regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.,

[Federal Register: January 28, 2002 (Volume 67, Number 18)]

[Notices]

[Page 3927-3929]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr28ja02-90]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45322; File No. SR-Phlx-2001-115]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 thereto by the Philadelphia Stock Exchange, Inc. Relating to the Volume Thresholds for the Options Specialist Shortfall Fee and Corresponding Shortfall Credit

January 22, 2002.

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 December 20, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') filedwith 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 Exchange. On January 15, 2002, the Exchange filedAmendment No. 1 to the proposed rule change.\3\ The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240.19b-4.

\3\ See letter from Cynthia K. Hoekstra, Counsel, Phlx, to Kelly Riley, Senior Special Counsel, Division of Market Regulation, Commission, dated January 14, 2002 (``Amendment No. 1''). In Amendment No. 1, the Exchange clarified the statutory basis of the proposed rule change to include Section 6(b)(4) of the Act. In addition, the Exchange requested that, rather than being filed pursuant to Section 19(b)(3)(A)(ii) of the Act, under which it was originally filed, that the proposed rule change now be filed pursuant to Section 19(b)(2) of the Act. Finally, the Exchange requested that the proposed fee be approved as of January 2, 2002 and that the proposed rule change be approved on an accelerated basis in order to permit the Exchange to invoice its January fees in a timely manner by the middle of February.

1. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

   The Exchange proposes to amend its schedule of dues, fees and charges to increase the requisite volume thresholds associated with the options specialist 10 percent deficit fee (``shortfall fee'') \4\ and corresponding options specialist 10 percent shortfall credit (``shortfall credit'').\5\ The Exchange also proposes to amend the definition of a Top 120 Option, clarify who is eligible to receive the shortfall credit and make other minor, technical amendments to its fee schedule. The Exchange intends to implement the proposed volume thresholds retroactively for transactions settling on or after January 2, 2002.\6\

   \4\ See Securities Exchange Act Release No. 43201 (August 23, 2000), 65 FR 52465 (August 29, 2000) (SR-Phlx-00-71).

   \5\ See Securities Exchange Act Release No. 44892 (October 1, 2001), 66 FR 51487 (October 9, 2001) (SR-Phlx-2001-83).

   \6\ See Amendment No. 1, supra note 3. The Exchange states that the shortfall fee will continue to be eligible for the monthly credit of up to $1,000 to be applied against certain fees, dues and charges and other amounts owed to the Exchange by certain members. See Securities Exchange Act Release No. 44292 (May 11, 2001), 66 FR 27715 (May 18, 2001) (SR-Phlx-2001-49).

   The text of the proposed rule change appears below. New text is in italics; deletions are in brackets.

   Summary of Equity Option Charges (P. 1/2)

   SPECIALIST [10%] DEFICIT (Shortfall) FEE I

   $.35 per contract for specialists trading any Top 120 Option if [at least 10% of] the following total national monthly contract volume for such Top 120 Option is not effected on the PHLX: 11 percent for the period January through March 2002; 12 percent for the period April through June 2002; 13 percent for the period July through September 2002; and 14 percent for the period October through December 2002.

   Summary of Equity Option Charges (P. 2/2)

   [OPTIONS] SPECIALIST [10%] DEFICIT (Shortfall) FEE CREDIT

   A credit of $.35 per contract may be earned by options specialists for all contracts traded in excess of the [10%] following volume thresholds in eligible issues for the monthly periods commencing September 1, 2001. These credits may be applied against previously imposed ``shortfall fees'' for the preceding six months for issues that in the month the deficit occurred, the equity option traded in excess of 10 million contracts per month: 11 percent for the period January through March 2002; 12 percent for the period April through June 2002; 13 percent for the period July through September 2002; and 14 percent for the period October through December 2002. * * * * *

   I denotes fee eligible for monthly credit of up to $1,000.

2. 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 IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.

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

      (1) Purpose

      According to the Exchange, the purpose of the proposed rule change is to increase the volume thresholds related to the options specialist shortfall fee and corresponding shortfall credit in order to encourage specialists to compete for order flow in the national market. The options traded by the specialist unit, and the transactions related thereto, may be especially valuable to that specialist unit and the Exchange due to their potential profitability. Therefore, the Exchange believes that the specialist should compete for order flow in the national market, because that specialist unit is the key party responsible for marketing and receiving order flow in that particular option.

      Currently, the Exchange imposes a fee of $0.35 per contract to be paid by the specialist trading any Top 120 Option if at least 10 percent of the total national monthly contract volume (``total volume'') for such Top 120 Option is not effected on the Exchange in that

      [[Page 3928]]

      month.\7\ In addition, a corresponding shortfall credit of $0.35 per contract may be earned toward previously imposed shortfall fees for each contract traded in excess of the 10 percent volume threshold during a subsequent monthly time period. Thus, the Exchange states that options specialists may apply this credit when trading in their issues falls below the 10 percent volume threshold in one month, and exceeds the threshold in a subsequent month. Such a credit may be applied against shortfall fees imposed within the preceding six months for the same option, provided that, in the month the deficit occurred, the option traded in excess of 10 million contracts nationwide that month.\8\

      \7\ The Exchange states that at present a Top 120 Option is defined as one of the 120 most actively traded equity options in terms of the total number of contracts in that option that were traded nationally for a specified month based on volume reflected by The Options Clearing Corporation (``OCC'') and which was listed on the Exchange after January 1, 1997.

