[Federal Register Volume 62, Number 113 (Thursday, June 12, 1997)]
[Notices]
[Pages 32136-32141]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-15330]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38711; File No. SR-Phlx 97-14]


Self-Regulatory Organization; Notice of Filing and Order Granting 
Partial Accelerated Approval to a Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. Relating to Rule 722, Margin Accounts

June 2, 1997.
    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 May 8, 
1997, the Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC''or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. Phlx submitted amendment No. 1 on May 20, 1997.\1\ Phlx 
submitted Amendment No. 2 on May 28, 1997.\2\ Phlx submitted Amendment 
No. 3 on May 30, 1997.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons, 
and to grant accelerated approval to the portions of the proposal 
relating to customer cash accounts, over-the-counter (``OTC'') options, 
market-maker and specialist ``good faith'' margin requirements for 
permitted offset transactions, and

[[Page 32137]]

certain other portions of the proposal as discusses below.\4\
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    \1\ See Letter from Michele R. Weisbaum, Vice President and 
Associate General Counsel, Phlx, to Michael Walinskas, Senior 
Special Counsel, Division of Market Regulation (``Market 
Regulation''), Commission, dated May 19, 1997 (``Amendment No. 1''). 
Amendment No. 1 superseded the original rule filing in its entirety 
by addressing technical changes by making corrections to certain 
typographical errors appearing in the rule filing. Amendment No. 1 
also makes a number of substantive changes.
    \2\ See Letter from Michele R. Weisbaum, Vice President and 
Associate General Counsel, Phlx, to Michael Walinskas, Senior 
Special Counsel, Market Regulation, Commission, dated May 28, 1997 
(``Amendment No. 2). Amendment No. 2 supersedes Amendment No. 1 with 
regard to certain portions of the rule filing the Commission is 
approving today by accelerated approval.
    \3\ See Letter from Diane Anderson, Vice President, Examinations 
Department, Phlx, to Michael Walinskas, Senior Special Counsel, 
Market Regulation, Commission, dated May 30, 1997 (``Amendment No. 
3''). Amendment No. 3 corrects an inadvertent omission to Amendment 
No. 2.
    \4\ The Commission is not approving the following portions of 
the proposed rule filing: the proposed definition of ``qualified 
stock basket'' (Rule 722(a)(7)); Customer Margin Accounts--
Derivative Securities (Rule 722(d)); and Commentary .14.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx, pursuant to Rule 19b-4 of the Act, proposes to revise its 
rules governing margin in order to (i) establish Phlx rules to govern 
areas of margin regulation that will no longer be addressed by 
Regulation T of the Board of Governors of the Federal Reserve System 
(``Federal Reserve Board,'' ``FRB,'' or ``Board''), (ii) conform 
certain Phlx margin rules to those of the New York Stock Exchange 
(``NYSE''), and (iii) rearrange existing provisions of the Phlx margin 
rules for ease of reading. The text of the proposed rule change is 
available at the Office of the Secretary, Phlx and at the Commission.

