[Federal Register Volume 60, Number 25 (Tuesday, February 7, 1995)]
[Notices]
[Pages 7255-7256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2908]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35306; File No. SR-Phlx-94-23]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating to Inter-Currency Spread 
Priority

January 31, 1995.
    On August 1, 1994, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Act),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to allow spread priority for 
eligible spreads between two different foreign currency options 
(``FCOs'').

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1992).
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    Notice of the proposed rule change was published for comment and 
appeared in the Federal Register on December 7, 1994.\3\ No comments 
were received on the proposal. This order approves the proposal.

    \3\See Securities Exchange Act Release No. 35023 (November 29, 
1994), 59 FR 63149.
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I. Description of the Proposal

    The purpose of this proposal is to amend the current definition of 
spread order contained in Rule 1066(f)(1) to include transactions 
involving options in two different foreign currencies (``inter-currency 
spread'') and to extend the spread priority principles to inter-
currency spread orders.
    Rule 1066(f)(1) currently 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 proposes to extend this definition by adopting Rule 
1066(f)(1)(A), Inter-Currency Spread Order, as a subcategory of spread 
order.\4\ Furthermore, the Exchange proposes to adopt Rule 1033(i), 
Inter-Currency Spread Priority, in order to extend the current spread 
priority principles to inter-currency spreads. As a result, an inter-
currency spread involving any two FCOs, American-\5\ or European-
style\6\ expiration, and any expiration date (regular, month-end, or 
long-term) will not be eligible for spread priority treatment, as 
described below. 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.

    \4\Proposed Phlx Rule 1066(f)(1)(A) defines Inter-Currency 
Spread Order in the following manner: In the case of foreign 
currency options, a spread order may consist of an order to buy a 
stated number of option contracts in one foreign currency and to 
sell the same number of option contracts in a different foreign 
currency option.
    \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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    Inter-currency spreads are currently 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 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.
    The Phlx's current priority rule, Rule 1033(d), allows a spread 
order (which includes a spread involving only one foreign currency) to 
be executed as a single transaction at a total net debit or credit with 
one contra-side. Furthermore, an eligible spread can be afforded 
priority as long as the net credit/debit improves the established 
market for the spread, provided, however, that at least one option leg 
is executed at a better price than the established market for that 
option and no option leg is executed outside of the established market 
for that option. The same principles apply to three-way, ratio, and 
multi-spread transactions in foreign currency.\7\

    \7\See Securities Exchange Act Release No. 34015 (November 29, 
1994).
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    The Exchange believes that extending priority treatment to inter-
currency spreads is appropriate for several reasons. First, the 
Exchange believes that spread priority for inter-currency spreads will 
facilitate a more simplified procedure for the execution of such 
orders. In this context, Phlx notes that the execution of inter-
currency spreads as contingency orders may present a logistical problem 
given that 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. Second, 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.\8\ The Exchange believes 
that the availability of such strategies should enhance liquidity in 
existing FCOs. Finally, the Exchange believes that the requirement in 
proposed Phlx Rule 1033(i) that each leg os an inter-currency spread be 
executed at or within the market for the individual leg, and that at 
least one leg be executed at a price which improves the established 
market, will benefit investors. 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.

    \8\A cross-rate currency option is an option to purchase or sell 
a foreign currency at an exercise price that is denominated in 
another foreign currency. The exercise price, therefore, represents 
an exchange rate between two foreign currencies. [[Page 7256]] 
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II. Discussion

    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).\9\ In particular, the 
Commission believes the proposal is consistent with the Section 6(b)(5) 
requirement that the rules of an exchange be designed to promote just 
and equitable principles of trade and not to permit unfair 
discrimination between customers, issuers, brokers, and dealers.

    \9\15 U.S.C. 78f(b)(5) (1982).
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    The Commission believes that allowing inter-currency spread orders 
to attain spread priority is appropriate for several reasons. First, 
because the FCO market is dominated by institutional and corporate 
investors, the preemption of public customer limit orders (a concern of 
the Commission in the context of equity and index options), is 
unlikely. In this regard, the Commission notes that the proposed 
changes are applicable solely to the FCO market, which is dominated by 
institutions and sophisticated corporate investors. This is in part due 
to the complex nature of the instruments and the tremendous size of the 
underlying currency markets.
    Second, because inter-currency spreads are currently executed as 
contingency orders, and therefore more susceptible to non-execution, 
the Commission believes granting priority to such orders will 
facilitate their execution and, therefore, may lead to more efficient 
quotes and tighter spreads.
    Third, the priority principles applicable to inter-currency spreads 
mirror the priority rules currently in place for regular FCO spread 
orders. As a result, an inter-currency spread may be executed at a 
total net credit/debit with one other participant, provided at least 
one leg of the spread is executed at a better price than the 
established bid or offer for that contract and that no option leg is 
executed at a price outside of the established bid or offer for that 
option contract. Accordingly, the Commission believes that this change 
will allow institutional and corporate investors to better utilize 
sophisticated trading techniques involving FCOs for hedging and risk 
management purposes without altering the existing priority principles.
    Finally, because the proposed definition limits an inter-currency 
spread to a maximum of two foreign currencies, the Commission notes 
that the logistical problems and confusion attendant to the execution 
of orders involving three or more foreign currencies will be avoided.
    It therefore is ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-Phlx-94-23) is approved.

    \10\15 U.S.C. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\

    \11\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2908 Filed 2-6-95; 8:45 am]
BILLING CODE 8010-01-M