1356 Federal Register / Vol. 62, No. 6 / Thursday, January 9, 1997 / Notices

1 15 U.S.C. § 78s(b)(1)

2Securities Exchange Act Release No. 37944

(November 13, 1996), 61 FR 59125.

3Securities Exchange Act Release No. 34925

(November 1, 1994), 59 FR 55720.

4Securities Exchange Act Release No. 35464

(March 9, 1995), 60 FR 14043.

5Securities Exchange Act Release No. 6176

(August 31, 1995), 60 FR 46879.

6See Securities Exchange Act Release No. 37944,

supra note 2.

7 15 § 78f(b)(5).

8Telephone conversation between Michelle R.

Weissbaum, Vice President and Associate General

Counsel, Phlx, and Janet W. Russell-Hunter, Special

Counsel, Office of Market Supervision, Division of

Market Regulation, Commission, on November 13,

1996.

9See Securities Exchange Act Release No. 34925,

supra note 3.

10The Commission notes that it would have

serious concerns about any further reductions in the

minimum opening contract size, which could

change the institutional nature and intent of the

product.

11 15 U.S.C. 78s(b)(2).

12 17 CFR 200.30–3(a)(12).

[Release No. 34–38113; International Series

Release No. 1042; File No. SR–PHLX–96–

45]

Self-Regulatory Organizations;

Philadelphia Stock Exchange,

Incorporated; Approval of Proposed

Rule Change Relating to Minimum

Transaction Size for Customized

Foreign Currency Options

January 3, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

November 1, 1996, the Philadelphia

Stock Exchange, Inc. (‘‘Phlx’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) a proposed rule change

to revise the minimum opening and

closing transaction size and responsive

quotation size for customized foreign

currency options from 100 to 50

contracts. The proposal was published

for comment in the Federal Register on

November 20, 1996.2 No comments

were received on the proposed rule

change. This order approves the

Exchange’s proposal.

On November 1, 1994, the

Commission approved the Exchange’s

proposal to trade customized foreign

currency options.3 Users now have the

ability to customize the strike price and

quotation method and choose any

underlying and base currency

combination out of all Exchange listed

currencies, including the U.S. dollar.

The product was introduced to attract

institutional customers who like the

flexibility and variety offered in the

over-the-counter market but would

prefer the benefits attributed to an

exchange auction market to hedge their

exchange rate risks.

The Exchange originally instituted a

300 contract minimum opening

transaction size pursuant to Rule

1069(a)(6). A number of mid-sized

corporations and institutions then told

the Exchange that the contract value

was too large for their purposes. They

believed that customized currency

options would fill a market need for

them, but that the opening transaction

size was prohibitive. The Exchange,

thus, determined to reduce the

transaction size in stages. In March of

1995, the Exchange reduced the size of

an opening transaction to 200 contracts4

and then reduced it further to 100

contracts in August of that year.5

According to the Exchange, that size,

however, still remains too large for a

significant segment of medium sized

corporations, especially those that are

located in Canada and the Pacific basin.

Those companies would like the

opportunity to hedge their currency risk

using an exchange traded customized

option contract in a cost-effective

manner. Therefore, the Exchange now

proposes to reduce the minimum

opening transaction size to 50 contracts.

which would be equivalent in dollar

terms to an average minimum

transaction value for customized foreign

currency options of between $2 and $3

million.6

The minimum size of the closing

transaction and the minimum

responsive quote size obligation would

also be reduced form 100 contracts to

the lesser of 50 contracts or the

remaining contracts.

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),7 in that

the proposal is designed to promote just

and equitable principles of trade,

prevent fraudulent and manipulative

acts and practices, and to protect

investors and the public interest.

Specifically, the Commission believes

that the proposed rule change is

designed to make the customized

foreign currency option market

accessible to more medium sized

corporate foreign currency option users

while maintaining the focus of this

market towards institutional investors.

As a result, the Commission believes

that the proposal may serve to add

liquidity to this market, which would

benefit all users of customized foreign

currency options.

Even with lowering the minimum

opening transaction size to 50 contracts,

the minimum value of an opening

customized foreign currency option

transaction involving any approved

currency will be between $2 and $3

million. The Commission believes that

because the customized foreign

currency option market is used almost

exclusively by institutional investors,

and because the dollar value of opening

transactions in customized foreign

currencies is still very substantial,

lowering the minimum transaction size

to 50 contracts should not result in the

entrance of unsophisticated investors

into this market. Furthermore, the

Exchange, in publicizing the reduction

of the minimum contract size for

customized foreign currency options to

its members in a regulatory circular,

will emphasize the necessity for

compliance with the Phlx suitability

rule, Rule 1026, applicable to options

transactions.8 Rule 1026(b), among other

things prohibits a member from

recommending to a customer an

opening transaction in any option

contract, unless the person making the

recommendation has a reasonable basis

for believing, at the time of making the

recommendation, that the customer is

capable of evaluating the risks of the

recommended transaction, and is

financially able to bear the risks of the

recommended position in the option

contract. Based on the foregoing, the

Commission believes that this proposal

does not raise any regulatory concerns

that were not adequately addressed by

the Exchange when the Commission

approved the trading of customized

foreign currency options.9 Moreover, the

institutional nature of customized

foreign currencies should remain

unchanged, even with the reduction in

minimum opening transaction size

being approved herein.10

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,11 that the

proposed rule change (SR–Phlx–95–43)

is hereby approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.12

[FR Doc. 97–442 Filed 1–8–97; 8:45 am]

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