[Federal Register Volume 64, Number 72 (Thursday, April 15, 1999)]
[Notices]
[Pages 18648-18651]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9356]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41256; International Series Release No. 1190; File No.
SR-PHLX-98-51]
Self-Regulatory Organizations, Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. Relating to Customized
Cross-Rates Foreign Currency Option Margin Levels
April 6, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 16, 1998, 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 PHLX.
The PHLX amended the proposal on March 15, 1993.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Nandita Yagnik, Counsel, PHLX, to Hong-anh
Tran, Attorney, Division of Market Regulation (``Division''),
Commission, dated March 15, 1999 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to amend PHLX Rule 722, Margin Accounts, to
codify its method of calculating customer margin requirements for
customized cross-rate foreign currency options (``CCRs'').\4\ The
required margin for CCRs is determined by combining the actual cost of
the CCR, or the ``premium,'' plus an extra or ``add-on'' amount that is
raised or lowered according to the volatility of the currencies
involved.\5\ The proposed method for calculating the margin for all
CCRs will be outlined in PHLX Rule 722, Tiers I and II, and Commentary
.15, with the exception of the margin for CCRs involving the Mexican
peso,\6\ which will be calculated in accordance with Commentary .16 and
will be placed in Tier III. Tier IV, which currently addresses Mexican
peso CCR margin levels, will be deleted. The text of the proposed rule
change follows. Proposed new language is italicized; proposed deletions
are in [brackets].
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\4\ CCRs are traded pursuant to PHLX Rule 1069. A CCR is an
option to purchase or sell an underlying currency that can be any
approved currency as defined pursuant to PHLX Rule 1009(c).
Moreover, the option's exercise price is denominated in another
approved currency (the trading currency), and neither the underlying
nor the trading currency is denominated in U.S. dollars.
\5\ The margin may also be reduced in ``out-of-the money''
situations, where the value of the option does not accord with
current market conditions. Notwithstanding, the margin cannot be
reduced to less than 100% of the current market value of the premium
plus .75% of the underlying component value.
\6\ The Exchange currently has Commission approval to trade, as
CCRs, the Mexican peso only against the Canadian dollar. Thus, CCR
options involving the Mexican peso include Canadian dollar/Mexican
peso and Mexican peso/Canadian dollar contracts. See PHLX Rule
1069(a)(1)(B).
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* * * * *
Margin Accounts
Rule 722.(a)-(c) No change.
(d) 1-2 No change.
3. Short Positions--Listed Options and Currency, Currency Index or
Stock Index Warrants. Subject to the exceptions set forth below, the
margin on any put or call option listed or traded on a registered
national securities exchange or association and issued by a registered
clearing corporation or any currency warrant, currency index warrant or
stock index warrant which is issued, guaranteed or carried ``short'' in
a customer's account shall be 100% of the current market value of the
option or warrant plus the percentage of the current market value of
the underlying security, foreign currency or index specified in column
II below.
Notwithstanding the margin required below, the minimum margin on
any put or call or any warrant issued, guaranteed or carried ``short''
in a customer's account may be reduced by any ``out-of-the-money-
amount'' (as defined below), but shall not be less than 100% of the
current market value of the option or warrant plus the percentage of
current market value of the underlying security, foreign currency or
index specified in column II below with the exception that the minimum
margin required on each such put option contract shall not be less than
the current option market value plus the minimum percentage set forth
in column III of the option's aggregate exercise price amount.
[[Page 18649]]
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II. Initial and/or
I. Type of option maintenance III. Minimum margin IV. Underlying component value
margin required required
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(1).............................. .................. No change........... ...................................
(2).............................. .................. No change........... ...................................
(3).............................. .................. No change........... ...................................
(4) Foreign Currencies........... (#) \3/4\%.............. The product of Units per foreign
currentcy contract and the closing
spot price.
(5) Cross-Rate................... 4% \3/4\%.............. The products Units per cross-rate
contract and the closing spot
price.
