[Federal Register Volume 61, Number 197 (Wednesday, October 9, 1996)]
[Notices]
[Pages 52921-52925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25917]


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COMMODITY FUTURES TRADING COMMISSION


Petition of the Philadelphia Stock Exchange, Inc. for Exemptive 
Relief To Permit United States Customers To Establish or Offset 
Positions in Certain Foreign Currency Options on the Hong Kong Futures 
Exchange Ltd. Through Registered Broker-Dealers

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed order and request for comment.

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SUMMARY: The Philadelphia Stock Exchange, Inc. (``PHLX'') has 
petitioned the Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') for exemptive relief pursuant to Sections 4(c), 4c(b) and 
4c(f) of the Commodity Exchange Act (``CEA'' or ``Act''),1 to 
permit United States customers to establish or offset positions in PHLX 
foreign currency options on the Hong Kong Futures Exchange Ltd. 
(``HKFE'') through registered broker-dealers pursuant to regulation by 
the Securities and Exchange Commission (``SEC'') under the federal 
securities laws, and in accordance with Section 4c(f) of the Act. The 
Commission seeks comment on the PHLX petition, as discussed more fully 
below, and on any related issues. Copies of the PHLX petition are 
available for inspection at the Office of the Secretariat or may be 
obtained through the Office of the Secretariat by mail at the address 
listed below or by telephoning (202) 418-5100.

    \1\ 7 U.S.C. 1 et seq. (1994).
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DATES: Comments must be received on or before November 8, 1996.

ADDRESSES: Comments should be submitted to Jean A. Webb, Secretary, 
Commodity Futures Trading Commission, 1155 21st Street, N.W., 
Washington, D.C. 20581. In addition, comments may be sent by facsimile 
transmission to facsimile number (202) 418-5521, or by electronic mail 
to [email protected]. Reference should be made to the Petition of the 
Philadelphia Stock Exchange, Inc.

FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief 
Counsel or Tina Paraskevas Shea, Attorney/Advisor, Division of Trading 
and Markets, Commodity Futures Trading Commission, 1155 21st Street, 
N.W., Washington, D.C. 20581. Telephone number: (202) 418-5450. 
Facsimile number: (202) 418-5536. Electronic mail: [email protected]

[[Page 52922]]

