[Federal Register Volume 59, Number 50 (Tuesday, March 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5929]


[[Page Unknown]]

[Federal Register: March 15, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33732; International Series Release No.; File No. SR-
PHLX-93-10]

 

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment to Proposed Rule Change by the Philadelphia Stock Exchange, 
Inc., Relating to the Listing of Cash/Spot Foreign Currency Option 
Contracts

March 8, 1994.

I. Introduction

    On March 12, 1993, the Philadelphia Stock Exchange, Inc. (``PHLX'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list cash-settled, European-
style\3\ cash/spot foreign currency option contracts (``cash/spot 
FCOs'') on the German mark (``DM'').\4\ The DM cash/spot FCOs will have 
the same contract size as the PHLX's current U.S. dollar/DM based 
options (62,500 German marks) and will trade in one-week and two-week 
expirations.
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    \1\15 U.S.C. 78s(b)(1) (1982).
    \2\17 CFR 240.19b-4 (1993).
    \3\A European-style option may be exercised only during a 
limited period time before the option expires.
    \4\The PHLX amended its filing on June 1, 1993 (``Amendment No. 
1'') to indicate that trading in an expiring cash/spot contract 
ceases at 10:30 a.m. on its expiration Monday, rather than 9 a.m. On 
July 16, 1993, the PHLX amended its filing to provide that a market 
information vendor(s) would be the PHLX's designated agent(s) for 
purposes of determining the closing settlement price for the cash/
spot contracts (``Amendment No. 2''). On September 27, 1993, the 
PHLX amended its proposal to provide a list of the Exchange holidays 
and designated bank holidays on which cash/spot contracts will not 
expire. If a cash/spot contract is scheduled to expire on an 
Exchange holiday or on a designated bank holiday, then the option 
will expire at 11:59 p.m. Eastern Time (``ET'') on the previous 
business date (``Amendment No. 3''). On April 29, 1993, the PHLX 
submitted a letter stating that the PHLX's automated trading 
systems, as well as those of the Options Price Reporting Authority 
(``OPRA''), have sufficient capacity to adequately process 
quotations and trades in the DM cash/spot FCOs. See Letter from 
Murray L. Ross, Secretary, PHLX, to Richard Zack, Branch Chief, 
Options Regulation, Division of Market Regulation (``Division''), 
Commission, and to Eugene Lopez, Assistant Director, Automation and 
International Markets, Division, Commission, dated April 28, 1993 
(``April 28 Letter''). On July 7, 1993, the PHLX submitted a letter 
describing the procedures it will use to calculate the settlement 
value for cash/spot contracts. See Letter from Murray L. Ross, 
Secretary, PHLX, to Richard Zack, Branch Chief, Options Regulation, 
Division, Commission, dated July 7, 1993. On January 4, 1994, the 
PHLX submitted a letter that: (1) Withdraws File No. SR-PHLX-93-12 
(proposing margin for cash/spot contracts of 2.5%); (2) proposes a 
margin level of 4% for cash/spot contracts; and (3) states that the 
Exchange will aggregate cash/spot contracts with existing FCOs on 
the same underlying currency for position limit purposes. See Letter 
from Eric W. Noll, Assistant Vice President, New Product 
Development, PHLX, to Richard Zack, Branch Chief, Options 
Regulation, Division, Commission, dated January 4, 1994 (``January 4 
Letter''). In addition, the PHLX proposes to collect margin for the 
cash/spot contracts on a two-day basis. See Letter from Murray L. 
Ross, Secretary, PHLX, to Richard Zack, Branch Chief, Options 
Regulation, Division, Commission, dated January 21, 1994 (``January 
21 Letter''). Finally, the PHLX submitted a letter indicating that 
cash/spot FCOs will be aggregated with other FCOs on the same 
underlying currency for the exercise limit as well as position limit 
purposes. See Letter from Murray L. Ross, Secretary, PHLX, to Yvonne 
Fraticelli, Staff Attorney, Options Branch, Division, Commission, 
dated February 9, 1994 (``February 9 Letter'').
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    The proposed rule change was noticed for comment in Securities 
Exchange Act Release No. 32685 (July 28, 1993), 58 FR 41529. No 
comments were received on the proposal. This order approves the 
proposal.\5\
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    \5\This order specifically approves DM cash/spot FCOs. In the 
future, the listing of additional cash/spot FCOs based on different 
foreign currencies will require separate 19b-4 filings with the 
Commission.
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II. Description of the Proposal

