[Federal Register Volume 62, Number 247 (Wednesday, December 24, 1997)]
[Notices]
[Pages 67425-67426]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33587]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39460; International Series Release No. 1109; File No. 
SR-Phlx-97-22]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change, as Amended, and Notice of Filing and Order Granting Accelerated 
Approval of Amendment Nos. 2 and 3 to the Proposed Rule Change by the 
Philadelphia Stock Exchange, Inc., Relating to the Trading of 
Customized Foreign Currency Options on the Mexican Peso

December 17, 1997.

I. Introduction

    On May 2, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') a 
proposed rule change to amend its rules to accommodate the trading of 
customized foreign currency options (``FCOs'') on the Mexican peso.\3\ 
On May 21, 1997, the Phlx submitted to the Commission Amendment No. 1 
to the proposal.\4\ Notice of the proposal was published for comment 
and appeared in the Federal Register on May 30, 1997.\5\ On July 15, 
1997, the Phlx submitted to the Commission Amendment No. 2 to the 
proposal.\6\ On December 12, 1997, the Phlx submitted to the Commission 
Amendment No. 3 to the proposal.\7\ No comment letters were received on 
the proposed rule change. This order approves the Exchange's proposal, 
as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Customized FCOs provide investors with the ability, within 
specified limits, to trade FCOs with customized strike prices, 
cross-rate FCOs on any two approved currencies, and FCOs where the 
U.S. dollar is the underlying currency. In addition, FCO 
participants may express quotes for customized FCOs as a percentage 
of the underlying currency, in addition to quoting in terms of the 
base currency per unit of the underlying currency. See Securities 
Exchange Act Release No. 34925 (November 1, 1994), 59 FR 55720 
(November 8, 1995) (``Release No. 34-34925'').
    \4\ In Amendment No. 1, the Phlx clarified the contract 
specifications for the U.S. dollar/Mexican Peso contract, the 
inverse contract (Mexican Peso/U.S. dollar), and the Canadian dollar 
cross-rates, as described more fully herein. See Letter from Nandita 
Yagnik, Phlx, to Margaret Blake, Office of Market Supervision 
(``OMS''), Division of Market Regulation (``Market Regulation''), 
Commission, dated May 21, 1997.
    \5\ See Securities Exchange Act Release No. 38667 (May 22, 
1997), 62 FR 29385.
    \6\ In Amendment No. 2, the Phlx proposes to set the position 
limit for the Mexican Peso at 100,000 contracts. See Letter from 
Nandita Yagnik, Phlx, to Margaret Blake, OMS, Market Regulation, 
Commission, dated July 11, 1997 (``Amendment No. 2'').
    \7\ In Amendment No. 3, the Phlx proposes to increase the 
proposed customer margin for FCOs on the Mexican Peso from 8% to 
17%. Further, the Phlx states that the margin level of 17% will 
remain in effect until the Phlx receives Commission approval for the 
new customer margining system which will be filed with the 
Commission after it is approved by the Phlx Board of Directors. If 
approved by the Commission, margin for options on the Mexican peso 
would then be set at levels established by the new margining system. 
See Letter from Nandita Yagnik, Phlx, to John Ayanian, OMS, Market 
Regulation, Commission, dated December 10, 1997.
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II. Description of the Proposal

