[Federal Register Volume 61, Number 197 (Wednesday, October 9, 1996)]
[Notices]
[Pages 52921-52925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25917]
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COMMODITY FUTURES TRADING COMMISSION
Petition of the Philadelphia Stock Exchange, Inc. for Exemptive
Relief To Permit United States Customers To Establish or Offset
Positions in Certain Foreign Currency Options on the Hong Kong Futures
Exchange Ltd. Through Registered Broker-Dealers
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed order and request for comment.
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SUMMARY: The Philadelphia Stock Exchange, Inc. (``PHLX'') has
petitioned the Commodity Futures Trading Commission (``Commission'' or
``CFTC'') for exemptive relief pursuant to Sections 4(c), 4c(b) and
4c(f) of the Commodity Exchange Act (``CEA'' or ``Act''),1 to
permit United States customers to establish or offset positions in PHLX
foreign currency options on the Hong Kong Futures Exchange Ltd.
(``HKFE'') through registered broker-dealers pursuant to regulation by
the Securities and Exchange Commission (``SEC'') under the federal
securities laws, and in accordance with Section 4c(f) of the Act. The
Commission seeks comment on the PHLX petition, as discussed more fully
below, and on any related issues. Copies of the PHLX petition are
available for inspection at the Office of the Secretariat or may be
obtained through the Office of the Secretariat by mail at the address
listed below or by telephoning (202) 418-5100.
\1\ 7 U.S.C. 1 et seq. (1994).
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DATES: Comments must be received on or before November 8, 1996.
ADDRESSES: Comments should be submitted to Jean A. Webb, Secretary,
Commodity Futures Trading Commission, 1155 21st Street, N.W.,
Washington, D.C. 20581. In addition, comments may be sent by facsimile
transmission to facsimile number (202) 418-5521, or by electronic mail
to secretary@cftc.gov. Reference should be made to the Petition of the
Philadelphia Stock Exchange, Inc.
FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief
Counsel or Tina Paraskevas Shea, Attorney/Advisor, Division of Trading
and Markets, Commodity Futures Trading Commission, 1155 21st Street,
N.W., Washington, D.C. 20581. Telephone number: (202) 418-5450.
Facsimile number: (202) 418-5536. Electronic mail: tm@cftc.gov
[[Page 52922]]
SUPPLEMENTARY INFORMATION
I. Background
PHLX is a national securities exchange which has been registered
with the SEC since 1934.2 Equity securities, equity and index
options, and foreign currency options are listed for trading on the
PHLX. PHLX initially commenced trading foreign currency options on
December 10, 1982. Foreign currency options currently listed on the
PHLX include dollar-denominated options on the British pound, Canadian
dollar, Japanese yen, German mark, Swiss franc, French franc, ECU and
Australian dollar.3 In 1991, PHLX received SEC approval to trade
three cross-rate currency options where such options have no U.S.
dollar component and premiums and exercise prices are denominated in
currencies other than the U.S. dollar.4 In 1994, PHLX received
approval to list Cash/Spot foreign currency options that allow holders
to receive U.S. dollars representing the difference between the current
foreign exchange spot price and the exercise price of the particular
contract.5 PHLX also has received approval to introduce customized
currency options 6 which allow users to customize most aspects of
a currency option trade, including: exercise price, currency
pairs,7 premium quotation (either units of currency or percent of
underlying value), currency of premium payment, and expiration
dates.8 In general, auction trading of PHLX's currency options
occurs between 2:30 a.m. Eastern Time (``ET'') and 2:30 p.m. ET each
business day.9
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\2\ Facts relevant to this petition are drawn from PHLX's
petition dated August 15, 1996 (``the Petition''), filed with the
Commission on August 16, 1996. As noted above, copies of the PHLX
petition may be obtained through the Commission's Office of the
Secretariat.
\3\ See Securities Exchange Act Release Nos. 19133 (October 14,
1982), 47 FR 46946 (SEC approval of SR-PHLX-81-4); 10822 (April 4,
1984), 49 FR 14611 (French franc); 22853 (February 3, 1986), 51 FR
5129 (ECU); and 23945 (December 30, 1986), 52 FR 633 (Australian
dollar).