    Cash/spot FCOs are cash-settled, European-style options issued by 
the Options Clearing Corporation (``OCC'')\6\ that allow holders to 
receive U.S. dollars representing the difference between the current 
foreign exchange spot/price\7\ and the exercise price of the cash/spot 
FCO. Specifically, upon exercise of an in-the-money cash/spot FCO 
structured as a call, the holder will receive from OCC U.S. dollars 
representing the difference between the exercise strike price and the 
closing settlement value of the cash/spot FCO contract multiplied by 
the number of units of currency covered by the contract. For a cash/
spot FCO structured as a put, the holder will receive U.S. dollars 
representing the excess of the exercise price over the closing 
settlement value of the cash/spot FCO contract multiplied by the number 
of units of foreign currency covered by the contract.
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    \6\OCC submitted a proposal to accommodate the trading of cash/
spot FCOs. The Commission approved the OCC's proposal on January 19, 
1994. See Securities Exchange Act Release No. 33491 (January 19, 
1994), 59 FR 3898 (order approving File No. SR-OCC-93-10).
    \7\The ``spot price'' with respect to an option contract on a 
foreign currency means the price, in terms of U.S. dollars, quoted 
by various commercial banks in the interbank foreign exchange market 
for the sale of a single unit of such foreign currency for immediate 
delivery, which generally means delivery within two business days 
following the date on which the terms of such sale are agreed upon. 
See Securities Exchange Act Release No. 33491 (January 19, 1994), 59 
FR 3898 (order approving File No. SR-OCC-93-10).
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    Unlike other PHLX-traded FCOs, cash/spot FCOs which are in-the-
money by any amount on the expiration date will be exercised 
automatically by OCC.\8\ Cash/spot FCOs which are out-of-the-money at 
expiration will expire worthless.
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    \8\The PHLX notes that the cash/spot FCOs will be the first 
PHLX-traded FCO to utilize a feature which does not depend on any 
manual submission of exercise notices or the ability to opt out of 
exercise procedures.
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    The closing settlement value, which will be disseminated through 
OPRA, will be determined by a designated agent(s) of the Exchange under 
proposed PHLX Rule 1057, ``Cash/Spot Foreign Currency Option Closing 
Settlement Value.'' Pursuant to PHLX Rule 1057, at 10 a.m. (Eastern 
Standard Time (``EST'') or Eastern Daylight Time ((``EDT'')) on every 
expiration date for cash/spot contracts, the market information 
vendor(s) acting as the Exchange's designated agent(s) will collect a 
bid and offer quotation for the current foreign exchange spot/price 
from the quotations submitted to the designated agent(s) by at least 15 
interbank foreign exchange participants, which the designated agent(s) 
will select randomly from a list of 25 active interbank foreign 
exchange market participants.\9\ After discarding the five highest 
offers and five lowest bids, the Exchange's designated agent(s) will 
arithmetically average the remaining ten bids and ten offers to arrive 
at a closing settlement value. This value will be calculated and sent 
to the PHLX every 30 seconds until 10:30 a.m.,\10\ when the designated 
agent(s) will determine the final settlement value. At that time, the 
settlement value will be entered manually into the PHLX's systems, 
disseminated through OPRA and sent to the OCC for entry into the OCC 
clearing systems.\11\
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    \9\The PHLX will select the list of interbank market 
participants by evaluating the number of times each contributor 
supplies DM spot quotes to the market information vendor(s) on 
Monday mornings between 10 a.m. and 10:30 a.m. The pool of quote 
contributors will be reviewed every six months based on these 
criteria and substitutions will be made, if necessary. If at any 
time an interbank market participant ceases to distribute DM spot 
quotes or is no longer in the business of making DM markets, that 
entity will be replaced before the end of the six-month period. See 
July 7 Letter.
    \10\Telephone conversation between Murray Ross, Secretary, PHLX, 
and Yvonne Fraticelli, Staff Attorney, Options Branch, Division, 
Commission, on March 8, 1994.
    \11\See July 7 Letter.
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    As noted above, the Exchange proposes, initially, to list and trade 
weekly DM cash/spot FCOs which have the same contract size as the 
PHLX's current U.S. dollar/DM based options (62,500 German marks). The 
PHLX plans to designate a three-letter contract symbol, with the third 
letter presenting each expiration week of the month.12 At the time 
a new expiration is listed, the PHLX plans to list three exercise 
strike prices for each cash/spot FCO around the current spot price. The 
PHLX may add new exercise prices during the life of the option, 
consistent with Exchange Rule 1012, ``Series of Options Open for 
Trading.''13 The strike prices will be listed at half-cent 
intervals.14
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    \1\2The PHLX plans to reserve five symbols, with the first two 
