[Federal Register Volume 61, Number 192 (Wednesday, October 2, 1996)]
[Notices]
[Pages 51479-51481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25154]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37718; File No. SR-Phlx-96-13]
Self-Regulatory Organizations; Proposed Rule Changes;
Philadelphia Stock Exchange, Inc.
September 24, 1996.
Self-Regulatory Organizations; Philadelphia Stock Exchange,
Inc.; Order
[[Page 51480]]
Approving Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval of Amendment No. 1 Thereto Relating to
Trading Hours and Expiration Times for Customized Foreign Currency
Options.
On May 7, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to: (1) Adjust the time that all
customized FCOs cease trading on expiration day from 9:00 a.m. and 2:30
p.m. until 8:00 a.m. (all time references are to eastern standard
time); (2) adopt a uniform expiration time for all customized FCOs of
10:15 a.m. (instead of 11:59 p.m.); and (3) make all customized FCOs
subject to pro-rata assignment.
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\1\ 15 U.S.C. 78s(b)(1) (1988 & Supp. V 1993).
\2\ 17 CFR 240.19b-4 (1994).
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Notice of the proposed rule change was published for comment and
appeared in the Federal Register on June 18, 1996.\3\ No comments were
received on the proposal. On July 15, 1996, the Phlx submitted
Amendment No. 1 (``Amendment No. 1'') to the filing.\4\ This order
approves the proposal, as amended.
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\3\ See Securities Exchange Act Release No. 37287 (June 7,
1996), 61 FR 30932.
\4\ See Letter from Michele R. Weisbaum, Phlx, to Stephen Youhn,
SEC, dated July 15, 1996. Amendment No. 1 codifies a provision
relating to pro-rata assignment of customized foreign currently
options.
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I. Description of the Proposal
The Exchange has two types of customized FCOs: custom-dated FCOs
and non-custom dated FCOs. Both types of these customized FCOs,
however, have different expiration times and procedures and trading
hours. Custom-dated FCOs (which expire on any trading day except a
regular mid-month or end-of-month expiration) currently cease trading
at 9:00 a.m., expire at 10:15 a.m. on their expiration date, and are
subject to a pro-rata assignment process.
Non-custom dated FCOs do not have a custom date (i.e., mid-month or
end-of-month expiration date,\5\ they cease trading at 2:30 p.m.,
expire at 11:59 p.m., and are subject to random assignment. The
Exchange proposes to change this scheme to correspond to that of custom
dated FCOs. Accordingly, Phlx proposes to alter the expiration times
for non-custom dated FCOs so that they cease trading at 8:00 a.m.,\6\
expire at 10:15 a.m. on their expiration date, and are subject to pro-
rata assignment. As a result, all customized FCOs (i.e., custom-dated
and non-custom dated) will have the same expiration process regardless
of when they expire.
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\5\ Non-custom dated FCOs expire on the same day as standardized
FCO expiration dates. An example of a non-custom dated FCO would be
an FCO which has a custom strike price or is quoted as an inverse
option.
\6\ Although custom-dated FCOs currently cease trading at 9:00
a.m., the Phlx, as discussed below, proposes to amend this time such
that all customized FCOs cease trading at 8:00 a.m.
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According to Phlx, customized FCOs are mainly traded by
institutional customers who often buy the options as a hedge against
over-the-counter contracts. Because the over-the-counter options
typically expire at 10:00 a.m., these customers cannot effectively
hedge their risk with customized FCOs unless they know their assignment
exposure at the same time. Thus, custom dated options have been a very
useful trading vehicle for the institutional market due to their 10:15
a.m. expiration and pro-rata exercise notification at 10:00 a.m. Non-
custom dated FCOs, however, have not been as useful for offsetting
purposes since customers do not know their assignment exposure until
the following day. Therefore, the Exchange believes that by having all
customized FCOs expire at 10:15 a.m., and by implementing a pro-rata
exercise regime, it will add liquidity to the market and encourage
institutions to take advantage of all types of exchange traded FCOs.
Furthermore, the Phlx believes that by revising the expiration times
for non-custom dated FCOs, it will increase the volume for this type of
customized FCO and thereby reduce the amount of paperwork at
expiration.
Second, in order to facilitate back office processing, the Exchange
proposes to extend by one hour the amount of time between the period
when an FCO ceases trading and expiration. Accordingly, Phlx proposes
to have all customized FCOs cease trading at 8:00 a.m. (rather than at
9:00 a.m.) on the day of expiration. Presently, member firms only have
one hour (between 9:00 a.m. and 10:00 a.m.) to prepare and accept
exercise instructions for custom-dated FCOs and submit them to the
Options Clearing Corporation (``OCC''), which then processes and
disseminates a preliminary indication of the percent of contracts
exercised for each series. The contracts then expire at 10:15 a.m. and
a pro-rata assignment process is used. By ceasing trading one hour
earlier (8:00 a.m.), the firms would double the amount of time in which
they have to process these instructions.
