a) to Rule 1003C states in full: With 
respect to all PHLX FOREX Options, bidding and/or offering so as to 
create differences of no more than $.0025 (expressed as $.25) 
between the bid and the offer for each option contract for which the 
prevailing bid is less than $.0200 (expressed as $2.00); no more 
than $.0040 (expressed as $.40) where the prevailing bid is $.0200 
(expressed as $2.00) or more but less than $.0500 (expressed as 
$5.00); no more than $.0050 (expressed as $.50) where the prevailing 
bid is $.0500 (expressed as $5.00) or more but less than $.1000 
(expressed as $10.00); no more than $.0080 (expressed as $.80) where 
the prevailing bid is $.1000 (expressed as $10.00) or more but less 
than $.2000 (expressed as $20.00); and no more than $.0100 
(expressed as $1.00) where the prevailing bid is $.2000 (expressed 
as $20.00).
     Proposed OFPA F-6 is similar.
    \33\ Proposed subsection (b) to Rule 1003C states further: The 
bid/ask differentials set forth in this subparagraph (b) only 
applies to electronic quotations and only following the opening 
rotation in each security (i.e., the bid/ask differentials specified 
in sub-paragraph (a) above shall apply during opening rotation). 
Quotations provided in open outcry may not be made with bid/ask 
differentials set forth in this subparagraph (b) and instead must 
comply with the legal bid/ask differential requirements described in 
sub-paragraph (a) above and not in this sub-paragraph (b).
    \34\ As an example, it would be unwieldy for a trader in a crowd 
to have to announce that he is improving a price by .0010 (one tenth 
of a penny). The ``expressed as'' price would allow the trader to 
announce that he is improving the price by ten cents or a dime.
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    Proposed Rule 1004C regarding bids and offers of PHLX FOREX Options

[[Page 5077]]

states that except as provided in paragraph (b) and (c) of that Rule 
(contract adjustments and spread type priority),\35\ all bids or offers 
made on the Exchange floor for PHLX FOREX Option contracts shall be 
expressed in terms of U.S. dollars per unit of the underlying foreign 
currency. The example given in the rule is that a bid of ``.0325'' 
(which would be expressed as ``3.25'') for a premium on a $1.70 strike 
price option on the British pound would represent a bid to pay $325 per 
option contract.
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    \35\ Proposed Rule 1004C subsection (b) states: All bids or 
offers for an option contract for which the Options Clearing 
Corporation has established an adjusted unit of trading in 
accordance with paragraphs (c) and (d) of Section 11 of Article VI 
of the by-laws of the Options Clearing Corporation shall be 
expressed in terms of dollars per the appropriate fractional part of 
the total securities and/or other property constituting such 
adjusted unit of trading.
    Proposed Rule 1004C subsection (c) states: When a member holding 
a hedge order, as defined in Rule 1066 and bidding or offering on 
the basis of a total credit or debit for the order has determined 
that the order may not be executed by a combination of transactions 
at or within the bids and offers established in the marketplace, 
then the order may be executed as a hedge order at the total credit 
or debit with one other member with priority over either the bid or 
the offer established in the marketplace that is not better than the 
bids or offers comprising such total credit or debit, provided that, 
the member executes at least one option leg at a better price than 
established bid or offer for that option contract AND no option leg 
is executed at a price outside of the established bid or offer for 
that option contract.
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    The minimum trading increment for PHLX FOREX Options is set forth 
in proposed Rule 1005C. Subsection (a) states that all PHLX FOREX 
Options where the underlying foreign currency is not the U.S. dollar 
(unless a PHLX FOREX Options pair) shall have a minimum increment of 
$.0001 but will be expressed for trading as $.01. Subsection (b) adds 
that different, higher, minimum increments may, however, be fixed by 
the Exchange for option contracts of a particular series of PHLX FOREX 
Options. This information will be posted on the Exchange's Web site.

