Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Philadelphia Stock Exchange, Inc., To Establish a Firm Facilitation Exemption

[Federal Register Volume 61, Number 133 (Wednesday, July 10, 1996)]
[Notices]
[Pages 36410-36412]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17501]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37398; File No. SR-Phlx-96-19]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., To Establish a Firm 
Facilitation Exemption

July 2, 1996.
    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 June 3, 1996, 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, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. 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) (1988).
    \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 Phlx is proposing to adopt a firm facilitation exemption from 
position and exercise limits applicable to both index and equity 
options for up to two times above the existing limits.

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 self-regulatory organization 
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 self-regulatory organization 
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 Phlx is proposing to establish a firm facilitation exemption\3\ 
for all non-multiply-listed Exchange options by adding new Commentary 
.08 to Exchange Rule 1001 and new Commentary .02 to Exchange Rule 
1001A.\4\ The exemption would be available to equity and index options, 
including customized options.\5\
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    \3\ The Commission notes that a facilitation trade is defined as 
a transaction that involves crossing an order of a member firm's 
public customer with an order for the member firm's proprietary 
account.
    \4\ The Exchange notes that its rule filing is similar to 
proposals which the Commission has recently approved for other 
options exchanges. See Securities Exchange Act Release Nos. 36964 
(March 13, 1996), 61 FR 11453 (March 20, 1996) (File No. SR-CBOE-95-
68); 37178 (May 8, 1996), 61 FR 24523 (May 15, 1996) (File No. SR-
PSE-96-10); 37179 (May 8, 1996), 61 FR 24520 (May 15, 1996) (File 
No. SR-Amex-96-11).
    \5\ See Securities Exchange Act Release No. 37048 (March 29, 
1996), 61 FR 15549 (April 8, 1996) (File No. SR-Phlx-96-08).
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    Under the proposal, the procedures in Exchange Rule 1064(b) for 
crossing a customer order with a firm facilitation order must be 
followed. Moreover, only after all market participants in the trading 
crowd have been given a reasonable opportunity to accept the terms, may 
the representing Floor Broker cross all or any remaining part of such 
order in accordance with the rule. According to the Phlx, the purpose 
of this procedure is to ensure that the trading crowd cannot first 
facilitate the order before resorting to a position limit exemption for 
the facilitating firm. Thus, only after it is determined that the 
trading crowd will not fill the order may the firm's customer order be 
crossed with the firm's facilitation order pursuant to the exemption.
    The Phlx notes that the firm facilitation provision will be in 
addition to and separate from the standard limit, as well as other 
exemptions available under Exchange position limit rules. For example, 
if a member organization decides to facilitate customer orders in ABC 
options, which is assumed not to be multiply-listed and also assumed to 
have a 10,500 contract standard position limit, the member organization 
may qualify for a firm facilitation exemption of up to twice that limit 
(21,000 contracts), as well as an equity hedge

[[Page 36411]]