(6) Tier I Customized Cross-rate 4% \3/4\%.............. The product of Units per cross-rate
currency options. contract and the closing spot
price.
(7) Tier II Customized Cross-rate 6% \3/4\%.............. The product of Units per cross-rate
currency options. contract and the closing spot
price.
(8) Tier III Customized Cross- [7%]## \3/4\%.............. The product of Units per cross-rate
rate currency options. contract and the closing spot
price.
[(9) Tier IV Customized Cross- 17% \3/4\%.............. The product of Units per cross-rate
rate currency options. contract and the closing spot
price.
[(10)]9 7........................ .................. No change...........
[(11)]10......................... .................. No change...........
[(12)]11......................... .................. No change...........
[(13)]12......................... .................. No change...........
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# The margin requirement for foreign currency options will be determined pursuant to Commentary .16 of this Rule
722.
##The margin requirement for Tier III customized cross-rate foreign currency options will be determined pursuant
to Commentary .15 and .16 of this Rule 722.
Rule 722(d)4-5 No change.
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\7\ Pursuant to a telephone conversation between Nandita Yagnik,
Counsel, PHLX, and Hong-anh Tran, Attorney, Division, Commission,
dated April 6, 1999, the PHLX proposes to renumber items (10)
through (13) as items (9) through (12).
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Rule 722(e)-(i) No change.
* * * * *
Commentary
.01-.14 No change.
.15 For purposes of this rule, the Exchange shall designate the
tier level of the customized cross-rate currency options. The Exchange
shall make such determination for Tier I and Tier II options based upon
the correlation between the currency pairs. Currency pairs which
exhibit a correlation less than .25 over the preceding two year period
shall be placed in Tier II while all other currency pairs shall be
placed in Tier I. The correlations between the currency pairs in these
two tiers shall be reviewed no less frequently than on a monthly basis.
Tier III will include customized cross-rate currency options which
involve [either the Italian lira or Spanish peseta. Tier IV will
include customized cross-rate currency options which involve] the
Mexican peso[.] and the margin requirement will be determined according
to the methodology pursuant to Commentary .16 below.
.16 The margin requirement for any foreign currency put or call
option listed or traded on the Exchange and issued by a registered
clearing corporation which is issued, guaranteed or carried ``short''
in a customer's account, except for cross-rate currency options other
than customized cross-rate currency options based on the Mexican peso,
shall be the amount provided in paragraph (d)(3) of this Rule 722 and
shall be calculated as follows:
(a) The Exchange will review five day price movements over the most
recent three year period for each foreign currency underlying options
traded on the Exchange and will set a margin level which would have
covered the price changes over the review period at least 97.5% of the
time (``confidence level'').
(b) Subsequent reviews of five day price changes over the most
recent three year period will be performed quarterly on the 15th of
January, April, July and October of each year.
(c) If the results of subsequent reviews show that the confidence
level for any currency has fallen below 97%, the Exchange will increase
the margin requirement for that currency up to a 98% confidence level.
If the results show a confidence level between 97% and 97.5%, the
currency will be monitored monthly until the confidence level exceeds
97.5% for two consecutive months. If the results of a monthly review
show that the confidence level has fallen below 97%, the margin
requirement will be increased to a 98% confidence level. If the results
of any review show that the confidence level has exceeded 98.5%, the
margin level would be reduced to a level which would provide a 98%
confidence level.
(d) The Exchange will also review each currency for large price
movements outside the margin level (``extreme outlier test''). If the
results of any review show a price movement, either positive or
negative, of greater than two times the current margin level, the
margin requirement for that currency will be increased to a confidence
level of 99%.
(e) Pursuant to paragraph (i)(8) of this Rule 722, the Exchange may
also conduct reviews of currency margin levels at any time that market
conditions warrant.