Position and Exercise Limits for PHLX FOREX Options

    Proposed Rule 1008C establishes that the new PHLX FOREX Options, 
namely the British pound, the Swiss franc, the Canadian dollar, the 
Australian dollar, the New Zealand dollar, and the Euro, will each have 
a position limit of 1,200,000 contracts. The proposed position limit 
for PHLX FOREX Options is identical to the current position limit for 
FCOs (WCOs) on Euros. The Exchange believes that it is proper to keep 
the proposed position limit at 1.2 million contracts for each such FX 
Option overlying a major foreign currency,\36\ as this would further 
the goal of eliminating investor confusion by standardizing proposed 
PHLX FOREX Options. The proposed rule also establishes that if a PHLX 
FOREX Option and an FCO (WCO) are listed on the same underlying 
currency (e.g. a Euro PHLX FOREX Option and a Euro FCO (WCO)), then the 
position for each such option on the same underlying currency will be 
aggregated for purposes of determining compliance with the position 
limit established in this rule.
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    \36\ The six major foreign currencies that underlie PHLX FOREX 
Options are all within the top ten most traded foreign currencies in 
the world, and represent a 72.9% share of the daily market turnover 
(excluding U.S. dollars). Moreover, these underlying foreign 
currencies are very liquid, such that in 2010 the British pound, the 
Swiss franc, the Canadian dollar, the Australian dollar, the New 
Zealand dollar, and the Euro had an average daily volume, in 
billions of U.S. dollars, of 360, 168, 182, 249, 4, and 1,101, 
respectively. Source: Bank for International Settlements (BIS) 
Triennial Central Bank Survey, Report on Global Foreign Exchange 
Market Activity in 2010.
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    Historically, position and exercise limits have served as a 
regulatory tool designed to address manipulative schemes and adverse 
market impact surrounding the use of options. Since the inception of 
standardized options trading, the options exchanges have had rules 
limiting the aggregate number of options contracts that a member or 
customer may hold or exercise. Thus, position and exercise limits have 
been established for FCOs (WCOs) trading on the Exchange; \37\ and a 
1.2 million contract position and exercise limit has, in particular, 
been successfully used for trading Euro FCOs (WCOs).\38\
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    \37\ Rule 1001 and 1002. These rules also establish limits for 
equity and ETF options.
    \38\ See Securities Exchange Act Release No. 60169 (June 24, 
2009), 74 FR 31789 (July 2, 2009)(SR-Phlx-2009-40)(order approving). 
Position limits for non-Euro foreign currency options are 600,000 
contracts. See also Securities Exchange Act Release No. 64695 (June 
17, 2011), 76 FR 36942 (June 23, 2011)(SR-Phlx-2011-58)(order 
approving position limit increase for options on Standard and 
Poor's(R) Depositary Receipts (SPDRs(R)).
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    Position limit rules have also, where needed, historically included 
aggregation of positions among certain products. These include, as an 
example, options on lower-volume proprietary indexes and the components 
of such indexes, and full value and reduced value indexes.\39\ 
Aggregation would be applied in such circumstances because of the 
potential ability to influence price by amassing large positions in 
such proprietary lower-volume or clearly related products.
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    \39\ See Rules 1001A subsection (f) (regarding proprietary Alpha 
Index aggregation) and subsection (e) (regarding full and reduced-
value index aggregation).
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    The products underlying PHLX FOREX Options, namely foreign 
currencies, are traded on the global foreign exchange (FX) market that 
is considered to be one of the largest, most liquid financial markets 
in the world, with a $4.0 trillion average daily turnover in 2010.\40\ 
The huge foreign exchange trading volume represents the largest asset 
class in the world and the highest liquidity among investment vehicles. 
Notwithstanding, based on informal communications with Commission 
staff, wherein staff expressed a general preference for aggregation, in 
Rule 1008C the Exchange is proposing aggregation for PHLX FOREX Options 
and FCOs (WCOs) that are listed on the same underlying currency. For 
purposes of conformity, in Commentary .05 of Rule 1001 the Exchange is 
proposing similar aggregation language in respect of foreign currency 
options (FCOs or WCOs).
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    \40\ It has been observed that the average daily turnover of the 
FX market is equivalent to: more than 12 times the average daily 
turnover of global equity markets (about $320 billion--World 
Federation of Exchanges aggregate 2009); more than 50 times the 
average daily turnover of the NYSE (about $70 billion--World 
Federation of Exchanges 2009); more than $500 a day for every man, 
woman, and child on earth (based on world population of 6.9 
billion--US Census Bureau); and an annual turnover more than 10 
times world GDP (about $58 trillion--World Bank 2009). Source: Bank 
for International Settlements (BIS) Triennial Central Bank Survey 
2010.
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    Finally, the Exchange notes that the six current FCOs (WCOs) that 
are based on the currencies that would also underlie PHLX FOREX Options 
have not experienced problems attributable to position limits.
    Proposed Rule 1009C establishes that the exercise limits for 
options on PHLX FOREX Options will be equivalent to the position limits 
prescribed in Rule 1008C.

