[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Notices]
[Pages 58124-58126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28619]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36473; International Series Release No. 884; File No.
SR-PHLX-95-62]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to the
Selective Quoting Facility for Foreign Currency Options
November 9, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on
September 18, 1995, the Philadelphia Stock Exchange, Inc. (``PHLX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Commentary .04 to PHLX Rule 1012, ``Series of Options Open for
Trading,'' and Floor Procedure Advice (``Advice'') F-18, ``FCO
Expiration Months and Strike Prices,'' establish the Selective Quoting
Facility (``SQF'') for foreign currency options (``FCOs''). The SQF, a
feature of the Exchange's Auto-Quote system, categorizes each FCO
series as either an ``update strike'' or a ``non-update strike.''
Update strikes, for which PHLX quotes must be made available for
continuous dissemination to the public throughout the trading day
include, at the minimum: (1) The four strike prices below and the four
strike prices above the underlying price for American-style options \1\
with expiration dates of the three nearest mid-month expirations and
the three nearest month-end expirations; and (2) any other European-
style \2\ or American-style series where there is open interest as of
the commencement of that date. In addition, update series may be
activated intra-day at the initiative of the PHLX or in response to a
request from either the respective specialist or from an FCO floor
official. The PHLX proposes to amend Exchange Rule 1012, Commentary .04
and Advice F-18 to (1) categorize series which maintain open interest
but have not traded within the previous five days as non-update
series;\3\ and (2) amend the definition of update series, which are set
at the commencement of each trading day, to include the 10, 20, 30, 40
and 50 delta \4\ strikes below and above the underlying price rather
than the four strike prices above and below the underlying price. The
proposal to amend the definition of update series to include the 10,
20, 30, 40, and 50 delta strikes below and above the underlying price
will not result in additional strike price intervals; rather, it will
identify the existing strike prices which will be classified as update
series.\5\
\1\ An American-style option can be exercised on any business
day prior to its expiration date and on its expiration date.
\2\ A European-style option can only be exercised during a
specified period before it expires.
\3\ For non-update series, continuous dissemination of Exchange
quotes to the public is not required. Although the proposal
classifies series which maintain open interest but have not traded
within the previous five trade days as non-update series, the
proposal also provides that such series must have one bid/ask quote
disseminated at the close of each trade day.
\4\ Delta is a measure of how an option premium changes in
relation to the price of the underlying instrument. For example, a
delta of 50 means that for every one point move in the spot price of
an underlying foreign currency, the option premium moves \1/2\.
\5\ Telephone conversation between Edith Hallahan, Special
Counsel, Regulatory Services, PHLX, and Yvonne Fraticelli, Attorney,
Options Branch, Division of Market Regulation, Commission, on
October 6, 1995.
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The text of the proposed rule change is available at the Office of
the Secretary, PHLX, and at the Commission.
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 self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections (A), (B), and (C) below,
of the most significant aspects of such statements.
[[Page 58125]]
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The PHLX proposes to amend the SQF, contained in PHLX Rule 1012,
Commentary .04, and in Advice F-18, to reduce the number of FCO strike
prices continuously updated and disseminated by the Exchange. Advice F-
18 establishes criteria to determine for each FCO series whether its
bid/ask quotation is eligible for processing through the Options Price
Reporting Authority (``OPRA'') for off-floor dissemination to vendors.
The Exchange proposes to eliminate updating and disseminating strike
prices in FCO series of no immediate investment interest to customers.
Currently, the SQF, which is a feature of the Exchange's Auto-Quote
system, categorizes certain FCO strikes as ``non-update'' or
``inactive'' strikes, which are disseminated with the OPRA indicator
``I'' and zeroes (e.g., 000-000) in lieu of a market. In contrast,
``update'' or ``active'' strikes include at a minimum: (1) Around-the-
money strikes in near-term American-style options; and (2) strikes with
open interest. Update series may also be added at the initiative of the
Exchange or in response to a request by the specialist or an FCO floor
official.