    The Phlx proposes to amend its rules to accommodate the trading of 
customized foreign currency options on the Mexican peso. Currently, the 
Phlx offers listed FCOs on the British pound, French franc, Swiss 
franc, Japanese yen, Canadian dollar, Australian dollar, German mark 
and the European Currency Unit. Since November 1994, the Exchange has 
offered the ability to trade customized contracts on all of the above 
currencies in relation to the U.S. dollar or in relation to each 
other.\8\ In 1995, the Exchange listed for trading customized options 
on the Italian Lira and the Spanish peseta.\9\ The Exchange is 
proposing to list and trade customized options on the Mexican peso 
pursuant to Phlx Rule 1069. The Exchange is requesting approval to 
trade the peso only against the U.S. dollar and the Canadian dollar. In 
making this proposal, the Exchange states that it wants to capitalize 
upon Mexico's position near the forefront of the world's emerging 
markets, as well as the increased activity in Mexican equities and 
derivative securities based on Mexican markets.
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    \8\ See Securities Exchange Act Release No. 34925 (November 1, 
1994), 59 FR 55720 (November 8, 1994).
    \9\ See Securities Exchange Act Release No. 36255 (September 20, 
1995), 60 FR 50229 (September 28, 1995).
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    Because the peso would only trade as a customized contract, there 
would be no continuously quoted series of peso contracts. Phlx Rule 
1069(a)(1) provides that customized options contracts may be traded on 
any approved underlying foreign currency pursuant to Phlx Rule 1009. 
Therefore, the Exchange proposes to amend Phlx Rule 1009 to add the 
Mexican peso to the list of approved underlying foreign currencies. 
Pursuant to Phlx Rule 1069(a)(1)(B), users would be able to trade 
customized contracts between the Mexican peso (``MXP'') and the U.S. 
dollar (``USD'') in U.S. terms (USD/MXP), or as an inverse contract 
(MXP/USD) (i.e., the trading currency is Mexican pesos and the 
underlying currency is U.S. dollars). The contract size for the 
customized contract in U.S. terms would be 250,000 MXP.\10\ The premium 
will be .00001 USD per unit or 2.50 USD for an option contract having a 
unit of trading of 250,000 MXP. The contract size for the inverse would 
be 50,000 USD. The premium will be .0001 MXP per unit or 5.00 MXP for 
an option contract having a unit of trading of 50,000 USD.
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    \10\ Based on an exchange rate of 8.1070 Mexican peso/U.S. 
dollars on December 9, 1997, as published in The Wall Street 
Journal, this would correspond to an opening position for a Mexican 
peso FCO transaction (i.e., 100 contracts) valued at approximately 
$3,083,000.
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    No cross rate FCO on the peso will be offered at this time except 
for the Mexican peso against the Canadian dollar (``CAD''). The 
contract size for the cross-rate (CAD/MXP) would be 250,000 MXP. The 
premium will be .00001 CAD per unit or 2.50 CAD for an option contract 
having a unit of trading of 250,000 MXP. The contract size for the 
cross-rate (MXP/CAD) would be 50,000 CAD. The premium will be .0001 MXP 
per unit or 5.00 MXP for an option contract having a unit of trading of 
50,000 CAD.
    Consistent with Exchange Rule 1069(j), no quote spread parameters 
will apply to these contracts. The Exchange also proposes to amend 
Rules 1033 and 1034 to explain how premiums will be quoted and what the 
minimum fractional change will be for USD/MXP.
    The Exchange proposes to apply customer margin ``add-on'' 
percentage of 17% for customized MXP contracts.\11\ In no event will 
the Exchange reduce the margin levels for customized FCOs involving the 
peso below the 17% level without the prior approval of the Commission 
pursuant to Section 19(b) of the Act. Whenever the customer margin 
levels for customized FCOs on the peso are changed, the Exchange will 
promptly notify the Exchange's membership and the public. The Exchange 
represents that this margin level covers at least 99% of all five day 
price movements over the last three years.\12\
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    \11\ For these purposes, ``add-on'' is the percentage of the 
current market value of the currency a Customized FCO that the 
holder of a ``short'' position must pay in addition to the current 
market value of each Customized FCO. The 17% add-on applies to both 
initial and maintenance margin positions in Mexican peso options.
    \12\ See Amendment No. 3, supra note 7.
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    As with customized FCOs currently being listed by the Phlx. The 
Options

[[Page 67426]]

Clearing Corporation (``OCC'') will clear and settle all trades in 
customized FCOs involving the peso. Because quotes in these options 
will not be continuously updated or otherwise priced by the Phlx, OCC 
will generate a theoretical price based on the prices and quotes of the 
customized FCOs and the closing value of the relevant underlying 
currency. OCC will use this price to market the customized FCO 
contracts involving the peso daily and to calculate margin 
requirements.\13\
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    \13\ Telephone conversation between Nandita Yagnik, Phlx, and 
John Ayanian, OMS, Market Regulation, Commission, on December 17, 
1997.
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III. Commission Finding and Conclusions

