
[Federal Register: May 22, 2008 (Volume 73, Number 100)]
[Notices]               
[Page 29805-29808]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22my08-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57824; File No. SR-Phlx-2008-35]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to FLEX Equity Option Opening Transactions

May 15, 2008.
    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 May 5, 2008, the Philadelphia Stock Exchange, Inc. (``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 Phlx. The 
Exchange filed the proposed rule change pursuant to Section 19(b)(3)(A) 
of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the 
proposal effective upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Phlx Rule 1079 (FLEX Index, Equity and 
Currency Options) to establish a pilot program that would reduce from 
250 contracts to 150 contracts the minimum value size for an opening 
transaction (other than FLEX Quotes responsive to a FLEX Request for 
Quotes) \5\ in any

[[Page 29806]]

FLEX Equity Option \6\ series in which there is no open interest at the 
time a FLEX Request for Quotes (``RFQ'') is submitted (the ``Pilot 
Program''). The Exchange also proposes to modify the minimum value size 
for an opening transaction in a currently-opened FLEX Equity series 
(other than FLEX Quotes responsive to a RFQ) to the lesser of 100 
contracts or the number of contracts overlying $1 million in the 
underlying securities.
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    \5\ FLEX Quotes responsive to a FLEX Request for Quote (``RFQ'') 
have different parameters that are not changed by this filing. See 
Phlx Rule 1079(a)(8)(C).
    \6\ FLEX Equity Options are flexible exchange-traded options 
contracts that overlie equity securities. FLEX Equity Options 
provide investors with the ability to customize basic option 
features including size, expiration date, exercise style, and 
certain exercise prices. FLEX Equity Options (as also FLEX index 
options) may have expiration dates within five years. See Phlx Rule 
1079.
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    The text of the proposed rule change is available at the Phlx, the 
Commission's Public Reference Room, and http://www.phlx.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Phlx included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Phlx has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to initiate a year and a 
half long Pilot Program that would reduce the minimum value size for an 
opening transaction (other than FLEX Quotes responsive to a FLEX RFQ) 
in any FLEX Equity Option series in which there is no open interest at 
the time an RFQ is submitted, and to modify the minimum value size for 
an opening transaction in a currently-opened FLEX Equity series (other 
than FLEX Quotes responsive to a FLEX RFQ). The proposed clarification 
of the criteria for opening FLEX option transactions should provide 
members that use FLEX Equity Options greater flexibility in structuring 
the terms of such options to better comport with the particular needs 
of the members and their customers.
    Currently, Phlx Rule 1079(a)(8)(A) sets the minimum opening 
transaction value size in the case of a FLEX Equity Option in a newly 
established series as the lesser of (i) 250 contracts or (ii) the 
number of contracts overlying $1 million in the underlying 
securities.\7\ Under the Pilot Program, the Exchange proposes to reduce 
the ``250 contracts'' component to ``150 contracts;'' the $1 million 
underlying value component will continue to apply unchanged.\8\ The 
proposed Pilot Program would be similar to one that has already been 
approved for other options exchanges.\9\
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    \7\ Under this formula, an opening transaction in a FLEX Equity 
series in a stock priced at $40 or more would reach the $1 million 
limit before it would reach the contract size limit, i.e., 250 
contracts times the multiplier (100) times the stock price ($40) 
equals $1 million in underlying value. For a FLEX Equity series in a 
stock priced at less than $40, the 250 contract size limit applies.
    \8\ Under this proposed formula, an opening transaction in a 
FLEX Equity series in a stock priced at approximately $66.67 or more 
would reach the $1 million limit before it would reach the contract 
size limit, i.e., 150 contracts times the multiplier (100) times the 
stock price ($66.67) equals just over $1 million in underlying 
value. For a FLEX Equity series in a stock priced at less than 
$66.67, the 150 contract size limit would apply.
    \9\ See Securities Exchange Act Release No. 57429 (March 4, 
2008), 73 FR 13058 (March 11, 2008) (SR-CBOE-2006-36) (``CBOE Pilot 
Program Order'').