letters, XD, representing the DM cash/spot contract and the third 
letter representing the week of the month that the contract expires. 
Thus, the symbol ZXDA would represent weekly cash/spot German market 
contracts expiring on the first Monday of the month, and XDB would 
represent an expiration on the second Monday of the month.
    \1\3Telephone conversation between Murray Ross, Secretary, PHLX, 
and Yvonne Fraticelli, Staff Attorney, Options Branch, Division, 
Commission, on March 8, 1994.
    \1\4The PHLX has represented that the Exchange's automated 
trading systems as well as those of OPRA have sufficient capacity to 
adequately process quotations and trades in the proposed cash/spot 
FCOs. See April 28 Letter, supra note 4.
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    Cash/spot FCOs will trade during the same hours as the FCOs trading 
currently on the PHLX,15 and will be listed, initially, in one-
week and two-week expirations, with new series listed each Monday at 
1:30 a.m. EST. The expiring cash/spot contract will cease trading at 
10:30 a.m. and expire at 11:59 p.m. on its expiration Monday, unless 
such Monday is an Exchange holiday or an Exchange designated bank 
holiday, when, under PHLX Rule 1000(b)(21), ``Expiration Date,'' as 
amended, the cash/spot FCO will expire at 11:59 p.m. on the preceding 
business date (i.e., Friday).16
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    \1\5FCOs currently trade Monday through Friday from 1:30 a.m.-
2:30 p.m. EST.
    \1\6See Amendment No. 3, supra note 4. The following holidays 
are currently observed by the Exchange: New Years Day, Presidents' 
Day, Good Friday, Memorial Day, Independence Day, Labor Day, 
Thanksgiving and Christmas. In addition, the PHLX has listed the 
following holidays as designated bank holidays in 1994: November 1 
(French holiday), December 26 and 27 (Boxing Day, U.K.), January 17 
(Martin Luther King Day), April 4 (Easter Monday, U.K.), May 2 (May 
Day, U.K.), May 23 (German holiday), August 1 (Swiss holiday), 
August 15 (French holiday), August 29 (U.K. bank holiday), October 3 
(German holiday), and October 10 (U.S. bank holiday).
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    Accordingly, on Exchange holidays and Exchange designated bank 
holidays, the expiring cash/spot FCO will cease trading at 10:30 a.m. 
on the preceding business day. In addition, when Monday is an exchange 
holiday, a new two-week contract will be listed on the following 
Tuesday at 1:30 a.m. EST as opposed to the normal Sunday morning 
listing.
    The cash/spot FCOs will trade in accordance with the rules 
governing all PHLX FCOs, including sales practice rules and floor 
trading procedures. In addition, the PHLX proposes to amend PHLX Rule 
1014, ``Obligations and Restrictions Applicable to Specialists and 
Registered Options Traders,'' to provide that bid/ask differentials for 
cash/spot FCOs shall be determined by reference to the underlying 
foreign currency. For example, the DM cash/spot contract would be 
subject to the bid/ask differential for DM options. The PHLX also 
proposes to amend PHLX Rule 1033, ``Bids and Offers--Premium,'' to 
provide that bids and offers for cash/spot FCOs shall be expressed in 
terms of dollars per unit of the underling foreign currency. For 
position limit and exercise limit purposes, cash/spot contracts will be 
aggregated with other existing contracts on the same underlying 
currency.17
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    \1\7See January 4 Letter and January 9 Letter, supra note 4.
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    The PHLX proposes to apply Exchange Rule 722, ``Margin Accounts,'' 
to cash/spot FCOs, so that the current margin requirements for FCOs 
will apply to cash/spot FCOs. Specifically, for any put or call cash/
spot option issued, guaranteed or carried ``short'' in a customer's 
account the required margin shall be 100% of the options premium plus 
4% of the value of the underlying contract less any out-of-the-money 
amount, with an adjustment for out-of-the-money options to be not less 
than 100% of the option premium plus \3/4\ of the underlying contract 
value.18 The PHLX plans to collect margin within two days 
following the date on which a customer enters into a cash/spot FCO 
position.19
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    \1\8See January 4 Letter, supra note 4.
    \1\9See January 21 Letter, supra note 4.
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    The Exchange believes that cash/spot FCOs should respond to the 
continuing needs of market participants, particularly portfolio 
managers and other institutional currency market participants, by 
providing protection from short-term market movements while offering an 
alternative to hedging currency portfolios with short duration futures, 
forward contracts, or off-exchange customized derivative instruments. 
In this regard, the PHLX notes that FCOs provide a strategic investment 
tool for sophisticated retail options customers, multi-national 
corporations, and proprietary traders who manage and hedge foreign 
currency exposure. In addition, banks trade short-term FCOs to hedge 
the risks of trading in the foreign currency forward and cash markets.

