[Federal Register Volume 60, Number 90 (Wednesday, May 10, 1995)]
[Notices]
[Pages 24945-24947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11511]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35678; International Series Release No. 809; File No. 
SR-Phlx-95-20]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to the Trading 
of Customized Foreign Currency Options on the Italian Lira

May 4, 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 April 5, 
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. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.

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 trade 
customized foreign currency options (``FCOs'') on the Italian lira. The 
text of the proposed rule change is available at the Office of the 
Secretary, the 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. [[Page 24946]] 

(A) Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

    Currently the Phlx offers listed FCOs on the British pound, French 
franc, Swiss franc, Japanese yen, Canadian dollar, Australian dollar, 
German mark and European Currency Unit. Since November 1994, the 
Exchange has offered the ability to trade ``customized'' FCOs on all of 
these currencies.\1\ The Exchange now proposes to add the Italian lira 
to the list of approved currencies on which customized FCOs may be 
listed and traded pursuant to Exchange Rule 1069. Thus, there would be 
no continuously quoted series of Italian lira contracts. Rule 
1069(a)(1) provides that customized FCOs may be traded on any approved 
underlying foreign currency pursuant to Exchange Rule 1009, so the 
Exchange proposes to amend Rule 1009 to add the Italian lira to the 
list of approved underlying foreign currencies.

    \1\More specifically, customized FCOs provide investors with the 
ability, within specified limits, to trade FCOs with customized 
strike prices, cross-rate FCOs on any two approved currencies, and 
FCOs where the U.S. dollar is the underlying currency. In addition, 
FCO participants may express quotes for customized FCOs as a 
percentage of the underlying currency, in addition to quoting in 
terms of the base currency per unit of the underlying currency. See 
Securities Exchange Act Release No. 34925 (November 1, 1994), 59 FR 
55720 (November 8, 1995) (``Exchange Act Release No. 34925).
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    The Exchange represents that the Italian lira accounts for a 
significant portion of the inter-bank foreign exchange market turnover. 
According to the Bank for International Settlements (``BIS''), the 
Italian lira represents the ninth most active interbank currency traded 
against the U.S. dollar, accounting for 2.4% or more of inter-bank 
trading.\2\ Moreover, over 87% of the activity in the lira is against 
either the U.S. dollar (58%) or the German Mark (29%).\3\ The Italian 
lira is not pegged to a rate of exchange vis a vis the U.S. dollar. 
Further, the United States has substantial trade relations with Italy.

    \2\See BIS Central Bank of Foreign Exchange Market Activity in 
April 1992 (March 1993).
    \3\Id.
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    The Exchange represents that the initial and maintenance customer 
margin levels for the Italian lira will initially be set at 4%, which 
would cover 98.58% of all seven day price movements over the last two 
years.\4\ Pursuant to Rule 1069(a)(1)(B), users would be able to trade 
customized FCOs between the Italian lira and any other approved foreign 
currency. Currency pairs between the Italian lira and the Australian 
dollar and between the Italian lira and the Canadian dollar have 
exhibited a correlation or less than .25 over the preceding two year 
period and will be placed in Tier II under Exchange Rule 722, thereby 
requiring 6% margin.\5\ All other currency pairs involving the lira 
would be placed in Tier I (4% margin required) because their 
correlations have exceeded .25.\6\

    \4\The Commission notes that the margin level review currently 
applicable to customized FCOs on the Exchange's existing approved 
foreign currencies will also apply to customized FCOs involving the 
Italian lira. See Exchange Act Release No. 34925, supra note. 1.
    \5\Id.
    \6\Id.
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    The contract size for the Italian lira would be 50,000,000 lira.\7\ 
The premiums will be quoted in thousandths of a cent per unit for U.S. 
dollar/Italian lira contracts and the minimum premium would be 
$0.(00000) 01 per unit which equals $5.00. Exchange Rule 1069(j)(1)(A) 
will be added to provide that, because the Exchange does not have 
continuously quoted FCOs on the Italian lira, there will be no quote 
spread parameters applicable to customized FCOs on the Italian lira.\8\

    \7\Based on an exchange rate of 1,709.4 Italian lira/U.S. 
dollars on April 5, 1995, as published in the Wall Street Journal, 
this would correspond to an opening position for an Italian lira 
customized FCO transaction (i.e., 200 contracts) valued at 
approximately $5,850,000.
    \8\Pursuant to Exchange Rule 1069(j)(1), quote spread parameters 
for customized strike FCOs on approved foreign currencies are twice 
those provided in Rule 1014(c). Because the Phlx does not list 
regular FCOs on the Italian lira (and will not be able to list 
regular FCOs on the lira pursuant to this proposal), no quote spread 
parameters for the lira are specified in Rule 1014(c).
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    Consistent with the Phlx's other approved foreign currencies, 
Exchange Rule 1033 will be amended to specify the bid and offer rules 
for customized FCOs based on the Italian lira. Similarly, Rule 1034 
will be amended to provide that the Exchange will determine the minimum 
fractional change applicable to Italian lira customized FCOs.\9\

    \9\Specifically, the Exchange is proposing a minimum fractional 
change of $0. (00000)01 for Italian lira customized FCOs. Telephone 
conversation between Michele Weisbaum, Associate General Counsel, 
Phlx, and Brad Ritter, Senior Counsel, Office of Market Supervision, 
Division of Market Regulation, Commission, on May 4, 1995. The 
Commission notes that the Exchange may be required to submit a rule 
filing pursuant to Section 19(b) of the Act prior to altering this 
minimum fractional change level.
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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 promote just and 
equitable principles of trade, foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, and processing 
information, and facilitate transactions in securities, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, as well as to protect investors and the 
public interest by offering investors the ability to trade options on a 
major international currency in an auction market environment with all 
of the attendant protections as an alternative to trading it in the 
over-the-counter market.

(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 
[[Page 24947]] 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-95-20 and should 
be submitted by May 31, 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. 95-11511 Filed 5-9-95; 8:45 am]
BILLING CODE 8010-01-M