[Federal Register Volume 61, Number 239 (Wednesday, December 11, 1996)]
[Notices]
[Pages 65254-65256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31398]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38017; File No. SR-PHLX-96-44]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by Philadelphia Stock Exchange, Inc. Relating to Modifying the 
Formula Which Calculates the Settlement Value for Dollar Denominated 
Delivery Options (``3D Options'')

December 4, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on October 
30, 1996, the Philadelphia Stock Exchange, Inc. (``PHLX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons. The 
Exchange also filed Amendments Nos. 1, 2, and 3 on November 19, 1996, 
December 2, 1996 and December 3, 1996, respectively, the substance of 
which are incorporated into this notice.

I. Self-Regulatory Organization's Statement of the Terms and Substance 
of the Proposed Rule Change

    The Exchange proposes to change PHLX Rule 1057, in order to modify 
the formula which calculates the settlement value for Dollar 
Denominated Delivery currency options (``3D Options''). PHLX proposes 
to modify the existing formula to reflect the fact that there may be a 
variation in the appropriate number of bids and offers that are 
available for each currency. The Exchange would randomly select at 
least five (5) such bids and offers from a pool of twenty-five (25) 
active interbank foreign exchange participants, and set the number for 
each individual currency prior to commencing trading 3D Options on that 
currency.\1\ Due to the variation in the number of bids and offers, the 
Exchange also proposes to amend the rule to state that it will discard 
one third of the highest offers and one third of the lowest bids and 
offers to arrive at the closing settlement value.
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    \1\ The Exchange would have the ability to obtain bids and 
offers from more than five interbank foreign exchange participants 
as determined by the Foreign Currency Option Committee.
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    The text of the proposed rule change follows. (New language is in 
italics and deletions are in brackets.)

    Rule 1057. 3D (Dollar Denominated Delivery) foreign currency 
options are cash settled options. The Exchange shall contract with a 
market information vendor(s) which shall act as the Exchange's 
designated agent(s) to generate the closing settlement value 
utilizing the following methodology sanctioned by the Exchange 
described below.
    The closing settlement price shall be determined by the 
Exchange's designated agent(s) as follows: On every expiration date 
for 3D contracts, at 10:30 A.M. (EST or EDT), the Exchange 
designated agent(s) shall collect a bid and offer quotation for the 
current foreign exchange spot/price [from at least fifteen (15) 
interbank foreign exchange participants randomly selected from a 
list of twenty-five (25) active interbank foreign exchange market 
participants.] from an appropriate number of interbank foreign 
exchange participants determined by the Exchange selected at random 
from a pool of twenty-five (25) active interbank foreign exchange 
participants. A minimum number of five (5) interbank foreign 
exchange participants must be selected from the group of 25 
interbank foreign exchange participants. After discarding [the five] 
one-third of the highest offers and [five] one-third of the lowest 
bids, the Exchange's designated agent will arithmetically average 
the remaining [ten (10) bids and ten (10) offers] bids and offers to 
arrive at a closing settlement value.
    In the event of the Exchange's designated agent(s) inability to 
generate a closing settlement value, the Exchange will poll the 
interbank market participants directly (by

[[Page 65255]]

