

[Federal Register: October 18, 2007 (Volume 72, Number 201)]
[Notices]               
[Page 59130-59132]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18oc07-89]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56651; File No. SR-Phlx-2007-71]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change as Modified by Amendment No. 1 Thereto To Eliminate 
Position and Exercise Limits on Russell 2000[supreg] Index Options

 October 12, 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 September 21, 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, which Items have been substantially prepared by the Exchange. 
On September 27, 2007, the Exchange filed Amendment No. 1 to the 
proposed rule change. This order provides notice of the proposed rule 
change, as modified by Amendment No. 1, and approves the proposal on an 
accelerated basis.
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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 proposes to amend its Rule 1079 (FLEX Index and Equity 
Options) \3\ and Rule 1001A (Position Limits) to specify that full-
value options on the Russell 2000[supreg] Index (``RUT'') and one tenth 
(1/10th) value options on the Russell 2000[supreg] Index (``RMN'') 
shall have no position limits, and that reduced-value or mini-size 
contracts shall be aggregated with full-value or full-size contracts 
and counted by the amount by which they equal a full-value contract. 
The text of the proposed rule change is available at Phlx, the 
Commission's Public Reference Room, and http://www.phlx.com.

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    \3\ Flexible Exchange Options (``FLEX options'') are customized 
equity or index option contracts made available by Phlx and other 
option exchanges that allow certain terms of the option to be 
specified, such as the underlying security, the type of the option, 
the exercise price, the expiration date, and the exercise style. See 
Phlx Rule 1079.
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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
    The purpose of the proposed rule change is to amend Phlx Rules 1079 
and 1001A to eliminate the position limits on RUT options and RMN 
options, which are multiply-listed and heavily traded options on the 
broad-based Russell 2000[supreg] Index.\4\ The purpose of the proposed 
rule change is also to clarify that reduced-value or mini-size options 
contracts shall be aggregated with full-value or full-size options 
contracts and shall be counted by the amount by which they equal a 
full-value contract.
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    \4\ As result of the rule changes proposed herein, RUT options 
and RMN options would likewise have no exercise limits. See Phlx 
Rules 1079(e) and 1002A.
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    The current position limits for RUT options of 50,000 contracts, 
with no more than 30,000 of such contracts in a series in the nearest 
expiration month, and 500,000 contracts for RMN options, with 300,000 
contracts in the nearest expiration month, were established when the 
Commission approved the rule change that provided for the listing and 
trading of RUT and RMN options on the Exchange, and have remained 
unchanged.\5\ These limits are similar to the position limits 
established on other exchanges trading options on the Russell 
2000[supreg] Index, which have recently received Commission approval to 
eliminate position limits on these options.\6\
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    \5\ See Securities Exchange Act Release No. 55305 (February 15, 
2007), 72 FR 8240 (February 23, 2007) (SR-Phlx-2006-65).
    \6\ See Securities Exchange Act Release Nos. 56351 (September 4, 
2007), 72 FR 51875 (September 11, 2007) (SR-Amex-2007-81); and 56350 
(September 4, 2007), 72 FR 51878 (September 11, 2007) (SR-CBOE-2007-
79) (collectively, ``RUT Approval Orders'').
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    The Exchange believes that the circumstances and considerations 
relevant to the Commission approving the elimination of position and 
exercise limits for other heavily traded broad-based index options 
(e.g., options on the Standard & Poor's 500 Index (``SPX''), the 
Standard & Poor's 100 Index (``OEX''), the Dow Jones Industrial Average 
Index (``DJX''), and the Nasdaq-100 Index (``NDX'')) equally apply to 
the current proposal relating to RUT and RMN position limits.\7\ In 
approving the elimination of position limits for SPX, OEX, DJX, and NDX 
options, the Commission considered that the enormous capitalization of 
each of these indexes and the deep and liquid markets for the 
securities underlying each index significantly reduced concerns of 
market manipulation or disruption in the underlying markets. The 
Commission also noted the active trading volume for options on these 
respective indexes.
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    \7\ See Securities Exchange Act Release Nos. 44994 (October 26, 
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22) (elimination 
of position and exercise limits on SPX, OEX, and DJX options) 
(``SPX, OEX, and DJX Position Limit Elimination Approval Order''); 
and 52650 (October 21, 2005), 70 FR 62147 (October 28, 2005) (SR-
CBOE-2005-41) (elimination of position and exercise limits on NDX 
options) (``NDX Position Limit Elimination Approval Order''). The 
Exchange also notes that there are no position and exercise limits 
for the Chicago Board Options Exchange, Incorporated (``CBOE'') 
volatility index options based on SPX, DJX, and NDX.
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    Phlx believes that RUT shares common factors with the SPX, OEX, 
DJX, and NDX. As of the date of this filing, the approximate market 
capitalizations of the SPX, OEX, DJX, and NDX were $13.95 trillion, 
$8.06 trillion, $4.4 trillion and $2.36 trillion, respectively; the 
average daily trading volume (``ADTV'') for all underlying components 
of the indexes were 1.27 billion, 540 million, 240 million, and 400 
million shares, respectively; and the ADTV for options on the indexes 
were 610,000 contracts, 60,000 contracts, 34,000 contracts, and 58,000 
contracts respectively.\8\ Phlx believes that RUT has very comparable 
characteristics. The market capitalization for RUT is approximately 
$1.73 trillion dollars, the

