[Federal Register Volume 59, Number 44 (Monday, March 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5069]
[[Page Unknown]]
[Federal Register: March 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33693; International Series Release No. 638; File No.
SR-PHLX-94-05]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to Quote
Spread Parameters for Long-Term Foreign Currency Options
February 28, 1994.
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 February
7, 1994, 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
The PHLX proposes to amend Exchange Rule 1014, ``Obligations and
Restrictions Applicable to Specialists and Registered Options
Traders,'' and Floor Procedure Advice (``Advice'') F-6, ``Option Quote
Spread Parameters'' to: (1) Establish quote spread parameters for long-
term foreign currency options (``FCOs''); (2) revise the quote spread
parameters for options on the French franc; and (3) revise the quote
spread parameters for cross-rate FCOs. Specifically, the PHLX proposes
to establish the following quote spread parameters for long-term FCOs:
for options on the British pound, bidding and/or offering so as to
create differences of no more than $.0100 between the bid and the offer
for each option contract for which the bid is $.1500 or less and no
more than $.0150 where the bid is more than $.1500; for options on the
French franc, bidding and/or offering so as to create differences of no
more than $.00100 between the bid and the offer for each option
contract where the bid is $.01500 or less and no more than $.00150
where the bid is more than $.01500; for options on the German mark and
Swiss franc, bidding and/or offering for each option contract so as to
create differences of no more than $.0030 where the bid is $.0500 or
less and no more than $.0050 where the bid is more than $.0500; and for
options on the Japanese yen, bidding and/or offering for each option
contract so as to create differences of no more than $.000040 where the
bid is $.000500 or less and $.000070 where the bid is over $.000500.
The text of the proposal 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.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The PHLX proposes to adopt quote spread parameters for long-term
FCOs. Quote spread parameters, also referred to as bid/ask
differentials, govern the width of market quotations;1
specifically, maximum widths between the bid and ask for PHLX options
are mandated by PHLX Rule 1014(c). The Exchange notes that although a
violation of the maximum quote spread may result in a fine,2 the
quote spreads are not applicable during fast market conditions,
pursuant to Advice F-10, ``Extraordinary Market Conditions.''3
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\1\For example, if the maximum quote spread for a Canadian
dollar options is $.0005 where the bid is $.0050 or less, then the
following is an acceptable quotation: .0020-.0025.
\2\Violations of Advice F-6 may result in the issuance of a fine
pursuant to the Exchange's minor rule violation enforcement and
reporting plan.
\3\Advice F-10 states that in the interest of a fair and orderly
market, two floor officials may declare a ``fast market,'' during
which displayed quotes are not firm and the volume guarantees of
Advice A-11, ``Responsibility to Make Ten-Up Markets,'' are not
applicable; nevertheless, best efforts are required to display
quotes and fill orders.
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Currently, FCOs are generally subject to the quote spread
parameters that appear in Exchange Rule 1014 as well as Advice F-6. The
PHLX has traded long-term FCOs since 1992, when PHLX Rule 1012 was
amended to permit the listing of options with an expiration of up to 36
months in the future.4 The Long-Term FCO Approval Order stated
specifically that long-term FCOs would not be subject to existing quote
spread parameters because, at that time, no basis had been determined
for establishing reasonable prices for longer term FCOs as a result of
the lack of historical pricing. Currently, long-term FCOs become
subject to Advice F-6 once there is less than twelve months remaining
until expiration.
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\4\See Securities Exchange Act Release No. 30672 (May 6, 1992),
57 FR 20546 (order approving File No. SR-PHLX-91-30) (``Long-Term
FCO Approval Order'').
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Currently, the PHLX trades four long-term FCOs: British pound,
German mark, French franc, and Japanese yen.5 The PHLX proposes to
codify specific parameters in order to demonstrate consistency in quote
width to FCO customers and to prevent overly wide quotes. The proposed
parameters for long-term FCOs would be wider than the quote spread
parameters applicable to regular FCOs (FCOs with less than 12 months to
expiration) due to the lack of historical pricing in pricing an option
with 12 to 36 months to expiration. Accordingly, the PHLX proposes to
add these quote spread parameters to Advice F-6 and to Exchange Rule
1014(c)(ii).
