[Federal Register Volume 61, Number 19 (Monday, January 29, 1996)]
[Notices]
[Pages 2858-2860]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1471]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36746; International Series Release No. 919; File No. 
SR-PHLX-95-13]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 3 to the Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc., Relating to Modifications of the Position and Exercise 
Limits for Foreign Currency Options

January 19, 1996.
    On March 10, 1995, as subsequently amended below, the Philadelphia 
Stock Exchange, Inc. (``PHLX'' or ``Exchange'') submitted to the 
Securities and Exchange Commission (``SEC'' or ``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 
amend PHLX Rules 1001, ``Position Limits,'' \3\ and 1002, ``Exercise 
Limits,'' \4\ to increase the position and exercise limits for all 
foreign currency options (``FCOs''), except for options on the Italian 
lira and the Spanish peseta, to 200,000 contracts.\5\ The PHLX 
subsequently filed Amendment Nos. 1, 2,\6\ and 3 \7\ to the proposed 
rule change on April 5, 1995, May 2, 1995, and December 20, 1995, 
respectively.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR Sec. 240.19b-4 (1995).
    \3\ Position limits impose a ceiling on the number of option 
contracts which an investor or group of investors acting in concert 
may hold or write in each class of options on the same side of the 
market (i.e., aggregating long calls and short puts or long puts and 
short calls).
    \4\ Exercise limits prohibit an investor or group of investors 
acting in concert from exercising more than a specified number of 
puts or calls in a particular class within five consecutive business 
days.
    \5\ See note 7, infra, and accompanying text.
    \6\ On April 5, 1995, the PHLX submitted a revised version of 
the text of the proposed rule change, which amends the text to 
indicate that the proposed position and exercise limit for FCOs is 
200,000 contracts. See Letter from Edith Hallahan, Special Counsel, 
Regulatory Services, to Michael Walinskas, Branch Chief, Office of 
Market Supervision (``OMS''), Division of Market Regulation 
(``Division''), Commission, dated April 5, 1995 (``Amendment No. 
1''). On April 26, 1995, the PHLX amended PHLX Rule 1001, Commentary 
.05(c), to (1) replace references to the current FCO position limits 
with references to the proposed FCO position limit; (2) designate 
current paragraph (c) as paragraph (b), in order to reflect the 
deletion of current paragraph (b); and (3) provide that the position 
and exercise limit for customized and non-customized contracts on 
the German mark/Japanese yen cross-rate and the British pound/German 
mark cross-rate options, as well as for cross-rate options traded 
pursuant to PHLX Rule 1069, ``Customized Foreign Currency Options,'' 
is 200,000 contracts. See Letter from Edith Hallahan, Special 
Counsel, Regulatory Services, PHLX, to Michael Walinskas, Branch 
Chief, OMS, Division, Commission, dated April 26, 1995 (``Amendment 
No. 2'').
    \7\ The PHLX amended its proposal to provide that options on the 
Italian lira and the Spanish peseta will continue to be subject to 
their current position and exercise limits of 100,000 contracts. The 
Exchange also indicated that, under the proposal, the aggregation 
principles provided in PHLX Rule 1001 will continue to apply. See 
Letter from Gerald D. O'Connell, First Vice President, Market 
Regulation and Trading Operations, PHLX, to Michael Walinskas, 
Branch Chief, OMS, Division, Commission, dated December 20, 1995 
(``Amendment No. 3'').
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    Notice of the proposed rule change and Amendment Nos. 1 and 2 
appeared in the Federal Register on May 16, 1995.\8\ No comments were 
received on the proposal.

    \8\ See Securities Exchange Act Release No. 35688 (May 8, 1995), 
60 FR 26062.
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    Currently, PHLX Rules 1001 and 1002 establish the following 
position and exercise limits for FCOs: (i) 150,000 contracts for FCOs 
which meet an annual trading volume of at least 3,500,000 contracts; 
and (ii) 100,000 contracts for all other FCOs traded on the PHLX. The 
PHLX proposes to amend Exchange Rules 1001 and 1002 to increase the 
position and exercise limits for all FCOs, except for options on the 
Italian lira and the Spanish peseta,\9\ to 200,000 contracts.