II. Self-Regulatory Organization's Statements 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

    The purpose of the proposed rule change is to make revisions to the 
Phlx rules governing margin that will (i) establish Phlx rules to 
govern areas of margin regulation that will no longer be addressed by 
Regulation T of the Board of Governors of the Federal Reserve System, 
(ii) conform certain Phlx margin rules to those of the NYSE, and (iii) 
rearrange existing provisions of the Phlx margin rules for ease of 
reading.
    The Exchange is proposing changes at this time because of recent 
amendments to Regulation T, the regulation that covers extensions of 
credit by and to brokers and dealers by the Federal Reserve Board.\5\ 
Among other things, the amendments to Regulation T will modify or 
delete certain Board rules regarding options transactions in favor of 
rules that must be adopted by the options exchanges and approved by the 
Commission. The new options provisions in Regulation T became effective 
June 1, 1997. In the course of amending the Exchange's rules to 
accommodate the changes necessary because of the Regulation T 
amendments, it became necessary for the sake of clarity to propose 
changes to the margin rules that would conform certain Phlx rules to 
the rules of the NYSE and to rearrange existing provisions of Rule 722 
for the sake of organization.
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    \5\ 61 FR 20386 (May 6, 1996) (Federal Reserve Board's release 
adopting certain changes to Regulation T).
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Definition Section
    Rule 722 has been rearranged to set forth the definitions 
applicable to the rule in section (a) now instead of at the end of the 
rule. Accordingly, all of the definitions that are currently in section 
(e) have been moved to new section (a) with three additions: (1) the 
definition of the term ``current market value'' will now also 
incorporate a definition relevant to options and spot market prices 
which is currently in section (c)(2)(A) (i) and (ii); (2) a definition 
of the term ``escrow agreement'' has been added in subsection (6); and 
(3) a definition of the term ``qualified stock basket'' is added in 
subsection (7).
Customer Margin Accounts
    The Exchange is also proposing to rearrange Rule 722 so that all 
provisions concerning customer margin accounts are in the same section. 
Currently, customer margin provisions appear throughout the rule. 
Paragraph (b) will now set forth the general rules for margin 
requirements on long and short positions in customer margin accounts. 
Paragraph (c) will set forth the exceptions for specific types of 
securities and positions held in margin accounts. Specific provisions 
relevant to options and warrants will be covered in paragraph (d) 
entitled Derivative Securities. Paragraph (b) is merely renumbered 
paragraph (a) from the current rule with headings added for clarity and 
the term stock is being changed to security for broader application.
    The first exception in paragraph (c), Margin Accounts-Exceptions, 
will be for offsetting ``long'' and ``short'' positions. The margin 
treatment which currently is in section (b)(1) will be moved to section 
(c)(1) but will not be changed. Specifically, long positions in a 
security exchangeable or convertible into the security held in a short 
position will require that 10% of the current market value of the 
``long'' position be maintained and ``long'' and ``short'' positions on 
the same security will be margined at 5%. These provisions are 
consistent with NYSE Rule 431.
    The margin treatment for exempted securities and marginable 
corporate debt is being moved from section (b)(2) in the current rule 
to new section (c)(2) but is not being changed in any substantive 
manner. Consistent with NYSE Rule 431, obligations of the United States 
are subject to a margin requirement of between 1% and 6% depending on 
the years to maturity for the obligation. Zero coupon bonds are subject 
to a margin requirement of 3% for bonds with five years or more to 
maturity. All other exempted securities are subject to an initial and 
maintenance margin requirement of 15% of the current market value or 7% 
of the principal amount, whichever is greater. The maintenance margin 
requirement for non-convertible debt securities will remain at 20% of 
the current market value or 7% of the principal amount, whichever 
amount is greater with the exception for mortgage related securities 
which have a 5% maintenance margin requirement.
    The remainder of current paragraphs (b)(2) through (b)(6) is now 
renumbered as paragraphs (c)(2)(B) through (c)(5). All of the 
provisions applicable to Special Provisions, Cash Transactions with 
Customers, Joint Accounts in which the Carrying Member Organization or 
a Partner Thereof or Shareholder Therein has an Interest, International 
Arbitrage Accounts and Broker Dealer Accounts will remain in the rule 
as is except that Subpart (b)(5) is being removed from this section 
because the provisions for specialist and market maker accounts will 
now be covered under section (g). Subparagraph (b) which deals with 
joint accounts is being moved to section (g)(3) and since the Exchange 
no longer has odd-lot dealers, subparagraph (a) is being completely 
deleted.
    New proposed section (d) of Rule 722 is entitled Customer Margin 
Accounts--Derivative Securities, and will contain all of the provisions 
applicable to options and warrants in customer margin accounts. The 
first paragraph states that active securities dealt in on a recognized 
exchange will be valued at current market prices but that other 
securities will be valued conservatively and that substantial 
additional margin will be required where the securities are unusually 
volatile or illiquid. This provision is being moved, unchanged, from 
section (c)(1).
    The next provision sets forth the continuing rule that long 
positions in

