

[Federal Register: February 8, 2008 (Volume 73, Number 27)]
[Notices]               
[Page 7622-7624]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08fe08-108]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57265; File No. SR-Phlx-2007-68]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change as Modified by 
Amendment Nos. 1 and 2 Thereto Relating to Customized U.S. Dollar-
Settled Foreign Currency Options

February 4, 2008.

I. Introduction

    On September 6, 2007, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934, as amended (``Act'') \1\ and Rule 19b-
4 thereunder,\2\ a proposed rule change relating to trading of 
individually tailored U.S. dollar-settled foreign currency options 
(``FCOs''). On December 18, 2007, the Exchange filed Amendment No. 1. 
The proposed rule change, as amended, was published for comment in the 
Federal Register on December 31, 2007.\3\ The Commission received no 
comments on the proposal. On January 29, 2008, the Exchange filed 
Amendment No. 2.\4\ This order approves the proposed rule change, as 
amended.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57018 (December 20, 
2007), 72 FR 74392 (``Notice'').
    \4\ See Partial Amendment dated January 29, 2008 (``Amendment 
No. 2''). Amendment No. 2 made one technical correction to the rule 
text. This correction is not subject to notice and comment.
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II. Description of the Proposal

    Individually tailored index and equity options currently may be 
traded pursuant to Rule 1079, FLEX Index and Equity Options.\5\ Phlx 
proposes to amend Rule 1079 \6\ to permit trading of U.S. dollar-
settled FCOs with individually tailored expiration dates and exercise 
prices (``FLEX currency options'').\7\ Provisions of Rule 1079 that are 
not limited by their terms to FLEX index or equity options will be 
equally applicable to FLEX currency options.\8\ The Options Clearing 
Corporation (``OCC'') will be the issuer and guarantor of these new 
options.
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    \5\ See Securities Exchange Act Release No. 39549 (January 14, 
1998), 63 FR 3601 (January 23, 1998) (adopting SR-Phlx-96-38). The 
term ``FLEX'' is a trademark of the Chicago Board Options Exchange, 
Inc.
    \6\ The Exchange also proposes to amend Floor Procedure Advice 
F-28, Trading FLEX Index and Equity Options, to make corresponding 
changes to those being proposed to Rule 1079(b).
    \7\ Currently, a variety of customized physical delivery FCOs 
are traded on the Exchange pursuant to Rule 1069, Customized Foreign 
Currency Options. Users currently have the ability with respect to 
physical delivery FCOs to customize the strike price and quotation 
method and to choose underlying and base currency combinations from 
among various Exchange listed currencies, including the U.S. dollar. 
See Securities Exchange Act Release No. 34925 (November 1, 1994), 59 
FR 55720 (November 8, 1994). References in Exchange rules to ``FLEX 
currency options'' will apply only to U.S. dollar-settled FCOs and 
will not include customized physical delivery FCOs that trade 
pursuant to Phlx Rule 1069.
    \8\ Generally, like FLEX index and equity options, FLEX currency 
options will be traded in accordance with many existing options 
rules. Rule 1079 states that to the extent that the provisions of 
Rule 1079 are inconsistent with other applicable Exchange rules, 
Rule 1079 takes precedence with respect to FLEX options.
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A. Characteristics of FLEX Currency Options

    Pursuant to proposed Rule 1079(a)(3)(C), users will be able to 
individually tailor the strike prices of FLEX currency options. Strike 
prices need not be consistent with strike price intervals permissible 
for non-FLEX U.S. dollar-settled FCOs. The strike price may be 
specified in terms of a specific dollar amount rounded to the nearest 
ten thousandth of a dollar (expressed without reference to the first 
two decimal places) for FLEX currency options other than the Japanese 
yen currency option. FLEX options on the Japanese yen may be specified 
in terms of a specific dollar amount rounded to the nearest one 
millionth of a dollar (expressed without reference to the first four 
decimal places).\9\
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    \9\ FLEX currency options will be margined at the same levels as 
the Exchange's non-FLEX U.S. dollar-settled FCOs. See Phlx Rule 722.

