[Federal Register Volume 62, Number 113 (Thursday, June 12, 1997)]
[Notices]
[Pages 32136-32141]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-15330]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38711; File No. SR-Phlx 97-14]
Self-Regulatory Organization; Notice of Filing and Order Granting
Partial Accelerated Approval to a Proposed Rule Change by the
Philadelphia Stock Exchange, Inc. Relating to Rule 722, Margin Accounts
June 2, 1997.
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 May 8,
1997, 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. Phlx submitted amendment No. 1 on May 20, 1997.\1\ Phlx
submitted Amendment No. 2 on May 28, 1997.\2\ Phlx submitted Amendment
No. 3 on May 30, 1997.\3\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons,
and to grant accelerated approval to the portions of the proposal
relating to customer cash accounts, over-the-counter (``OTC'') options,
market-maker and specialist ``good faith'' margin requirements for
permitted offset transactions, and
[[Page 32137]]
certain other portions of the proposal as discusses below.\4\
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\1\ See Letter from Michele R. Weisbaum, Vice President and
Associate General Counsel, Phlx, to Michael Walinskas, Senior
Special Counsel, Division of Market Regulation (``Market
Regulation''), Commission, dated May 19, 1997 (``Amendment No. 1'').
Amendment No. 1 superseded the original rule filing in its entirety
by addressing technical changes by making corrections to certain
typographical errors appearing in the rule filing. Amendment No. 1
also makes a number of substantive changes.
\2\ See Letter from Michele R. Weisbaum, Vice President and
Associate General Counsel, Phlx, to Michael Walinskas, Senior
Special Counsel, Market Regulation, Commission, dated May 28, 1997
(``Amendment No. 2). Amendment No. 2 supersedes Amendment No. 1 with
regard to certain portions of the rule filing the Commission is
approving today by accelerated approval.
\3\ See Letter from Diane Anderson, Vice President, Examinations
Department, Phlx, to Michael Walinskas, Senior Special Counsel,
Market Regulation, Commission, dated May 30, 1997 (``Amendment No.
3''). Amendment No. 3 corrects an inadvertent omission to Amendment
No. 2.
\4\ The Commission is not approving the following portions of
the proposed rule filing: the proposed definition of ``qualified
stock basket'' (Rule 722(a)(7)); Customer Margin Accounts--
Derivative Securities (Rule 722(d)); and Commentary .14.
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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 revise its
rules governing margin in order to (i) establish Phlx rules to govern
areas of margin regulation that will no longer be addressed by
Regulation T of the Board of Governors of the Federal Reserve System
(``Federal Reserve Board,'' ``FRB,'' or ``Board''), (ii) conform
certain Phlx margin rules to those of the New York Stock Exchange
(``NYSE''), and (iii) rearrange existing provisions of the Phlx margin
rules for ease of reading. 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 Statements 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 purpose of the proposed rule change is to make revisions to the
Phlx rules governing margin that will (i) establish Phlx rules to
govern areas of margin regulation that will no longer be addressed by
Regulation T of the Board of Governors of the Federal Reserve System,
(ii) conform certain Phlx margin rules to those of the NYSE, and (iii)
rearrange existing provisions of the Phlx margin rules for ease of
reading.
The Exchange is proposing changes at this time because of recent
amendments to Regulation T, the regulation that covers extensions of
credit by and to brokers and dealers by the Federal Reserve Board.\5\
Among other things, the amendments to Regulation T will modify or
delete certain Board rules regarding options transactions in favor of
rules that must be adopted by the options exchanges and approved by the
Commission. The new options provisions in Regulation T became effective
June 1, 1997. In the course of amending the Exchange's rules to
accommodate the changes necessary because of the Regulation T
amendments, it became necessary for the sake of clarity to propose
changes to the margin rules that would conform certain Phlx rules to
the rules of the NYSE and to rearrange existing provisions of Rule 722
for the sake of organization.
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\5\ 61 FR 20386 (May 6, 1996) (Federal Reserve Board's release
adopting certain changes to Regulation T).
