[Federal Register Volume 59, Number 83 (Monday, May 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10395]
[[Page Unknown]]
[Federal Register: May 2, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33959; International Series Release No. 660; File No.
SR-Phlx-94-11]
Self-Regulatory Organizations; Filing of Proposed Rule Change by
the Philadelphia Stock Exchange, Inc. Relating to Adoption of a
Customized Strike Facility for Foreign Currency Options
April 25, 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 March 4,
1994, 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.\1\ The Commission is publishing
this notice to solicit comments on the proposed rule change for
interested persons.
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\1\On March 22, 1994, the Exchange filed Amendment No. 1 to the
proposed rule change to specify that requests for quotes and
responsive quotes for customized strike options will be promptly
reported to the Options Price Reporting Authority and disseminated
as administrative text messages. See Letter from Michele Weisbaum,
Associate General Counsel, Phlx, to Michael Walinskas, Branch Chief,
Office of Derivatives and Equity Oversight (``ODEO''), Division of
Market Regulation (``Division''), Commission, dated March 22, 1994
(``Amendment No. 1''). On April 9, 1994, the Exchange filed
Amendment No. 2 to the proposed rule change to: (1) revise the
procedure in proposed Rule 1069(b) for executing a trade using
customized strike prices; and (2) provide that the quote spread
parameters for customized strike options will be twice those
provided in Phlx Rule 1014(c). See Letter from Michele Weisbaum,
Associate General Counsel, Phlx, to Michael Walinskas, Branch Chief,
ODEO, Division, Commission, dated April 8, 1994 (``Amendment No.
2'').
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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 adopt new
Rule 1069 to provide for the listing and trading of currency options
with customized strike prices. Rules 1002 and 1047, which address
exercise limits and trading rotations, respectively, are also being
amended accordingly. The text of the proposed rule change is available
at the Office of the Secretary, the 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 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
The Phlx states that the purpose of the filing is to adopt a
procedure whereby foreign currency option traders and their customers
will have the ability, within specified limits, to designate their own
option exercise price parameters on a trade. The Exchange now lists
specific series of options on foreign currencies that have exercises or
strike prices in set intervals at or near the spot price of the
underlying currency on which the options are traded. Users of the Phlx
foreign currency option market will now have the ability to trade
foreign currency options having a chosen exercise price, regardless of
whether it is a listed exercise price at the time. These options will
be called ``customized strike options.''
In the over-the-counter market, foreign currency options users
currently have the ability to designate the terms of such options with
respect to expiration date, exercise style, exercise price, and size.
The participants in that customized market are typically institutional
investors and banks, investors that often buy and sell options in large
size transactions. Users of the Phlx market, because of the selection
of expiration dates, strike prices, and exercise styles currently
listed on the Exchange, already have a significant ability to dictate
the terms of a foreign currency option contract. Once this new rule is
adopted, Phlx market participants will also be able to trade foreign
currency options with any chosen exercise price, regardless of whether
it is not one that has already been listed within the given parameters
set by the Phlx.
Customized strike options will be available for all currently
listed foreign currency options, including cross-rate options but
excluding cash-spot options. The customized strike option contracts may
also be either American or European-style and may have any expiration
date currently available for non-custom options, including long-term
options with terms up to three years out.\2\
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\2\The Phlx has received approval to trade long-term foreign
currency options with dates up to three years out. See Securities
Exchange Act Release No. 30672 (May 6, 1992), 57 FR 20546 (May 13,
1992). However, the Exchange is presently only listing options with
expirations as long as two years out and currently expects to only
trade customized strike options with expirations up to two years
out.
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By giving these institutional customers and banks the ability to
further customize options they wish to trade on an exchange, the Phlx
believes they will be able to better manage their risks and hedge their
portfolios, while receiving all of the protections and benefits an
organized exchange can provide. Also, by having the Options Clearing
Corporation (``OCC'') as the issuer and guarantor of the customized
strike options, the Phlx believes that concerns regarding contra-party
creditworthiness and option exercise performance are greatly reduced.
Finally, the Phlx believes that the real time dissemination of requests
for quotes, responsive quotes, and last sale information through the
Options Price Reporting Authority (``OPRA'') will help promote and
achieve market transparency in these options.
Customized strike options will be subject to all Exchange rules and
regulations regarding surveillance and sales practices. Unless
specifically exempted, all floor trading procedures will also be
adhered to. Examples of different procedures for customized strike
options include no continuous quoting, no opening or closing rotations,
and restrictions as to exercise.\3\ Examples of similar trading
practices include position limits and maximum quote spread parameters.
