[Federal Register Volume 60, Number 188 (Thursday, September 28, 1995)]
[Notices]
[Pages 50229-50231]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24026]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36255; International Series Release No. 858 File Nos. 
SR-Phlx-95-20 and SR-Phlx-95-21]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Changes and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to Each of the Proposed Rule Changes by the 
Philadelphia Stock Exchange, Inc. Relating to the Listing of Customized 
Foreign Currency Options on the Italian Lira and Spanish Peseta

September 20, 1995.
    On April 5, 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 Exchange Commission (``Commission'') two proposed 
rule changes--one to permit the listing of customized foreign currency 
options (``Customized FCOs'') on the Italian lira (``Lira'') and the 
other to list Customized FCOs on the Spanish peseta (``Peseta'').\3\ 
Notices of the proposals appeared in the Federal Register on May 10, 
1995.\4\ No comment letters were received on either proposed rule 
change. The Exchange subsequently filed Amendment No. 1 to each of the 
proposals on August 21, 1995.\5\ This order approves both of the Phlx 
proposals, as amended.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ 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'').
    \4\ See Securities Exchange Act Release Nos. 35678 (May 4, 
1995), 60 FR 24945 (notice of File No. SR-Phlx-95-20), and 35677 
(May 4, 1995), 60 FR 24941 (notice of File No. SR-Phlx-95-21).
    \5\ In Amendment No. 1 to each proposal, as discussed more fully 
herein, the Phlx: (1) increased the proposed margin levels for 
Customized FCOs on the proposed currencies; (2) proposed that cross-
rate Customized FCOs involving the Lira or Peseta be subject to 
these increased margin requirements; (3) amended Phlx Rule 1009 to 
state in the rule that Exchange-traded FCOs on the Lira and Peseta 
are limited to Customized FCOs; and (4) made certain clarifying non-
substantive amendments (e.q., renumbering rule sections) that were 
necessary in order to incorporate the addition of both proposed 
currencies into the Exchange's rules. See Letter from Michele 
Weisbaum, Associate General Counsel and Assistant Vice President, 
Phlx, to Michael Walinskas, Branch Chief, Office of Market 
Supervision (``OMS''), Division of Market Regulation (``Division''), 
Commission, dated August 21, 1995 (``Amendment No. 1'').
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    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.\6\ The Exchange now proposes to add the Lira and 
Peseta to the list of approved currencies on which Customized FCOs may 
be listed and traded pursuant to Exchange Rule 1069. Thus, there will 
be no continuously quoted series of Customized FCO contracts on either 
the Lira or Peseta.

    \6\ See Exchange Act Release No. 34925, supra note 3.
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    Phlx Rule 1069(a)(1) provides that Customized FCOs may be traded on 
any approved underlying foreign currency pursuant to Exchange Rule 
1009. Accordingly, the Exchange proposes to amend Rule 1009 to: (1) Add 
the Lira and Peseta to the list of approved underlying foreign 
currencies; and (2) specify that the Lira and Peseta are being added to 
the list of approved currencies solely for purposes of trading 
Customized FCOs pursuant to Exchange Rule 1069.\7\ Additionally, Rules 
1014 and 1069 are being amended to provide that there will be no quote 
spread parameters for Customized FCOs involving either the Lira or the 
Peseta.\8\

    \7\ See Amendment No. 1, supra note 5. The definitions of 
``foreign currency'' and ``unit of underlying foreign currency'' in 
Rule 1000(a) are also being amended to add references to the Lira 
and the Peseta.
    \8\ Pursuant to Exchange Rule 1069(j)(1), quote spread 
parameters for customized strike FCOs on currently approved foreign 
currencies are twice those provided in Rule 1014(c). Because the 
Phlx does not list regular FCOs on either the Lira or Peseta (and 
will not be able to list regular FCOs on either currency pursuant to 
this approval order), Rules 1014(c) and 1069 will provide that there 
will be no quote spread parameters for Customized FCOs involving 
either the Lira or Peseta. The Exchange will conduct a study of the 
markets for Customized FCOs based on the Lira and Peseta to build an 
historical pricing reference database on which to analyze whether 
quote spread parameters should be imposed in the future for these 
Customized FCOs. Telephone conversation between Michele Weisbaum, 
Assistant General Counsel and Assistant Vice President, Phlx, and 
Brad Ritter, Senior Counsel, OMS, Division, Commission, on September 
7, 1995.

