[Federal Register Volume 60, Number 188 (Thursday, September 28, 1995)]
[Notices]
[Pages 50229-50231]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24026]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36255; International Series Release No. 858 File Nos.
SR-Phlx-95-20 and SR-Phlx-95-21]
Self-Regulatory Organizations; Order Approving Proposed Rule
Changes and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 1 to Each of the Proposed Rule Changes by the
Philadelphia Stock Exchange, Inc. Relating to the Listing of Customized
Foreign Currency Options on the Italian Lira and Spanish Peseta
September 20, 1995.
On April 5, 1995, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ filed
with the Securities Exchange Commission (``Commission'') two proposed
rule changes--one to permit the listing of customized foreign currency
options (``Customized FCOs'') on the Italian lira (``Lira'') and the
other to list Customized FCOs on the Spanish peseta (``Peseta'').\3\
Notices of the proposals appeared in the Federal Register on May 10,
1995.\4\ No comment letters were received on either proposed rule
change. The Exchange subsequently filed Amendment No. 1 to each of the
proposals on August 21, 1995.\5\ This order approves both of the Phlx
proposals, as amended.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ Customized FCOs provide investors with the ability, within
specified limits, to trade FCOs with customized strike prices,
cross-rate FCOs on any two approved currencies, and FCOs where the
U.S. dollar is the underlying currency. In addition, FCO
participants may express quotes for customized FCOs as a percentage
of the underlying currency, in addition to quoting in terms of the
base currency per unit of the underlying currency. See Securities
Exchange Act Release No. 34925 (November 1, 1994), 59 FR 55720
(November 8, 1995) (``Exchange Act Release No. 34925'').
\4\ See Securities Exchange Act Release Nos. 35678 (May 4,
1995), 60 FR 24945 (notice of File No. SR-Phlx-95-20), and 35677
(May 4, 1995), 60 FR 24941 (notice of File No. SR-Phlx-95-21).
\5\ In Amendment No. 1 to each proposal, as discussed more fully
herein, the Phlx: (1) increased the proposed margin levels for
Customized FCOs on the proposed currencies; (2) proposed that cross-
rate Customized FCOs involving the Lira or Peseta be subject to
these increased margin requirements; (3) amended Phlx Rule 1009 to
state in the rule that Exchange-traded FCOs on the Lira and Peseta
are limited to Customized FCOs; and (4) made certain clarifying non-
substantive amendments (e.q., renumbering rule sections) that were
necessary in order to incorporate the addition of both proposed
currencies into the Exchange's rules. See Letter from Michele
Weisbaum, Associate General Counsel and Assistant Vice President,
Phlx, to Michael Walinskas, Branch Chief, Office of Market
Supervision (``OMS''), Division of Market Regulation (``Division''),
Commission, dated August 21, 1995 (``Amendment No. 1'').
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Currently the Phlx offers listed FCOs on the British pound, French
franc, Swiss franc, Japanese yen, Canadian dollar, Australian dollar,
German mark and European Currency Unit. Since November 1994, the
Exchange has offered the ability to trade Customized FCOs on all of
these currencies.\6\ The Exchange now proposes to add the Lira and
Peseta to the list of approved currencies on which Customized FCOs may
be listed and traded pursuant to Exchange Rule 1069. Thus, there will
be no continuously quoted series of Customized FCO contracts on either
the Lira or Peseta.
\6\ See Exchange Act Release No. 34925, supra note 3.
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Phlx Rule 1069(a)(1) provides that Customized FCOs may be traded on
any approved underlying foreign currency pursuant to Exchange Rule
1009. Accordingly, the Exchange proposes to amend Rule 1009 to: (1) Add
the Lira and Peseta to the list of approved underlying foreign
currencies; and (2) specify that the Lira and Peseta are being added to
the list of approved currencies solely for purposes of trading
Customized FCOs pursuant to Exchange Rule 1069.\7\ Additionally, Rules
1014 and 1069 are being amended to provide that there will be no quote
spread parameters for Customized FCOs involving either the Lira or the
Peseta.\8\
\7\ See Amendment No. 1, supra note 5. The definitions of
``foreign currency'' and ``unit of underlying foreign currency'' in
Rule 1000(a) are also being amended to add references to the Lira
and the Peseta.
