[Federal Register Volume 61, Number 244 (Wednesday, December 18, 1996)]
[Notices]
[Pages 66721-66723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32081]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38041; File No. SR-Phlx-96-11]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change and Notice of Filing
and Order Granting Accelerated Approval of Amendment No. 2 to Proposed
Rule Change Relating to the Exchange's Calculation of Settlement Values
for Cash/Spot Foreign Currency Option Contracts (``3-D Options'')
December 11, 1996.
On April 30, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to permit the Exchange to
calculate settlement values for the cash/spot Dollar Denominated
Delivery foreign currency option contracts (``3-D options'') and to
limit the Exchange's liability in connection with the calculation and
dissemination of these settlement values. On May 20, 1996, the Exchange
submitted Amendment No. 1 to the proposed rule change.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Murray L. Ross, Vice President and
Secretary, Phlx, to Anthony P. Pecora, Attorney, Division of Market
Regulation, SEC, dated May 17, 1996 (``Amendment No. 1''). The
changes contained in this letter were superseded by Amendment No. 2.
See infra note 5.
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The proposed rule change, along with Amendment No. 1, was published
for comment in the Federal Register on June 25, 1996.\4\ On August 22,
1996, the Phlx clarified that it would not rely upon the proposed
limitation of liability clause to limit the Exchange's liability for
intentional misconduct or for any violation of the federal securities
laws.\5\ No comments were received on the proposal. This order approves
the proposal, as amended by Amendment No. 2.
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\4\ Securities Exchange Act Release No. 37323 (June 18, 1996) 61
FR 32880.
\5\ See letter from Murray L. Ross, Vice President and
Secretary, Phlx, to Anthony P. Pecora, Attorney, Division of Market
Regulation, SEC, dated August 21, 1996 (``Amendment No. 2'')
(superseding Amendment No. 1).
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On March 8, 1994, the Commission approved trading for 3-D Foreign
Currency Options on the Deutsche Mark.\6\ Currently, the closing
settlement value for 3-D options is calculated by a market information
vendor acting as the Exchange's designated agent. The market
information vendor will collect the bid and offer quotations for the
current foreign exchange spot price from quotations submitted by at
least fifteen interbank foreign exchange market participants, which the
designated agent will select randomly from a list of twenty-five active
interbank foreign exchange market participants. After discarding the
five highest and the five lowest bids and offers, the market
information vendor averages the
[[Page 66722]]
remaining ten bids and offers to arrive at a closing settlement
price.\7\
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\6\ Securities Exchange Act Release No. 33732 (Mar. 8, 1994), 59
FR 12023 (approving File No. SR-Phlx-93-10). Although the Commission
has approved trading for 3-D Foreign Currency Options on the
Japanese Yen, trading in these securities on the Exchange has not
yet begun. Securities Exchange Act Release No. 36505 (Nov. 22,
1995), 60 FR 61277 (approving File No. SR-Phlx-95-42).
\7\ The Exchange currently has a proposal pending at the
Commission that would modify this settlement value formula. See
Securities Exchange Act Release No. 38017 (Dec. 4, 1996) (publishing
notice of File No. SR-Phlx-96-44).
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The Phlx proposes to amend Phlx Rule 1057 to permit the Exchange to
choose whether it will calculate the settlement value for 3-D options
itself or employ a designated market information vendor as an agent of
the Exchange for that purpose.\8\ The Exchange will continue to use the
same methodology for calculating the settlement value for 3-D options
as described in Phlx Rule 1057.
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\8\ The Exchange does not intend to redesignate the reporting
authority on a regular or frequent basis. Instead, the Exchange will
select a reporting authority with the intention, to the extent
possible, that the selection will be lasting. Telephone conversation
between Nandita Yagnik, New Products Development, Phlx, and Anthony
P. Pecora, Attorney, Division of Market Regulation, SEC (Dec. 4,
1996).
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The Phlx believes that calculating its own settlement value for 3-D
options will enable the Exchange to exert control over the assembly of
this value. The Exchange also believes that the proposed rule change
will reduce the necessary response time in the event there is a problem
in the calculation or dissemination of the 3-D options settlement
value.
The Exchange also proposes to amend Phlx Rule 1057 by including a
``limitation of liability'' clause that limits the Exchange's liability
in connection with the calculation and dissemination of the 3-D
settlement value. The Exchange believes the limitation of liability
clause will provide added protection to the Exchange and alleviate the
threat of potential liability in calculating the 3-D settlement value.
In this regard, the Phlx acknowledges that the proposed limitation of
liability clause cannot be relied upon by the Exchange to limit its
liability for intentional misconduct or for any violation of the
federal securities laws.\9\
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\9\ See Amendment No. 2, supra note 5.
