[Federal Register Volume 59, Number 132 (Tuesday, July 12, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16755]
[[Page Unknown]]
[Federal Register: July 12, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34308; International Series Release No. 679; File No.
SR-Phlx-94-18]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. Relating to European-
Term and Cross-Rate Customized Foreign Currency Options
July 5, 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 April
12, 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. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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 amend
pending new Rule 1069\1\ to provide for the ability to: (1) Trade
European-term option contracts on any foreign currency on which the
Phlx currently trades foreign currency options (``FCOs''); (2) trade
cross-rate FCOs on any two such approved currencies; and (3) allow
users to quote all customized FCOs in percentage terms. Proposed Rule
1069, as well as existing Rules 1000, 1009, 1014, 1033, and 1034, would
be amended accordingly. The text of the proposed rule change is
available at the Office of the Secretary, the Phlx, and at the
Commission.
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\1\See Securities Exchange Act Release No. 33959 (April 25,
1994), 59 FR 22698 (May 2, 1994) (``File No. SR-Phlx-94-11'').
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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
On March 4, 1994, the Phlx filed with the Commission a proposal
(File No. SR-Phlx-94-11)\2\ to allow FCO traders and their customers to
have the ability, within specified limits, to designate their own
option exercise price parameters on a trade. In that filing, the
Exchange proposed to allow its users to dictate the specific strike
price of an FCO contract that they would like to buy or sell without
requiring the Exchange to continuously disseminate quotes for these
options. For example, if the Exchange has listed June .5450 and .5500
Deutsche mark calls and the customer wants to trade June .5487 Deutsche
mark calls, the customer could request a quote in this option and the
trade could occur. The Exchange, however, would not have to
continuously disseminate quotes for this option until expiration
because this may be the only trade that ever occurs in this series.
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\2\Id.
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The Exchange is now proposing to expand upon its proposed FCO
customization contained in File No. SR-Phlx-94-11. If File No. SR-Phlx-
94-11 as well as the present proposal are approved, the Exchange would
be able to offer the ability for its participants to trade non-
standardized strike prices on existing series of FCOs as well as
``inverse'' or European-term contracts on those currencies presently
listed on the Exchange, and cross-rate contracts on any two of the
existing eight currencies on which the Exchange presently lists FCOs
(i.e., the British pound, Swiss franc, French franc, Deutsche mark,
Japanese yen, Australian dollar, Canadian dollar, and European Currency
Unit).
European-Term FCOs
The first addition to the array of previously proposed customized
FCOs that the Exchange now proposes to offer is the European-term
contract. The Exchange presently lists options on eight foreign
currencies. Each of these FCO contracts is structured so that the
trading currency is the U.S. dollar (e.g., French franc/U.S. dollar).
The option is quoted in U.S. dollars per unit of the relevant foreign
currency and the premium is paid in U.S. dollars. Upon exercise of a
call option, for example, the relevant foreign currency would be
delivered.
The European-term customized FCO contract would be the inverse of
the FCO contracts just described (e.g., U.S. dollar/French franc). The
option will be quoted in units of the foreign currency per U.S. dollar
and the premium will be paid in the foreign currency. Because the
underlying currency is the U.S. dollar, U.S. dollars will be delivered
upon exercise of a call option. The title of proposed Rule 1069\3\ will
be changed to ``Customized Options'' to reflect the fact that users
will be able to customize FCO contracts in more aspects than merely the
strike price. Exchange Rule 1000(13), which provides the definition of
``foreign currency,'' will also be amended to include the U.S. dollar
so that U.S. dollars may be considered an underlying foreign currency
under all applicable Exchange rules. Similarly, Rule 1009, which lists
all of the approved underlying foreign currencies would also be
amended, as well as the definitions of ``spot sales price'' and
``forward sales price'' in Rules 1000(16) and 1000(17).
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\3\Id.
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Cross-Rate FCOs
The second proposed addition to the customized FCO facility
proposed in File No. SR-Phlx-94-11 would allow the Exchange to offer
the ability to trade any cross-rate FCO contract on any two foreign
currencies approved for trading on the Exchange pursuant to Rule
1009.\4\ For example, an option on the Swiss franc/Canadian dollar
could be traded. The Exchange believes, however, that it would be
inefficient to disseminate updated quotes on all of the possible
combinations of cross-rate FCOs that could be created by all of the
listed currencies now available. The Exchange believes that most will
not be of wide spread interest but may appeal to only a limited number
of customers or be active for only brief periods of time due to
unpredictable political or economic events in the U.S. and abroad.
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\4\The Exchange presently offers two standardized cross-rate
FCOs, the Deutsche mark/Japanese yen and the British pound/Deutsche
mark. The Exchange also has approval to trade the British pound/
Japanese yen, however, it has not yet been made available for
trading. See Securities Exchange Act Release No. 29919 (November 7,
1991), 56 FR 58109 (November 15, 1991).
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Alternative Order Formats
Finally, the Exchange proposes to offer the ability to request
quotes and receive quotes in terms of a percentage of the underlying
currency in addition to the present unit of currency format (i.e.,
cents per unit of the underlying currency). Percentage quoting would be
offered on all FCOs available through the proposed customized FCO
facility. The Exchange represents that many users of FCOs have
requested this quotation method and the Exchange believes it is
appropriate to offer it in this limited fashion through the proposed
customized FCO facility. Unit of currency quotations will also still be
available for the proposed customized FCOs.