* * * * *
II. Self-Regulatory Organization's Statements 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 proposal. 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
Currently, the Exchange offers an array of foreign currency option
products (``FCOs''), including among others, standardized and
customized (the category into which CCRs fall) currency options which
have differing
[[Page 18650]]
margin requirements. The Exchange currently lists standardized foreign
currency options \8\ that include standardized options on eight foreign
currencies (``Standardized FCOs'').\9\ The Exchange also lists two
cross-rate (``Standardized CRs) \10\ currency options. The Exchange
also presently lists customized foreign currency options (``Customized
FCOs'') \11\ that include customized strikes (``Customized
Strikes''),\12\ customized inverse FCOs (``Customized Inverses''),\13\
and CCRs.
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\8\ Standardized options carry specific contract terms for
features such as contract size, strike price intervals, expiration
dates, price quoting and premium settlement.
\9\ The eight foreign currencies previously approved for listing
were the Australian dollar, British pound, Canadian dollar, German
mark, European Currency Unit, French franc, Japanese yen and Swiss
franc. See PHLX Rule 1009(c). The base currency (which is the
currency in which premiums are quoted and paid) for these
Standardized FCOs is the U.S. dollar. See Securities Exchange Act
Release Nos. 19133 (October 14, 1982), 47 FR 46946 (October 21,
1982) (File No. SR-Phlx-81-4) (regarding the listing and trading of
standardized options based on the British pound, German mark, Swiss
franc, Canadian dollar and Japanese yen); 20822 (April 4, 1984), 49
FR 14611 (April 12, 1984) (File No. SR-Phlx-84-1) (regarding the
listing and trading of Standardized FCOs based on the French franc);
22853 (February 3, 1986), 51 FR 5129 (February 11, 1986) (File No.
SR-Phlx-85-10) (regarding the listing and trading of Standardized
FCOs based on the European Currency Unit); and 23945 (December 30,
1986), 52 FR 633 (January 7, 1987) (File No. SR-Phlx-86-38)
(regarding the listing and trading of Standardized FCOs based on the
Australian dollar).
\10\ The Exchange presently offers two Standardized CRs, the
Deutsche mark/Japanese yen and the British pound/Deutsche mark. The
Exchange also has approval to trade a third standardized CR, the
British pound/Japanese yen, however, it has not yet been made
available for trading. See Securities Exchange Act Release No. 29919
(November 7, 1991), 56 FR 58109 (November 15, 1991) (File Nos. SR-
Phlx-90-12; SR-Phlx-91-03; SR-Phlx-91-23).
\11\ Customized options allow users to customize all aspects of
a currency option including: choice of exercise price, the
expiration dates of up to two years, and premium quotation as either
units of currency or percent of underlying value. Presently, the
Exchange lists customized, not standardized, currency options
involving the Italian lira, the Spanish peseta, and the Mexican
peso. See PHLX Rules 1009(c) and 1069.
\12\ The Exchange offers Customized Strikes on any approved
currency presently listed under PHLX Rule 1009(c). Customized
Strikes provide FCO traders and their customers with the ability,
within certain limits, to trade an FCO with any exercise price it
chooses on a specific approved currency even if that price does not
correspond to an exercise price of a listed standardized FCO. See
Securities Exchange Act Release No. 34925 (November 1, 1994), 59 FR
55720 (November 8, 1994) (File No. SR-Phlx-94-18).
\13\ A Customized Inverse is a Customized FCO where the
underlying currency (the currency in which an FCO settles) is the
U.S. dollar. The Exchange presently provides for the trading of
Customized Inverses on any of the approved currencies. See
Securities Exchange Act Release No. 34925 (November 1, 1994), 59 FR
55720 (November 8, 1994) (File No. SR-Phlx-94-18).