[[Page 32138]]

listed options and warrants will not have any loan value for purposes 
of computing margin in customer accounts. It is being moved from 
current paragraph (c)(2) and is renamed, Long Positions--Listed Options 
and Currency, Currency Index or Stock Index Warrants.
    Paragraph (d)(3) restates the existing provisions of current 
paragraph (c)(2)(B)(i) regarding short listed options and warrants. The 
paragraph and accompanying chart sets forth the margin requirements for 
equity options, index options, foreign currency options, currency 
warrants, currency index warrants and stock index warrants listed or 
traded on a national securities exchange. It is not applicable to OTC 
options which are provided for in section (f) of the rule (current 
subsection (ii) to paragraph (c)(2)(B) which dealt with OTC options is 
also being deleted at this time). The one addition to the existing rule 
is the exception for short put options that would cap the margin 
requirement at no less than the option market value plus the minimum 
percentage applicable to that type of option in column III of the 
option's aggregate exercise price amount. The purpose of this cap is to 
assure that the margin requirement does not continue to increase as the 
risk of the put position decreases as it becomes farther out-of-the-
money.
    Existing paragraph (c)(2)(C) is being renumbered as (d)(4) and 
certain omitted words caused by typographical errors are being 
corrected.
    The margin treatment for various related securities positions 
involving listed options and warrants carried in a customer margin 
account has been revised and rearranged from what is in the current 
rule. Current paragraph (c)(2)(D) is renumbered as (d)(5)(A)(i) and 
entitled Straddles/Combinations. The provision has not been changed and 
thus continues to state that where a call option contract (on a stock, 
index or foreign currency) is carried in a short position for the same 
customer for which a short put option is held, the margin on the put or 
call, whichever amount is greater, plus the current market value of the 
other option is required to be maintained. The first two paragraphs of 
current subpart (c)(2)(F)(i) applicable to warrant straddles has been 
moved into this section and numbered as (d)(5)(A) (ii) and (iii). 
Former subparagraph (E) is renumbered as (d)(5)(B) and entitled, Short 
option offset by long option where long option expires with or after 
short option. The substance of the section has not been changed but has 
been redrafted for the sake of clarity and brevity. The margin 
treatment for spread positions on stock index, currency and currency 
index warrants in the present rule (in section (c)(2)(F)(i)) is 
continued in section (d)(5)(C). The margin treatment for covered write 
convertibles which was formerly in subparagraph (F)(i) will now be in 
(d)(5)(D) but the language in that section applicable to short puts 
will be deleted because it is covered under a new subsection (E) which 
is being added for covered calls and covered puts. Finally, a new 
provision for short equity call options offset by a warrant to purchase 
the underlying security has been added in new subsection (d)(5)(F). The 
provision, which is consistent with Regulation T, requires no margin 
for this position if the warrant to purchase the underlying security 
does not expire on or before the expiration date of the short call, and 
if the amount (if any) by which the exercise price of the warrant 
exceeds the exercise price of the short call is deposited in the 
account.
Customer Cash Accounts
    The Exchange is proposing to add a provision to Rule 722 detailing 
the circumstances under which a customer may carry short equity options 
in a cash account, i.e., an account for which no loan value is 
extended. This provision is consistent with a provision in Regulation T 
