[Federal Register Volume 61, Number 19 (Monday, January 29, 1996)]
[Notices]
[Pages 2853-2856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1475]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36757; File No. SR-NASD-95-55]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the National
Association of Securities Dealers, Inc., To Add Two Position and
Exercise Limit Tiers for Qualifying Equity Option Classes
January 22, 1996.
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 November 20, 1995, the National Association of Securities Dealers,
Inc. (``NASD'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. The NASD has requested accelerated approval for the
proposal. This order approves the NASD's proposal on an accelerated
basis and solicits comments from interested persons.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing to amend Article III, Section 33(b)(3)(A) of
the NASD Rules of Fair Practice to add two new position limit tiers for
option classes overlying equity securities that meet certain criteria
for high liquidity. Specifically, the NASD proposes to add a 20,000-
contract position limit tier and a 25,000-contract position limit tier.
The NASD requests that the Commission find good cause, pursuant to
Section 19(b)(2) of the Act, to approve the proposed rule change prior
to the thirtieth day after publication in the Federal Register.
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 NASD 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 III below. The NASD 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
The NASD proposes to amend its rules governing position and
exercise limits for equity options \3\ to conform to similar proposals
by the options exchanges which were recently approved by the
Commission.\4\ NASD rules currently provide that position and exercise
limits are determined according to a ``three-tiered'' system.
Specifically, depending upon the trading volume and public float of the
underlying security, the position limit for an equity option is either
4,500, 7,500, or 10,500 contracts.\5\
\3\ Position 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 and long puts and short calls)
that can be held or written by an investor of group of investors
acting in concern. Exercised limits restrict the number of options
contracts which an investor or group of investors acting in concert
can exercise within five consecutive business days. Under NASD
Rules, exercise limits correspond to position limits, such that
investors in options classes on the same side of the market are
allowed to exercise, during any five consecutive business days, only
the number of options contracts set forth as the applicable position
limit for those options classes. See Sections 33(b) (3) and (4) of
Article III of the NASD Rules of Fair Practice.
\4\ See Securities Exchange Act Release Nos. 36371 (October 13,
1995), 60 FR 54269 (October 20, 1995) (order approving File No. SR-
CBOE-95-42); and 36409 (October 23, 1995), 60 FR 55399 (October 31,
1995) (Order approving File Nos. SR-NYSE-95-31, SR-PSE-95-25, SR-
Amex-95-42, and SR-Phlx-95-71).
\5\ In this connection, NASD rules do not specifically govern
how a specific equity option falls within one of the three position
limit tiers. Rather, the NASD's position limit rule provides that
the position limit established by an options exchange(s) for a
particular equity option is the applicable position limit for
purposes of the NASD's rule.
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In particular, the 10,500-contract position limit applies to: (1)
Exchange-listed options traded by ``access'' \6\ firms with a
corresponding 10,500-contract position limit imposed by the options
exchange(s) on which the option is traded; \7\ (2) all conventional
options overlying equity securities which underlie exchange-traded
options that have a 10,500-contract position limit; \8\ and (3) all
conventional options overlying equity securities that qualify for, but
do not underlie, an exchange-traded option with a position limit of
10,500-contracts.
\6\ ``Access'' firms are NASD members which conduct a business
in exchange-listed options but which are not members of any of the
options exchanges upon which the options are listed and traded.
\7\ To be eligible for the 10,500-contract position limit under
the options exchanges' rules, an underlying security must have
either (i) trading volume of at least 40 million shares during the
most recent six month trading period; or (ii) trading volume of at
least 30 million shares during the most recent six month trading
period and at least 120 million shares currently outstanding.
\8\ Conventional equity options are defined in Article III,
Section 33(b)(2)(GG) of the NASD Rules of Fair Practice to mean
``any option contract not issued, or subject to issuance, by The
Options Clearing Corporation.''
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Similarly, the 7,500-contract position limit applies to: (1)
Exchange-listed options traded by ``access'' firms with a corresponding
7,500-contract position limit imposed by the options exchange(s) on
which the option is traded; \9\ (2) all conventional options overlying
equity securities which underlie exchange-traded options that have a
7,500-contract position limit; and (3) all conventional options
overlying equity securities that qualify for, but do not underlie, an
exchange-traded option with a position limit of 7,500-contracts.