In evaluating proposals of self-regulatory organizations
(``SROs'') to list and trade products on a national securities
exchange, the SEC makes a determination that the proposed rule
change is consistent with the requirements of the Securities
Exchange Act of 1934 (the ``1934 Act'') and the SEC rules applicable
thereunder. Under Section 6(b)(5) of the 1934 Act, the SEC
predicates approval of exchange trading for new products upon a
determination that the trading of such product is in the public
interest. The SEC also considers such factors as fraud and market
manipulation potential, economic benefit, just and equitable
principles of trade, customer protections, market surveillance,
adequacy of margin requirements, market impact and the maintenance
of a fair and orderly market. See, e.g., Securities Exchange Act
Release No. 36505 (November 22, 1995), 60 FR 61277 (SEC Order to
approve the listing and trading of Cash Spot options on the Japanese
yen).
\4\ See Securities Exchange Act Release No. 29919 (November 7,
1991), 56 FR 58109.
\5\ See Securities Exchange Act Release Nos. 33732 (March 8,
1994), 59 FR 12023 (Cash/Spot options on German mark); 36505
(November 22, 1995), 60 FR 61277 (Cash/Spot options on Japanese
yen).
\6\ See Securities Exchange Act Release No. 34925 (November 1,
1994), 59 FR 55720.
\7\ See Securities Exchange Act Release No. 36255 (September 20,
1995), 60 FR 50229 (Italian lira and Spanish peseta became eligible
for customized pairs).
\8\ See Securities Exchange Act Release No. 36468 (November 8,
1995), 60 FR 57613 (customized expiration dates authorized).
\9\ See Securities Exchange Act Release No. 34898 (October 26,
1994), 59 FR 54651 (establishing these trading hours for most
currency options except the Canadian dollar, which commences trading
at 7:00 a.m. ET each business day). Historically, PHLX has had even
more extensive trading hours. Cf. Securities Exchange Act Release
No. 24652 (June 29, 1987), 52 FR 25680 (trading hours from 7:00 p.m.
ET to 2:30 p.m. ET the following day). The latter extended segment
was added to accommodate market interest in the Far East, but
subsequently was suspended as a result of relatively low transaction
volume. See Securities Exchange Act Release No. 33246 (November 24,
1993), 58 FR 63421.
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PHLX is seeking exemptive relief in order to permit U.S. customers
to establish positions in PHLX foreign currency options on HKFE and
offset such positions on PHLX, or to establish positions in PHLX
foreign currency options on PHLX and offset them on HKFE through U.S.
registered broker-dealers. PHLX seeks exemptive relief to assure that:
(1) HKFE cross-listed foreign currency options can be made fungible and
linked with PHLX foreign currency options pursuant to SEC oversight and
the federal securities laws, and (2) the PHLX and HKFE linked foreign
currency options will not be subject to inconsistent or duplicative
regulation, taking cognizance of the policies inherent in Section 4c(f)
of the Act.10 PHLX contends that the requested relief is
consistent with Section 4c(f) of the CEA, which provides that nothing
in the CEA ``shall be deemed to govern or in any way be applicable to
any transaction in an option on foreign currency traded on a national
securities exchange.'' 11 PHLX requests that the Commission issue
an exemptive order pursuant to Section 4(c) and Section 4c(b) of the
CEA to permit the offer and sale in the United States of PHLX foreign
currency options that are cleared and settled for all purposes in the
U.S. to be cross-listed for trading on HKFE in accordance with
applicable federal securities laws and regulations.12
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\10\ 7 U.S.C. 6c(f) (1994). The Petition does not assert that
the HKFE is a national securities exchange. Rather, it makes the
argument that the request is not inconsistent with Congressional
policy to permit foreign currency options to trade on either a
national securities exchange or on a futures exchange. Similarly,
the Commission is not implying that the HKFE is a national
securities exchange.
\11\ Id.
