[Federal Register Volume 59, Number 159 (Thursday, August 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20232]


[[Page Unknown]]

[Federal Register: August 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34525; International Series Release No. 698; File No. 
SR-PHLX-93-13]

 

Self-Regulatory Organizations; Notice of Filing Proposed Rule 
Change and Amendment Nos. 1 and 2 by the Philadelphia Stock Exchange, 
Inc., Relating To Modifications of the Position and Exercise Limits for 
Foreign Currency Options

August 11, 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 March 
29, 1993, as amended on July 19, 1994, and on July 26, 1994,\1\ 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.\2\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\On July 19, 1994, the PHLX amended its proposal to establish 
a foreign currency option (``FCO'') position limit of 150,000 
contracts for FCOs with annual trading volume of at least 4,000,000 
contracts. See Letter from Gerald D. O'Connell, First Vice 
President, Regulation and Trading Operations, PHLX, to Michael 
Walinskas, Branch Chief, Options Regulation, Division of Market 
Regulation (``Division''), Commission, dated July 19, 1994 
(``Amendment No. 1''). On July 26, 1994, the PHLX amended the 
proposal to provide that FCOs with annual trading volume of 
3,500,000 contracts would be eligible for a position limit of 
150,000 contracts and to indicate that the PHLX plans a one-time 
immediate review to implement the higher position limit for FCOs 
which meet the annual trading volume requirement. See Letter from 
Gerald D. O'Connell, First Vice President, Regulation and Trading 
Operations, PHLX, to Michael Walinskas, Branch Chief, Options 
Regulation, Division, Commission, dated July 26, 1994 (``Amendment 
No. 2'').
    \2\The PHLX also submitted information concerning the 
implementation and effective date of the proposal. See Letter from 
Edith Hallahan, Attorney, Market Surveillance, PHLX, to Richard 
Zack, Branch Chief, Options Branch, Division, Commission, dated July 
27, 1993 (``July 27 Letter'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Currently, PHLX Rule 1001, ``Position Limits,''\3\ establishes a 
position limit of 100,000 contracts for FCOs traded on the PHLX.\4\ The 
PHLX proposes to amend Exchange Rule 1001 and Exchange Rule 1002, 
``Exercise Limits,''\5\ to increase the position and exercise limits 
for FCOs. Specifically, under proposed Commentary .05(b) to PHLX Rule 
1001, the PHLX proposes to review the previous year's volume 
information for all FCOs, including cross-rate FCOs,\6\ at the 
beginning of each calendar year and to establish a position limit of 
150,000 contracts for FCOs with annual trading volume of at least 
3,500,000 contracts, based upon the previous year's volume. At the 
beginning of each calendar year, the PHLX will review FCO volume 
information from the previous year to determine which limit will apply; 
a higher limit will be effective on the date set by the Exchange, and a 
lower limit will take effect after the last expiration then trading. In 
addition, the PHLX's Market Surveillance Department plans to monitor 
trading volume on a monthly basis, so that FCOs will be eligible 
immediately for a higher position limit when annual trading volume, as 
measured from the beginning of the calendar year, exceeds the levels 
established in the proposal.
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    \3\Position limits impose a ceiling on the number of option 
contracts which an investor or group of investors acting in concert 
may hold or write in each class of options on the same side of the 
market (i.e., aggregating long calls and short puts or long puts and 
short calls).
    \4\See Securities Exchange Act Release No. 23710 (October 15, 
1986), 51 FR 37691 (order approving File Nos. SR-PHLX-86-24 and SR-
CBOE-86-30).
    \5\Exercise limits prohibit an investor or group of investors 
acting in concert from exercising more than a specified number of 
puts or calls in a particular class within five consecutive business 
days.
    \6\See July 27 Letter, supra note 1. Currently, the PHLX trades 
two cross-rate FCOs, the British pound/Deutsche mark and the 
Deutsche mark/Japanese yen.
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    The text of the proposed rule change 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