and is being added so that the Phlx rule is more complete and thus, 
easier for members to rely on the rule for all aspects of margin 
regulation. The proposed new paragraph (e)(1) of Rule 722 would permit 
either a call option contract or a put option contract held in a short 
position to be carried in a cash account if the option contract was a 
covered position and the account contained one of the specified 
offsets. In the case of a short call option, permitted offsets include: 
(i) the underlying security, in an amount equal or greater than that 
specified by the option contract, provided it is held in the account 
until full cash payment for the underlying security is received; (ii) a 
security immediately convertible without the payment of money into an 
equal or greater quantity of the underlying security specified by the 
option contract, if held in, or purchased on the same day, provided 
that the option premium is held in the account until full cash payment 
for the convertible security is received and the ability to convert 
does not expire before the expiration of the short call option; or 
(iii) an escrow agreement issued by a bank and either held in the 
account at the time the call is written or received in the account 
promptly thereafter. In the case of a short put option, allowable 
offsets include: (i) a cash or cash equivalent as defined in Regulation 
T of not less than the aggregate put exercise amount; or (ii) an escrow 
agreement issued by a bank which is obligated to deliver the required 
cash in the event of assignment of the short put.
    New proposed paragraph (e)(2) of Rule 722 would add a provision 
that permits a customer to hold certain index options in a cash account 
such as short European-style index options offset by long European-
style index options on the same underlying index. In order to qualify 
for the cash account, the long position would have to be held in the 
account, or purchased for the account on the same day. In addition, the 
option premium would have to be held in the account until full cash 
payment for the long option is received; the long option must expire 
with the short option and the account must hold cash or cash 
equivalents of not less than any amount by which the aggregate exercise 
price of a long call (short put) exceeds the aggregate exercise price 
of a short call (long put). This new treatment is justified because the 
Federal Reserve Board decided to defer to the options exchanges the 
authority to determine the specific options-related strategies allowed 
to be effected in the cash account, provided that the risk of the 
strategy is defined and the account contains the securities and/or cash 
required to fully cover the exposure.
    Options positions covered by escrow receipts meeting the 
requirements of Options Clearing Corporation (``OCC'') Rule 610 or 
option guarantee letters have been moved from section (c)(2)(G) to 
paragraph (e)(3) of Rule 722 and entitled, Certain Covered Options 
Transactions. The provisions applicable to put and call option 
contracts on equity options, index options and foreign currency options 
have not been changed except to correct a typographical error.
Over-the-Counter Options
    The Exchange is adopting margin requirements for OTC options which 
are the same as the OTC options margin rules in NYSE Rule 431. Within 
this section (proposed Rule 722(f)) is a chart showing the initial and/
or maintenance margin required for options on various types of 
underlying instruments. The amount of margin required is the percentage 
of the current market value of the underlying component times the 
multiplier, if any (set forth on the chart) plus any ``in-the-money 
amount.'' The amount of the margin required to be maintained may be 
reduced for a short put or call by any ``out-of-the-money amount.'' The 
amount to which the