\8\ Pursuant to Exchange Rule 1069(j)(1), quote spread
parameters for customized strike FCOs on currently approved foreign
currencies are twice those provided in Rule 1014(c). Because the
Phlx does not list regular FCOs on either the Lira or Peseta (and
will not be able to list regular FCOs on either currency pursuant to
this approval order), Rules 1014(c) and 1069 will provide that there
will be no quote spread parameters for Customized FCOs involving
either the Lira or Peseta. The Exchange will conduct a study of the
markets for Customized FCOs based on the Lira and Peseta to build an
historical pricing reference database on which to analyze whether
quote spread parameters should be imposed in the future for these
Customized FCOs. Telephone conversation between Michele Weisbaum,
Assistant General Counsel and Assistant Vice President, Phlx, and
Brad Ritter, Senior Counsel, OMS, Division, Commission, on September
7, 1995.
[[Page 50230]]
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Consistent with the Phlx's other approved foreign currencies,
Exchange Rule 1033 will be amended to specify the bid and offer rules
for Customized FCOs based on the Lira and Peseta. Similarly, Rule 1034
will be amended to provide that the Exchange will determine the minimum
fractional change applicable to Customized FCOs on the Lira and Peseta.
Contract Specifications
Customized FCOs based on the Lira will have the following
characteristics: (1) the contract size will be 50,000,000 Lira; \9\ (2)
the premiums will be quoted in thousandths of a cent per unit for U.S.
dollar/Italian lira contracts; and (3) the minimum premium will be $0.
(00000) 01 per unit (i.e., $5.00).
\9\ Based on an exchange rate of 1,615.00 Italian lira/U.S.
dollars on August 23, 1995, as published in The Wall Street Journal,
this would correspond to an opening position for an Italian lira
customized FCO transaction (i.e., 100 contracts) valued at
approximately $3,096,000.
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Customized FCOs based on the Peseta will have the following
characteristics: (1) The contract size will be 5,000,000 pesetas; \10\
(2) the premiums will be quoted in thousandths of a cent per unit for
U.S. dollar/Spanish peseta contracts; and (3) the minimum premium will
be $0. (0000) 01 per unit (i.e., $5.00).
\10\ Based on an exchange rate of 126.25 Spanish pesetas/U.S.
dollars on August 23, 1995, as published in The Wall Street Journal,
this would correspond to an opening position for a Spanish peseta
customized FCO transaction (i.e., 100 contracts) valued at
approximately $3,960,000.
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Customer Margin
For customer margin purposes, the Exchange is proposing to amend
Rule 722 to set the customer margin ``add-on'' \11\ percentage for
Customized FCOs on both the Lira and Peseta at 7% for both initial and
maintenance margin, with no adjustment for out-of-the-money Customized
FCOs.\12\ The Exchange will conduct a regular review of the margin
levels for Customized FCOs involving either the Lira or Peseta.\13\ In
this review, which will be conducted at least quarterly,\14\ the
Exchange will determine the frequency distributions reflecting the
percentage price returns for the Lira and Peseta, each in relation to
the U.S. dollar, for all seven day periods during the preceding three
year period. If the Exchange determines as a result of one of these
reviews that the current margin add-on for each currency is not
sufficient to cover at least 97.5% of all seven day price returns
during that period, the Exchange will take immediate steps to increase
the margin levels for each currency to one that will cover at least
97.5% of all such instances and will immediately notify the Commission
of any such increases. In no event will the Exchange reduce the margin
levels for Customized FCOs involving either the Lira or Peseta below
the 7% level without the prior approval of the Commission pursuant to
Section 19(b) of the Act. Whenever the customer margin levels for
Customized FCOs on either the Lira or Peseta are changed, the Exchange
will promptly notify the Exchange's membership and the public.
\11\ For these purposes, ``add-on'' is the percentage of the
current market value of the currency a Customized FCO that the
holder of a ``short'' position must pay in addition to the current
market value of each Customized FCO.
\12\ According to the Exchange, the 7% margin add-on level is
sufficient to cover 98.84% and 99.10% of all seven day price changes
during the past three years involving the Lira and Peseta,
respectively, in relation to the U.S. dollar. See Amendment No. 1,
supra note 5.
\13\ Telephone conversation between Michele Weisbaum, Associate
General Counsel and Assistant Vice President, Phlx, and Brad Ritter,
Senior Counsel, OMS, Division, Commission, on August 30, 1995.
