[Federal Register Volume 60, Number 58 (Monday, March 27, 1995)]
[Notices]
[Pages 15807-15809]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7448]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35520; International Series Release No. 793, File No. 
SR-Phlx-95-02]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. Relating to Additional Expirations 
for the Cash/Spot German Mark Foreign Currency Options (``3D Options'')

March 21, 1995.
    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 January 
25, 1995, 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. On February 
24, 1995, the Exchange filed Amendment No. 1 to the proposed rule 
change.\1\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.

    \1\In Amendment No. 1, the Exchange proposed to: (1) Amend the 
procedure for the symbols that will be used for the proposed longer 
term 3D Options; (2) change the name of these options in Phlx's 
rules from ``cash/spot'' to ``3D'' FCOs; (3) specify the strike 
price intervals applicable to the longer-term 3D Options; and (4) 
clarify that the proposal to permit spread margin treatment between 
the 3D Options and the regular Deutsche mark FCO will be applicable 
to the weekly, consecutive month, and cycle month series 3D Options. 
See Letter from Michele Weisbaum, Associate General Counsel, Phlx, 
to Brad Ritter, Senior Counsel, Office of Market Supervision, 
Division of Market Regulation, Commission, dated February 24, 1995 
(``Amendment No. 1'').
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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 
Exchange Rule 1012(a)(ii) to permit listing German mark cash/spot 
foreign currency options (``FCOs''), commonly referred to as ``3D 
Options,''\2\ with series having up to 12 months to expiration. The 
text of the proposed rule change is available at the Office of the 
Secretary, the Phlx, and at the Commission.

    \2\``3D'' refers to dollar denominated delivery.
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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

    On March 8, 1994, the Commission approved the listing and trading 
of 3D Options.\3\ These FCOs are issued by The Options Clearing 
Corporation and are European-style.\4\ The options have one-week and 
two-week expirations to provide a hedging vehicle for: sophisticated 
retail customers, portfolio managers, and multi-national corporations 
which need to hedge their [[Page 15808]] short term foreign currency 
exposure; and to banks which need to hedge the risks associated with 
trading in the forward and cash markets. The Exchange represents that 
the users of 3D Options have particularly liked the U.S. dollar 
settlement feature because they do not have to establish foreign bank 
credit lines, nor do they have to worry about the potential of 
exchanging currency due to exercises and assignments. The Exchange 
further represents that although the users find 3D Options beneficial 
for managing their short term foreign currency risks, they have also 
suggested that they would like to use a U.S. dollar settled option to 
hedge longer term risks. The Phlx, therefore, proposes to add longer 
term expirations to the 3D Option contract in order to address these 
requests.

    \3\See Securities Exchange Act Release No. 33732 (March 8, 
1994), 59 FR 12023 (March 15, 1994).
    \4\A European-style option may only be exercised during a 
specified time period immediately prior to expiration of the option.
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    The Exchange proposes to list 3D Options with expirations 
corresponding to the consecutive month and cycle month series for 
regular FCOs. Specifically, 3D Options will be listed on the March, 
June, September, and December cycle with two near-term months. The 
expiration date will be the Monday preceding the third Wednesday of 
each month, thus creating a mid-month U.S. dollar settled FCO. The Phlx 
proposes to amend Phlx Rule 1012(a)(ii)(B) and (C) to reflect these 
additional series of options. The Exchange will not list 3D Options 
with month-end expirations or with more than 12 months to 
expiration.\5\

    \5\The Exchange is also proposing to amend Rules 1000, 1012, 
1014, 1057, and 1069 to change references in its rules from cash/
spot FCOs to 3D FCOs, as, these FCOs are more commonly referred to. 
The Exchange is also proposing non-substantive changes to Rule 1012 
for ease of reading. See Amendment No. 1, supra note 1.
    The Exchange believes that 3D Options with a longer term to 
expiration will meet the needs of investment managers who are seeking 
to protect portfolios against foreign exchange fluctuations but who do 
not wish to receive or deliver the underlying currency to achieve that 
goal. Similarly, the Exchange believes that corporate treasurers 
seeking balance sheet protection would also prefer paying or receiving 
U.S. dollars rather than exchanging German marks. Both of these 
potential users may have either short or long-term concerns. Finally, 
retail traders who may have either a short or long-term market 
perspective, will, in the Exchange's opinion, find these options 
attractive because they will not have to establish foreign bank credit 
lines or have to deal with the delivery or receipt of the underlying 
foreign currency at settlement.
    Currently, the weekly 3D Options are listed with the symbol XDA, 
SDB, XDC, XDD, or XDE depending on whether they will expire on the 
first, second, third, fourth, or fifth Monday of the month, 
respectively. Because the proposed longer term 3D Options will expire 
on the Monday before the third Wednesday of each month, they will 
always expire on either the second or third Monday of the month. 
Accordingly, the longer-term 3D Options will be listed with the symbol 
XDB or XDC and will carry that symbol until expiration.\6\