The Exchange proposes to implement these changes to the customized
FCOs as follows: first, the portion of the rule filing which changes
the time that custom-dated FCOs cease trading to 8:00 a.m. will be
implemented immediately upon approval of this filling. Second, Phlx
proposes to implement the changes to the non-custom dated FCOs (i.e.,
cease trading at 8:00 a.m., expiration at 10:115 a.m., and switch to
pro-rata assignment) upon subsequent Commission approval of a
corresponding OCC filing (``corresponding OCC filing'').\7\ However, if
open interest exists in any series of non-custom dated FCOs at the time
of approval of the corresponding OCC filing, these series will be
exempted from the proposed new procedures and will continue to cease
trading at 2:30 p.m., expire at 11:59 p.m., and be subject to random
assignment.\8\ This exemption will be noted in Phlx Rule
1000(b)(21)(iv) and will be publicized in numerous memoranda to the
membership.\9\
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\7\ The OCC filing, which is expected to be filed in October
1996, will, among other things, propose changes in OCC rules to
accommodate assignment procedures from random to pro-rata assignment
for non-custom dated FCOs.
\8\ Telephone conversation between Michele R. Weisbaum, Phlx,
and Stephen Youhn, SEC on August 12, 1996.
\9\ This transitional process will be similar to the one used
when the Exchange changed the expiration from the Saturday preceding
the third Wednesday of the expiration month to the Friday preceding
the third Wednesday. See Securities Exchange Act Release No. 32452
(July 13, 1993).
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II. Discussion
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) in that the proposal is
designed to foster just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market, and
protect investors and the public interest.
Phlx proposes to move the cease trading time for custom-dated FCOs
back one hour to 8:00 a.m. By extending the amount of time in which
member firms have to process exercise instructions by one hour, the
Commission believes that the clearing and settlement process relating
to the exercise and assignment of FCOs should benefit and operate in a
more efficient manner. Furthermore, upon Commission approval of the
corresponding OCC filing, as discussed above, non-custom dated FCOs
will
[[Page 51481]]
have their cease trading and expiration times moved to 8:00 a.m. and
10:15 a.m., respectively, resulting in uniform tracing cut-off times
and expirations for all customized FCOs. The Commission believes that
these changes should serve to enhance liquidity in the FCO market and
reduce the possibility of investor confusion creased by disparate
trading cut-off times and expirations.
In addition, by switching the assignment methodology for non-custom
dated FCOs from random to pro-rata assignment, the Commission believes
that writers of non-custom dated FCOs will be able to more quickly
gauge their exercise exposure. The Commission notes that OCC provides
preliminary notification to members shortly before expiration as to the
total amount of exercised contracts for each FCO series. Despite this
notification, however, with random assignment, shorts do not know until
the next day whether they have been assigned. Pro-rata assignment
allows members to ascertain their exercise exposure in a more expedient
manner. Accordingly, the Commission believes that pro-rata assignment
may help increase liquidity in the FCO market and reduce the
possibility of undue risk to investors. Also, this change will result
in all customized FCOs having pro-rata assignment, which should also
reduce the possibility of investor confusion created by disparate
assignment procedures.
As discussed above, the Commission notes that the changes to the
features of the non-custom dated FCOs will create uniformity for all
customized FCOs (i.e., 8:00 a.m. cease trading time, 10:15 a.m.
expiration, and pro-rata assignment). These changes, however, will
become effective only upon Commission approval of the corresponding OCC
filing needed to accommodate the Phlx changes \10\ and apply only to
new series of non-custom dated FCOs opened after that date. Outstanding
series of non-custom dated FCOs at the time of OCC approval will be
``grandfathered'' (i.e., they will continue to cease trading at 2:30
p.m., expire at 11:59 p.m., and be subject to random assignment). Prior
to implementation of these changes, Phlx will issue a circular to
members that will clarify which series of FCOs will be affected by the
proposal. The Commission believes this should ensure investors will be
adequately apprised of these changes and the affected series.
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\10\ See supra note 7.
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In summary, the Commission believes the proposed changes will be
implemented in a fair manner and will not result in changing the terms
of outstanding contracts. Moreover, the Commission believes the
proposal will foster investor protection and facilitate transactions in
securities consistent with Section 6(b)(5) of the Act by achieving
uniformity between the different types of customized FCOs. The
Commission also believes the proposal may help to reduce the confusion
attendant to disparate expiration times and assignment procedures for
customized FCOs.
The Commission finds good cause for approving Amendment No. 1 to
the proposal prior to the thirtieth day after the date of publication
of notice thereof in the Federal Register. The Commission notes that
the Amendment simply codifies a rule change that was previously
discussed in the original proposal. As such, the Amendment does not
raise any new or unique regulatory issues. Accordingly, the Commission
believes, consistent with Section 6(b)(5) of the Act, that good cause
exists to approve Amendment No. 1 to the proposal on an accelerated
basis.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1. 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 available for inspection and
copying in the Commission's Public Reference Section, 450 Fifth Street,
NW., Washington, DC. 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 SR-Phlx-96-13 and should be submitted by October 23, 1996.
It therefore is ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-Phlx-96-13) is approved, as
amended. That portion of the rule filing which amends the cease trading
and expiration times, as well as the assignment methodology for non-
custom dated FCOs, is approved contingent upon subsequent Commission
approval of a corresponding OCC filing.
\11\ 15 U.S.C. 78s(b)(2) (1988).
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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) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-25154 Filed 10-1-96; 8:45 am]
BILLING CODE 8010-01-M
