95-24026. 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 ...  

  • [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
    
    

Document Information

Published:
09/28/1995
Department:
Securities and Exchange Commission
Entry Type:
Notice
Document Number:
95-24026
Pages:
50229-50231 (3 pages)
Docket Numbers:
Release No. 34-36255, International Series Release No. 858 File Nos. SR-Phlx-95-20 and SR-Phlx-95-21
PDF File:
95-24026.pdf