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[[Page 7623]]

    Pursuant to proposed Rule 1079(a)(6), FLEX currency option 
contracts will be allowed to expire on any month, business day and year 
within two years,\10\ provided that a FLEX currency option will not be 
permitted to expire on any day that falls on or within two business 
days prior or subsequent to an expiration day for a non-FLEX U.S. 
dollar-settled FCO on the same underlying currency or on any day on 
which the Federal Reserve Bank is not scheduled to publish its Noon 
Buying Rate.\11\ All FLEX currency options with customized expiration 
dates will expire at 11:59 p.m. eastern time on their designated 
expiration date and cease trading at 10:15 a.m. eastern time that 
day.\12\
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    \10\ U.S. dollar-settled FCO contracts currently may only be 
traded with expirations at one, two, three, six, nine and twelve 
months. See Phlx Rule 1012.
    \11\ See proposed amendment to Rule 1079(a)(6)(A). FLEX index 
and equity options also cannot expire on or within two business days 
prior to or subsequent to an expiration day for a non-FLEX index or 
equity option on the same underlying index or security, as 
applicable.
    \12\ Id. See also proposed amendment to Rule 1079(a)(9)(C).
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    FLEX currency options will be quoted in terms of dollars per unit 
of underlying foreign currency, like the non-FLEX U.S. dollar settled 
FCOs.\13\ FLEX currency options may be quoted and traded in the same 
minimum increments that are established for non-FLEX U.S. dollar 
settled FCOs.\14\ FLEX currency options, like non-FLEX U.S. dollar-
settled FCOs, will be limited to European exercise style only.\15\
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    \13\ See proposed Rule 1079(a)(4)(B).
    \14\ See Phlx Rule 1034(a)(ii)(A).
    \15\ Currently, Rule 1079(a)(5) permits market participants to 
determine whether a FLEX index or equity option will have either an 
American or European exercise style. An American style option may be 
exercised at any time up to its expiration, while a European style 
option can only be exercised on its expiration day. See Phlx Rule 
1000(b)(34) and (35).
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    Pursuant to proposed Rule 1079(a)(8), if there is no open interest 
in the particular FLEX currency option series when a request for a 
quote (``RFQ'') is submitted,\16\ the minimum size of an RFQ for FLEX 
currency options will be 50 contracts. If there is open interest, the 
minimum size of the RFQ will be 25 contracts, or the remaining size on 
a closing transaction, whichever is less. The minimum value size for a 
responsive quote, other than a responsive quote of an assigned 
Registered Options Trader (``ROT'') or assigned Specialist, will be 50 
contracts or the remaining size on a closing transaction, whichever is 
less. Assigned ROTs and assigned Specialists who respond to an RFQ \17\ 
will be required to respond to each RFQ with at least 250 contracts or 
the size amount requested in the RFQ, whichever is less.\18\
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    \16\ See Phlx Rule 1079(b) for a description of the RFQ 
procedure for FLEX options. This procedure will apply to FLEX 
currency options in the same way as to FLEX index and equity 
options.
    \17\ See Rule 1079(c)(1) regarding Assigned ROTs and Assigned 
Specialists. Rule 1079(c)(1) currently applies to all FLEX options 
and will apply to FLEX currency options as well.
    \18\ These minimum sizes are different from the minimum sizes 
applicable to FLEX index and equity options under existing Rule 
1079(a)(8).
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    Rule 1079(a)(9) is being amended to provide for settlement for FLEX 
currency options. The settlement value determination for FLEX currency 
options will be the same as for non-FLEX U.S. dollar-settled FCOs, 
except that the closing settlement value for FLEX currency options will 
be the Noon Buying Rate on the expiration date, whereas Rule 1057 bases 
the closing settlement value for non-FLEX U.S. dollar-settled FCO on 
the Noon Buying Rate on the business day prior to expiration.\19\ FLEX 
currency options will be subject to the exercise-by-exception 
procedures of OCC.\20\
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    \19\ The closing settlement value for FLEX options on the 
Canadian dollar, the Swiss franc and the Japanese yen 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 
expiration date, rounded to the nearest .0001 (except in the case of 
the Japanese yen where the amount would be rounded to the nearest 
.000001). If the Noon Buying Rate is not announced by 5 p.m. eastern 
time on expiration day, the closing settlement value will be based 
upon the most recently announced Noon Buying Rate, unless the 
Exchange determined to apply an alternative closing settlement value 
as a result of extraordinary circumstances.
    \20\ See OCC Rule 805, which sets forth the expiration date 
exercise procedures for options cleared and settled by the OCC. The 
exercise-by-exception or ``Ex-by-Ex'' procedure employed by OCC in 
OCC Rule 805 allows an OCC Clearing Member to effect a choice not to 
exercise an option that is in the money by the exercise threshold 
amount or more, or to exercise an option which has not reached the 
exercise threshold amount.
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B. Quoting and Trading of FLEX Options