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Definition Section
Rule 722 has been rearranged to set forth the definitions
applicable to the rule in section (a) now instead of at the end of the
rule. Accordingly, all of the definitions that are currently in section
(e) have been moved to new section (a) with three additions: (1) the
definition of the term ``current market value'' will now also
incorporate a definition relevant to options and spot market prices
which is currently in section (c)(2)(A) (i) and (ii); (2) a definition
of the term ``escrow agreement'' has been added in subsection (6); and
(3) a definition of the term ``qualified stock basket'' is added in
subsection (7).
Customer Margin Accounts
The Exchange is also proposing to rearrange Rule 722 so that all
provisions concerning customer margin accounts are in the same section.
Currently, customer margin provisions appear throughout the rule.
Paragraph (b) will now set forth the general rules for margin
requirements on long and short positions in customer margin accounts.
Paragraph (c) will set forth the exceptions for specific types of
securities and positions held in margin accounts. Specific provisions
relevant to options and warrants will be covered in paragraph (d)
entitled Derivative Securities. Paragraph (b) is merely renumbered
paragraph (a) from the current rule with headings added for clarity and
the term stock is being changed to security for broader application.
The first exception in paragraph (c), Margin Accounts-Exceptions,
will be for offsetting ``long'' and ``short'' positions. The margin
treatment which currently is in section (b)(1) will be moved to section
(c)(1) but will not be changed. Specifically, long positions in a
security exchangeable or convertible into the security held in a short
position will require that 10% of the current market value of the
``long'' position be maintained and ``long'' and ``short'' positions on
the same security will be margined at 5%. These provisions are
consistent with NYSE Rule 431.
The margin treatment for exempted securities and marginable
corporate debt is being moved from section (b)(2) in the current rule
to new section (c)(2) but is not being changed in any substantive
manner. Consistent with NYSE Rule 431, obligations of the United States
are subject to a margin requirement of between 1% and 6% depending on
the years to maturity for the obligation. Zero coupon bonds are subject
to a margin requirement of 3% for bonds with five years or more to
maturity. All other exempted securities are subject to an initial and
maintenance margin requirement of 15% of the current market value or 7%
of the principal amount, whichever is greater. The maintenance margin
requirement for non-convertible debt securities will remain at 20% of
the current market value or 7% of the principal amount, whichever
amount is greater with the exception for mortgage related securities
which have a 5% maintenance margin requirement.
The remainder of current paragraphs (b)(2) through (b)(6) is now
renumbered as paragraphs (c)(2)(B) through (c)(5). All of the
provisions applicable to Special Provisions, Cash Transactions with
Customers, Joint Accounts in which the Carrying Member Organization or
a Partner Thereof or Shareholder Therein has an Interest, International
Arbitrage Accounts and Broker Dealer Accounts will remain in the rule
as is except that Subpart (b)(5) is being removed from this section
because the provisions for specialist and market maker accounts will
now be covered under section (g). Subparagraph (b) which deals with
joint accounts is being moved to section (g)(3) and since the Exchange
no longer has odd-lot dealers, subparagraph (a) is being completely
deleted.
New proposed section (d) of Rule 722 is entitled Customer Margin
Accounts--Derivative Securities, and will contain all of the provisions
applicable to options and warrants in customer margin accounts. The
first paragraph states that active securities dealt in on a recognized
exchange will be valued at current market prices but that other
securities will be valued conservatively and that substantial
additional margin will be required where the securities are unusually
volatile or illiquid. This provision is being moved, unchanged, from
section (c)(1).
The next provision sets forth the continuing rule that long
positions in
[[Page 32138]]
listed options and warrants will not have any loan value for purposes
of computing margin in customer accounts. It is being moved from
current paragraph (c)(2) and is renamed, Long Positions--Listed Options
and Currency, Currency Index or Stock Index Warrants.
Paragraph (d)(3) restates the existing provisions of current
paragraph (c)(2)(B)(i) regarding short listed options and warrants. The
paragraph and accompanying chart sets forth the margin requirements for
equity options, index options, foreign currency options, currency
warrants, currency index warrants and stock index warrants listed or
traded on a national securities exchange. It is not applicable to OTC
options which are provided for in section (f) of the rule (current
subsection (ii) to paragraph (c)(2)(B) which dealt with OTC options is
also being deleted at this time). The one addition to the existing rule
is the exception for short put options that would cap the margin
requirement at no less than the option market value plus the minimum
percentage applicable to that type of option in column III of the
option's aggregate exercise price amount. The purpose of this cap is to
assure that the margin requirement does not continue to increase as the
risk of the put position decreases as it becomes farther out-of-the-
money.