III. Commission Findings and Conclusions

    The Commission finds that the proposed rule change is 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).\20\
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    \20\15 U.S.C. 78f(b)(5) (1982).
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    Specifically, the Commission believes that the proposal is designed 
to provide investors with a new and innovative means to hedge foreign 
currency portfolios and cash flows from short-term market risk, thereby 
facilitating transactions in FCOs. The Commission believes that the 
one- and two-week expirations for the cash/spot FCOs will provide 
investors with greater flexibility to tailor foreign currency options 
positions to satisfy their investment objectives.\21\ In this regard, 
the Commission notes that the PHLX has stated that FCOs provide a 
strategic investment tool for sophisticated retail options customers, 
multi-national corporations, and proprietary traders who manage and 
hedge foreign currency exposure, as well as for banks, which trade 
short-term FCOs to hedge the risks of trading in the foreign currency 
forward and cash markets. The Exchange states, in addition, that 
international financial markets are focusing increasingly on shorter 
term FCO instruments and that there is an active over-the-counter 
(``OTC'') market for short-term FCOs, both in the U.S. and abroad.\22\
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    \21\Pursuant to section 6(b)(5) of the Act the Commission must 
predicate approval of exchange trading for new products upon a 
finding that the introduction of the product is in the public 
interest. Such a finding would be difficult with respect to a 
product that served no investment hedging or other economic 
function, because any benefits that might be derived by market 
participants would likely be outweighed by the potential for 
manipulation, diminished public confidence in the integrity of the 
markets, and other valid regulatory concerns.
    \22\In conjunction with the PHLX's approval order for cash/spot 
FCOs, the Commission also approved for distribution a revised 
Options Disclosure document entitled Characteristics and Risks of 
Standardized, Options that describes the characteristics and risks 
of trading in cash/spot FCOs. This disclosure document must be 
provided to investors in cash/spot FCOs before their accounts are 
approved for transactions in cash/spot FCOs or their orders for 
cash/spot FCOs are accepted. See Securities Exchange Act Release No. 
33582 (February 4, 1994), 59 FR 6661.
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    The PHLX's cash/spot FCOs are a response by the Exchange to meet 
the demands of sophisticated foreign currency market participants who 
are concentrations increasingly on shorter term FCO products. The 
Commission believes that the cash/spot FCOs will also broaden the 
hedging opportunities of foreign currency market participants by 
providing them with an alternative to using futures contracts, forward 
contracts and/or off-exchange customized derivative instruments to 
satisfy their short-term foreign currency investment needs, thereby 
promoting competition among these markets.
    The Commission believes that the PHLX's proposal will help to 
promote the maintenance of a fair and orderly market by extending the 
benefits of a listed currency market to an instrument designed to meet 
the investment needs of foreign currency market participants. The 
attributes of the Exchange's markets versus the OTC market for short-
term FCOs include, but are not limited to, a regulated market center, 
an auction market, with posted market quotations and transaction 
reporting, standardized contract specifications, parameters and 
procedures and procedures for clearance and settlement, and the 
guarantee of the OCC.
    The trading of cash/spot FCOs, however, raises several issues, 
including issues related to product design, customer protection, 
surveillance, and market impact. For the reasons discussed below, the 
Commission believes that the PHLX has adequately addressed these 
issues.