SUPPLEMENTARY INFORMATION

I. Background

    PHLX is a national securities exchange which has been registered 
with the SEC since 1934.2 Equity securities, equity and index 
options, and foreign currency options are listed for trading on the 
PHLX. PHLX initially commenced trading foreign currency options on 
December 10, 1982. Foreign currency options currently listed on the 
PHLX include dollar-denominated options on the British pound, Canadian 
dollar, Japanese yen, German mark, Swiss franc, French franc, ECU and 
Australian dollar.3 In 1991, PHLX received SEC approval to trade 
three cross-rate currency options where such options have no U.S. 
dollar component and premiums and exercise prices are denominated in 
currencies other than the U.S. dollar.4 In 1994, PHLX received 
approval to list Cash/Spot foreign currency options that allow holders 
to receive U.S. dollars representing the difference between the current 
foreign exchange spot price and the exercise price of the particular 
contract.5 PHLX also has received approval to introduce customized 
currency options 6 which allow users to customize most aspects of 
a currency option trade, including: exercise price, currency 
pairs,7 premium quotation (either units of currency or percent of 
underlying value), currency of premium payment, and expiration 
dates.8 In general, auction trading of PHLX's currency options 
occurs between 2:30 a.m. Eastern Time (``ET'') and 2:30 p.m. ET each 
business day.9
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    \2\ Facts relevant to this petition are drawn from PHLX's 
petition dated August 15, 1996 (``the Petition''), filed with the 
Commission on August 16, 1996. As noted above, copies of the PHLX 
petition may be obtained through the Commission's Office of the 
Secretariat.
    \3\ See Securities Exchange Act Release Nos. 19133 (October 14, 
1982), 47 FR 46946 (SEC approval of SR-PHLX-81-4); 10822 (April 4, 
1984), 49 FR 14611 (French franc); 22853 (February 3, 1986), 51 FR 
5129 (ECU); and 23945 (December 30, 1986), 52 FR 633 (Australian 
dollar).
    In evaluating proposals of self-regulatory organizations 
(``SROs'') to list and trade products on a national securities 
exchange, the SEC makes a determination that the proposed rule 
change is consistent with the requirements of the Securities 
Exchange Act of 1934 (the ``1934 Act'') and the SEC rules applicable 
thereunder. Under Section 6(b)(5) of the 1934 Act, the SEC 
predicates approval of exchange trading for new products upon a 
determination that the trading of such product is in the public 
interest. The SEC also considers such factors as fraud and market 
manipulation potential, economic benefit, just and equitable 
principles of trade, customer protections, market surveillance, 
adequacy of margin requirements, market impact and the maintenance 
of a fair and orderly market. See, e.g., Securities Exchange Act 
Release No. 36505 (November 22, 1995), 60 FR 61277 (SEC Order to 
approve the listing and trading of Cash Spot options on the Japanese 
yen).
    \4\ See Securities Exchange Act Release No. 29919 (November 7, 
1991), 56 FR 58109.
    \5\ See Securities Exchange Act Release Nos. 33732 (March 8, 
1994), 59 FR 12023 (Cash/Spot options on German mark); 36505 
(November 22, 1995), 60 FR 61277 (Cash/Spot options on Japanese 
yen).
    \6\ See Securities Exchange Act Release No. 34925 (November 1, 
1994), 59 FR 55720.
    \7\ See Securities Exchange Act Release No. 36255 (September 20, 
1995), 60 FR 50229 (Italian lira and Spanish peseta became eligible 
for customized pairs).
    \8\ See Securities Exchange Act Release No. 36468 (November 8, 
1995), 60 FR 57613 (customized expiration dates authorized).
    \9\ See Securities Exchange Act Release No. 34898 (October 26, 
1994), 59 FR 54651 (establishing these trading hours for most 
currency options except the Canadian dollar, which commences trading 
at 7:00 a.m. ET each business day). Historically, PHLX has had even 
more extensive trading hours. Cf. Securities Exchange Act Release 
No. 24652 (June 29, 1987), 52 FR 25680 (trading hours from 7:00 p.m. 
ET to 2:30 p.m. ET the following day). The latter extended segment 
was added to accommodate market interest in the Far East, but 
subsequently was suspended as a result of relatively low transaction 
volume. See Securities Exchange Act Release No. 33246 (November 24, 
1993), 58 FR 63421.
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    PHLX is seeking exemptive relief in order to permit U.S. customers 
to establish positions in PHLX foreign currency options on HKFE and 
offset such positions on PHLX, or to establish positions in PHLX 
foreign currency options on PHLX and offset them on HKFE through U.S. 
registered broker-dealers. PHLX seeks exemptive relief to assure that: 
(1) HKFE cross-listed foreign currency options can be made fungible and 
linked with PHLX foreign currency options pursuant to SEC oversight and 
the federal securities laws, and (2) the PHLX and HKFE linked foreign 
currency options will not be subject to inconsistent or duplicative 
regulation, taking cognizance of the policies inherent in Section 4c(f) 
of the Act.10 PHLX contends that the requested relief is 
consistent with Section 4c(f) of the CEA, which provides that nothing 
in the CEA ``shall be deemed to govern or in any way be applicable to 
any transaction in an option on foreign currency traded on a national 
securities exchange.'' 11 PHLX requests that the Commission issue 
an exemptive order pursuant to Section 4(c) and Section 4c(b) of the 
CEA to permit the offer and sale in the United States of PHLX foreign 
currency options that are cleared and settled for all purposes in the 
U.S. to be cross-listed for trading on HKFE in accordance with 
applicable federal securities laws and regulations.12
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    \10\ 7 U.S.C. 6c(f) (1994). The Petition does not assert that 
the HKFE is a national securities exchange. Rather, it makes the 
argument that the request is not inconsistent with Congressional 
policy to permit foreign currency options to trade on either a 
national securities exchange or on a futures exchange. Similarly, 
the Commission is not implying that the HKFE is a national 
securities exchange.
    \11\ Id.
    \12\ 7 U.S.C. 6(c) and 6c(b) (1994), respectively. If such 
exemptive relief were issued, the Commission would limit the scope 
of the relief to PHLX foreign currency options that are cross-listed 
for trading on HKFE pursuant to agreement between PHLX and HKFE, in 
accordance with SEC regulation, as represented to the Commission 
pursuant to PHLX's Petition. All other foreign futures and options 
contracts that HKFE would seek to offer or sell in the United States 
would remain subject to the CEA and the Commission's regulations, 
including the Commission's Part 30 rules (17 C.F.R. 30 (1996)), 
which regulate the offer and sale in the United States of foreign 
futures and options contracts.
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    Sections 4(c) and 4c(b) of the CEA vest the Commission with the 
authority to exempt certain transactions from regulation under the 
CEA.13 Section 4(c) of the CEA provides, in relevant part, that 
the Commission may, ``by rule, regulation, or order, after notice and 
opportunity for hearing * * * exempt any agreement, contract, or 
transaction * * * that is otherwise subject to'' the CEA and the 
Commission's regulations from all provisions of the CEA except Section 
2(a)(1)(B).14 Such exemption may be granted upon a determination 
by the Commission that: (1) The exemption is in the public interest; 
15 (2) the requirements from which exemption is sought should not 
be applied to the agreement, contract, or transaction at issue and the 
exemption would be consistent with the purposes of the