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The add-on margin calculation methodology for Standardized FCOs is
based on a methodology, outlined in Commentary .16 to PHLX Rule
722.\14\ Standardized CRs presently carry an initial and maintenance
add-on margin of 4%, which covers greater than 96% of all seven-day
price movements over the preceding one-year period.\15\ Customized
Inverses and Customized Strikes that trade in U.S. dollars are
currently margined following the same methodology as the Exchange's
Standardized FCOs (see Commentary .16 to PHLX Rule 722).
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\14\ See Securities Exchange Act Release No. 40208 (July 5,
1998), 63 FR 39388 (July 22, 1998) (File No. SR-Phlx-97-63).
\15\ See Securities Exchange Act Release No. 29919 (November 7,
1991), 56 FR 58109 (November 15, 1991) (File No. SR-Phlx-90-12); SR-
Phlx-91-03; SR-Phlx-91-23).
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The add-on margin requirements for CCRs,\16\ however, developed
differently from that of Standardized FCOs, or Standardized CRs. The
Exchange developed a method for determining add-on margin levels for
currency pairs using a tiered system, believing that it would prove
burdensome to determine the margin level for each currency pair due to
the numerous combinations of approved currencies.\16\ Under the tiered
system, margin levels are determined based upon the correlations
between all the possible combinations of approved currencies, thus
significantly reducing the burden on the Exchange to calculate the
margin levels for each individual currency pair.
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\16\ The add-on margin treatment for Customized Strikes based on
CCRs (i.e., a CCR with a customized strike price) follows the same
tiered system as CCRs.
\17\ See Securities Exchange Release No. 34925 (November 1,
1994), 59 FR 55720 (November 8, 1994) (File No. SR-Phlx-94-18).
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Changes to the Margin for CCRs Involving Italian Lira and Spanish
Peseta
There are four tiers in the system (I-IV), each of which provides
an overall margin for short CCR positions, which include an add-on
percentage amount for both initial and maintenance margins (e.g., 4%
for Tier I) as well as a set minimum add-on margin requirement, which
is currently \3/4\% for each tier. Currently, Tier III applies to CCRs
involving the Italian lira and the Spanish peseta, such that any CCRs
involving those currencies would have an add-on margin requirement of
7%.\18\ The Exchange now proposes to set add-on margins for CCRs
involving the Italian lira and the Spanish peseta following the same
correlation method used for CCRs other than the Mexican peso.\19\ For a
pair of approved currencies, this method examines the correlation
between the daily price change for one of those currencies with the
daily price change for the other currency for the preceding two-year
period. If the correlation is greater than or equal to .25, then the
add-on margin level is 4% for that currency pair (i.e., Tier I). If the
correlation is below .25, then the add-on margin level for the currency
pair is 6% (i.e Tier II).Commentary .15 to PHLX Rule 722 (as well as
the chart within that Rule) will be amended to reflect these changes to
the status of CCRs involving the Italian lira and the Spanish peseta.
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\18\ The Exchange indicates that when the Commission approved
CCRs on the Italian lira and the Spanish peseta, the margin level of
7% was determined by the frequency of distributions method
reflecting at least 97.5% of all seven day price movements over the
preceding three-year period. Specifically, the 7% margin covered
98.84% and 99.10% of all seven day price changes over the three-year
review period involving the Italian lira and the Spanish peseta,
respectively.
\19\ The PHLX represents that the Italian lira and Spanish
peseta have become more established currencies in the currency
market, and therefore should be margined in accordance with margins
for other approved currencies in a customized cross-rate context.
Specifically, the risks involved in trading CCRs involving the lira
or peseta have now been reduced so that the 7% customer margin add-
on percentage for either case, based on at least 97.5% confidence
level, is no longer necessary.
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The PHLX Examinations Department will review the correlation
between the currency of pairs monthly. The currency pairs underlying
the customized cross-rate options may move between Tiers I and II
depending upon their correlation to each other in the preceding period.
If the monthly review reveals that any combination of approved
currencies should be in a different tier based on the correlation, the
Exchange will implement the change immediately, and promptly notify the
membership and Commission.