    \9\ As noted above, the position and exercise limits for options 
on the Italian lira and the Spanish peseta will continue to be 
100,000 contracts. See Amendment No. 3, supra note 7.
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    PHLX FCO position and exercise limits were set initially at 10,000 
contracts in 1982, when FCOs first began trading on the Exchange.\10\ 
Since that time, the position and exercise limits have been raised four 
times.\11\ In 1993, the Exchange filed a proposal to adopt a two-tiered 
approach to FCO position and exercise limits, which was approved by the 
Commission in September 1994.\12\ According to the PHLX, many of the 
factors cited at that time continue to indicate that FCO position and 
exercise limits warrant an increase to 200,000 contracts. For example, 
the Chicago Mercantile Exchange (``CME'') substituted ``position 
accountability standards'' \13\ for position limits for futures and 
futures options on certain foreign currencies.\14\ As a result, the 
PHLX believes that the Exchange is placed at a serious competitive 
disadvantage.

    \10\ See Securities Exchange Act Release no. 19313 (October 14, 
1982), 47 FR 46946 (October 21, 1982) (order approving File No. SR-
PHLX-81-4).
    \11\ See Securities Exchange Act Release Nos. 21676 (January 18, 
1985), 50 FR 3859 (January 28, 1985) (order approving File No. SR-
PHLX-84-18 (increasing position limits from 10,000 to 25,000 
contracts); 22479 (September 27, 1985), 50 FR 41276 (October 9, 
1985) (order approving File No. SR-PHLX-85-22) (increasing position 
limits to 50,000 contracts); 23710 (October 15, 1986), 51 FR 37691 
(October 23, 1986) (order approving File No. SR-PHLX-86-24) 
(increasing position limits to 100,000 contracts); and 34712 
(September 23, 1994), 59 FR 50307 (October 3, 1994) (order approving 
File No. SR-PHLX-93-13) (adopting position limit of 150,000 
contracts for FCOs with annual trading volume of at least 3,500,000 
contracts).
    \12\ See Securities Exchange Act Release No. 34712, supra note 
10.
    \13\ Position accountability standards require traders who own 
or control positions in excess of established limits to provide to 
the exchange, upon request, information regarding the nature of the 
position and the trading strategy employed.
    \14\ See Letter from Jean A. Webb, Secretary, Commodity Futures 
trading Commission (``CFTC''), to Todd E. Petzel, Senior Vice 
President, Research, and Chief Economist, CME, dated January 2, 
1992. See also Speculative Position Limits--Exemption from CFTC Rule 
1.61; CME Proposed Amendments to Rules 3902.D, 5001.E, 3010.F, 
3012.F, 3013.F, 3015.F, 4604, and Deletion of Rules 3902.F, 5001.G, 
3010.H., 3012.H, 3013.H, and 3015.H.
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    In addition, the Exchange has commenced trading customized 
FCOs,\15\ in which positions are aggregated with other FCO positions in 
the underlying currency; however, customized option trading volume is 
not included in the volume calculation to determine the applicable 
position limit under the current two-tiered system. In addition to 
customized options, there are also other FCO products that are 
aggregated for position and exercise limit purposes, including long-
term, month-end, cash/spot, and American- and European-style FCOs.\16\ 
According to the PHLX, FCO 

[[Page 2859]]
participants have continued to accumulate positions near existing 
limits. If large traders continue to be restricted by the current 
position and exercise limit levels, the PHLX believes that trading 
interest could migrate to the over-the-counter (``OTC'') market, 
hampering PHLX liquidity. The Exchange believes that a higher position 
and exercise limit may enable such traders to consider, or return to, 
an exchange marketplace for their FCO trading, thereby increasing the 
liquidity of the PHLX's FCO markets. The PHLX believes that increases 
are particularly appropriate because the FCO market attracts a large 
number of institutional and corporate investors with substantial 
hedging needs. According to the Exchange, these investors utilize the 
PHLX marketplace by participating in block size transactions in FCOs to 
hedge exposure to fluctuations in exchange rates.

