[Federal Register Volume 60, Number 221 (Thursday, November 16, 1995)]
[Notices]
[Pages 57613-57615]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28316]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36468; International Series Release No. 882; File No.
SR-PHLX-95-52]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval to Amendment Nos. 1 and 2 to Proposed Rule Change
by the Philadelphia Stock Exchange, Inc., Relating to Customized
Foreign Currency Options With Customized Expiration Dates
November 8, 1995
I. Introduction
On July 27, 1995, the Philadelphia Stock Exchange, Inc. (``PHLX''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to provide for the trading of customized foreign
currency options (``Customized FCOs'') with customized expiration
dates.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
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The proposed rule change appeared in the Federal Register on August
29, 1995.\3\ No comment letters were received on the proposed rule
change. The Exchange subsequently filed Amendment No. 1 to proposal on
September 14, 1995 \4\ and Amendment No. 2 on November 7, 1995.\5\ This
order approves the Exchange's proposal, as amended.
\3\ See Securities Exchange Act Release No. 36131 (August 22,
1995), 60 FR 44927 (August 29, 1995).
\4\ Amendment No. 1 to the proposed rule change: (1) Revises the
language of Exchange Rule 1069(a) to specify that a FCO with a
customized expiration date may only be created with an expiration
date of up to two years from the date of its issuance; and (2)
provides that with respect to FCOs with customized expiration dates,
Exchange member organizations will be required to utilize a pro-rata
method of assignment for its customers. This procedure is set forth
in new subsection (k) to Rule 1069. See letter from Michele R.
Weisbaum, Associate General Counsel, PHLX, to Michael Walinskas,
Branch Chief, Office of Market Supervision (``OMS''), Division of
Market Regulation (``Division''), Commission, dated September 14,
1995 (``Amendment No. 1'').
\5\ Amendment No. 2 to the proposed rule change establishes in
new subsection (iv) to PHLX Rule 1000(b)(21) when a Customized
expiration date FCO may expire. According to the PHLX's amendment, a
Customized expiration date FCO will expire at 10:15 a.m.,
Philadelphia time, on its designated date provided that such date is
not longer than two years from its date of issuance and is an
Exchange business date (excluding regular mid-month and end of month
expiration dates and days deemed invalid by the Exchange, such as
Exchange holidays and Exchange-designated holidays). See letter from
Michele R. Weisbaum, Associate General Counsel, PHLX, to Michael
Walinskas, Branch Chief, OMS, Division, Commission, dated November
7, 1995 (``Amendment No. 2'').
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II. Background and Description
Pursuant to the proposed rule change, the PHLX would be able to
offer its FCO participants the ability to trade Customized FCOs \6\
with non-standardized expiration dates. In effect, the proposal adds an
additional term, ``expiration date,'' that can be tailored on a
Customized FCO transaction. At present, pursuant to Exchange Rule 1012,
FCO users can only trade Customized FCO contracts with expiration dates
corresponding to those for non-Customized FCOs. Thus, Customized FCO
contracts may only be traded with mid-month and end-of-month
expirations at 1, 2, 3, 6, 9, 12, 18, and 24 months. The Exchange's
proposal therefore revises this previously-standard term by allowing
Customized FCO contracts to expire on any business day (excluding
Exchange holidays, e.g., Memorial Day, and Exchange-designated
holidays, e.g., Boxing Day) in any month up to two years from the date
of its issuance. The Exchange represents that institutions and
multinational corporations will thus be able to hedge their exchange
rate exposure more accurately by trading a contract that expires on a
trading day of their choosing.
\6\ Users of FCOs have been able to trade Customized FCOs on the
PHLX since November 1994. See Securities Exchange Act Release No.
34925 (November 1, 1994), 59 FR 55720 (November 8, 1994) (order
approving File No. SR-PHLX-94-18) (``Securities Exchange Act Release
No. 34925''). Through this mechanism, participants in the PHLX's
Customized FCO market have the ability to customize their strike
price and quotation method, and may choose any underlying and base
currency combination from all Exchange-listed currencies.