The Exchange also proposes including an additional adjustment for
``out-of-the-money amounts'' in those CCRs involving the Italian lira
or the Spanish peseta. This adjustment is currently applied to the
overall initial and maintenance margin for all the currency pairs
currently in Tiers I and II, but not to those involving the Italian
lira or the Spanish peseta.\20\
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\20\ See Securities Exchange Act Release 34925 (November 1,
1994), 59 FR 55720 (November 8, 1994) (File No. SR-Phlx-94-18); and
See Securities Exchange Act Release No. 40208 (July 5, 1998), 63 FR
39338 (July 22, 1998) (File No. SR-Phlx-97-63).
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Changes to Add-On Margin for CCRs Involving the Mexican Peso
Tier IV presently applies to CCRs involving the Mexican peso.\21\
Tier IV
[[Page 18651]]
requires an initial and/or maintenance add-on margin of 17%, and covers
99% of all five-day price movements over the preceding three-year
period. Currently, under Tier III, there is a 7% initial and/or
maintenance add-on margin. Under the proposal, the 7% add-on will be
eliminated and the margin requirement for Tier III CCRs will be
determined pursuant to Commentary .15 and .16 of PHLX Rule 722, as
amended.\22\ The Exchange now proposes to delete Tier IV and to amend
Tier III to apply to margin levels for CCRs involving the Mexican peso.
Under the proposed method for calculating the add-on margin for CCRs
involving the Mexican peso, the Exchange will still review five-day
price movements over the most recent three-year period but the
calculation as proposed would cover cover at least 97.5% of all such
five-day price movements rather than the current 99%. This
determination is the same as that currently applied to Standardized
FCOs covered by Commentary .16 to PHLX Rule 722. The PHLX Examinations
Department will review margin levels for CCRs involving the Mexican
peso quarterly, at the same time such review is conducted for
Standardized FCOs. The Exchange indicates that applying the add-on
margin methodology outlined in Commentary .16 to Mexican peso CCRs will
eliminate the need to state the actual add-on margin levels for
Canadian dollar/Mexican peso and Mexican peso/Canadian dollar CCR
contracts. Instead, the Exchange proposed to provide notice of the add-
on margin levels for Mexican peso CCRs quarterly via circulars to the
membership, the other market participants, and the Commission. The
notice will follow the schedule outlined for quarterly reviews
conducted for Standardized FCOs.
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\21\ The Mexican peso may only be traded as CCRs against the
Canadian dollar. See PHLX Rule 1069(a)(1)(B); See Securities
Exchange Act Release No. 34925 (November 1, 1994), 59 FR 55720
(November 8, 1994) (File No. SR-Phlx-94-18).
\21\ The Exchange is proposing to amend Commentary .15 to remove
the Italian lira and Spanish peseta CCRs from Tier III, to remove a
reference to Tier IV, and to move CCRs involving Mexican pesos to
Tier III, to note that margin for Mexican peso CCRs is to be
calculated pursuant to Commentary .16. The Exchange is proposing to
amend Commentary .16 to clarify that CCRs involving the Mexican peso
are to be calculated under the formula set out in that commentary.
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2. Statutory Basis
The proposed rule change is consistent with Section 6 of the
Act,\23\ and specifically Section 6(b)(5) thereof,\24\ in that it is
designed (a) to promote just and equitable principles of trade; (b) to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, and processing information with respect in CCRs;
and (c) to facilitate transactions in securities by establishing a
methodology for the calculation of margin levels for CCRs that will
remain consistent and ease the burden of determining new margin levels
for each currency traded in the customized environment.
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\23\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5).
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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 its reasons for so finding or (ii) as to
which the Exchange 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, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.
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 with the
Commission's Public Reference Section, 450 Fifth Street, NW,
Washington, DC 20549. 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-98-51 and should
be submitted by May 6, 1999.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-9356 Filed 4-14-99; 8:45 am]
BILLING CODE 8010-01-M
