[Federal Register Volume 61, Number 19 (Monday, January 29, 1996)]
[Notices]
[Pages 2858-2860]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1471]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36746; International Series Release No. 919; File No.
SR-PHLX-95-13]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 3 to the Proposed Rule Change by the Philadelphia Stock
Exchange, Inc., Relating to Modifications of the Position and Exercise
Limits for Foreign Currency Options
January 19, 1996.
On March 10, 1995, as subsequently amended below, the Philadelphia
Stock Exchange, Inc. (``PHLX'' or ``Exchange'') submitted to the
Securities and Exchange Commission (``SEC'' or ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend PHLX Rules 1001, ``Position Limits,'' \3\ and 1002, ``Exercise
Limits,'' \4\ to increase the position and exercise limits for all
foreign currency options (``FCOs''), except for options on the Italian
lira and the Spanish peseta, to 200,000 contracts.\5\ The PHLX
subsequently filed Amendment Nos. 1, 2,\6\ and 3 \7\ to the proposed
rule change on April 5, 1995, May 2, 1995, and December 20, 1995,
respectively.
\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR Sec. 240.19b-4 (1995).
\3\ Position limits impose a ceiling on the number of option
contracts which an investor or group of investors acting in concert
may hold or write in each class of options on the same side of the
market (i.e., aggregating long calls and short puts or long puts and
short calls).
\4\ Exercise limits prohibit an investor or group of investors
acting in concert from exercising more than a specified number of
puts or calls in a particular class within five consecutive business
days.
\5\ See note 7, infra, and accompanying text.
\6\ On April 5, 1995, the PHLX submitted a revised version of
the text of the proposed rule change, which amends the text to
indicate that the proposed position and exercise limit for FCOs is
200,000 contracts. See Letter from Edith Hallahan, Special Counsel,
Regulatory Services, to Michael Walinskas, Branch Chief, Office of
Market Supervision (``OMS''), Division of Market Regulation
(``Division''), Commission, dated April 5, 1995 (``Amendment No.
1''). On April 26, 1995, the PHLX amended PHLX Rule 1001, Commentary
.05(c), to (1) replace references to the current FCO position limits
with references to the proposed FCO position limit; (2) designate
current paragraph (c) as paragraph (b), in order to reflect the
deletion of current paragraph (b); and (3) provide that the position
and exercise limit for customized and non-customized contracts on
the German mark/Japanese yen cross-rate and the British pound/German
mark cross-rate options, as well as for cross-rate options traded
pursuant to PHLX Rule 1069, ``Customized Foreign Currency Options,''
is 200,000 contracts. See Letter from Edith Hallahan, Special
Counsel, Regulatory Services, PHLX, to Michael Walinskas, Branch
Chief, OMS, Division, Commission, dated April 26, 1995 (``Amendment
No. 2'').
\7\ The PHLX amended its proposal to provide that options on the
Italian lira and the Spanish peseta will continue to be subject to
their current position and exercise limits of 100,000 contracts. The
Exchange also indicated that, under the proposal, the aggregation
principles provided in PHLX Rule 1001 will continue to apply. See
Letter from Gerald D. O'Connell, First Vice President, Market
Regulation and Trading Operations, PHLX, to Michael Walinskas,
Branch Chief, OMS, Division, Commission, dated December 20, 1995
(``Amendment No. 3'').
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Notice of the proposed rule change and Amendment Nos. 1 and 2
appeared in the Federal Register on May 16, 1995.\8\ No comments were
received on the proposal.
\8\ See Securities Exchange Act Release No. 35688 (May 8, 1995),
60 FR 26062.
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Currently, PHLX Rules 1001 and 1002 establish the following
position and exercise limits for FCOs: (i) 150,000 contracts for FCOs
which meet an annual trading volume of at least 3,500,000 contracts;
and (ii) 100,000 contracts for all other FCOs traded on the PHLX. The
PHLX proposes to amend Exchange Rules 1001 and 1002 to increase the
position and exercise limits for all FCOs, except for options on the
Italian lira and the Spanish peseta,\9\ to 200,000 contracts.
\9\ As noted above, the position and exercise limits for options
on the Italian lira and the Spanish peseta will continue to be
100,000 contracts. See Amendment No. 3, supra note 7.