\12\ 7 U.S.C. 6(c) and 6c(b) (1994), respectively. If such
exemptive relief were issued, the Commission would limit the scope
of the relief to PHLX foreign currency options that are cross-listed
for trading on HKFE pursuant to agreement between PHLX and HKFE, in
accordance with SEC regulation, as represented to the Commission
pursuant to PHLX's Petition. All other foreign futures and options
contracts that HKFE would seek to offer or sell in the United States
would remain subject to the CEA and the Commission's regulations,
including the Commission's Part 30 rules (17 C.F.R. 30 (1996)),
which regulate the offer and sale in the United States of foreign
futures and options contracts.
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Sections 4(c) and 4c(b) of the CEA vest the Commission with the
authority to exempt certain transactions from regulation under the
CEA.13 Section 4(c) of the CEA provides, in relevant part, that
the Commission may, ``by rule, regulation, or order, after notice and
opportunity for hearing * * * exempt any agreement, contract, or
transaction * * * that is otherwise subject to'' the CEA and the
Commission's regulations from all provisions of the CEA except Section
2(a)(1)(B).14 Such exemption may be granted upon a determination
by the Commission that: (1) The exemption is in the public interest;
15 (2) the requirements from which exemption is sought should not
be applied to the agreement, contract, or transaction at issue and the
exemption would be consistent with the purposes of the
[[Page 52923]]
CEA; (3) the agreement, contract or transaction will be entered into
solely between ``appropriate persons;'' 16 and (4) the agreement,
contract or transaction will not have a material adverse effect upon
the ability of the Commission or any contract market to discharge its
regulatory or self-regulatory duties under the CEA.17
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\13\ 7 U.S.C. 6(c) and 6c(b) (1994).
\14\ 7 U.S.C. 6(c)(1) (1994). Section 4(c)(1) provides: In order
to promote responsible economic or financial innovation and fair
competition, the Commission by rule, regulation, or order, after
notice and opportunity for hearing, may (on its own initiative or on
application of any person, including any board of trade designated
as a contract market for transactions for future delivery in any
commodity under section 5 of this Act) exempt any agreement,
contract or transaction (or class thereof) that is otherwise subject
to subsection (a) [the exchange-trading requirement] (including any
person or class of persons offering, entering into, rendering advice
or rendering other services with respect to, the agreement,
contract, or transaction), either unconditionally or on stated terms
or conditions or for stated periods and either retroactively or
prospectively, or both, from any of the requirements of subsection
(a), or from any other provision of this Act (except section
2(a)(1)(B)), if the Commission determines that the exemption would
be consistent with the public interest.
\15\ The Conference Committee Report on the legislation enacting
Section 4(c) (the ``Conference Report'') states that the ``public
interest'' includes ``the national public interests noted in the
[CEA], the prevention of fraud and the preservation of the financial
integrity of markets, as well as the promotion of responsible
economic or financial innovation and fair competition.'' H.R. Rep.
No. 978, 102d Cong., 2d Sess. 78 (1992). In making a determination
with respect to the public interest, the Conferees provided that the
Commission should ``assess the impact of a proposed exemption on the
maintenance of the integrity and soundness of markets and market
participants'' and that an exemption should not be denied ``solely
on grounds that it may compete with or draw market share away from
the existing market.'' Id. at 78-79.
\16\ Section 4(c)(3)(A)-(J) defines ``appropriate persons'' to
include generally a bank or trust company, a savings association, an
insurance company, a registered investment company, a commodity pool
operated by a Commission registrant, certain business entities and
employee benefit plans, governmental entities, registered broker-
dealers, and registered futures commission merchants, floor brokers
and floor traders. 7 U.S.C. 6(c)(3)(A)-(J).