    \15\ See Securities Exchange Act Release No. 34925 (November 1, 
1994), 59 FR 55720 (November 8, 1994) (order approving File No. SR-
PHLX-94-18).
    \16\ See e.g., Securities Exchange Act Release Nos. 30672 (May 
6, 1992), 57 FR 20546 (May 13, 1992) (order approving File No. SR-
PHLX-91-30) (aggregating long-term FCOs); 30945 (July 21, 1992), 57 
FR 33381 (July 28, 1992) (order approving File No. SR-PHLX-92-13) 
(aggregating month-end FCOs); 33732 (March 8, 1994), 59 FR 12023 
(March 15, 1994) (order approving File No. SR-PHLX-93-10) 
(aggregating cash/spot FCOs); and 24859 (August 27, 1987), 52 FR 
33493 (September 3, 1987) (order approving File No. SR-PHLX-87-24) 
(aggregating European-style contracts).
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    Since the most recent increase in position and exercise limits, the 
Exchange has continued to examine FCO position and exercise limits in 
light of the underlying currency market. The PHLX estimates that the 
size of the worldwide currency market has grown exponentially. For 
example, in 1989, total gross global foreign exchange turnover was 
estimated to be $932 billion per day and net global turnover was 
estimated to be $640 billion per day.\17\ In 1992, total gross global 
foreign exchange turnover was estimated to be $1.354 billion per day, 
which represents a 35% increase since 1989. Further, global ``net-net'' 
exchange market turnover was estimated at $880 billion; this takes into 
account local and cross-border double counting and estimated gaps in 
reporting.\18\

    \17\ See Bank for International Settlements (``BIS'') Central 
Bank Survey of Foreign Exchange Market Activity in 1989.
    \18\ See BIS Central Bank Survey of Foreign Exchange Market 
Activity in April 1992 (March 1993).
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    Further, the PHLX believes that, as a percentage of total global 
currency turnover, the impact of a PHLX FCO position, even at 200,000 
contracts, is minimal.\19\

    \19\ According to the PHLX, 200,000 contracts would represent 
less than 2% of the daily international currency transaction volume 
in the Deutsche mark; 22% of the daily international currency 
transaction volume in the Australian dollar; 5% of the daily 
international currency transaction volume in the British pound; 16% 
of the daily international currency transaction volume in the 
Canadian dollar; 19% of the daily international currency transaction 
volume in the French franc; 8% of the daily international currency 
transaction volume in the Swiss franc; and 4% of the daily 
international currency transaction volume in the Japanese yen. See 
Letter from Gerald D. O'Connell, First Vice President, Market 
Regulation and Trading Operations, PHLX, to Yvonne Fraticelli, 
Attorney, Office of Market Supervision, Division of Market 
Regulation, Commission, dated May 18, 1995.
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    The Exchange also believes that the proposed increase is reasonable 
in light of prior position and exercise limit increases. The 1992 
increase represents a 50% increase in the two affected options. 
Previously, the Commission approved increases of 150%, 100%, and 
100%.\20\ Accordingly, the PHLX believes that the current proposal to 
raise by 100% the position and exercise limits for all FCOs, except 
options on the Italian lira and the Spanish peseta, is in line with 
prior changes, and specifically does not create a higher increase than 
any prior one.

    \20\ In 1985, the first increase from 10,000 contracts to 25,000 
contracts represented a 150% change while the second increase from 
25,000 to 50,000 contracts represented a 100% increase; similarly, 
the 1986 change to 100,000 contracts represented a 100% change. The 
proposed changes, from 150,000 to 200,000 contracts, and from 
100,000 to 200,000 contracts, represent changes of 33% and 100%, 
respectively.
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    Because of the large size of the underlying market in foreign 
currencies, the PHLX does not believe that manipulative concerns would 
be enhanced if the limits for FCOs were increased. In this regard, the 
Exchange notes that its surveillance procedures are designed to detect 
violations of these limits. In addition, the PHLX notes that the 
proposal will eliminate the fluctuations in limits inherent in a 
volume-based approach.
    For these reasons, and in light of these market changes, the 
Exchange believes that the proposed rule change is consistent with 
Section 6 of the Act, in general, and, in particular, with Section 
6(b)(5), in that it is designed to promote just and equitable 
principles of trade as well as to protect investors and the public 
interest. The PHLX believes that the proposal will increase the depth 
and liquidity of the FCO market which, in turn, should result in 
position and exercise limit levels that serve the purposes of 
protecting investors and the public interest as well as preventing 
unfair acts and practices, such as manipulation.
    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).\21\ Specifically, the 
Commission believes that the proposal to increase the position and 
exercise limits for all FCOs, except for options on the Italian lira 
and the Spanish peseta, should help to accommodate the needs of 
investors and market participants while helping to increase the depth 
and liquidity of the PHLX's FCO market. The proposal should also 
simplify the PHLX's rules by establishing limits that will not change 
periodically based on trading volume in the FCO as exists under the 
PHLX's current rules.