phone or facsimile transmission) to determine the fair and accurate 
closing settlement value using the above methodology.
    The Exchange shall disseminate the closing settlement value 
after its calculation officially through the Options Price Reporting 
Authority.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Commission approved trading for 3D Foreign Currency Options on 
the Deutsche Mark (``3D Mark'') on March 8, 1994.\2\ In November 1995, 
the Commission approved trading for 3D Foreign Currency Options on the 
Japanese Yen (``3D Yen'') \3\; however, they have not begun trading on 
the Exchange to date. Presently, bid and offer quotations for the 
current foreign exchange spot price from at least fifteen (15) 
interbank foreign exchange participants randomly selected from a list 
of twenty-five (25) active interbank foreign exchange participants are 
collected. After discarding the five (5) highest offers and the five 
(5) lowest bids, the remaining ten (10) bids and offers are 
arithmetically averaged to arrive at a closing settlement value.\4\
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    \2\ See Securities Exchange Act Release No. 33732 (March 8, 
1994), 59 FR 12023 (order approving the listing and trading of cash/
spot dollar denominated delivery foreign currency option contracts.)
    \3\ See Securities Exchange Act Release No. 36505, (November 22, 
1995), 60 FR 61277 (order approving listing and trading of 3D 
foreign currency options on the Japanese yen.)
    \4\ See Exchange Rule 1057. Exchange filing SR-PHLX 96-11, 
pending at the Commission, would allow PHLX to elect to calculate 
the settlement value in house instead of requiring an agent/vendor 
to do it and would limit the liability of the Exchange regarding the 
accuracy of the settlement value. However, liability for intentional 
misconduct and/or any violations of the federal securities laws 
would not be limited. See Securities Exchange Act Release No. 37323 
(June 18, 1996), 61 FR 32880 (June 25, 1996) (notice).
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    The Exchange has found that the number of banks that are able to 
provide bid and offer quotations for different currencies varies 
according to the currency. For some of the more widely traded 
currencies such as the Deutsche mark and the Japanese yen, updated bids 
and offers among interbank participants are much more prevalent than 
for the less popular currencies, where the pool of potential 
contributors of the spot value for the individual currency is much 
smaller.
    The Exchange proposes to make the current settlement value formula 
more flexible in order to permit the Exchange to determine the 
appropriate number of bids and offers to collect and average on a 
currency-by-currency basis. As noted above, the Exchange would randomly 
select at least five (5) interbank participants from a pool of twenty-
five (25) active interbank participants. Additionally, as the number of 
bids and offers may vary across currencies, the existing rule language 
that requires the five (5) highest offers and the five (5) lowest bids 
be discarded would also be modified. The Exchange proposes to discard 
one third of the highest offers and one third of the lowest bids and 
average the remaining bids and offers to arrive at the closing 
settlement value.
    The Exchange contends that the revised settlement value formula 
will ensure that the settlement value for 3D Options contracts 
accurately reflects the spot price for foreign currencies because it 
will use bid and offer quotations from the appropriate number of banks 
that represent the spot value for the currency in question. In 
addition, the Exchange will employ the same back up procedures that are 
outlined for the 3D Mark and the 3D Yen that guard against unreliable 
or manipulated quotes.
    The Exchange's Foreign Currency Option Committee will determine 
what the appropriate number of bid and offer quotations should be for 
each currency. The Committee will not have the discretion to select 
less than five (5) interbank foreign exchange participants from which 
to obtain these bid and offer quotations. The Committee will have the 
ability to increase or decrease the number, although the Exchange does 
not anticipate this occurring very frequently. The Committee will not 
have the ability to decrease the number of interbank participants to 
less than five (5) participants. The Exchange will periodically review 
the contributing interbanks to assure that the number has not 
materially increased or decreased. The Committee will then have the 
discretion to act upon this information.
    The Committee has determined to continue to collect fifteen (15) 
bid and offer quotations from a pool of twenty-five (25) for the 3D 
Mark. For the 3D Yen, however, there are fewer banks that diligently 
provide updated quotes. Therefore, the Committee has determined that a 
more accurate representation of the Japanese Yen Market would be 
derived from collecting ten (10) bid and ask quotations from a group of 
twenty-five (25) active interbank participants and discarding the three 
(3) highest offers and the three (3) lowest bids prior to averaging 
them.
    The Exchange maintains that in proposing any new 3D Foreign 
Currency Option contracts for listing and trading on the Exchange, the 
Exchange will identify the appropriate number of bank quotations that 
will be collected to arrive at the settlement value in the rule filing 
submitted pursuant to Rule 19b-4 of the Act. The number of interbank 
participants from which the quotations are collected cannot be less 
than five (5). Any changes in that number will require approval of the 
Exchange's Foreign Currency Options Committee.
    The Exchange will provide notice, at least one week prior to 
settlement of the 3D currency option, to its membership and the public 
of any change in the number of contributor bank quotations used to 
calculate the settlement value for that 3D currency option. In the 
event the Exchange lists and trades 3D options on a new currency, the 
Exchange will provide at least one week notice of the number of 
contributor bank quotations used to derive the settlement value prior 
to listing and trading the 3D options on the new currency.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act \5\ in that it promotes just and 
equitable principles of trade, prevents fraudulent and manipulative 
acts and practices, and protects investors and the public interest 
because it provides the Exchange with the ability to list a wider 
variety of currencies and therefore, provide investors with a greater 
opportunity to hedge their currency risk and facilitate transactions in 
foreign currency options.
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    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

[[Page 65256]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. 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 Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-PHLX-96-44 and 
should be submitted by January 2, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-31398 Filed 12-10-96; 8:45 am]
BILLING CODE 8010-01-M