Section 4(c)(3)(K), which was added by the Congressional
Committee Conferees to the final statutory provision, provides the
Commission with flexibility in granting exemptions for persons or
entities not expressly enumerated. Specifically, that section
provides that ``appropriate persons'' include ``persons that the
Commission determines to be appropriate in light of their financial
or other qualifications, or the applicability of appropriate
regulatory protections.'' 7 U.S.C. 6(c)(3)(k)(1994). The language of
this provision indicates that persons permitted to engage in
transactions that are otherwise regulated by a governmental agency
may qualify as ``appropriate persons'' in specific circumstances
where the Commission's regulatory concerns are satisfied. In the
context of determining persons qualifying for the so-called Part 34
``hybrid exemption,'' which provides for an exemption from CFTC
regulations for certain hybrid instruments, the Commission stated
that ``appropriate persons'' eligible for the hybrid exemption would
include ``person[s] permitted by applicable securities or banking
requirements to purchase or enter into the security [component] of
the hybrid instrument * * *.'' 58 FR 5580 (January 22, 1993)(release
adopting final rules regarding the regulation of hybrid
instruments).
\17\ 7 U.S.C. 6(c)(2) (1994).
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Section 4c(b) of the CEA grants the Commission plenary authority to
regulate commodity options in the United States. It prohibits persons
from entering into any transaction involving any commodity regulated
under the CEA which is of the character of or is commonly known ``as an
option * * * contrary to any rule, regulation or order of the
Commission * * *.'' 18 Section 4c(b) vests the Commission with the
authority to implement orders, rules or regulations to regulate, among
other instruments, option transactions, upon notice and opportunity for
hearing.
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\18\ 7 U.S.C. 6c(b)(1994). Section 4c(b) provides, in relevant
part: No person shall offer to enter into, enter into or confirm the
execution of, any transaction involving any commodity regulated
under this Act which is of the character of, or is commonly known to
the trade as, an ``option'' [or] ``privilege'', * * * contrary to
any rule, regulation, or order of the Commission prohibiting any
such transaction or allowing any such transaction under such terms
and conditions as the Commission shall prescribe. Any such order,
rule, or regulation may be made only after notice and opportunity
for hearing, and the Commission may set different terms and
conditions for different markets.
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The PHLX petition is summarized below.
II. Description of PHLX Proposal
A. Licensing Agreement With HKFE
PHLX and HKFE have entered into a licensing agreement (the
``Linkage'') authorizing HKFE to trade foreign currency options during
Asian business hours in the same manner as PHLX foreign currency
options are traded on PHLX. The Linkage provides for cross-listing of
PHLX foreign currency options, permitting U.S. customers and non-U.S.
customers to establish positions in PHLX foreign currency options on
HKFE and offset them on PHLX or to establish positions in PHLX foreign
currency options on PHLX and offset them on HKFE. The Linkage, by
permitting PHLX foreign currency options to be traded on HKFE during
Asian business hours, effectively extends the trading hours of the
currency option contracts traded on PHLX, a national securities
exchange. The proposed Linkage would be applicable to all foreign
currency option contracts for which PHLX has received SEC approval.
Incorporated in 1976, HKFE is licensed as an exchange company by
the Governor in Council of Hong Kong and is governed by a board of
directors consisting of both HKFE members and non-members from the Hong
Kong financial and business community. In addition, the operations of
the HKFE and the HKFE Clearing Corporation Limited (``HCC''), HKFE's
subsidiary, are under the jurisdiction of and are regulated by Hong
Kong's independent financial regulatory body, the Securities and
Futures Commission (``SFC'').
Linkages between exchanges in different time zones have been used
as a means of lengthening trading hours, broadening distribution of
products, and enhancing volume and open interest. PHLX believes that
the proposed Linkage would stimulate trading interest in PHLX's foreign
currency options in the Far East. It does not view its agreement with
HKFE as precluding similar agreements between HKFE and U.S. futures
exchanges with respect to foreign currency options such that a similar
arrangement potentially could permit futures commission merchants
(``FCMs'') to offset currency options undertaken on a futures exchange
pursuant to a similar linkage agreement with HKFE if futures exchanges
so desired, maintaining the symmetry now contained in Section 4c(f)
which permits such options to be traded on both domestic futures and
securities options markets.