[[Page 50230]]

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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 Lira and Peseta. Similarly, Rule 1034 
will be amended to provide that the Exchange will determine the minimum 
fractional change applicable to Customized FCOs on the Lira and Peseta.

Contract Specifications

    Customized FCOs based on the Lira will have the following 
characteristics: (1) the contract size will be 50,000,000 Lira; \9\ (2) 
the premiums will be quoted in thousandths of a cent per unit for U.S. 
dollar/Italian lira contracts; and (3) the minimum premium will be $0. 
(00000) 01 per unit (i.e., $5.00).

    \9\ Based on an exchange rate of 1,615.00 Italian lira/U.S. 
dollars on August 23, 1995, as published in The Wall Street Journal, 
this would correspond to an opening position for an Italian lira 
customized FCO transaction (i.e., 100 contracts) valued at 
approximately $3,096,000.
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    Customized FCOs based on the Peseta will have the following 
characteristics: (1) The contract size will be 5,000,000 pesetas; \10\ 
(2) the premiums will be quoted in thousandths of a cent per unit for 
U.S. dollar/Spanish peseta contracts; and (3) the minimum premium will 
be $0. (0000) 01 per unit (i.e., $5.00).

    \10\ Based on an exchange rate of 126.25 Spanish pesetas/U.S. 
dollars on August 23, 1995, as published in The Wall Street Journal, 
this would correspond to an opening position for a Spanish peseta 
customized FCO transaction (i.e., 100 contracts) valued at 
approximately $3,960,000.
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Customer Margin

    For customer margin purposes, the Exchange is proposing to amend 
Rule 722 to set the customer margin ``add-on'' \11\ percentage for 
Customized FCOs on both the Lira and Peseta at 7% for both initial and 
maintenance margin, with no adjustment for out-of-the-money Customized 
FCOs.\12\ The Exchange will conduct a regular review of the margin 
levels for Customized FCOs involving either the Lira or Peseta.\13\ In 
this review, which will be conducted at least quarterly,\14\ the 
Exchange will determine the frequency distributions reflecting the 
percentage price returns for the Lira and Peseta, each in relation to 
the U.S. dollar, for all seven day periods during the preceding three 
year period. If the Exchange determines as a result of one of these 
reviews that the current margin add-on for each currency is not 
sufficient to cover at least 97.5% of all seven day price returns 
during that period, the Exchange will take immediate steps to increase 
the margin levels for each currency to one that will cover at least 
97.5% of all such instances and will immediately notify the Commission 
of any such increases. In no event will the Exchange reduce the margin 
levels for Customized FCOs involving either the Lira or Peseta below 
the 7% level without the prior approval of the Commission pursuant to 
Section 19(b) of the Act. Whenever the customer margin levels for 
Customized FCOs on either the Lira or Peseta are changed, the Exchange 
will promptly notify the Exchange's membership and the public.

    \11\ For these purposes, ``add-on'' is the percentage of the 
current market value of the currency a Customized FCO that the 
holder of a ``short'' position must pay in addition to the current 
market value of each Customized FCO.
    \12\ According to the Exchange, the 7% margin add-on level is 
sufficient to cover 98.84% and 99.10% of all seven day price changes 
during the past three years involving the Lira and Peseta, 
respectively, in relation to the U.S. dollar. See Amendment No. 1, 
supra note 5.
    \13\ Telephone conversation between Michele Weisbaum, Associate 
General Counsel and Assistant Vice President, Phlx, and Brad Ritter, 
Senior Counsel, OMS, Division, Commission, on August 30, 1995.
    \14\ Id.
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Customized Cross-Rates

    Pursuant to Phlx Rule 1069(a)(1)(B), the Exchange may list cross-
rate Customized FCOs on any two approved currencies, exclusive of the 
U.S. dollar (``Customized Cross-Rates'').\15\ Customized Cross-Rates 
are currently margined using a two-tier system.