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    Given that FLEX Equity Option transactions can occur in increments 
of 100 or more contracts in subsequent opening transactions,\10\ the 
Exchange believes it is reasonable to permit the initial series opening 
transaction size to be 150 contracts (or $1 million in underlying 
value, whichever is less). The Exchange believes that the proposed 
reduction of the minimum value size for opening a series provides FLEX-
participating members and their customers with greater flexibility in 
structuring the terms of FLEX Equity Options to better suit the FLEX 
traders' particular needs.
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    \10\ Specifically, for FLEX Equity Options the minimum value 
size for a transaction in any currently-opened FLEX series is, as 
proposed, the lesser of 100 contracts or the number of contracts 
overlying $1 million in the underlying securities; or the lesser of 
25 contracts or the remaining size in the case of a closing 
transaction. Additionally, the minimum value size for a FLEX Quote 
entered in response to a RFQ in FLEX Equity Options is the lesser of 
25 contracts or the remaining size in a closing transaction. See 
Phlx Rules 1079(a)(8)(B)(ii) and 1079(a)(8)(C)(ii).
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    The Exchange notes that the opening size requirement for FLEX 
Equity Options was originally put in place to limit participation in 
FLEX Equity Options to sophisticated, high net worth investors rather 
than retail investors.\11\ According to the Chicago Board Options 
Exchange, Incorporated (``CBOE''), which has a pilot program that is 
similar to the one proposed herein, it received requests from broker-
dealers representing institutional clients that the minimum value size 
for opening transactions be reduced.\12\ In proposing the reduction of 
the 250 contract component to 150 contracts, CBOE stated in its filing 
that it is cognizant of the desire to continue to provide both the 
requisite amount of investor protection that the minimum opening size 
requirement was originally designed to achieve, as well as the need for 
market participants to have the flexibility to serve their customers' 
particular investment needs.\13\
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    \11\ The existing customer base for FLEX Options includes both 
institutional investors and high net worth individuals.
    \12\ See CBOE Pilot Program Order, supra note 9, at 73 FR 13059.
    \13\ See id.
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    The Exchange believes that modifying the minimum opening 
transaction value size in this way will further broaden the base of 
institutional investors that use FLEX Equity Options to manage their 
trading and investment risk, including investors that currently trade 
in the over-the-counter market for customized options that can take on 
contract characteristics similar to FLEX Options but for which similar 
opening size restrictions do not apply. The Exchange believes that 
market participants benefit from being able to trade these customized 
options in an exchange environment in several ways, including, but not 
limited to, enhanced efficiency in initiating and closing out 
positions; increased market transparency; and heightened contra-party 
creditworthiness due to the role of The Options Clearing Corporation as 
issuer and guarantor of FLEX Equity Options.
    Should the Exchange desire to propose an extension, expansion, or 
permanent implementation of the Pilot Program, the Exchange would 
submit, along with a filing proposing any necessary amendments to the 
Pilot Program, a pilot program report.\14\ The report would be 
submitted to the Commission at least ninety days prior to the 
expiration date of the one-and-a-half year Pilot Program.
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    \14\ At a minimum the report must provide (i) data and analysis 
on the open interest and trading volume in FLEX Equity Options for 
which series were opened with a minimum opening size of 150 to 249 
contracts and less than $1 million in underlying value; and (ii) 
analysis on the types of investors that initiated opening FLEX 
Equity Options transactions (i.e., institutional, high net worth, or 
retail, if any). The proposed reporting requirements for the instant 
proposal are identical to the CBOE Pilot Program. This information 
was confirmed pursuant to a telephone conversation between Jurij 
Trypupenko, Director and Counsel, Phlx and Marc McKayle, Special 
Counsel, Division of Trading and Markets, SEC on May 12, 2008.
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    Finally, the Exchange is also proposing to modify the minimum value