A. Pricing and Settlement Value

    The Commission believes that the methodology described in PHLX Rule 
1957 for calculating the settlement value of the cash/spot FCOs is 
designed to provide an accurate reflection of the foreign currency spot 
price. As noted above, pursuant to PHLX Rule 1057, at 10 a.m. (EST or 
EDT) on expiration day, the market information vendor(s) acting as the 
Exchange's designated agent(s) will collect bid and offer quotations 
for the current foreign exchange spot/price from the quotations 
submitted to the designated agent(s) by at least 15 interbank foreign 
exchange participants, which the designated agent(s) will select 
randomly from a list of 25 active interbank foreign exchange market 
participants. After discarding the five highest offers and five lowest 
bids, the Exchange's designated agent(s) will arithmetically average 
the remaining ten bids and ten offers to arrive at a closing settlement 
price, which will be calculated and sent to the PHLX every 30 seconds 
or every minute until 10:30 a.m., when the designated agent(s) will 
determine the final settlement price. The PHLX states that the spot 
market for foreign currencies is active and highly competitive,23 
so that the variations among the quotations of interbank market 
participants are relatively small. The Commission believes that the 
PHLX's procedures and the competitive nature of the spot market for 
foreign currencies should help to ensure that the settlement values for 
cash/spot contracts will accurately reflect the spot price for foreign 
currencies.
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    \2\3The Commission has found previously that the DM spot market 
is very active and that the interbank foreign currency spot market, 
in general, is an extremely large, diverse market comprised of banks 
and other financial institutions worldwide. The foreign currency 
spot market is supplemented by equally deep and liquid markets for 
standardized options and futures on foreign currencies and options 
on those futures. There is also an active OTC market for FCOs. See 
Securities Exchange Act Release No. 31627 (December 21, 1992), 57 FR 
62399 (order approving File No. SR-Amex-92-36) (``Multiple Foreign 
Currency Warrants Approval Order'').
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    In addition, the Commission believes that the PHLX's procedures 
should guard against unreliable or manipulated quotes. In this regard, 
the Commission notes that the cash/spot settlement value will be 
determined on the basis of quotes obtained from 15 randomly selected 
active interbank foreign exchange market participants obtained from a 
universe of 25 interbank market participants. After discarding the five 
highest offers and five lowest bids, the Exchange's designated agent(s) 
will arithmetically average the remaining ten bids and ten offers to 
arrive at a final settlement price. The Commission believes that by 
having its designated agent(s) choose interbank market participants at 
random for the purposes of collecting quotes, and then averaging those 
randomly obtained figures to arrive at the final settlement value, the 
PHLX has designed procedures which minimize the Commission's concerns 
for manipulation and inaccuracy in calculating the cash/spot settlement 
value.

