[Federal Register Volume 60, Number 80 (Wednesday, April 26, 1995)]
[Notices]
[Pages 20544-20545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10182]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35631; International Series Release No. 805; File No. 
SR-Phlx-95-06]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to British 
Pound Strike Price Intervals

April 20, 1995.

I. Introduction

    On January 30, 1995, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change to revise its strike 
price policy respecting foreign currency options on the British pound 
by changing from: a $.025 interval to a $.01 interval in the nearest 
three expiration months; a $.025 interval to a $.02 interval in the 
next three nearest expiration months; and a $.05 interval to a $.04 
interval for long-term British pound options, which have 12 to 36 
months until expiration.

    \1\15 U.S.C. 78s(b)(1).
    \2\17 CFR 240.19b-4.
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    Notice of the proposal was published for comment and appeared in 
the Federal Register on March 3, 1995.\3\ No comment letters were 
received on the proposed rule change. This order approves the 
Exchange's proposal.

    \3\See Securities Exchange Act Release No. 35420 (February 27, 
1995), 60 FR 11999 (March 3, 1995).
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II. Description of the Proposal

    The Phlx has proposed to revise its strike price policy respecting 
foreign currency options on the British pound pursuant to Phlx Rule 
1012--Series of Options Open for Trading by adopting shorter strike 
price intervals than currently used. Currently, British pound options 
are listed at 2\1/2\ cent intervals; long-term options are listed at 5 
cent intervals. Pursuant to Phlx Rule 1012, six expiration months are 
currently listed in regular foreign currency options, with one, two, 
three, six, nine, and twelve months until expiration. Additionally, two 
long-term options are currently listed (in June and December) with 18 
and 24 months until expiration. Fluctuations in the spot price of the 
British pound currently result in additional listings at 2\1/2\ cent 
intervals.\4\

    \4\Currently, the addition of strike prices, which is governed 
by Phlx Rules 1012 and 1101A, is determined by the movement of the 
underlying stock, index, or foreign currency, such that strike 
prices reasonably close to the value of the underlying security are 
listed for trading. When the Exchange plans to add a new strike 
price, a memorandum is distributed to the trading floor as well as 
over electronic systems notifying the membership and their customers 
of the new strike. See Securities Exchange Act Release No. 34349 
(July 11, 1994), 59 FR 36469 (July 18, 1994).
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    The Exchange proposes to revise its strike price policy respecting 
foreign currency options on the British pound by changing from a $.025 
interval to a $.01 interval in the nearest three expiration months and 
from a $.025 interval to a $.02 in the next three nearest expiration 
months. In addition to reducing the strike price interval from 2\1/2\ 
cents to 1 and 2 cents, respectively, the Exchange also proposes to 
reduce the strike price interval for long-term British pound options, 
which have 12 to 36 months until expiration, from $.05 to $.04.
    The Exchange states that the purpose of the proposed rule change is 
to address certain market needs that have arisen as a result of recent 
lower volatility respecting the British pound (in relation to the U.S. 
dollar), which has created a customer need for narrower strike price 
intervals.\5\ The Exchange represents that the lower volatility of the 
British pound has resulted in a narrower trading range for the currency 
option, sometimes limiting the availability of sufficient near- or at-
the-money series.

    \5\The Commission has previously approved certain Phlx proposals 
that shortened foreign currency option strike price intervals. See 
e.g., Securities Exchange Act Release Nos. 25685 (May 10, 1988), 53 
FR 17524 (May 17, 1988) (French franc from $.05 to $.025 strike 
price intervals) (File No. SR-Phlx-86-14), and 24103 (February 13, 
1987), 52 FR 5605 (February 25, 1987) (British Pound from $.05 to 
$.025 strike price intervals) (File No. SR-Phlx-86-14).
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    Additionally, the Exchange believes the proposal is necessary to 
ensure that the British pound foreign currency option contract remains 
competitive and consistent with the contract terms applicable to 
British pound foreign currency futures (and futures options) traded on 
the Chicago Mercantile Exchange (``CME''). Recently, the CME determined 
to list certain options on British pound futures (the three near 
months) as $.01 intervals.
    The Phlx asserts that the proposed rule change will initially 
create 496 new strike prices.\6\ Additionally, both the Phlx and the 
Options Price Reporting Authority (``OPRA'') represent that the 
predicted increase in the number of British pound options series will 
not adversely affect their respective computer processing capacities to 
accommodate the additional strike prices.\7\