When a series is added to the inactive category, those bids and
offers are no longer updated in the Exchange's Auto-Quote system for
dissemination; however, if interest is voiced in any such series, it
can be activated immediately upon establishment of a quote in that
series. Because inactive series are not continuously updated and
disseminated, quotation processing times are shortened so that quotes
of interest are updated and disseminated to customers much more
quickly. According to the PHLX, approximately 40% of the Exchange's
10,000 FCO strike prices are currently inactive.
At this time, the Exchange proposes to amend the SQF to
recategorize certain active strikes as inactive. Specifically, the PHLX
proposes to categorize as non-update FCO strikes with open interest
that have not traded within the previous five days. The PHLX believes
that this should reduce the number of strikes continuously updated and
disseminated and thereby further expedite the processing and
dissemination times of those strike prices in which there is apparent
customer interest. In addition to being disseminated with zeroes and an
``I'' intra-day, these strikes with open interest will also be quoted
once at the close of trading each day for purposes of mark-to-market of
positions and general day-end valuations for the benefit of the
position holders.
Further, instead of defining around-the-money strikes as those four
above and four below the spot price, the proposal provides that the
five options with an approximate 10, 20, 30, 40 and 50 delta will be
considered around-the-money. The PHLX notes that because deltas change,
the designation of active strikes will also be changed automatically
throughout the trade day. Thus, the requirement that active strikes
remain active throughout the trade day will also be eliminated.
According to the PHLX, recent volatility in the foreign currency
markets has caused fluctuating and dramatic movements in foreign
currency exchange rates. This, in turn, has created the addition of
considerably more strike prices as the spot price moves to accommodate
the new trading ranges of the underlying currencies. The PHLX notes
that these conditions have been particularly pronounced for Japanese
yen options.\6\ The Exchange believes that these market conditions now
impose an onerous burden on FCO specialists to maintain updated markets
in strike prices for which, on occasion, there is little or no customer
interest. The purpose of the proposal is to alleviate this burden and,
thus, to improve the timeliness and accuracy of FCO quotes.
\6\ See Securities Exchange Act Release No. 36239 (September 15,
1995), 60 FR 49032 (September 21, 1995) (File No. SR-PHLX-95-47)
(notice of filing of proposal to widen the quote spread parameters
for Japanese yen options).
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According to the PHLX, the SQF was adopted in 1994 with the goal,
similar to that of the current proposal, of reducing the number of
strike prices for which markets are continuously updated and
disseminated.\7\ In adopting the SQF, the PHLX established criteria to
provide more timely and accurate FCO quote displays by eliminating
quote change disseminations in series with no probable public investor
interest. The PHLX states that eliminating such quote changes reduces
dissemination delays caused by thousands of quote changes in volatile
trading periods.
\7\ See Securities Exchange Act Release No. 33067 (October 19,
1993), 58 FR 57658 (October 26, 1993) (order approving File No. SR-
PHLX-92-23) (``SQF Approval Order'').
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In analyzing different approaches to alleviating this burden, the
PHLX considered the impact on customers, floor traders, Exchange staff,
and vendors, among others, to achieve a solution. For instance, the
PHLX states that simply deleting strikes with no open interest creates
confusion for customers when gaps in the sequential orders of strike
prices result.\8\ Further, the PHLX notes that delisting and re-listing
strikes as the spot price fluctuates imposes administrative and systems
burdens on both the Options Clearing Corporation (``OCC'') and vendors
displaying FCO quotes.
\8\ Thus, although the Exchange is committed to delisting
unnecessary strike prices, the effectiveness of this policy is
limited by the potential for customers confusion and inconsistency
among series.
