[Federal Register Volume 64, Number 92 (Thursday, May 13, 1999)]
[Notices]
[Pages 25946-25948]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12063]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41365; International Series Release No. 1195; File No. 
SR-Phlx-99-12]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc. Proposing To Set Temporarily the Add-
On Margin Levels for Non-Customized Cross-Rate Foreign Currency Options

May 4, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 8, 1999, 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 and II below, which Items have been prepared by the Phlx. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to approve the 
proposal on an accelerated basis for a period of six months until 
November 4, 1999.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to codify the margin levels set forth in Phlx 
Rule 722(d) for non-customized cross-rate foreign currency options 
(``Cross-Rate FCOs'') for a three month period or until it develops an 
updated method of calculating those margin levels. Specifically, the 
Exchange proposes to continue to require that the initial and 
maintenance margin requirement for customers' short positions in Cross-
Rate FCOs equal an ``add-on margin'' of four percent of the current 
market value of the underlying FCO contract, plus 100 percent of the 
current market value of the option's premium, adjusted for ``out-

[[Page 25947]]

of-the-money-amounts,'' \3\ However, the overall initial and 
maintenance margin may not be reduced below the ``minimum margin 
requirement.'' \4\
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    \3\ For foreign currency put options, ``out-of-the-money-
amounts'' equal the aggregate exercise price of the option minus the 
product of units per foreign currency contract and the closing spot 
price. See Phlx Rule 722(d).
    For foreign currency call options, ``out-of-the-money-amounts'' 
equal the product of units per foreign currency contract and the 
closing spot price minus the aggregate exercise price of the option. 
See id.
    \4\ The minimum margin on any put or call carried ``short'' in a 
customer's account may be reduced by any ``out-of-the-money-amount'' 
but shall not be less than 100% of the current market value of the 
option plus \3/4\% of the current market value of the underlying FCO 
contract, with the exception that the minimum margin on each such 
put option contract shall not be less than 100% of the current 
market value of the option plus \3/4\% of the option's aggregate 
exercise price amount. See id.
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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 Exchange 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 Exchange 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
    In 1991, the Commission approved the Exchange's proposal to list 
and trade three non-customized cross rate currency options--German 
mark/Japanese yen, British pound/German mark and British pound/Japanese 
yen options.\5\ The Commission's order approved the proposed margin 
system for these products for a one-year period only, because the 
Cross-Rate FCOs were new products and the Commission was concerned that 
the volatility in the underlying currencies could change significantly. 
Accordingly, the Commission stated that the Exchange should further 
analyze the add-on margin adequacy, and, within nine months, submit the 
analysis along with a proposed rule change to retain the margin level 
or establish a new level.
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    \5\ See Securities Exchange Act Release No. 29919 (November 7, 
1991), 56 FR 58109 (November 15, 1991). Although the Exchange 
received approval for the British pound/Japanese yen cross-rate FCO, 
the Exchange has not listed such a contract. Non-customized options 
carry specific contract terms for features such as contract size, 
strike price intervals, expiration date, price quoting and premium 
settlement.
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    As approved by the Commission in 1991, the Exchange's customer 
margin requirements for short positions for each Cross-Rate FCO applied 
a four percent add-on margin. The Exchange represented at the time that 
this add-on margin level was sufficient to cover each cross-rate 
product's historical volatility over seven-day intervals (for the July 
30, 1990 to July 30, 1991 time period) with a confidence level of 
greater than 96 percent.
    Due to an oversight, the Exchange did not file the required 
analysis and the proposed rule change with the Commission within nine 
months of the 1991 order. The Exchange now proposes to codify the four 
percent add-on margin level for three months or until it develops an 
updated method of calculating those margin levels. During this time, 
the Exchange will examine the add-on margin level to determine if it 
continues to cover the same confidence level or whether a different 
add-on margin level will be more appropriate. The Exchange anticipates 
filing a new proposed rule change within three months from the date 
that this order has been approved by the Commission. Applying the same 
reasoning as in 1991, the Exchange believes that the four percent add-
on margin level currently provides an adequate level of customer's add-
on margin coverage for the German mark/Japanese yen and British pound/
German mark cross-rate products.\6\
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    \6\ For the British pound/German mark FCOs, the 4% add-on margin 
level covers the historical price volatility of all seven-day price 
movements at a 100% confidence level for the period January 16, 1998 
to January 15, 1999.
    For the German mark/Japanese yen FCOs, the 4% add-on margin 
level covers the historical price volatility of all seven-day price 
movements at a 94.49% confidence level for the period of January 16, 
1998 to January 15, 1999. To attain a 96% confidence level for 
German mark/Japanese yen FCOs, the Exchange would have to apply a 
4.5% add-on margin level.
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2. Statutory Basis
    The Exchange believes that the four percent level is an adequate 
add-on margin level for each German mark/Japanese yen and British 
pound/German mark FCO on a temporary basis, pending further analysis. 
For this reason, the Exchange believes that the proposed rule change is 
consistent with Section 6 of the Act \7\ in general, and in particular, 
with Section 6(b)(5),\8\ in that it is designed to promote just and 
equitable principles of trade, as well as to protect investors and the 
public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    The Commission has reviewed carefully the Phlx's proposed rule 
change and believes, for the reasons set forth below, the proposal is 
consistent with the requirements of Section 6 of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange. Specifically, the Commission believes that the proposal is 
consistent with Section 6(b)(5) of the Act \9\ because it will 
facilitate transactions in securities, promote just and equitable 
principles of trade, and protect investors and the public interest by 
allowing the Exchange to continue to trade Cross-Rate FCOs on an 
interim basis, while using a margin requirement that the Commission 
believes is justifiable.
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    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission's 1991 order approved the four percent add-on margin 
for Cross-Rate FCOs for a one-year period. The Exchange now proposes to 
use a four percent add-on margin level for each non-customized cross-
rate product for ``a three-month period or until an updated method for 
calculating such margins * * * is developed.'' The Exchange will 
further examine the adequacy of the four percent add-on margin level 
during that period.
    The Exchange represents that for the period of January 16, 1998 to 
January 15, 1999, the four percent add-on margin level covered non-
customized German mark/Japanese yen FCOs at a 94.49 percent confidence 
level, and covered non-customized British pound/German mark FCOs at a 
100 percent confidence level. Based on those confidence levels, the 
lower of which is close to the 96 percent confidence level that was 
contained in the Commission's 1991 approval order, the Commission 
believes it is reasonable to permit the

