

[Federal Register: July 16, 2007 (Volume 72, Number 135)]
[Notices]               
[Page 38853-38858]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16jy07-62]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56034; International Series Release No. 1304; File No. 
SR-Phlx-2007-34]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change, as Modified by Amendment No. 1 Thereto, Relating to U.S. 
Dollar-Settled Foreign Currency Options

July 10, 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 April 13, 2007, 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 and 
II below. On June 13, 2007, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons and is approving the proposal, as modified by 
Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced the original filing in its 
entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Phlx proposes to: (1) List and trade U.S. dollar-settled foreign 
currency options (``FCOs'') on the Australian dollar, the Canadian 
dollar, the Swiss franc and the Japanese yen (together, the ``New 
Currencies''); (2) amend certain rules relating to the quoting 
convention for U.S. dollar-settled FCOs for purposes of clarity; (3) 
delete from Rule 1012 a requirement that the Exchange delist any series 
of U.S. dollar-settled FCOs outside of a ten percent band around the 
spot price that have no open interest; (4) amend the closing settlement 
value rule by moving from 2 p.m. (Eastern time (``ET'')) to 5 p.m. ET 
the time after which the Exchange will use the previously announced 
Noon Buying Rate as the basis for the closing settlement value; (5) 
extend the applicability of Rule 1064, ``Crossing, Facilitation and 
Solicited Orders,'' to U.S. dollar-settled FCOs; and (6) clarify the 
applicability of Rule 1092, ``Obvious Errors,'' to U.S. dollar-settled 
FCOs.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.Phlx.com/exchange/phlx_rule_fil.html, at 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 III 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
    On January 8, 2007, the Exchange began trading U.S. dollar-settled 
options on the British pound and the Euro on the Exchange's electronic 
trading platform for options, Phlx XL.\4\ These

[[Page 38854]]