\9\ To be eligible for the 7,500-contract position limit under
the options exchanges' rules, an underlying security must have
either (i) trading volume of at least 20 million shares during the
most recent six month trading period; or (ii) trading volume of at
least 15 million shares during the most recent six month trading
period and at least 40 million shares currently outstanding.
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Lastly, the 4,500-contract position limit applies to: (1) Exchange-
listed options traded by ``access'' firms with a corresponding 4,500-
contract position limit imposed by the options exchange(s) on which the
option is traded; \10\ and (2) all conventional options overlying
equity securities which either underlie exchange-traded options that
have a 4,500-contract position limit or do not underlie an exchange-
traded option.
\10\ Under the rules of the options exchanges, all securities
that do not qualify for a position limit of 10,500-contracts or
7,500-contracts are subject to the 4,500-contract tier.
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Through this rule filing, the NASD proposes to add two new higher
position limit tiers that correspond to the two new ``upper'' position
limit tiers recently approved by the Commission for exchange-traded
options.\11\ Specifically, the NASD proposes to add a 20,000-contract
position limit tier and a 25,000-contract position limit tier. To
qualify for the 20,000-contract position limit tier, the underlying
security must have at least 240 million shares outstanding with 60
million shares traded in the past six months, or have 80 million shares
traded in the past six months. To qualify for the 25,000-contract
position limit tier, the underlying security must have at least 300
million shares outstanding with 75 million shares traded in the past
six months, or have 100 million shares traded in the past six months.
Thus, for NASD members that are ``access'' firms
[[Page 2855]]
or that are involved in conventional equity option transactions, the
proposal will conform the NASD's position and exercise limit rules to
the position limit tiers recently approved by the Commission for the
options exchanges.
\11\ See supra note 4.
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The NASD believes that the proposed ``upper'' position limits are
warranted for the following reasons. First, the higher position and
exercise limits will afford market participants, particularly investors
with sizable holdings, accounts, or assets, greater flexibility to
employ larger options positions when effecting their hedging and
investment strategies. Second, the higher position limit tiers likely
will facilitate greater activity in exchange-listed options and
conventional equity options, thereby enhancing liquidity in the markets
for exchange-traded options, conventional equity options, and the
securities underlying those options. Third, by conforming the NASD's
position and exercise limits to the limits imposed by the options
exchanges, there will be no confusion by market participants concerning
applicable position and exercise limits. Fourth, with respect to equity
securities underlying exchange-traded options, market participants will
be able to establish conventional options positions on these securities
equivalent in size of standardized options positions on these
securities.
Moreover, the NASD believes that the proposed larger position limit
tiers will not compromise the integrity of the options markets or
jeopardize the stability of the securities markets underlying exchange-
traded equity options or conventional equity options. Specifically,
because the eligibility standards for the higher position limit tiers
will ensure that only those securities with a sufficiently large
capitalization and public float will be eligible for the higher limits,
the NASD does not believe that the higher position limit tiers will
have an adverse market impact. In addition, as noted in the Chicago
Board Options Exchange, Inc.'s (``CBOE'') rule filing concerning the
higher position limit tiers, the largest dollar value that could be
controlled in any equity options class by any one investor or group of
investors acting in concert under the proposal would not exceed .7
percent of the market capitalization of any security eligible for one
of the higher position limit tiers.\12\ Accordingly, the NASD believes
that the proposed position limit tiers would involve a very modest
increase in position limits. Furthermore, the NASD notes that it will
continue to apply its options surveillance procedures and that it and
the options exchanges will continue to be members of the Intermarket
Surveillance Group (``ISG'').
\12\ See supra note 4.
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2. Statutory Basis
The NASD believes that the proposed rule change is consistent with
Section 15A(b)(6) of the Act.\13\ Section 15A(b)(6) requires that the
rules of a national securities association be 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 regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest. Specifically, the NASD
believes that the proposal will promote the maintenance of fair and
orderly markets because it will, among other things, serve to avoid
investor confusion concerning applicable equity option position and
exercise limits as well as to facilitate the use of equity options by
investors, without compromising the integrity of the equity options
markets or the markets for the securities underlying equity options.
\13\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD 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
Comments were neither solicited nor received with respect to the
proposed rule change.