[[Page 25948]]

Exchange to use a four percent add-on margin level for all Cross-Rate 
FCOs for a six-month period until November 4, 1999.\10\
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    \10\ The Commission believes that the Exchange should consider 
requiring a sufficient add-on margin level for all German mark/
Japanese yen FCOs to achieve at least a 96% confidence level.
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    The Exchange has requested that the Commission approve the proposed 
rule change prior to the thirtieth day after the publication of the 
proposal in the Federal Register, so that the Exchange may immediately 
codify the four percent add-on margin until it can complete further 
analysis. The Commission finds good cause for approving the proposed 
rule change, on a pilot basis, prior to the thirtieth day after the 
date of publication of notice thereof in the Federal Register, so that 
the Exchange may continue to use the four percent add-on margin for 
Cross-Rate FCOs during this six-month period, while it is reviewing the 
adequacy of margin levels for these products on a permanent basis.
    The Commission requires that the Exchange file a proposed rule 
change to permanently codify the margin system for non-customized 
Cross-Rate FCOs by August 4, 1999, which is three months from the date 
of this order. That requirement will provide the Commission with 
sufficient time to review that proposed rule change before this order's 
approval of the four percent add-on margin expires on November 4, 1999.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
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 Section, 450 Fifth Street, NW, 
Washington, DC 20549-0609. Copies of 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-99-12 and should be 
submitted by June 3, 1999.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change is hereby approved on an 
accelerated basis for a period of six months until November 4, 
1999.\12\

    \11\ 15 U.S.C. 78s(b)(2).
    \12\ In approving the proposal, the Commission has considered 
the rule's impact on efficiency, competition and capital formation. 
15 U.S.C. 78c(f).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-12063 Filed 5-12-99; 8:45 am]
BILLING CODE 8010-01-M