[[Page 32139]]

margin required may be reduced is set forth in a separate column.
    The Exchange is proposing to add margin treatment for related 
securities positions involving OTC options held in a customer margin 
account. The Exchange is proposing to add special margin treatment 
provisions for covered write convertibles, covered calls and puts, and 
spreads and straddles involving OTC options which are the same as that 
found in NYSE Rule 431.
Specialist and Market Maker Accounts
    Phlx rules as well as the rules of the other option exchanges have 
always distinguished the margin treatment for specialists and market 
makers from those of the customers because of the unique position of 
specialists and market makers in maintaining liquid markets. The rules 
recognize that options specialists and market makers must engage in 
various hedging transactions to manage the risk involved in fulfilling 
their role. Regulation T is deleting its provisions governing permitted 
offset treatment on specialists and market makers and is deferring this 
authority to the self-regulatory organizations (``SROs''). 
Consequently, the proposed rule (Rule 722(f)(2)) sets forth various 
permitted offset positions which may be cleared and carried by a member 
organization on behalf of one or more registered specialists or 
registered options traders (hereinafter collectively referred to as 
``market makers'') upon a margin basis satisfactory to the concerned 
parties.
    A permitted offset position will be defined to mean, in the case of 
an option in which a market maker makes a market, a position in the 
underlying instrument or other related instrument and in the case of 
other securities in which a market maker makes a market, a position in 
options overlying the securities in which the market maker makes a 
market, if the account holds the following positions: (i) a long 
position in the underlying instrument offset by a short position which 
is ``in-the-money''; (ii) a short position in the underlying instrument 
offset by a long option position which is ``in-the-money''; (iii) a 
stock position resulting from the assignment of a market maker short 
option position; (iv) a stock position resulting from the exercise of a 
market maker long position; (v) a net long position in a security 
(other than an option) in which a market maker makes a market; (vi) a 
net short position in a security (other than an option) in which the 
market maker makes a market; or (vii) an offset position as defined in 
SEC Rule 15c3-1. All permitted offset transactions must be effected for 
the purpose of hedging, reducing the risk of, rebalancing, liquidating 
open positions of market-makers, or accommodation of customer orders, 
or other similar market-making purpose.
    For purposes of the rule, ``in- or at-the-money'' means that the 
current market price of the underlying security is not more than two 
standard exercise price intervals below (with respect to a call option) 
or above (with respect to a put option) the exercise price of the 
option. In determining the types of instruments which are entitled to 
be carried in a permitted offset position, reference can be made to the 
definition of ``related instrument'' which is set forth in the rule. 
``Related instrument'' within an option class or product group is any 
related derivative product that meets the offset level requirements for 
product groups under Rule 15c3-1 (the net capital rule) of the Act, or 
any applicable SEC staff interpretations or no-action positions 
(hereinafter referred to collectively as ``Exchange Act Rule 15c3-1''). 
The term ``product group'' means two or more options classes, related 
instruments, and qualified stock baskets for which it has been 
determined that a percentage of offsetting profits may be applied to 
losses in the determination of net capital as set forth in Exchange Act 
Rule 15c3-1.
    Commentary .14 will now address the manner in which the carrying 
firm may comply with its responsibility to extend credit properly to 
market maker permitted offset transactions effected on an exchange 
where the market maker is not registered. If a market maker fails to 
specify to which account such an order should be placed and the 
resulting transaction clears in a market maker account, and not a 
customer account, it will be presumed that the market maker elected 
market maker margin treatment for the position effected on an exchange 
of which he is not a member. Clearing firms are, however, responsible 
for implementing adequate procedures to ensure that such orders are 
recorded accurately and cleared into the appropriate accounts.
    The Exchange is also proposing to add a provision regarding trading 
in an account in a deficit (see, section (g)(4)(C)(ii)). The addition 
generally states that nothing shall prohibit the carrying firm from 
effecting hedging transactions in a deficit account with the prior 
written approval of the carrying firm's SEC designated examining 
authority.
    Finally, proposed paragraphs (h), Foreign Currency Options-Letters 
of Credit and (i) of Rule 722 entitled Other Provisions, will 
incorporate the remainder of existing Rule 722 which includes 
provisions for When Issued and When Distributed Securities, Guaranteed 
Accounts, Consolidation of Accounts, Time within which Margin or Mark-
to-Market must be Obtained, Practice of Meeting Regulation T Margin 
Calls by Liquidation Prohibited, Margin Required in Excess of Letters 
of Credit,  and CIPs.
    The proposed rule change is consistent with Section 6 of the Act in 
general, and in particular, with Section 6(b)(5), in that it is 
designed to promote just and equitable principles of trade, prevent 
fraudulent and manipulative acts and practices, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, as 
well as to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

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

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 date of 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 Phlx consents, the Commission will:
    (A) By order approve such proposed rule change, or,
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The Exchange has requested that the Commission find good cause, 
pursuant to Section 19(b)(2) of the Act, for approving the proposed 
rule change on an accelerated basis prior to the thirtieth day after 
publication in the Federal Register.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the proposed rule

[[Page 32140]]

change and Amendment Nos. 1, 2 and 3. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 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 in the Commission's Public Reference Room. Copies of all such 
filing will also be available for inspection and copying at the 
principal office of the Phlx. All submissions should refer to File No. 
SR-Phlx-97-14 and should be submitted by July 3, 1997.

