[Federal Register Volume 61, Number 239 (Wednesday, December 11, 1996)]
[Notices]
[Pages 65254-65256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31398]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38017; File No. SR-PHLX-96-44]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by Philadelphia Stock Exchange, Inc. Relating to Modifying the
Formula Which Calculates the Settlement Value for Dollar Denominated
Delivery Options (``3D Options'')
December 4, 1996.
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 October
30, 1996, the Philadelphia Stock Exchange, Inc. (``PHLX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``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. The
Exchange also filed Amendments Nos. 1, 2, and 3 on November 19, 1996,
December 2, 1996 and December 3, 1996, respectively, the substance of
which are incorporated into this notice.
I. Self-Regulatory Organization's Statement of the Terms and Substance
of the Proposed Rule Change
The Exchange proposes to change PHLX Rule 1057, in order to modify
the formula which calculates the settlement value for Dollar
Denominated Delivery currency options (``3D Options''). PHLX proposes
to modify the existing formula to reflect the fact that there may be a
variation in the appropriate number of bids and offers that are
available for each currency. The Exchange would randomly select at
least five (5) such bids and offers from a pool of twenty-five (25)
active interbank foreign exchange participants, and set the number for
each individual currency prior to commencing trading 3D Options on that
currency.\1\ Due to the variation in the number of bids and offers, the
Exchange also proposes to amend the rule to state that it will discard
one third of the highest offers and one third of the lowest bids and
offers to arrive at the closing settlement value.
---------------------------------------------------------------------------
\1\ The Exchange would have the ability to obtain bids and
offers from more than five interbank foreign exchange participants
as determined by the Foreign Currency Option Committee.
---------------------------------------------------------------------------
The text of the proposed rule change follows. (New language is in
italics and deletions are in brackets.)
Rule 1057. 3D (Dollar Denominated Delivery) foreign currency
options are cash settled options. The Exchange shall contract with a
market information vendor(s) which shall act as the Exchange's
designated agent(s) to generate the closing settlement value
utilizing the following methodology sanctioned by the Exchange
described below.
The closing settlement price shall be determined by the
Exchange's designated agent(s) as follows: On every expiration date
for 3D contracts, at 10:30 A.M. (EST or EDT), the Exchange
designated agent(s) shall collect a bid and offer quotation for the
current foreign exchange spot/price [from at least fifteen (15)
interbank foreign exchange participants randomly selected from a
list of twenty-five (25) active interbank foreign exchange market
participants.] from an appropriate number of interbank foreign
exchange participants determined by the Exchange selected at random
from a pool of twenty-five (25) active interbank foreign exchange
participants. A minimum number of five (5) interbank foreign
exchange participants must be selected from the group of 25
interbank foreign exchange participants. After discarding [the five]
one-third of the highest offers and [five] one-third of the lowest
bids, the Exchange's designated agent will arithmetically average
the remaining [ten (10) bids and ten (10) offers] bids and offers to
arrive at a closing settlement value.
In the event of the Exchange's designated agent(s) inability to
generate a closing settlement value, the Exchange will poll the
interbank market participants directly (by
[[Page 65255]]
phone or facsimile transmission) to determine the fair and accurate
closing settlement value using the above methodology.
The Exchange shall disseminate the closing settlement value
after its calculation officially through the Options Price Reporting
Authority.
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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Commission approved trading for 3D Foreign Currency Options on
the Deutsche Mark (``3D Mark'') on March 8, 1994.\2\ In November 1995,
the Commission approved trading for 3D Foreign Currency Options on the
Japanese Yen (``3D Yen'') \3\; however, they have not begun trading on
the Exchange to date. Presently, bid and offer quotations for the
current foreign exchange spot price from at least fifteen (15)
interbank foreign exchange participants randomly selected from a list
of twenty-five (25) active interbank foreign exchange participants are
collected. After discarding the five (5) highest offers and the five
(5) lowest bids, the remaining ten (10) bids and offers are
arithmetically averaged to arrive at a closing settlement value.\4\
---------------------------------------------------------------------------
\2\ See Securities Exchange Act Release No. 33732 (March 8,
1994), 59 FR 12023 (order approving the listing and trading of cash/
spot dollar denominated delivery foreign currency option contracts.)
\3\ See Securities Exchange Act Release No. 36505, (November 22,
1995), 60 FR 61277 (order approving listing and trading of 3D
foreign currency options on the Japanese yen.)