    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, the requirements of Section 6(b)(5) of the Act.\14\ First, 
the Commission believes that the trading of listed customized FCOs on 
the peso should provide investors with a hedging and risk transfer 
vehicle that will reflect the overall movement of the peso in relation 
to the U.S. dollar and the Canadian dollar. In this regard, customized 
FCOs on the peso should provide investors with an efficient and 
effective means of managing risk associated with the peso.\15\
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    \14\ 15 U.S.C. 78f(b)(5).
    \15\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    Second, customized FCOs on the peso will trade within the 
Exchange's existing framework for customized FCOs, unless otherwise 
amended herein, which the Commission has previously found to adequately 
address the Commission's regulatory concerns.\16\ Specifically, this 
framework includes, among other things, rules pertaining to: 
obligations of specialists and registered options traders (Rule 1014); 
position limits (Rule 1001);\17\ exercise limits (Rule 1002); bids and 
offers (Rule 1033); minimum fractional changes (Rule 1034); and trading 
rotations, halts, and suspensions (Rule 1047).\18\
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    \16\ See Release No. 34-34925, supra note 3.
    \17\ Phlx Rule 1001 generally provides for position limits of 
200,000 contracts on the same side of the market relating to the 
same foreign currency, unless otherwise noted in the text of the 
rule. In Amendment No. 2, the Phlx proposed lower position limits of 
100,000 contracts for options on the Mexican peso. See Phlx Rule 
1001, commentary .05(b).
    \18\ Id.
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    Third, the Commission believes it is reasonable for the Phlx to set 
a position limit of 100,000 contracts for options on the Mexican peso 
because the total U.S. dollar value position limit is similar to those 
approved for the Spanish peseta and the Italian lira. For example, the 
total U.S. dollar value position limit for FCOs on the Italian lira 
when approved was $3,096,000,000.\19\ Currently, the total U.S. dollar 
value position limit for FCOs on the Mexican peso is approximately 
$3,083,000,000.\20\ Additionally, the Commission notes that the 
proposed position limit of 100,000 contracts for customized FCOs 
(including customized cross-rates with the Canadian dollar) involving 
the Mexican peso imposes more restrictive limits than Phlx Rule 1001 
would otherwise provide.\21\
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    \19\ Based on an exchange rate of 1,1615 Italian lira/U.S. 
dollar on August 23, 1995, as published in The Wall Street Journal. 
Based on an exchange rate of 1,753 Italian lira/U.S. dollar on 
December 9, 1997, as published in The Wall Street Journal, the total 
U.S. dollar value position limit was approximately $2,852,000,000.
    \20\ Based on an exchange rate of 8.1070 Mexican peso/U.S. 
dollar on December 9, 1997, as published in The Wall Street Journal.
    \21\ See supra note 17.
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    Fourth, the Exchange has proposed adequate customer margin 
requirements for customized FCOs on the Mexican peso. The proposed add-
on margin (i.e., 17%) provides sufficient coverage to account for 
historical and potential volatility in the peso in relation to the U.S. 
dollar. Moreover, customized cross-rates involving the peso and the 
Canadian dollar will be margined at the 17% margin add-on level. As a 
result, the Commission believes that the proposed customer margin 
levels will result in adequate coverage of contract obligations and are 
designed to reduce risks arising from inadequate margin levels for 
customized FCOs involving the Mexican peso.
    The Commission finds good cause for approving Amendment Nos. 2 and 
3 to the proposed rule change prior to the thirtieth day after the date 
of publication of notice of filing thereof in the Federal Register. As 
noted above, in proposed Amendment No. 2, the Phlx sets a position 
limit that, in total U.S. dollar value terms, is similar to position 
limits approved for options on the Spanish peseta and the Italian lira. 
In addition, the Phlx's proposal to set similar position limits for 
options on the Spanish peseta and the Italian lira was published in the 
Federal Register for the full 21-day comment period without any 
comments being received by the Commission.
    Second, the proposal in Amendment No. 3 to increase the margin 
level for customized FCOs (including customized cross-rates with the 
Canadian dollar) involving the Mexican peso serves an investor 
protection purpose by reducing the risks that can arise from inadequate 
margin levels. Additionally, the Commission notes that the changes set 
forth in Amendment No. 3 impose more restrictive standards than those 
contained in the original proposal which was published in the Federal 
Register for the full 21-day comment period without any comments being 
received by the Commission.
    Accordingly, the Commission believes that Amendment Nos. 2 and 3 
are consistent with Section 6(b)(5) of the Act and that good cause 
exists to approve these amendments on an accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 2 and 3. 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 such filing will also be 
available for inspection and copying at the principal office of the 
Phlx. All submissions should refer to SR-Phlx-97-22 and should be 
submitted by January 14, 1998.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (File No. SR-Phlx-97-22) is 
approved, as amended.

    \22\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-33587 Filed 12-23-97; 8:45 am]
BILLING CODE 8010-01-M