[[Page 29807]]

size for an opening transaction in a currently-opened FLEX Equity 
series (other than FLEX Quotes responsive to a FLEX RFQ). Presently, 
Phlx Rule 1079(a)(8)(B) sets the minimum transaction value size for an 
opening transaction in a currently-opened series at 100 contracts. The 
Exchange is proposing to modify the minimum size formula to the lesser 
of (i) 100 contracts or (ii) the number of contracts overlying $1 
million in the underlying securities. This change would only impact 
those FLEX Equity series in which the underlying stock is trading at 
more than $100.\15\
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    \15\ Under this proposed formula, a transaction in a currently-
opened FLEX Equity series in a stock priced at more than $100 would 
reach the $1 million limit before it would reach the contract size 
limit, i.e., 100 contracts times the multiplier (100) times the 
stock price ($100) equals $1 million in underlying value.
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    The FLEX minimum size requirements for subsequent opening 
transactions in a currently-opened series is higher for certain stocks 
priced over $100 than the minimum size needed to initially open the 
series in similarly priced stocks. The Exchange therefore believes that 
this proposal is necessary for there to be consistency between the 
minimum size requirements for new series and currently-opened series 
when the underlying stock is trading at more than $100.\16\
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    \16\ For example, a new FLEX Equity series in a stock trading at 
$110 could open with an initial transaction size of 91 contracts, 
i.e., 91 contracts times the multiplier (100) times the stock price 
($110) equals just over $1 million in underlying value. Once the 
series is opened, absent the proposed change, any further opening 
transactions would require a minimum contract size of 100 contracts, 
despite the fact that with the stock price of $110, this would be 
valued at $1.1 million, more than the value of the initial opening 
transaction.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \17\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \18\ 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, among other things, lowering from 250 to 150 the minimum 
number of contracts required to open a FLEX series and thereby 
providing FLEX-participating members and their customers greater 
flexibility to trade FLEX Equity Options.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has designated the proposed rule change as one that 
may take effect upon filing with the Commission pursuant to Section 
19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(6)(iii) thereunder \20\ 
because it does not: (i) Significantly affect the protection of 
investors or the public interest; (ii) impose any significant burden on 
competition; and (iii) become operative for 30 days from the date on 
which it was filed, or such shorter time as the Commission may 
designate.\21\
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6)(iii).
    \21\ In addition, Rule 19b-4(f)(6)(iii) requires a self-
regulatory organization to give the Commission written notice of its 
intent to file a proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has fulfilled this requirement. In particular, the 
Commission notes that the proposal was originally designated under 
Section 19(b)(2) of the Act (File No. SR-Phlx-2008-29). Following a 
conversation with Commission staff, the Phlx withdrew that filing 
and submitted the present filing designated for immediate 
effectiveness under Section 19(b)(3)(A).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. Rule 
19b-4(f)(6)(iii), however, permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange requested that the 
Commission waive the 30-day operative delay and designate the proposed 
rule change immediately operative, so the Exchange can implement the 
rule change, which is based on a CBOE proposal recently approved by the 
Commission, without delay.\22\ The Exchange believes that waiving the 
30-day operative delay is consistent with the protection of investors 
and the public interest in that it would provide it with the ability to 
trade products that are traded or available on other options exchanges.
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    \22\ See CBOE Pilot Program Order, supra note 9.
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\23\ Therefore, the Commission designates the proposal to be 
operative upon filing.
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    \23\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2008-35 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-2008-35. 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

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the Commission's Public Reference Room, 100 F Street, NE., Washington, 
DC 20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of the filing also will be available for inspection and 
copying at the principal office of the Phlx. All comments received will 
be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-Phlx-2008-35 and should be submitted on 
or before June 12, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-11428 Filed 5-21-08; 8:45 am]

BILLING CODE 8010-01-P
