[Federal Register Volume 61, Number 244 (Wednesday, December 18, 1996)] [Notices] [Pages 66721-66723] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 96-32081] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-38041; File No. SR-Phlx-96-11] Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 2 to Proposed Rule Change Relating to the Exchange's Calculation of Settlement Values for Cash/Spot Foreign Currency Option Contracts (``3-D Options'') December 11, 1996. On April 30, 1996, 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 permit the Exchange to calculate settlement values for the cash/spot Dollar Denominated Delivery foreign currency option contracts (``3-D options'') and to limit the Exchange's liability in connection with the calculation and dissemination of these settlement values. On May 20, 1996, the Exchange submitted Amendment No. 1 to the proposed rule change.\3\ --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ See letter from Murray L. Ross, Vice President and Secretary, Phlx, to Anthony P. Pecora, Attorney, Division of Market Regulation, SEC, dated May 17, 1996 (``Amendment No. 1''). The changes contained in this letter were superseded by Amendment No. 2. See infra note 5. --------------------------------------------------------------------------- The proposed rule change, along with Amendment No. 1, was published for comment in the Federal Register on June 25, 1996.\4\ On August 22, 1996, the Phlx clarified that it would not rely upon the proposed limitation of liability clause to limit the Exchange's liability for intentional misconduct or for any violation of the federal securities laws.\5\ No comments were received on the proposal. This order approves the proposal, as amended by Amendment No. 2. --------------------------------------------------------------------------- \4\ Securities Exchange Act Release No. 37323 (June 18, 1996) 61 FR 32880. \5\ See letter from Murray L. Ross, Vice President and Secretary, Phlx, to Anthony P. Pecora, Attorney, Division of Market Regulation, SEC, dated August 21, 1996 (``Amendment No. 2'') (superseding Amendment No. 1). --------------------------------------------------------------------------- On March 8, 1994, the Commission approved trading for 3-D Foreign Currency Options on the Deutsche Mark.\6\ Currently, the closing settlement value for 3-D options is calculated by a market information vendor acting as the Exchange's designated agent. The market information vendor will collect the bid and offer quotations for the current foreign exchange spot price from quotations submitted by at least fifteen interbank foreign exchange market participants, which the designated agent will select randomly from a list of twenty-five active interbank foreign exchange market participants. After discarding the five highest and the five lowest bids and offers, the market information vendor averages the [[Page 66722]] remaining ten bids and offers to arrive at a closing settlement price.\7\ --------------------------------------------------------------------------- \6\ Securities Exchange Act Release No. 33732 (Mar. 8, 1994), 59 FR 12023 (approving File No. SR-Phlx-93-10). Although the Commission has approved trading for 3-D Foreign Currency Options on the Japanese Yen, trading in these securities on the Exchange has not yet begun. Securities Exchange Act Release No. 36505 (Nov. 22, 1995), 60 FR 61277 (approving File No. SR-Phlx-95-42). \7\ The Exchange currently has a proposal pending at the Commission that would modify this settlement value formula. See Securities Exchange Act Release No. 38017 (Dec. 4, 1996) (publishing notice of File No. SR-Phlx-96-44). --------------------------------------------------------------------------- The Phlx proposes to amend Phlx Rule 1057 to permit the Exchange to choose whether it will calculate the settlement value for 3-D options itself or employ a designated market information vendor as an agent of the Exchange for that purpose.\8\ The Exchange will continue to use the same methodology for calculating the settlement value for 3-D options as described in Phlx Rule 1057. --------------------------------------------------------------------------- \8\ The Exchange does not intend to redesignate the reporting authority on a regular or frequent basis. Instead, the Exchange will select a reporting authority with the intention, to the extent possible, that the selection will be lasting. Telephone conversation between Nandita Yagnik, New Products Development, Phlx, and Anthony P. Pecora, Attorney, Division of Market Regulation, SEC (Dec. 4, 1996). --------------------------------------------------------------------------- The Phlx believes that calculating its own settlement value for 3-D options will enable the Exchange to exert control over the assembly of this value. The Exchange also believes that the proposed rule change will reduce the necessary response time in the event there is a problem in the calculation or dissemination of the 3-D options settlement value. The Exchange also proposes to amend Phlx Rule 1057 by including a ``limitation of liability'' clause that limits the Exchange's liability in connection with the calculation and dissemination of the 3-D settlement value. The Exchange believes the limitation of liability clause will provide added protection to the Exchange and alleviate the threat of potential liability in calculating the 3-D settlement value. In this regard, the Phlx acknowledges that the proposed limitation of liability clause cannot be relied upon by the Exchange to limit its liability for intentional misconduct or for any violation of the federal securities laws.\9\ --------------------------------------------------------------------------- \9\ See Amendment No. 2, supra note 5. --------------------------------------------------------------------------- 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 Section 6(b).