new U.S. dollar-settled FCOs were in addition to the Exchange's 
existing physical delivery FCOs. The Exchange now proposes to list U.S. 
dollar-settled FCOs on the New Currencies. U.S. dollar-settled FCOs on 
the New Currencies will be subject to the same rules that now apply to 
existing U.S. dollar-settled options on foreign currencies.\5\ In 
addition, a number of rules are being amended to specifically apply to 
U.S. dollar-settled options on the New Currencies, as described below. 
Like the British pound and the Euro, physical delivery options on the 
four New Currencies are already traded on the Exchange. These existing, 
physical delivery options on the New Currencies will not be affected by 
this proposal and will continue to trade as they do today, by open 
outcry.
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    \4\ See Securities Exchange Act Release No. 54989 (December 21, 
2006), 71 FR 78506 (December 29, 2006) (SR-Phlx-2006-34) (``Pound/
Euro FCO Approval Order''). In approving the listing and trading of 
U.S. dollar-settled FCOs on the British pound and the Euro, the 
Commission's approval order stated that the listing and trading of 
additional U.S. dollar-settled FCOs on other foreign currencies 
would require the Exchange to file additional proposed rule changes 
on Form 19b-4. Id.
    \5\ See Pound/Euro FCO Approval Order, supra note 4, for a 
description of the rules applicable to U.S. dollar-settled FCOs.
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    The Exchange proposes to disseminate, over the facilities of the 
Consolidated Tape Association, at least once every fifteen seconds 
while the Exchange is open for trading, a modified spot rate for the 
four New Currencies like the modified spot rate currently disseminated 
for the British pound and the Euro.\6\ The modified spot rate will be 
calculated by the Exchange based on spot prices (bids and asks) it 
receives from Thomson Financial LLC (``Thomson''). For the Australian 
dollar, the Exchange will determine the midpoint between the bid and 
the ask and will modify that rate by multiplying it by 100.\7\ However, 
because the Thomson spot rate selected by the Exchange \8\ is expressed 
differently for the Canadian dollar, the Japanese yen and the Swiss 
franc than for the Australian dollar, the British pound and the Euro 
(in foreign currency units per U.S. dollar rather than in U.S. dollars 
per unit of foreign currency) the modified spot rate Phlx will 
disseminate for the Canadian dollar, the Japanese yen and the Swiss 
franc will be one divided by the midpoint between the bid and ask of 
the Thomson spot rate, rounded up to the nearest millionth if the 
result ends in values greater than or equal to five ten-millionths, and 
rounded down if less than five ten-millionths, multiplied by the 
appropriate modifier.\9\ For the Canadian dollar and the Swiss franc, 
the modifier will be 100. For the Japanese yen, the modifier will be 
10,000.\10\ The Exchange believes that sufficient other venues exist 
for obtaining reliable spot market information on the New Currencies so 
that investors in U.S. dollar-settled FCOs can monitor the underlying 
spot market in the New Currencies.
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    \6\ See Securities Exchange Act Release No. 55513 (March 22, 
2007), 72 FR 14636 (March 28, 2007) (SR-Phlx-2007-28). The modified 
spot rate disseminated by the Exchange will not otherwise amend or 
affect the Exchange's existing rules governing U.S. dollar-settled 
FCOs.
    \7\ For example, if .8688 U.S. dollars buys 1 Australian dollar, 
a modifier of 100 would be used so that the modified spot rate would 
become 86.88.
    \8\ Telephone conversation between Carla Behnfeldt, Director, 
Phlx, David Hsu, Special Counsel, and Sara Gillis, Attorney, 
Division of Market Regulation, Commission, on June 20, 2007.
    \9\ Premiums and spot rates for the Canadian dollar, the 
Japanese yen, and the Swiss franc have been quoted in foreign 
currency units per U.S. dollar for years in connection with the 
Exchange's physical delivery FCOs. The Exchange also represents that 
other major market data vendors also quote spot rates in terms of 
foreign currency units per U.S. dollar for these currencies as well.
    \10\ For example, if 115.84 Japanese yen buys one U.S. dollar, 
the Exchange will divide that amount into one to determine that 
.008632596 dollars will buy one Japanese yen. The Exchange would 
then multiply the rounded figure, .008633, by 10,000, so that the 
modified spot rate to be disseminated would be 86.33.
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    Rule 1012, ``Series Of Options Open For Trading,'' Commentary .06, 
