[Federal Register Volume 64, Number 218 (Friday, November 12, 1999)]
[Notices]
[Pages 61682-61685]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29599]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42093; International Series Release No. 1209; File No.
SR-Phlx-99-30]
Self-Regulatory Organizations; Notice of Filing of the Proposed
Rule Change and Order Granting Partial Accelerated Approval of
Amendment No. 1 to the Proposed Rule Change by the Philadelphia Stock
Exchange, Inc. Relating to Non-Customized Cross-Rate Foreign Currency
Options Margin Levels
November 3, 1999.
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 August 5, 1999, the Philadelphia Stock Exchange, Inc. (``Phlx'' and
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Item I, II, and III below which Items have been prepared by the
Exchange. On October 26, 1999, the Exchange filed Amendment 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
and to grant partial accelerated approval to permit the continued use
of the existing four percent add-on margin for non-customized Cross-
Rate FCOs until February 4, 2000.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange requested accelerated
approval from the Commission to temporarily extend the 4% add-on
margin for all non-customized cross-rate foreign currency options
until February 4, 2000; provided statistical data to substantiate
the proposed rule change; and made substantive rule changes to the
proposed rule text. See Letter from Nandita Yagnik, Counsel, Phlx,
to Hong-anh Tran, Attorney, Division of Market Regulation
(``Division''), Commission, dated October 25, 1999 (``Amendment No.
1'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposed to amend Phlx Rule 722(d) to determine the
add-on margin levels for non-customized cross-rate foreign currency
options (``Cross-Rate FOCs'') using the methodology outlined in
Commentary .16 to that Rule, in lieu of the fixed four percent rate
that the Exchange currently uses. In the interim, the Exchange requests
that the Commission approve, on an accelerated basis, the continued use
of the existing four percent add-on margin for non-customized Cross-
Rate FCOs until February 4, 2000.\4\
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\4\ SeeAmendment No. 1, supra note 3. Non-customized options
carry specific contract terms for features such as contract size,
strike price intervals, expiration date, price quoting and premium
settlement.
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The text of the proposed rule change follows. Proposed new language
is italicized; proposed deletions are in [brackets].
Margin Accounts
Rule 722 (a)-(c)--No change.
(d) 1-2--No change.
3. Short Positions--Listed Options and Currency, Currency Index
or Stock Index Warrants. Subject to the exceptions set forth below,
the margin on any put or call option listed or traded on a
registered national securities exchange or association and issued by
a registered clearing corporation or any currency warrant, currency
index warrant or stock index warrant which is issued, guaranteed or
carried ``short'' in a customer's account shall be 100% of the
current market value of the option or warrant plus the percentage of
the current market value of the underlying security, foreign
currency or index specified in column II below.
Notwithstanding the margin required below, the minimum margin on
any put or call or any warrant issued, guaranteed or carried
``short'' in a customer's account may be reduced by any ``out-of-
the-money-amount'' (as defined below), but shall not be less than
100% of the current market value of the option or warrant plus the
percentage of the current market value of the underlying security,
foreign currency or index specified in column III below with the
exception that the minimum margin required on each such put option
contract shall not be less than the current option market value plus
the minimum percentage set forth in column III of the option's
aggregate exercise price amount.
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II Initial and/
or maintenance III Minimum
I Type of option margin margin IV Underlying component value
required required(percent)
(percent)
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(1) Stock................................ 20 10 The equivalent number of shares
at current market prices.
(2) Industry Index Stock Group........... 20 10 The product of the current index
group value and the applicable
index multiplier.
(a) Super Cap Index...................... 20 10 The product of the current index
group value and the applicable
index multiplier.
(3) Broad Index stock group.............. 15 10 The product of the current index
group value and the applicable
index multiplier.
(4) Foreign Currencies................... 1 \3/4\ The product of Units per foreign
currency contract and the
closing spot price.
[[Page 61683]]
(5) Cross-Rate........................... 2 [4%] \3/4\ The product of Units per cross-
rate contract and the closing
spot price.
(6) Tier I Customized Cross-rate currency 4 \3/4\ The product of Units per cross-
options. rate contract and the closing
spot price.
