[Federal Register Volume 60, Number 58 (Monday, March 27, 1995)]
[Notices]
[Pages 15807-15809]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7448]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35520; International Series Release No. 793, File No.
SR-Phlx-95-02]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 to the Proposed Rule Change by the
Philadelphia Stock Exchange, Inc. Relating to Additional Expirations
for the Cash/Spot German Mark Foreign Currency Options (``3D Options'')
March 21, 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 January
25, 1995, 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 Phlx. On February
24, 1995, the Exchange filed Amendment No. 1 to the proposed rule
change.\1\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons.
\1\In Amendment No. 1, the Exchange proposed to: (1) Amend the
procedure for the symbols that will be used for the proposed longer
term 3D Options; (2) change the name of these options in Phlx's
rules from ``cash/spot'' to ``3D'' FCOs; (3) specify the strike
price intervals applicable to the longer-term 3D Options; and (4)
clarify that the proposal to permit spread margin treatment between
the 3D Options and the regular Deutsche mark FCO will be applicable
to the weekly, consecutive month, and cycle month series 3D Options.
See Letter from Michele Weisbaum, Associate General Counsel, Phlx,
to Brad Ritter, Senior Counsel, Office of Market Supervision,
Division of Market Regulation, Commission, dated February 24, 1995
(``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx, pursuant to Rule 19b-4 of the Act, proposes to amend
Exchange Rule 1012(a)(ii) to permit listing German mark cash/spot
foreign currency options (``FCOs''), commonly referred to as ``3D
Options,''\2\ with series having up to 12 months to expiration. The
text of the proposed rule change is available at the Office of the
Secretary, the Phlx, and at the Commission.
\2\``3D'' refers to dollar denominated delivery.
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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 Phlx 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 Phlx 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 the
Statutory Basis for, the Proposed Rule Change
On March 8, 1994, the Commission approved the listing and trading
of 3D Options.\3\ These FCOs are issued by The Options Clearing
Corporation and are European-style.\4\ The options have one-week and
two-week expirations to provide a hedging vehicle for: sophisticated
retail customers, portfolio managers, and multi-national corporations
which need to hedge their [[Page 15808]] short term foreign currency
exposure; and to banks which need to hedge the risks associated with
trading in the forward and cash markets. The Exchange represents that
the users of 3D Options have particularly liked the U.S. dollar
settlement feature because they do not have to establish foreign bank
credit lines, nor do they have to worry about the potential of
exchanging currency due to exercises and assignments. The Exchange
further represents that although the users find 3D Options beneficial
for managing their short term foreign currency risks, they have also
suggested that they would like to use a U.S. dollar settled option to
hedge longer term risks. The Phlx, therefore, proposes to add longer
term expirations to the 3D Option contract in order to address these
requests.
\3\See Securities Exchange Act Release No. 33732 (March 8,
1994), 59 FR 12023 (March 15, 1994).
\4\A European-style option may only be exercised during a
specified time period immediately prior to expiration of the option.
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The Exchange proposes to list 3D Options with expirations
corresponding to the consecutive month and cycle month series for
regular FCOs. Specifically, 3D Options will be listed on the March,
June, September, and December cycle with two near-term months. The
expiration date will be the Monday preceding the third Wednesday of
each month, thus creating a mid-month U.S. dollar settled FCO. The Phlx
proposes to amend Phlx Rule 1012(a)(ii)(B) and (C) to reflect these
additional series of options. The Exchange will not list 3D Options
with month-end expirations or with more than 12 months to
expiration.\5\
\5\The Exchange is also proposing to amend Rules 1000, 1012,
1014, 1057, and 1069 to change references in its rules from cash/
spot FCOs to 3D FCOs, as, these FCOs are more commonly referred to.
The Exchange is also proposing non-substantive changes to Rule 1012
for ease of reading. See Amendment No. 1, supra note 1.
The Exchange believes that 3D Options with a longer term to
expiration will meet the needs of investment managers who are seeking
to protect portfolios against foreign exchange fluctuations but who do
not wish to receive or deliver the underlying currency to achieve that
goal. Similarly, the Exchange believes that corporate treasurers
seeking balance sheet protection would also prefer paying or receiving
U.S. dollars rather than exchanging German marks. Both of these
potential users may have either short or long-term concerns. Finally,
retail traders who may have either a short or long-term market
perspective, will, in the Exchange's opinion, find these options
attractive because they will not have to establish foreign bank credit
lines or have to deal with the delivery or receipt of the underlying
foreign currency at settlement.