Existing paragraph (c)(2)(C) is being renumbered as (d)(4) and
certain omitted words caused by typographical errors are being
corrected.
The margin treatment for various related securities positions
involving listed options and warrants carried in a customer margin
account has been revised and rearranged from what is in the current
rule. Current paragraph (c)(2)(D) is renumbered as (d)(5)(A)(i) and
entitled Straddles/Combinations. The provision has not been changed and
thus continues to state that where a call option contract (on a stock,
index or foreign currency) is carried in a short position for the same
customer for which a short put option is held, the margin on the put or
call, whichever amount is greater, plus the current market value of the
other option is required to be maintained. The first two paragraphs of
current subpart (c)(2)(F)(i) applicable to warrant straddles has been
moved into this section and numbered as (d)(5)(A) (ii) and (iii).
Former subparagraph (E) is renumbered as (d)(5)(B) and entitled, Short
option offset by long option where long option expires with or after
short option. The substance of the section has not been changed but has
been redrafted for the sake of clarity and brevity. The margin
treatment for spread positions on stock index, currency and currency
index warrants in the present rule (in section (c)(2)(F)(i)) is
continued in section (d)(5)(C). The margin treatment for covered write
convertibles which was formerly in subparagraph (F)(i) will now be in
(d)(5)(D) but the language in that section applicable to short puts
will be deleted because it is covered under a new subsection (E) which
is being added for covered calls and covered puts. Finally, a new
provision for short equity call options offset by a warrant to purchase
the underlying security has been added in new subsection (d)(5)(F). The
provision, which is consistent with Regulation T, requires no margin
for this position if the warrant to purchase the underlying security
does not expire on or before the expiration date of the short call, and
if the amount (if any) by which the exercise price of the warrant
exceeds the exercise price of the short call is deposited in the
account.
Customer Cash Accounts
The Exchange is proposing to add a provision to Rule 722 detailing
the circumstances under which a customer may carry short equity options
in a cash account, i.e., an account for which no loan value is
extended. This provision is consistent with a provision in Regulation T
and is being added so that the Phlx rule is more complete and thus,
easier for members to rely on the rule for all aspects of margin
regulation. The proposed new paragraph (e)(1) of Rule 722 would permit
either a call option contract or a put option contract held in a short
position to be carried in a cash account if the option contract was a
covered position and the account contained one of the specified
offsets. In the case of a short call option, permitted offsets include:
(i) the underlying security, in an amount equal or greater than that
specified by the option contract, provided it is held in the account
until full cash payment for the underlying security is received; (ii) a
security immediately convertible without the payment of money into an
equal or greater quantity of the underlying security specified by the
option contract, if held in, or purchased on the same day, provided
that the option premium is held in the account until full cash payment
for the convertible security is received and the ability to convert
does not expire before the expiration of the short call option; or
(iii) an escrow agreement issued by a bank and either held in the
account at the time the call is written or received in the account
promptly thereafter. In the case of a short put option, allowable
offsets include: (i) a cash or cash equivalent as defined in Regulation
T of not less than the aggregate put exercise amount; or (ii) an escrow
agreement issued by a bank which is obligated to deliver the required
cash in the event of assignment of the short put.
New proposed paragraph (e)(2) of Rule 722 would add a provision
that permits a customer to hold certain index options in a cash account
such as short European-style index options offset by long European-
style index options on the same underlying index. In order to qualify
for the cash account, the long position would have to be held in the
account, or purchased for the account on the same day. In addition, the
option premium would have to be held in the account until full cash
payment for the long option is received; the long option must expire
with the short option and the account must hold cash or cash
equivalents of not less than any amount by which the aggregate exercise
price of a long call (short put) exceeds the aggregate exercise price
of a short call (long put). This new treatment is justified because the
Federal Reserve Board decided to defer to the options exchanges the
authority to determine the specific options-related strategies allowed
to be effected in the cash account, provided that the risk of the
strategy is defined and the account contains the securities and/or cash
required to fully cover the exposure.
