[Federal Register Volume 62, Number 117 (Wednesday, June 18, 1997)]
[Notices]
[Pages 33147-33149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-15889]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38735; File No. SR-Phlx-97-14]
Self-Regulatory Organizations; Order Granting Partial Accelerated
Approval to a Proposed Rule Change by the Philadelphia Stock Exchange,
Inc. Relating to Rule 722, Margin Accounts
June 11, 1997.
I. Introduction
On May 8, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') a proposed rule change to amend certain
sections of the Exchange's rules to comply with changes to Regulation T
which became effective June 1, 1997. 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\
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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 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.
\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).
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The proposed rule change, including the amendments, was published
for comment, and partial accelerated approval of the proposal was
granted in Securities Exchange Act Release No. 38711 (June 2, 1997).\4\
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\4\ The Notice and Order has not been published in the Federal
Register as of June 11, 1997. See SEC Release No. 34-38711 for a
discussion of those provisions of the proposed rule change that were
approved in that release.
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This order grants partial approval to a portion of the proposed
rule change.
II. Description of the Proposal
The fall description of the proposed rule change set forth in File
No. SR-Phlx-97-14 can be found in SEC Release No. 34-38711. The
following description covers only those sections of Rule 722 (``Rule'')
being approved through this order, specifically paragraph (d) of Rule
722--Covered Margin Accounts--Derivative Securities.
Customer Margin Accounts
The Exchange is proposing to rearrange Rule 722 so that all
provisions concerning customer margin accounts are in the same section.
Specific provisions relevant to options and warrants will be covered in
paragraph (d) of the Rule, entitled Derivative Securities.
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 of proposed Rule 722(d) 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) of the Rule.
The next provision of the Rule sets forth the continuing rule that
long positions in 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) of Rule 722 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 II of
the
[[Page 33148]]
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) of the Rule 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) of the Rule 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) of the Rule
applicable to warrant straddles has been moved into this section and
numbered as (d)(5)(A) (ii) and (iii). Former subparagraph (E) of the
Rule 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) of the Rule will now be in
subparagraph (d)(5)(D) of the Rule; however, the language in that
section applicable to short puts will be deleted because it is covered
under a new subsection (d)(5)(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) of the Rule. 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.
III. Discussion
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: \5\ proposed paragraph (d) of Rule 722, Customer Margin
Accounts--Derivative Securities, with the exception of Rule
722(d)(5)(E) Covered Calls/Covered Puts which is not being approved at
this time.\6\ 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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\5\ 15 U.S.C. 78f(b)(5).
\6\ The Commission also is not approving at this time (1)
proposed Commentary .14 to the Rule, which addresses several items
regarding options specialists and market-maker permitted offsets and
(2) the definition of ``qualified stock basket'' in Rule 722(a)(7).
Collectively, these are the only portions of the filing that have
not been approved as of the date of this order.
\7\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, completion, and capital
formation. 15 U.S.C. Sec. 78c(f).
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The Exchange is proposing to rearrange Rule 722 so that all
provisions concerning customer margin accounts are in the same section.
Specific provisions relevants to options and warrants will be covered
in paragraph (d) of the Rule entitled Derivative Securities. These
changes are non-substantive and reasonable.
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
volatitle or illiquid. This provision is being moved, unchanged, from
section (c)(1), and, accordingly, raises no new regulatory issues. The
Commission finds the relocation of this provision to be reasonable.
The next provision of the Rule is being moved from current
paragraph (c)(2) and is renamed, Long Positions-Listed Options and
Currency, Currency Index or Stock Index Warrants. This provision is
also unchanged and, accordingly, raises no new regulatory issues, and
is reasonable.
Paragraph (d)(3) of the Rule restates the existing provisions of
current paragraph (c)(2)(B)(i) regarding short listed options and
warrants. The only 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 Exchange states that 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.
The changes to this provision are substantially identical to changes
adopted by the other options exchanges recently, and, accordingly, the
Commission finds it reasonable for Phlx to adopt this provision.\8\
Existing paragraph (c)(2)(C) of the Rule is being renumbered as
paragraph (d)(4) and certain omitted words caused by typographical
errors are being corrected. It is not the intention of Phlx to change
the meaning of this provisions and, accordingly, this change raises no
new regulatory issues. The Commission finds the adoption of this
provision reasonable.
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\8\ See, e.g., SEC Release No. 34-38709 (June 2, 1997) approving
changes to the Chicago Board Options Exchange's (``CBOE'') margin
rules.
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Current paragraph (c)(2)(D) of the Rule is renumbered as
(d)(5)(A)(i) and entitled Straddles/Combinations. The first two
paragraphs of current subpart (c)(2)(F)(i) of the Rule applicable to
warrant straddles has been moved into this section and numbered as
(d)(5)(A) (ii) and (iii). The provisions have not been changed and
therefore raise no new regulatory issues. The Commission finds the
relocation of these provisions to be reasonable.
Former subparagraph (E) of the Rule is renumbered as (d)(5)(B) and
entitled, Short option offset by long option where long option expires
with or after short option. The Exchange states that the substance of
the section has not been changed but has been redrafted for the sake of
clarity and brevity. The Commission concurs that the provision is
substantially identical to a similar provision contained in the CBOE's
rules.\9\ Accordingly, the change raises no new regulatory issues and
is reasonable.
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\9\ See CBOE Rule 12.3(c)(5)(B)(3).
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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) of the Rule. This
section has not been changed, and,
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accordingly, raises no new regulatory issues. The Commission finds the
provision to be reasonable.
The margin treatment for covered write convertibles which was
formerly in subparagraph (F)(i) of the Rule will now be in (d)(5)(D) of
the Rule; however, the language in that section applicable to short
puts is being deleted because it will be covered under proposed
subsection (E) relating to covered calls and covered puts. Subparagraph
(d)(5)(D) is not being changed substantively and raises no new
regulatory issues. The Commission finds it reasonable for the Exchange
to delete the language relating to short puts from this subparagraph,
but notes that proposed subsection (E) is not being approved at this
time.
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 proposed treatment for a short listed call
covered by a warrant is new to Rule 722 but it is substantially similar
with the current treatment under Regulation T, 12 CFR 220.4(b) and,
accordingly, is reasonable.\10\
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\10\ The Commission notes that other exchanges have recently
adopted identical provisions. See, e.g., SEC Release 34-38709 (June
2, 1997).
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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.\11\ The
portions of the filing approved today are either (1) non-substantive
changes that move or consolidate existing Phlx margin provisions or (2)
nearly identical to provisions contained in the existing margin rules
of the CBOE. Together, the changes make Phlx's margin provisions easier
to understand and more uniform with the margin provisions of the other
options exchanges.
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\11\ The Commission invited interested persons to submit written
data, views and arguments concerning the proposed rule change and
amendments in SEC Release 34-38711 (June 2, 1997). See, IV
Solicitation of Comments.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the portions of the proposed rule change and amendments
(SR-Phlx-97-14) relating to proposed Rule 722, paragraph (d), Customer
Margin Accounts--Derivative Securities (with the exception of proposed
paragraph (d)(5)(E)) are approved.
\12\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-15889 Filed 6-17-97; 8:45 am]
BILLING CODE 8010-01-M