B. Customer Protection

    The Commission believes that a regulatory system designed to 
protect public customers must be in place before the trading of 
sophisticated financial instruments, such as cash/spot FCOs, can 
commence on a national securities exchange. The PHLX proposes to amend 
several rules to address these concerns. Specifically, the PHLX 
proposes to apply PHLX Rule 1024, ``Conduct of Accounts Open for 
Trading,'' PHLX Rule 1025, ``Supervision of Accounts,'' and PHLX Rules 
1026, ``Suitability,'' and 1027, ``Discretionary Accounts,'' to cash/
spot FCOs.24 Under paragraph (b) of PHLX Rule 1024, as amended, 
members will be prohibited from accepting a customer order to purchase 
or write a cash/spot FCO unless such customer's account has been 
specially approved in writing by a designated Foreign Currency Options 
Principal of the member for transactions in cash/spot FCOs. Exchange 
Rule 1026 is designed to ensure that options, including cash/spot FCOs, 
will be sold only to customers capable of evaluating and bearing the 
risks associated with trading in the instruments. Finally, under 
Exchange Rule 1027, members will be permitted to exercise discretionary 
power with respect to trading cash/spot FCOs in a customer's account 
only if the member has received prior written authorization from the 
customer and the account has been accepted in writing by a designated 
Foreign Currency Options Principal. In addition, under Exchange Rule 
1027, the Foreign Currency Options Principal or a Registered Options 
Principal must approve and initial each discretionary cash/spot FCO 
order on the day the order is entered.
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    \2\4See Amendment No. 3, supra note 4.
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    The Commission notes that the Options Disclosure Document (``ODD'') 
has been amended to include cash/spot FCOs and that the Exchange plans 
to deliver a circular to its members describing the specific risks 
associated with cash/spot FCOs.
    Because the PHLX has taken steps to ensure that the risks of 
trading cash/spot FCOs will be disclosed to public customers and to 
members, and because the cash/spot FCOs will be subject to the same 
regulatory regime as FCOs currently traded on the PHLX, the Commission 
believes that the PHLX has provided adequate safeguards to ensure the 
protection of investors in cash/spot FCOs.

C. Surveillance

    The Commission notes, in addition, that the PHLX plans to integrate 
the cash/spot FCOs into existing PHLX market surveillance programs.\25\ 
In light of the design of the cash/spot contracts and the developed 
market for foreign currencies, the Commission believes that the markets 
for the cash/spot FCOs will not be readily susceptible to manipulation.
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    \25\See Amendment No. 3, supra note 4.
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D. Position and Exercise Limits and Margin Requirements

    As noted above, cash/spot FCOs will be aggregated with other 
existing contracts on the same underlying currency for position and 
exercise limit purposes.\26\ The Commission believes that aggregation 
of cash/spot FCOs with existing contracts on the same underlying 
currency for position and exercise limit purposes will reduce concerns 
regarding manipulations or disruptions of the markets for cash/spot 
FCOs, other currency options, and the underlying currencies, while at 
the same time not hampering the depth and liquidity of the market for 
cash/spot FCOs.
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    \26\See February 9 Letter, supra note 4.
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    The Commission believes the proposed margin levels for cash/spot 
contracts, which are consistent with the margin levels for the PHLX's 
other FCOs, will result in adequate coverage of contract obligations 
and are designed to preclude the systemic risks arising from 
excessively low margin levels. As noted above, the margin requirement 
on any put or call cash/spot option issued, guaranteed or carried 
``short'' in a customer's account shall be 100% of the option premium 
plus 4% of the value of the underlying contract less any out-of-the-
money amount, with an adjustment for out-of-the-money options to be not 
less than 100% of the option premium plus \3/4\% of the underlying 
contract value. The PHLX plans to collect margin within two days 
following the date on which a customer enters into a cash/spot FCO 
position. The PHLX has indicated that the proposed margin would cover 
the historical volatility of the DM over a two-day period with a 99.40% 
level of confidence. Accordingly, the Commission believes that the 
PHLX's proposed margin level will result in adequate coverage for cash/
spot contracts. Because the volatility of foreign currencies can change 
significantly, the Commission expects the PHLX to monitor the adequacy 
of margin levels for cash/spot FCOs to ensure that the required margin 
remains appropriate in view of the volatility of the underlying 
instrument.\27\
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    \27\In this regard, the Commission would view coverage of less 
than 97% as problematic.
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E. Other Proposed Rule Changes