Options positions covered by escrow receipts meeting the
requirements of Options Clearing Corporation (``OCC'') Rule 610 or
option guarantee letters have been moved from section (c)(2)(G) to
paragraph (e)(3) of Rule 722 and entitled, Certain Covered Options
Transactions. The provisions applicable to put and call option
contracts on equity options, index options and foreign currency options
have not been changed except to correct a typographical error.
Over-the-Counter Options
The Exchange is adopting margin requirements for OTC options which
are the same as the OTC options margin rules in NYSE Rule 431. Within
this section (proposed Rule 722(f)) is a chart showing the initial and/
or maintenance margin required for options on various types of
underlying instruments. The amount of margin required is the percentage
of the current market value of the underlying component times the
multiplier, if any (set forth on the chart) plus any ``in-the-money
amount.'' The amount of the margin required to be maintained may be
reduced for a short put or call by any ``out-of-the-money amount.'' The
amount to which the
[[Page 32139]]
margin required may be reduced is set forth in a separate column.
The Exchange is proposing to add margin treatment for related
securities positions involving OTC options held in a customer margin
account. The Exchange is proposing to add special margin treatment
provisions for covered write convertibles, covered calls and puts, and
spreads and straddles involving OTC options which are the same as that
found in NYSE Rule 431.
Specialist and Market Maker Accounts
Phlx rules as well as the rules of the other option exchanges have
always distinguished the margin treatment for specialists and market
makers from those of the customers because of the unique position of
specialists and market makers in maintaining liquid markets. The rules
recognize that options specialists and market makers must engage in
various hedging transactions to manage the risk involved in fulfilling
their role. Regulation T is deleting its provisions governing permitted
offset treatment on specialists and market makers and is deferring this
authority to the self-regulatory organizations (``SROs'').
Consequently, the proposed rule (Rule 722(f)(2)) sets forth various
permitted offset positions which may be cleared and carried by a member
organization on behalf of one or more registered specialists or
registered options traders (hereinafter collectively referred to as
``market makers'') upon a margin basis satisfactory to the concerned
parties.
A permitted offset position will be defined to mean, in the case of
an option in which a market maker makes a market, a position in the
underlying instrument or other related instrument and in the case of
other securities in which a market maker makes a market, a position in
options overlying the securities in which the market maker makes a
market, if the account holds the following positions: (i) a long
position in the underlying instrument offset by a short position which
is ``in-the-money''; (ii) a short position in the underlying instrument
offset by a long option position which is ``in-the-money''; (iii) a
stock position resulting from the assignment of a market maker short
option position; (iv) a stock position resulting from the exercise of a
market maker long position; (v) a net long position in a security
(other than an option) in which a market maker makes a market; (vi) a
net short position in a security (other than an option) in which the
market maker makes a market; or (vii) an offset position as defined in
SEC Rule 15c3-1. All permitted offset transactions must be effected for
the purpose of hedging, reducing the risk of, rebalancing, liquidating
open positions of market-makers, or accommodation of customer orders,
or other similar market-making purpose.
For purposes of the rule, ``in- or at-the-money'' means that the
current market price of the underlying security is not more than two
standard exercise price intervals below (with respect to a call option)
or above (with respect to a put option) the exercise price of the
option. In determining the types of instruments which are entitled to
be carried in a permitted offset position, reference can be made to the
definition of ``related instrument'' which is set forth in the rule.
``Related instrument'' within an option class or product group is any
related derivative product that meets the offset level requirements for
product groups under Rule 15c3-1 (the net capital rule) of the Act, or
any applicable SEC staff interpretations or no-action positions
(hereinafter referred to collectively as ``Exchange Act Rule 15c3-1'').
The term ``product group'' means two or more options classes, related
instruments, and qualified stock baskets for which it has been
determined that a percentage of offsetting profits may be applied to
losses in the determination of net capital as set forth in Exchange Act
Rule 15c3-1.
Commentary .14 will now address the manner in which the carrying
firm may comply with its responsibility to extend credit properly to
market maker permitted offset transactions effected on an exchange
where the market maker is not registered. If a market maker fails to
specify to which account such an order should be placed and the
resulting transaction clears in a market maker account, and not a
customer account, it will be presumed that the market maker elected
market maker margin treatment for the position effected on an exchange
of which he is not a member. Clearing firms are, however, responsible
for implementing adequate procedures to ensure that such orders are
recorded accurately and cleared into the appropriate accounts.