Position and exercise limits for customized strike options will be the
same as those provided for existing options on the same underlying
currency and positions in these options will be aggregated with
existing options in calculating position and exercise limits.
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\3\As proposed, the lesser of 100 contracts or the remaining
number of contracts may be exercised. See Amendment No. 2, supra
note 1.
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The Exchange believes that these options are better suited to large
institutional and bank traders rather than individuals and will
therefore tailor the product to such traders by requiring a minimum
size for any trade that may occur. Quotes may not be requested and
trades may not be executed in a series with no open interest for less
than 300 contracts. Responsive quotes to series with no open interest
must be at least 300 contracts for assigned ROTs and 100 contracts for
non-assigned ROTs. Responsive quotes and transactions in currently
opened series may be the lesser of 100 contracts or the remaining
number of contracts. Current methods of quoting will be used for these
options.
A 300 contract trade could have an underlying equivalent value of
approximately $12 million, depending on the specified currency. Because
of the relatively large size of the potential trades, the Exchange will
impose higher net capital requirements for ROTs trading in customized
strike options. Assigned ROTs will be subject to a $1 million minimum
net liquid assets requirement and all other ROTs will be subject to a
$250,000 minimum net liquid assets requirement. In accordance with
Exchange Rule 722, these options will be margined the same as regular
foreign currency options since the underlying currency and settlements
will be identical.
The proposed trade execution procedure is as follows.\4\ A
participant will come into the trading crowd and request a quote in a
customized strike option. The crowd will now have a standard time (as
described below) in which to submit responsive quotes. No trade may
occur until the expiration of the response period unless at least two
assigned ROTs have quoted a market. During the response time, existing
time priority and parity rules will apply in order to determine who
will participate on the contra-side of the order except that if an
assigned ROT has made a market and another participant betters the
market, the assigned ROT will have an opportunity to match that better
market if he voices that market prior to the execution of the trade.\5\
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\4\Id.
\5\Because, under the proposal, assigned ROTs would be required
to maintain higher net capital and make larger markets in unopened
series than unassigned ROTs, the Exchange believes that giving the
assigned ROTs this benefit will encourage ROTs to register for
assignments in the customized strike options and thereby provide
liquidity.
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The Foreign Currency Options Committee (``Committee'') has
determined that the response period should be a standard predefined
interval that may only change at the direction of the Committee and
with adequate notice to the membership and the Commission. Acceptable
time periods may be within the range of one to ten minutes and will be
set by the Committee prior to the start-up of trading in the customized
strike options. For example, the Committee may set the time period to
two minutes for all trades.
When a request for a quote is voiced in the trading crowd, it and
all responsive quotes will be displayed and reported to OPRA and
disseminated as an administrative text message over the OPRA System.\6\
Additionally, once a trade is consummated, it will also be reported to
OPRA and disseminated as an administrative text message over the OPRA
System. The specialist will not be obligated to make continuous markets
in customized options where open interest has been created. OCC will
clear and settle the options. Because quotes in these options will not
be continuously updated or otherwise priced by the Exchange, OCC will
generate a theoretical price based on the prices of currently listed
series and the closing value of the underlying foreign currency. OCC
will use this price to mark the options daily and calculate margin
requirements.
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\6\See Amendment No. 1, supra note 1.
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Acknowledging the consistent volatility of the foreign currency
market, the Phlx believes that customized strike options should bode
well for the investors speculating and hedging on the relative
performance of the various economies, as reflected by their currencies.
Finally, the quote spread parameters applicable to customized
strike options will be double the existing parameters for listed series
provided in Rule 1014.\7\ The Exchange believes the existing quote
spread parameters are too narrow for use with options such as these
which have customized features.\8\
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\7\See Amendment No. 2, supra note 1.
\8\Telephone conversation between Michele Weisbaum, Associate
General Counsel, Phlx, and Brad Ritter, Attorney, ODEO, Division,
Commission, on April 14, 1994.
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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 promote just and
equitable principles of trade, foster cooperation and coordination with
persons engaged in regulating, clearing, settling, and processing
information, and facilitate transactions in securities, remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, protect investors and the
public interest by providing foreign currency option market
participants with strike prices more closely suited to their trading
strategies.
(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 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 inviting 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 in 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 Phlx. All
submissions should refer to File No. SR-Phlx-94-11 and should be
submitted by May 23, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\17 CFR 200.30(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-10395 Filed 4-29-94; 8:45 am]
BILLING CODE 8010-01-M
