[Federal Register Volume 60, Number 221 (Thursday, November 16, 1995)]
[Notices]
[Pages 57613-57615]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28316]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36468; International Series Release No. 882; File No. 
SR-PHLX-95-52]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval to Amendment Nos. 1 and 2 to Proposed Rule Change 
by the Philadelphia Stock Exchange, Inc., Relating to Customized 
Foreign Currency Options With Customized Expiration Dates

November 8, 1995

I. Introduction

    On July 27, 1995, the Philadelphia Stock Exchange, Inc. (``PHLX'' 
or ``Exchange'') submitted to 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 provide for the trading of customized foreign 
currency options (``Customized FCOs'') with customized expiration 
dates.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
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    The proposed rule change appeared in the Federal Register on August 
29, 1995.\3\ No comment letters were received on the proposed rule 
change. The Exchange subsequently filed Amendment No. 1 to proposal on 
September 14, 1995 \4\ and Amendment No. 2 on November 7, 1995.\5\ This 
order approves the Exchange's proposal, as amended.

    \3\ See Securities Exchange Act Release No. 36131 (August 22, 
1995), 60 FR 44927 (August 29, 1995).
    \4\ Amendment No. 1 to the proposed rule change: (1) Revises the 
language of Exchange Rule 1069(a) to specify that a FCO with a 
customized expiration date may only be created with an expiration 
date of up to two years from the date of its issuance; and (2) 
provides that with respect to FCOs with customized expiration dates, 
Exchange member organizations will be required to utilize a pro-rata 
method of assignment for its customers. This procedure is set forth 
in new subsection (k) to Rule 1069. See letter from Michele R. 
Weisbaum, Associate General Counsel, PHLX, to Michael Walinskas, 
Branch Chief, Office of Market Supervision (``OMS''), Division of 
Market Regulation (``Division''), Commission, dated September 14, 
1995 (``Amendment No. 1'').
    \5\ Amendment No. 2 to the proposed rule change establishes in 
new subsection (iv) to PHLX Rule 1000(b)(21) when a Customized 
expiration date FCO may expire. According to the PHLX's amendment, a 
Customized expiration date FCO will expire at 10:15 a.m., 
Philadelphia time, on its designated date provided that such date is 
not longer than two years from its date of issuance and is an 
Exchange business date (excluding regular mid-month and end of month 
expiration dates and days deemed invalid by the Exchange, such as 
Exchange holidays and Exchange-designated holidays). See letter from 
Michele R. Weisbaum, Associate General Counsel, PHLX, to Michael 
Walinskas, Branch Chief, OMS, Division, Commission, dated November 
7, 1995 (``Amendment No. 2'').
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II. Background and Description

    Pursuant to the proposed rule change, the PHLX would be able to 
offer its FCO participants the ability to trade Customized FCOs \6\ 
with non-standardized expiration dates. In effect, the proposal adds an 
additional term, ``expiration date,'' that can be tailored on a 
Customized FCO transaction. At present, pursuant to Exchange Rule 1012, 
FCO users can only trade Customized FCO contracts with expiration dates 
corresponding to those for non-Customized FCOs. Thus, Customized FCO 
contracts may only be traded with mid-month and end-of-month 
expirations at 1, 2, 3, 6, 9, 12, 18, and 24 months. The Exchange's 
proposal therefore revises this previously-standard term by allowing 
Customized FCO contracts to expire on any business day (excluding 
Exchange holidays, e.g., Memorial Day, and Exchange-designated 
holidays, e.g., Boxing Day) in any month up to two years from the date 
of its issuance. The Exchange represents that institutions and 
multinational corporations will thus be able to hedge their exchange 
rate exposure more accurately by trading a contract that expires on a 
trading day of their choosing.