(7) Tier II Customized Cross-rate 6 \3/4\ The product of Units per cross-
currency options. rate contract and the closing
spot price.
(8) Tier III Customized Cross-rate 7 \3/4\ The product of Units per cross-
currency options. rate contract and the closing
spot price.
(9) Tier IV Customized Cross-rate 17 \3/4\ The product of Units per cross-
currency options. rate contract and the closing
spot price.
(10) Broad Stock Index Warrant........... 15 10 The stock index group value.
(11) Industry Stock Index Warrant........ 20 10 The stock index group value.
(12) Currency Warrant.................... ............... ................. The product of units of
underlying currency per warrant
and the closing spot price for
each of the currencies below.
Australian dollar........................ 4 \3/4\ .................................
British pound............................ 4 \3/4\ .................................
Canadian dollar.......................... 4 \3/4\ .................................
German mark.............................. 4 \3/4\ .................................
ECU...................................... 4 \3/4\ .................................
French franc............................. 4 \3/4\ .................................
Japanese yen............................. 4 3 \3/4\ .................................
Swiss franc.............................. 4 \3/4\ .................................
(13) Currency Index Warrant.............. ** ** The currency index group value.
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1 The margin requirement for foreign currency options will be determined pursuant to Commentary .16 of this Rule
722.
2 The margin requirement for non-customized cross-rate foreign currency options will be determined pursuant to
Commentary .16 of this Rule 722.
3 Currency index warrant margin will be determined on a case-by-case basis as approved by the Securities and
Exchange Commission.
For purposes of this sub-section (d)(3), ``out-of-the-money
amounts'' are determined as follows:
Option Issue--no change.
4.5--No change.
(e)--(i) No change.
Commentary .01--15 No change.
Commentary .16:
.16--The margin requirement for any foreign currency put or call
option listed or traded on the Exchange and issued by a registered
clearing corporation which is issued, guaranteed or carried
``short'' in a customer's account, [except for cross-rate currency
options,] shall be the amount provided in paragraph (d)(3) of this
Rule 722 and shall be calculated as follows:
(a) The Exchange will review five day price movements comparing
base currency against the underlying currency over the most recent
three year period for each foreign currency pair underlying options
traded on the Exchange and will set a margin level which would have
covered the price changes over the review period at least 97.5% of
the time (``confidence level'').
(b) Subsequent reviews of five day price changes over the most
recent three year period will be performed quarterly on the 15th of
January, April, July and October of each year.
(c) If the results of subsequent reviews show that the
confidence level for any currency has fallen below 97%, the Exchange
will increase the margin requirement for that currency up to a 98%
confidence level. If the results show a confidence level between 97%
and 97.5%, the currency will be monitored monthly until the
confidence level exceeds 97.5% for two consecutive months. If the
results of a monthly review show that the confidence level has
fallen below 97%, the margin requirement will be increased to a 98%
confidence level. If the results of any review show that the
confidence level has exceeded 98.5%, the margin level would be
reduced to a level which would provide a 98% confidence level.
(d) The Exchange will also review each currency pair for large
price movements outside the margin level (``extreme outlier test'').
If the results of any review show a price movement, either positive
or negative, of greater than two times the current margin level, the
margin requirement for that currency pair will be increased to a
confidence level of 99%.
(e) Pursuant to paragraph (i)(8) of this Rule 722, the Exchange
may also conduct reviews of currency margin levels at any time that
market conditions warrant.
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 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 V below. The Exchange 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
In 1991, the Commission approved the Exchange's proposal to list
and trade three non-customized Cross-Rate FCOs--German mark/Japanese
yen, British pound/German mark and British pound/Japanese yen
options.\5\ The Commission's 1991 order approved the proposed four
percent add-on margin level for the Cross-Rate FCOs for a one-year
period only, because FCOs were new products and the Commission was
concerned that the volatility in the underlying currencies could change
significantly. The Commission also stated that the Exchange should
further analyze the add-on margin adequacy and, within nine months,
submit the analysis along with a proposed rule change to retain the
margin level or establish a new level.
