[Federal Register Volume 62, Number 37 (Tuesday, February 25, 1997)]
[Notices]
[Pages 8483-8485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4528]
[[Page 8483]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38295; International Series Release No. 1052; File No.
SR-PHLX-96-44]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval to Amendment No. 4 to the Proposed Rule Change by
the Philadelphia Stock Exchange, Inc. Modifying the Formula Which
Calculates the Settlement Value for Dollar Denominated Deliver Options
February 14, 1997.
I. Introduction
On October 30, 1996, as subsequently amended on November 19, 1996,
December 2, 1996, December 3, 1996,\1\ and February 11, 1997,\2\ 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'') \3\ and Rule 19b-4 thereunder,\4\ a proposed rule change to
modify the formula which calculates the settlement value for Dollar
Denominated Deliver foreign currency options (``3D Options'').
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\1\ See Letters to Heather Seidel, Attorney, Market Regulation,
SEC, from Nandita Yagnik, Attorney, PHLX, dated November 18, 1996
(``Amendment No. 1''), November 25, 1996 (``Amendment No. 2''), and
December 3, 1996 (``Amendment No. 3'') respectively. The substance
of these amendments was incorporated into the notice release and is
discussed below. See Securities Exchange Act Release No. 38017
(December 4, 1996), 61 FR 65244 (December 12, 1996).
\2\ Amendment No. 4 was filed with the Commission on February
11, 1997. The amendment changed the rule language to require that
the appropriate number of interbank foreign exchange participants be
selected at random from a pool of at least twenty-five (25) active
interbank foreign exchange participants (addition underlined), and
further explained the procedure for calculating a settlement value
for the 3D Options. See letter from Nandita Yagnik, Attorney, New
Product Development, PHLX to Heather Seidel, Attorney, Market
Regulation, Commission, dated February 7, 1997.
\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
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Notice of the proposed rule change, including Amendment Nos. 1, 2
and 3, together with the substance of the proposal, was published for
comment in Securities Exchange Act Release No. 38017 (December 3,
1996), 61 FR 65244 (December 12, 1996). No comments were received on
the proposal. This order approves the proposed rule change, as amended,
including Amendment No. 4 on an accelerated basis.
II. Description
The Exchange proposes to amend PHLX Rule 1057, in order to modify
the formula which calculates the settlement value for 3D Options. The
Commission approved trading for 3D Foreign Currency Options on the
Deutsche Mark (``3D Mark'') on March 8, 1994.\5\ In November 1995, the
Commission approved trading for 3D Foreign Currency Options on the
Japanese Yen (``3D Yen'').\6\ 3D Yen options, however, have not begun
trading on the Exchange to date. Presently, for the 3D Mark, bid and
offer quotations for the current foreign exchange spot price are
collected from fifteen interbank foreign exchange participants randomly
selected from a list of forty active interbank foreign exchange
participants.\7\ This group of forty is selected from a larger list of
interbank foreign exchange participants who provide continuous
quotations for each currency and consists of the most active interbank
participants out of the larger list.\8\ According to the PHLX, the
actual number of interbank foreign exchange participants used for a
particular currency will depend on the current number of interbank
participants making active quotes, which is measured by frequency.\9\
After discarding the five highest offers and the five lowest bids of
the randomly selected fifteen, the remaining ten bids and offers are
arithmetically averaged to arrive at a closing settlement value.\10\
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\5\ 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).
\6\ 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).
\7\ PHLX rules currently require such list to be selected from a
group of twenty-five (25) interbank foreign exchange participants.
Amendment No. 4 amends the rule to reflect current practice to use
``at least'' twenty-five (25) interbank participants. See Amendment
No. 4.
\8\ Telephone conversation between Nandita Yagnik, Attorney,
PHLX, and Heather Seidel, Attorney, Market Regulation, Commission,
on February 11, 1997.
\9\ Active interbank participants are defined by PHLX to be
``those which provide quotations with the greatest frequency from
2:30 a.m. (the start of the trading day) until 9:30 a.m.'' See
Amendment No. 4.
