[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-
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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