    \6\The total number of new strikes includes both puts and calls 
for American and European style options on the British pound. See 
Letter from Gerald O'Connell, First Vice President, Phlx, to Michael 
Walinskas, Office of Market Supervision (``OMS''), Division of 
Market Regulation (``Division''), Commission, dated April 10, 1995 
(``O'Connell Letter No. 1'').
    \7\See Letter from William H. Morgan, Vice President, Phlx, to 
Michael Walinskas, OMS, Division, Commission, dated April 12, 1995 
(``Morgan Letter''). See also Letter from Joseph P. Corrigan, 
Executive Director, OPRA, to William Terrell, Vice President, Phlx, 
dated April 6, 1995 (``OPRA Letter'').
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    The Exchange further states that its general policy with respect to 
the delisting of inactive options series, subject to the assigned 
option specialist's approval, is to delist series in which there is no 
open interest beginning with the highest or lowest strike for that 
month. The Exchange, however, may not delist a series if such 
[[Page 20545]] delisting would create a gap in consecutive strikes.\8\

    \8\See Letter from Gerald O'Connell, First Vice President, Phlx, 
to Michael Walinskas, Branch Chief, OMS, Division, Commission, dated 
April 12, 1995 (``O'Connell Letter No. 2'').
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    The Exchange believes that the proposed reduction in the strike 
price interval should provide investors and traders of British pound 
foreign currency options with the ability to more closely tailor 
investment and hedging strategies to British pound trading levels and 
movement. The Exchange further believes that the proposed rule change 
is designed to promote just and equitable principles of trade by 
enabling more effective management of foreign currency risk respecting 
the British pound.

III. Commission Finding 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) of the Act.\9\ 
Specifically the Commission finds that the Exchange's proposal to 
revise its strike price policy respecting foreign currency options on 
the British pound by changing from a $.025 interval to a $.01 interval 
in the nearest three months; from $.025 interval to $.02 interval in 
the next three nearest expiration months; and from $.05 to $.04 
interval for long-term British pound options, which have 12 to 36 
months until expiration, is a reasonable attempt to perfect the 
mechanism of a free and open market and a national market system.

    \9\15 U.S.C. 78f(b)(5).
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    The Commission recognizes that any narrowing of strike price 
intervals increases the flexibility accorded market participants and 
allows options positions to be more finely tailored to achieve intended 
investment objectives. At the same time, however, narrower strike price 
intervals create the possibility of dispersing trading interest to the 
degree that there is an excessive dilution of liquidity in open options 
series.
    Accordingly, an evaluation of the appropriate strike price interval 
for an option contract requires a balancing of the need to accommodate 
market participants by providing a wide array of investment 
opportunities and the need to avoid causing excessive proliferation of 
illiquid options series. The Commission believes that the Phlx proposal 
strikes such a reasonable balance. Although the proposal makes 
available a significant number of new options series, the Commission 
notes that Phlx generally seeks to delist options series (including 
British pound foreign currency options) with no open interest.\10\ 
Therefore, the Phlx should be able to eliminate any illiquid series 
that might result from the implementation of the new strike price 
proposal. Accordingly, the Commission expects the Phlx to monitor 
British pound foreign currency options activity closely in order to 
detect any proliferation of illiquid series possibly resulting from the 
narrower strike price intervals and to act promptly to remedy this 
situation should it occur.

    \10\See O'Connell Letter No. 2, supra note 8.
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    In addition, based on representations from the Phlx\11\ and 
OPRA,\12\ the Commission believes that the predicted increase in the 
number of British pound options series should not adversely affect the 
computer processing capacity to accommodate the additional strike 
prices. More specifically, both the Phlx and OPRA have represented that 
their respective systems can adequately handle the additional options 
transaction-related traffic generated by the projected new series. 
Nevertheless, the Commission requests that the Exchange monitor the 
volume of additional options series listed as a result of this rule 
change and continue to ensure that these additional series will not 
adversely impact processing system capacity.

    \11\See Morgan Letter, supra note 7. See also O'Connell Letter 
No. 1, supra note 6.
    \12\See OPRA Letter, supra note 7.
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-Phlx-95-06) is 
approved.

    \13\15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\

    \14\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10182 Filed 4-25-95; 8:45 am]
BILLING CODE 8010-01-M