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Therefore, the PHLX proposes to make certain changes to the SQF,
which are intended to reduce the number of FCO series subject to
continuous quote change dissemination. First, under the proposal,
update series will no longer include series with open interest if such
series did not trade within the previous five trading days; a closing
quotation will nevertheless be disseminated in such series. The
Exchange believes this change will eliminate a significant number of
quote changes, because in many series a small number of FCO positions
create open interest, which remains without fluctuation or additional
trading volume. The PHLX notes that public customers, like all market
participants, continue to be protected by the SQF feature which
requires a quotation to be disseminated before a trade can be
entered.\9\ In addition, the PHLX believes that the proposal protects
public investors because one quote will be disseminated at the end of
the trading day for any inactive series with open interest. The purpose
of this quote is to provide option holders with an indication of the
market for that option as well as to provide OCC with a closing value
to mark the market for margin and capital purposes.\10\
\9\ See SQF Approval Order, supra note 7. In the SQF Approval
Order, the Commission noted that public customers are protected by
the feature of the SQF which requires a quotation to be disseminated
after an options series is activated but before a trade can be
entered.
\10\ See PHLX Rule 722(e)(i). See also SEC Rule 15c3-1.
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Second, the proposal redefines active strikes as those with an
approximate 10, 20, 30, 40, or 50 delta around the underlying price.
According to the PHLX, the purpose of this change is to categorize
strike prices in the terminology used by FCO market participants. The
PHLX notes that, in some instances, the fourth strike price below the
spot price could be a 30 delta option, so that the activated around-
the-money series do not include a 40 or 50 delta option. The Exchange
believes that it is important to include strike prices with a delta up
to 50 because these represent the most active, volatile
[[Page 58126]]
options, for which the dissemination of quotes is meaningful.
The PHLX recognizes that redefining active strikes in terms of a
delta figure may result in a greater number of strikes as well.
Further, the Exchange notes that the delta associated with a strike
changes as the spot price changes, so that different strikes become the
10-50 delta strikes, and, thus, the active series. Therefore, the PHLX
proposes to amend the SQF to ``deactivate'' strikes intra-day that no
longer fit the definition of active. For instance, those series which
are no longer around-the-money based on a delta change would be de-
activated. New around-the-money strikes, in response to market changes,
will be updated and disseminated. However, a former update strike may
qualify as an update strike due to, for example, open interest and
trading volume.\11\
\11\ Under the proposal, update strikes are defined to include
not only the 10, 20, 30, 40, and 50 delta strikes, but also any
other series where there is open interest at the commencement of the
day, if that series has traded within the previous five trade dates.
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Thus, the Exchange believes that enhancing the SQF should address
the strike price and quote change situation in a volatile FCO market.
As an estimate, the PHLX anticipates these steps will reduce the number
of strike prices currently disseminated each day by approximately 15%,
or 1,000 strikes, which will improve the Exchange's ability to provide
timely and accurate quotes, including quotes in new FCO products that
may be traded on the Exchange in the future.
The Exchange believes that the proposal 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,
prevent fraudulent and manipulative acts and practices, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, as well as to protect
investors and the public interest. Specifically, the Exchange believes
that the proposal should promote just and equitable principles of trade
by facilitating speedier dissemination of FCO markets. The PHLX states
that the proposal is also designed to facilitate coordination between
the Exchange and OCC, OPRA, and securities information vendors. The
PHLX notes that the protections of the SQF will include an end-of-day
quote for inactive series with open interest, consistent with the
protection of investors and the public interest. In sum, the PHLX
believes that the proposed changes to the SQF should facilitate the
specialists' ability to focus on active series, which should, in turn,
result in tighter, more liquid markets, consistent with Section
6(b)(5).
(B) Self-Regulatory Organization's Statement on Burden on Competition
The PHLX does not believe that the proposed rule change will impose
any inappropriate burden on competition.
(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 reason for so finding or (ii) as to
which the self-regulatory organization 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.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. 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 December 15,
1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
\12\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-28619 Filed 11-22-95; 8:45 am]
BILLING CODE 8010-01-M