    Currently, PHLX Rule 1001 establishes a position limit of 100,000 
contracts for FCOs traded on the PHLX. The PHLX proposes to amend 
Exchange Rules 1001 and 1002 to increase the position and exercise 
limits for FCOs, including cross-rate FCOs. Specifically, under 
proposed Commentary .05(b) to PHLX Rule 1001, the PHLX proposes to 
establish a position limit of 150,000 contracts for FCOs with annual 
trading volume of at least 3,500,000 contracts, based upon the previous 
year's volume. At the beginning of each calendar year, the PHLX will 
review FCO volume information from the previous year to determine which 
limit will apply; a higher limit will be effective on the date set by 
the Exchange, and a lower limit will take effect after the last 
expiration then trading. In addition, the PHLX's Market Surveillance 
Department plans to monitor trading volume on a monthly basis, so that 
FCOs will be eligible immediately for a higher position limit when 
annual trading volume, as measured from the beginning of the calendar 
year, exceeds the levels established in the proposal.
    The PHLX notes that the Exchange's exercise limits are established 
by reference to position limits, so that any increase in position 
limits will also increase exercise limits. Accordingly, the PHLX 
proposes to amend Exchange Rule 1002 to reflect the proposed amendment 
to Exchange Rule 1001.
    The Exchange views the current FCO position and exercise limits as 
too low in light of increased levels of trading activity in the 
underlying currency markets and the resultant growth in liquidity of 
PHLX FCOs in recent years. In addition, the PHLX notes the number of 
products (e.g., long-term, month-end, American- and European-style 
options) that are currently aggregated to determine position limits as 
well as the likelihood that additional products will be aggregated in 
the future.
    Accordingly, the PHLX's proposal is designed to identify and 
accommodate those active currencies where heavier trading and open 
interest warrant higher limits. Under this proposal, the PHLX does not 
anticipate that all of the limits will be increased, as only one 
currency currently qualifies for higher limits under the proposed 
standards.\7\
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    \7\During 1993, only Deutsche mark options had trading volume 
which would qualify for the 150,000 contract limit.
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    When FCOs began trading on the PHLX in 1982, FCO position limits 
were set at 10,000 contracts.\8\ Since that time the position limits 
have been changed three times, including an increase to the current 
level of 100,000 contracts in 1986.\9\ Since 1986, the PHLX has added 
several new products for which position limits are aggregated with 
other trading in the same underlying foreign currency.\10\ As a result, 
many traders have recently begun to regularly accumulate positions near 
existing limits, especially in certain more active currencies. However, 
in other currencies lacking the same volume or trading interest, the 
current level of 100,000 contracts has proved adequate and reasonable. 
In those active currencies, the PHLX believes that trading interest 
could migrate to the over-the-counter market, hampering PHLX liquidity 
if large traders continue to be restricted by the current position 
limits.
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    \8\See Securities Exchange Act Release No. 19313 (December 8, 
1982) 47 FR 56591 (order approving File No. SR-PHLX-81-4).
    \9\See Securities Exchange Act Release No. 27310, supra note 2. 
See also Securities Exchange Act Release Nos. 21676 (January 18, 
1985) 50 FR 3859 (order approving File No. SR-PHLX-84-18) 
(increasing position limits from 10,000 to 25,000 contracts); and 
22479 (September 27, 1985), 50 FR 41276 (order approving File No. 
SR-PHLX-85-22) (increasing position limits to 50,000 contracts).
    \10\See e.g., Securities Exchange Act Release Nos. 24859 (August 
27, 1987) 52 FR 33493 (order approving File No. SR-PHLX-87-24) 
(aggregating European-style contracts); 29804 (October 10, 1991) 57 
FR 20546 (order approving File No. SR-PHLX-91-30) (aggregating long-
term options); and 30945 (July 21, 1992) 57 FR 33381 (order 
approving File No. SR-PHLX-92-13) (aggregating month-end options).
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    The PHLX notes that since the time of the most recent increase in 
position limits, it is estimated that the size of the underlying 
currency market has grown exponentially.\11\ For example, it is 
estimated that 250,000 PHLX Deutsche mark contracts would represent 
less than 1% of the daily international currency transaction volume in 
the Deutsche mark. Since 1986, average daily trading volume in PHLX 
FCOs has grown from 30,880 to 48,246 contracts in 1992.\12\ As of 
February 1993, average daily volume was 61,062 contracts. Monthly 
volume and open interest have also increased dramatically since 1986, 
especially in certain FCOs. Further, the highest monthly open interest 
in FCOs reached 995,941 in 1986; 1,188,570 contracts in 1987; and 
1,190,389 contracts in 1992. Total volume has increased from 7,905,239 
contracts in 1986 to 12,158,069 contracts in 1992.
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    \11\In 1989, total gross global foreign exchange turnover was 
estimated to be $932 billion per day and net global turnover was 
estimated to be $640 billion per day. See Bank for International 
Settlements (``BIS'') Survey of Foreign Exchange Market Activity, 
April 1989. In 1992, total gross global foreign exchange turnover 
was estimated to be $1,354 billion per day, a 35% increase since 
April 1989. After allowing for the elimination of local and cross-
border double-counting and estimated gaps in reporting (e.g., 
exchange-traded options and futures and countries not providing 
counterparty information for over-the-counter transactions), global 
``net-net'' exchange market turnover in spot, forward and derivative 
contracts may be estimated at $880 billion per day during April 
1992. See BIS Central Bank Survey of Foreign Exchange Market 
Activity in April 1992, March 1993.
    \12\Average daily volume in foreign currency options was 14,829 
contracts in 1985 and 30,880 contracts in 1986.
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    In light of these market changes, the PHLX believes that increased 
position and exercise limits are necessary to add depth and liquidity 
to the market. Because of the large size of the underlying market in 
foreign currencies, the PHLX does not believe that manipulative 
concerns would be enhanced if limits were increased. Moreover, the 
Exchange believes that these increases are particularly appropriate 
because the FCO market attracts a large number of institutional and 
corporate investors who have substantial hedging needs and do block\13\ 
size transactions in FCOs.
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    \13\For the purposes of this proposal, the PHLX defines ``block-
sized orders'' as orders of 100 contracts or more. See July 27 
Letter, supra note 1.
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    In prior releases approving increases in FCO position limits, the 
PHLX notes that the Commission has stated that although position and 
exercise limits must be sufficient to protect the options and related 
markets from disruptions caused by manipulation, at the same time, the 
limits must not be so low as to discourage participation in the options 
market by institutions and other investors with substantial hedging 
needs or to prevent specialists and market makers from adequately 
meeting their obligations to maintain a fair and orderly market.\14\ 
Although the Exchange may grant position limit exemptions in the 
interest of fair and orderly markets, the Exchange believes that it is 
more direct and logical to establish more appropriate position limits 
for all investors.
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    \14\See Securities Exchange Act Release No. 22479, supra, note 
9.
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    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 as well as to protect investors and the public 
interest. The PHLX believes that the increased depth and liquidity of 
the FCO market should promote just and equitable principles of trade. 
In addition, the PHLX believes that the proposed approach to FCO 
position limits should ensure that the applicable limit is reasonably 
related to trading volume. The PHLX believes that this, in turn, should 
result in position limit levels that serve the purposes of protecting 
investors and the public interest as well as preventing unfair acts and 
practices, such as manipulation.

(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 received or requested.

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 its reason for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve such proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying 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 September 8, 
1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-20232 Filed 8-17-94; 8:45 am]
BILLING CODE 8010-01-M