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Under the PHLX's proposal, any Customized FCO contract with a
customized expiration date (``Customized expiration date FCOs'') will
cease trading at 9:00 a.m., Philadelphia time, on its expiration date,
and will expire at 10:15 a.m., Philadelphia time, on that date.
Customized FCOs with expiration dates established pursuant to PHLX Rule
1012 (i.e., Customized FCOs with expiration dates corresponding to the
expiration dates for non-Customized FCOs), however, will not follow
this procedure. Instead, maintaining current practice,
[[Page 57614]]
these option contracts will cease trading at 2:30 p.m., Philadelphia
time, on their expiration date, and expire at 11:59 p.m., Philadelphia
time, on the same date, even if intentionally or unintentionally
designated as a Customized FCO with a customized expiration date.
Under the PHLX's proposal, new series of Customized expiration date
FCOs with ``same day'' expiration dates may not be opened. In contrast,
new series of Customized FCOs with standardized expiration dates may be
opened on their expiration dates. Previously opened positions, however,
may continue to be reduced or increased on their expiration date until
the end of the trading times noted above, regardless of whether the FCO
contains a customized or standardized expiration date.
In all other respects, transactions in Customized FCOs containing a
customized expiration date shall be treated identically to other
Customized FCOs. Moreover, all existing Exchange rules and regulations,
including those involving surveillance and sales practice, will be
applicable to Customized expiration date FCOs.
In addition, under the PHLX's proposal, Exchange member
organizations will be required to utilize a pro-rata FCO assignments.
Lastly, it is contemplated that the pro-rata process being implemented
by the Exchange and its member organizations will be identical to that
which the Options Clearing Corporation (``OCC'') will utilize for
Customized expiration date FCO assignments.\7\
\7\ The Commission notes that the PHLX has recommended to its
member organizations that they adopt the same methodology as the OCC
in determining pro-rata assignment for Customized expiration date
FCO assignments. Moreover, if an Exchange member organization elects
not to utilize the OCC's pro-rata procedures, member organizations
have been instructed to notify the PHLX. Telephone Conversation
between Michele R. Weisbaum, Associate General Counsel, PHLX, and
Michael Walinskas, Branch Chief, OMS, Division, Commission, on
November 1, 1995. See also Securities Exchange Act Release No. 36453
(November 2, 1995) (order approving OCC pro-rata allocation
procedures for Customized expiration date FCO assignments).
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III. Discussion
The Commission finds 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, with the requirements of Sections 6(b)(5) and 11A.\8\
Specifically, the Commission believes that the proposed rule change is
designed to provide investors with a tailored or customized product
that may be more suitable to their investment needs. Moreover,
consistent with Section 11A, the proposal should encourage fair
competition among brokers and dealers and exchange markets, by allowing
the PHLX to compete with the growing over-the-counter (``OTC'') market
in Customized FCOs. In this regard, the Commission notes, the OTC
derivatives market in Customized FCOs has developed, in part, because
it meets the needs of institutional investors who require increased
flexibility in satisfying particular investment objectives.
Accordingly, the Commission believes that the PHLX's proposal is a
reasonable response to meet the demands of sophisticated portfolio
managers and other institutional investors who are increasingly using
the OTC market in order to satisfy their foreign currency hedging
needs.
\8\ 15 U.S.C. 78f(b)(5) and 78k-1 (1988).
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The Commission also believes that the PHLX's proposal will help to
promote the maintenance of a fair and orderly FCO market, consistent
with Sections 6(b)(5) and 11A, because the proposal extends the
advantages of a listed, exchange market to Customized FCOs with
customized expiration dates. The attributes of the Exchange's FCO
market versus an OTC market include, but are not limited to, a
centralized market center, transparency, and secondary market
liquidity. Similarly, by having the OCC as the issuer and guarantor of
Customized expiration date FCOs, concerns regarding contra-party
creditworthiness and performance upon exercise are eliminated.