[[Page 59131]]

ADTV for the underlying securities is 535 million shares, and the ADTV 
for the option is 79,000 contracts.
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    \8\ ADTVs are calculated over the previous three months of 
trading.
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    In approving the elimination of position and exercise limits for 
SPX, OEX, DJX, and NDX options, the Commission also noted that the 
financial requirements imposed by an exchange (and the Commission) 
would serve to address any concerns that a member or its customer(s) 
may try to maintain an inordinately large unhedged position in the 
indexes. Similar financial requirements would also apply to RUT 
options. Under Phlx rules, for example, the Exchange has the authority 
to impose additional margin and/or assess capital charges and the 
ability to monitor accounts to determine when such action is 
warranted.\9\
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    \9\ See Phlx Rules 1001A and 722 (Margin Accounts). The Exchange 
notes that File No. SR-Phlx-2007-33, which is pending before the 
Commission, proposes to amend Phlx Rule 722 to make this rule 
similar to CBOE and New York Stock Exchange LLC margin rules.
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    In approving the elimination of position limits for SPX, OEX, DJX, 
and NDX, the Commission also relied heavily on the Exchange's ability 
to provide surveillance and reporting safeguards to detect and deter 
trading abuses arising from the elimination of position and exercise 
limits in options on these indexes. The Exchange represents that it 
monitors trading in RUT options in much the same manner as trading in 
its other index options (e.g., Phlx Gold/Silver Sector options, Phlx 
Oil Service Sector options) and that the current Phlx surveillance 
procedures are more than adequate to continue monitoring RUT options. 
Moreover, the proposed rule change would impose a reporting requirement 
on Phlx members or member organizations that trade RUT options.\10\ 
This reporting requirement would require members or member 
organizations who maintain in excess of 100,000 RUT option contracts on 
the same side of the market, for their own accounts or for the account 
of customers, to report information to the Exchange as to whether the 
positions are hedged and if applicable, provide a description of the 
hedge and information concerning collateral used to carry the position. 
In the interest of consistency, the Exchange also proposes to amend 
Exchange Rule 1079 relating to the trading of FLEX broad-based index 
options to reflect that there shall be no position or exercise limits 
on RUT and RMN options.
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    \10\ See Phlx Rule 1001A(c).
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    Finally, position and exercise limits for reduced-value options are 
aggregated with full-value options for the purpose of determining 
compliance with position and exercise limits. The Exchange proposes 
amending its Rules 1007(d) and 1001A(e) to clarify that reduced-value 
options contracts will be aggregated with full-value options contracts 
and counted by the amount by which they are equivalent to a full-value 
contract (e.g., ten (10) one tenth (1/10th) value contracts equal one 
(1) full-value contract). In light of this general aggregation and 
counting rule, the Exchange proposes to delete language that indicates 
how specific reduced value contracts must be counted for aggregation 
purposes.
    The Exchange believes that eliminating position and exercise limits 
for RUT options (including FLEX options) and clarifying the applicable 
aggregation methodology is consistent with the rules of other exchanges 
relating to RUT and similar broad-based indexes, and allows Phlx 
members and their customers greater hedging and investment 
opportunities.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act, specifically,\12\ in that it is designed to perfect 
the mechanism of a free and open market and the national market system, 
protect investors and the public interest, and promotes just and 
equitable principles of trade. The proposal would achieve these 
objectives by clarifying the Exchange's position limit rules regarding 
multiply-listed and heavily-traded RUT and RMN options and placing them 
on an equal basis with the rules of other exchanges trading such 
options.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    No written comments were either solicited or received.

III. 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-2007-71 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-2007-71. 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, on official 
business days between the hours of 10 a.m. and 3 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-2007-71 and should be submitted on or before 
November 8, 2007.