B. The Options Clearing Corporation/Clearance and Settlement
The Options Clearing Corporation (``OCC''), owned equally by the
five national securities exchanges that list options, functions as the
issuer and clearing organization for all options traded on national
securities exchanges, including the foreign currency options traded on
PHLX. OCC is regulated as a clearing agency by the SEC under the 1934
Act. OCC will issue, clear and settle PHLX foreign currency options
that are cross-listed on HKFE. PHLX, HKFE, and OCC expect to enter into
an International Market Agreement (the ``IMA''), which will govern the
trading and clearance of transactions in such options. The IMA would be
applicable only to PHLX foreign currency options cross-listed on HKFE
and would address issues relevant to the trading and clearance of the
PHLX contracts, including ``issuance, disclosure, expiration months,
exercise prices, units of trading, margin, comparison, clearing and
settlement of PHLX foreign currency options traded on HKFE, and the
respective rights and obligations of the parties with respect to such
options.'' 19
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\19\ Petition at p.5.
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OCC also anticipates the execution of an ``Associate Clearinghouse
Agreement'' with HCC or an affiliate of HKFE organized for the purpose
of acting as a clearing organization for the PHLX foreign currency
option contracts traded on HKFE, under which HCC or such affiliate will
act as an ``associate clearinghouse'' of OCC. The Associate
Clearinghouse Agreement will provide that HCC or the HCC affiliate will
be treated as an OCC clearing member, for purposes of clearing trades
in PHLX foreign currency options for HKFE members that are not clearing
members of OCC, whether such trades are effected on HKFE or (through
PHLX members) on PHLX.
C. Regulatory and SRO Oversight of Cross-Listed PHLX Foreign Currency
Options.
1. SEC regulation. Consistent with the CEA and the federal
securities laws, options on foreign currencies may be traded on a
designated contract market subject to the Commission's jurisdiction or
on a national securities exchange subject to SEC jurisdiction.20
Foreign currency options have been traded on PHLX subject to the
securities laws and the SEC regulatory protections since 1982. PHLX
states that, because the currency options it proposes to be traded on
HKFE would be cross-listed
[[Page 52924]]
PHLX foreign currency options, transactions in these options that are
effected on HKFE pursuant to the Linkage should in effect be subject to
the same regulatory structure in the United States as PHLX foreign
currency options.21 PHLX represents that the cross-listed options
will be registered under the Securities Act of 1933 for offer and sale
in the United States, and that ``such transactions will be subject to
the full panoply of regulation under the 1934 Act, including broker-
dealer registration and related requirements.'' 22
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\20\ Section 4c(f) of the CEA, 7 U.S.C. 6c(f) (1994).
\21\ Petition at p.7.
\22\ Petition at p.7. PHLX expects that PHLX foreign currency
options would be cross-listed for trading on the HKFE upon the
Commission's issuance of exemptive relief and following approval by
the SEC of conforming amendments to the rules of PHLX and the OCC in
order to provide for the Linkage.
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2. SRO oversight.
a. PHLX rules. The petition summarizes PHLX requirements relating
to account opening procedures, suitability, qualification of sales
persons, supervision of accounts, disclosure, advertisements, time-
stamping and reporting of orders, and dual trading. These rules govern
transactions in foreign currency options on PHLX. PHLX represents that
HKFE has agreed to adopt certain of the rules similar to PHLX's rules
and requirements to apply to cross-listed PHLX foreign currency options
and has further agreed to adopt no exchange rules that conflict with
PHLX's options rules.
As stated in the PHLX petition, PHLX rules require that a
customer's account be specifically approved for options trading before
any option transactions may be effected for that customer. Such
approval must be in writing, can be made only by a ``Registered Options
Principal,'' 23 and may occur only after the member firm
``exercise[s] due diligence to learn the essential facts as to the
customer and his investment objectives and financial situation.''