\10\ Specifically, the Commission believes the proposal is consistent with the Section 6(b)(5) \11\ requirements that the rules of an exchange be designed to promote just and equitable principles of trade, to facilitate transactions in securities, to prevent fraudulent and manipulative acts and, in general, to protect investors and the public interest. --------------------------------------------------------------------------- \10\ 15 U.S.C. 78f(b). \11\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The Commission agrees with the Phlx's assertion that, by calculating its own settlement value for 3-D options, investors should be benefitted because the response time needed in the event there is a problem in the calculation or dissemination of the 3-D options settlement values should be reduced. In any case, the same methodology for calculating the settlement values, as set forth in Phlx Rule 1057, will be used, irrespective of whether the Phlx or a market information vendor is performing this function. With regard to the limitation of liability clause, the Commission finds that the proposed language will provide the Phlx with protection that is substantively similar to protection already afforded other self-regulatory organizations.\12\ Additionally, because the Phlx represents that the proposed rule change cannot be used to limit its liability for intentional misconduct or for any violations of the federal securities laws, the Commission believes that the proposal will protect investors and the public interest, while also serving to facilitate transactions in securities. Specifically, entities, such as the Phlx, may be encouraged to calculate and disseminate settlement values.\13\ Therefore, these derivative products, which are found to provide hedging or other economic functions, should remain available to investors. --------------------------------------------------------------------------- \12\ See American Stock Exchange Rules 902C and 1003; Chicago Board Options Exchange Rule 24.14; New York Stock Exchange Rule 702(b). \13\ See, Securities Exchange Act Release No. 34125 (May 27, 1994), 59 FR 29307 (approving File No. SR-Amex-93-41). --------------------------------------------------------------------------- Finally, although the current language in the ``Characteristics and Risks of Standardized Options'' Options Disclosure Document (``ODD'') \14\ adequately discloses a reporting authority's limited liability regarding the dissemination of index values, the Commission believes it would be useful if this language was more prominent in the ODD.\15\ Therefore, in connection with the approval of this proposal, The Options Clearing Corporation (``OCC'') has indicated that it will address this issue the next time it conducts a general revision of the ODD.\16\ --------------------------------------------------------------------------- \14\ Form S-20 and Rule 9b-1 establish a disclosure framework specifically tailored to the informational needs of investors in standardized options that are traded on national securities exchanges and cleared through clearing agencies registered as such under the Act. Under this options disclosure system, the exchange(s) on which standardized options are listed and traded must prepare an ODD that, among other things, identifies the issuer and describes the uses, mechanics, and risks of options trading and other matters in language that easily can be understood by the general investing public. Broker-dealers must provide a copy of the ODD to each customer at or prior to the approval of the customer's account for trading in any standardized option. Any amendment to the ODD must be distributed to each customer whose account is approved for trading the options class for which the ODD relates. See 17 CFR 240.9b-1; Securities Exchange Release No. 31910 (Feb. 23, 1993), 58 FR 12280 (approving File No. SR-ODD-93-1). \15\ Currently, this information appears on pages twenty-six and seventy-six of the ODD. \16\ See letter from James C. Yong, First Vice President and General Counsel, OCC, to Anthony P. Pecora, Attorney, Division of Market Regulation, SEC, dated November 6, 1996. --------------------------------------------------------------------------- The Commission finds good cause for approving Amendment No. 2 prior to the thirtieth day after the date of publication of notice of filing thereof in the Federal Register because this amendment merely conforms the proposal to similar rules of other self-regulatory organizations.\17\ Moreover, the Commission notes that prior proposals by other SROs to limit their liability in connection with the administration of new proprietary indexes and products were published by the Commission for the full statutory comment period without any comments being received.\18\ Therefore, the Commission believes that granting accelerated approval to Amendment No. 2 is appropriate and consistent with Section 6(b)(5) and Section 19(b)(2) of the Act.\19\ --------------------------------------------------------------------------- \17\ See supra footnote 12 (listing comparable rules). \18\ See, e.g., Securities Exchange Act Release No. 34125 (May 27, 1994), 59 FR 29307 (approving File No. SR-Amex-93-41). \19\ 15 U.S.C. 78f(b)(5) and 78s(b)(2). --------------------------------------------------------------------------- Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 2. 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. Sec. 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 such 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-96-11 and should be submitted by [insert date 21 days from date of publication]. [[Page 66723]] It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\20\ that the proposed rule change (SR-Phlx-96-11), as amended by Amendment No. 2, is approved. \20\ 15 U.S.C. 78s(b)(2). --------------------------------------------------------------------------- For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\21\ --------------------------------------------------------------------------- \21\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 96-32081 Filed 12-17-96; 8:45 am] BILLING CODE 8010-01-M