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PHLX FCO position and exercise limits were set initially at 10,000
contracts in 1982, when FCOs first began trading on the Exchange.\10\
Since that time, the position and exercise limits have been raised four
times.\11\ In 1993, the Exchange filed a proposal to adopt a two-tiered
approach to FCO position and exercise limits, which was approved by the
Commission in September 1994.\12\ According to the PHLX, many of the
factors cited at that time continue to indicate that FCO position and
exercise limits warrant an increase to 200,000 contracts. For example,
the Chicago Mercantile Exchange (``CME'') substituted ``position
accountability standards'' \13\ for position limits for futures and
futures options on certain foreign currencies.\14\ As a result, the
PHLX believes that the Exchange is placed at a serious competitive
disadvantage.
\10\ See Securities Exchange Act Release no. 19313 (October 14,
1982), 47 FR 46946 (October 21, 1982) (order approving File No. SR-
PHLX-81-4).
\11\ See Securities Exchange Act Release Nos. 21676 (January 18,
1985), 50 FR 3859 (January 28, 1985) (order approving File No. SR-
PHLX-84-18 (increasing position limits from 10,000 to 25,000
contracts); 22479 (September 27, 1985), 50 FR 41276 (October 9,
1985) (order approving File No. SR-PHLX-85-22) (increasing position
limits to 50,000 contracts); 23710 (October 15, 1986), 51 FR 37691
(October 23, 1986) (order approving File No. SR-PHLX-86-24)
(increasing position limits to 100,000 contracts); and 34712
(September 23, 1994), 59 FR 50307 (October 3, 1994) (order approving
File No. SR-PHLX-93-13) (adopting position limit of 150,000
contracts for FCOs with annual trading volume of at least 3,500,000
contracts).
\12\ See Securities Exchange Act Release No. 34712, supra note
10.
\13\ Position accountability standards require traders who own
or control positions in excess of established limits to provide to
the exchange, upon request, information regarding the nature of the
position and the trading strategy employed.
\14\ See Letter from Jean A. Webb, Secretary, Commodity Futures
trading Commission (``CFTC''), to Todd E. Petzel, Senior Vice
President, Research, and Chief Economist, CME, dated January 2,
1992. See also Speculative Position Limits--Exemption from CFTC Rule
1.61; CME Proposed Amendments to Rules 3902.D, 5001.E, 3010.F,
3012.F, 3013.F, 3015.F, 4604, and Deletion of Rules 3902.F, 5001.G,
3010.H., 3012.H, 3013.H, and 3015.H.
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In addition, the Exchange has commenced trading customized
FCOs,\15\ in which positions are aggregated with other FCO positions in
the underlying currency; however, customized option trading volume is
not included in the volume calculation to determine the applicable
position limit under the current two-tiered system. In addition to
customized options, there are also other FCO products that are
aggregated for position and exercise limit purposes, including long-
term, month-end, cash/spot, and American- and European-style FCOs.\16\
According to the PHLX, FCO
[[Page 2859]]
participants have continued to accumulate positions near existing
limits. If large traders continue to be restricted by the current
position and exercise limit levels, the PHLX believes that trading
interest could migrate to the over-the-counter (``OTC'') market,
hampering PHLX liquidity. The Exchange believes that a higher position
and exercise limit may enable such traders to consider, or return to,
an exchange marketplace for their FCO trading, thereby increasing the
liquidity of the PHLX's FCO markets. The PHLX believes that increases
are particularly appropriate because the FCO market attracts a large
number of institutional and corporate investors with substantial
hedging needs. According to the Exchange, these investors utilize the
PHLX marketplace by participating in block size transactions in FCOs to
hedge exposure to fluctuations in exchange rates.
\15\ See Securities Exchange Act Release No. 34925 (November 1,
1994), 59 FR 55720 (November 8, 1994) (order approving File No. SR-
PHLX-94-18).
\16\ See e.g., Securities Exchange Act Release Nos. 30672 (May
6, 1992), 57 FR 20546 (May 13, 1992) (order approving File No. SR-
PHLX-91-30) (aggregating long-term FCOs); 30945 (July 21, 1992), 57
FR 33381 (July 28, 1992) (order approving File No. SR-PHLX-92-13)
(aggregating month-end FCOs); 33732 (March 8, 1994), 59 FR 12023
(March 15, 1994) (order approving File No. SR-PHLX-93-10)
(aggregating cash/spot FCOs); and 24859 (August 27, 1987), 52 FR
33493 (September 3, 1987) (order approving File No. SR-PHLX-87-24)
(aggregating European-style contracts).