      \8\ The Exchange states that nationwide trading figures are based on the national monthly contract volume reflected by the OCC.

      The proposed fee amendments would increase the requisite volume thresholds by 1 percent per quarter over each quarter of 2002. Thus, the minimum trading volume requirements for total volume in the Top 120 Options would be in excess of: 11 percent for the period January through March 2002; 12 percent for the period April through June 2002; 13 percent for the period July through September 2002; and 14 percent for the period October through December 2002. The related shortfall credit will also be amended to correspond with the volume thresholds described above. Therefore, in order to qualify for the shortfall credit, specialists/specialist units must have total volume in the Top 120 Options (that otherwise qualify based on the 10 million contract volume requirement) in excess of: 11 percent for the period January through March 2002; 12 percent for the period April through June 2002; 13 percent for the period July through September 2002; and 14 percent for the period October through December 2002.

      The Exchange also proposes to amend the definition of a Top 120 Option to include the top 120 most actively traded equity options in terms of the total numbers of contracts in that option that were traded nationally for a specified month based on volume reflected by OCC.\9\

      \9\ The Exchange states that previously, options listed on the Phlx before January 1, 1997 were excluded from the calculation of the Top 120 Options. The Phlx intends to continue to divide by two the total volume reported by OCC, which reflects both sides of an executed transaction, thus avoiding one trade being counted twice for purposes of determining overall volume. See Securities Exchange Act Release No. 43201 (August 23, 2000), 65 FR 52465 (August 29, 2000) (SR-Phlx-00-71).

      Currently, the rate of $0.35 per contract is paid to the Exchange if the requisite volume for such Top 120 Option is not effected on the Phlx in that month and a shortfall credit of $0.35 may be earned against previously imposed shortfall fees, as discussed above. These rates will remain unchanged.

      In order to avoid one specialist unit trying to claim the credit for volume deficits created by another specialist unit, the Exchange also proposes to clarify that the shortfall credit is available only to the same specialist unit or one associated with or related to that specialist unit to capture, for example, affiliates, subsidiaries and corporate mergers.

      The Exchange states that other procedures relating to the specialist shortfall fee and shortfall credit remain unchanged.\10\ Finally, the Exchange proposes to make other minor, technical amendments to the headings of the shortfall fee and credit to make them more consistent.

      \10\ The Exchange states that, for example, the previously imposed transition period for newly listed options would remain in effect. Therefore, the requisite volume threshold of three percent for the first full calendar month and six percent for the second full calendar month of trading will remain unchanged. The Exchange fee schedule continues to apply to all equity options transactions not covered by this options specialist shortfall fee. Also, the three-month differentiation to determine whether an equity option is considered a Top 120 Option will remain in effect, i.e., September's Top 120 Options are based on June's volume. See Securities Exchange Act Release No. 43201 (August 23, 2000), 65 FR 52465 (August 29, 2000) (SR-Phlx-00-71). Any excess volume (over the total volume target) may not be carried over to a future month.

      The Exchange believes that this proposal is necessary to continue to attract order flow to the Exchange in order to remain competitive. According to the Exchange, the proposed fee should encourage specialists to vigorously compete for order flow, which not only enhances the specialists' role, but also provides additional revenue to the Exchange. Moreover, the Exchange expects that specialists' efforts to maintain the requisite volume thresholds as outlined above should contribute to deeper, more liquid markets and tighter spreads. Thus, the Exchange believes that competition should be enhanced, and important auction market principles preserved.

      In conclusion, the Exchange proposes to implement the proposed volume thresholds retroactively for transactions settling on or after January 2, 2002. To that end, the Exchange has requested accelerated approval so that the proposed rule change may become effective as of January 2, 2002. The Exchange stated that approval of the proposed rule change on an accelerated basis would ensure that all of the applicable fees for January 2002 are integrated into the Exchange's routine billing cycle thus avoiding potential member confusion. (2) Statutory Basis

      The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,\11\ in general, and furthers the objectives of Sections 6(b)(4) \12\ and 6(b)(5) \13\ of the Act, in particular, because it provides for the equitable allocation of reasonable dues, fees, and other charges among its members and it is intended to promote just and equitable principles of trade and protect investors and the public interest by attracting more order flow to the Exchange, which should result in increased liquidity and tighter markets.

      \11\ 15 U.S.C. 78f(b).

      \12\ 15 U.S.C. 78f(b)(4).

      \13\ 15 U.S.C. 78f(b)(5).

   2. Self-Regulatory Organization's Statement on Burden on Competition

      The Exchange does not believe that the proposed rule change will impose any inappropriate burden on competition.

   3. 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.

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

   Within 35 days of the date of 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 Exchange consents, the Commission will:

   1. By order approve such proposed rule change; or

   2. Institute proceedings to determine whether the proposed rule change should be disapproved.

4. Solicitation of Comments

   Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with

   [[Page 3929]]

   the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filedwith 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 will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to File No. SR-Phlx-2001-115 and should be submitted by February 12, 2002.

   For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\14\

   \14\ 17 CFR 200.30-3(a)(12).

   Jill M. Peterson, Assistant Secretary.

   [FR Doc. 02-1955Filed1-25-02; 8:45 am]

   BILLING CODE 8010-01-P