[[Page 52923]]

CEA; (3) the agreement, contract or transaction will be entered into 
solely between ``appropriate persons;'' 16 and (4) the agreement, 
contract or transaction will not have a material adverse effect upon 
the ability of the Commission or any contract market to discharge its 
regulatory or self-regulatory duties under the CEA.17
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    \13\ 7 U.S.C. 6(c) and 6c(b) (1994).
    \14\ 7 U.S.C. 6(c)(1) (1994). Section 4(c)(1) provides: In order 
to promote responsible economic or financial innovation and fair 
competition, the Commission by rule, regulation, or order, after 
notice and opportunity for hearing, may (on its own initiative or on 
application of any person, including any board of trade designated 
as a contract market for transactions for future delivery in any 
commodity under section 5 of this Act) exempt any agreement, 
contract or transaction (or class thereof) that is otherwise subject 
to subsection (a) [the exchange-trading requirement] (including any 
person or class of persons offering, entering into, rendering advice 
or rendering other services with respect to, the agreement, 
contract, or transaction), either unconditionally or on stated terms 
or conditions or for stated periods and either retroactively or 
prospectively, or both, from any of the requirements of subsection 
(a), or from any other provision of this Act (except section 
2(a)(1)(B)), if the Commission determines that the exemption would 
be consistent with the public interest.
    \15\ The Conference Committee Report on the legislation enacting 
Section 4(c) (the ``Conference Report'') states that the ``public 
interest'' includes ``the national public interests noted in the 
[CEA], the prevention of fraud and the preservation of the financial 
integrity of markets, as well as the promotion of responsible 
economic or financial innovation and fair competition.'' H.R. Rep. 
No. 978, 102d Cong., 2d Sess. 78 (1992). In making a determination 
with respect to the public interest, the Conferees provided that the 
Commission should ``assess the impact of a proposed exemption on the 
maintenance of the integrity and soundness of markets and market 
participants'' and that an exemption should not be denied ``solely 
on grounds that it may compete with or draw market share away from 
the existing market.'' Id. at 78-79.
    \16\ Section 4(c)(3)(A)-(J) defines ``appropriate persons'' to 
include generally a bank or trust company, a savings association, an 
insurance company, a registered investment company, a commodity pool 
operated by a Commission registrant, certain business entities and 
employee benefit plans, governmental entities, registered broker-
dealers, and registered futures commission merchants, floor brokers 
and floor traders. 7 U.S.C. 6(c)(3)(A)-(J).
    Section 4(c)(3)(K), which was added by the Congressional 
Committee Conferees to the final statutory provision, provides the 
Commission with flexibility in granting exemptions for persons or 
entities not expressly enumerated. Specifically, that section 
provides that ``appropriate persons'' include ``persons that the 
Commission determines to be appropriate in light of their financial 
or other qualifications, or the applicability of appropriate 
regulatory protections.'' 7 U.S.C. 6(c)(3)(k)(1994). The language of 
this provision indicates that persons permitted to engage in 
transactions that are otherwise regulated by a governmental agency 
may qualify as ``appropriate persons'' in specific circumstances 
where the Commission's regulatory concerns are satisfied. In the 
context of determining persons qualifying for the so-called Part 34 
``hybrid exemption,'' which provides for an exemption from CFTC 
regulations for certain hybrid instruments, the Commission stated 
that ``appropriate persons'' eligible for the hybrid exemption would 
include ``person[s] permitted by applicable securities or banking 
requirements to purchase or enter into the security [component] of 
the hybrid instrument * * *.'' 58 FR 5580 (January 22, 1993)(release 
adopting final rules regarding the regulation of hybrid 
instruments).
    \17\ 7 U.S.C. 6(c)(2) (1994).
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    Section 4c(b) of the CEA grants the Commission plenary authority to 
regulate commodity options in the United States. It prohibits persons 
from entering into any transaction involving any commodity regulated 
under the CEA which is of the character of or is commonly known ``as an 
option * * * contrary to any rule, regulation or order of the 
Commission * * *.'' 18 Section 4c(b) vests the Commission with the 
authority to implement orders, rules or regulations to regulate, among 
other instruments, option transactions, upon notice and opportunity for 
hearing.
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    \18\ 7 U.S.C. 6c(b)(1994). Section 4c(b) provides, in relevant 
part: No person shall offer to enter into, enter into or confirm the 
execution of, any transaction involving any commodity regulated 
under this Act which is of the character of, or is commonly known to 
the trade as, an ``option'' [or] ``privilege'', * * * contrary to 
any rule, regulation, or order of the Commission prohibiting any 
such transaction or allowing any such transaction under such terms 
and conditions as the Commission shall prescribe. Any such order, 
rule, or regulation may be made only after notice and opportunity 
for hearing, and the Commission may set different terms and 
conditions for different markets.
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    The PHLX petition is summarized below.