currently provides that the Exchange will initially list exercise 
strike prices for each expiration of U.S. dollar-settled options on the 
Euro and the British pound within a ten percent band around the current 
spot price at half-cent ($.005) intervals. This rule is being expanded 
to cover all U.S. dollar-settled foreign currency options, including 
options on the New Currencies. The Exchange also is proposing to amend 
the rule by deleting a current requirement that the Exchange delist any 
previously-listed series outside of the current ten percent band that 
have no open interest. The Exchange has found that this requirement is 
an administrative burden and does not believe that the restriction is 
justified. For example, the Exchange has found that approximately once 
a week, it is required to delete a series only to have it be listed 
again in a day or two due to movement in the currency. Delisting and 
relisting various exercise prices with no advance notice on a daily 
basis has the potential to confuse investors and complicate their 
trading strategies and decisions.
    Rule 1033, ``Bids and Offers--Premium,'' will apply to U.S. dollar-
settled options on the New Currencies as well as to the existing U.S. 
dollar-settled options on the British pound and the Euro. Pursuant to 
Rule 1033(b)(ii)(A), bids and offers are to be expressed in terms of 
U.S. dollars per unit of the underlying foreign currency, provided that 
the first two decimal places shall be omitted from all bid and offer 
quotations for the Swiss franc, the Canadian dollar, and the Australian 
dollar, and the first four decimal places shall be omitted from all bid 
and offer quotations for the Japanese yen. Thus, for example, a bid of 
``1.60'' for an option contract on the Japanese yen shall represent a 
bid to pay $.000160 per yen.\11\
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    \11\ Rule 1014, ``Obligations and Restrictions Applicable to 
Specialists and Registered Options Traders,'' and Options Floor 
Procedure Advice F-6, ``Option Quote Parameters,'' are being revised 
to provide an illustration of the different option quote spread 
parameters for U.S. dollar-settled options on the Japanese yen, 
which differ from the other U.S. dollar-settled FCOs in that four 
decimal places, rather than two, are to be disregarded when the 
quote parameters are expressed.
    Rules 1014 and 1034 are also being amended by removing the 
dollar sign before the ``expressed as'' values for quotes and quote 
spread parameters. Similarly, dollar signs are being added to 
Options Floor Procedure Advice F-6 in front of the maximum quote 
spreads (but not in front of the ``expressed as'' values for the 
maximum quote spreads). The Exchange believes that these changes 
will make the quoting convention (i.e., disregarding the first four 
decimal places for the Japanese yen and the first two decimal places 
for the other currencies underlying the U.S. dollar-settled FCOs) 
less confusing to the investing public. The changes will also make 
Rules 1014 and 1034 more consistent with Rule 1033.
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    Rule 1034, ``Minimum Increments,'' currently prescribes the minimum 
trading increment for all U.S. dollar-settled FCOs. This rule will now 
apply to the New Currencies as well. However, the rule is being amended 
to add an example of the minimum trading increment in the case of U.S. 
dollar-settled options on the Japanese yen, which differs from the 
other U.S. dollar-settled currencies options in that four decimal 
places, rather than two, are to be disregarded.\12\
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    \12\ Thus, the amended rule provides that all U.S. dollar-
settled FCOs on the Japanese yen quoting at $.000300 (expressed as 
3.00) or higher shall have a minimum trading increment of $.000010 
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 1,000,000 Japanese yen. The minimum increment 
for U.S. dollar-settled FCOs on the Japanese yen quoting under 
$.000300 (expressed as 3.00) shall be $.000005 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 
1,000,000 Japanese yen.
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    Rule 1057, ``U.S. Dollar-Settled Foreign Currency Option Closing 
Settlement Value,'' currently provides for the determination of the 
closing settlement value for U.S. dollar-settled options on the British 
pound and the Euro. The rule is being amended to provide for the 
closing settlement value for U.S. dollar settled options on the New 
Currencies. Because the Noon Buying Rate is expressed differently for

