6680 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Notices

19 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Position limits impose a ceiling on the number

of option contracts in each class on the same side

of the market (i.e., aggregating long calls and short

puts or long puts and short calls) that can be held

or written by an investor or group of investors

acting in concert.

4See Exchange Act Release No. 41216 (March 26,

1999), 64 FR 16019.

5See Letter from John Dayton, Phlx, to Nancy

Sanow, Commission, dated November 9, 1999

(‘‘Amendment No. 1’’).

6Position limits impose a ceiling on the number

of option contracts in each class on the same side

of the market (i.e., aggregating long calls and short

puts or long puts and short calls) that can be held

or written by an investor or group of investors

acting in concert.

7Exercise limits prohibit an investor or group of

investors acting in concert from exercising more

than a specified number of puts or calls in a

particular class within five consecutive business

days.

8See 15 U.S.C. 78f(b). In approving this rule

change, the Commission notes that it has

considered the proposal’s impact on efficiency,

competition, and capital formation, consistent with

Section 3 of the Act. Id. at 78c(f).

9Exchange Act Release Nos. 39489 (December 24,

1997), 63 FR 276 (January 5, 1998) (SR–CBOE–97–

11) (order approving an increase in OEX position

and exercise limits); 31330 (October 16, 1992), 57

FR 48408 (October 23, 1992) (SR–Amex–92–13)

(order approving an increase in Institutional Index

Options position and exercise limits).

10Position and exercise limits for the XOC were

raised from 17,000 to 25,000 contracts in 1996.

Position and exercise limits for the VLE were raised

from approximately 13,000 contracts, based on a

position limit based on monetary value, to 25,000

contracts in 1988. The US Top 100 Index was

created with limits of 25,000 contracts in 1995. See

Exchange Act Release No. 36745 (January 19, 1996),

61 FR 2561 (January 26, 1996) (SR–Phlx–95–38)

(establishing XOC position and exercise limits);

Exchange Act Release No. 35591 (April 11, 1995),

60 FR 19423 (April 18, 1995) (SR–Phlx–95–07)

(establishing TPX position and exercise limits);

Exchange Act Release No. 25644 (May 3, 1988), 53

FR 16829 (May 11, 1988) (SR–Phlx–88–06)

(establishing VLE position and exercise limits). See

also Exchange Act Release Nos. 37676 (September

13, 1996), 61 FR 49508 (September 20, 1996) (order

approving SR–CBOE–96–01, increasing position

limits for the SPX from 45,000 to 100,000

contracts); 39789 (December 24, 1997), 63 FR 276

(January 5, 1998) (order approving SR–CBOE–97–

11, increasing position limits for the OEX from

75,000 to 150,000 contracts). See also infra note 19.

11See H.R. Rep. No. IFC–3, 96th Cong., 1st Sess.

At 189–91 (Comm. Print 1978).

12The Phlx has been trading market index

options sionce 1985. See Exchange Act Release No.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.19

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–3087 Filed 2–9–00; 9:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42386; File No. SR–Phlx–

98–55]

Self-Regulatory Organizations;

Philadelphia Stock Exchange, Inc.:

Order Approving Proposed Rule

Change and Notice of Filing and Order

Granting Accelerated Approval to

Amendment No. 1 Relating to an

Increase in Position and Exercise

Limits for Certain Broad-Based Index

Options

February 4, 2000.

I. Introduction

On December 21, 1998 the

Philadelphia Stock Exchange, Inc.

(‘‘Phlx’’ or ‘‘Exchange’’) submitted to the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’), pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Exchange Act’’

or ‘‘Act’’) 1 and Rule 19b–4 thereunder,2

a proposed rule change to increase

broad-based (‘‘market’’) index option

position and exercise limits on the

Value Line Composite Index (‘‘VLE’’),

the US Top 100 Index (‘‘TPX’’), and the

National Over-the-Counter Index

(‘‘XOC’’).3

The proposed rule change was

published for comment in the Federal

Register on April 2, 1999.4 No

comments were received on the

proposal. On November 10, 1999, the

Phlx filed an amendment to the

proposed rule change.5 This order

approves the proposal, as amended.