II. Description of PHLX Proposal

A. Licensing Agreement With HKFE

    PHLX and HKFE have entered into a licensing agreement (the 
``Linkage'') authorizing HKFE to trade foreign currency options during 
Asian business hours in the same manner as PHLX foreign currency 
options are traded on PHLX. The Linkage provides for cross-listing of 
PHLX foreign currency options, permitting U.S. customers and non-U.S. 
customers to establish positions in PHLX foreign currency options on 
HKFE and offset them on PHLX or to establish positions in PHLX foreign 
currency options on PHLX and offset them on HKFE. The Linkage, by 
permitting PHLX foreign currency options to be traded on HKFE during 
Asian business hours, effectively extends the trading hours of the 
currency option contracts traded on PHLX, a national securities 
exchange. The proposed Linkage would be applicable to all foreign 
currency option contracts for which PHLX has received SEC approval.
    Incorporated in 1976, HKFE is licensed as an exchange company by 
the Governor in Council of Hong Kong and is governed by a board of 
directors consisting of both HKFE members and non-members from the Hong 
Kong financial and business community. In addition, the operations of 
the HKFE and the HKFE Clearing Corporation Limited (``HCC''), HKFE's 
subsidiary, are under the jurisdiction of and are regulated by Hong 
Kong's independent financial regulatory body, the Securities and 
Futures Commission (``SFC'').
    Linkages between exchanges in different time zones have been used 
as a means of lengthening trading hours, broadening distribution of 
products, and enhancing volume and open interest. PHLX believes that 
the proposed Linkage would stimulate trading interest in PHLX's foreign 
currency options in the Far East. It does not view its agreement with 
HKFE as precluding similar agreements between HKFE and U.S. futures 
exchanges with respect to foreign currency options such that a similar 
arrangement potentially could permit futures commission merchants 
(``FCMs'') to offset currency options undertaken on a futures exchange 
pursuant to a similar linkage agreement with HKFE if futures exchanges 
so desired, maintaining the symmetry now contained in Section 4c(f) 
which permits such options to be traded on both domestic futures and 
securities options markets.

