Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Proposing To Set Temporarily the Add- On Margin Levels for Non-Customized Cross-Rate Foreign Currency Options

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41365; International Series Release No. 1195; File No.

SR-Phlx-99-12]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Accelerated Approval of Proposed Rule Change by the

Philadelphia Stock Exchange, Inc. Proposing To Set Temporarily the Add-

On Margin Levels for Non-Customized Cross-Rate Foreign Currency Options

May 4, 1999.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that

on April 8, 1999, the Philadelphia Stock Exchange, Inc. (``Phlx'' or

``Exchange'') filed with the Securities and Exchange Commission

(``SEC'' or ``Commission'') the proposed rule change as described in

Items I and II 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 and to approve the

proposal on an accelerated basis for a period of six months until

November 4, 1999.

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

\2\ 17 CFR 240.19b-4.

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I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Change

The Exchange proposes to codify the margin levels set forth in Phlx

Rule 722(d) for non-customized cross-rate foreign currency options

(``Cross-Rate FCOs'') for a three month period or until it develops an

updated method of calculating those margin levels. Specifically, the

Exchange proposes to continue to require that the initial and

maintenance margin requirement for customers' short positions in Cross-

Rate FCOs equal an ``add-on margin'' of four percent of the current

market value of the underlying FCO contract, plus 100 percent of the

current market value of the option's premium, adjusted for ``out-

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of-the-money-amounts,'' \3\ However, the overall initial and

maintenance margin may not be reduced below the ``minimum margin

requirement.'' \4\

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\3\ For foreign currency put options, ``out-of-the-money-

amounts'' equal the aggregate exercise price of the option minus the

product of units per foreign currency contract and the closing spot

price. See Phlx Rule 722(d).

For foreign currency call options, ``out-of-the-money-amounts''

equal the product of units per foreign currency contract and the

closing spot price minus the aggregate exercise price of the option.

See id.

\4\ The minimum margin on any put or call carried ``short'' in a

customer's account may be reduced by any ``out-of-the-money-amount''

but shall not be less than 100% of the current market value of the

option plus \3/4\% of the current market value of the underlying FCO

contract, with the exception that the minimum margin on each such

put option contract shall not be less than 100% of the current

market value of the option plus \3/4\% of the option's aggregate

exercise price amount. See id.

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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 Exchange 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 Exchange 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

Statutory Basis for, the Proposed Rule Change

1. Purpose

In 1991, the Commission approved the Exchange's proposal to list

and trade three non-customized cross rate currency options--German

mark/Japanese yen, British pound/German mark and British pound/Japanese

yen options.\5\ The Commission's order approved the proposed margin

system for these products for a one-year period only, because the

Cross-Rate FCOs 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.

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\5\ See Securities Exchange Act Release No. 29919 (November 7,

1991), 56 FR 58109 (November 15, 1991). Although the Exchange

received approval for the British pound/Japanese yen cross-rate FCO,

the Exchange has not listed such a contract. Non-customized options

carry specific contract terms for features such as contract size,

strike price intervals, expiration date, price quoting and premium

settlement.

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As approved by the Commission in 1991, the Exchange's customer

margin requirements for short positions for each Cross-Rate FCO applied

a four percent add-on margin. The Exchange represented at the time that

this add-on margin level was sufficient to cover each cross-rate

product's historical volatility over seven-day intervals (for the July

30, 1990 to July 30, 1991 time period) with a confidence level of

greater than 96 percent.

Due to an oversight, the Exchange did not file the required

analysis and the proposed rule change with the Commission within nine

months of the 1991 order. The Exchange now proposes to codify the four

percent add-on margin level for three months or until it develops an

updated method of calculating those margin levels. During this time,

the Exchange will examine the add-on margin level to determine if it

continues to cover the same confidence level or whether a different

add-on margin level will be more appropriate. The Exchange anticipates

filing a new proposed rule change within three months from the date

that this order has been approved by the Commission. Applying the same

reasoning as in 1991, the Exchange believes that the four percent add-

on margin level currently provides an adequate level of customer's add-

on margin coverage for the German mark/Japanese yen and British pound/

German mark cross-rate products.\6\

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\6\ For the British pound/German mark FCOs, the 4% add-on margin

level covers the historical price volatility of all seven-day price

movements at a 100% confidence level for the period January 16, 1998

to January 15, 1999.