    \21\ 15 U.S.C. Sec. 78f(b)(5) (1988 & Supp. V 1993).
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    The Commission believes, as it has stated in the past, that 
although position and exercise limits for FCOs must be sufficient to 
protect the options and related markets from disruptions by 
manipulation, the limits must not be established at levels that are so 
low as to discourage participation in the options market by 
institutions and other investors with substantial hedging needs or to 
prevent market makers from adequately meeting their obligations to 
maintain a fair and orderly market.\22\ In its proposal, the PHLX 
states that the FCO market attracts a large number of corporate and 
institutional investors who have substantial needs and who execute 
block-sized transactions in FCOs. In addition, the PHLX believes that 
trading could migrate to the OTC market if traders continue to be 
restricted by the PHLX's current FCO position and exercise limits. In 
light of the size of the FCO market and the needs of FCO investors and 
market makers, the Commission believes that the PHLX's proposal is a 
reasonable effort to accommodate the needs of market participants and 
to help the Exchange remain competitive with the OTC market for FCOs.

    \22\ See Securities Exchange Act Release Nos. 22479 and 34712, 
supra note 10.
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    At the same time, the Commission does not believe that the proposal 
significantly increases concerns regarding intermarket manipulations or 
disruptions of the markets for FCOs or the underlying currencies. The 
Commission notes that the interbank foreign currency spot market is an 
extremely large, diverse market comprise of banks and other financial 
institutions worldwide.\23\ That market is supplemented by equally deep 
and liquid markets for standardized options and futures on foreign 
currencies and options on those futures. An active OTC market also 
exists in FCOs.

    \23\ See Securities Exchange Act Release No. 31627 (December 21, 
1992), 57 FR 62399 (December 30, 1992) (order approving File No. SR-
Amex-92-36).
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    Moreover, the absence of discernible manipulative problems under 
the current FCO position and exercise limits leads the Commission to 
conclude that 

[[Page 2860]]
the proposed increase is warranted. The Commission recognizes, as it 
has stated in the past, that there are no ideal limits in the sense 
that options positions of any given size can be stated conclusively to 
be free of any manipulative concerns.\24\ The PHLX and the Commission, 
however, have relied largely on the absence of discernible manipulation 
or disruption problems under the current limit as an indicator that 
additional increase can be safely considered. The Commission believes 
for these reasons that the proposed liberalization of existing FCO 
position and exercise limits is appropriate.\25\

    \24\ See Securities Exchange Act Release No. 33288 (December 3, 
1993), 58 FR 65221 (December 13, 1993) (order approving File No. SR-
PHLX-93-07).
    \25\ The Commission continues to believe that proposals to 
increase position and exercise limits must be justified and 
evaluated separately. After reviewing the proposed exercise limits, 
the Commission has concluded that the exercise limit increase does 
not raise manipulation problems or increase concerns over market 
disruption in the underlying currencies.
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    In addition, the Commission believes that the PHLX's surveillance 
programs will be adequate to detect and deter position and exercise 
limit violations by market participants as well as detect and deter 
attempted manipulative activity and other trading abuses.
    The Commission finds good cause for approving Amendment No. 3 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of the notice thereof in the Federal Register. 
Specifically, Amendment No. 3 clarifies the Exchange's proposal by 
indicating that the proposed rule change does not alter the aggregation 
principles contained in PHLX Rule 1001. In addition, Amendment No. 3 
provides that the position and exercise limits for options on the 
Italian lira and the Spanish peseta will continue to be 100,000 
contracts. This clarification was necessary because at the time the 
proposal was originally submitted the PHLX did not have approval to 
trade those FCOs. In addition, the Commission believes that the 100,000 
contract limit for options on the Italian lira and the Spanish peseta 
should remain unchanged at this time because the PHLX trades only 
customized options on those currencies and the market for those 
currencies may not be as deep and liquid as the market for other FCOs 
traded by the PHLX. Based on the above, the Commission finds good cause 
to accelerate approval of Amendment No. 3.

Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 3. 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. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by February 8, 
1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-PHLX-95-13), as amended, is 
approved.

    \26\ 15 U.S.C. Sec. 78s(b)(2) (1982).
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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) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-1471 Filed 1-26-96; 8:45 am]
BILLING CODE 8010-01-M