Federal Register / Vol. 62, No. 247 / Wednesday, December 24, 1997 / Notices 67425

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Customized 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.

5See 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.

8See Securities Exchange Act Release No. 34925

(November 1, 1994), 59 FR 55720 (November 8,

1994).

9See Securities Exchange Act Release No. 36255

(September 20, 1995), 60 FR 50229 (September 28,

1995).

10Based 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.

11For 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.

12See Amendment No. 3, supra note 7.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–33526 Filed 12–23–97; 8:45 am]

BILLING CODE 8010–01–M

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.

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.

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.

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

As with customized FCOs currently

being listed by the Phlx. The Options
67426 Federal Register / Vol. 62, No. 247 / Wednesday, December 24, 1997 / Notices

13Telephone conversation between Nandita

Yagnik, Phlx, and John Ayanian, OMS, Market

Regulation, Commission, on December 17, 1997.

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).

16See Release No. 34–34925, supra note 3.

17Phlx 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.

19Based 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.

20Based on an exchange rate of 8.1070 Mexican

peso/U.S. dollar on December 9, 1997, as published

in The Wall Street Journal.

21See supra note 17.

22 15 U.S.C. 78s(b)(2).

23 17 CFR 200.30–3(a)(12).

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

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

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

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

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 crossrates 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.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.23

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–33587 Filed 12–23–97; 8:45 am]

BILLING CODE 8010–01–M