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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, with the requirements of Section 6(b).\10\ Specifically,
the Commission believes the proposal is consistent with the Section
6(b)(5) \11\ requirements that the rules of an exchange be designed to
promote just and equitable principles of trade, to facilitate
transactions in securities, to prevent fraudulent and manipulative acts
and, in general, to protect investors and the public interest.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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The Commission agrees with the Phlx's assertion that, by
calculating its own settlement value for 3-D options, investors should
be benefitted because the response time needed in the event there is a
problem in the calculation or dissemination of the 3-D options
settlement values should be reduced. In any case, the same methodology
for calculating the settlement values, as set forth in Phlx Rule 1057,
will be used, irrespective of whether the Phlx or a market information
vendor is performing this function.
With regard to the limitation of liability clause, the Commission
finds that the proposed language will provide the Phlx with protection
that is substantively similar to protection already afforded other
self-regulatory organizations.\12\ Additionally, because the Phlx
represents that the proposed rule change cannot be used to limit its
liability for intentional misconduct or for any violations of the
federal securities laws, the Commission believes that the proposal will
protect investors and the public interest, while also serving to
facilitate transactions in securities. Specifically, entities, such as
the Phlx, may be encouraged to calculate and disseminate settlement
values.\13\ Therefore, these derivative products, which are found to
provide hedging or other economic functions, should remain available to
investors.
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\12\ See American Stock Exchange Rules 902C and 1003; Chicago
Board Options Exchange Rule 24.14; New York Stock Exchange Rule
702(b).
\13\ See, Securities Exchange Act Release No. 34125 (May 27,
1994), 59 FR 29307 (approving File No. SR-Amex-93-41).
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Finally, although the current language in the ``Characteristics and
Risks of Standardized Options'' Options Disclosure Document (``ODD'')
\14\ adequately discloses a reporting authority's limited liability
regarding the dissemination of index values, the Commission believes it
would be useful if this language was more prominent in the ODD.\15\
Therefore, in connection with the approval of this proposal, The
Options Clearing Corporation (``OCC'') has indicated that it will
address this issue the next time it conducts a general revision of the
ODD.\16\
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\14\ Form S-20 and Rule 9b-1 establish a disclosure framework
specifically tailored to the informational needs of investors in
standardized options that are traded on national securities
exchanges and cleared through clearing agencies registered as such
under the Act. Under this options disclosure system, the exchange(s)
on which standardized options are listed and traded must prepare an
ODD that, among other things, identifies the issuer and describes
the uses, mechanics, and risks of options trading and other matters
in language that easily can be understood by the general investing
public. Broker-dealers must provide a copy of the ODD to each
customer at or prior to the approval of the customer's account for
trading in any standardized option. Any amendment to the ODD must be
distributed to each customer whose account is approved for trading
the options class for which the ODD relates. See 17 CFR 240.9b-1;
Securities Exchange Release No. 31910 (Feb. 23, 1993), 58 FR 12280
(approving File No. SR-ODD-93-1).
\15\ Currently, this information appears on pages twenty-six and
seventy-six of the ODD.
\16\ See letter from James C. Yong, First Vice President and
General Counsel, OCC, to Anthony P. Pecora, Attorney, Division of
Market Regulation, SEC, dated November 6, 1996.
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The Commission finds good cause for approving Amendment No. 2 prior
to the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register because this amendment merely conforms
the proposal to similar rules of other self-regulatory
organizations.\17\ Moreover, the Commission notes that prior proposals
by other SROs to limit their liability in connection with the
administration of new proprietary indexes and products were published
by the Commission for the full statutory comment period without any
comments being received.\18\ Therefore, the Commission believes that
granting accelerated approval to Amendment No. 2 is appropriate and
consistent with Section 6(b)(5) and Section 19(b)(2) of the Act.\19\
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\17\ See supra footnote 12 (listing comparable rules).
\18\ See, e.g., Securities Exchange Act Release No. 34125 (May
27, 1994), 59 FR 29307 (approving File No. SR-Amex-93-41).
\19\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2. 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. Sec. 552, will be available for inspection and
copying at the Commission's Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such filing also will be
available for inspection and copying at the principal office of the
Phlx. All submissions should refer to File No. SR-Phlx-96-11 and should
be submitted by [insert date 21 days from date of publication].
[[Page 66723]]
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-Phlx-96-11), as amended by
Amendment No. 2, is approved.
\20\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-32081 Filed 12-17-96; 8:45 am]
BILLING CODE 8010-01-M