The Exchange states that the over-the-counter (``OTC'') market has
traditionally given its users the ability to customize FCO contracts by
allowing them to designate many if not all of the terms of the FCO
contracts. The participants in the OTC market, according to the
Exchange, are typically institutional investors, corporations, and
banks, who buy and sell FCOs in large size transactions in order to
hedge risks relating to fluctuating exchange rates. By trading in the
OTC market, these users do not benefit from the advantages offered by
an organized exchange, such as, transparency, margin and collateral,
and secondary market liquidity. The Exchange is now proposing to give
these users the flexibility of the OTC market by allowing them to trade
and quote FCO contracts tailored to their specifications but within the
confines of an exchange environment. By having the Options Clearing
Corporation (``OCC'') as the issuer and guarantor of the customized
FCOs, it will eliminate concern over contra-party creditworthiness and
assure performance upon exercise of the customized FCOs. Finally, the
Exchange believes that transparency will be achieved by the real time
dissemination of the quotes, requests for quotes, and last sale
information through the Options Price Reporting Authority (``OPRA'').
Applicability of Existing Exchange Rules
European-term and cross-rate customized FCOs would be subject to
all Exchange rules and regulations regarding surveillance and sales
practice. Unless specifically exempted, all floor trading procedures
will also be adhered to. Examples of different procedures for the
proposed European-term and cross-rate customized FCOs include no
continuous quoting, no opening or closing rotations, size restrictions
as to exercise, new minimum fractional changes, and new maximum quote
spread parameters. Position and exercise limits for European-term
customized FCOs would be the same as those applicable to FCOs on the
same foreign currency and positions in these options will be aggregated
with existing FCOs in calculating position and exercise limits. For
example, U.S. dollar/Deutsche mark FCOs will be aggregated with
Deutsche mark/U.S. dollar FCO positions. The Exchange will establish
separate position limits for the cross-rate customized FCOs.
The minimum quote and transaction sizes that the Exchange proposed
in File No. SR-Phlx-94-11 for customized strike FCOs will also apply to
customized European-term and cross-rate FCOs.\5\ Specifically, 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 for 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 for all participants.
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\5\See File No. SR-Phlx-94-11, supra note 1.
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Financial Responsibility
The Exchange will impose higher net capital requirements for ROTs
trading in customized FCOs. 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.
European-term customized FCOs will be margined in the same fashion as
existing FCO contracts. The Exchange proposes to allow spread margin
treatment for European-term contracts offset against corresponding
standardized contracts in instances in which the long notional value of
either the European-term or standardized contract equals or exceeds the
short national value of the other side.
Cross-rate customized FCOs will be margined using a three tier
system. The Exchange will look at the correlation coefficients between
any two currency combinations for each of the 28 possible (non-U.S.
dollar) cross-rates in order to determine whether the two currencies
have high, low, or negative correlations. Margin levels will be set by
using a tier system based upon the degree of correlation between the
different currencies. Historically, for example, the Exchange states
that there has been a very high correlation between the French franc,
Swiss franc, Deutsche mark, and the European Currency Unit (Tier I).
Thus, the margin levels necessary for a cross-rate based on any two of
these currencies should, the Exchange believes, be low. The
correlations between any Tier I currency and either the British pound
or the Japanese yen (Tier II) are, according to the Exchange, slightly
lower and would, therefore, require higher margin levels. Finally, the
Exchange states that the correlations between any of the currencies in
Tiers I or II and either the Canadian dollar or the Australian dollar
(Tier III) are extremely low or negative, thereby requiring a higher
margin level than the other two. Accordingly, the Exchange proposes to
establish margin levels of 2% for cross-rate FCOs based upon any two
currencies within Tier 1; 4% for cross-rate FCOs based on one Tier I
currency and one Tier II currency or two Tier II currencies; and 6% for
FCOs based on one Tier III currency and one Tier I or Tier II currency
or two Tier III currencies. After the cross-rate customized FCOs are
trading, the Exchange will review the correlations quarterly to see if
any of the currencies are eligible for placement in another tier based
upon the correlation over the prior quarter.
Transparency
When a request for a customized FCO quote is voiced in the trading
crowd, it will be displayed and all responsive quotes will also be
displayed. Once a trade is consummated, it will be reported to OPRA and
disseminated as an administrative text message over the OPRA system.
The Exchange will not be obligated to make continuous markets in
customized FCOs, even where open interest has been created. OCC will
clear and settle the customized FCOs. 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 and quotes of
the customized FCOs, prices of standardized series and the closing
value of the underlying foreign currency. OCC will use this price to
mark the FCOs daily and calculate margin requirements.
Miscellaneous Corrections
Because this rule filing is proposing to change language in Rules
1009 and 1033, the Exchange is also proposing to correct some
inaccurate or redundant information contained in those rules. First,
the Exchange believes that Commentary .01(6) of Rule 1009 is almost
identical to subsection (c) of that rule and is therefore proposed to
be deleted. Secondly, the contract size of the British pound and the
French franc, as approved by the Commission, are 31,250 pounds\6\ and
250,000 francs,\7\ not 12,500 pounds and 125,000 francs as currently
stated in Phlx's rules. These sizes and corresponding examples of how
to calculate the premium on these FCOs are being corrected in Rule
1033.
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\6\See Securities Exchange Act Release No. 26088 (September 16,
1988), 53 FR 36931 (September 22, 1988).
\7\See Securities Exchange Act Release No. 26478 (January 19,
1989), 54 FR 4362 (January 30, 1989).
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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 the 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 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 in the
Commission's Pubic Reference Section, 450 Fifth Street, NW.,
Washington, DC. Copies of such filing will all be available for
inspection and copying at the principal office of the Phlx. All
submissions should refer to File No. SR-Phlx-94-18 and should be
submitted by August 2, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-16755 Filed 7-11-94; 8:45 am]
BILLING CODE 8010-01-M
