[Federal Register Volume 60, Number 105 (Thursday, June 1, 1995)]
[Notices]
[Pages 28638-28639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13413]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35756; File No. SR-Phlx-95-02]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Amendment No. 1 to the Proposed Rule Change, and Notice of
Filing and Order Granting Accelerated Approval of Amendment No. 2 to
the Proposed Rule Change by the Philadelphia Stock Exchange, Inc.,
Relating to Additional Expirations for Cash/Spot German Mark Foreign
Currency Options (``3D Options'')
May 24, 1995.
On January 25, 1995, the Philadelphia Stock Exchange, Inc.
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list series of cash/spot
German mark foreign currency options (``3D Options'') having up to 12
months to expiration. On February 24, 1995, the Exchange filed
Amendment No. 1 to the proposed rule change.\3\ Notice of the proposed
rule change and Amendment No. 1 thereto appeared in the Federal
Register on March 27, 1995.\4\ No comment letters were received on the
proposed rule change, as amended. The Exchange subsequently filed
Amendment No. 2 to the proposal on May 9, 1995.\5\ This order approves
the Exchange's proposal, as amended.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ 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'' foreign currency options
(``FCOs''); and (3) specify the strike price intervals applicable to
the longer-term 3D Options. See Letter from Michele Weisbaum,
Associate General Counsel, Phlx, to Brad Ritter, Senior Counsel,
Office of Market Supervision (``OMS''), Division of Market
Regulation (``Division''), Commission, dated February 24, 1995.
Amendment No. 1 also clarified the proposal to allow spread margin
between the 3D Options and the regular Deutsche mark FCO. This
proposal, however, was later withdrawn in Amendment No. 2. See
Amendment No. 2, supra note 5.
\4\ See Securities Exchange Act Release No. 35520 (March 21,
1995), 60 FR 15807.
\5\ In Amendment No. 2, the Exchange withdrew its request for
spread margin treatment between the Exchange's German mark FCOs and
the 3D Options. Additionally, the Exchange notified the Commission
that it is terminating its agreement with one of the two outside
vendors that it had contracted with to calculate the settlement
value of the 3D Options. See Letter from Michele Weisbaum, Associate
General Counsel, Phlx, to Brad Ritter, Senior Counsel, OMS,
Division, Commission, dated May 8, 1995 (``Amendment No. 2'').
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On March 8, 1994, the Commission approved the listing and trading
of 3D Options.\6\ 3D Options are issued by The Options Clearing
Corporation and are European-style.\7\ These FCOs currently have one-
week and two-week expirations and were originally designed to provide a
hedging vehicle for: sophisticated retail customers, portfolio
managers, and multi-national corporations which need to hedge their
short term foreign currency exposure; and to banks which need to hedge
the risks associated with trading in the forward and cash markets.
\6\ See Securities Exchange Act Release No. 33732 (March 8,
1994), 59 FR 12023 (March 15, 1994) (``3D Approval Order'').
\7\ 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 represents that the users of 3D Options have
particularly liked the U.S. dollar settlement feature and have
indicated to the Exchange that they would like to be able to use an
exchange-traded U.S. dollar settled FCO to hedge longer-term currency
risks. As a result, in addition to the current one-week and two-week
expiration series of 3D Options, the Phlx proposes to list series of 3D
Options on the March, June, September, and December cycle and the two
near-term months. Phlx Rules 1012(a)(ii) (B) and (C) are being amended
to reflect these additional series of options.
The expiration date for these longer-term 3D Options will be the
Monday preceding the third Wednesday of each month. The Exchange will
not list 3D Options with month-end expirations or series with more than
12 months to expiration.\8\
\8\ The Exchange is also amending Phlx Rules 1000, 1012, 1014,
1057, and 1069 to change references from ``cash/spot'' FCOs to
``3D'' FCOs, as these options are more commonly referred to. The
Exchange is also making some non-substantive changes to Rule 1012
for ease of reading.
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Currently, 3D Options are listed with the symbol XDA, XDB, 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.
3D Options are currently listed in one-half point strike price
intervals. The longer-term 3D Options listed for the three near term
months will also be listed in one-half point strike price intervals.
The 3D Options listed with six, nine, of twelve months to expiration
will have one point strike price intervals.
