[Federal Register Volume 60, Number 105 (Thursday, June 1, 1995)]
[Notices]
[Pages 28638-28639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13413]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35756; File No. SR-Phlx-95-02]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change, and Notice of 
Filing and Order Granting Accelerated Approval of Amendment No. 2 to 
the Proposed Rule Change by the Philadelphia Stock Exchange, Inc., 
Relating to Additional Expirations for Cash/Spot German Mark Foreign 
Currency Options (``3D Options'')

May 24, 1995.
    On January 25, 1995, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list series of cash/spot 
German mark foreign currency options (``3D Options'') having up to 12 
months to expiration. On February 24, 1995, the Exchange filed 
Amendment No. 1 to the proposed rule change.\3\ Notice of the proposed 
rule change and Amendment No. 1 thereto appeared in the Federal 
Register on March 27, 1995.\4\ No comment letters were received on the 
proposed rule change, as amended. The Exchange subsequently filed 
Amendment No. 2 to the proposal on May 9, 1995.\5\ This order approves 
the Exchange's proposal, as amended.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ 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'' foreign currency options 
(``FCOs''); and (3) specify the strike price intervals applicable to 
the longer-term 3D Options. See Letter from Michele Weisbaum, 
Associate General Counsel, Phlx, to Brad Ritter, Senior Counsel, 
Office of Market Supervision (``OMS''), Division of Market 
Regulation (``Division''), Commission, dated February 24, 1995. 
Amendment No. 1 also clarified the proposal to allow spread margin 
between the 3D Options and the regular Deutsche mark FCO. This 
proposal, however, was later withdrawn in Amendment No. 2. See 
Amendment No. 2, supra note 5.
    \4\ See Securities Exchange Act Release No. 35520 (March 21, 
1995), 60 FR 15807.
    \5\ In Amendment No. 2, the Exchange withdrew its request for 
spread margin treatment between the Exchange's German mark FCOs and 
the 3D Options. Additionally, the Exchange notified the Commission 
that it is terminating its agreement with one of the two outside 
vendors that it had contracted with to calculate the settlement 
value of the 3D Options. See Letter from Michele Weisbaum, Associate 
General Counsel, Phlx, to Brad Ritter, Senior Counsel, OMS, 
Division, Commission, dated May 8, 1995 (``Amendment No. 2'').
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    On March 8, 1994, the Commission approved the listing and trading 
of 3D Options.\6\ 3D Options are issued by The Options Clearing 
Corporation and are European-style.\7\ These FCOs currently have one-
week and two-week expirations and were originally designed to provide a 
hedging vehicle for: sophisticated retail customers, portfolio 
managers, and multi-national corporations which need to hedge their 
short term foreign currency exposure; and to banks which need to hedge 
the risks associated with trading in the forward and cash markets.

    \6\ See Securities Exchange Act Release No. 33732 (March 8, 
1994), 59 FR 12023 (March 15, 1994) (``3D Approval Order'').
    \7\ 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 represents that the users of 3D Options have 
particularly liked the U.S. dollar settlement feature and have 
indicated to the Exchange that they would like to be able to use an 
exchange-traded U.S. dollar settled FCO to hedge longer-term currency 
risks. As a result, in addition to the current one-week and two-week 
expiration series of 3D Options, the Phlx proposes to list series of 3D 
Options on the March, June, September, and December cycle and the two 
near-term months. Phlx Rules 1012(a)(ii) (B) and (C) are being amended 
to reflect these additional series of options.
    The expiration date for these longer-term 3D Options will be the 
Monday preceding the third Wednesday of each month. The Exchange will 
not list 3D Options with month-end expirations or series with more than 
12 months to expiration.\8\

    \8\ The Exchange is also amending Phlx Rules 1000, 1012, 1014, 
1057, and 1069 to change references from ``cash/spot'' FCOs to 
``3D'' FCOs, as these options are more commonly referred to. The 
Exchange is also making some non-substantive changes to Rule 1012 
for ease of reading.
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    Currently, 3D Options are listed with the symbol XDA, XDB, 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.
    3D Options are currently listed in one-half point strike price 
intervals. The longer-term 3D Options listed for the three near term 
months will also be listed in one-half point strike price intervals. 
The 3D Options listed with six, nine, of twelve months to expiration 
will have one point strike price intervals.
    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 that the 
proposal is designed to promote just and equitable principles of trade, 
to prevent fraudulent and manipulative acts and practices, and to 
protect investors and the public interest. Specifically, the Commission 
believes that the proposal is designed to provide investors an 
additional means of hedging foreign currency portfolios and cash flows 
with longer-term market risk, thereby facilitating transactions in 
FCOs. The Commission believes that by allowing the Phlx to list these 
options with up to 12 months to expiration, investors will be provided 
with greater flexibility to tailor FCO positions to satisfy their 
investment objectives.\10\ In [[Page 28639]] this regard, the 
Commission notes that the Phlx has stated that the longer-term 3D 
Options 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 long-term concerns for which the one-week and 
two-week expiration 3D Options would not be an appropriate hedging 
vehicle. Finally, the Exchange believes that retail traders who may 
have a long-term market perspective will find the longer-term 3D 
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.\11\

