[Federal Register Volume 60, Number 25 (Tuesday, February 7, 1995)]
[Notices]
[Pages 7255-7256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2908]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35306; File No. SR-Phlx-94-23]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Approving Proposed Rule Change Relating to Inter-Currency Spread
Priority
January 31, 1995.
On August 1, 1994, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Act),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to allow spread priority for
eligible spreads between two different foreign currency options
(``FCOs'').
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1992).
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Notice of the proposed rule change was published for comment and
appeared in the Federal Register on December 7, 1994.\3\ No comments
were received on the proposal. This order approves the proposal.
\3\See Securities Exchange Act Release No. 35023 (November 29,
1994), 59 FR 63149.
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I. Description of the Proposal
The purpose of this proposal is to amend the current definition of
spread order contained in Rule 1066(f)(1) to include transactions
involving options in two different foreign currencies (``inter-currency
spread'') and to extend the spread priority principles to inter-
currency spread orders.
Rule 1066(f)(1) currently defines a spread as an order to buy a
stated number of option contracts and to sell the same number of option
contracts, in a different series of the same class of options. The
Exchange proposes to extend this definition by adopting Rule
1066(f)(1)(A), Inter-Currency Spread Order, as a subcategory of spread
order.\4\ Furthermore, the Exchange proposes to adopt Rule 1033(i),
Inter-Currency Spread Priority, in order to extend the current spread
priority principles to inter-currency spreads. As a result, an inter-
currency spread involving any two FCOs, American-\5\ or European-
style\6\ expiration, and any expiration date (regular, month-end, or
long-term) will not be eligible for spread priority treatment, as
described below. Inter-currency spread priority pursuant to the
proposed rule change would not, however, be available for cross-rate,
cash/spot, or the Exchange's customized FCOs.
\4\Proposed Phlx Rule 1066(f)(1)(A) defines Inter-Currency
Spread Order in the following manner: In the case of foreign
currency options, a spread order may consist of an order to buy a
stated number of option contracts in one foreign currency and to
sell the same number of option contracts in a different foreign
currency option.
\5\An American-style option is one that can be exercised at any
time prior to expiration of the option.
\6\A European-style option is one that can only be exercised
during a specified period immediately prior to expiration of the
option.
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Inter-currency spreads are currently executed as contingency orders
pursuant to Phlx Rule 1066. For example, an FCO floor broker would
quote a French franc market as well as a Swiss franc market, in each
respective trading crowd; then, the floor broker would announce ``99
bid for 99 Sep 99 French franc calls if I can sell 99 Dec 99 Swiss
franc puts at 99.'' However, each component of the spread must be bid/
offered individually, which, according to the Exchange, generally means
that each component is executed at a price better than the established
bid/offer. In addition, the Exchange believes that because each leg
must be executed between the established market, such contingency
orders are more likely to be broken up by market interest in one leg,
such that the end result may be a different number of contracts for
each leg.
The Phlx's current priority rule, Rule 1033(d), allows a spread
order (which includes a spread involving only one foreign currency) to
be executed as a single transaction at a total net debit or credit with
one contra-side. Furthermore, an eligible spread can be afforded
priority as long as the net credit/debit improves the established
market for the spread, provided, however, that at least one option leg
is executed at a better price than the established market for that
option and no option leg is executed outside of the established market
for that option. The same principles apply to three-way, ratio, and
multi-spread transactions in foreign currency.\7\
\7\See Securities Exchange Act Release No. 34015 (November 29,
1994).
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The Exchange believes that extending priority treatment to inter-
currency spreads is appropriate for several reasons. First, the
Exchange believes that spread priority for inter-currency spreads will
facilitate a more simplified procedure for the execution of such
orders. In this context, Phlx notes that the execution of inter-
currency spreads as contingency orders may present a logistical problem
given that floor brokers must, in exercising due diligence, shuttle
between two trading crowds or, to prevent a trade from occurring while
the floor broker is in the second crowd, utilize two floor brokers to
execute such an order. Second, inter-currency spreads provide a trading
strategy for FCO market participants based on the interplay between the
currencies of two countries, similar to the advantages and
opportunities associated with cross-rate FCOs.\8\ The Exchange believes
that the availability of such strategies should enhance liquidity in
existing FCOs. Finally, the Exchange believes that the requirement in
proposed Phlx Rule 1033(i) that each leg os an inter-currency spread be
executed at or within the market for the individual leg, and that at
least one leg be executed at a price which improves the established
market, will benefit investors. The Exchange states that this
requirement is also consistent with Phlx Rule 118 which provides that
when a bid/offer is clearly established, no bid/offer outside that
price shall be established.
\8\A cross-rate currency option is an option to purchase or sell
a foreign currency at an exercise price that is denominated in
another foreign currency. The exercise price, therefore, represents
an exchange rate between two foreign currencies. [[Page 7256]]
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II. Discussion
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, the requirements of Section 6(b)(5).\9\ In particular, the
Commission believes the proposal is consistent with the Section 6(b)(5)
requirement that the rules of an exchange be designed to promote just
and equitable principles of trade and not to permit unfair
discrimination between customers, issuers, brokers, and dealers.
\9\15 U.S.C. 78f(b)(5) (1982).
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The Commission believes that allowing inter-currency spread orders
to attain spread priority is appropriate for several reasons. First,
because the FCO market is dominated by institutional and corporate
investors, the preemption of public customer limit orders (a concern of
the Commission in the context of equity and index options), is
unlikely. In this regard, the Commission notes that the proposed
changes are applicable solely to the FCO market, which is dominated by
institutions and sophisticated corporate investors. This is in part due
to the complex nature of the instruments and the tremendous size of the
underlying currency markets.
Second, because inter-currency spreads are currently executed as
contingency orders, and therefore more susceptible to non-execution,
the Commission believes granting priority to such orders will
facilitate their execution and, therefore, may lead to more efficient
quotes and tighter spreads.
Third, the priority principles applicable to inter-currency spreads
mirror the priority rules currently in place for regular FCO spread
orders. As a result, an inter-currency spread may be executed at a
total net credit/debit with one other participant, provided at least
one leg of the spread is executed at a better price than the
established bid or offer for that contract and that no option leg is
executed at a price outside of the established bid or offer for that
option contract. Accordingly, the Commission believes that this change
will allow institutional and corporate investors to better utilize
sophisticated trading techniques involving FCOs for hedging and risk
management purposes without altering the existing priority principles.
Finally, because the proposed definition limits an inter-currency
spread to a maximum of two foreign currencies, the Commission notes
that the logistical problems and confusion attendant to the execution
of orders involving three or more foreign currencies will be avoided.
It therefore is ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (SR-Phlx-94-23) is approved.
\10\15 U.S.C. 78s(b)(2) (1982).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
\11\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2908 Filed 2-6-95; 8:45 am]
BILLING CODE 8010-01-M