B. The Options Clearing Corporation/Clearance and Settlement

    The Options Clearing Corporation (``OCC''), owned equally by the 
five national securities exchanges that list options, functions as the 
issuer and clearing organization for all options traded on national 
securities exchanges, including the foreign currency options traded on 
PHLX. OCC is regulated as a clearing agency by the SEC under the 1934 
Act. OCC will issue, clear and settle PHLX foreign currency options 
that are cross-listed on HKFE. PHLX, HKFE, and OCC expect to enter into 
an International Market Agreement (the ``IMA''), which will govern the 
trading and clearance of transactions in such options. The IMA would be 
applicable only to PHLX foreign currency options cross-listed on HKFE 
and would address issues relevant to the trading and clearance of the 
PHLX contracts, including ``issuance, disclosure, expiration months, 
exercise prices, units of trading, margin, comparison, clearing and 
settlement of PHLX foreign currency options traded on HKFE, and the 
respective rights and obligations of the parties with respect to such 
options.'' 19
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    \19\ Petition at p.5.
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    OCC also anticipates the execution of an ``Associate Clearinghouse 
Agreement'' with HCC or an affiliate of HKFE organized for the purpose 
of acting as a clearing organization for the PHLX foreign currency 
option contracts traded on HKFE, under which HCC or such affiliate will 
act as an ``associate clearinghouse'' of OCC. The Associate 
Clearinghouse Agreement will provide that HCC or the HCC affiliate will 
be treated as an OCC clearing member, for purposes of clearing trades 
in PHLX foreign currency options for HKFE members that are not clearing 
members of OCC, whether such trades are effected on HKFE or (through 
PHLX members) on PHLX.

C. Regulatory and SRO Oversight of Cross-Listed PHLX Foreign Currency 
Options.

    1. SEC regulation. Consistent with the CEA and the federal 
securities laws, options on foreign currencies may be traded on a 
designated contract market subject to the Commission's jurisdiction or 
on a national securities exchange subject to SEC jurisdiction.20 
Foreign currency options have been traded on PHLX subject to the 
securities laws and the SEC regulatory protections since 1982. PHLX 
states that, because the currency options it proposes to be traded on 
HKFE would be cross-listed

[[Page 52924]]