V. Commission's Findings and Order Granting Partial Accelerated 
Approval of Proposed Rule Change

    The Commission finds the following portions of the proposed rule 
change to be 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)(5) 
of the Act: \6\ moving the Definition Section of Rule 722 to the front 
of the rule, proposing to revise the definition of ``current market 
value'' and add the definition of ``escrow agreement'' (the proposed 
definition of ``qualified stock basket'' is not being approved at this 
time); proposed paragraphs (b) and (c) of Rule 722 relating to Customer 
Margin Accounts (but not proposed paragraph (d), which is not being 
approved at this time); that portion of the proposed rule concerning 
Customer Cash Accounts; that portion of the proposed rule concerning 
OTC Options; that portion of the proposed rule concerning Specialists 
and Market-Maker Accounts, incorporating certain permitted offset 
transactions from Regulation T and Exchange Act Rule 15c3-1 (proposed 
Rule 722 (g)); and proposed paragraphs (h) and (i) of Rule 722, 
relating to Foreign Currency Options--Letters of Credit and Other 
Provisions. Section 6(b)(5) requires, among other things, that the 
Exchange have rules that are designed to promote just and equitable 
principles of trade, to remove impediments to, and perfect the 
mechanism of a free and open market and, in general, to protect 
investors and the public interest.\7\
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    \6\ 15 U.S.C. 78f(b)(5).
    \7\ In approving these rules, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. Sec. 78c(f).
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    The Exchange proposes to move the definition section of Rule 722 
from the back of the rule to the front, revise one definition and add 
new definitions of the terms ``current market value'' and ``escrow 
agreement.''
    The revised definition of the term ``current market value'' will 
now also incorporate a definition relevant to options and spot market 
prices which is currently in section (c)(2)(A) (i) and (ii) of Rule 
722. Accordingly, the proposed definition does not raise new or unique 
issues.
    The term ``escrow agreement'' being adopted by the Exchange is 
nearly identical to that of Regulation T except that it represents a 
more restrictive approach. The Commission concludes that it is 
reasonable for the Exchange to limit the allowed issuers of escrow 
receipts to entities such as banks.
    Paragraph (b) of Rule 722 (Customer Margin Accounts--General Rule) 
will not set forth the general rules for margin requirements on long 
and short positions in customer margin accounts. Paragraph (c) of Rule 
722 (Customer Margin Accounts--Exceptions) will set forth the 
exceptions for specific types of securities and positions held in 
margin accounts. Neither of these paragraphs has been substantively 
revised, and, accordingly, they raise no new regulatory issues. The 
Commission concludes that it is reasonable for the Exchange to move 
these paragraphs to their new location in Rule 722.
    The Exchange is proposing to add a provision to Rule 722 detailing 
the circumstances under which a customer may carry short equity options 
in a cash account, i.e., an account for which no loan value is extended 
(Rule 722(e)(1)). This provision is consistent with a provision in 
Regulation T and accordingly does not raise new issues. The Exchange is 
also proposing to add a new paragraph (e)(2) permitting a customer to 
hold debit put spreads involving European-style broad-based stock index 
options to be carried in a cash account. This provision is 
substantially similar to an existing provision in the rules of the 
Chicago Board Options Exchange (``CBOE'').\8\ Accordingly, the 
Commission finds this provision to be a reasonable one for the Phlx to 
adopt at this time, while noting that although in its Statement of the 
Terms of Substance of the Proposed Rule Change the Phlx appears to be 
interpreting the provision broadly, the wording of the rule permits 
only the debit put spreads discussed above to be carried in a cash 
account.
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    \8\ See CBOE Rule 24.11A.
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    The Exchange is proposing to move the section of its rule 
addressing Option positions covered by escrow receipts meeting the 
requirements of OCC Rule 610 or option guarantee letters from section 
(c)(2)(G) to paragraph (3) of the cash account section and rename it, 
Certain Covered Options Transactions. The provisions applicable to put 
and call option contracts on equity options, index options and foreign 
currency options have not been changed except to correct a 
typographical error, and, accordingly, do not raise any new regulatory 
issues. The Commission finds that this provision is a reasonable one at 
this time.
    The Exchange is proposing to adopt margin requirements for over-
the-counter options which are the same as the OTC option margin rules 
in NYSE Rule 431, and, accordingly, do not raise new regulatory 
issues.\9\ The Commission also believes that the Exchange's decision to 
model its margin treatment for OTC options and related securities 
positions based on the NYSE positions should help foster coordination 
between markets by achieving parity between the margin requirements of 
the various SROs. The Commission also believes that this approach will 
promote coordination in regulating, clearing, settling, and 
facilitating transactions in securities by providing for uniformity in 
this area of the SROs' margin schemes and reducing confusion among 
customers.
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    \9\ See NYSE Rule 431(f)(2).
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    The Exchange has proposed to adopt specific provisions governing 
permitted offset treatment for market-makers and specialists that were 
deleted from Regulation T as of June 1, 1997. The proposed rule sets 
forth various permitted offset positions which may be cleared and 
carried by a member organization on behalf of one or more market-makers 
upon a margin basis satisfactory to the concerned parties ``good 
faith'' margin). In addition, it requires that the amount of any 
deficiency between the equity maintained by the market-maker and the 
haircuts specified in Exchange Act Rule 15c3-1 shall be considered as a 
deduction from net worth in the net capital computation of the carrying 
broker.
    The six proposed offsets described in proposed Rule 722 (g)(4)(i) 
to (vi) codify the existing permitted offsets that were provided under 
Regulation T until June