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Since the most recent increase in position and exercise limits, the
Exchange has continued to examine FCO position and exercise limits in
light of the underlying currency market. The PHLX estimates that the
size of the worldwide currency market has grown exponentially. For
example, in 1989, total gross global foreign exchange turnover was
estimated to be $932 billion per day and net global turnover was
estimated to be $640 billion per day.\17\ In 1992, total gross global
foreign exchange turnover was estimated to be $1.354 billion per day,
which represents a 35% increase since 1989. Further, global ``net-net''
exchange market turnover was estimated at $880 billion; this takes into
account local and cross-border double counting and estimated gaps in
reporting.\18\
\17\ See Bank for International Settlements (``BIS'') Central
Bank Survey of Foreign Exchange Market Activity in 1989.
\18\ See BIS Central Bank Survey of Foreign Exchange Market
Activity in April 1992 (March 1993).
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Further, the PHLX believes that, as a percentage of total global
currency turnover, the impact of a PHLX FCO position, even at 200,000
contracts, is minimal.\19\
\19\ According to the PHLX, 200,000 contracts would represent
less than 2% of the daily international currency transaction volume
in the Deutsche mark; 22% of the daily international currency
transaction volume in the Australian dollar; 5% of the daily
international currency transaction volume in the British pound; 16%
of the daily international currency transaction volume in the
Canadian dollar; 19% of the daily international currency transaction
volume in the French franc; 8% of the daily international currency
transaction volume in the Swiss franc; and 4% of the daily
international currency transaction volume in the Japanese yen. See
Letter from Gerald D. O'Connell, First Vice President, Market
Regulation and Trading Operations, PHLX, to Yvonne Fraticelli,
Attorney, Office of Market Supervision, Division of Market
Regulation, Commission, dated May 18, 1995.
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The Exchange also believes that the proposed increase is reasonable
in light of prior position and exercise limit increases. The 1992
increase represents a 50% increase in the two affected options.
Previously, the Commission approved increases of 150%, 100%, and
100%.\20\ Accordingly, the PHLX believes that the current proposal to
raise by 100% the position and exercise limits for all FCOs, except
options on the Italian lira and the Spanish peseta, is in line with
prior changes, and specifically does not create a higher increase than
any prior one.
\20\ In 1985, the first increase from 10,000 contracts to 25,000
contracts represented a 150% change while the second increase from
25,000 to 50,000 contracts represented a 100% increase; similarly,
the 1986 change to 100,000 contracts represented a 100% change. The
proposed changes, from 150,000 to 200,000 contracts, and from
100,000 to 200,000 contracts, represent changes of 33% and 100%,
respectively.
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Because of the large size of the underlying market in foreign
currencies, the PHLX does not believe that manipulative concerns would
be enhanced if the limits for FCOs were increased. In this regard, the
Exchange notes that its surveillance procedures are designed to detect
violations of these limits. In addition, the PHLX notes that the
proposal will eliminate the fluctuations in limits inherent in a
volume-based approach.
For these reasons, and in light of these market changes, the
Exchange believes that the proposed rule change is consistent with
Section 6 of the Act, in general, and, in particular, with Section
6(b)(5), in that it is designed to promote just and equitable
principles of trade as well as to protect investors and the public
interest. The PHLX believes that the proposal will increase the depth
and liquidity of the FCO market which, in turn, should result in
position and exercise limit levels that serve the purposes of
protecting investors and the public interest as well as preventing
unfair acts and practices, such as manipulation.
The Commission finds that the proposed rule change 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).\21\ Specifically, the
Commission believes that the proposal to increase the position and
exercise limits for all FCOs, except for options on the Italian lira
and the Spanish peseta, should help to accommodate the needs of
investors and market participants while helping to increase the depth
and liquidity of the PHLX's FCO market. The proposal should also
simplify the PHLX's rules by establishing limits that will not change
periodically based on trading volume in the FCO as exists under the
PHLX's current rules.