exemption of up to twice the standard limit (21,000 contracts), in 
addition to the 10,500 contract standard limit. If both exemptions are 
allowed, the facilitation firm may hold or control a combined position 
of up to 52,500 ABC contracts on the same-side of the market.\6\
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    \6\ In addition, exercise limits will continue to correspond to 
position limits, such that investors may exercise the number of 
contracts set forth as the position limit as well as those contracts 
exempted by this proposal, during five consecutive business days. 
See Exchange Rules 1002 and 1002A.
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    The Phlx notes, however, that the firm facilitation exemption would 
not presently extend to all options listed on the Exchange. Rather, 
until coordinated intermarket procedures are developed, the firm 
facilitation exemption will be extended only to non-multiply-listed 
options.
    Under the proposal, the facilitation exemption requires prior 
approval from two Floor Officials and submission of a Firm Facilitation 
Form.\7\ Although approval may be granted on the basis of verbal 
representations, the facilitation firm is required to furnish to the 
Market Surveillance Department, within two business days or such other 
time period designated by the Exchange,\8\ appropriate forms 
substantiating the basis for the exemption.
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    \7\ According to the Phlx, the purpose of the Firm Facilitation 
Form is to detail the terms of the customer order and the resulting 
facilitation, as well as to ensure compliance with the exemption. In 
addition, pursuant to the existing requirements of Exchange Rule 
1064(b), facilitation orders must be marked with an ``F'' prior to 
executing facilitating trades. Lastly, Firm Facilitation Forms will 
be made available at the Exchange's Surveillance Post.
    \8\ Telephone Conversation between Edith Hallahan, Special 
Counsel, Regulatory Services, Phlx, and Matthew S. Morris, Attorney, 
Office of Market Supervision, Division of Market Regulation, 
Commission, on June 19, 1996.
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    The Exchange notes, however, that the facilitation firm need not 
have the customer order in hand when requesting the exemption, as long 
as the exemption is properly used to facilitate a customer order 
pursuant to the rule. Because the provision states the position ``will 
facilitate'' a customer order, a firm approaching the limit may request 
an exemption prior to receiving an order, in response to customer 
interest.
    Within five business days after the execution of a facilitation 
exemption order, a facilitation firm must hedge all exempt option 
positions that have not previously been liquidated, and furnish to the 
Market Surveillance Department documentation reflecting the resulting 
hedged positions. In meeting this requirement, and to ensure fair and 
orderly markets, the facilitation firm must establish and liquidate its 
own as well as its customer's option and stock positions (or their 
equivalent) in an orderly fashion, and not in a manner calculated to 
cause unreasonable price fluctuations or unwarranted price changes.
    In addition, a facilitation firm is not permitted to use the 
facilitation exemption with a view toward taking advantage of any 
differential in the price between a group of securities and an 
overlying stock index option. According to the Phlx, this prohibition 
against index arbitrage should prevent undue market impact on the 
options or any underlying stock positions by preventing the increased 
positions from being used in a leveraged manner. Moreover, to 
facilitate surveillance and to ensure an accurate audit trail, the 
facilitation firm is required to promptly provide to the Exchange any 
information or documents requested concerning the exempted and hedged 
positions, to furnish copies of the relevant order tickets to the 
market Surveillance Department on the day of execution, and to notify 
the Exchange of any material change in the exempted option position or 
the hedge.
    The Exchange is also proposing several minor changes to its rules. 
First, the introductory paragraph to Exchange Rule 1001 is to be 
amended to list the 20,000 and 25,000 contract position limit tiers, 
which were inadvertently omitted when Commentary .05(a) was amended to 
adopt these limits.\9\ Second, Exchange Rule 1064(b) is to be amended 
to eliminate the incorrect limitation to ``equity'' options, as this 
provision applies to index options as well. Third, the equity option 
hedge exemption contained in Commentary .07 to Exchange Rule 1001 is to 
be amended to state that the exemption is available up to ``two times 
above'' existing limits, as opposed to ``three times'' the limits, as 
currently stated. The maximum size of the exemption is not being 
changed, just rephrased in terms of the excess number of contracts 
above the applicable position limit. In this manner, the provision will 
be consistent with the index option hedge exemption of the Phlx as well 
as other exchanges.\10\ Fourth, the equity option hedge exemption is to 
be amended to state that it is separate from any other exemption 
available under Exchange rules.
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    \9\ See Securities Exchange Act Release No. 36409 (October 23, 
1995), 60 FR 55399 (October 31, 1995) (File No. SR-Phlx-95-71).
    \10\ See Phlx Rule 1001A, Commentary .01. See also CBOE Rule 
4.11, Interpretations and Policies .04(b).
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2. Statutory Basis
    For these reasons, the Phlx believes that the proposed rule change 
is consistent with Section 6(b) of the Act in general, and with Section 
6(b)(5) in particular,\11\ in that it is designed to facilitate 
transactions in securities, to protect investors and the public 
interest, and will accommodate the needs of investors and other market 
participants without substantially increasing concerns regarding 
manipulation and other trading abuses.
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    \11\ 15 U.S.C. 78f(b)(5) (1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The self-regulatory organization does not believe that the proposed 
rule change will impose any inappropriate burden on competition.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve the proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
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

[[Page 36412]]

available for inspection and copying at the Commission's Public 
Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies 
of such filing also will be available for inspection and copying at the 
principal office of the Phlx. All submissions should refer to File No. 
SR-Phlx-96-19 and should be submitted by July 29, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-17501 Filed 7-9-96; 8:45 am]
BILLING CODE 8010-01-M