[[Page 38855]]

the Canadian dollar, the Japanese yen, and the Swiss franc than for the 
Australian dollar, the British pound, and the Euro--in foreign currency 
units per U. S. dollar rather than in U. S. dollars per unit of foreign 
currency--the closing settlement value for the Canadian dollar, the 
Japanese yen, and the Swiss franc will be an amount equal to one 
divided by the day's announced Noon Buying Rate, as determined by the 
Federal Reserve Bank of New York on the trading day prior to 
expiration, rounded to the nearest .0001 (except in the case of the 
Japanese yen where the amount shall be rounded to the nearest .000001).
    In addition, Rule 1057 provides that if the Noon Buying Rate is not 
announced by 2 p.m. ET, the closing settlement value will be based upon 
the most recently announced Noon Buying Rate, unless the Exchange 
determines to apply an alternative closing settlement value as a result 
of extraordinary circumstances. The Exchange is proposing to amend Rule 
1057 to provide that the closing settlement value will be based upon 
the most recently announced Noon Buying Rate if the Noon Buying Rate is 
not announced by 5 p.m. ET (rather than 2 p.m. ET). The Exchange 
believes that moving the deadline to 5 p.m. ET should decrease the 
likelihood that it may be required to base the closing settlement value 
on the previously announced Noon Buying Rate, which is likely not to be 
current. The rule will continue to permit the Exchange to apply an 
alternative closing settlement value as a result of extraordinary 
circumstances.
    Rule 1001, ``Position Limits,'' provides that the position limits 
shall be 200,000 put or call option contracts (aggregating both U.S. 
dollar-settled and physical delivery contracts) on the same side of the 
market relating to the same underlying foreign currency. Rule 1001 is 
being amended, however, to provide that one U.S. dollar-settled 
Australian dollar option contract shall count as one-fifth of a 
contract, one U.S. dollar-settled Canadian dollar option contract shall 
count as one-fifth of a contract, one U.S. dollar-settled Swiss Franc 
option contract shall count as one-sixth of a contract, and one U.S. 
dollar-settled Japanese yen option contract shall count as one-sixth of 
a contract.\13\ The counting of U.S. dollar-settled option contracts as 
less than one full contract reflects the fact that the size of the U.S. 
dollar-settled option contract is smaller than the Exchange's physical 
delivery contract on the same currencies.\14\ The position limit rules 
were originally adopted for the larger physical delivery contracts.
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    \13\ Currently, Rule 1001 provides that one U.S. dollar-settled 
British pound option contract shall count as one-third of a 
contract, and that one U.S. dollar-settled Euro option contract 
shall count as one-sixth of a contract.
    \14\ The size of the U.S. dollar-settled Australian dollar 
option contract is 10,000 Australian dollars, which is one-fifth the 
size of the physical delivery contract size of 50,000 Australian 
dollars. The size of the U.S. dollar-settled Canadian dollar option 
contract is 10,000 Canadian dollars, which is one-fifth the size of 
the physical delivery contract size of 50,000 Canadian dollars. The 
size of the U.S. dollar-settled Swiss franc option contract is 
10,000 Swiss francs, which is approximately one-sixth the size of 
the physical delivery contract size of 62,500 Swiss francs. The size 
of the U.S. dollar-settled Japanese yen option contract is 1,000,000 
Japanese yen, which is approximately one-sixth the size of the 
physical delivery contract size of 6,250,000 Japanese yen.
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    Rule 1014, Commentary .13 is being revised to delete the 
requirement that the Options Committee and the Foreign Currency Options 
Committee each establish separate in-person amounts for equity and 
index options and foreign currency options, respectively. For purposes 
of Rule 1014, Commentary .13, the Exchange believes that there is no 
useful reason to establish separate requirements for equity and index 
options on the one hand, and U.S. dollar-settled FCOs on the other.\15\ 
This amendment will permit the Options Committee to establish one in-
person requirement applicable to all ROTs and permit any ROT to satisfy 
that in-person requirement by trading any kind of option, be it equity, 
index or FCOs.
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    \15\ Currently, Options Floor Procedure Advice B-3 provides that 
a ROT (other than a Remote Streaming Quote Trader (``RSQT'')) is 
required to trade in-person, and not through the use of orders, the 
greater of 1,000 contracts or 50% of his contract volume on the 
Exchange each quarter. ROTs may satisfy this requirement in any 
option traded on the Exchange. Floor Procedure Advice B-3 also 
contains a separate requirement that at least 50% of a ROT's trading 
activity in each quarter must be in assigned options. This 
requirement will continue to apply to ROTs assigned to equity and 
index options and FCOs.
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    The Exchange also is proposing to amend Rule 1064, ``Crossing, 
Facilitation and Solicited Orders,'' to extend the applicability of the 
rule to U.S. dollar-settled FCOs. Rule 1064 sets forth, among other 
things, the procedures by which a floor broker holding an equity or 
index option order (``original order'') may cross it with another order 
or orders he or she is holding, or, in the case of a public customer 
order, with a contra side order provided by the originating firm from 
its own proprietary account (``facilitation order''). Under certain 
conditions, Rule 1064 provides ``participation guarantees'' in such 
crossing or facilitation transactions, entitling the floor broker to 
cross a certain percentage of the original order with the other order 
or orders ahead of members of the trading crowd. These participation 
guarantees currently apply to transactions in equity and index options 
only. The Exchange proposes to amend Rule 1064, Commentary .02, to 
provide a participation guarantee for trading in U.S. dollar-settled 
options that is the same as the participation guarantee for index 
options.
    The Exchange also is proposing to amend Rule 1092, ``Obvious 
Errors,'' to clarify that the obvious error amounts stated in the 
existing rule are the amounts by which the amount is ``expressed'' and 
not the actual amounts. This is merely a technical correction.
    Exchange rules designed to protect public customers trading in FCOs 
will apply to U.S. dollar-settled FCOs on the New Currencies. 
Specifically, Phlx Rule 1024(b) relating to approval of customer 
accounts to trade options, Phlx Rule 1026 relating to suitability, Phlx 
Rule 1027 relating to discretionary power over customer accounts 
trading in options, Phlx Rule 1025 relating to the supervision of 
accounts, Phlx Rule 1028 relating to confirmations, and Phlx Rule 1029 
relating to delivery of options disclosure documents will apply to 
trading in U.S. dollar-settled FCOs, including FCOs on the New 
Currencies.
    The Exchange represents that it has an adequate surveillance 
program in place for FCOs. The Exchange is also a member of the 
Intermarket Surveillance Group (``ISG'') and may obtain trading 
information via the ISG from other exchanges who are members or 
affiliated members of the ISG.\16\ Futures on the New Currencies trade 
on the Chicago Mercantile Exchange (``CME'') and the New York Board of 
Trade (``NYBOT''). The New York Stock Exchange (``NYSE'') and NYSE Arca 
list the following exchange traded funds: CurrencyShares Australian 
Dollar Trust, CurrencyShares Canadian Dollar Trust, and CurrencyShares 
Swiss Franc Trust. The Exchange represents 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. Phlx can obtain surveillance 
information from the NYSE, NYSE Arca, CME and NYBOT, as they are 
members of the ISG. In addition, Phlx is able to obtain