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

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder that are applicable to a

[[Page 59132]]

national securities exchange.\13\ In particular, the Commission 
believes the proposed rule change is consistent with the requirements 
of Section 6(b)(5) of the Act, which requires that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and in general to protect investors and the 
public interest.\14\
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    \13\ In approving this proposed 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).
    \14\ 15 U.S.C. 78f(b)(5).
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    Since the inception of standardized options trading, the options 
exchanges have had rules imposing limits on the aggregate number of 
options contracts that a member or customer could hold or exercise. 
These rules are intended to prevent the establishment of options 
positions that can be used or might create incentives to manipulate or 
disrupt the underlying market so as to benefit the options position.
    The Commission notes that it continues to believe that the 
fundamental purposes of position and exercise limits remain valid. 
Nevertheless, the Commission believes that experience with the trading 
of index options as well as enhanced reporting requirements and the 
Exchange's surveillance capabilities have made it possible to approve 
the elimination of position and exercise limits on certain broad-based 
index options.\15\ The Commission believes that the considerations upon 
which it relied in approving the elimination of position and exercise 
limits for other index options equally apply with respect to options on 
RUT.\16\
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    \15\ See SPX, OEX, and DJX Position Limit Elimination Approval 
Order and NDX Position Limit Elimination Approval Order, supra note 
7.
    \16\ See id.
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    As noted by the Exchange, the market capitalization of the RUT is 
approximately $1.73 trillion. The ADTV for all underlying components of 
the index is approximately 535 million shares. The Commission believes 
that the enormous market capitalization of RUT and the deep, liquid 
market for the underlying component securities significantly reduce 
concerns regarding market manipulation or disruption in the underlying 
market. Removing position and exercise limits for RUT options may also 
bring additional depth and liquidity, in terms of both volume and open 
interest, to RUT options without significantly increasing concerns 
regarding intermarket manipulation or disruption of the options or the 
underlying securities.
    In addition, the Commission believes that financial requirements 
imposed by both the Exchange and the Commission adequately address 
concerns that a Phlx member or its customer may try to maintain an 
inordinately large unhedged position in RUT options. Current risk-based 
haircut and margin methodologies serve to limit the size of positions 
maintained by any one account by increasing the margin and/or capital 
that a member must maintain for a large position held by itself or by 
its customer. Under the proposal, Phlx also would have the authority 
under its rules to impose a higher margin requirement upon an account 
maintaining an under-hedged position when it determines a higher 
requirement is warranted. In addition, the clearing firm carrying the 
account would be subject to capital charges under Rule 15c3-1 under the 
Act \17\ to the extent of any margin deficiency resulting from the 
higher margin requirement.
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    \17\ 17 CFR 240.15c3-1.
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    In approving the elimination of position and exercise limits for 
other index options, the Commission took note of the enhanced 
surveillance and reporting safeguards that the exchanges had adopted to 
allow it to detect and deter trading abuses that might arise as a 
result.\18\ Phlx represents that it monitors trading in RUT options and 
RMN options in much the same manner as trading in its other index 
options. These safeguards, including the new 100,000-contract reporting 
requirement described above, would allow Phlx to monitor large 
positions in order to identify instances of potential risk and to 
assess and respond to any market concerns at an early stage. In this 
regard, the Commission expects Phlx to take prompt action, including 
timely communication with the Commission and other marketplace self-
regulatory organizations responsible for oversight of trading in 
component stocks, should any unanticipated adverse market effects 
develop. Moreover, as previously noted, the Exchange has the 
flexibility to specify other reporting requirements, as well as to vary 
the limit at which the reporting requirements may be triggered. The 
Exchange also proposes to amend its rules to state that reduced-value 
options will be aggregated with full-value options when calculating 
reporting requirements.
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    \18\ See SPX, OEX, and DJX Position Limit Elimination Approval 
Order and NDX Position Limit Elimination Approval Order, supra note 
7.
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    The Commission finds good cause, consistent with Section 19(b)(2) 
of the Act, to grant accelerated approval of the proposed rule change 
prior to the thirtieth day after the date of publication of notice 
thereof in the Federal Register. The Commission notes that it recently 
approved substantially similar proposals filed by the American Stock 
Exchange LLC and CBOE.\19\ The Commission believes that Phlx's proposal 
to eliminate position and exercise limits for RUT options raises no new 
issues. Moreover, accelerating approval of the proposed rule change 
will allow Phlx members and their customers greater hedging and 
investment opportunities in RUT options without further delay.
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    \19\ See RUT Approval Orders, supra note 6.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-Phlx-2007-71), as modified 
by Amendment No. 1, be, and it hereby is, approved on an accelerated 
basis.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-20522 Filed 10-17-07; 8:45 am]

BILLING CODE 8011-01-P