The Exchange is also proposing to add a provision regarding trading
in an account in a deficit (see, section (g)(4)(C)(ii)). The addition
generally states that nothing shall prohibit the carrying firm from
effecting hedging transactions in a deficit account with the prior
written approval of the carrying firm's SEC designated examining
authority.
Finally, proposed paragraphs (h), Foreign Currency Options-Letters
of Credit and (i) of Rule 722 entitled Other Provisions, will
incorporate the remainder of existing Rule 722 which includes
provisions for When Issued and When Distributed Securities, Guaranteed
Accounts, Consolidation of Accounts, Time within which Margin or Mark-
to-Market must be Obtained, Practice of Meeting Regulation T Margin
Calls by Liquidation Prohibited, Margin Required in Excess of Letters
of Credit, and CIPs.
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, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, as
well as to protect investors and the public interest.
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 Phlx 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.
The Exchange has requested that the Commission find good cause,
pursuant to Section 19(b)(2) of the Act, for approving the proposed
rule change on an accelerated basis prior to the thirtieth day after
publication in the Federal Register.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the proposed rule
[[Page 32140]]
change and Amendment Nos. 1, 2 and 3. 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 Room. Copies of all 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-97-14 and should be submitted by July 3, 1997.
V. Commission's Findings and Order Granting Partial Accelerated
Approval of Proposed Rule Change
The Commission finds the following portions of the proposed rule
change to be consistent with the requirements of the Act and the rules
and regulations thereunder applicable to a national securities
exchange, and, in particular, with the requirements of Section 6(b)(5)
of the Act: \6\ moving the Definition Section of Rule 722 to the front
of the rule, proposing to revise the definition of ``current market
value'' and add the definition of ``escrow agreement'' (the proposed
definition of ``qualified stock basket'' is not being approved at this
time); proposed paragraphs (b) and (c) of Rule 722 relating to Customer
Margin Accounts (but not proposed paragraph (d), which is not being
approved at this time); that portion of the proposed rule concerning
Customer Cash Accounts; that portion of the proposed rule concerning
OTC Options; that portion of the proposed rule concerning Specialists
and Market-Maker Accounts, incorporating certain permitted offset
transactions from Regulation T and Exchange Act Rule 15c3-1 (proposed
Rule 722 (g)); and proposed paragraphs (h) and (i) of Rule 722,
relating to Foreign Currency Options--Letters of Credit and Other
Provisions. Section 6(b)(5) requires, among other things, that the
Exchange have rules that are designed to promote just and equitable
principles of trade, to remove impediments to, and perfect the
mechanism of a free and open market and, in general, to protect
investors and the public interest.\7\
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\6\ 15 U.S.C. 78f(b)(5).
\7\ In approving these rules, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. Sec. 78c(f).
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The Exchange proposes to move the definition section of Rule 722
from the back of the rule to the front, revise one definition and add
new definitions of the terms ``current market value'' and ``escrow
agreement.''
The revised definition of the term ``current market value'' will
now also incorporate a definition relevant to options and spot market
prices which is currently in section (c)(2)(A) (i) and (ii) of Rule
722. Accordingly, the proposed definition does not raise new or unique
issues.
The term ``escrow agreement'' being adopted by the Exchange is
nearly identical to that of Regulation T except that it represents a
more restrictive approach. The Commission concludes that it is
reasonable for the Exchange to limit the allowed issuers of escrow
receipts to entities such as banks.
Paragraph (b) of Rule 722 (Customer Margin Accounts--General Rule)
will not set forth the general rules for margin requirements on long
and short positions in customer margin accounts. Paragraph (c) of Rule
722 (Customer Margin Accounts--Exceptions) will set forth the
exceptions for specific types of securities and positions held in
margin accounts. Neither of these paragraphs has been substantively
revised, and, accordingly, they raise no new regulatory issues. The
Commission concludes that it is reasonable for the Exchange to move
these paragraphs to their new location in Rule 722.
