[Federal Register Volume 62, Number 6 (Thursday, January 9, 1997)]
[Notices]
[Page 1356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-442]



[[Page 1356]]

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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38113; International Series Release No. 1042; File No. 
SR-PHLX-96-45]


Self-Regulatory Organizations; Philadelphia Stock Exchange, 
Incorporated; Approval of Proposed Rule Change Relating to Minimum 
Transaction Size for Customized Foreign Currency Options

January 3, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 1, 1996, the 
Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') a 
proposed rule change to revise the minimum opening and closing 
transaction size and responsive quotation size for customized foreign 
currency options from 100 to 50 contracts. The proposal was published 
for comment in the Federal Register on November 20, 1996.\2\ No 
comments were received on the proposed rule change. This order approves 
the Exchange's proposal.
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    \1\ 15 U.S.C. Sec. 78s(b)(1)
    \2\ Securities Exchange Act Release No. 37944 (November 13, 
1996), 61 FR 59125.
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    On November 1, 1994, the Commission approved the Exchange's 
proposal to trade customized foreign currency options.\3\ Users now 
have the ability to customize the strike price and quotation method and 
choose any underlying and base currency combination out of all Exchange 
listed currencies, including the U.S. dollar. The product was 
introduced to attract institutional customers who like the flexibility 
and variety offered in the over-the-counter market but would prefer the 
benefits attributed to an exchange auction market to hedge their 
exchange rate risks.
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    \3\ Securities Exchange Act Release No. 34925 (November 1, 
1994), 59 FR 55720.
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    The Exchange originally instituted a 300 contract minimum opening 
transaction size pursuant to Rule 1069(a)(6). A number of mid-sized 
corporations and institutions then told the Exchange that the contract 
value was too large for their purposes. They believed that customized 
currency options would fill a market need for them, but that the 
opening transaction size was prohibitive. The Exchange, thus, 
determined to reduce the transaction size in stages. In March of 1995, 
the Exchange reduced the size of an opening transaction to 200 
contracts\4\ and then reduced it further to 100 contracts in August of 
that year.\5\ According to the Exchange, that size, however, still 
remains too large for a significant segment of medium sized 
corporations, especially those that are located in Canada and the 
Pacific basin. Those companies would like the opportunity to hedge 
their currency risk using an exchange traded customized option contract 
in a cost-effective manner. Therefore, the Exchange now proposes to 
reduce the minimum opening transaction size to 50 contracts. which 
would be equivalent in dollar terms to an average minimum transaction 
value for customized foreign currency options of between $2 and $3 
million.\6\
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    \4\ Securities Exchange Act Release No. 35464 (March 9, 1995), 
60 FR 14043.
    \5\ Securities Exchange Act Release No. 6176 (August 31, 1995), 
60 FR 46879.
    \6\ See Securities Exchange Act Release No. 37944, supra note 2.
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    The minimum size of the closing transaction and the minimum 
responsive quote size obligation would also be reduced form 100 
contracts to the lesser of 50 contracts or the remaining contracts.
    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),\7\ in that the 
proposal is designed to promote just and equitable principles of trade, 
prevent fraudulent and manipulative acts and practices, and to protect 
investors and the public interest. Specifically, the Commission 
believes that the proposed rule change is designed to make the 
customized foreign currency option market accessible to more medium 
sized corporate foreign currency option users while maintaining the 
focus of this market towards institutional investors. As a result, the 
Commission believes that the proposal may serve to add liquidity to 
this market, which would benefit all users of customized foreign 
currency options.
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    \7\ 15 Sec. 78f(b)(5).
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    Even with lowering the minimum opening transaction size to 50 
contracts, the minimum value of an opening customized foreign currency 
option transaction involving any approved currency will be between $2 
and $3 million. The Commission believes that because the customized 
foreign currency option market is used almost exclusively by 
institutional investors, and because the dollar value of opening 
transactions in customized foreign currencies is still very 
substantial, lowering the minimum transaction size to 50 contracts 
should not result in the entrance of unsophisticated investors into 
this market. Furthermore, the Exchange, in publicizing the reduction of 
the minimum contract size for customized foreign currency options to 
its members in a regulatory circular, will emphasize the necessity for 
compliance with the Phlx suitability rule, Rule 1026, applicable to 
options transactions.\8\ Rule 1026(b), among other things prohibits a 
member from recommending to a customer an opening transaction in any 
option contract, unless the person making the recommendation has a 
reasonable basis for believing, at the time of making the 
recommendation, that the customer is capable of evaluating the risks of 
the recommended transaction, and is financially able to bear the risks 
of the recommended position in the option contract. Based on the 
foregoing, the Commission believes that this proposal does not raise 
any regulatory concerns that were not adequately addressed by the 
Exchange when the Commission approved the trading of customized foreign 
currency options.\9\ Moreover, the institutional nature of customized 
foreign currencies should remain unchanged, even with the reduction in 
minimum opening transaction size being approved herein.\10\
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    \8\ Telephone conversation between Michelle R. Weissbaum, Vice 
President and Associate General Counsel, Phlx, and Janet W. Russell-
Hunter, Special Counsel, Office of Market Supervision, Division of 
Market Regulation, Commission, on November 13, 1996.
    \9\ See Securities Exchange Act Release No. 34925, supra note 3.
    \10\ The Commission notes that it would have serious concerns 
about any further reductions in the minimum opening contract size, 
which could change the institutional nature and intent of the 
product.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-Phlx-95-43) is hereby 
approved.

    \11\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 97-442 Filed 1-8-97; 8:45 am]
BILLING CODE 8010-0-M