[Federal Register Volume 59, Number 44 (Monday, March 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5069]


[[Page Unknown]]

[Federal Register: March 7, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33693; International Series Release No. 638; File No. 
SR-PHLX-94-05]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to Quote 
Spread Parameters for Long-Term Foreign Currency Options

February 28, 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 February 
7, 1994, 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. 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 proposes to amend Exchange Rule 1014, ``Obligations and 
Restrictions Applicable to Specialists and Registered Options 
Traders,'' and Floor Procedure Advice (``Advice'') F-6, ``Option Quote 
Spread Parameters'' to: (1) Establish quote spread parameters for long-
term foreign currency options (``FCOs''); (2) revise the quote spread 
parameters for options on the French franc; and (3) revise the quote 
spread parameters for cross-rate FCOs. Specifically, the PHLX proposes 
to establish the following quote spread parameters for long-term FCOs: 
for options on the British pound, bidding and/or offering so as to 
create differences of no more than $.0100 between the bid and the offer 
for each option contract for which the bid is $.1500 or less and no 
more than $.0150 where the bid is more than $.1500; for options on the 
French franc, bidding and/or offering so as to create differences of no 
more than $.00100 between the bid and the offer for each option 
contract where the bid is $.01500 or less and no more than $.00150 
where the bid is more than $.01500; for options on the German mark and 
Swiss franc, bidding and/or offering for each option contract so as to 
create differences of no more than $.0030 where the bid is $.0500 or 
less and no more than $.0050 where the bid is more than $.0500; and for 
options on the Japanese yen, bidding and/or offering for each option 
contract so as to create differences of no more than $.000040 where the 
bid is $.000500 or less and $.000070 where the bid is over $.000500.
    The text of the proposal is available at the Office of the 
Secretary, PHLX, and at the Commission.

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 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 PHLX proposes to adopt quote spread parameters for long-term 
FCOs. Quote spread parameters, also referred to as bid/ask 
differentials, govern the width of market quotations;1 
specifically, maximum widths between the bid and ask for PHLX options 
are mandated by PHLX Rule 1014(c). The Exchange notes that although a 
violation of the maximum quote spread may result in a fine,2 the 
quote spreads are not applicable during fast market conditions, 
pursuant to Advice F-10, ``Extraordinary Market Conditions.''3
---------------------------------------------------------------------------

    \1\For example, if the maximum quote spread for a Canadian 
dollar options is $.0005 where the bid is $.0050 or less, then the 
following is an acceptable quotation: .0020-.0025.
    \2\Violations of Advice F-6 may result in the issuance of a fine 
pursuant to the Exchange's minor rule violation enforcement and 
reporting plan.
    \3\Advice F-10 states that in the interest of a fair and orderly 
market, two floor officials may declare a ``fast market,'' during 
which displayed quotes are not firm and the volume guarantees of 
Advice A-11, ``Responsibility to Make Ten-Up Markets,'' are not 
applicable; nevertheless, best efforts are required to display 
quotes and fill orders.
---------------------------------------------------------------------------

    Currently, FCOs are generally subject to the quote spread 
parameters that appear in Exchange Rule 1014 as well as Advice F-6. The 
PHLX has traded long-term FCOs since 1992, when PHLX Rule 1012 was 
amended to permit the listing of options with an expiration of up to 36 
months in the future.4 The Long-Term FCO Approval Order stated 
specifically that long-term FCOs would not be subject to existing quote 
spread parameters because, at that time, no basis had been determined 
for establishing reasonable prices for longer term FCOs as a result of 
the lack of historical pricing. Currently, long-term FCOs become 
subject to Advice F-6 once there is less than twelve months remaining 
until expiration.
---------------------------------------------------------------------------

    \4\See Securities Exchange Act Release No. 30672 (May 6, 1992), 
57 FR 20546 (order approving File No. SR-PHLX-91-30) (``Long-Term 
FCO Approval Order'').
---------------------------------------------------------------------------

    Currently, the PHLX trades four long-term FCOs: British pound, 
German mark, French franc, and Japanese yen.5 The PHLX proposes to 
codify specific parameters in order to demonstrate consistency in quote 
width to FCO customers and to prevent overly wide quotes. The proposed 
parameters for long-term FCOs would be wider than the quote spread 
parameters applicable to regular FCOs (FCOs with less than 12 months to 
expiration) due to the lack of historical pricing in pricing an option 
with 12 to 36 months to expiration. Accordingly, the PHLX proposes to 
add these quote spread parameters to Advice F-6 and to Exchange Rule 
1014(c)(ii).
---------------------------------------------------------------------------