III. 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 changes that are filed
with the Commission, and all written communications relating to the
proposed rule changes 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 filings also will be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to File No. SR-NASD-95-55 and should
be submitted by February 20, 1996.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
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 association, and, in
particular, with the requirements of Section 15A(b)(6). Specifically,
the Commission believes that the proposed addition of position and
exercise limit tiers of 25,000-contracts and 20,000-contracts for
qualifying equity options will accommodate the needs of investors and
market participants. The Commission also believes that the proposed
rule change will increase the potential depth and liquidity of the
equity options market as well as the underlying cash market without
significantly increasing concerns regarding intermarket manipulations
or disruptions of the market for the options or the underlying
securities. Accordingly, as discussed below, the Commission believes
that the rule proposal is consistent with the requirements of Section
15A(b)(6), that association rules facilitate transactions in securities
while continuing to further investor protection and the public
interest.
In approving the increased limits, the Commission recognizes that
securities with active and deep trading markets, as well as with broad
public ownership, are more difficult to manipulate or disrupt than
securities having less active and deep markets and having smaller
public floats. The proposed additional position and exercise limit
tiers recognize this by seeking to minimize the restraints on those
options classes that can accommodate larger limits without
significantly increasing manipulation concerns.\14\ In particular,
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the proposed limit of 25,000-contracts and 20,000-contracts for options
on the most actively traded, widely held securities, permits the
Commission to avoid placing unnecessary restraints on those options
where the manipulative potential is the least and the need for
increased positions likely is the greatest. Accordingly, the Commission
believes that the additional position and exercise limit tiers is
warranted.
\14\ The Commission continues to believe that proposals to
increase position and exercise limits must be justified and
evaluated separately. After reviewing the proposed exercise limits,
along with the eligibility criteria for the two new tiers, the
Commission has concluded that the proposed exercise limit additions
do not raise manipulation problems or increase concerns over market
disruption in the underlying securities.
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The Commission believes that the proposed additions to the NASD's
position and exercise limit tiers appears to be both appropriate and
consistent with the Commission's gradual, evolutionary approach. There
are no ideal position limits in the sense that options positions of any
given size can be stated conclusively to be free of any manipulative
concerns. The Commission, however, is relying on the absence of
discernible manipulation problems under the current framework as an
indicator that the proposed additional limit tiers are justified.
The Commission does not believe that the addition of the two new
higher limit tiers will have any adverse effects on the options
markets. In approving the initial two-tiered position limit system, the
Commission stated that it did not believe that requiring traders to
keep track of two limits rather than one was burdensome or confusing or
would lead to accidental violations.\15\ The Commission does not
believe that a change from the current three tiers to five tiers should
change this conclusion.
\15\ In this regard, the Commission notes that the options
exchanges and the NASD routinely review the trading characteristics
of the underlying stocks to determine the appropriate position and
exercise limit tiers for the option classes.
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The Commission believes that although position and exercise limits
for options must be sufficient to protect the options and related
markets from disruptions by manipulations, the 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 market makers from adequately meeting their
obligations to maintain a fair and orderly market. The Commission
believes that the NASD's proposal is a reasonable and appropriately
tailored effort to accommodate the identified needs of options market
participants. In this regard it is important to note that the proposals
only add higher position and exercise limit tiers for classes of
options involving the most liquid stocks. As a result, the proposal
affects only a small number of equity option classes that are traded.
In addition, based on the NASD's experience, the Commission believes
that the proposed additional limit tiers should result in little or no
additional risk to the marketplace.\16\
\16\ The Commission notes that to the extent the potential for
manipulation increases because of the additional tiers, the
Commission believes the NASD's surveillance programs will be
adequate to detect as well as to deter attempted manipulative
activity. The Commission will, of course, continue to monitor the
NASD's surveillance programs to ensure that problems do not arise.
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The Commission finds good cause to approve the proposed rule
changes prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. Specifically, by
accelerating the approval of the NASD's rule proposal, the Commission
is conforming the NASD's position and exercise limits with those levels
recently approved for the options exchanges.\17\ Accelerated approval
of the proposed rule change will thereby provide for the desired
uniformity for position and exercise limits within the exchange traded
options market. Any other course of action could lead to unnecessary
investor confusion. In addition, the CBOE's proposal was noticed for
the entire twenty-one day comment period and generated no negative
responses.\18\ Accordingly, the Commission believes that it is
consistent with Section 15A(b)(6) of the Act to approve the proposed
rule change on an accelerated basis.
\17\ See supra note 4.
\18\ Id.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) \19\ of the
Act that the proposed rule change (File No. SR-NASD-95-55) is hereby
approved on an accelerated basis.
\19\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
\20\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-1475 Filed 1-26-96; 8:45 am]
BILLING CODE 8010-01-M
