[Federal Register Volume 60, Number 155 (Friday, August 11, 1995)]
[Notices]
[Pages 41140-41142]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19931]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36062; International Series Release No. 835 File No. 
SR-Phlx-95-42]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., to List and Trade 3D 
Foreign Currency Options on the Japanese Yen

August 4, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 14, 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 Exchange. The 
Exchange subsequently filed Amendment No. 1 to the proposed rule change 
on July 7, 1995.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Phlx submitted Amendment No. 1 to the Commission to make 
certain technical corrections to the proposal. See Letter from 
Michele Weisbaum, Associate General Counsel, Phlx, to John Ayanian, 
Attorney, Office of Market Supervision (``OMS''), Division of Market 
Regulation (``Market Regulation''), Commission, dated July 7, 1995.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade cash settled foreign 
currency options on the Japanese Yen. The text of the proposed rule 
change is available at the Office of the Secretary, the Exchange, 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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections (A), (B), and (C) below, of the most significant aspects of 
such statements.

[[Page 41141]]


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

    The purpose of the proposed rule change is to list and trade Dollar 
Denominated Delivery (``3D'') foreign currency options (``FCOs'') on 
the Japanese Yen. In March 1994, the Commission approved the listing 
and trading of 3D FCOs on the German Mark.\4\ 3D FCOs are cash-settled, 
European-style options issued by the Options Clearing Corporation 
(``OCC'') that allow holders to receive U.S. dollars representing the 
difference between the current foreign exchange spot price \5\ and the 
exercise price of the option. Specifically, upon exercise of an in-the-
money 3D FCO structured as a call, the holder will receive, from OCC, 
U.S. dollars representing the difference between the exercise strike 
price and the closing settlement value of the 3D FCO contract 
multiplied by the number of units of currency covered by the contract. 
For a 3D FCO structured as a put, the holder will receive U.S. dollars 
representing the excess of the exercise price over the closing 
settlement value of the 3D FCO contract multiplied by the number of 
units of foreign currency covered by the contract.

    \4\ See Securities Exchange Act Release No. 33732 (March 8, 
1995), 59 FR 12023 (March 15, 1994).
    \5\ The ``spot price'' with respect to an option contract on a 
foreign currency option contract means the price for the sale of one 
foreign currency for another, quoted by various commercial banks in 
the interbank foreign exchange market for the sale of a single unit 
of such foreign currency for immediate delivery (which generally 
means delivery within two business days following the date on which 
the terms of such sale are agreed upon). See Phlx Rule 1000(b)(16).
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    Unlike other Phlx-traded FCOs, 3D FCOs which are in-the-money by 
any amount on the expiration date will be exercised automatically by 
OCC. 3D FCOs which are out-of-the-money at expiration will expire 
worthless.
    German 3D FCOs were originally listed with one-week and two-week 
expirations to provide a hedging vehicle to sophisticated retail 
customers, portfolio managers and multi-national corporations which 
needed to hedge their short term foreign currency exposure and also to 
banks which needed to hedge the risks associated with trading in the 
forward and cash markets. Recently, the Exchange received approval from 
the Commission to list German 3D FCO contracts with longer term 
expirations up to twelve months \6\ due to the interest expressed by 
the users of the product who did not wish to establish foreign bank 
credit lines or worry about the potential of exchanging currency at 
exercise and assignment.

    \6\ See Securities Exchange Act Release No. 35756 (May 24, 
1995), 60 FR 28638 (June 1, 1995).
    The Exchange is now proposing to list and trade 3D FCOs on the 
Japanese yen (U.S. dollar/Japanese yen). The contract size will be 
6,250,000 yen, the same as physically settled Japanese yen contract. 
Pursuant to Phlx Rule 1012(a)(ii), the contracts will be listed with 
expirations at one week and two weeks and one, two, three, six and nine 
months (twelve month options will not be listed at this time). The 
options will be on the March, June, September, December cycle and no 
month end or long term expirations will be listed. The expiration date 
for the consecutive and cycle month options will be the Monday 
preceding the third Wednesday of each month. The Exchange expects that 
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the symbols for these options will be as follows:

XJA  first Monday of month expiration
XJB  second Monday of month expiration
XJC  third Monday of month expiration
XJD  fourth Monday of month expiration
XJE  fifth Monday of month expiration
XJS  settlement symbol