The Exchange is proposing to add a provision to Rule 722 detailing
the circumstances under which a customer may carry short equity options
in a cash account, i.e., an account for which no loan value is extended
(Rule 722(e)(1)). This provision is consistent with a provision in
Regulation T and accordingly does not raise new issues. The Exchange is
also proposing to add a new paragraph (e)(2) permitting a customer to
hold debit put spreads involving European-style broad-based stock index
options to be carried in a cash account. This provision is
substantially similar to an existing provision in the rules of the
Chicago Board Options Exchange (``CBOE'').\8\ Accordingly, the
Commission finds this provision to be a reasonable one for the Phlx to
adopt at this time, while noting that although in its Statement of the
Terms of Substance of the Proposed Rule Change the Phlx appears to be
interpreting the provision broadly, the wording of the rule permits
only the debit put spreads discussed above to be carried in a cash
account.
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\8\ See CBOE Rule 24.11A.
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The Exchange is proposing to move the section of its rule
addressing Option positions covered by escrow receipts meeting the
requirements of OCC Rule 610 or option guarantee letters from section
(c)(2)(G) to paragraph (3) of the cash account section and rename it,
Certain Covered Options Transactions. The provisions applicable to put
and call option contracts on equity options, index options and foreign
currency options have not been changed except to correct a
typographical error, and, accordingly, do not raise any new regulatory
issues. The Commission finds that this provision is a reasonable one at
this time.
The Exchange is proposing to adopt margin requirements for over-
the-counter options which are the same as the OTC option margin rules
in NYSE Rule 431, and, accordingly, do not raise new regulatory
issues.\9\ The Commission also believes that the Exchange's decision to
model its margin treatment for OTC options and related securities
positions based on the NYSE positions should help foster coordination
between markets by achieving parity between the margin requirements of
the various SROs. The Commission also believes that this approach will
promote coordination in regulating, clearing, settling, and
facilitating transactions in securities by providing for uniformity in
this area of the SROs' margin schemes and reducing confusion among
customers.
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\9\ See NYSE Rule 431(f)(2).
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The Exchange has proposed to adopt specific provisions governing
permitted offset treatment for market-makers and specialists that were
deleted from Regulation T as of June 1, 1997. The proposed rule sets
forth various permitted offset positions which may be cleared and
carried by a member organization on behalf of one or more market-makers
upon a margin basis satisfactory to the concerned parties ``good
faith'' margin). In addition, it requires that the amount of any
deficiency between the equity maintained by the market-maker and the
haircuts specified in Exchange Act Rule 15c3-1 shall be considered as a
deduction from net worth in the net capital computation of the carrying
broker.
The six proposed offsets described in proposed Rule 722 (g)(4)(i)
to (vi) codify the existing permitted offsets that were provided under
Regulation T until June
[[Page 32141]]
1, 1997. These offsets reflect well-recognized market-making hedging
transactions involving certain options offset strategies involving the
related underlying stock. The addition of Rule 722(g)(4)(vii), allowing
any offset position defined under Exchange Act Rule 15c3-1 constitutes
a significant expansion of permitted offset positions. The inclusion of
item (vii) recognizes that options market-makers and specialists must
engage in various hedging transactions to manage the risk involved in
fulfilling their role, and, therefore, allows a member organization to
clear and carry market-maker's offset positions as defined in Exchange
Act Rule 15c3-1 upon a good faith margin basis. The Exchange has
clarified its proposal to reflect that market-makers are permitted to
receive good faith margin for all permitted offset positions only if
they are effected for market-making purposes such as hedging, reducing
the risk of rebalancing, liquidating open positions of the market-
maker, accommodating customer orders, or another similar market-making
purpose. The Exchange is also proposing to add a provision regarding
trading in an account in a deficit (section (g)(4)(C)(ii)). The
addition generally states that nothing shall prohibit the carrying firm
from effecting hedging transactions in a deficit account with the prior
written approval of the carrying firm's SEC designated examining
authority.
The Commission believes that the permitted offset proposal is a
reasonable effort by the Phlx to accommodate the needs of Phlx market-
makers in undertaking their market-making responsibilities as it
recognizes the occasional need for market-makers to effect transactions
in their course of dealing in options classes for which the marker-
maker is not registered. The Commission believes that this approach
will not adversely affect the depth and liquidity necessary to maintain
fair and orderly markets. The Commission expects Phlx clearing firms
and other Phlx members that extend margin to market-makers to implement
adequate procedures to ensure that offsets elected by market-makers are
recorded accurately and cleared into appropriate accounts. In addition,
such members should have a reasonable basis for determining that the
offset transactions satisfy the market-making purpose requirements set
forth in Phlx Rule 722(g). The Commission believes that these
requirements will ensure that transactions effected by market-makers
and specialists receiving the offset treatment are in fact directly
related to their market-making function and are not effected for
speculative purposes on a margin basis which should be available only
for bona fide market-making activity.