Accordingly, the Commission believes that the PHLX's proposal to trade
Customized expiration date FCOs is appropriate.
Furthermore, the PHLX's proposal offers increased flexibility to
institutional investors without increasing the potential for market
manipulation. As all existing Exchange rules and regulations regarding
surveillance and sales practice will apply to Customized expiration
date FCOs, the PHLX will be able to continue to adequately monitor
Customized FCOs including Customized expiration date FCOs.\9\
\9\ The Commission notes that before trading in Customized
expiration date FCOs may commence, the Commission must approve a
supplement to the Options Disclosure Document (``ODD'') regarding
this product. See SR-ODD-95-1.
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Finally, the Commission finds that Customized expiration date FCOs
are standardized options for purposes of Rule 9b-1 under the Act.\10\
The Commission notes that its determination that Customized expiration
date FCOs are standardized options for purposes of Rule 9b-1 is
consistent with its initial decision regarding Customized FCOs.\11\
\10\ 17 CFR 240.9b-1 (1994).
\11\ See Securities Exchange Act Release No. 34925, supra note
6. The Commission also notes that it has approved the listing by
certain of the options exchanges to trade flexible exchange options
on broad/based indexes with customized expiration dates (``FLEX
Options'') See, e.g., Securities Exchange Act Release No. 31920
(February 24, 1993), 58 FR 12280 (March 3, 1993) (order approving
listing and trading of FLEX Options on S&P 500 and 100 stock
indexes).
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The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register.
Specifically, Amendment No. 1 to the PHLX's proposal merely clarifies
the proposal by adding language to Rule 1069 that specifies the
necessary procedures for exercise and assignment, and, particularly,
the implementation of pro-rata assignment for the product. The proposed
use of pro-rata assignment was adequately described in the PHLX's
proposal and was subject to a full notice and comment period.\12\ As a
result, the Commission does not believe that the amendment raises any
new or unique regulatory issues. Accelerated approval of the amendment
will therefore permit the Exchange to begin offering these products
without further delay to those investors who desire an exchange-traded
product that includes a customized expiration date. Accordingly, the
Commission believes that it is consistent with Section 6(b)(5) of the
Act to approve Amendment No. 1 to the proposal on an accelerated basis.
\12\ See supra note 3.
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The Commission also finds good cause for approving Amendment No. 2
to the proposed rule change prior to the thirtieth day after the date
of publication of notice of filing thereof in the Federal Register.
Specifically, Amendment No. 2 to the PHLX's proposal merely serves to
codify in PHLX rules the Exchange's stated proposal, that was subject
to a full notice and comment period,\13\ regarding the specific time
and date that Customized FCOs expire. As a result, the Commission does
not believe that the amendment raises any new or unique regulatory
issues. Accelerated approval of the amendment will therefore permit the
Exchange to begin offering these products without further delay to
those investors who desire an exchange-traded product that includes a
customized expiration date. Accordingly, the Commission believes that
it is consistent with Section 6(b)(5)
[[Page 57615]]
of the Act to approve Amendment No. 2 to the proposal on an accelerated
basis.
\13\ See supra note 3.
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Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 1 and 2 to the rule proposal.
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 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 at the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of this filing also will be available for inspection and copying
at the principal office of the PHLX. All submissions should refer to
File No. SR-PHLX-95-52 and should be submitted by December 7 1995.
IV Conclusion
For the foregoing reasons, the Commission finds that the PHLX's
proposal to trade Customized FCOs with customized expiration dates is
consistent with the requirements of the Act and the rules and
regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-PHLX-95-52), as amended, is
approved.
\14\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
\15\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-28316 Filed 11-16-95; 8:45 am]
BILLING CODE 8010-01-M