II. Description

The Phlx proposed to amend Phlx

Rule 1001A(a)(i)–(ii) by increasing

market index option position limits on

the VLE, the TPX, and the XOC.6

Specifically, the Phlx proposed to triple

the current levels of 25,000 contracts

total and 15,000 contracts in the nearest

expiration month for the VLE and the

TPX to 75,000 contracts total and 45,000

contracts in the nearest expiration

month. The Phlx also proposed to triple

position and exercise limits for the XOC

from 25,000 contracts total to 75,000

contracts total.

Exchange exercise limits,7 which are

expressed in Phlx Rule 1002A, are

established by reference to position

limits, such that any increase in

position limits would also increase

exercise limits. Accordingly, the Phlx

proposed to increase exercise limits to

correspond to the proposed increases in

position limits.

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 of the Act.8

Specifically, the Commission believes

that the proposed rule change is

designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, to foster cooperation and

coordination with persons engaged in

facilitating transactions in securities,

and to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system.

Position limits serve as a regulatory

tool designed to address potential

manipulative schemes and adverse

market impact surrounding the use of

options. In the past, the Commission has

stated that:

Since the inception of standardized

options trading, the options exchanges have

had rules imposing limits on the aggregate

number of options contracts that a member

or customer could hold or exercise. These

rules are intended to prevent the

establishment of options positions that can

be used or might create incentives to

manipulate or disrupt the underlying market

so as to benefit the options position. In

particular, position and exercise limits are

designed to minimize the potential for minimanipulations and for corners or squeezes of

the underlying market. In addition such

limits serve to reduce the possibility for

disruption of the options market itself,

especially in illiquid options classes.9

In general, the Commission has taken

a gradual, evolutionary approach toward

expansion of position and exercise

limits.10 The Commission has been

careful to balance two competing

concerns when considering the

appropriate level at which to set option

position and exercise limits. The

Commission has recognized that the

limits must be sufficient to prevent

investors from disrupting the market in

the component securities comprising

the indexes. At the same time, the

Commission has determined that limits

must not be established at levels that are

so low as to discourage participation in

the options market by institutions and

other investors with substantial hedging

needs or to prevent specialists and

market-makers from adequately meeting

their obligations to maintain a fair and

orderly market.11

The Commission has carefully

considered the Phlx’s proposal. At the

outset, the Commission notes that it still

believes that the fundamental purposes

of position and exercise limits are being

served by their existence. Nevertheless,

the Commission believes that the Phlx’s

current experience with the trading of

market index options 12 make it

Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Notices 6681

22044 (May 17, 1985), 50 FR 21532 (May 24, 1985)

(order approving SR–Phlx–84–28, establishing the

XOC index option).

13 VLE is an equally weighted, arithmetically

averaged index based on the approximately 1,700

listed and over-the-counter stocks followed and

published by Value Line, Inc. in the Value Line

Investment Survey. As of September 29, 1999, the

total market capitalization for VLE was $14.5

trillion. Telephone call between John Dayton, Phlx,

and Christine Richardson, Commission, September

30, 1999. TPX is a capitalization-weighted index

composed of the 100 most highly capitalized U.S.

corporations, including both listed and Nasdaq

National Market System traded securities. As of

October 14, 1999, the total market capitalization for

TPX was $7.5 trillion. XOC is capitalizationweighted and composed of the common stocks of

the 100 largest capitalized corporations whose

stocks are traded over-the-counter. As of October

14, 1999, the total market capitalization for XOC

was $2.2 trillion. See Phlx website at http://

www.Phlx.com.

14Exchange Act Rule 15c3–1 requires a capital

charge equal to the maximum potential loss on a

broker-dealer’s aggregate index position over a +

(¥) 10% market move. Exchange margin rules

require margin on naked index options, which are

in or at-the-money equal to a 15% move in the

underlying index; and a minimum 10% charge for

naked out-of-the money contracts. At an index

value of 9,000 this approximates to a $135,000 to

$90,000 requirement per each unhedged contract.