The Exchange's proposed definition of ``in- or at-the-money,'' for
purposes of permitted offset transactions, represents a codification of
a long standing practice among the options markets of permitting the
financing of options specialists and market-makers underlying stock
positions on a good faith basis when offset on a share-for-share basis
by options which are ``in-or at-the-money,'' i.e., where the current
market price of the underlying security is not more than two standard
exercise price intervals below (with respect to a call option) or above
(with respect to a put option) the exercise price of the option. The
Commission believes it is appropriate for the Phlx to codify this
longstanding practice. This practice is also being codified today by
the CBOE.\10\
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\10\ The Commission notes that the CBOE asserts that it has
received oral no-action relief from the Federal Reserve Board
permitting the two standard exercise price interval interpretation.
See Securities Exchange Act Release No. 38709 (June 2, 1997).
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Proposed paragraphs (h), Foreign Currency Options-Letters of Credit
and (i) of Rule 722 entitled Other Provisions, will incorporate the
remainder of existing Rule 722 which includes provisions for When
Issued and When Distributed Securities, Guaranteed Accounts,
Consolidation of Accounts, Time within which Margin or Mark-to Market
must be Obtained, Practice of Meeting Regulation T Margin Calls by
Liquidation Prohibited, Margin Required in Excess of Letters of Credit,
and CIPs. The Exchange is making no changes to either of these proposed
paragraphs, and, accordingly, their relocation within Rule 722 raises
no new regulatory issues. The Commission finds this to be a reasonable
change.
The Commission finds good cause for approving the portions of the
proposed rule change discussed above prior to the thirtieth day after
the date of publication thereof in the Federal Register. The Commission
believes that accelerated approval of those portions of the proposal is
appropriate in part because it will enable the Exchange's members to
continue the use of permitted offset transactions allowed until June 1,
1997 under Regulation T, and as defined in Exchange Act Rule 15c3-1.
The Exchange has clarified its proposal to reflect that specialists and
market-makers are permitted to receive good faith margin for all
permitted offset positions only if they are effected for market-making
purposes such as hedging, reducing the risk of rebalancing, liquidating
open positions of the market-maker or specialist, accommodating
customer orders, or another similar market-making purpose.
Accelerated Approval of Amendments Nos. 1, 2 and 3
The Commission finds good cause for partially approving the
proposed rule change including Amendment No. 1 prior to the thirtieth
day after the date of publication of notice of filing thereof. The
Commission also finds good cause for approving Amendment Nos. 2 and 3
prior to the thirtieth day after the date of publication of notice of
filing thereof. Amendment No. 1 supersedes the original rule filing in
its entirety by addressing technical changes by making corrections to
certain typographical errors appearing in the rule filing. Amendment
No. 1 also makes a number of substantive changes to the rule filing.
Amendment No. 2 supersedes Amendment No. 1 with regard to certain
portions of the rule filing the Commission is approving today by
accelerated approval order. Amendment No. 2 addresses technical changes
by making corrections to certain typographical errors appearing in the
rule filing and in Amendment No. 1. Amendment No. 3 also addresses
technical changes by making corrections to certain inadvertent
omissions in the rule filing and in Amendment No. 2. All of the amended
changes strengthen and clarify the proposal. Based on the above, the
Commission finds that there exists good cause consistent with Section
6(b)(5) of the Act, to partially accelerate approval of the amendments
as discussed above.
It is therefore ordered pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change and amendments (SR-Phlx-97-14)
are approved as discussed above, except for the proposed definition of
``qualified stock basket'' (Rule 722 (a)(7)); Cutomer Margin Accounts--
Derivative Securities (Rule 722(d)); and Commentary .14.
\11\ 15 U.S.C. Sec. 78s(b)(2).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-15330 Filed 6-11-97; 8:45 am]
BILLING CODE 8010-01-M