For the German mark/Japanese yen FCOs, the 4% add-on margin

level covers the historical price volatility of all seven-day price

movements at a 94.49% confidence level for the period of January 16,

1998 to January 15, 1999. To attain a 96% confidence level for

German mark/Japanese yen FCOs, the Exchange would have to apply a

4.5% add-on margin level.

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2. Statutory Basis

The Exchange believes that the four percent level is an adequate

add-on margin level for each German mark/Japanese yen and British

pound/German mark FCO on a temporary basis, pending further analysis.

For this reason, the Exchange believes that the proposed rule change is

consistent with Section 6 of the Act \7\ in general, and in particular,

with Section 6(b)(5),\8\ in that it is designed to promote just and

equitable principles of trade, as well as to protect investors and the

public interest.

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\7\ 15 U.S.C. 78f(b).

\8\ 15 U.S.C. 78f(b)(5).

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B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange 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

The Exchange has neither solicited nor received written comments on

the proposed rule change.

III. Commission's Findings and Order Granting Accelerated Approval

of Proposed Rule Change

The Commission has reviewed carefully the Phlx's proposed rule

change and believes, for the reasons set forth below, the proposal is

consistent with the requirements of Section 6 of the Act and the rules

and regulations thereunder applicable to a national securities

exchange. Specifically, the Commission believes that the proposal is

consistent with Section 6(b)(5) of the Act \9\ because it will

facilitate transactions in securities, promote just and equitable

principles of trade, and protect investors and the public interest by

allowing the Exchange to continue to trade Cross-Rate FCOs on an

interim basis, while using a margin requirement that the Commission

believes is justifiable.

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\9\ 15 U.S.C. 78f(b)(5).

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The Commission's 1991 order approved the four percent add-on margin

for Cross-Rate FCOs for a one-year period. The Exchange now proposes to

use a four percent add-on margin level for each non-customized cross-

rate product for ``a three-month period or until an updated method for

calculating such margins * * * is developed.'' The Exchange will

further examine the adequacy of the four percent add-on margin level

during that period.

The Exchange represents that for the period of January 16, 1998 to

January 15, 1999, the four percent add-on margin level covered non-

customized German mark/Japanese yen FCOs at a 94.49 percent confidence

level, and covered non-customized British pound/German mark FCOs at a

100 percent confidence level. Based on those confidence levels, the

lower of which is close to the 96 percent confidence level that was

contained in the Commission's 1991 approval order, the Commission

believes it is reasonable to permit the

[[Page 25948]]

Exchange to use a four percent add-on margin level for all Cross-Rate

FCOs for a six-month period until November 4, 1999.\10\

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\10\ The Commission believes that the Exchange should consider

requiring a sufficient add-on margin level for all German mark/

Japanese yen FCOs to achieve at least a 96% confidence level.

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The Exchange has requested that the Commission approve the proposed

rule change prior to the thirtieth day after the publication of the

proposal in the Federal Register, so that the Exchange may immediately

codify the four percent add-on margin until it can complete further

analysis. The Commission finds good cause for approving the proposed

rule change, on a pilot basis, prior to the thirtieth day after the

date of publication of notice thereof in the Federal Register, so that

the Exchange may continue to use the four percent add-on margin for

Cross-Rate FCOs during this six-month period, while it is reviewing the

adequacy of margin levels for these products on a permanent basis.

The Commission requires that the Exchange file a proposed rule

change to permanently codify the margin system for non-customized

Cross-Rate FCOs by August 4, 1999, which is three months from the date

of this order. That requirement will provide the Commission with

sufficient time to review that proposed rule change before this order's

approval of the four percent add-on margin expires on November 4, 1999.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing, including whether the proposed rule

change is consistent with the Act. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW, Washington, DC 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 Section, 450 Fifth Street, NW,

Washington, DC 20549-0609. 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-99-12 and should be

submitted by June 3, 1999.

V. Conclusion

It is therefore ordered, pursuant to section 19(b)(2) of the

Act,\11\ that the proposed rule change is hereby approved on an

accelerated basis for a period of six months until November 4,

1999.\12\

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

\12\ In approving the proposal, the Commission has considered

the rule's impact on efficiency, competition and capital formation.

15 U.S.C. 78c(f).

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For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\13\

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\13\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-12063 Filed 5-12-99; 8:45 am]

BILLING CODE 8010-01-M