Closing Settlement Value of PHLX FOREX Options

    PHLX FOREX Options will use a closing settlement value methodology 
that is identical to what is currently being used for FCOs (WCOs) with 
one distinction. Calculating settlement value for PHLX FOREX Options 
will use the spot market price, whereas WCOs or FCOs currently use the 
Exchange Spot Price. This is set forth in proposed Rule 1006C, which 
states that the closing settlement value for PHLX FOREX Options and for 
FLEX PHLX FOREX Options on the Australian dollar, the Euro, the British 
pound, the Canadian dollar, the Swiss franc, and the New Zealand dollar 
shall be the spot market price at 12:00:00 Eastern Time (noon) on the 
last trading day prior to expiration unless the Exchange determines to

[[Page 5078]]

apply an alternative closing settlement value as a result of 
extraordinary circumstances.\41\ The rule states that, like with WCOs 
and FCOs, PHLX FOREX Options will be settled in U.S. dollars per unit 
of underlying currency; and that the Exchange will disseminate the 
closing settlement value through one or more major market data vendors. 
The rule also indicates that the disclaimer of liability that is 
applicable to WCOs and FCOs is likewise applicable to PHLX FOREX 
Options.\42\ The Exchange will disseminate PHLX FOREX Option closing 
settlement values on its Web site.
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    \41\ The expiration date for PHLX FOREX Options would be the 
Saturday following the third Friday of the expiration month, and the 
last trading day would be the third Friday of the expiration month. 
This is similar to WCOs or FCOs.
    \42\ The disclaimer of liability in proposed Rule 1006C states: 
Neither the Exchange, nor any agent of the Exchange shall have any 
liability for damages, claims, losses or expenses caused by any 
errors, omissions, or delays in calculating or disseminating the 
current settlement value or the closing settlement value resulting 
from an act, condition, or cause beyond the reasonable control of 
the Exchange including but not limited to, an act of God; fire; 
flood; extraordinary weather conditions; war; insurrection; riot; 
strike; accident; action of government; communications or power 
failure; equipment or software malfunction; any error, omission, or 
delay in the reports of transactions in one or more underlying 
currencies or any error, omission or delay in the reports of the 
current settlement value or the closing settlement value by the 
Exchange.
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FLEX--PHLX FOREX Options

    Rule 1079 deals with the process of listing and trading FLEX 
equity, index, and foreign currency options (WCOs and FCOs) on the 
Exchange. The rule states that FLEX options are available for foreign 
currency options (FCOs and WCOs) and discusses, among other things: 
Opening FLEX options trading through the Request-for-Quote (``RFQ'') 
process; quotes responsive to RFQs; trading parameters and procedures; 
and position and exercise limits for FLEX options. The Exchange is 
adding proposed Rule 1007C stating that the FLEX procedures set forth 
in Rule 1079 in respect of foreign currency options will also be 
applicable to PHLX FOREX Options.