\14\ Id.
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Customized Cross-Rates
Pursuant to Phlx Rule 1069(a)(1)(B), the Exchange may list cross-
rate Customized FCOs on any two approved currencies, exclusive of the
U.S. dollar (``Customized Cross-Rates'').\15\ Customized Cross-Rates
are currently margined using a two-tier system.
\15\ See Exchange Act Release No. 34925, supra note 3.
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Because the margin add-on percentage for Customized FCOs on the
Lira and Peseta are initially being set at levels significantly higher
than those for the Phlx's other approved currencies, the Phlx will
begin using a three-tier system for Customized Cross-Rates: \16\ Tier I
will consist of all approved currency pairings not involving the Lira
or Peseta whose daily price changes have a correlation greater than or
equal to .25 during the most recent 24 month period; Tier II will
consist of all remaining pairings of approved currencies not involving
the Lira or Peseta; and Tier III will consist of all Customized Cross-
Rates involving the Lira or the Peseta. The initial and maintenance
margin requirements for Tier I and Tier II Customized Cross-Rates will
remain at current levels (i.e, 100% of the underlying value plus 4% and
6%, respectively), subject to any changes resulting from the Phlx's
periodic reviews of margin adequacy.\17\
\16\ See Amendment No. 1, supra note 5.
\17\ The Exchange conducts a regular two-step review of the
margin levels for Customized Cross-Rates. The first review, which is
conducted at least monthly, examines the correlations between all of
the possible combinations of approved currencies for the most recent
two-year period. If a monthly or any special review reveals that a
combination of approved currencies should be in another tier based
on the correlation of those approved currencies, the Exchange will
take immediate steps to implement the change. The second review
examines whether the actual margin levels are adequate to cover
seven day price changes for all possible cross-rate combinations
within Tiers I and II. Frequency distributions of seven day price
movements for all currency combinations are reviewed on a monthly
basis to determine whether the percentage of margin ``add-on'' is
sufficient to cover 95% of all instances over the preceding two year
period for all currency combinations within each tier. If the
percentage falls to less than 95%, the Exchange will take steps to
increase the margin level for those pairings to one that will cover
at least 97.5% of all instances. If the margin adequacy level is
greater than 99%, the Exchange will take steps to lower the margin
requirements for those pairings to one which will cover 99%. In no
event, however, will the initial or maintenance margin levels for
any pairing of approved currencies be reduced below the 4% and 6%
levels discussed above without the prior approval of the Commission.
See Exchange Act Release No. 34925, supra note 3.
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The initial and maintenance margin requirements for Tier III
Customized Cross-Rates will initially be set at 100% of the underlying
value plus 7%.\18\ the Phlx will continue to conduct its regular
periodic reviews of the margin adequacy for all approved currency
combinations, however, Tier III currency pairings will not be eligible
to be moved to either Tier I or Tier II based on such reviews. As a
result, for Tier III currency pairings, the Phlx will need to conduct
only the second stage of the review that it presently conducts for
Customized Cross-Rates in Tiers I and II,\19\ as modified below.
Specifically, on at least a quarterly basis,\20\ the Exchange will
determine whether the actual margin level for Tier III (i.e., 7% add-
on) is adequate to cover seven day price changes for all possible
cross-rate combinations within Tier III. If the margin add-on is not
sufficient to cover at least 97.5% of all such changes during the
preceding three year period, the Exchange will take immediate steps to
increase the margin level to one that will cover at least 97.5% of all
such instances and will immediately notify the Commission of such
increases. In no event will the initial or maintenance
[[Page 50231]]
margin levels for any Tier III pairing be reduced below the 7% level
discussed above without the prior approval of the Commission pursuant
to Section 19(b) of the Act.\21\
\18\ See Amendment No. 1, supra note 5.
\19\ See supra note 17.
\20\ See supra note 13.
\21\ See Amendment No. 1, supra note 5.
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As with Customized FCOs currently being listed by the Phlx, the
Options Clearing Corporation (``OCC'') will clear and settle all trades
in Customized FCOs involving the Lira or Peseta. Because quotes in
these options will not be continuously updated or otherwise priced by
the Phlx, the OCC will generate a theoretical price based on the prices
and quotes of the Customized FCOs and the closing value of the relevant
underlying currency. The OCC will use this price to make the Customized
FCO contracts involving the Lira and Peseta daily and to calculate
margin requirements.
