[Federal Register Volume 66, Number 8 (Thursday, January 11, 2001)]
[Notices]
[Pages 2471-2472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-793]



[[Page 2471]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43790; International Series Release No. 1243; File No. 
SR-Phlx-00-66]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to the 
Narrowing of the Exercise Strike Price Interval for Foreign Currency 
Options on the Euro

January 2, 2001.

I. Introduction

    On July 12, 2000, pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ the 
Philadelphia Stock Exchange, Inc. (``Phlx'') filed with the Securities 
and Exchange Commission (``Commission'') a proposed rule change to 
reduce, from two cents to one cent, the strike price interval for 
foreign currency options on the Euro denominated in U.S. dollars 
(``Euro FCOs''). The proposed rule change and Amendment No. 1 thereto 
\3\ were published for comment and appeared in the Federal Register on 
November 21, 2000.\4\ The Commission received no comments on the 
proposal. This order approves the Phlx's proposed rule change, as 
amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 superseded the original filing in its 
entirety. See letter from Richard S. Rudolph, Counsel, Phlx, to 
Nancy J. Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated October 19, 2000.
    \4\ See Securities Exchange Act Release No. 43539 (November 9, 
2000), 65 FR 69982.
---------------------------------------------------------------------------

II. Description of the Proposal

    The Phlx proposes to adopt a narrower strike price interval with 
respect to American-style and European-style, standardized Euro FCOs 
with one, two, three, six, nine, and twelve months until expiration. 
Currently, Euro FCOs are listed at two-cent intervals. The Phlx 
proposes to reduce the exercise strike price interval of all Euro FCO 
series to one cent because the spot price of the Euro has declined 
against the U.S. dollar. For example, the Euro was worth $1.18738 in 
1999, but was worth only $.8544 by October 2000.\5\
---------------------------------------------------------------------------

    \5\ The Phlx previously traded options on the European Currency 
Unit (``ECU''), but delisted the product in July 1997 due to lack of 
open interest and trading activity. The Phlx reintroduced the ECU 
options in May 1998 with a two-cent strike price interval. See 
Securities Exchange Act Release No. 39940 (April 30, 1998), 63 FR 
25258 (May 7, 1998) (SR-Phlx-98-17). This provided investors with an 
investment vehicle during the conversion from the ECU to the Euro, 
which occurred in January 1999. The Phlx began trading the Euro FCO 
in January 1999. See Securities Exchange Act Release No. 40953 
(January 15, 1999), 64 FR 3734 (January 25, 1999) (SR-Phlx-99-01).
---------------------------------------------------------------------------

