[Federal Register Volume 62, Number 20 (Thursday, January 30, 1997)]
[Notices]
[Pages 4555-4556]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2260]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38202; File No. SR-Amex-96-41]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendments
Nos. 1 and 2 Thereto by the American Stock Exchange, Inc., Relating to
an Increase in Narrow-Based Index Option Position and Exercise Limits
January 23, 1997.
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 1, 1996, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') filed with the Securities 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 Amex subsequently filed Amendment No. 1 to the
proposed rule change on November 15, 1996 \3\ and Amendment No. 2 to
the proposed rule change on January 16, 1997.\4\ The Exchange has
requested accelerated approval for the proposal. This order approves
the Amex's proposal, as amended, on an accelerated basis and solicits
comments from interested persons.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Claudia Crowley, Special Counsel, Legal and
Regulatory Policy, Amex, to Matthew Morris, Division of Market
Regulation (``Division''), Commission, dated November 15, 1996
(``Amendment No. 1''). In Amendment No. 1, the Amex amended its rule
filing to restate Item 3(a) in order to correct various errors
contained in the original filing and withdrew its request that the
proposed rule change be given accelerated effectiveness pursuant to
Section 19(b)(2) of the Act.
\4\ See letter from Claudia Crowley, Special Counsel, Legal and
Regulatory Policy, Amex, to Matthew Morris, Division, Commission,
dated January 16, 1997 (``Amendment No. 2''). In Amendment No. 2,
the Amex withdrew its request that the Computer Technology Index be
given preferential treatment with respect to position and exercise
limits and renewed its request that the proposed rule change be
given accelerated effectiveness pursuant to Section 19(b)(2) of the
Act.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex is proposing to amend Exchange Rule 904C to increase
position and exercise limits for narrow-based index options from 6,000,
9,000, or 12,000 contracts to 9,000, 12,000, or 15,000 contracts.\5\
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\5\ Position limits impose a ceiling on the number of option
contracts which an investor or group of investors acting in concert
may hold or write in each class of options on the same side of the
market (i.e., aggregating long calls and short puts or long puts and
short calls). Exercise 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.
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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 Amex 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 Amex 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
Exchange Rules 904C and 905C provide that position and exercise
limits for narrow-based index options be set at one of three levels
depending upon the weightings of the component securities in such
narrow-based index. Currently, a narrow-based index option will have a
6,000 contract limit if a single component security accounts for more
than 30% of the index value; a 9,000 contract limit if a single
component security accounts for more than 20% (but less than 30%) of
the index value or any five component securities together account for
more than 50% of the index value; and a 12,000 contract limit for those
narrow-based indexes that do not fall within any one of the other
categories.
According to the Exchange, stringent position limits create
difficulties for investors in narrow-based index options, especially
for those institutional investors who own large portfolios of the
component securities and who generally use the options markets to hedge
those portfolios. Therefore, the Exchange proposes an increase in the
position and exercise limits to 9,000 for the lowest level; 12,000 for
the middle level; and 15,000 for the highest level.
The Exchange believes that this increase in position and exercise
limits is appropriate in that the current limits have been in place
since November 30, 1995,\6\ and the proposed increases are consistent
with the Commission's gradual approach to increase position and
exercise limits. According to the Exchange, in the past year, there has
been a notable increase in narrow-based index option trading. For
example, through September 1996, narrow-based index option volume has
increased 42% over all of 1995. As discussed above, the Exchange
believes that these increases are needed by investors and will thus
increase the depth and liquidity of the market for narrow-based index
options without causing any market disruption. In addition, the
Exchange will continue to monitor and surveil for manipulation and
violations of the position and exercise limits through the use of the
monitoring systems currently in place.
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\6\ See Securities Exchange Act Release No. 36537 (November 30,
1995), 60 FR 62916 (December 7, 1995) (order establishing position
and exercise limits for narrow-based index options at 6,000, 9,000
or 12,000 contracts) (Amex-95-45).
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act in general and furthers the objectives of
Section 6(b)(5) in particular in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and is not designed to permit unfair
discrimination between customers, issuers, brokers or dealers.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex 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.,
[[Page 4556]]
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 Amex. All submissions should
refer to File No. SR-Ames-96-41 and should be submitted by February 20,
1997.
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 Act and the rules and regulations thereunder applicable to a
national securities exchange, and, in particular, the requirements of
Section 6(b)(5) thereunder.