The Commission finds that the proposed rule changes are 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).\22\ First, the
Commission believes that the trading of listed Customized FCOs on the
Lira and Peseta should provide investors with a hedging and risk
transfer vehicle that will reflect the overall movement of the Lira and
Peseta in relation to the U.S. dollar and the other Phlx approved
currencies. In this regard, Customized FCOs on the Lira and Peseta
should provide investors with an efficient and effective means of
managing risk associated with those currencies.
\22\ 15 U.S.C. 78f(b)(5) (1988).
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Second, Customized FCOs on both the Lira and Peseta will trade
within the Exchange's existing framework for Customized FCOs which the
Commission has previously found to adequately address the Commission's
regulatory concerns.\23\ Specifically, this framework includes, among
other things, rules pertaining to: obligations of specialists and
registered options trades (Rule 1014); position limits (Rule 1001);
exercise limits (Rule 1002); bids and offers (Rule 1033); minimum
fractional changes (Rule 1034); and trading rotations, halts, and
suspensions (Rule 1047).\24\
\23\ See Exchange Act Release No. 34925, supra note 3.
\24\ id.
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Third, the Exchange has proposed adequate customer margin
requirements for Customized FCOs on both proposed currencies. The
proposed add-on margin (i.e., 7% for both the Lira and Peseta) provides
sufficient coverage to account for historical and potential volatility
in the Lira and the Peseta in relation to the U.S. dollar. As noted
above, the 7% customer margin add-on level would cover 98.84% and
99.10% of all seven day price changes over the prior three-year period
in the Lira and Peseta, respectively, in relation to the U.S. dollar.
Moreover, all Customized Cross-Rates involving either the Lira or
Peseta will be margined at the 7% margin add-on level as opposed to
either the 4% or 6% levels that apply to Customized Cross-Rates
involving the Exchange's other approved currencies. In addition, the
Exchange must conduct periodic reviews of the volatility in the two
currencies and must take immediate steps to increase the existing
customer margin levels if the Exchange determines that the existing
levels are no longer adequate.\25\ As a result, the Commission believes
that the proposed customer margin levels and the review and maintenance
criteria for those margin levels will result in adequate coverage of
contract obligations and are designed to reduce risks arising from
inadequate margin levels for Customized FCOs (including Customized
Cross-Rates) involving either the Lira or Peseta.
\25\ See ``Customer Margin'' and ``Customized Cross-Rates,''
supra.
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The Commission finds good cause for approving Amendment No. 1 to
each of the proposed rule changes prior to the thirtieth day after the
date of publication of notice of filing thereof in the Federal
Register. First, the changes increasing the margin levels for
Customized FCOs (including Customized Cross-Rates) involving the Lira
or Peseta serve an investor protection purpose by reducing the risks
that can arise from inadequate margin levels. Additionally, the
Commission notes that these changes impose more restrictive standards
than those contained in the original proposals which were published in
the Federal Register for the full 21-day comment without any comments
being received by the Commission.
Second, the changes to the language in the Phlx's rules specifying
that FCOs on the Lira and the Peseta are limited to Customized FCOs
(including Customized Cross-Rates) and the remaining clarifying
amendments in Amendment No. 1 serve to minimize any potential for
investor confusion from the proposed rule changes.
Third, accelerated approval of the proposed amendments to the rule
changes will allow the Exchange to begin offering these products
without further delay to those investors who desire an exchange-traded
product to hedge their currency exposure to the Lira and Peseta.
Accordingly, the Commission believes that the proposed rule changes
are consistent with Section 6(b)(5) of the Act and that good cause
exists to approve Amendment No. 1 to each of the Phlx's proposals on an
accelerated basis.
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 to each of the proposals. Persons
making written submissions should file six copies thereof with the
Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 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, N.W., Washington, D.C. Copies of
such filing will also be available for inspection and copying at the
principal office of the Phlx. All submissions should refer to the File
No. SR-Phlx-95-20 or File No. SR-Phlx-95-21, as appropriate, and should
be submitted by October 19, 1995.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule changes (File Nos. SR-Phlx-95-20 and
SR-Phlx-95-21), as amended, are approved.
\26\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
\27\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-24026 Filed 9-27-95; 8:45 am]
BILLING CODE 8010-01-M