Currently, the weekly 3D Options are listed with the symbol XDA,
SDB, XDC, XDD, or XDE depending on whether they will expire on the
first, second, third, fourth, or fifth Monday of the month,
respectively. Because the proposed longer term 3D Options will expire
on the Monday before the third Wednesday of each month, they will
always expire on either the second or third Monday of the month.
Accordingly, the longer-term 3D Options will be listed with the symbol
XDB or XDC and will carry that symbol until expiration.\6\
\6\For example, a March 1995 3D Option that would expire on
Monday March 13, would be listed, for example, as an XDB March 62
call, whereas the April 1995 3D Option that would expire on Tuesday,
April 18 (Monday being an Exchange holiday) would be listed as an
XDC April 62 call. See Amendment No. 1, supra note 1.
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3D Options are currently listed in one-half point strike price
intervals. The Exchange proposes that the proposed longer-term 3D
Options listed for the three near term months will also be listed in
one-half point strike price intervals, while the 3D Options listed with
six, nine, or twelve months to expiration will have one point strike
price intervals.\7\
\7\Id.
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The Exchange intends to allow spread margin treatment between the
German mark FCO (``XDM'') and the 3D Options pursuant to Exchange Rule
722(c)(2)(E).\8\ This provision allows for short calls or puts to be
offset against long calls or puts for margin purposes if the underlying
foreign currency and number of units are the same, provided that the
``long'' position expires on or after the date of the ``short''
position. Even though 3D Options are settled in U.S. dollars and XDM
contracts are settled in German marks, the Exchange believes that it
should be permissible for a broker-dealer to extend to its customers
spread margin treatment for a position consisting of a 3D Option offset
against an XDM under the existing Exchange rules.\9\ The Exchange
believes that this type of spread margin treatment is warranted for the
same economic reasons that the Exchange has allowed customers to spread
two XDM positions against each other. In both cases, a customer is
hedging an option position on the same underlying currency--the German
mark. If the market value of the underlying decreases, the customer
will lose money on the long side and profit on the short side and,
conversely, if the market value of the underlying increases, the
customer will profit on the long side and lose on the short side. The
Exchange feels that risk reducing strategies need to be recognized and
spread margin treatment permitted.
\8\Exchange Rule 722(c)(2)(E) provides: ``Where a call that is
listed or traded on a registered national securities exchange or
association is carried `short' for a customer's account and the
account is `long' a call listed or traded on an exchange or
association, expiring on or after the date of the `short' call and
written on the same number of * * * units of the same underlying
foreign currency, the minimum margin must be maintained in respect
of the `short' position shall be the lesser of (i) the required
amount pursuant to subparagraph (B)(i) or (B)(ii) of the paragraph
(c)(2), as the case may be, or (ii) the amount, if any, by which the
exercise price of the `long' call exceeds the exercise price of the
`short' call.''
``Where a put that is listed or traded on a registered national
securities exchange or association is carried `short' for a
customer's account and the account is also `long' a put listed or
traded on an exchange or association expiring on or after the
expiration date of the `short' put and written on the same number of
* * * units of the same underlying foreign currency (in the case of
options on a foreign currency), the minimum margin which must be
maintained in respect of the `short' put shall be the lesser of (i)
the margin required pursuant to subparagraphs (B)(i) or (B)(ii) of
this paragraph (c)(2) as the case may be, or (ii) the amount, if
any, by which the exercise price of the `short' put exceeds the
exercise price of the `long' put.''
\9\This proposal will apply both to the existing 3D Options and
to the proposed longer-term 3D Options. See Amendment No. 1, supra
note 1.
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The Exchange believes that the foregoing rule change proposal is
consistent with Section 6 of the Act, in general, and with Section
6(b)(5), in particular, in that it is designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, to facilitate transactions in securities, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and to protect investors and the
public interest by providing FCO users who do not necessarily need to
exchange currency at settlement with an alternative U.S. dollar settled
FCO with corresponding expirations.
(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 solicited or received with respect to the
proposed rule change.
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 [[Page 15809]] 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 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 in 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 Phlx. All
submissions should refer to File No. SR-Phlx-95-02 and should be
submitted by April 17, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
\10\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-7448 Filed 3-24-95; 8:45 am]
BILLING CODE 8010-01-M