    \6\For example, a March 1995 3D Option that would expire on 
Monday March 13, would be listed, for example, as an XDB March 62 
call, whereas the April 1995 3D Option that would expire on Tuesday, 
April 18 (Monday being an Exchange holiday) would be listed as an 
XDC April 62 call. See Amendment No. 1, supra note 1.
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    3D Options are currently listed in one-half point strike price 
intervals. The Exchange proposes that the proposed longer-term 3D 
Options listed for the three near term months will also be listed in 
one-half point strike price intervals, while the 3D Options listed with 
six, nine, or twelve months to expiration will have one point strike 
price intervals.\7\

    \7\Id.
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    The Exchange intends to allow spread margin treatment between the 
German mark FCO (``XDM'') and the 3D Options pursuant to Exchange Rule 
722(c)(2)(E).\8\ This provision allows for short calls or puts to be 
offset against long calls or puts for margin purposes if the underlying 
foreign currency and number of units are the same, provided that the 
``long'' position expires on or after the date of the ``short'' 
position. Even though 3D Options are settled in U.S. dollars and XDM 
contracts are settled in German marks, the Exchange believes that it 
should be permissible for a broker-dealer to extend to its customers 
spread margin treatment for a position consisting of a 3D Option offset 
against an XDM under the existing Exchange rules.\9\ The Exchange 
believes that this type of spread margin treatment is warranted for the 
same economic reasons that the Exchange has allowed customers to spread 
two XDM positions against each other. In both cases, a customer is 
hedging an option position on the same underlying currency--the German 
mark. If the market value of the underlying decreases, the customer 
will lose money on the long side and profit on the short side and, 
conversely, if the market value of the underlying increases, the 
customer will profit on the long side and lose on the short side. The 
Exchange feels that risk reducing strategies need to be recognized and 
spread margin treatment permitted.

    \8\Exchange Rule 722(c)(2)(E) provides: ``Where a call that is 
listed or traded on a registered national securities exchange or 
association is carried `short' for a customer's account and the 
account is `long' a call listed or traded on an exchange or 
association, expiring on or after the date of the `short' call and 
written on the same number of * * * units of the same underlying 
foreign currency, the minimum margin must be maintained in respect 
of the `short' position shall be the lesser of (i) the required 
amount pursuant to subparagraph (B)(i) or (B)(ii) of the paragraph 
(c)(2), as the case may be, or (ii) the amount, if any, by which the 
exercise price of the `long' call exceeds the exercise price of the 
`short' call.''
    ``Where a put that is listed or traded on a registered national 
securities exchange or association is carried `short' for a 
customer's account and the account is also `long' a put listed or 
traded on an exchange or association expiring on or after the 
expiration date of the `short' put and written on the same number of 
* * * units of the same underlying foreign currency (in the case of 
options on a foreign currency), the minimum margin which must be 
maintained in respect of the `short' put shall be the lesser of (i) 
the margin required pursuant to subparagraphs (B)(i) or (B)(ii) of 
this paragraph (c)(2) as the case may be, or (ii) the amount, if 
any, by which the exercise price of the `short' put exceeds the 
exercise price of the `long' put.''
    \9\This proposal will apply both to the existing 3D Options and 
to the proposed longer-term 3D Options. See Amendment No. 1, supra 
note 1.
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    The Exchange believes that the foregoing rule change proposal is 
consistent with Section 6 of the Act, in general, and with Section 
6(b)(5), in particular, in that it is designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, to facilitate transactions in securities, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and to protect investors and the 
public interest by providing FCO users who do not necessarily need to 
exchange currency at settlement with an alternative U.S. dollar settled 
FCO with corresponding expirations.
(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 [[Page 15809]] 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-95-02 and should be 
submitted by April 17, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\

    \10\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-7448 Filed 3-24-95; 8:45 am]
BILLING CODE 8010-01-M