\10\ See Exchange Rule 1057. The Commission approved PHLX filing
SR-PHLX-96-11, which allows PHLX to elect to calculate the
settlement value in house instead of requiring an agent/vendor to do
it. In addition, the new rule limits the liability of the Exchange
regarding the accuracy of the settlement value except for
intentional misconduct and/or any violations of the federal
securities laws. See Securities Exchange Act Release Nos. 37323
(June 18, 1996), 61 FR 32880 (June 25, 1996) (notice) and 38041
(December 11, 1996), 61 FR 66721 (December 18, 1996) (approval
order).
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The algorithm for calculating the settlement value has a feature
that scans the group of fifteen randomly selected quotations and
automatically identifies those that are updated every five or more
minutes and replaces them with quotations from the original pool of
interbank participants \11\ that are updated more frequently than every
five minutes. PHLX's goal is to use quotations that are updated every
one to two minutes for settlement value purposes, but the algorithm
will not replace quotations until they are being updated every five or
more minutes.\12\
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\11\ As noted above, the rule is being amended to indicate such
pool must be at least twenty-five. Currently the PHLX selects from a
pool of forty interbank participants for the 3D option on the German
Mark and intends to use forty for the 3D option on the Japanese Yen.
\12\ See Amendment No. 4.
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The Exchange found that the number of banks that are able to
provide active 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, there are many more interbank
foreign exchange participants that update the bids and offers more
frequently than every five minutes than for the less popular
currencies, where the pool of potential contributors of the spot value
for the individual currency is much smaller and quotations may be
updated less often, although still on a continual basis.
To reflect the fact that there may be variation in the appropriate
number of bids and offers that are available for each currency, the
Exchange is proposing to make the current settlement value formula more
flexible by permitting the Exchange, within certain guidelines, to
determine the appropriate number of bids and offers to collect and
average on a currency-by-currency basis. The Exchange would randomly
select at least five interbank participants from a pool of at least
twenty-five active interbank foreign participants. Additionally, as the
number of bids and offers may vary across currencies, the existing rule
language that requires the five highest offers and the five lowest bids
to be discarded would also be modified. Instead, 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 would set the number for each individual
currency prior to commencing trading 3D Options on that
[[Page 8484]]
currency.\13\ 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.\14\
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\13\ 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.
\14\ See Securities Exchange Act Release Nos. 33732 (March 8,
1994), 59 FR 12023 (March 15, 1994) (3D Mark approval order) and
36505 (November 22, 1995), 60 FR 61277 (November 29, 1995) (3D Yen
approval order).
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The Exchange's Foreign Currency Option Committee (``the
Committee'') will determine what the appropriate number of bid and
offer quotations should be for determining settlement values on each
currency within the minimum requirements of the PHLX rule. For example,
the Committee will not have the discretion to select less than five
interbank foreign exchange participants from which to obtain these bid
and offer quotations. In addition, under the rule, the minimum number
of bids and offers must still be randomly selected from a pool of at
least twenty-five active interbank foreign participants and the
Committee will not have the discretion to reduce the pool of
participants below this number.
Although the Committee will have the ability to increase or
decrease the number of bids and offers randomly selected from the
larger pool of at least twenty-five bids and offers, to determine the
settlement value for 3D options, the Exchange has stated it does not
anticipate this occurring very frequently. 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 within the rule's
requirements. Notice of any change, however, to the number of
contributor bank quotations used must be provided to the membership and
public at least one week prior to settlement of the 3D currency option.
The Committee has determined to continue to collect fifteen bid and
offer quotations from a pool of forty for the 3D Mark.\15\ For the 3D
Yen, however, there are fewer banks that diligently provide quotes that
are updated more frequently than every five minutes. This results in
the algorithm not being able to replace quotes updated every five
minutes or more with more frequently updated quotes because there are
not enough quotes that are less than five minutes old.\16\ Therefore,
the Committee has determined that a more accurate representation of the
Japanese Yen Market would be derived from collecting ten bid and ask
quotations from a group of forty active interbank participants and
discarding the three highest offers and the three lowest bids prior to
averaging them.
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\15\ See Amendment No. 4.
\16\ See Amendment No. 4.
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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 Section 19(b) and Rule 19b-4 of the Act. As noted
above, the number of interbank participants from which the quotations
are collected cannot be less than five. Further, 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.
