[Federal Register Volume 60, Number 94 (Tuesday, May 16, 1995)]
[Notices]
[Pages 26062-26065]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11946]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35688; International Series Release No. 811; File No.
SR-PHLX-95-13]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1 and 2 to the Proposed Rule Change by the
Philadelphia Stock Exchange, Inc., Relating to Modifications of the
Position and Exercise Limits for Foreign Currency Options
May 8, 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 March
10, 1995, [[Page 26063]] 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.\1\ The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
\1\ On April 5, 1995, the PHLX submitted a revised version of
the text of the proposed rule change, which amends the text to
indicate that the proposed position limit for foreign currency
options (``FCOs'') is 200,000 contracts. See Letter from Edith
Hallahan, Special Counsel, Regulatory Services, to Michael
Walinskas, Branch Chief, Office of Market Supervision (``OMS''),
Division of Market Regulation (``Division''), Commission, dated
April 5, 1995 (``Amendment No. 1''). On April 26, 1995, the PHLX
amended PHLX Rule 1001, Commentary .05(c), to replace references to
the current FCO position limits with references to the proposed FCO
position limit and to designate current paragraph (c) as paragraph
(b), in order to reflect the deletion of current paragraph (b). See
Letter from Edith Hallahan, Special Counsel, Regulatory Services,
PHLX, to Michael Walinskas, Branch Chief, OMS, Division, Commission,
dated April 26, 1995 (``Amendment No. 2'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Currently, PHLX Rule 1001, ``Position Limits,'' \2\ establishes the
following position limits for FCOs: (i) 150,000 contracts for FCOs
which had annual trading volume of at least 3,500,000 contracts; and
(ii) 100,000 contracts for all other FCOs traded on the PHLX, The PHLX
proposes to amend Exchange Rule 1001 and Exchange Rule 1002, ``Exercise
Limits,'' \3\ to increase the position and exercise limits for all FCOs
to 200,000 contracts.
\2\ Position limits impose a ceiling on the number of option
contracts which an investor or group of investors acting in concert
may hold or write in each class of options on the same side of the
market (i.e., aggregating long calls and short puts or long puts and
short calls).
\3\ Exercise limits prohibit an investor or group of investors
acting in concert from exercising more than a specified number of
puts or calls in a particular class within five consecutive business
days.
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The text of the proposed rule change 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 increase the position limits for FCOs from the
current two-tiered approach of 100,000 or 150,000 contracts to 200,00
contracts for all FCOs. The PHLX states that in recent years, the size
of the underlying market for foreign currencies has grown steadily.
Thus, the Exchange believes that the existing FCO position limits are
too low, in view of the large market for the underlying foreign
currencies. In addition, the Exchange believes that increasing the
position limits for FCOs may increase the liquidity of the PHLX's FCO
markets and encourage the migration of trading from the over-the-
counter (``OTC'') market.
PHLX FCO position limits were set initially at 10,000 contracts in
1982, when FCOs first began trading on the Exchange.\4\ Since that
time, the position limits have been raised four times.\5\ In 1993, the
Exchange filed a proposal to adopt a two-tiered approach to FCO
position limits, which was approved by the Commission in September
1994.\6\ According to the PHLX, many of the factors cited at that time
continue to indicate that FCO position limits warrant an increase to
200,000 contracts. For example, the Chicago Mercantile Exchange
(``CME'') substituted ``position accountability standards'' \7\ for
position limits for futures and futures options on certain foreign
currencies.\8\ As a result, the PHLX believes that the Exchange is
placed at a serious competitive disadvantage.
\4\ See Securities Exchange Act Release No. 19313 (October 14,
1982), 47 FR 46946 (October 21, 1982) (order approving File No. SR-
PHLX-81-4).