    \6\ Users of FCOs have been able to trade Customized FCOs on the 
PHLX since November 1994. See Securities Exchange Act Release No. 
34925 (November 1, 1994), 59 FR 55720 (November 8, 1994) (order 
approving File No. SR-PHLX-94-18) (``Securities Exchange Act Release 
No. 34925''). Through this mechanism, participants in the PHLX's 
Customized FCO market have the ability to customize their strike 
price and quotation method, and may choose any underlying and base 
currency combination from all Exchange-listed currencies.
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    Under the PHLX's proposal, any Customized FCO contract with a 
customized expiration date (``Customized expiration date FCOs'') will 
cease trading at 9:00 a.m., Philadelphia time, on its expiration date, 
and will expire at 10:15 a.m., Philadelphia time, on that date. 
Customized FCOs with expiration dates established pursuant to PHLX Rule 
1012 (i.e., Customized FCOs with expiration dates corresponding to the 
expiration dates for non-Customized FCOs), however, will not follow 
this procedure. Instead, maintaining current practice, 

[[Page 57614]]
these option contracts will cease trading at 2:30 p.m., Philadelphia 
time, on their expiration date, and expire at 11:59 p.m., Philadelphia 
time, on the same date, even if intentionally or unintentionally 
designated as a Customized FCO with a customized expiration date.
    Under the PHLX's proposal, new series of Customized expiration date 
FCOs with ``same day'' expiration dates may not be opened. In contrast, 
new series of Customized FCOs with standardized expiration dates may be 
opened on their expiration dates. Previously opened positions, however, 
may continue to be reduced or increased on their expiration date until 
the end of the trading times noted above, regardless of whether the FCO 
contains a customized or standardized expiration date.
    In all other respects, transactions in Customized FCOs containing a 
customized expiration date shall be treated identically to other 
Customized FCOs. Moreover, all existing Exchange rules and regulations, 
including those involving surveillance and sales practice, will be 
applicable to Customized expiration date FCOs.
    In addition, under the PHLX's proposal, Exchange member 
organizations will be required to utilize a pro-rata FCO assignments. 
Lastly, it is contemplated that the pro-rata process being implemented 
by the Exchange and its member organizations will be identical to that 
which the Options Clearing Corporation (``OCC'') will utilize for 
Customized expiration date FCO assignments.\7\

    \7\ The Commission notes that the PHLX has recommended to its 
member organizations that they adopt the same methodology as the OCC 
in determining pro-rata assignment for Customized expiration date 
FCO assignments. Moreover, if an Exchange member organization elects 
not to utilize the OCC's pro-rata procedures, member organizations 
have been instructed to notify the PHLX. Telephone Conversation 
between Michele R. Weisbaum, Associate General Counsel, PHLX, and 
Michael Walinskas, Branch Chief, OMS, Division, Commission, on 
November 1, 1995. See also Securities Exchange Act Release No. 36453 
(November 2, 1995) (order approving OCC pro-rata allocation 
procedures for Customized expiration date FCO assignments).
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III. Discussion

    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, with the requirements of Sections 6(b)(5) and 11A.\8\ 
Specifically, the Commission believes that the proposed rule change is 
designed to provide investors with a tailored or customized product 
that may be more suitable to their investment needs. Moreover, 
consistent with Section 11A, the proposal should encourage fair 
competition among brokers and dealers and exchange markets, by allowing 
the PHLX to compete with the growing over-the-counter (``OTC'') market 
in Customized FCOs. In this regard, the Commission notes, the OTC 
derivatives market in Customized FCOs has developed, in part, because 
it meets the needs of institutional investors who require increased 
flexibility in satisfying particular investment objectives. 
Accordingly, the Commission believes that the PHLX's proposal is a 
reasonable response to meet the demands of sophisticated portfolio 
managers and other institutional investors who are increasingly using 
the OTC market in order to satisfy their foreign currency hedging 
needs.