III. Discussion
The Commission believes 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).\17\ The Commission
finds that the proposed rule change promotes just and equitable
principles of trade, prevents fraudulent and manipulative acts and
practices, and protects investors and the public interest because it
will provide the Exchange with greater flexibility to ensure that
settlement values for 3D foreign currency options are an accurate
reflection of the most current and active contributor interbank
participants. This should benefit investors trading these products,
thereby facilitating transactions in foreign currency options in
accordance with Section 6(b)(5) of the Act.
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\17\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed rule change will more
accurately reflect the foreign currency spot price for each individual
currency because it allows the Exchange to tailor the number of
interbank foreign exchange participants to the active spot market in
each individual currency. The Commission finds that PHLX's amended
procedures for calculating the settlement value for the 3D Options, and
the competitive nature of the spot market for foreign currencies,
should help to ensure that the settlement values accurately reflect the
spot price for each foreign currency.\18\ In addition, the Commission
believes that PHLX's amended procedure will continue to guard against
unreliable or manipulated quotes because the designated agent(s) will
continue to randomly choose interbank foreign exchange participants for
the purpose of collecting quotes, and those randomly chosen quotes will
then be averaged to arrive at the final settlement value. In addition,
as described above, although the change does give PHLX some flexibility
in the number of bids and offers randomly selected, the current
methodology for eliminating less frequent quotes will remain the same.
This should continue to ensure settlement values are on an accurate
reflection of the most current quotes.
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\18\ The Commission has previously found that the interbank
foreign currency spot market, in general, is an extremely large,
diverse market comprised of banks and other financial institutions
worldwide. The foreign currency spot market is supplemented by
equally deep and liquid markets for standardized options and futures
on foreign currencies and options on those futures. There is also an
active over-the-counter market for foreign currency options. See
Securities Exchange Act Release No. 31627 (December 21, 1992), 57 FR
62399.
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The Commission also believes that the inability of the Exchange to
decrease the number of bid and offer quotations for each currency that
will be randomly selected from the larger pool of at least twenty-five
to less than five interbank foreign exchange participants guards
against potential manipulation by ensuring that the final settlement
value is an average of a minimum number of interbank quotations and is
not determined by one or two banks. By requiring bid and offer
quotations from at least five interbank participants and allowing only
one third of the highest and one third of the lowest bids and offers to
be discarded, the amended rule requires that, at a minimum, the final
settlement value for any 3D Option must be calculated from at least
three bid and offer quotations.\19\ Additionally, the Commission finds
that the requirement that the Exchange provide notice (at least one
week in advance of settlement of the 3D Option) to its membership and
public of any change in the number of contributor bank quotations used
to calculate the final settlement value for that 3D Option helps to
ensure that the investors are aware of the terms of the 3D Option and
how the settlement value will be calculated before the expiration of
that option.
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\19\ See Amendment No. 4.
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The Commission finds good cause for approving Amendment No. 4 prior
to the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. Among other
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things, Amendment No. 4 amends PHLX's rules to allow the number of
interbank exchange participants to be chosen from a pool of twenty-five
participants or more, rather than a pool of only twenty-five, by adding
the words ``at least.'' The Commission believes good cause exists to
accelerate approval of Amendment No. 4 because this amendment may
provide a more accurate final settlement value, by providing more
quotes for the calculation. The algorithm will still replace any quotes
that are updated five minutes or more with more frequently updated
quotes if they are available. In addition, in approving the 3D Japanese
Yen options, the Commission understood that PHLX may use more than
twenty-five interbank foreign exchange participants. Also, the
amendment further explains the process for calculating the settlement
value for 3D Options and clarifies the Exchange's purpose for the
proposed rule change. Further, the proposal to change the formula for
calculating the settlement value for 3D options was noticed previously
in the Federal Register for the full statutory period and the
Commission did not receive any comments. Accordingly, the Commission
believes that it is consistent with Sections 6 and 19(b)(2) of the Act
to approve Amendment No. 4 to the proposal on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 4 to the proposed rule change.
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 rules
change that are filed with the Commission, and all written
communications relating to the Amendment No. 4 between the Commission
and any persons, 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 in the Commission's Public Reference Room.
Copies of such filing will also be available at the principal office of
the Exchange. All submissions should refer to File No. SR-PHLX-96-44
and should be submitted by March 18, 1997.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\20\ that the proposed rule change (SR-PHLX-96-44), as amended, is
approved.
\20\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-4528 Filed 2-24-97; 8:45 am]
BILLING CODE 8010-01-M