    The Automated Options Market (``AUTOM'') system is not available 
for FLEX options.\21\ All FLEX options must be quoted and traded in the 
trading crowd of the corresponding non-FLEX option. Quoting and trading 
in FLEX currency options will be subject to Rule 1079(b), which 
currently governs the quoting and trading of FLEX index and equity 
options. Rule 1079(c), which governs who may trade FLEX options, will 
apply to FLEX currency options in the same manner as FLEX index and 
equity options. In addition, crossing in FLEX currency options will be 
governed by Rule 1079(b)(6), which currently applies to crosses in FLEX 
index and equity options.
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    \21\ The term ``AUTOM'' is used interchangeably with the term 
``Phlx XL,'' the Exchange's fully electronic trading platform for 
options. The Exchange intends to file a separate proposed rule 
change to update its rules to reflect that orders are now delivered 
electronically over Phlx XL.
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C. Position Limits

    Proposed Rule 1079(d)(3) is unique to FLEX currency options and 
provides that positions in FLEX currency options will be aggregated 
with positions in non-FLEX U.S. dollar-settled FCO contracts, as well 
as physical delivery FCO contracts, for purposes of determining 
compliance with the position limits established by Phlx Rule 1001.\22\
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    \22\ Like non-FLEX U.S. dollar-settled FCOs, (i) one British 
pound FLEX option contract will count as one-third of a contract, 
(ii) one Euro FLEX option contract will count as one-sixth of a 
contract, (iii) one Australian dollar FLEX option contract will 
count as one-fifth of a contract, (iv) one Canadian dollar FLEX 
option contract will count as one-fifth of a contract, (v) one Swiss 
Franc FLEX option contract will count as one-sixth of a contract, 
and (vi) one U.S. dollar-settled Japanese yen FLEX option contract 
will count as one-sixth of a contract. The counting of both FLEX and 
non-FLEX U.S. dollar-settled FCO contracts as less than one full 
contract reflects the fact that the size of the U.S. dollar-settled 
FCO contract is smaller than the Exchange's physical delivery 
contract on the same currencies. The position limit rules were 
originally adopted for the larger physical delivery contracts. In 
addition, the Exchange has amended Rule 1079(e), Exercise Limits, to 
include FLEX U.S. dollar-settled FCOs.
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D. Trading Hours

    The Exchange has determined that, initially, FLEX currency options 
will have the same trading hours as non-FLEX U.S. dollar-settled FCOs. 
The Exchange will be able to establish other trading times for FLEX 
currency options within the regular trading hours for the non-FLEX U.S. 
dollar-settled FCOs, including reflecting any new trading hours for 
non-FLEX U.S. dollar-settled FCOs.\23\
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    \23\ Under this proposal, expanding and narrowing FLEX currency 
trading hours within the regular trading hours of the particular 
product would not require a proposed rule change pursuant to Section 
19(b) of the Act. The Exchange, however, would notify its members, 
in advance, prior to making any such change. Any proposal to expand 
trading hours outside of established regular trading hours will be 
submitted as a proposed rule change to the Commission pursuant to 
Section 19(b) of the Act.
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E. Surveillance and Customer Protection

    Exchange rules and regulations involving sales practice will be 
applicable to FLEX currency options. The Exchange also represents that 
it has adequate surveillance procedures for, and systems capacity to 
support, the trading of FLEX currency options.

III. Commission Finding and Conclusions

    After careful consideration, the Commission finds that the proposed

[[Page 7624]]

rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange, and, in particular, the requirements of Section 
6(b)(5) and 11A of the Act.\24\ Specifically, the Commission finds that 
Phlx's proposal is designed to provide investors with a tailored 
product that may be more suitable to their investment needs. Moreover, 
consistent with Section 11A, the proposal encourages fair competition 
among brokers and dealers and exchange markets, by allowing the 
Exchange to compete with the over-the-counter market in foreign 
currency options. Additionally, the Commission believes that the 
proposal will help promote the maintenance of fair and orderly markets 
because it will extend the benefits of a listed, exchange market to 
FCOs that are more flexible than currently listed FCOs.\25\
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    \24\ 15 U.S.C. 78f(b)(5) and 78k-1.
    \25\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The proposed rule change will permit the trading of U.S. dollar-
settled FCOs with individually tailored expiration dates and strike 
prices.\26\ The Commission notes that it previously approved rules 
relating to the listing and trading of FLEX index and equity options on 
Phlx, which give investors and other market participants the ability to 
individually tailor, within specified limits, certain terms of those 
index and equity options.\27\ The current proposal incorporates FLEX 
currency options into these existing rules and regulatory framework. 
The Commission finds that the Exchange's proposal to introduce the 
trading of FLEX currency options into the market in this manner, which 
will result in a substantially similar regulatory structure for all 
FLEX products traded on Phlx, is consistent with the Act.
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    \26\ As noted above, OCC will be the issuer and guarantor of all 
FLEX currency options. The Commission is designating FLEX currency 
options as standardized options for purposes of the options 
disclosure framework established under Rule 9b-1 of the Act. See 
Securities Exchange Act Release Nos. 31910 (February 23, 1993), 58 
FR 12056 (March 2, 1993); 34925 (November 1, 1994), 59 FR 55720 
(November 8, 1994); and 36841 (February 14, 1996), 61 FR 6666 
(February 21, 1996).
    \27\ See Securities Exchange Act Release No. 39549 (January 14, 
1998), 63 FR 3601 (January 23, 1998).
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    Pursuant to the proposed rule change, the Exchange will be able to 
offer investors and other market participants the ability to trade FLEX 
currency options with an expiration date in any month, business day and 
year, subject to certain explicit restrictions as described above. The 
ability to customize expiration dates is designed to enable investors 
and other market participants to hedge their exchange rate exposure 
more accurately by trading a contract that expires on the date of their 
choice. The proposal also will permit investors and other market 
participants to individually tailor the strike prices of FLEX currency 
options. As the proposal makes clear, such strike prices need not be 
consistent with strike price intervals permissible for non-FLEX U.S. 
dollar-settled FCOs. This additional flexibility permits users of FLEX 
currency options to tailor the product according to their investment 
needs and objectives, and the Commission finds it consistent with the 
Act.
    The Commission also believes that the Exchange has extended the 
application of existing rules regarding FLEX index and equity options, 
and non-FLEX U.S. dollar-settled FCOs, to FLEX currency options 
consistent with the Act. For example, like FLEX index and equity 
options, the expiration date for a FLEX currency option cannot fall on 
or within two business days prior or subsequent to an expiration date 
for a non-FLEX option on the same underlying currency. Further, the 
procedure for quoting and trading of FLEX currency options in Rule 
1079(b) will be the same as the existing procedure for the quoting and 
trading of FLEX index and equity options. The proposal also sets 
minimum size requirements for RFQs and responses to RFQs, as it does 
for FLEX index and equity options. Similarly, the Exchange's proposal 
applies certain rules governing non-FLEX U.S. dollar-settled FCOs to 
FLEX currency options. For example, like non-FLEX U.S. dollar-settled 
FCOs, FLEX currency options will be quoted in terms of dollars per unit 
of underlying foreign currency, and may be quoted and traded in the 
same minimum increments that are established for non-FLEX U.S. dollar-
settled FCOs. The settlement value determination for FLEX currency 
options also will be calculated in a manner that is substantially 
identical to the calculation of settlement value for non-FLEX U.S. 
dollar-settled FCOs, and FLEX currency options will have the same 
trading hours as non-FLEX U.S. dollar-settled FCOs.
    In addition, the proposal requires the aggregation of positions in 
FLEX currency options with positions in non-FLEX U.S. dollar-settled 
FCOs and physical delivery FCOs for purposes of determining compliance 
with the Exchange's existing position limit rules in Rule 1001.\28\ The 
Commission believes that such aggregation, which is designed to 
minimize concerns regarding manipulations or disruptions of the market 
for those and related products, is consistent with the Act.
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    \28\ See supra note 22 and accompanying text.
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    Finally, 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 FLEX currency options, can 
commence on a national securities exchange. Phlx has represented that 
Exchange rules and regulations involving sales practice will be 
applicable to FLEX currency options, and that the Exchange has adequate 
surveillance procedures for, and systems capacity to support, the 
trading of FLEX currency options. Thus, the Commission believes that 
the goal of ensuring adequate customer protection has been satisfied by 
the Exchange, consistent with the Act.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange. In 
addition, the Commission finds pursuant to Rule 9b-1 under the Act that 
FLEX currency options are standardized options for purposes of the 
options disclosure framework established under Rule 9b-1 of the 
Act.\29\
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    \29\ See supra note 26.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\30\ that the proposed rule change (SR-Phlx-2007-68), as amended, 
is approved.
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    \30\ 15 U.S.C. 78s(b)(2).
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    It is further ordered, pursuant to Rule 9b-1(a)(4) under the 
Act,\31\ that FLEX currency options are designated as standardized 
options.
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    \31\ 17 CFR 240.9b-1(a)(4).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12) and 17 CFR 200.30-3(a)(51).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-2332 Filed 2-7-08; 8:45 am]

BILLING CODE 8011-01-P