    \9\ 15 U.S.C. 78f(b)(5) (1988).
    \10\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of any new option proposal upon a finding that 
the introduction of such new derivative instrument is in the public 
interest. Such a finding would be difficult for a derivative 
instrument that served no hedging or other economic function because 
any benefits that might be derived by market participants likely 
would be outweighed by the potential for manipulation, diminished 
public confidence in the integrity of the markets, and other valid 
regulatory concerns.
    \11\ The Commission notes that prior to listing longer-term 3D 
Options the Exchange will be required to provide written 
representations that both the Exchange and the Options Price 
Reporting Authority have the necessary systems capacity to support 
these new series of options.
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    Additionally, the Commission notes that except as modified herein, 
all of the representations made by the Exchange and all of the rules 
approved by the Commission in connection with the 3D Approval Order, 
including, but not limited to, aggregation with regular Deutsche mark 
FCOs for position and exercise limit purposes, extended trading hours 
on expiration Mondays, Exchange and bank holidays on which 3D Options 
will not expire, and automatic exercise of in-the-money 3D Options,\12\ 
will also apply to the longer-term 3D Options listed pursuant to this 
approval.\13\

    \12\ See 3D Approval Order, supra note 6.
    \13\ One additional modification herein is with regard to 
customer margin. In connection with the 3D Approval Order, the Phlx 
agreed to collect margin within two days following the date on which 
a customer enters into a cash/spot FCO position and to maintain 
customer margin at a level sufficient to produce at least a 97% 
confidence level in the volatility of the Deutsche mark in relation 
to the U.S. dollar for all two-day intervals during the two year 
period preceding the time of measurement. These margin provisions 
will apply to the longer-term 3D Options only when these options 
have two weeks or less to expiration. At all other times, the 
Exchange's customer margin procedures applicable to the Phlx's 
regular Deutsche mark FCOs will apply. Telephone conversation 
between Michele Weisbaum, Associate General Counsel, Phlx, and Brad 
Ritter, Senior Counsel, OMS, Division, Commission, on May 23, 1995.
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    As a result, for the reasons stated above and in the 3D Approval 
Order,\14\ the Commission finds that the proposed rule change is 
consistent with the Act.

    \14\ See 3D Approval Order, supra note 6.
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    The Commission finds good cause for approving Amendment No. 2 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, Amendment No. 2 merely withdraws the Exchange's request 
for spread margin treatment between the Exchange's German mark FCOs and 
the 3D Options.\15\ Because the requested spread margin treatment would 
have been a liberalization of the Exchange's existing margin rules, 
withdrawing this request from the proposal does not raise any 
regulatory issues.

    \15\ See Amendment No. 2, supra note 5.
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    The Commission notes that the termination by the Phlx of its 
relationship with one of the vendors used to calculate the settlement 
value for the 3D Options is, in this case, a non-substantive change. In 
this regard, based on the representations by the Phlx describing the 
procedures used for calculating the settlement value, including the 
backup procedures to be used in the event of a complication, the 
Commission believes that the Phlx will be able to continue to comply 
with the procedures specified in the 3D Approval Order despite this 
change.\16\ Accordingly, the Commission believes it is consistent with 
Section 6(b)(5) of the Act to approve Amendment No. 2 to the Phlx's 
proposal on an accelerated basis.

    \16\ See 3D Approval Order, supra note 6. The Commission expects 
the Phlx to continue to notify the Commission prior to making any 
change in the procedures approved in the 3D Approval Order.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities, and Exchange Commission, 450 Fifth Street NW., Washington, 
DC 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 
NW., Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the Phlx.\16\

    \16\ See 3D Approval Order, supra note 6. The Commission expects 
the Phlx to continue to notify the Commission prior to making any 
change in the procedures approved in the 3D Approval Order.
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    All submissions should refer to the File No. SR-Phlx-95-02 and 
should be submitted by June 22, 1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-Phlx-95-02), as amended, is 
approved contingent upon the Exchange's submission to the Commission of 
adequate systems capacity representations.\18\

    \17\ 15 U.S.C. 78s(b)(2) (1988).
    \18\ See supra note 11.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\

    \19\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13413 Filed 5-31-95; 8:45 am]
BILLING CODE 8010-01-M