PHLX foreign currency options, transactions in these options that are 
effected on HKFE pursuant to the Linkage should in effect be subject to 
the same regulatory structure in the United States as PHLX foreign 
currency options.21 PHLX represents that the cross-listed options 
will be registered under the Securities Act of 1933 for offer and sale 
in the United States, and that ``such transactions will be subject to 
the full panoply of regulation under the 1934 Act, including broker-
dealer registration and related requirements.'' 22
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    \20\ Section 4c(f) of the CEA, 7 U.S.C. 6c(f) (1994).
    \21\ Petition at p.7.
    \22\ Petition at p.7. PHLX expects that PHLX foreign currency 
options would be cross-listed for trading on the HKFE upon the 
Commission's issuance of exemptive relief and following approval by 
the SEC of conforming amendments to the rules of PHLX and the OCC in 
order to provide for the Linkage.
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    2. SRO oversight.
    a. PHLX rules. The petition summarizes PHLX requirements relating 
to account opening procedures, suitability, qualification of sales 
persons, supervision of accounts, disclosure, advertisements, time-
stamping and reporting of orders, and dual trading. These rules govern 
transactions in foreign currency options on PHLX. PHLX represents that 
HKFE has agreed to adopt certain of the rules similar to PHLX's rules 
and requirements to apply to cross-listed PHLX foreign currency options 
and has further agreed to adopt no exchange rules that conflict with 
PHLX's options rules.
    As stated in the PHLX petition, PHLX rules require that a 
customer's account be specifically approved for options trading before 
any option transactions may be effected for that customer. Such 
approval must be in writing, can be made only by a ``Registered Options 
Principal,'' 23 and may occur only after the member firm 
``exercise[s] due diligence to learn the essential facts as to the 
customer and his investment objectives and financial situation.'' 
24 PHLX rules also require that a customer's account be 
specifically approved for transactions in foreign currency, in writing, 
by a ``Foreign Currency Options Principal,'' before transactions in 
such options are effected. PHLX also has a customer suitability rule, 
which prohibits a member firm from recommending any option transaction 
to a customer unless the firm ``has reasonable grounds to believe that 
the entire recommended transaction is not unsuitable'' for the 
customer. Both the National Association of Securities Dealers, Inc. and 
PHLX require that persons selling foreign currency options pass a 
certification examination. SEC and PHLX rules prohibit brokers from 
accepting a customer option order or approving a customer account for 
trading of option contracts unless the customer has been provided with 
an SEC-reviewed disclosure document specific to the particular type of 
option order the customer seeks to enter.25 PHLX rules also 
establish detailed standards regarding the content of advertisements, 
sales literature, and other options-related communications and the 
manner in which such communications may be presented to the public.
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    \23\ A ``registered options principal'' must pass a proficiency 
examination demonstrating knowledge of the SRO requirements 
applicable to options transactions, including the rules of PHLX and 
OCC, and also must demonstrate an understanding of options trading.
    \24\ Petition at p.7.
    \25\ SEC Rule 9b-1 provides that an options disclosure document 
must include information delineating the mechanics of options 
trading, options trading risks, the uses of options, transaction 
costs, margin requirements, and relevant tax issues. 17 C.F.R. 
240.9b-1 (1996).
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    PHLX rules require member firms to establish written procedures to 
provide for the ``diligent supervision'' of all customer option 
accounts and all option orders in such accounts and maintain a special 
supervisory structure for foreign currency options. PHLX requires that 
all order tickets be time-stamped immediately upon execution, and floor 
brokers and traders are required to report relevant information 
regarding each option transaction. With the exception of specialists, 
PHLX floor traders are prohibited from dual trading, that is, trading a 
particular options class for their own account on the day of execution 
of a customer order in the same options class.
    b. Intermarket surveillance. PHLX and HKFE have executed an 
Intermarket Surveillance Group Surveillance Sharing Agreement (the 
``Surveillance Agreement'') providing for the exchange of surveillance 
information as needed in order for each exchange to discharge its 
respective surveillance responsibilities. This agreement tracks the 
Intermarket Surveillance Group Surveillance Sharing Agreement to which 
all U.S. securities, options and stock index futures exchanges 
currently are parties. The Surveillance Agreement requires each 
exchange to report all foreign currency options trading activity to the 
other and grants each exchange access to information needed to 
discharge its self-regulatory responsibilities. It provides that each 
exchange must cooperate and use its best efforts to obtain requested 
information when information is needed in the investigation of any 
question or complaint regarding the propriety of any transaction or 
series of transactions in foreign currency options or regarding any 
other aspect of trading and/or transactions therein that might be 
significant for rule enforcement purposes. The parties have agreed to 
resolve in good faith any disagreements between them regarding any 
requests for information or responses. The petition sets forth the 
contingency plans in the event that HKFE denies a request for 
assistance under the Surveillance Agreement and the denial is material 
to PHLX's self-regulatory program. Minimum reporting requirements are 
set forth in an addendum to the Surveillance Agreement.

D. Practical Concerns Prompting the Requested Relief

    PHLX argues that ``the requested relief is necessary for U.S. 
customers to derive the same benefits from the Linkage as foreign 
customers.'' 26 PHLX notes that subjecting ``identical and 
fungible'' foreign currency option contracts to two different 
regulatory schemes would result in U.S. customers being required to 
maintain accounts with two brokerage firms, a broker-dealer and an FCM, 
to trade the same contract. Moreover, even if a customer transacted 
through a dually registered entity, PHLX foreign currency options that 
are established or offset on PHLX would be required to be held in a 
separate account from PHLX foreign currency options that are 
established or offset on HKFE. As a result, positions could not be 
netted for margin or settlement purposes, a limitation that ``would 
severely diminish the economic viability of the Linkage'' as, 
effectively, the contracts would not be fungible, defeating one purpose 
of the link.27 PHLX also notes that U.S. futures exchanges could 
seek to enter into similar arrangements with HKFE or other overseas 
exchanges to cross-list foreign currency options that have approval for 
trading by the CFTC. PHLX argues that FCMs would not incur a 
competitive disadvantage should the relief be granted; as they 
currently may not offer and sell PHLX foreign currency options, the 
requested relief would not alter the status quo.
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    \26\ Petition at p.13.
    \27\ Petition at p.13.
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E. Determinations Under Section 4(c) of the CEA