    \15\ See Exchange Act Release No. 34925, supra note 3.
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    Because the margin add-on percentage for Customized FCOs on the 
Lira and Peseta are initially being set at levels significantly higher 
than those for the Phlx's other approved currencies, the Phlx will 
begin using a three-tier system for Customized Cross-Rates: \16\ Tier I 
will consist of all approved currency pairings not involving the Lira 
or Peseta whose daily price changes have a correlation greater than or 
equal to .25 during the most recent 24 month period; Tier II will 
consist of all remaining pairings of approved currencies not involving 
the Lira or Peseta; and Tier III will consist of all Customized Cross-
Rates involving the Lira or the Peseta. The initial and maintenance 
margin requirements for Tier I and Tier II Customized Cross-Rates will 
remain at current levels (i.e, 100% of the underlying value plus 4% and 
6%, respectively), subject to any changes resulting from the Phlx's 
periodic reviews of margin adequacy.\17\

    \16\ See Amendment No. 1, supra note 5.
    \17\ The Exchange conducts a regular two-step review of the 
margin levels for Customized Cross-Rates. The first review, which is 
conducted at least monthly, examines the correlations between all of 
the possible combinations of approved currencies for the most recent 
two-year period. If a monthly or any special review reveals that a 
combination of approved currencies should be in another tier based 
on the correlation of those approved currencies, the Exchange will 
take immediate steps to implement the change. The second review 
examines whether the actual margin levels are adequate to cover 
seven day price changes for all possible cross-rate combinations 
within Tiers I and II. Frequency distributions of seven day price 
movements for all currency combinations are reviewed on a monthly 
basis to determine whether the percentage of margin ``add-on'' is 
sufficient to cover 95% of all instances over the preceding two year 
period for all currency combinations within each tier. If the 
percentage falls to less than 95%, the Exchange will take steps to 
increase the margin level for those pairings to one that will cover 
at least 97.5% of all instances. If the margin adequacy level is 
greater than 99%, the Exchange will take steps to lower the margin 
requirements for those pairings to one which will cover 99%. In no 
event, however, will the initial or maintenance margin levels for 
any pairing of approved currencies be reduced below the 4% and 6% 
levels discussed above without the prior approval of the Commission. 
See Exchange Act Release No. 34925, supra note 3.
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    The initial and maintenance margin requirements for Tier III 
Customized Cross-Rates will initially be set at 100% of the underlying 
value plus 7%.\18\ the Phlx will continue to conduct its regular 
periodic reviews of the margin adequacy for all approved currency 
combinations, however, Tier III currency pairings will not be eligible 
to be moved to either Tier I or Tier II based on such reviews. As a 
result, for Tier III currency pairings, the Phlx will need to conduct 
only the second stage of the review that it presently conducts for 
Customized Cross-Rates in Tiers I and II,\19\ as modified below. 
Specifically, on at least a quarterly basis,\20\ the Exchange will 
determine whether the actual margin level for Tier III (i.e., 7% add-
on) is adequate to cover seven day price changes for all possible 
cross-rate combinations within Tier III. If the margin add-on is not 
sufficient to cover at least 97.5% of all such changes during the 
preceding three year period, the Exchange will take immediate steps to 
increase the margin level to one that will cover at least 97.5% of all 
such instances and will immediately notify the Commission of such 
increases. In no event will the initial or maintenance 

[[Page 50231]]
margin levels for any Tier III pairing be reduced below the 7% level 
discussed above without the prior approval of the Commission pursuant 
to Section 19(b) of the Act.\21\

    \18\ See Amendment No. 1, supra note 5.
    \19\ See supra note 17.
    \20\ See supra note 13.
    \21\ See Amendment No. 1, supra note 5.
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    As with Customized FCOs currently being listed by the Phlx, the 
Options Clearing Corporation (``OCC'') will clear and settle all trades 
in Customized FCOs involving the Lira or Peseta. Because quotes in 
these options will not be continuously updated or otherwise priced by 
the Phlx, the OCC will generate a theoretical price based on the prices 
and quotes of the Customized FCOs and the closing value of the relevant 
underlying currency. The OCC will use this price to make the Customized 
FCO contracts involving the Lira and Peseta daily and to calculate 
margin requirements.
    The Commission finds that the proposed rule changes are 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).\22\ First, the 
Commission believes that the trading of listed Customized FCOs on the 
Lira and Peseta should provide investors with a hedging and risk 
transfer vehicle that will reflect the overall movement of the Lira and 
Peseta in relation to the U.S. dollar and the other Phlx approved 
currencies. In this regard, Customized FCOs on the Lira and Peseta 
should provide investors with an efficient and effective means of 
managing risk associated with those currencies.