[[Page 38856]]

information regarding trading in these products through Phlx members, 
in connection with such members' proprietary or customer trades which 
they effect on any relevant market.\17\
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    \16\ 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.
    \17\ See Equity Floor Procedure Advice F-8 and Options Floor 
Procedure F-8, ``Failure to Comply with an Exchange Inquiry.'' 
Pursuant to Phlx Rule 1022, specialists and Registered Options 
Traders (``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 specialist or ROT may engage in foreign currency 
trading in any account not reported pursuant to the rule. Phlx Rule 
1022 also requires every specialist and ROT to make available to 
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. Rule 1022(d) 
includes ``other foreign currency derivatives'' in the list of 
currency related transactions with respect to which specialists and 
ROTs must provide information to the Exchange.
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    Finally, the Exchange represents that it has the necessary systems 
capacity to support new options series that will result from the 
introduction of U.S. dollar-settled options on the New Currencies.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \18\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\19\ 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 offering investors the ability to invest in U.S. dollar-
settled FCOs on the New Currencies and by simplifying existing rules 
relating to the expression of strike prices and quotes in the U.S. 
dollar-settled FCO products.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition 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. 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-2007-34 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2007-34. 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 amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-Phlx-2007-34 and should be submitted on or before August 
6, 2007.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\20\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\21\ 
which requires that an exchange have rules designed, among other 
things, 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. Significant aspects of the proposal are discussed 
below.
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    \20\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
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A. U.S. Dollar-Settled FCOs on the New Currencies

    The Commission notes that it recently approved rules governing the 
listing and trading on Phlx of U.S. dollar-settled options on the 
British pound and the Euro,\22\ and that such rules will be applicable 
to U.S. dollar-settled options on the New Currencies.\23\ The 
Commission believes that these rules provide for regulation of the 
listing and trading of FCOs on the New Currencies on Phlx consistent 
with the Act, as discussed further below.
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    \22\ See Pound/Euro FCO Approval Order, supra note 4.
    \23\ The Commission notes that the Exchange is making certain 
technical and clarifying amendments to a number of the existing 
rules to specifically apply those rules to, and reflect certain 
differences in, U.S. dollar-settled options on each currency.
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1. Settlement Value and Dissemination of Information
    The Commission believes that sufficient venues exist for obtaining 
reliable information on the New Currencies so that investors in U.S. 
dollar-settled FCOs can monitor the underlying spot market in the New 
Currencies. The Commission notes that, in addition to other major 
market vendors providing such information, Phlx will disseminate a 
modified spot rate for the New Currencies at least once every fifteen 
seconds while the Exchange is open for trading, which will give 
investors an additional means to track the value of the New Currencies 
underlying the FCOs. The Commission also believes that Phlx's 
procedures and the competitive nature of the spot market for the New 
Currencies should help to ensure that the settlement values for U.S. 
dollar-settled FCO contracts will accurately reflect the spot price for 
the New Currencies. Finally, the closing settlement value, as 
calculated pursuant