\5\ See Securities Exchange Act Release Nos. 21676 (January 18,
1985), 50 FR 3859 (January 28, 1985) (order approving File No. SR-
PHLX-84-18 (increasing position limits from 10,000 to 25,000
contracts); 22479 (September 27, 1985), 50 FR 41276 (October 9,
1985) (order approving File No. SR-PHLX-85-22) (increasing position
limits to 50,000 contracts); 23710 (October 15, 1986), 51 FR 37691
(October 23, 1986) (order approving File No. SR-PHLX-86-24)
(increasing position limits to 100,000 contracts); and 34712
(September 23, 1994), 59 FR 50307 (October 3, 1994) (order approving
File No. SR-PHLX-93-13) (adopting position limit of 150,000
contracts for FCOs with annual trading volume of at least 3,500,000
contracts).
\6\ See Securities Exchange Act Release No. 34712, supra note 4.
\7\ Position accountability standards require traders who own or
control positions in excess of established limits to provide to the
exchange, upon request, information regarding the nature of the
position and the trading strategy employed.
\8\ See Letter from Jean A. Webb, Secretary, Commodity Futures
Trading Commission (``CFTC''), to Todd E. Petzel, Senior Vice
President, Research, and Chief Economist, CME, dated January 2,
1992. In its notice of the CME's proposal, the CFTC states that
``the nearly inexhaustible deliverable supply of major foreign
currencies, such as those currently traded, coupled with the very
high liquidity of the underlying cash markets and the ease of
arbitrage between the cash and futures markets * * * substantially
lessen the threat of market manipulation or distortions caused by
large * * * positions. In this regard, it should be noted that the
relative depth of deliverable supplies for futures and option
contracts on foreign currencies is unique * * *.'' See Speculative
Position Limits--Exemption from CFTC Rule 1.61; CME Proposed
Amendments to Rules 3902.D, 5001.E., 3010.F, 3012.F, 3013.F, 3015.,
4604, and Deletion of Rules 3902.F, 5001.G, 3010.H., 3012.H, 3013.H,
and 3015.H.
In addition, the Exchange has since commenced trading customized
FCOs,\9\ in which positions are aggregated with other FCO positions in
the underlying currency; however, customized option trading volume is
not included in the volume calculation to determine the applicable
position limit under the current two-tiered system. In addition to
customized options, there are also other FCO products that are
aggregated for position limit purposes, including long-term, month-end,
cash/spot, and American- and European-style options.\10\
\9\ See Securities Exchange Act Release No. 34925 (November 1,
1994), 59 FR 55720 (November 8, 1994) (order approving File No. SR-
PHLX-94-18).
\10\ See e.g., Securities Exchange Act Release Nos. 30672 (May
6, 1992), 57 FR 20546 (May 13, 1992) (order approving File No. SR-
PHLX-91-30) (aggregating long-term FCOs); 30945 (July 21, 1992), 57
FR 33381 (July 28, 1992) (order approving File No. SR-PHLX-92-13)
(aggregating month-end FCOs); 33732 (March 8, 1994), 59 FR 12023
(order approving File No. SR-PHLX-93-10) (aggregating cash/spot
FCOs); and 24859 (August 27, 1987), 52 FR 33493 (September 3, 1987)
(order approving File No. SR-PHLX-87-24) (aggregating European-style
contracts).
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As a result, the PHLX claims that FCO participants have continued
to accumulate positions near existing limits. If large traders continue
to be restricted by the current position limit levels, the PHLX
believes that trading interest could migrate to the OTC market,
hampering PHLX liquidity. The Exchange believes that a higher position
limit may enable such traders to consider, or return to, an exchange
marketplace for their FCO trading. Thus, the PHLX believes that
increased position and exercise limits are necessary to add depth and
liquidity to the PHLX's FCO market. These increases are particularly
appropriate because the FCO market attracts a large number of
institutional and corporate investors with substantial hedging
[[Page 26064]] needs. These investors utilize the PHLX marketplace by
participating in block size transactions in FCOs to hedge exposure to
fluctuations in exchange rates due to international business
transactions, often many billions of dollars.
Since the most recent increase in position limits, the Exchange has
continued to examine FCO position limits in light of the vast
underlying currency market. The PHLX represents that the Commission has
recognized that the interbank foreign currency spot market is an
extremely large, diverse market consisting of banks and other financial
institutions worldwide, supplemented by equally deep and liquid markets
for standardized options, futures and futures options, as well as an
active OTC market.\11\
\11\ See Securities Exchange Act Release No. 34712, supra note
4.