24 PHLX rules also require that a customer's account be
specifically approved for transactions in foreign currency, in writing,
by a ``Foreign Currency Options Principal,'' before transactions in
such options are effected. PHLX also has a customer suitability rule,
which prohibits a member firm from recommending any option transaction
to a customer unless the firm ``has reasonable grounds to believe that
the entire recommended transaction is not unsuitable'' for the
customer. Both the National Association of Securities Dealers, Inc. and
PHLX require that persons selling foreign currency options pass a
certification examination. SEC and PHLX rules prohibit brokers from
accepting a customer option order or approving a customer account for
trading of option contracts unless the customer has been provided with
an SEC-reviewed disclosure document specific to the particular type of
option order the customer seeks to enter.25 PHLX rules also
establish detailed standards regarding the content of advertisements,
sales literature, and other options-related communications and the
manner in which such communications may be presented to the public.
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\23\ A ``registered options principal'' must pass a proficiency
examination demonstrating knowledge of the SRO requirements
applicable to options transactions, including the rules of PHLX and
OCC, and also must demonstrate an understanding of options trading.
\24\ Petition at p.7.
\25\ SEC Rule 9b-1 provides that an options disclosure document
must include information delineating the mechanics of options
trading, options trading risks, the uses of options, transaction
costs, margin requirements, and relevant tax issues. 17 C.F.R.
240.9b-1 (1996).
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PHLX rules require member firms to establish written procedures to
provide for the ``diligent supervision'' of all customer option
accounts and all option orders in such accounts and maintain a special
supervisory structure for foreign currency options. PHLX requires that
all order tickets be time-stamped immediately upon execution, and floor
brokers and traders are required to report relevant information
regarding each option transaction. With the exception of specialists,
PHLX floor traders are prohibited from dual trading, that is, trading a
particular options class for their own account on the day of execution
of a customer order in the same options class.
b. Intermarket surveillance. PHLX and HKFE have executed an
Intermarket Surveillance Group Surveillance Sharing Agreement (the
``Surveillance Agreement'') providing for the exchange of surveillance
information as needed in order for each exchange to discharge its
respective surveillance responsibilities. This agreement tracks the
Intermarket Surveillance Group Surveillance Sharing Agreement to which
all U.S. securities, options and stock index futures exchanges
currently are parties. The Surveillance Agreement requires each
exchange to report all foreign currency options trading activity to the
other and grants each exchange access to information needed to
discharge its self-regulatory responsibilities. It provides that each
exchange must cooperate and use its best efforts to obtain requested
information when information is needed in the investigation of any
question or complaint regarding the propriety of any transaction or
series of transactions in foreign currency options or regarding any
other aspect of trading and/or transactions therein that might be
significant for rule enforcement purposes. The parties have agreed to
resolve in good faith any disagreements between them regarding any
requests for information or responses. The petition sets forth the
contingency plans in the event that HKFE denies a request for
assistance under the Surveillance Agreement and the denial is material
to PHLX's self-regulatory program. Minimum reporting requirements are
set forth in an addendum to the Surveillance Agreement.
D. Practical Concerns Prompting the Requested Relief
PHLX argues that ``the requested relief is necessary for U.S.
customers to derive the same benefits from the Linkage as foreign
customers.'' 26 PHLX notes that subjecting ``identical and
fungible'' foreign currency option contracts to two different
regulatory schemes would result in U.S. customers being required to
maintain accounts with two brokerage firms, a broker-dealer and an FCM,
to trade the same contract. Moreover, even if a customer transacted
through a dually registered entity, PHLX foreign currency options that
are established or offset on PHLX would be required to be held in a
separate account from PHLX foreign currency options that are
established or offset on HKFE. As a result, positions could not be
netted for margin or settlement purposes, a limitation that ``would
severely diminish the economic viability of the Linkage'' as,
effectively, the contracts would not be fungible, defeating one purpose
of the link.27 PHLX also notes that U.S. futures exchanges could
seek to enter into similar arrangements with HKFE or other overseas
exchanges to cross-list foreign currency options that have approval for
trading by the CFTC. PHLX argues that FCMs would not incur a
competitive disadvantage should the relief be granted; as they
currently may not offer and sell PHLX foreign currency options, the
requested relief would not alter the status quo.