    \8\ 15 U.S.C. 78f(b)(5) and 78k-1 (1988).
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    The Commission also believes that the PHLX's proposal will help to 
promote the maintenance of a fair and orderly FCO market, consistent 
with Sections 6(b)(5) and 11A, because the proposal extends the 
advantages of a listed, exchange market to Customized FCOs with 
customized expiration dates. The attributes of the Exchange's FCO 
market versus an OTC market include, but are not limited to, a 
centralized market center, transparency, and secondary market 
liquidity. Similarly, by having the OCC as the issuer and guarantor of 
Customized expiration date FCOs, concerns regarding contra-party 
creditworthiness and performance upon exercise are eliminated. 
Accordingly, the Commission believes that the PHLX's proposal to trade 
Customized expiration date FCOs is appropriate.
    Furthermore, the PHLX's proposal offers increased flexibility to 
institutional investors without increasing the potential for market 
manipulation. As all existing Exchange rules and regulations regarding 
surveillance and sales practice will apply to Customized expiration 
date FCOs, the PHLX will be able to continue to adequately monitor 
Customized FCOs including Customized expiration date FCOs.\9\

    \9\ The Commission notes that before trading in Customized 
expiration date FCOs may commence, the Commission must approve a 
supplement to the Options Disclosure Document (``ODD'') regarding 
this product. See SR-ODD-95-1.
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    Finally, the Commission finds that Customized expiration date FCOs 
are standardized options for purposes of Rule 9b-1 under the Act.\10\ 
The Commission notes that its determination that Customized expiration 
date FCOs are standardized options for purposes of Rule 9b-1 is 
consistent with its initial decision regarding Customized FCOs.\11\

    \10\ 17 CFR 240.9b-1 (1994).
    \11\ See Securities Exchange Act Release No. 34925, supra note 
6. The Commission also notes that it has approved the listing by 
certain of the options exchanges to trade flexible exchange options 
on broad/based indexes with customized expiration dates (``FLEX 
Options'') See, e.g., Securities Exchange Act Release No. 31920 
(February 24, 1993), 58 FR 12280 (March 3, 1993) (order approving 
listing and trading of FLEX Options on S&P 500 and 100 stock 
indexes).
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    The Commission finds good cause for approving Amendment No. 1 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. 1 to the PHLX's proposal merely clarifies 
the proposal by adding language to Rule 1069 that specifies the 
necessary procedures for exercise and assignment, and, particularly, 
the implementation of pro-rata assignment for the product. The proposed 
use of pro-rata assignment was adequately described in the PHLX's 
proposal and was subject to a full notice and comment period.\12\ As a 
result, the Commission does not believe that the amendment raises any 
new or unique regulatory issues. Accelerated approval of the amendment 
will therefore permit the Exchange to begin offering these products 
without further delay to those investors who desire an exchange-traded 
product that includes a customized expiration date. Accordingly, the 
Commission believes that it is consistent with Section 6(b)(5) of the 
Act to approve Amendment No. 1 to the proposal on an accelerated basis.

    \12\ See supra note 3.
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    The Commission also 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 to the PHLX's proposal merely serves to 
codify in PHLX rules the Exchange's stated proposal, that was subject 
to a full notice and comment period,\13\ regarding the specific time 
and date that Customized FCOs expire. As a result, the Commission does 
not believe that the amendment raises any new or unique regulatory 
issues. Accelerated approval of the amendment will therefore permit the 
Exchange to begin offering these products without further delay to 
those investors who desire an exchange-traded product that includes a 
customized expiration date. Accordingly, the Commission believes that 
it is consistent with Section 6(b)(5) 

[[Page 57615]]
of the Act to approve Amendment No. 2 to the proposal on an accelerated 
basis.

    \13\ See supra note 3.
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    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 1 and 2 to the rule proposal. 
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 at the Commission's Public 
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of this filing also will be available for inspection and copying 
at the principal office of the PHLX. All submissions should refer to 
File No. SR-PHLX-95-52 and should be submitted by December 7 1995.

IV Conclusion

    For the foregoing reasons, the Commission finds that the PHLX's 
proposal to trade Customized FCOs with customized expiration dates is 
consistent with the requirements of the Act and the rules and 
regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-PHLX-95-52), as amended, is 
approved.

    \14\ 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.\15\

    \15\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-28316 Filed 11-16-95; 8:45 am]
BILLING CODE 8010-01-M