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5) \9\ in that the
proposal is designed to promote just and equitable principles of trade,
to prevent fraudulent and manipulative acts and practices, and to
protect investors and the public interest. Specifically, the Commission
believes that the proposal is designed to provide investors an
additional means of hedging foreign currency portfolios and cash flows
with longer-term market risk, thereby facilitating transactions in
FCOs. The Commission believes that by allowing the Phlx to list these
options with up to 12 months to expiration, investors will be provided
with greater flexibility to tailor FCO positions to satisfy their
investment objectives.\10\ In [[Page 28639]] this regard, the
Commission notes that the Phlx has stated that the longer-term 3D
Options 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 long-term concerns for which the one-week and
two-week expiration 3D Options would not be an appropriate hedging
vehicle. Finally, the Exchange believes that retail traders who may
have a long-term market perspective will find the longer-term 3D
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.\11\
\9\ 15 U.S.C. 78f(b)(5) (1988).
\10\ Pursuant to Section 6(b)(5) of the Act, the Commission must
predicate approval of any new option proposal upon a finding that
the introduction of such new derivative instrument is in the public
interest. Such a finding would be difficult for a derivative
instrument that served no hedging or other economic function because
any benefits that might be derived by market participants likely
would be outweighed by the potential for manipulation, diminished
public confidence in the integrity of the markets, and other valid
regulatory concerns.
\11\ The Commission notes that prior to listing longer-term 3D
Options the Exchange will be required to provide written
representations that both the Exchange and the Options Price
Reporting Authority have the necessary systems capacity to support
these new series of options.
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Additionally, the Commission notes that except as modified herein,
all of the representations made by the Exchange and all of the rules
approved by the Commission in connection with the 3D Approval Order,
including, but not limited to, aggregation with regular Deutsche mark
FCOs for position and exercise limit purposes, extended trading hours
on expiration Mondays, Exchange and bank holidays on which 3D Options
will not expire, and automatic exercise of in-the-money 3D Options,\12\
will also apply to the longer-term 3D Options listed pursuant to this
approval.\13\
\12\ See 3D Approval Order, supra note 6.
\13\ One additional modification herein is with regard to
customer margin. In connection with the 3D Approval Order, the Phlx
agreed to collect margin within two days following the date on which
a customer enters into a cash/spot FCO position and to maintain
customer margin at a level sufficient to produce at least a 97%
confidence level in the volatility of the Deutsche mark in relation
to the U.S. dollar for all two-day intervals during the two year
period preceding the time of measurement. These margin provisions
will apply to the longer-term 3D Options only when these options
have two weeks or less to expiration. At all other times, the
Exchange's customer margin procedures applicable to the Phlx's
regular Deutsche mark FCOs will apply. Telephone conversation
between Michele Weisbaum, Associate General Counsel, Phlx, and Brad
Ritter, Senior Counsel, OMS, Division, Commission, on May 23, 1995.
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As a result, for the reasons stated above and in the 3D Approval
Order,\14\ the Commission finds that the proposed rule change is
consistent with the Act.
\14\ See 3D Approval Order, supra note 6.
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The Commission finds good cause for approving Amendment No. 2 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register.
Specifically, Amendment No. 2 merely withdraws the Exchange's request
for spread margin treatment between the Exchange's German mark FCOs and
the 3D Options.\15\ Because the requested spread margin treatment would
have been a liberalization of the Exchange's existing margin rules,
withdrawing this request from the proposal does not raise any
regulatory issues.
\15\ See Amendment No. 2, supra note 5.
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The Commission notes that the termination by the Phlx of its
relationship with one of the vendors used to calculate the settlement
value for the 3D Options is, in this case, a non-substantive change. In
this regard, based on the representations by the Phlx describing the
procedures used for calculating the settlement value, including the
backup procedures to be used in the event of a complication, the
Commission believes that the Phlx will be able to continue to comply
with the procedures specified in the 3D Approval Order despite this
change.\16\ Accordingly, the Commission believes it is consistent with
Section 6(b)(5) of the Act to approve Amendment No. 2 to the Phlx's
proposal on an accelerated basis.
\16\ See 3D Approval Order, supra note 6. The Commission expects
the Phlx to continue to notify the Commission prior to making any
change in the procedures approved in the 3D Approval Order.
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2. 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.\16\
\16\ See 3D Approval Order, supra note 6. The Commission expects
the Phlx to continue to notify the Commission prior to making any
change in the procedures approved in the 3D Approval Order.
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All submissions should refer to the File No. SR-Phlx-95-02 and
should be submitted by June 22, 1995.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-Phlx-95-02), as amended, is
approved contingent upon the Exchange's submission to the Commission of
adequate systems capacity representations.\18\
\17\ 15 U.S.C. 78s(b)(2) (1988).
\18\ See supra note 11.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
\19\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13413 Filed 5-31-95; 8:45 am]
BILLING CODE 8010-01-M