15See Exchange Act Release No. 38248 (February

6, 1997), 62 FR 6474 (February 12, 1997) Adopting

Risk-Based Haircuts); and Phlx Rule 722 Margins.

16The Commission emphasizes that the Phlx

must closely monitor compliance with position and

exercise limits and impose appropriate sanctions

for failures to comply with the Exchange’s position

and exercise limit rules.

17 Disclosure of specific surveillance procedures

could provide market participants with information

that could aid potential attempts at avoiding

regulatory detection of inappropriate trading

activity.

18See Amendment No. 1.

permissible to increase position and

exercise limits for certain market index

options while still ensuring that large

positions in such index options will not

unduly disrupt the options or

underlying cash markets.

The Commission believes that an

increase in position and exercise limits

for certain market index options is

appropriate for several reasons. The

Commission notes first that the proposal

is limited to options on three market

indexes, the VLE, TPX and XOC. The

Commission believes that the

capitalization of, and relatively deep,

liquid markets for, the underlying

securities contained in these indexes

significantly reduces concerns regarding

market manipulation or disruption in

the underlying market.13 Increasing

position and exercise limits for these

index options may also bring additional

depth and liquidity, in terms of both

volume and open interest, to the

affected index options classes without

significantly increasing concerns

regarding intermarket manipulations or

disruptions of the options or the

underlying securities.

Second, increasing position and

exercise limits for these specific indexes

should better serve the hedging needs of

institutions that engage in trading

strategies different from those covered

under the index hedge exemption policy

(e.g. delta hedges, OTC vs. listed

hedges).

Third, the Commission believes that

financial requirements imposed by Phlx

and by the Commission adequately

address concerns that a Phlx member or

its customer may try to maintain an

inordinately large unhedged position in

a market index option. Current margin

and risk-based haircut methodologies

serve to limit the size of positions

maintained by any one account by

increasing the margin and/or capital

that a member must maintain for a large

position held by itself or by its

customer.14 Phlx also has the authority

under its rules to impose a higher

margin requirement upon the member

or member organization when it

determines that market conditions so

warrant. Monitoring accounts

maintaining large positions should

provide the Exchange with the

information necessary to determine

whether to impose additional margin

and/or whether to assess capital charges

upon a member organization carrying

the account. In addition, the

Commission’s net capital rule, Rule

15c3–1 under the exchange Act,

imposes a capital charge on members to

the extent of any margin deficiency

resulting from the higher margin

requirement. The significant increases

in unhedged options capital charges

resulting from the September 1997

adoption of risk-based haircuts and

Phlx’s margin requirements applicable

to these products under Exchange rules

serves as an additional form of

protection.15 The Commission also

notes that the OCC will serve as the

counter-party guarantor in every

exchange-traded transaction.

Fourth, the Commission notes that the

index options and other types of indexbased derivatives (e.g., forwards and

swaps) are not subject to position and

exercise limits in the OTC market. The

Commission believes that increasing

position and exercise limits for the VLE,

TPX, and XOC options will better allow

Phlx to compete with the OTC market.

Fifth, the Commission believes that

Phlx’s surveillance procedures will

adequately allow it to detect and deter

potential trading abuses arising from the

increased position and exercise limits

for VLE, TPX and XOC options. The

absence of any discernible manipulative

problems for broad-based index options

at existing levels leads the Commission

to conclude that the proposed increases

are reasonable and that they can be

safely implemented. The Commission

believes that the Phlx’s surveillance

program is adequate to detect and deter

violations of position and exercise

limits, as well as to detect and deter

attempted manipulation and other

trading abuses through the use of such

illegal positions by market

participants.16 In addition, the Phlx has

submitted to the Commission a detailed

description of enhanced surveillance

procedures the Exchange will

implement in order to monitor accounts

maintaining large positions. The

Commission believes that Phlx’s new

surveillance procedures should enable

the Exchange to assess and respond to

market concerns at an early stage.