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\5\ See Securities Exchange Act Release No. 29919 (November 7,
1991), 56 FR 58109 (November 5, 1991) (``1991 Order''). The Exchange
received approval to list the British pound/Japanese yen Cross-rate
FCO, but it has not listed such a contract.
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Based on the 1991 Order, the Exchange's customer margin
requirements for short positions for non-customized Cross-Rate FCOs
equaled the add-on margin of four percent of the
[[Page 61684]]
current market value of the underlying FCO contract, plus 100 percent
of the current market value of the option's premium, adjusted for
``out-of-the-money-amounts,'' \6\ not to be less than 100 percent of
the current options premium, plus a ``minimum add-on margin amount.''
\7\ The Exchange represented at the time that this add-on margin level
was sufficient to cover each cross-rate product's historical price
volatility over seven-day intervals (for the July 30, 1990 to July 30,
1991 time period) with a confidence level of at least 96 percent.
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\6\ For foreign currency put options, ``out-of-the-money-
amounts'' equal the aggregate exercise price of the option minus the
product of units per foreign currency contract and the closing spot
price. See Phlx Rule 722(d).
For foreign currency call options, ``out-of-the-money-amounts''
equal the product of units per foreign currency contract and the
closing spot price minus the aggregate exercise price of the option.
See id.
\7\ The minimum add-on margin on any call carried ``short'' in a
customer's account is equal to \3/4\% of the current market value of
the underlying FCO contract; the minimum add-on margin on any such
put option contract is equal to \3/4\% of the option's aggregate
exercise price amount. See id.
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Due to an oversight, the Exchange did not file the required
analysis of the adequacy of the add-on margin or the proposed rule
change within nine months of the 1991 Order. Following this discovery,
the Exchange filed, in 1999, a proposed rule change codifying the four
percent add-on margin level for a three-month period while it
considered a method of determining add-on margin, on a permanent basis,
for all Cross-Rate FCOs.\8\ The Commission's 1999 Order permitted the
Exchange to apply a four percent add-on margin level for all Cross-Rate
FCOs for a six-month period until November 4, 1999.
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\8\ See Securities Exchange Act Release No. 41365 (May 4, 1999),
64 FR 25946 (May 13, 1999) (SR-Phlx-99-12) (``1999 Order'').
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On August 5, 1999, the Exchange filed the current proposed rule
change to determine the add-on margin levels for Cross-Rate FCOs using
the methodology outlined in Commentary .16 to Phlx Rule 722, in lieu of
the four percent rate that the Exchange currently uses. To apply the
Commentary .16 methodology to each currency pair of a Cross-Rate FCO,
the Exchange proposes to review five day price movements of the base
currency relative to the underlying currency \9\ over the most recent
three year period and would set an add-on margin level sufficient to
cover those price changes at least 97.5 percent of the time. If
subsequent quarterly reviews show that the existing add-on margin level
for any cross-rate FCO currency pair provides a confidence level below
97 percent, the Exchange would increase the add-on margin requirement
for that currency pair to a level that would have covered those price
movements at a 98 percent confidence level. If a subsequent quarterly
review shows a confidence level between 97 percent and 97.5 percent,
the add-on margin level would remain the same but would be subject to
monthly follow-up reviews until the confidence level exceeds 97.5
percent for two consecutive months (then the Exchange would put it back
on the quarterly review cycle). If a monthly follow-up review showed
that the confidence level dropped below 97 percent, the Exchange
proposes to increase the add-on margin level to a 98 percent confidence
level. Generally, if any review shows that the confidence level exceeds
98.5 percent, the Exchange would reduce the add-on margin level to a 98
percent confidence level. To account for the possibility of
unexpectedly large price movements, if any review show that a Cross-
Rate FCO currency pair had a five-day price movement, either positive
or negative, greater than two times the existing add-on margin level,
the Exchange would set the add-on margin requirement for that currency
pair to a 99 percent confidence level (``Extreme Outlier Test'').
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\9\ The underlying currency is the currency in which a foreign
currency option settles. The base currency is the currency in which
premiums are quoted and paid.
