[Federal Register Volume 61, Number 53 (Monday, March 18, 1996)]
[Notices]
[Pages 11074-11075]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6325]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36951; International Series Release No. 950; File No. 
SR-Phlx-95-80]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to Strike 
Price Intervals for Australian Dollar Options

March 11, 1996.

I. Introduction

    On January 2, 1996, 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 and Exchange Commission (``SEC'' or ``Commission'') 
a proposed rule change to revise its strike price policy respecting 
foreign currency options on the Australian dollar by changing from a 
$.01 interval to a $.005 interval in the nearest three expiration 
months.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposal was published for comment and appeared in 
the Federal Register on January 24, 1996.\3\ No comment letters were 
received on the proposed rule change. This order approves the 
Exchange's proposal

    \3\ See Securities Exchange Act Release No. 36729 (January 17, 
1996), 61 FR 1964.
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II. Description of the Proposal

    The Phlx has proposed to revise its strike price policy respecting 
foreign currency options on the Australian dollar pursuant to Phlx Rule 
1012--Series of Options Open for Trading by adopting shorter strike 
price intervals than currently used. Currently, Australian dollar 
options are listed at 1 cent intervals.\4\ Pursuant to Phlx Rule 1012, 
six expiration months are currently listed in regular foreign currency 
options, with one, two, three, six, nine, and twelve months until 
expiration.

    \4\ See Securities Exchange Act Release No. 23945 (December 30, 
1986), 52 FR 633 (January 7, 1987) (SR-Phlx-96-38).
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    The Exchange proposes to revise its strike price policy respecting 
foreign currency options on the Australian dollar by changing from a 
$.01 interval to a $.005 interval in the nearest three expiration 
months. The mid-term expiration months (listed with six, nine, and 
twelve months until expiration) will continue to be listed at one cent 
interval.
    The Exchange states that the purpose of the proposed rule change is 
to address certain market needs that have arisen as a result of recent 
lower volatility respecting the Australian dollar (in relation to the 
U.S. dollar), which has created a customer need for narrower strike 
price intervals.\5\ The Exchange represents that the lower volatility 
of the Australian dollar has regulated in a narrower trading range for 
the currency option.

    \5\ The Commission has previously approved certain Phlx 
proposals that shortened foreign currency option strike price 
intervals. See e.g., Securities Exchange Act Release Nos. 35631 
(April 20, 1995), 60 FR 20544 (April 26, 1995) (British pound from 
$.025 to $.01 strike price intervals) (file No. SR-Phlx-95-06); 
25685 (May 10, 1988), 53 FR 17524 (May 17, 1988) (French franc from 
$.05 to $.025 strike price intervals) (File No. SR-Phlx-86-14), and 
24103 (February 13, 1987), 52 FR 5605 (February 25, 1987) (British 
Pound from $.05 to $.025 strike price intervals) (File No. SR-Phlx-
86-14).
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    The Phlx asserts that the proposed rule change will initially 
create 72 new strike prices.\6\ Additionally, both the Phlx and the 
Options Price Reporting Authority (``OPRA'') represent that the 
predicted increase in the number of Australian dollar options series 
will not adversely affect their respective computer processing 
capacities to accommodate the additional strike prices.\7\

    \6\ The total number of new strikes includes both puts and calls 
for American and European style options on the Australian dollar. 
See Letter from Gerald O'Connell, First Vice President, Phlx, to 
Michael Walinskas, Office of Market Supervision (``OMS''), Division 
of Market Regulation (``Market Regulation''), Commission, dated 
February 29, 1996 (``O'Connell Letter'').
    \7\ See Letters from Tom Wittman, Director, Trading Systems, 
Phlx, dated March 6, 1996 (``Phlx Capacity Letter''), and Joseph P. 
Corrigan, Executive Director, OPRA, dated March 7, 1996 (``OPRA 
Capacity Letter''), to Michael Walinskas, Branch Chief, OMS, Market 
Regulation, Commission.
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    The Exchange further states that its general policy with respect to 
the delisting of inactive options series, subject to the assigned 
option specialist's approval, is to delist series in which there is no 
open interest beginning with the highest or lowest strike for that 
month. The Exchange, however, may not delist a series if such delisting 
would create a gap in consecutive strikes.\8\

    \8\ See Letter from Gerald O'Connell, First Vice President, 
Phlx, to Michael Walinskas, Branch Chief, OMS, Market Regulation, 
Commission, dated March 1, 1996 (``O'Connell Letter No. 2'').
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    The Exchange believes that the proposed reduction in the strike 
price interval should provide investors and traders of Australian 
dollar foreign

[[Page 11075]]
currency options with the ability to more closely tailor investment and 
hedging strategies to Australian dollar trading levels and movement. 
The Exchange further believes that the proposed rule change is designed 
to promote just and equitable principles of trade by enabling more 
effective management of foreign currency risk respecting the Australian 
dollar.

III. Commission Finding and Conclusions

    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) of the Act.\9\ 
Specifically, the Commission finds that the Exchange's proposal to 
revise its strike price policy respecting foreign currency options on 
the Australian dollar by changing from a $.01 interval to a $.005 
interval in the nearest three months is a reasonable attempt to perfect 
the mechanism of a free and open market and a national market system.

    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission recognizes that any narrowing of strike price 
intervals increases the flexibility accorded market participants and 
allows options positions to be more finely tailored to achieve intended 
investment objectives. At the same time, however, narrower strike price 
intervals create the possibility of dispersing trading interest to the 
degree that there is an excessive dilution of liquidity in open options 
series.
    Accordingly, an evaluation of the appropriate strike price interval 
for an options contract requires a balancing of the need to accommodate 
market participants by providing a wide array of investment 
opportunities and the need to avoid causing excessive proliferation of 
illiquid options series. The Commission believes that the Phlx proposal 
strikes such a reasonable balance. Although the proposal makes 
available a significant number of new options series, the Commission 
notes that Phlx generally seeks to delist options series (including 
Australian dollar foreign currency options) with no open interest.\10\ 
Therefore, the Phlx should be able to eliminate any illiquid series 
that might result from the implementation of the new strike price 
proposal. Accordingly, the Commission expects the Phlx to monitor 
Australian dollar foreign currency options activity closely in order to 
detect any proliferation of illiquid series possibly resulting from the 
narrower strike price intervals and to act promptly to remedy this 
situation should it occur.

    \10\ See O'Connell Letter No. 2, supra note 8.
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    In addition, based on representations from the Phlx \11\ and 
OPRA,\12\ the Commission believes that the predicted increase in the 
number of Australian dollar options series should not adversely affect 
the computer processing capacity to accommodate the additional strike 
prices. More specifically, both the Phlx and OPRA have represented that 
their respective systems can adequately handle the additional options 
transaction-related traffic generated by the projected new series. 
Nevertheless, the Commission requests that the Exchange monitor the 
volume of additional options series listed as a result of this rule 
change and continue to ensure that these additional series will not 
adversely impact processing system capacity.

    \11\ See Phlx Capacity Letter, supra note 7. See also O'Connell 
Letter, supra note 6.
    \12\ See OPRA Letter, supra note 7.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-Phlx-95-80) is 
approved.

    \13\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\

    \14\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-6325 Filed 3-15-96; 8:45 am]
BILLING CODE 8010-01-M