[[Page 32141]]

1, 1997. These offsets reflect well-recognized market-making hedging 
transactions involving certain options offset strategies involving the 
related underlying stock. The addition of Rule 722(g)(4)(vii), allowing 
any offset position defined under Exchange Act Rule 15c3-1 constitutes 
a significant expansion of permitted offset positions. The inclusion of 
item (vii) recognizes that options market-makers and specialists must 
engage in various hedging transactions to manage the risk involved in 
fulfilling their role, and, therefore, allows a member organization to 
clear and carry market-maker's offset positions as defined in Exchange 
Act Rule 15c3-1 upon a good faith margin basis. The Exchange has 
clarified its proposal to reflect that market-makers are permitted to 
receive good faith margin for all permitted offset positions only if 
they are effected for market-making purposes such as hedging, reducing 
the risk of rebalancing, liquidating open positions of the market-
maker, accommodating customer orders, or another similar market-making 
purpose. The Exchange is also proposing to add a provision regarding 
trading in an account in a deficit (section (g)(4)(C)(ii)). The 
addition generally states that nothing shall prohibit the carrying firm 
from effecting hedging transactions in a deficit account with the prior 
written approval of the carrying firm's SEC designated examining 
authority.
    The Commission believes that the permitted offset proposal is a 
reasonable effort by the Phlx to accommodate the needs of Phlx market-
makers in undertaking their market-making responsibilities as it 
recognizes the occasional need for market-makers to effect transactions 
in their course of dealing in options classes for which the marker-
maker is not registered. The Commission believes that this approach 
will not adversely affect the depth and liquidity necessary to maintain 
fair and orderly markets. The Commission expects Phlx clearing firms 
and other Phlx members that extend margin to market-makers to implement 
adequate procedures to ensure that offsets elected by market-makers are 
recorded accurately and cleared into appropriate accounts. In addition, 
such members should have a reasonable basis for determining that the 
offset transactions satisfy the market-making purpose requirements set 
forth in Phlx Rule 722(g). The Commission believes that these 
requirements will ensure that transactions effected by market-makers 
and specialists receiving the offset treatment are in fact directly 
related to their market-making function and are not effected for 
speculative purposes on a margin basis which should be available only 
for bona fide market-making activity.
    The Exchange's proposed definition of ``in- or at-the-money,'' for 
purposes of permitted offset transactions, represents a codification of 
a long standing practice among the options markets of permitting the 
financing of options specialists and market-makers underlying stock 
positions on a good faith basis when offset on a share-for-share basis 
by options which are ``in-or at-the-money,'' i.e., where the current 
market price of the underlying security is not more than two standard 
exercise price intervals below (with respect to a call option) or above 
(with respect to a put option) the exercise price of the option. The 
Commission believes it is appropriate for the Phlx to codify this 
longstanding practice. This practice is also being codified today by 
the CBOE.\10\
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    \10\ The Commission notes that the CBOE asserts that it has 
received oral no-action relief from the Federal Reserve Board 