    \22\ 15 U.S.C. 78f(b)(5) (1988).
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    Second, Customized FCOs on both the Lira and Peseta will trade 
within the Exchange's existing framework for Customized FCOs which the 
Commission has previously found to adequately address the Commission's 
regulatory concerns.\23\ Specifically, this framework includes, among 
other things, rules pertaining to: obligations of specialists and 
registered options trades (Rule 1014); position limits (Rule 1001); 
exercise limits (Rule 1002); bids and offers (Rule 1033); minimum 
fractional changes (Rule 1034); and trading rotations, halts, and 
suspensions (Rule 1047).\24\

    \23\ See Exchange Act Release No. 34925, supra note 3.
    \24\ id.
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    Third, the Exchange has proposed adequate customer margin 
requirements for Customized FCOs on both proposed currencies. The 
proposed add-on margin (i.e., 7% for both the Lira and Peseta) provides 
sufficient coverage to account for historical and potential volatility 
in the Lira and the Peseta in relation to the U.S. dollar. As noted 
above, the 7% customer margin add-on level would cover 98.84% and 
99.10% of all seven day price changes over the prior three-year period 
in the Lira and Peseta, respectively, in relation to the U.S. dollar. 
Moreover, all Customized Cross-Rates involving either the Lira or 
Peseta will be margined at the 7% margin add-on level as opposed to 
either the 4% or 6% levels that apply to Customized Cross-Rates 
involving the Exchange's other approved currencies. In addition, the 
Exchange must conduct periodic reviews of the volatility in the two 
currencies and must take immediate steps to increase the existing 
customer margin levels if the Exchange determines that the existing 
levels are no longer adequate.\25\ As a result, the Commission believes 
that the proposed customer margin levels and the review and maintenance 
criteria for those margin levels will result in adequate coverage of 
contract obligations and are designed to reduce risks arising from 
inadequate margin levels for Customized FCOs (including Customized 
Cross-Rates) involving either the Lira or Peseta.

    \25\ See ``Customer Margin'' and ``Customized Cross-Rates,'' 
supra.
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    The Commission finds good cause for approving Amendment No. 1 to 
each of the proposed rule changes prior to the thirtieth day after the 
date of publication of notice of filing thereof in the Federal 
Register. First, the changes increasing the margin levels for 
Customized FCOs (including Customized Cross-Rates) involving the Lira 
or Peseta serve an investor protection purpose by reducing the risks 
that can arise from inadequate margin levels. Additionally, the 
Commission notes that these changes impose more restrictive standards 
than those contained in the original proposals which were published in 
the Federal Register for the full 21-day comment without any comments 
being received by the Commission.
    Second, the changes to the language in the Phlx's rules specifying 
that FCOs on the Lira and the Peseta are limited to Customized FCOs 
(including Customized Cross-Rates) and the remaining clarifying 
amendments in Amendment No. 1 serve to minimize any potential for 
investor confusion from the proposed rule changes.
    Third, accelerated approval of the proposed amendments to the rule 
changes will allow the Exchange to begin offering these products 
without further delay to those investors who desire an exchange-traded 
product to hedge their currency exposure to the Lira and Peseta.
    Accordingly, the Commission believes that the proposed rule changes 
are consistent with Section 6(b)(5) of the Act and that good cause 
exists to approve Amendment No. 1 to each of the Phlx's proposals on an 
accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1 to each of the proposals. 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 the File 
No. SR-Phlx-95-20 or File No. SR-Phlx-95-21, as appropriate, and should 
be submitted by October 19, 1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule changes (File Nos. SR-Phlx-95-20 and 
SR-Phlx-95-21), as amended, are approved.

    \26\ 15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\

    \27\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-24026 Filed 9-27-95; 8:45 am]
BILLING CODE 8010-01-M