    \5\Although the PHLX has not yet listed a long-term option on 
the Swiss franc, the PHLX is proposing a long-term quote spread 
parameter because it would be identical to the proposed quote spread 
parameter applicable to the long-term German mark option.
---------------------------------------------------------------------------

    The PHLX is also proposing minor changes to Exchange Rule 1014, 
including adding headings and punctuation. In addition, the PHLX 
proposes to correct the parameters for cross-rate FCOs, which appear in 
the incorrect base currency, and for French franc options, which cannot 
be quoted in odd numbers due to system limitations. Specifically, for 
options on the French franc, the PHLX proposes to establish a maximum 
quote spread of $.00014 where the bid is $.00250 or less; $.00024 where 
the bid is between $.00252 and .00750; and $.00034 where the bid is 
over $.00750.
    With respect to cross-rate options, the PHLX states that the 
original quote spread parameters were incorrect because the bids, which 
determine the quote spread, should be based on bids relating to the 
first currency. Under the current rule, for British pound/German mark 
cross-rate options, if the bid is .0100 German marks or less, the 
maximum quote spread is .0015 German marks. The PHLX states that this 
has proved incorrect and incompatible with the parameters commonly 
employed by traders to quote the British pound/German mark cross-rate 
option for two reasons: (1) The range of bids did not correspond to the 
ranges previously used for British pound quotes;6 and (2) the 
actual parameters (.0015, .0025 and .0035 German marks) proved to be 
too narrow in view of the unique pricing and settlement of cross-rate 
options. Thus, for British pound/German mark cross-rate options, the 
PHLX proposes the following parameters: Bidding and/or offering to 
create differences of no more than .0030 German marks between the bid 
and the offer where the bid is .0250 German marks or less; no more than 
.0050 German marks where the bid is more than .0250 but does not exceed 
.0750 German marks; and no more than .0070 German marks where the bid 
is more than .0750 German marks.7
---------------------------------------------------------------------------

    \6\The range of bids that determine the quote spread parameters 
applicable to British pound options is: $.0250 or less, $.0251 to 
$.0750, and over $.0750.
    \7\Although the PHLX has not yet listed the British pound/
Japanese yen option, the same inconsistency with British pound bid 
ranges requires correction and the quote spread parameters were also 
proposed too narrowly.
---------------------------------------------------------------------------

    For German mark/Japanese yen cross-rate options, the PHLX proposes 
the following parameters: Bidding and/or offering to create differences 
of no more than .12 Japanese yen between the bid and the offer where 
the bid is .40 Japanese yen or less; no more than .16 Japanese yen 
where the bid is more than .40 but does not exceed 1.60 Japanese yen; 
and no more than .20 Japanese yen where the bid is more than 1.60 
Japanese yen.
    For British pound/Japanese yen options, the PHLX proposes to 
establish the following parameters: Bidding and/or offering to create 
differences of no more than .0030 Japanese yen between the bid and the 
offer where the bid is .0250 Japanese yen or less; no moore than .0050 
Japanese yen where the bid is more than .0250 but does not exceed .0750 
Japanese yen; and no more than .0070 Japanese yen where the bid is more 
than .0750 Japanese yen. The Exchange proposes to correct the cross-
rate parameters both in the text of Exchange Rule 1014 as well as in 
Advice F-6 in order to facilitate the efficient trading and quoting of 
the relevant cross-rate options, as well as to inform members and 
customers of the maximum quote spread parameters.
    The PHLX believes that 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, and to protect investors and the public interest. 
Specifically, the PHLX believes that established quote spread 
parameters for long term FCOs should prevent overly wide quotes and 
foster uniformity in quote width, consistent with section 6(b)(5). In 
addition, the PHLX believes that the correction to cross-rate quote 
spread parameters should promote just and equitable principles of trade 
by providing a more feasible bid/ask differential, which, in turn, 
should facilitate trading in those options.

(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 is reason for so finding or (ii) as to 
which the self-regulatory organization consent, the Commission will:


    (a) By other 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 changes 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 at the Commission's Public Reference Section, 450 Fifth Street, 
NW., Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the above mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by March 28, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5069 Filed 3-4-94; 8:45 am]
BILLING CODE 8010-01-M