permitting the two standard exercise price interval interpretation. 
See Securities Exchange Act Release No. 38709 (June 2, 1997).
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    Proposed paragraphs (h), Foreign Currency Options-Letters of Credit 
and (i) of Rule 722 entitled Other Provisions, will incorporate the 
remainder of existing Rule 722 which includes provisions for When 
Issued and When Distributed Securities, Guaranteed Accounts, 
Consolidation of Accounts, Time within which Margin or Mark-to Market 
must be Obtained, Practice of Meeting Regulation T Margin Calls by 
Liquidation Prohibited, Margin Required in Excess of Letters of Credit, 
and CIPs. The Exchange is making no changes to either of these proposed 
paragraphs, and, accordingly, their relocation within Rule 722 raises 
no new regulatory issues. The Commission finds this to be a reasonable 
change.
    The Commission finds good cause for approving the portions of the 
proposed rule change discussed above prior to the thirtieth day after 
the date of publication thereof in the Federal Register. The Commission 
believes that accelerated approval of those portions of the proposal is 
appropriate in part because it will enable the Exchange's members to 
continue the use of permitted offset transactions allowed until June 1, 
1997 under Regulation T, and as defined in Exchange Act Rule 15c3-1. 
The Exchange has clarified its proposal to reflect that specialists and 
market-makers are permitted to receive good faith margin for all 
permitted offset positions only if they are effected for market-making 
purposes such as hedging, reducing the risk of rebalancing, liquidating 
open positions of the market-maker or specialist, accommodating 
customer orders, or another similar market-making purpose.
Accelerated Approval of Amendments Nos. 1, 2 and 3
    The Commission finds good cause for partially approving the 
proposed rule change including Amendment No. 1 prior to the thirtieth 
day after the date of publication of notice of filing thereof. The 
Commission also finds good cause for approving Amendment Nos. 2 and 3 
prior to the thirtieth day after the date of publication of notice of 
filing thereof. Amendment No. 1 supersedes the original rule filing in 
its entirety by addressing technical changes by making corrections to 
certain typographical errors appearing in the rule filing. Amendment 
No. 1 also makes a number of substantive changes to the rule filing. 
Amendment No. 2 supersedes Amendment No. 1 with regard to certain 
portions of the rule filing the Commission is approving today by 
accelerated approval order. Amendment No. 2 addresses technical changes 
by making corrections to certain typographical errors appearing in the 
rule filing and in Amendment No. 1. Amendment No. 3 also addresses 
technical changes by making corrections to certain inadvertent 
omissions in the rule filing and in Amendment No. 2. All of the amended 
changes strengthen and clarify the proposal. Based on the above, the 
Commission finds that there exists good cause consistent with Section 
6(b)(5) of the Act, to partially accelerate approval of the amendments 
as discussed above.
    It is therefore ordered pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change and amendments (SR-Phlx-97-14) 
are approved as discussed above, except for the proposed definition of 
``qualified stock basket'' (Rule 722 (a)(7)); Cutomer Margin Accounts--
Derivative Securities (Rule 722(d)); and Commentary .14.

    \11\ 15 U.S.C. Sec. 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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-15330 Filed 6-11-97; 8:45 am]
BILLING CODE 8010-01-M