Systems Capacity and Surveillance

    The Exchange represents that it has the necessary systems capacity 
to support new options series that will result from the introduction of 
PHLX FOREX Options on the Exchange. The Exchange represents that it has 
an adequate surveillance program in place for trading WCOs or FCOs. The 
Exchange will apply the same surveillance program to PHLX FOREX Options 
that it uses for WCOs or FCOs.\43\ Therefore, the Exchange represents 
that it has adequate surveillance for PHLX FOREX Options.
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    \43\ The Exchange is a member of the Intermarket Surveillance 
Group (``ISG'') under the Intermarket Surveillance Group Agreement, 
which was modernized in 2008, and may obtain trading information via 
the ISG from other exchanges who are members or affiliates of the 
ISG. The members of the ISG include all of the U.S. registered stock 
and options markets. The ISG members work together to coordinate 
surveillance and investigative information sharing in the stock and 
options markets. In addition, the major futures exchanges are 
affiliated members of the ISG, which allows for the sharing of 
surveillance information for potential intermarket trading abuses.
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Applicability of Rules for Foreign Currency Options

    As noted, proposed Rule 1000C establishes the principal that except 
to the extent that specific rules in the Rule 1000C Series govern, or 
unless the context otherwise requires, the provisions of Exchange 
Option Rules applicable to foreign currency options (WCOs or FCOs), 
Exchange By-Laws, and Rules and Policies of the Board of Directors are 
applicable to the trading on the Exchange of PHLX FOREX Options.\44\ An 
example of the applicability of an exchange trading rule is Rule 1014, 
which, among other things, generally discusses obligations and quote 
spread parameters applicable to foreign currency option and other types 
of specialists and ROTs. Proposed Rule 1003C supplements Rule 1014 by 
stating that with respect to classes of option contracts to which a 
specialist or ROT assignment extends, a specialist and an ROT, whenever 
the ROT (except a Remote Streaming Quote Trader or RSQT) enters the 
trading crowd in other than a floor brokerage capacity or is called 
upon by an Options Exchange Official or a Floor Broker \45\ to make a 
market, the specialist and ROT should exhibit certain behavior. In 
particular the rule states that the assigned specialist and ROT is 
expected to engage, to a reasonable degree under the existing 
circumstances, in dealing for his own account when there exists, or it 
is reasonably anticipated that there will exist, a lack of price 
continuity, a temporary disparity between the supply of and demand for 
a particular option contract, or a temporary distortion of the price 
relationships between option contracts of the same class.
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    \44\ Proposed Rule 1000C is modeled on, and essentially the same 
as, current Rule 1000A. This is the primary rule in the Exchange's 
1000A Series of rules for index options, and has continuously been 
in use for more than twenty-five years. See Securities Exchange Act 
Release No. 20437 (December 2, 1983), 48 FR 55229 (December 9, 
1983)(SR-Phlx-83-17)(order approving the 1000A Series of rules). 
Other securities markets use an analogous approach. See, for 
example, CBOE Chapter XXVIII (regarding corporate debt securities); 
ISE Rule 2131 (regarding portfolio depository receipts); BATS BZX 
Exchange Rule 14.11 (regarding managed fund shares); NASDAQ Rule 
2841 (regarding warrants); and NOM Rule 2 (regarding rules on NASDAQ 
Options Market).
    \45\ For definitions of specialist, RSQT, Options Exchange 
Official, and Floor Broker, see Rules 1020, 1014(b)(ii)(B), 1(w) and 
1060, respectively.
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    PHLX FOREX Options will follow the rules, some of which are 
supplemented by this filing, that are currently applicable to foreign 
currency options (WCOs or FCOs).\46\ These include rules that pertain 
to areas such as, for example, hours of trading, quoting and market 
making requirements, margin requirements, reporting options positions, 
filing trade information, and FLEX trading.\47\
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    \46\ See proposed Rule 1000C and infra note 45.
    \47\ Rules 101, 1014, 721, 1003, 1053, and 1079, respectively. 
Other Exchange rules that are applicable to the trading of foreign 
currency options products include Rules 1006 (Other Restrictions on 
Exchange Options Transactions and Exercises); 1014 (Obligations and 
Restrictions Applicable to Specialists and Registered Options 
Traders); 1022 (Securities Accounts and Orders of Specialists and 
Registered Options Traders); 1024 (Conduct of Accounts for Options 
Trading); 1025 (Supervision of Accounts); 1027 (Discretionary 
Accounts); 1028 (Confirmations); 1039 (Resolution Of Uncompared 
Trade); 1043 (Allocation of Exercise Notices); 1044 (Delivery and 
Payment); 1045 (Officers And Employees Restricted); 1047 (Trading 
Rotations, Halts and Suspensions); 1049 (Communications to 
Customers); 1063 (Responsibilities of Floor Brokers); 1064 
(Crossing, Facilitation and Solicited Orders); 1066 (Certain Types 
of Orders Defined); 1068 (Execution of Multi-Part Orders); 1080 
(Phlx XL and Phlx XL II); 1083 (Order Protection; Locked and Crossed 
Markets); 1089 (Dealing Directly With Specialist and Registered 
Option Trader in Foreign Currency Options); and 1092 (Obvious Errors 
and Catastrophic Errors).
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Option Floor Procedure Advices