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In addition to the routine reviews described above, the Exchange
would continue to have authority to impose a higher margin level at any
time, if market conditions so warrant.\10\
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\10\ See Phlx Rule 722(i)(8).
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Following the quarterly reviews described above and at any time
that a particular add-on margin level changes, the Exchange proposes to
distribute memoranda to FCO participants announcing the add-on margin
levels derived pursuant to the proposed methodology since the actual
add-on margin requirements for all Cross-Rate FCOs would no longer be
stated in Phlx Rule 722.
The Exchange subsequently filed on October 26, 1999 an amendment to
the proposed rule change requesting that the Commission approve the
extension of the use of a four percent add-on margin for all non-
customized Cross-Rate FCOs until February 4, 2000, to provide
additional time for the Commission to consider the proposed rule
change.\11\ The Exchange requests that the Commission approves the
interim extension of the existing four percent rate, on an accelerated
basis, to ensure that trading of these products may continue following
November 4, 1999, when the existing four percent add-on margin expires.
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\11\ See Amendment No. 1, supra note 3.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act \12\ in general, and in particular, with
Section 6(b)(5),\13\ in that it is designed to facilitate transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, as well as to
protect investors and the public interest by providing a margin level
which is directly related to the currency risk incurred by customers
trading these Cross-Rate FCO products. In particular, the Exchange
believes that the proposal is identical with the method of determining
margin calculation for non-customized foreign currency options where
the base currency is denominated in U.S. dollars (``non-customized
dollar-based FCOs''). The Exchange believes that this margin
methodology, coupled with the extreme outlier test, should ensure
adequate margin requirements for Cross-Rate FCOs.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change does not impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. 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.
III. 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:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
[[Page 61685]]
IV. Commission Findings and Order Granting Accelerated Approval of
the Temporary Extension of the Add-On Margin
The Exchange requested that the Commission approve the extension of
the four percent add-on margin for non-customized Cross-Rate FCOs until
February 4, 2000, prior to the thirtieth day after the publication of
the notice of this proposal in the Federal Register. The Exchange
requested this extension to ensure that trading of these products may
continue following November 4, 1999, when the existing four percent
add-on margin expires. The Commission finds that the Exchange's request
to extend the use of the four percent add-on margin for all non-
customized Cross-Rate FCOs until February 4, 2000 is consistent with
the requirements of Section 6 of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\14\
Specifically, the Commission finds that the proposal to temporarily
continue to use the four percent add-on margin for all non-customized
Cross-Rate FCOs is consistent with Section 6(b)(5) of the Act \15\
because it will facilitate transactions in securities, promote just and
equitable principles of trade, and protect investors and the public
interest. The Exchange has used the existing four percent add-on rate
since 1991 to trade Cross-Rate FCOs. The Exchange has recently provided
the commission statistical data that indicates that the existing four
percent margin has been adequate to cover five-day fluctuations for
both currently listed Cross-Rate FCO currency pairs over 97 percent of
the time over the past three years. This extension will also provide
the Commission with additional time to consider the proposed rule
change, while permitting the Exchange to trade these cross-rate FCOs
products following November 4, 1999. For these reasons, the Commission
finds good cause for approving the request for interim extension of the
existing four percent add-on margin prior to the thirtieth day after
the publication of notice thereof in the Federal Register.
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\14\ In approving the temporary extension of the add-on-margin,
the Commission has considered the rule's impact on efficiency,
competition and capita formation. 15 U.S.C. 78c(f).
\15\15 USC. 78f(b)(5).
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V. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with 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 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 Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Phix. All submissions should refer to File No. SR-Phix-99-30 and should
be submitted by December 3, 1999.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the continued use of the existing four percent add-on
margin for all non-customized Cross-Rate FCOs until February 4, 2000 is
hereby approved on an accelerated basis.\17\
\16\ 15 U.S.C. 78s(b)(2).
\17\ In approving the proposal, the Commission has considered
the rule's impact on efficiency, competition and capital formation.
15 U.S.C. 78c(f).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-29599 Filed 11-10-99; 8:45 am]
BILLING CODE 8010-01-M