    The Phlx's exercise strike price interval policies are administered 
pursuant to Phlx Rule 1012 (``Series of Options Open for Trading''). In 
accordance with Phlx Rule 1012, the Phlx lists regular and month-end 
Euro FCO contracts for each of the six expiration months. The Phlx 
currently lists Euro FCO contracts at two-cent strike price intervals; 
for example, it recently listed Euro FCOs at strike prices of $.80, 
$.82, $.84, $.86, $.88, and $.90 for each expiration month. The Phlx's 
adoption of the proposed one-cent exercise strike price interval would 
mean, in this example, that the additional strike prices of $.81, $.83, 
$.85, $.87, and $.89 would become available for trading in all six 
expiration months.
    The Phlx represents that the purpose of the proposed rule change is 
to respond to customer demand for a narrower strike price interval as a 
result of a decline in the underlying price of the Euro as expressed in 
U.S. dollars. The Phlx believes that the proposed rule change makes 
economic sense because a narrower strike price interval in Euro FCOs 
would enable market participants to tailor their investment strategies 
more closely to the precise movement of the Euro. The Phlx notes that 
the Commission previously has permitted narrower exercise strike price 
intervals with respect to foreign currency options based on the market 
value of the respective underlying security.\6\ The Phlx represents 
that it will distribute a memorandum to all of its members and FCO 
participants notifying them of the change in the exercise strike sprice 
interval for Euro FCO contracts, effective as of the date of Commission 
approval.\7\
    The adoption of a narrower price interval for Euro FCOs would mean 
that additional Euro FCO series would become available for trading at 
the Phlx. The Phlx notes that its Selective Quoting Facility \8\ would 
apply to all Euro FCO series traded. The Selective Quoting Facility 
provides that when the Phlx designates a particular foreign currency 
option series as a ``non-update strike.'' its quotes are not made 
avaialble for continuous dissemination to the public throughout the 
trading day. The Phlx believes that, by reducing the number of strike 
prices that are continuously updated and disseminated, the Selective 
Quoting Facility enables more timely and accurate quote displays of 
foreign currency options. Accordingly, the Phlx believes that the 
predicted increase in the number of Euro FCO series will not adversely 
affect its quote traffic and computer processing capacity.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 25685 (May 10, 
1988), 53 FR 17524 (May 17, 1988) (Order approving narrower strike 
price intervals with respect to foreign currency options on the 
British pound denominated in U.S. dollars) (SR-Phlx-88-13); 
Securities Exchange Act Release No. 35631 (April 20, 1995), 60 FR 
20544 (April 26, 1995) (Order approving narrower strike price 
interval with respect to foreign currency options on the French 
franc denominated in U.S. dollars) (SR-Phlx-95-06).
    \7\ Telephone conversation between Richard Rudolph, Counsel, 
Phlx, and Hong-Anh Tran, Special Counsel, Division of Market 
Regulation, Commission, on October 25, 2000.
    \8\ See Phlx Rule 1012, Commentary .04.
---------------------------------------------------------------------------

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules thereunder applicable to 
a national securities exchange, particularly section 6(b)(5) of the 
Act.\9\ The Commission notes that the proposal is consistent with prior 
Commission orders approving narrow strike price intervals based upon 
the market values of the underlying securities.\10\ Moreover, the 
Commission believes that the Phlx's proposal to adopt a one-cent strike 
price interval with respect to Euro FCOs will allow market participants 
to tailor their Euro FCO positions more finely and manage their 
currency risk with respect to the Euro more effectively. Accordingly, 
the Commission believes that the narrowing of the strike price interval 
for Euro FCOs will promote just and equitable principles of trade.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(5).
    \10\ See footnote 6, supra.
---------------------------------------------------------------------------

    The Commission notes, however, that the narrowing of the strike 
price interval may disperse trading interest to a degree that 
excessively dilutes liquidity in open Euro FCO series. Therefore, in 
evaluating the appropriate strike price interval for the Euro FCOs, the 
Commission must weigh the presumed benefit of a wider array of 
investment opportunities against the potential hazard of a 
proliferation of illiquid options series. The Commission believes that 
the Phlx proposal strikes a reasonable balance between those competing 
concerns. Although the proposal will make additional Euro FCO series 
available for trading, the Commission expects the Phlx to continue its 
current policy of delisting options series with no open interest,\11\

[[Page 2472]]

thereby eliminating any illiquid Euro FCO series that may result from 
the implementation of this proposal.
---------------------------------------------------------------------------

    \11\ See Securities Exchange Act Release No. 35631 (April 20, 
1995), 60 FR 20544 (April 26, 1995) (Order approving narrower strike 
price intervals with respect to foreign currency options on the 
British pound denominated in U.S. dollars) (SR-Phlx-95-06).
---------------------------------------------------------------------------

    Furthermore, because the Phlx will apply its Selective Quoting 
Facility to determine whether to disseminate the quotes of the 
additional Euro FCO series throughout the trading day, the Commission 
believes that the Phlx's computer system can manage the additional 
quote traffic that the new Eruo FCO options series are expected to 
generate. Nevertheless, the Commission requests that the Phlx monitor 
the volume of additional options series listed as a result of this rule 
change and ensure that the additional series do not adversely affect 
the computer system's processing capacity.

IV. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (File No. SR-Phlx-00-66) is 
approved.\13\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2).
    \13\ In approving the proposal, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
15 U.S.C 78c(f).

    For the Commission, by the Division of the Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-793 Filed 1-10-01; 8:45 am]
BILLING CODE 8010-01-M