Although it is inappropriate to discuss

the details of Phlx’s enhanced

surveillance program, the Commission

notes that these enhanced procedures

were critical in its determination to

approve the proposed rule change.17

Sixth, the Commission believes that

the enhanced reporting requirements

should allow Phlx to detect and deter

trading abuses arising from the

elimination of position and exercise

limits for VLE, TPX, or XOC. These

reports should also allow Phlx to

monitor large positions in order to

identify instances of potential risk and

to assess additional margin and/or

capital charges, if deemed necessary.

Specifically, Phlx will subject VLE,

TPX, and XOC to a 60,000 contract

reporting requirement. Each member or

member organization that maintains a

position on the same side of the market

in excess of these contract thresholds for

its own account or for the account of a

customer must file a report that

includes, but is not limited to, data

related to the option position, whether

such position is hedged and if so, a

description of the hedge. If applicable,

the report must contain information

concerning collateral used to carry the

position. Exchange Registered Option

Traders would be exempt from this

reporting requirement.18

Seventh, the Commission notes that it

recently approved proposed rule

changes from the Chicago Board

Options Exchange (‘‘CBOE’’) and the

American Stock Exchange (‘‘Amex’’),

which were even less restrictive than

the Phlx’s current proposal.

Specifically, those proposed rule

changes eliminated position and

exercise limits on a pilot basis for

certain market index options traded on

6682 Federal Register / Vol. 65, No. 28 / Thursday, February 10, 2000 / Notices

19See Exchange Act Release Nos. 41011

(February 1, 1999), 64 FR 6405 (February 9, 1999)

(order approving File No. SR–Amex–98–38,

eliminating position and exercise limits on a two

year pilot basis for Institutional Index Options and

Major Market Index Options and FLEX options on

those index options); 40969 (January 22, 1999), 64

FR 4911 (February 2, 1999) (order approving File

No. SR–CBOE–98–23, eliminating position and

exercise limits on two year pilot basis for the S&P

500 Index, the S&P 100 Index, and the Dow Jones

Industrial Average Index, and FLEX options on

those indexes).

20See Amendment No. 1. This includes

references in Phlx Rules 1079(d)(1), 1000A(b)(11),

(c); 1047A(a)(i), (d), (f)(iv); and 1101A Commentary

.01.

21 15 U.S.C. 78s(b)(2).

22 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 8s(b)(1).

2 17 CFR 240.19b–4.

3 In Amendment No. 1, the Exchange requested

that the Commission approve the existing 4% addon margin for all non-customized cross-rate foreign

currency options until February 4, 2000, prior to the

thirtieth day after the publication of the notice

thereof in the Federal Register; provided statistical

data to substantiate the proposed rule change; and

made substantive changes to the proposed rule text.

See Letter from Nandita Yagnik, Counsel, Phlx, to

Hong-anh Tran, Attorney, Division of Market

Regulation (‘‘Division’’), Commission, dated

October 25, 1999 (‘‘amendment No. 1’’). 4Securities Exchange Act Release No. 42093

(November 3, 1999), 64 FR 61682 (November 12,

1999) (File No. SR–Phlx–99–30). 5 In Amendment No. 2, the Exchange made

technical changes to the proposed rule text.

Specifically, the Exchange proposes to modify the

introductory portion of Commentary .16 to Phlx

Rule 722 to clarify that the Commentary .16

methodology applies to non-customized Cross-Rate

FCOs, but not to customized Cross-Rate FCOs. The

Exchange also proposes replacing the word

‘‘currency’’ with the term ‘‘currency pair’’

throughout Paragraph (c) of Commentary .16, and

adding the word ‘‘the’’ before the word ‘‘base

currency’’ in Paragraph (a) of the same commentary.