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\5\Although the PHLX has not yet listed a long-term option on
the Swiss franc, the PHLX is proposing a long-term quote spread
parameter because it would be identical to the proposed quote spread
parameter applicable to the long-term German mark option.
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The PHLX is also proposing minor changes to Exchange Rule 1014,
including adding headings and punctuation. In addition, the PHLX
proposes to correct the parameters for cross-rate FCOs, which appear in
the incorrect base currency, and for French franc options, which cannot
be quoted in odd numbers due to system limitations. Specifically, for
options on the French franc, the PHLX proposes to establish a maximum
quote spread of $.00014 where the bid is $.00250 or less; $.00024 where
the bid is between $.00252 and .00750; and $.00034 where the bid is
over $.00750.
With respect to cross-rate options, the PHLX states that the
original quote spread parameters were incorrect because the bids, which
determine the quote spread, should be based on bids relating to the
first currency. Under the current rule, for British pound/German mark
cross-rate options, if the bid is .0100 German marks or less, the
maximum quote spread is .0015 German marks. The PHLX states that this
has proved incorrect and incompatible with the parameters commonly
employed by traders to quote the British pound/German mark cross-rate
option for two reasons: (1) The range of bids did not correspond to the
ranges previously used for British pound quotes;6 and (2) the
actual parameters (.0015, .0025 and .0035 German marks) proved to be
too narrow in view of the unique pricing and settlement of cross-rate
options. Thus, for British pound/German mark cross-rate options, the
PHLX proposes the following parameters: Bidding and/or offering to
create differences of no more than .0030 German marks between the bid
and the offer where the bid is .0250 German marks or less; no more than
.0050 German marks where the bid is more than .0250 but does not exceed
.0750 German marks; and no more than .0070 German marks where the bid
is more than .0750 German marks.7
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\6\The range of bids that determine the quote spread parameters
applicable to British pound options is: $.0250 or less, $.0251 to
$.0750, and over $.0750.
\7\Although the PHLX has not yet listed the British pound/
Japanese yen option, the same inconsistency with British pound bid
ranges requires correction and the quote spread parameters were also
proposed too narrowly.
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For German mark/Japanese yen cross-rate options, the PHLX proposes
the following parameters: Bidding and/or offering to create differences
of no more than .12 Japanese yen between the bid and the offer where
the bid is .40 Japanese yen or less; no more than .16 Japanese yen
where the bid is more than .40 but does not exceed 1.60 Japanese yen;
and no more than .20 Japanese yen where the bid is more than 1.60
Japanese yen.
For British pound/Japanese yen options, the PHLX proposes to
establish the following parameters: Bidding and/or offering to create
differences of no more than .0030 Japanese yen between the bid and the
offer where the bid is .0250 Japanese yen or less; no moore than .0050
Japanese yen where the bid is more than .0250 but does not exceed .0750
Japanese yen; and no more than .0070 Japanese yen where the bid is more
than .0750 Japanese yen. The Exchange proposes to correct the cross-
rate parameters both in the text of Exchange Rule 1014 as well as in
Advice F-6 in order to facilitate the efficient trading and quoting of
the relevant cross-rate options, as well as to inform members and
customers of the maximum quote spread parameters.
The PHLX believes that the proposed rule change 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, and to protect investors and the public interest.
Specifically, the PHLX believes that established quote spread
parameters for long term FCOs should prevent overly wide quotes and
foster uniformity in quote width, consistent with section 6(b)(5). In
addition, the PHLX believes that the correction to cross-rate quote
spread parameters should promote just and equitable principles of trade
by providing a more feasible bid/ask differential, which, in turn,
should facilitate trading in those options.
(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 is reason for so finding or (ii) as to
which the self-regulatory organization consent, the Commission will:
(a) By other 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, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule changes 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,
NW., Washington, DC. 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 March 28, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5069 Filed 3-4-94; 8:45 am]
BILLING CODE 8010-01-M