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\26\ Petition at p.13.
\27\ Petition at p.13.
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E. Determinations Under Section 4(c) of the CEA
PHLX contends that an exemption under Section 4(c) of the CEA to
permit the offer and sale in the U.S. of PHLX foreign currency options
cross-listed for trading on HKFE would satisfy the
[[Page 52925]]
requirement of consistency with the public interest and the purposes of
the CEA because, according to PHLX, it would ``stimulate trading
interest in PHLX's foreign currency options,'' creating recognized
economic benefits.28 PHLX notes that it has provided a foreign
currency options market for more than a decade ``in accordance with the
securities laws and the SEC regulatory scheme without any
difficulties.'' 29 PHLX argues that the recognized economic
benefits of foreign currency options trading on PHLX, the contemplated
expansion of those benefits through the Linkage, and the applicability
of the SEC regulatory scheme, which provides protections comparable to
those of the CEA and Commission regulations that address the financial
integrity, fairness, and central marketplace issues cited by the
Commission in adopting its Part 36 rules, assure that the requested
relief is consistent with the public interest and the purposes of the
CEA.
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\28\ Petition at p.15.
\29\ Id.
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In addition, Section 4(c) requires that the Commission determine
that the requested exemption will not have a material adverse effect
upon the ability of the Commission or any contract market to discharge
its regulatory or self-regulatory duties. PHLX notes that the
Conference Report indicates that the Commission should consider
regulatory concerns such as ``market surveillance, financial integrity
of participants, protection of customers and trade practice
enforcement'' in making this determination.30 PHLX reasons that
the applicability of the SEC's comparable regulatory scheme to
transactions in PHLX foreign currency options in the U.S., including
those cross-listed for trading on HKFE, together with the regulatory
requirements imposed by the SFC and applicable Hong Kong laws and the
inter-market surveillance arrangement, will provide adequate customer
protections and market surveillance capabilities and therefore will not
have a material adverse impact on the ability of the Commission or any
contract market to discharge its regulatory or self-regulatory duties
under the CEA.
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\30\ H.R. Rep. No. 102-978, 102d Cong., 2d Sess. 78 (1992).
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Section 4(c) also requires that the agreement, contract or
transaction will be entered into solely between ``appropriate
persons.'' Appropriate persons include any persons the Commission
determines to be appropriate ``in light of their financial or other
qualifications, or the applicability of appropriate regulatory
protections.'' 31 PHLX reasons that the requested exemption for
PHLX foreign currency options cross-listed for trading on HKFE should
be available to all persons eligible to engage in such option
transactions under the SEC's regulatory framework, which limits such
trading to options qualified by the SEC in accordance with SEC approval
procedures 32or options customers determined to be suitable in
accordance with SEC and PHLX suitability requirements.33
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\31\ 7 U.S.C. 6(c)(3)(k)(1994).
\32\ See supra note 3.
\33\ See id. and Section II.C.2.a supra.
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III. Request for Comments
The Commission requests comments on any aspect of the Petition that
commenters believe may raise issues under the CEA or Commission
regulations. In particular, the Commission invites comments regarding:
(1) the appropriateness of addressing transactions as described herein
under the Commission's exemptive authority under Section 4(c) and/or
under the Commission's plenary authority under Section 4c(b); (2)
whether the proposed exemption is consistent with the standards set
forth in Section 4(c) of the CEA; (3) whether there is sufficient
authority under existing law for the SEC to exercise its regulatory and
supervisory authority over transactions effected pursuant to the
Linkage; (4) any material adverse effects that granting the PHLX
petition would have upon other securities exchanges, futures exchanges,
or Commission registrants, such as FCMs, from a competitive or other
perspective; (5) the type of risk assessment information that should be
available to the Commission regarding such transactions by FCM
affiliates; (6) whether the Commission should attach any conditions to
any exemptive relief that may be granted; and (7) any other issues
relevant to this petition.
Issued in Washington, DC, on October 2, 1996, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-25917 Filed 10-8-96; 8:45 am]
BILLING CODE 6351-01-P