    PHLX contends that an exemption under Section 4(c) of the CEA to 
permit the offer and sale in the U.S. of PHLX foreign currency options 
cross-listed for trading on HKFE would satisfy the

[[Page 52925]]

requirement of consistency with the public interest and the purposes of 
the CEA because, according to PHLX, it would ``stimulate trading 
interest in PHLX's foreign currency options,'' creating recognized 
economic benefits.28 PHLX notes that it has provided a foreign 
currency options market for more than a decade ``in accordance with the 
securities laws and the SEC regulatory scheme without any 
difficulties.'' 29 PHLX argues that the recognized economic 
benefits of foreign currency options trading on PHLX, the contemplated 
expansion of those benefits through the Linkage, and the applicability 
of the SEC regulatory scheme, which provides protections comparable to 
those of the CEA and Commission regulations that address the financial 
integrity, fairness, and central marketplace issues cited by the 
Commission in adopting its Part 36 rules, assure that the requested 
relief is consistent with the public interest and the purposes of the 
CEA.
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    \28\ Petition at p.15.
    \29\ Id.
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    In addition, Section 4(c) requires that the Commission determine 
that the requested exemption will not have a material adverse effect 
upon the ability of the Commission or any contract market to discharge 
its regulatory or self-regulatory duties. PHLX notes that the 
Conference Report indicates that the Commission should consider 
regulatory concerns such as ``market surveillance, financial integrity 
of participants, protection of customers and trade practice 
enforcement'' in making this determination.30 PHLX reasons that 
the applicability of the SEC's comparable regulatory scheme to 
transactions in PHLX foreign currency options in the U.S., including 
those cross-listed for trading on HKFE, together with the regulatory 
requirements imposed by the SFC and applicable Hong Kong laws and the 
inter-market surveillance arrangement, will provide adequate customer 
protections and market surveillance capabilities and therefore will not 
have a material adverse impact on the ability of the Commission or any 
contract market to discharge its regulatory or self-regulatory duties 
under the CEA.
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    \30\ H.R. Rep. No. 102-978, 102d Cong., 2d Sess. 78 (1992).
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    Section 4(c) also requires that the agreement, contract or 
transaction will be entered into solely between ``appropriate 
persons.'' Appropriate persons include any persons the Commission 
determines to be appropriate ``in light of their financial or other 
qualifications, or the applicability of appropriate regulatory 
protections.'' 31 PHLX reasons that the requested exemption for 
PHLX foreign currency options cross-listed for trading on HKFE should 
be available to all persons eligible to engage in such option 
transactions under the SEC's regulatory framework, which limits such 
trading to options qualified by the SEC in accordance with SEC approval 
procedures 32or options customers determined to be suitable in 
accordance with SEC and PHLX suitability requirements.33
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    \31\ 7 U.S.C. 6(c)(3)(k)(1994).
    \32\ See supra note 3.
    \33\ See id. and Section II.C.2.a supra.
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III. Request for Comments

    The Commission requests comments on any aspect of the Petition that 
commenters believe may raise issues under the CEA or Commission 
regulations. In particular, the Commission invites comments regarding: 
(1) the appropriateness of addressing transactions as described herein 
under the Commission's exemptive authority under Section 4(c) and/or 
under the Commission's plenary authority under Section 4c(b); (2) 
whether the proposed exemption is consistent with the standards set 
forth in Section 4(c) of the CEA; (3) whether there is sufficient 
authority under existing law for the SEC to exercise its regulatory and 
supervisory authority over transactions effected pursuant to the 
Linkage; (4) any material adverse effects that granting the PHLX 
petition would have upon other securities exchanges, futures exchanges, 
or Commission registrants, such as FCMs, from a competitive or other 
perspective; (5) the type of risk assessment information that should be 
available to the Commission regarding such transactions by FCM 
affiliates; (6) whether the Commission should attach any conditions to 
any exemptive relief that may be granted; and (7) any other issues 
relevant to this petition.

    Issued in Washington, DC, on October 2, 1996, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-25917 Filed 10-8-96; 8:45 am]
BILLING CODE 6351-01-P