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The PHLX estimates that the size of the worldwide currency market
has grown exponentially. In 1989, total gross global foreign exchange
turnover was estimated to be $932 billion per day and net global
turnover was estimated to be $640 billion per day.\12\ In 1992, total
gross global foreign exchange turnover was estimated to be $1.354
billion per day, which represents a 35% increase since 1989. Further,
global ``net-net'' exchange market turnover was estimated at $880
billion; this takes into account local and cross-border double counting
and estimated gaps in reporting.\13\
\12\ See Bank for International Settlements (``BIS'') Central
Bank Survey of Foreign Exchange Market Activity in 1989.
\13\ See BIS Central Bank Survey of Foreign Exchange Market
Activity in April 1992 (March 1993).
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With respect to the underlying dollar value of FCO positions at the
200,000 contract level, the Exchange believes that the figure should be
evaluated in the context of the worldwide currency market as a whole.
According to the PHLX, as a percentage of total global currency
turnover, the impact of a PHLX FCO position, even at 200,000 contracts,
is minimal. For example, the Exchange estimates that 200,000 Deutsche
mark contracts would represent far less than 2% of the daily
international currency transaction volume in the Deutsche mark.\14\ As
a comparison, the Exchange emphasizes that the interbank currency
market is exponentially larger than the daily volume on the New York
Stock Exchange, Inc. (``NYSE''): $8 billion on the NYSE as compared to
$800 billion in the currency markets.
\14\ 200,000 Deutsche mark contracts x 62,500 contracts x .68
(of $1.00) exchange rate=$9 billion, which is 2% of $544 billion.
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The Exchange also believes that the proposed increase is reasonable
in light of prior position limit increases. The 1992 increase
represents a 50% increase in the two affected options. Previously, the
Commission approved increases of 150%, 100%, and 100%.\15\ Accordingly,
the PHLX believes that the current proposal to raise the limits by 100%
is in line with prior changes, and specifically does not create a
higher increase than any prior one.
\15\ In 1985, the first increase from 10,000 contracts to 25,000
contracts represented a 150% change while the second increase from
25,000 to 50,000 contracts represented a 100% increase; similarly,
the 1986 change to 100,000 contracts represented a 100% change.
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Because of the large size of the underlying market in foreign
currencies, the PHLX does not believe that manipulative concerns would
be enhanced if the limits were increased. With respect to the proposed
increase in exercise limits, the Exchange believes that the proposal
does not raise new concerns regarding manipulation or potential market
disruption in the underlying currencies. The Exchange notes that its
surveillance procedures are designed to detect violations of these
limits. In addition, the Exchange notes that a higher limit for all
FCOs should simplify and facilitate the implementation of such limits,
without the volume reviews currently required, thereby eliminating the
fluctuations in limits inherent in a volume-based approach.
The PHLX notes that the Commission has stated previously that
although FCO position and exercise limits must be sufficient to protect
the options and related markets from disruptions caused by
manipulation, at the same time, the limits must not be so low as to
discourage participation in the options market by institutions and
other investors with substantial hedging needs or to prevent
specialists and market makers from adequately meeting their obligations
to maintain a fair and orderly market.\16\
\16\ See Securities Exchange Act Release No. 22479, supra note
5.
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For these reasons, and in light of these market changes, the
Exchange 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 trades as well as to protect investors and the public
interest. The PHLX believes that the increased depth and liquidity of
the FCO market should promote just and equitable principles of trade.
The PHLX believes that this, in turn, should result in position limit
levels that serve the purposes of protecting investors and the public
interest as well as preventing unfair acts and practices, such as
manipulation.
(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 received or requested.
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 reason 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, NW., Washington, DC 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 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 June 6, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\ [[Page 26065]]
\17\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-11946 Filed 5-15-95; 8:45 am]
BILLING CODE 8010-01-M
