# Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by the Philadelphia Stock Exchange Relating to Inter-Currency Spread Priority > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-30029 ## Record - **Collection:** Federal Register - **Document type:** Uncategorized Document - **Published:** December 7, 1994 ## Text SECURITIES AND EXCHANGE COMMISSION [Release No. 34-35023; File No. SR-Phlx-94-23] Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by the Philadelphia Stock Exchange Relating to Inter-Currency Spread Priority November 29, 1994. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on August 1, 1994, the Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Phlx. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\15 U.S.C. 78s(b)(1) (1988). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Phlx, pursuant to Rule 19b-4 of the Act, proposes to amend Rules 1033 and 1066 to allow spread priority for eligible spreads between two different foreign currency options (``FCOs''). For example, a Deutsche mark call and a French franc put could be executed as a spread, such that the bid/offer could be expressed as a net credit or debit and a single execution could occur as long as at least one individual component (leg) of each spread is executed at a better price than the established bid/offer and no leg is executed outside of the established bid/offer for that option contract. In order to permit the execution of inter-currency spreads, a definition of this type of order is proposed to be added to Phlx Rule 1066, as a subcategory of ``spread'' orders, which is a subcategory of ``hedge'' orders. Also, the Phlx proposes to adopt new paragraph (i) to Rule 1033, which establishes spread priority principles for inter- currency spreads. On November 18, 1994, the Phlx filed Amendment No. 1 to the proposal to renumber a proposed paragraph due to recent changes to Rule 1033.\2\ --------------------------------------------------------------------------- \2\See Letter from Edith Hallahan, Phlx, to Michael Walinskas, Derivative Products Regulation, SEC, dated Nov. 17, 1994. --------------------------------------------------------------------------- The text of the proposed rule change is available at the Office of the Secretary, Phlx, and at the Commission. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Phlx included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Phlx has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of such statements. (A) Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change Currently, an option spread is executable as a single transaction at a total net debit or credit with one contra-side, pursuant to Phlx Rule 1033(d). Under this provision, an eligible spread can be afforded spread priority as long as the net credit/debit improves the established market for the spread as measured by the aggregate price of the respective legs if executed individually. The Commission recently approved a Phlx proposal to expand the spread priority provisions applicable to FCOs to include three-way, ratio, and multi-spread transactions.\3\ Specifically, that proposal expanded upon the existing requirement (in Rule 1033(d)) to improve the established market as follows: at least one options leg must be executed at a better price than the established market for that option as well as that no option leg be executed outside of the established market for that option.\4\ --------------------------------------------------------------------------- \3\See Securities Exchange Act Release No. 35015 (November 29, 1994). \4\As a result, according to the Phlx, the net credit/debit necessarily improves the established market for the spread (the current standard), because the market for at least one leg is bettered. --------------------------------------------------------------------------- The purpose of this proposal is to extend spread priority to spreads involving two different foreign currency options. For example, a spread could be executed between any two FCOs, American-\5\ or European-style\6\ expiration, and any expiration date (regular, month- end, or long-term). Inter-currency spread priority pursuant to the proposed rule change would not, however, be available for cross-rate, cash/spot, or the Exchange's customized FCOs. --------------------------------------------------------------------------- \5\An American-style option is one that can be exercised at any time prior to expiration of the option. \6\A European-style option is one that can only be exercised during a specified period immediately prior to expiration of the option. --------------------------------------------------------------------------- According to the Phlx, absent spread priority, inter-currency spreads can be executed as contingency orders pursuant to Phlx Rule 1066. For example, an FCO floor broker would quote a French franc market as well as a Swiss franc market, in each respective trading crowd; then, the floor broker would announce ``99 bid for 99 Sep 99 French franc calls if i can sell 99 Dec 99 Swiss franc puts at 99.'' However, each component of the spread, however, must be bid/offered individually, which, according to the Exchange, generally means that each component is executed at a price better than the established bid/ offer. In addition, the Exchange believes that because each leg must be executed between the established market, such contingency orders are more likely to be broken up by market interest in one leg, such that the end result may be a different number of contracts for each leg. Rule 1066(f)(1) defines a spread as an order to buy a stated number of option contracts and to sell the same number of option contracts, in a different series of the same class of options. The Exchange now proposes to adopt Rule 1066(f)(1)(A) to define inter-currency spreads because the existing definition requires that both orders be for the same class of FCOs, which does not allow for spreads involving FCOs in different currencies. The Exchange believes that executing inter-currency spreads subject to a spread priority provision is appropriate for several reasons. First, inter-currency spreads provide a trading strategy for FCO market participants based on the interplay between the currencies of two countries, similar to the advantages and opportunities associated with cross-rate FCOs. The Exchange believes that the availability of such strategies should enhance liquidity in existing FCOs. Second, the Phlx emphasizes that inter-currency spreads are not a new trading strategy, as they are currently executable as two separate, contingent orders. Instead, inter-currency spread priority is intended to facilitate the execution of such orders, which, according to the Exchange, often proves to be difficult. For example, the execution of inter-currency spreads as contingency orders may present a logistical problem as floor brokers must, in exercising due diligence, shuttle between two trading crowds or, to prevent a trade from occurring while the floor broker is in the second crowd, utilize two floor brokers to execute such an order. The requirement in proposed Phlx Rule 1033(i) that each leg of an inter-currency spread be executed at or within the market for the individual leg, and that at least one leg is executed at a price which improves the established market, should, according to the Exchange, protect investors and the public interest as well as prevent manipulative acts and practices. The Exchange states that this requirement is also consistent with Phlx Rule 118 which provides that when a bid/offer is clearly established, no bid/offer outside that price shall be established. The Exchange further believes that spread priority for inter-currency spreads should facilitate a more simplified execution procedure for such orders. The Exchange believes that the proposed rule change is consistent with Section 6 of the Act, in general, and with Section 6(b)(5),\7\ in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest. --------------------------------------------------------------------------- \7\15 U.S.C. 78f(b)(5) (1988). --------------------------------------------------------------------------- (B) Self-Regulatory Organization's Statement on Burden on Competition The Phlx does not believe that the proposed rule change will impose any inappropriate burden on competition. (C) Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve such proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing. 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 in the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. Copies of such filing will also be available for inspection and copying at the principal office of the Phlx. All submissions should refer to File No. SR-Phlx-94-23 and should be submitted by December 28, 1994. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\8\ --------------------------------------------------------------------------- \8\17 CFR 200.30(a)(12) (1993). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-30029 Filed 12-6-94; 8:45 am] BILLING CODE 8010-01-M --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-30029. Public record. Not legal advice.