[[Page 38857]]

to Phlx rules, will be posted on the Exchange's Web site, where it will 
be publicly available to all visitors on an equal basis, without the 
need to enter any kind of password.\24\
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    \24\ Telephone conversation between Carla Behnfeldt, Director, 
Phlx, and Sara Gillis, Attorney, Division of Market Regulation, 
Commission, on July 3, 2007.
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2. Customer Protection
    The Commission believes that a regulatory system designed to 
protect public customers must be in place before the trading of 
sophisticated financial instruments, such as U.S. dollar-settled FCOs 
on the New Currencies, can commence on a national securities exchange. 
The Commission believes this goal has been satisfied by the application 
of Phlx customer protection rules to U.S. dollar-settled FCOs on the 
New Currencies.
3. Surveillance
    The Commission notes that Phlx will integrate U.S. dollar-settled 
FCOs on the New Currencies into existing Phlx market surveillance 
programs for equity and index options, physical delivery foreign 
currency options, and other U.S. dollar-settled FCOs, and that Phlx 
intends to apply those same program procedures to U.S. dollar-settled 
FCOs on the New Currencies. The Commission also notes that Phlx Rule 
1022, Equity Floor Procedure Advice F-8, and Options Floor Procedure F-
8 provide Phlx with the authority to obtain information regarding 
trading in CurrencyShares Australian Dollar Trust shares, 
CurrencyShares Canadian Dollar Trust shares, CurrencyShares Swiss Franc 
Trust shares, options on the New Currencies, and futures and options on 
futures on the New Currencies through Phlx members, in connection with 
such members' proprietary or customer trades which they effect on any 
relevant market. In addition, Phlx may obtain trading information 
through the ISG from other exchanges who are members or affiliates of 
the ISG. Specifically, Phlx can obtain such information from the NYSE 
and NYSE Arca in connection with trading in the CurrencyShares 
Australian Dollar Trust, CurrencyShares Canadian Dollar Trust, and 
CurrencyShares Swiss Franc Trust on the NYSE and NYSE Arca, and from 
the CME and NYBOT in connection with trading of futures on the New 
Currencies on those exchanges. Therefore, the Commission believes that 
Phlx should have the tools necessary to adequately surveil trading in 
U.S. dollar-settled FCOs on the New Currencies.
4. Position and Exercise Limits
    Like other U.S. dollar-settled FCOs, U.S. dollar-settled FCO 
contracts on the New Currencies will be aggregated with physical 
delivery contracts for position and exercise limit purposes. The 
Commission believes that aggregation of U.S. dollar-settled FCOs on the 
New Currencies with the physical delivery contracts for position and 
exercise limit purposes is prudent and minimizes concerns regarding 
manipulations or disruptions of the markets for U.S. dollar-settled FCO 
contracts and physical delivery contracts.
5. Other Rules
    The Commission believes that the other rule changes proposed by 
Phlx to accommodate the trading of U.S. dollar-settled FCOs on the New 
Currencies are consistent with the Act. In particular, the Commission 
believes it is reasonable for Phlx to initially list exercise strike 
prices for each expiration around the current spot price at half-cent 
($0.005) intervals up to five percent on each side, as it currently 
does for other U.S. dollar-settled FCOs.\25\ The Commission notes that 
Phlx has represented that it has the system capacity to support the 
additional quotations and messages that will result from listing 
options on U.S. dollar-settled FCOs on the New Currencies.\26\
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    \25\ When listing additional strikes, the Commission expects the 
Exchange to consider whether the listing of such strikes will be 
consistent with the maintenance of a fair and orderly market.
    \26\ See letter dated June 21, 2007 from Thomas A. Whitman, 
Senior Vice President, Phlx, to Heather Seidel, Assistant Director, 
Division of Market Regulation (``Division''), Commission.
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    The Commission also believes that it is consistent with the Act for 
the Exchange to apply the current minimum trading increments for other 
U.S. dollar-settled FCOs provided in Rule 1034 to U.S. dollar-settled 
FCOs on the New Currencies. The Commission notes that the Exchange has 
made appropriate clarifying changes to the rule to account for U.S. 
dollar-settled options on the Japanese yen, which differ from the other 
U.S. dollar-settled FCOs in that four decimal places, rather than two, 
are disregarded.\27\
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    \27\ See infra note 12 and accompanying text. The Commission 
notes that the Exchange is also making similar clarifying changes to 
other rules to account for differences in U.S. dollar-settled 
options on the Japanese yen. See e.g., Rule 1014, Rule 1033, and 
Options Floor Procedure Advice F-6.
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B. Other Rule Changes Relating to All U.S. Dollar-Settled FCOs