Since the inception of standardized options trading, the options
exchanges have had rules imposing limits on the aggregate number of
option contracts that a member or customer can hold or exercise. These
rules are intended to prevent the establishment of large options
positions that can be used or might create incentives to manipulate or
disrupt the underlying market so as to benefit the options position. At
the same time, the Commission has recognized that option position and
exercise 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.
In this regard, the Amex has stated that the current position
limits discourage market participation by certain large investors and
the institutions that compete to facilitate their trading. In addition,
the Amex notes that index option trading volume has increased
significantly since 1995, when the current industry index option
position limits were established. In light of the increased volume of
narrow-based index option trading and the needs of investors and market
makers, the Commission believes that the Amex's proposal is a
reasonable effort to accommodate the needs of market participants.
In addition, the Commission notes that the proposal, while
increasing the positions limits for narrow-based index options,
continues to reflect the unique characteristics of each index option
and maintains the structure of the current three-tiered system.
Specifically, the lowest proposed limit, 9,000 contracts, will apply to
narrow-based index options in which a single underlying stock accounts
for 30% or more of the index value during the 30-day period immediately
preceding the Exchange's review of industry index option positions
limits. A position limit of 12,000 contracts will apply if any single
underlying stock accounts, on average, for 20% or more of the index
value or any five underlying stocks account, on average for more than
50% of the index value, but no single stock in the group accounts, on
average, for 30% or more of the index value during the 30-day period
immediately preceding the Exchange's review of industry index option
position limits. The 15,000 contract limit will apply only if the
Exchange determines that the conditions requiring either the 9,000
contract limit or the 12,000 contract limit have not occurred.
The Commission believes that the proposed increases for the three
tiers of 25%, 33%, and 50%, for highest to lowest, respectively, appear
to be appropriate and consistent with the Commission's evolutionary
approach to position and exercise limits. In this regard, the absence
of discernible manipulative problems under the current three-tiered
position and exercise limit system for narrow-based index options leads
the Commission to conclude that the increases proposed by the Exchange
are warranted. The Commission recognizes that there are no ideal limits
in the sense that options positions of any given size can be stated
conclusively to be free of any manipulative concerns. Based upon the
absence of discernible manipulation or disruption problems under
current limits, however, the Commission believes that the proposed
limits can be safely considered. Accordingly, the Commission believes
that the Amex's proposed increases of existing position and exercise
limits for narrow-based index options is appropriate.\7\
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\7\ The Commission continues to believe that proposals to
increase position limits and exercise limits must be justified and
evaluated separately. After reviewing the proposed exercise limits,
along with the eligibility criteria for each tier, the Commission
has concluded that the proposed exercise limit increases for the
three-tiered framework do not raise manipulation problems or
increase concerns over market disruption in the underlying
securities.
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The Commission notes that the Exchange has had considerable
experience monitoring the current three-tiered framework in narrow-
based index options. The Commission has not found that differing
position and exercise limit requirements based on the particular
options product to have created programming or monitoring problems for
securities firms, or to have led to significant customer confusion.
Based on the current experience in handling position and exercise
limits, the Commission believes that the proposed increase in position
and exercise limits for narrow-based index options will not cause
significant problems.
Finally, the Commission believes that the Exchange's surveillance
programs are adequate to detect and to deter violations of position and
exercise limits as well as to detect and deter attempted manipulative
activity and other trading abuses through the use of such illegal
positions by market participants.
The Commission finds good cause to approve the proposal, as
amended, prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. On October 24, 1996,
the Commission approved an identical proposal for the Philadelphia
Stock Exchange, Inc. (``Phlx'').\8\ The Phlx's proposal was subject to
the full comment period and generated no responses. Amendments Nos. 1
and 2 conformed the Amex's rule filing to the Phlx's proposal.
Accordingly, the Commission believes that it is consistent with
Sections 6(b)(5) and 19(b)(2) of the Act to approve the proposed rule
change, as amended, on an accelerated basis.
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\8\ See Securities Exchange Act Release No. 37863 (October 24,
1996), 61 FR 56599 (November 1, 1996) (order establishing position
and exercise limits for narrow-based index options at 9,000, 12,000,
or 15,000 contracts) (Phlx-96-33).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) \9\ of the
Act, that the proposed rule change (File No. SR-Amex-96-41), as
amended, is hereby approved on an accelerated basis.
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\9\ 15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2260 Filed 1-29-97; 8:45 am]
BILLING CODE 8010-01-M