    The Commission believes that the other rules changes proposed by 
the PHLX to accommodate the trading of cash/spot FCOs are consistent 
with the Act. First, the Commission believes it is reasonable for the 
PHLX to list at least three exercise strike prices for each cash/spot 
FCO, and to list the strike prices at half-cent intervals, because such 
intervals will provide market participants with the flexibility to 
tailor their cash/spot FCO positions to achieve their investment 
objectives. At the same time, the Commission does not believe that the 
proposal will result in excessive proliferation of options series.\28\ 
The Commission notes, in addition, that the PHLX has represented that 
the Exchange and OPRA have adequate capacity to process quotations and 
trades in cash/spot FCOs.\29\
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    \28\When listing additional strikes, the Commission expects the 
Exchange to consider whether the listing of such strikes will be 
consistent with the maintenance of a fair and orderly market.
    \29\See April 28 Letter, supra note 4.
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    Second, the Commission believes that it is reasonable for the 
Exchange to amend PHLX Rule 1014 to provide that the bid/ask 
differentials for cash/spot FCOs shall be determined by reference to 
the underlying currency. The Commission believes that these bid/ask 
differentials should facilitate tightly quoted markets without 
impairing specialists' and Registered Options Traders' (``ROTs'') 
ability to provide market depth and liquidity. Accordingly, the 
Commission believes the quote spread parameters for cash/spot FCOs are 
consistent with the obligation of PHLX specialists and ROTs under the 
Act to provide fair and orderly markets.
    Third, the Commission believes that it is reasonable for the PHLX 
to amend PHLX Rule 1000(b)(21), ``Expiration Date,'' to clarify the 
procedures the PHLX will follow when a cash/spot FCO expires on an 
Exchange holiday or Exchange designated bank holiday.

F. Market Impact

    The Commission believes that the listing and trading of DM cash/
spot FCOs will not adversely affect the spot or derivative foreign 
currency markets. First, the Commission notes, as it has concluded in 
the past,\30\ that the interbank foreign currency spot market is an 
extremely large, diverse market comprised of banks and other financial 
institutions worldwide. That market is supplemented by equally deep and 
liquid markets for standardized options and futures on foreign 
currencies and options on those futures. There is also an active OTC 
market for FCOs. Given the probable expense of attempting to affect the 
FCO spot market underlying a cash/spot FCO (or any derivative market 
related thereto), the Commission believes that it would be difficult 
for a market participant to manipulate the underlying spot market, or 
any derivative market related thereto, to benefit a previously 
established cash/spot FCO position.
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    \30\See Multiple Foreign Currency Warrants Approval Order, Supra 
note 22.
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    Further, as noted above, the PHLX will apply its existing FCO 
surveillance procedures to the cash/spot FCOs, which should enable the 
Exchange to conduct, deter, as well as detect, other trading abuses 
involving the cash/spot FCO market and the markets for the underlying 
FCOs.
    The Commission finds good cause for approving Amendment No. 3 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 3, which provides that contracts scheduled to expire on 
Exchange holidays and designated bank holidays will expire on the 
previous business day, is technical in nature and raise no new 
regulatory issues. Therefore, the Commission believes it is consistent 
with sections 6(b)(5) and 19(b)(2) of the Act to approve Amendment No. 
3 to the PHLX's proposal on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendments No. 3 to the proposed rule change. 
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 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 April 5, 1994.
    It is Therefore Ordered, Pursuant to section 19(b)(2) of the 
Act,\31\ that the proposed rule change (File No. SR-PHLX-93-10) is 
approved.
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    \31\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\18 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5929 Filed 3-14-94; 8:45 am]
BILLING CODE 8010-01-M