[Federal Register Volume 59, Number 234 (Wednesday, December 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30029]


[[Page Unknown]]

[Federal Register: December 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35023; File No. SR-Phlx-94-23]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Philadelphia Stock Exchange Relating 
to Inter-Currency Spread Priority

November 29, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 1, 1994, the 
Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been prepared by the Phlx. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx, pursuant to Rule 19b-4 of the Act, proposes to amend 
Rules 1033 and 1066 to allow spread priority for eligible spreads 
between two different foreign currency options (``FCOs''). For example, 
a Deutsche mark call and a French franc put could be executed as a 
spread, such that the bid/offer could be expressed as a net credit or 
debit and a single execution could occur as long as at least one 
individual component (leg) of each spread is executed at a better price 
than the established bid/offer and no leg is executed outside of the 
established bid/offer for that option contract.
    In order to permit the execution of inter-currency spreads, a 
definition of this type of order is proposed to be added to Phlx Rule 
1066, as a subcategory of ``spread'' orders, which is a subcategory of 
``hedge'' orders. Also, the Phlx proposes to adopt new paragraph (i) to 
Rule 1033, which establishes spread priority principles for inter-
currency spreads. On November 18, 1994, the Phlx filed Amendment No. 1 
to the proposal to renumber a proposed paragraph due to recent changes 
to Rule 1033.\2\
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    \2\See Letter from Edith Hallahan, Phlx, to Michael Walinskas, 
Derivative Products Regulation, SEC, dated Nov. 17, 1994.
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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 Phlx 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 Phlx 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 the 
Statutory Basis for, the Proposed Rule Change

    Currently, an option spread is executable as a single transaction 
at a total net debit or credit with one contra-side, pursuant to Phlx 
Rule 1033(d). Under this provision, an eligible spread can be afforded 
spread priority as long as the net credit/debit improves the 
established market for the spread as measured by the aggregate price of 
the respective legs if executed individually.
    The Commission recently approved a Phlx proposal to expand the 
spread priority provisions applicable to FCOs to include three-way, 
ratio, and multi-spread transactions.\3\ Specifically, that proposal 
expanded upon the existing requirement (in Rule 1033(d)) to improve the 
established market as follows: at least one options leg must be 
executed at a better price than the established market for that option 
as well as that no option leg be executed outside of the established 
market for that option.\4\
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    \3\See Securities Exchange Act Release No. 35015 (November 29, 
1994).
    \4\As a result, according to the Phlx, the net credit/debit 
necessarily improves the established market for the spread (the 
current standard), because the market for at least one leg is 
bettered.
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    The purpose of this proposal is to extend spread priority to 
spreads involving two different foreign currency options. For example, 
a spread could be executed between any two FCOs, American-\5\ or 
European-style\6\ expiration, and any expiration date (regular, month-
end, or long-term). Inter-currency spread priority pursuant to the 
proposed rule change would not, however, be available for cross-rate, 
cash/spot, or the Exchange's customized FCOs.
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    \5\An American-style option is one that can be exercised at any 
time prior to expiration of the option.
    \6\A European-style option is one that can only be exercised 
during a specified period immediately prior to expiration of the 
option.
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    According to the Phlx, absent spread priority, inter-currency 
spreads can be executed as contingency orders pursuant to Phlx Rule 
1066. For example, an FCO floor broker would quote a French franc 
market as well as a Swiss franc market, in each respective trading 
crowd; then, the floor broker would announce ``99 bid for 99 Sep 99 
French franc calls if i can sell 99 Dec 99 Swiss franc puts at 99.'' 
However, each component of the spread, however, must be bid/offered 
individually, which, according to the Exchange, generally means that 
each component is executed at a price better than the established bid/
offer. In addition, the Exchange believes that because each leg must be 
executed between the established market, such contingency orders are 
more likely to be broken up by market interest in one leg, such that 
the end result may be a different number of contracts for each leg.
    Rule 1066(f)(1) defines a spread as an order to buy a stated number 
of option contracts and to sell the same number of option contracts, in 
a different series of the same class of options. The Exchange now 
proposes to adopt Rule 1066(f)(1)(A) to define inter-currency spreads 
because the existing definition requires that both orders be for the 
same class of FCOs, which does not allow for spreads involving FCOs in 
different currencies.
    The Exchange believes that executing inter-currency spreads subject 
to a spread priority provision is appropriate for several reasons. 
First, inter-currency spreads provide a trading strategy for FCO market 
participants based on the interplay between the currencies of two 
countries, similar to the advantages and opportunities associated with 
cross-rate FCOs. The Exchange believes that the availability of such 
strategies should enhance liquidity in existing FCOs.
    Second, the Phlx emphasizes that inter-currency spreads are not a 
new trading strategy, as they are currently executable as two separate, 
contingent orders. Instead, inter-currency spread priority is intended 
to facilitate the execution of such orders, which, according to the 
Exchange, often proves to be difficult. For example, the execution of 
inter-currency spreads as contingency orders may present a logistical 
problem as floor brokers must, in exercising due diligence, shuttle 
between two trading crowds or, to prevent a trade from occurring while 
the floor broker is in the second crowd, utilize two floor brokers to 
execute such an order.
    The requirement in proposed Phlx Rule 1033(i) that each leg of an 
inter-currency spread be executed at or within the market for the 
individual leg, and that at least one leg is executed at a price which 
improves the established market, should, according to the Exchange, 
protect investors and the public interest as well as prevent 
manipulative acts and practices. The Exchange states that this 
requirement is also consistent with Phlx Rule 118 which provides that 
when a bid/offer is clearly established, no bid/offer outside that 
price shall be established. The Exchange further believes that spread 
priority for inter-currency spreads should facilitate a more simplified 
execution procedure for such orders.
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act, in general, and with Section 6(b)(5),\7\ in 
particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and to protect investors and the public interest.
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    \7\15 U.S.C. 78f(b)(5) (1988).
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(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 solicited or received with respect to the 
proposed rule change.

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 reasons 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, 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 File No. SR-Phlx-94-23 and should be 
submitted by December 28, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\17 CFR 200.30(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30029 Filed 12-6-94; 8:45 am]
BILLING CODE 8010-01-M