See Letter from Nadita Yagnik, Counsel, Phlx, to

Hong-anh Tran, Attorney, Division of Market

Regulation (‘‘Division’’), Commission, dated

January 18, 2000 (‘‘Amendment No. 2’’).

6See Securities Exchange Act Release No. 29919

(November 7, 1991), 56 FR 58109 (November 15,

1991) (‘‘1991 Order‘‘). Although the Exchange

received approval for the British pound/Japanese

yen Cross-rate FCO, the Exchange has not listed

such a contract.

the CBOE and Amex.19 Although Phlx’s

VLE, TPX and XOC options are not

identical to CBOE’s or Amex’s, the

Commission believes that, given its

approval of these proposed rule

changes, the Phlx’s proposed increase in

position and exercise limits to three

times their current level is appropriate.

Finally, the Commission believes it

appropriate for the Exchange to

eliminate language contained in Phlx

Rule 1001A and 1101A, concerning the

Big Cap Index (‘‘MKT’’) since MKT is no

longer traded on the Exchange. The

Commission also believes it is

appropriate for the Exchange to delete

all references to options on the Super

Cap Index, as these options were

delisted from the Exchange on

September 29, 1999.20

The Commission finds good cause to

approve Amendment No. 1 to the

proposed rule change prior to the 30th

day after the date of publication of

notice of filing thereof in the Federal

Register. Amendment No. 1 provides for

a reporting requirement for member

firms that should aid the Exchange in

monitoring accounts with large

positions in VLE, TPX, and XOC.

Amendment No. 1 also makes certain

minor technical changes. Accordingly,

the Commission finds that, consistent

with Sections 6(b) and 19(b)(2) of the

Act, there is good cause to approve

Amendment No. 1 to the proposed rule

changes on an accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

1, including whether the amendments

are consistent with the Exchange Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549–0609. 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 in

the Commission’s Public Reference

Room, located at the above address.

Copies of such filing will also be

available for inspection and copying at

the principal office of the self-regulatory

organization. All submissions should

refer to File No. SR–Phlx–98–55 and

should be submitted by March 2, 2000.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,21 that the

proposed rule change (SR–Phlx–98–55)

be approved, as amended.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.22

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–3088 Filed 2–9–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42388; International Series

Release No. 1213; File No. SR–Phlx–99–30]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval to Amendment

No. 2 to the Proposed Rule Change by

the Philadelphia Stock Exchange, Inc.

Respecting Non-Customized CrossRate Foreign Currency Option Margin

Levels

February 4, 2000.

I. Introduction

On August 5, 1999, the Philadelphia

Stock Exchange, Inc. (‘‘Phlx’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘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

amend its method of calculating initial

and maintenance customer margin

requirements for non-customized crossrate foreign currency options (‘‘CrossRate FCOs’’). The Exchange amended

the proposal on October 26, 1999.3

The Commission published notice of

the proposed rule change in the Federal

Register on November 12, 1999.4 The

Exchange filed a second amendment to

the proposal on January 19, 2000.5 The

Commission received no comments on

the proposal. This order approves the

proposed rule change, as amended.

II. Description of the Proposal

The Exchange proposes to determine

the add-on margin levels for all noncustomized Cross-Rate FCOs using the

methodology outlined in Commentary

.16 to Phlx Rule 722, in lieu of the fixed

four percent rate that the Exchange

currently uses.

In 1991, the Commission approved

the Exchange’s proposal to list and trade

three non-customized Cross-Rate

FCOs—German mark/Japanese yen,

British pound/German mark and British

pound/Japanese yen options.6 The

Commission’s 1991 order approved a

four percent add-on margin level for the

non-customized Cross-Rate FCOs for a

one-year period only, because these

products were new products and the

Commission was concerned that the

volatility in the underlying currencies

could change significantly. Accordingly,

the Commission stated that the

Exchange should further analyze the

add-on margin adequacy, and, within

nine months, submit the analysis along

with a proposed rule change to retain

the margin level or establish a new

level.

Based on the 1991 Order, the

Exchange’s customer margin