\21\ 15 U.S.C. Sec. 78f(b)(5) (1988 & Supp. V 1993).
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The Commission believes, as it has stated in the past, that
although position and exercise limits for FCOs must be sufficient to
protect the options and related markets from disruptions by
manipulation, the limits must not be established at levels that are so
low as to discourage participation in the options market by
institutions and other investors with substantial hedging needs or to
prevent market makers from adequately meeting their obligations to
maintain a fair and orderly market.\22\ In its proposal, the PHLX
states that the FCO market attracts a large number of corporate and
institutional investors who have substantial needs and who execute
block-sized transactions in FCOs. In addition, the PHLX believes that
trading could migrate to the OTC market if traders continue to be
restricted by the PHLX's current FCO position and exercise limits. In
light of the size of the FCO market and the needs of FCO investors and
market makers, the Commission believes that the PHLX's proposal is a
reasonable effort to accommodate the needs of market participants and
to help the Exchange remain competitive with the OTC market for FCOs.
\22\ See Securities Exchange Act Release Nos. 22479 and 34712,
supra note 10.
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At the same time, the Commission does not believe that the proposal
significantly increases concerns regarding intermarket manipulations or
disruptions of the markets for FCOs or the underlying currencies. The
Commission notes that the interbank foreign currency spot market is an
extremely large, diverse market comprise of banks and other financial
institutions worldwide.\23\ That market is supplemented by equally deep
and liquid markets for standardized options and futures on foreign
currencies and options on those futures. An active OTC market also
exists in FCOs.
\23\ See Securities Exchange Act Release No. 31627 (December 21,
1992), 57 FR 62399 (December 30, 1992) (order approving File No. SR-
Amex-92-36).
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Moreover, the absence of discernible manipulative problems under
the current FCO position and exercise limits leads the Commission to
conclude that
[[Page 2860]]
the proposed increase is warranted. The Commission recognizes, as it
has stated in the past, that there are no ideal limits in the sense
that options positions of any given size can be stated conclusively to
be free of any manipulative concerns.\24\ The PHLX and the Commission,
however, have relied largely on the absence of discernible manipulation
or disruption problems under the current limit as an indicator that
additional increase can be safely considered. The Commission believes
for these reasons that the proposed liberalization of existing FCO
position and exercise limits is appropriate.\25\
\24\ See Securities Exchange Act Release No. 33288 (December 3,
1993), 58 FR 65221 (December 13, 1993) (order approving File No. SR-
PHLX-93-07).
\25\ The Commission continues to believe that proposals to
increase position and exercise limits must be justified and
evaluated separately. After reviewing the proposed exercise limits,
the Commission has concluded that the exercise limit increase does
not raise manipulation problems or increase concerns over market
disruption in the underlying currencies.
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In addition, the Commission believes that the PHLX's surveillance
programs will be adequate to detect and deter position and exercise
limit violations by market participants as well as detect and deter
attempted manipulative activity and other trading abuses.
The Commission finds good cause for approving Amendment No. 3 to
the proposed rule change prior to the thirtieth day after the date of
publication of the notice thereof in the Federal Register.
Specifically, Amendment No. 3 clarifies the Exchange's proposal by
indicating that the proposed rule change does not alter the aggregation
principles contained in PHLX Rule 1001. In addition, Amendment No. 3
provides that the position and exercise limits for options on the
Italian lira and the Spanish peseta will continue to be 100,000
contracts. This clarification was necessary because at the time the
proposal was originally submitted the PHLX did not have approval to
trade those FCOs. In addition, the Commission believes that the 100,000
contract limit for options on the Italian lira and the Spanish peseta
should remain unchanged at this time because the PHLX trades only
customized options on those currencies and the market for those
currencies may not be as deep and liquid as the market for other FCOs
traded by the PHLX. Based on the above, the Commission finds good cause
to accelerate approval of Amendment No. 3.
Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 3. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 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 available for inspection and
copying at the Commission's Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to the file
number in the caption above and should be submitted by February 8,
1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-PHLX-95-13), as amended, is
approved.
\26\ 15 U.S.C. Sec. 78s(b)(2) (1982).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
\27\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-1471 Filed 1-26-96; 8:45 am]
BILLING CODE 8010-01-M