    The 1, 2, 3, 6, and 9 month options will be listed with the symbol 
XJB or XJC depending on whether expiration will be the second or third 
Monday of that month and will carry that symbol to expiration. For 
example, a Sept 1995 option which would expire on Monday Sept. 18, 
would listed as an XJC Sept 85 call whereas the Nov 1995 option which 
would expire on Monday, Nov. 13, would be listed as an XJB Nov 85 call.
    Similar to the 3D German mark contracts, the Exchange proposes that 
a series of 3D Japanese yen options will trade during normal trading 
hours for foreign currency options, specifically, 2:30 a.m. to 2:30 
p.m. E.T. Monday through Friday. The expiring FCO contract will cease 
trading at 10:30 a.m. and expire at 11:59 p.m. on its expiration 
Monday, unless such Monday is an Exchange holiday or an Exchange 
designated bank holiday, when, under Phlx Rule 1000(b)(21), 
``Expiration date,'' as amended, the 3D FCO will expire at 11:59 p.m. 
on the preceding business date.
    Accordingly, on Exchange holidays and Exchange designated bank 
holidays, the expiring 3D FCOs will cease trading at 10:30 a.m. on the 
preceding business day. In addition, when Monday is an exchange 
holiday, a new two-week contract will be listed on the following 
Tuesday at 2:30 a.m. E.T. as opposed to the normal Monday morning 
listing.
    The closing settlement value, which will be disseminated through 
the Options Price Reporting Authority (``OPRA''), will be determined by 
a designated agent(s) of the Exchange under Phlx Rule 1057, ``Cash/Spot 
Foreign Currency Option Closing Settlement Value.'' Pursuant to Phlx 
Rule 1057, at 10 a.m. (E.T.), on every expiration date for 3D FCOs, the 
market information vendor(s), acting as the Exchange's designated agent 
will collect a bid and offer quotation for the current Japanese yen 
spot price from the quotations submitted by at least 15 interbank 
foreign exchange participants, which the designated agent will select 
randomly from a list of at least 25 active interbank foreign exchange 
market participants.\7\ After discarding the five highest offers and 
five lowest bids, the designated agent will arithmetically average the 
remaining ten bids and ten offers to arrive at a closing settlement 
value. This value will be calculated and sent to the Phlx every 30 
seconds until 10:30 a.m. when the designated agent will determine the 
final settlement value. At that time, the settlement value will be 
automatically entered into the Phlx's systems, and then the Phlx 
disseminates it to OPRA and the OCC for entry into the OCC clearing 
systems.

    \7\ The Phlx will select the list of interbank market 
participants by evaluating the number of times each contributor 
supplies Japanese yen spot quotes to the market information 
vendor(s) on Monday mornings between 10 a.m. and 10:30 a.m. The pool 
of quote contributors will be reviewed monthly based on these 
criteria and substitutions will be made, if necessary. If at any 
time an interbank market participant ceases to distribute JY spot 
quotes or is no longer in the business of making JY markets, that 
entity will be replaced.
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    The position limits and exercise limits for the 3D yen will be the 
same as the position and exercise limit for the physically settled 
Japanese yen contracts pursuant to Phlx Rule 1001 \8\ and Rule 1002 and 
positions in the 3D yen will be aggregated with positions in the 
physically settled Japanese yen contracts. The Phlx proposes to 
initially list exercise strike prices for each expiration around the 
current spot price and new strikes may be added during the life of the 
option in accordance with Phlx Rule 1012 at half-cent intervals for the 
3 near term month and at one cent intervals for the six and nine month 
options.

    \8\ Position and exercise limits on the Japanese yen are 100,000 
contracts on either side of the market, however, the Phlx has 
recently proposed to raise this limit to 200,000 contracts. This 
proposal is currently under review at the Commission. See Securities 
Exchange Act Release No. 35688 (May 8, 1995), 60 FR 26062 (May 16, 
1995).
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    The 3D Japanese yen options will trade in accordance with the rules 
governing all Phlx FCOs, including sales practice rules and floor 
trading rules. For example, Phlx Rule 1014, ``Obligations and 
Restrictions Applicable to Specialists and Registered 

[[Page 41142]]
Options Traders'' provides that bid/ask differentials for 3D FCOs shall 
be determined by reference to the underlying foreign currency. Further, 
3D Japanese yen options will not be subject to customized trading 
pursuant to Phlx Rule 1069.
    The 3D Japanese yen will have the same customer margin requirements 
as are provided for the existing Japanese yen FCOs pursuant to Phlx 
Rule 722, ``Margin Accounts.'' Specifically, for any put or call on 3D 
options which are issued, guaranteed or carried ``short'' in a 
customer's account, the required margin shall be 100% of the options 
premium plus 4% of the value of the underlying contract less any out-
of-the-money amount, with an adjustment for out-of-the money options to 
be not less than 100% of the options premium plus \3/4\% of the 
underlying contract margin within five days following the date on which 
a customer enters into a 3D FCO position and within two days if the 
option has two weeks or less to expiration.
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act, in general, and furthers the objectives of 
Section 6(b)(5), in particular, in that it is designed to promote just 
and equitable principles of trade, prevent fraudulent and manipulative 
acts and practices, as well as to protect investors and the public 
interest by providing foreign currency option users who do not 
necessarily need to exchange currency at settlement with an alternative 
cash settled foreign currency option with corresponding expirations.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any 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. Person 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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the Phlx. All 
submissions should refer to SR-Phlx-95-42 and should be submitted by 
September 1, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\

    \9\ 17 CFR 220.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-19931 Filed 8-10-95; 8:45 am]
BILLING CODE 8010-01-M