    The Commission believes that the other rule changes proposed by 
Phlx applicable to all U.S. dollar-settled FCOs listed and traded on 
Phlx (including U.S. dollar-settled FCOs on the New Currencies) are 
consistent with the Act. First, the Commission believes that it is 
reasonable for Phlx to remove the requirement that the Exchange delist 
any series of U.S. dollar-settled FCOs outside of the current ten 
percent band that has no open interest. The Commission notes that the 
Exchange has found this requirement to be an administrative burden and 
does not believe the restriction is justified.\28\
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    \28\ Nonetheless, the Commission expects the Exchange to 
consider whether the continued listing of such series would be 
consistent with the maintenance of a fair and orderly market.
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    The Commission also believes that it is reasonable for the Exchange 
to change from 2 p.m. ET to 5 p.m. ET the time up to which the Exchange 
will use the previously announced Noon Buying Rate as the basis for the 
closing settlement value, because this will give the Exchange a greater 
opportunity to use the Noon Buying Rate on the trading day prior to 
expiration instead of having to rely on a less-current previously 
announced Noon Buying Rate.
    Further, the Commission believes that it is reasonable for the 
Exchange to extend the application of Rule 1064 governing crossing, 
facilitation and solicited orders to U.S. dollar-settled FCOs. The 
Commission notes the Exchange's existing rule provides participation 
guarantees in crossing or facilitation transactions for trading in 
equity and index options, and the Commission believes that it is 
consistent with the Act to provide the same participation guarantee for 
trading in U.S. dollar-settled FCOs as for index options.

C. Accelerated Approval

    Pursuant to Section 19(b)(2) of the Act, the Commission finds good 
cause to approve the proposal, as amended, prior to the thirtieth day 
after the amended proposal is published for comment in the Federal 
Register. The Commission notes that U.S. dollar-settled FCOs on the New 
Currencies will be subject to the same Phlx rules and requirements as 
other U.S. dollar-settled FCOs, with technical changes where 
appropriate to account for U.S. dollar-settled FCOs on the New 
Currencies. The Commission also notes that it recently approved rules 
for the listing and trading of cash-settled FCOs on the New Currencies 
on the International Securities Exchange, LLC.\29\ Further, the 
Commission notes that it has previously approved Phlx's rule governing 
crossing, facilitation, and

[[Page 38858]]

solicited orders and providing for participation guarantees for equity 
and index options, and it believes that extending the applicability of 
such provisions to U.S. dollar-settled FCOs raises no new or novel 
issues.\30\ The Commission also believes that the other proposed 
clarifications to Phlx's rules serve to enhance the proposal and raise 
no new regulatory issues. Therefore, the Commission believes that the 
proposed rule changes relating to the listing and trading of U.S. 
dollar-settled FCOs on the New Currencies on Phlx do not raise 
additional significant regulatory issues that have not been previously 
considered by the Commission. As such, the Commission believes that it 
is appropriate to allow the Exchange to immediately list and trade U.S. 
dollar-settled FCOs on the New Currencies.
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    \29\ See Securities Exchange Act Release No. 55515 (April 3, 
2007), 72 FR 17963 (April 10, 2007) (SR-ISE-2006-59).
    \30\ The Commission notes that the participation guarantee 
percentage for U.S. dollar-settled FCOs will be the same as the 
current participation guarantee percentage for index options.
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    Accordingly, the Commission finds good cause to accelerate approval 
of the amended proposal prior to the thirtieth day after publication in 
the Federal Register.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-Phlx-2007-34), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-13695 Filed 7-13-07; 8:45 am]

BILLING CODE 8010-01-P