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

Conclusion

    The Exchange believes that PHLX FOREX Options using a pricing 
structure that is similar to that of underlying currencies in the 
interbank currency market represent a leveraged

[[Page 5079]]

derivative instrument that, from a competitive perspective, provides a 
familiarly-priced leveraged currency product on a regulated listed 
options market. PHLX FOREX Options should increase product competition, 
encourage trading, and provide additional investment and hedging 
opportunities for traders, market participants, and investors (to 
include retail and public investors).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \48\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \49\ 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.
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    \48\ 15 U.S.C. 78f(b).
    \49\ 15 U.S.C. 78f(b)(5).
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    The proposal should minimize or eliminate investor confusion by 
aligning the pricing and trading of PHLX FOREX Options to established 
methodologies. PHLX FOREX Options would use a pricing structure that is 
similar to the pricing structure that has been used in the interbank 
currency market for decades for currencies that underlie PHLX FOREX 
Options (as well as for other currencies). Traders of PHLX FOREX 
Options would have the ability, however, to express prices of such 
options for trading purposes in a familiar style that is used for 
trading other options on the Exchange.\50\
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    \50\ As an example, instead of a trader having to indicate that 
he is improving the price of a Euro PHLX FOREX Option by .0010 (one 
tenth of a penny), the trader would express that he is improving the 
price by ten cents or a dime. See also supra note 34.
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    At the same time, PHLX FOREX Options would be largely similar in 
structure to foreign currency options listed on the Exchange (FCOs or 
WCOs), and would trade in a like manner. The process for trading PHLX 
FOREX Options will be similar to the process that has been used for 
years, and continues being used, on the Exchange for trading foreign 
currency options (FCOs and WCOs).\51\ The current foreign currency 
options trading process will be enhanced by the Rule 1000C Series of 
proposed PHLX FOREX Options rules,\52\ which will supplement existing 
trading rules.
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    \51\ For applicable FCO (WCO) trading rules, see supra note 47.
    \52\ Proposed Rules 1000C through 1009C.
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    In addition, the Exchange will discuss the proposal in an OTA. In 
particular, the Exchange intends to educate members about the structure 
and trading procedure for PHLX FOREX Options as one of two foreign 
currency products that may be traded in parallel on the Exchange with 
the approval of this proposal. The Exchange believes that this will 
serve to minimize investor confusion while promoting investor 
protection.
    The Exchange believes that the proposed PHLX FOREX Options will 
offer market participants a leveraged derivative foreign currency 
product that, from a competitive perspective, should increase product 
competition, encourage trading, and provide additional investment and 
hedging opportunities for traders, market participants, and investors.

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 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 45 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 self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 email to rule-comments@sec.gov. Please include 
File No. SR-Phlx-2012-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2012-11. This file 
number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. 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-2012-11 and should be 
submitted on or before February 22, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-2202 Filed 1-31-12; 8:45 am]
BILLING CODE 8011-01-P