\4\ See Exchange Rule 1057. Exchange filing SR-PHLX 96-11,
pending at the Commission, would allow PHLX to elect to calculate
the settlement value in house instead of requiring an agent/vendor
to do it and would limit the liability of the Exchange regarding the
accuracy of the settlement value. However, liability for intentional
misconduct and/or any violations of the federal securities laws
would not be limited. See Securities Exchange Act Release No. 37323
(June 18, 1996), 61 FR 32880 (June 25, 1996) (notice).
---------------------------------------------------------------------------
The Exchange has found that the number of banks that are able to
provide bid and offer quotations for different currencies varies
according to the currency. For some of the more widely traded
currencies such as the Deutsche mark and the Japanese yen, updated bids
and offers among interbank participants are much more prevalent than
for the less popular currencies, where the pool of potential
contributors of the spot value for the individual currency is much
smaller.
The Exchange proposes to make the current settlement value formula
more flexible in order to permit the Exchange to determine the
appropriate number of bids and offers to collect and average on a
currency-by-currency basis. As noted above, the Exchange would randomly
select at least five (5) interbank participants from a pool of twenty-
five (25) active interbank participants. Additionally, as the number of
bids and offers may vary across currencies, the existing rule language
that requires the five (5) highest offers and the five (5) lowest bids
be discarded would also be modified. The Exchange proposes to discard
one third of the highest offers and one third of the lowest bids and
average the remaining bids and offers to arrive at the closing
settlement value.
The Exchange contends that the revised settlement value formula
will ensure that the settlement value for 3D Options contracts
accurately reflects the spot price for foreign currencies because it
will use bid and offer quotations from the appropriate number of banks
that represent the spot value for the currency in question. In
addition, the Exchange will employ the same back up procedures that are
outlined for the 3D Mark and the 3D Yen that guard against unreliable
or manipulated quotes.
The Exchange's Foreign Currency Option Committee will determine
what the appropriate number of bid and offer quotations should be for
each currency. The Committee will not have the discretion to select
less than five (5) interbank foreign exchange participants from which
to obtain these bid and offer quotations. The Committee will have the
ability to increase or decrease the number, although the Exchange does
not anticipate this occurring very frequently. The Committee will not
have the ability to decrease the number of interbank participants to
less than five (5) participants. The Exchange will periodically review
the contributing interbanks to assure that the number has not
materially increased or decreased. The Committee will then have the
discretion to act upon this information.
The Committee has determined to continue to collect fifteen (15)
bid and offer quotations from a pool of twenty-five (25) for the 3D
Mark. For the 3D Yen, however, there are fewer banks that diligently
provide updated quotes. Therefore, the Committee has determined that a
more accurate representation of the Japanese Yen Market would be
derived from collecting ten (10) bid and ask quotations from a group of
twenty-five (25) active interbank participants and discarding the three
(3) highest offers and the three (3) lowest bids prior to averaging
them.
The Exchange maintains that in proposing any new 3D Foreign
Currency Option contracts for listing and trading on the Exchange, the
Exchange will identify the appropriate number of bank quotations that
will be collected to arrive at the settlement value in the rule filing
submitted pursuant to Rule 19b-4 of the Act. The number of interbank
participants from which the quotations are collected cannot be less
than five (5). Any changes in that number will require approval of the
Exchange's Foreign Currency Options Committee.
The Exchange will provide notice, at least one week prior to
settlement of the 3D currency option, to its membership and the public
of any change in the number of contributor bank quotations used to
calculate the settlement value for that 3D currency option. In the
event the Exchange lists and trades 3D options on a new currency, the
Exchange will provide at least one week notice of the number of
contributor bank quotations used to derive the settlement value prior
to listing and trading the 3D options on the new currency.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act \5\ in that it promotes just and
equitable principles of trade, prevents fraudulent and manipulative
acts and practices, and protects investors and the public interest
because it provides the Exchange with the ability to list a wider
variety of currencies and therefore, provide investors with a greater
opportunity to hedge their currency risk and facilitate transactions in
foreign currency options.
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
[[Page 65256]]
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 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 self-regulatory organization consents, the Commission will:
(A) by order approve the 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 Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-PHLX-96-44 and
should be submitted by January 2, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
---------------------------------------------------------------------------
\6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-31398 Filed 12-10-96; 8:45 am]
BILLING CODE 8010-01-M
