[Federal Register Volume 60, Number 5 (Monday, January 9, 1995)]
[Notices]
[Pages 2413-2415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-430]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35180; File No. SR-NASD-94-54]
Self-Regulatory Organizations; Notice of Proposed Rule Change by
the National Association of Securities Dealers, Inc. Relating to
Position and Exercise Limits for Equity Options Overlying Securities
Not Subject to Standardized Options Trading
December 30, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on October 12, 1994, the
National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the NASD.
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). [[Page 2414]]
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Propose Rule Change
The NASD proposes to amend Section 33 of the NASD's Rules of Fair
Practice, the NASD's position limit rule for standardized and
conventional options, to increase the position and exercise limits for
certain equity securities that are not subject to standardized options
trading.\2\ In particular, under the proposal, if a security qualifies
for a position limit of 7,500 contracts or 10,500 contracts,\3\ it will
be subject to that higher position limit, regardless of whether it has
standardized options traded on it or not.
\2\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 or group of investors
acting in concert. Exercise 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 fourth as the applicable
position limit for those options classes. See Sections 33(b)(3) and
(4) of the NASD Rules of Fair Practice.
\3\See infra note 4 for a description of how the position limit
for a particular equity security is determined.
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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 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 IV 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
Currently, under NASD rules, position and exercise limits for
exchange-listed options traded by access firms\4\ or their customers
are determined according to a ``three-tiered'' system, where, depending
upon the float and trading volume of the underlying security, the
position limit for options on that security is 4,500, 7,500, or 10,500
contracts.\5\ For conventional equity options trading by any NASD
member,\6\ if the underlying security is subject to standardized
options trading, the NASD's position limit for conventional options on
that security is the same position limit imposed by the options
exchange(s) trading the option. However, if the security underlying the
option is not subject to standardized options trading, the applicable
position limit for conventional options on the security is the lowest
tier, i.e., 4,500 contracts.
\4\``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.
\5\In this connection, the NASD's 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. Under the rules of
each of the options exchanges, if the security underlying a
standardized option has trading volume of 40,000,000 shares over the
most recent six-month period or trading volume of 30,000,000 shares
over the most recent six-month period and float of 120,000,000, it
is subject to a position limit of 10,500 contracts; if the security
underlying a standardized option has trading volume of 20,000,000
shares over the most recent six-month period or trading volume of
15,000,000 shares over the most recent six-month period and float
40,000,000, it is subject to a position limit of 7,500 contracts;
and, if the underlying security is ineligible for a 10,500 or 7,500
contract position limit, it is subject to a 4,500-contract position
limit. The rules of each options exchange are uniform in regard to
the above. See e.g., Commentary .07 to American Stock Exchange Rule
904 and Interpretation and Policy .02 to Chicago Board Options
Exchange Rule 4.11.
\6\Conventional equity options are defined in 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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In some instances, however, a security may qualify for an options
position limit of 7,500 or 10,500 contracts but it is subject to a
position and exercise limit of 4,500 contracts because it does not
underlie a standardized option. Given that these securities qualify for
higher position limits but are not eligible for them solely because
there is no standardized option traded on them in the U.S., the NASD
believes its option position limit rule may be unduly restrictive for
these securities and unnecessarily constrain members' legitimate
hedging activity. Accordingly, the NASD proposes to amend Section 33 to
provide that the position limit for options on a security shall be
determined by the position limit tier the security falls under,
regardless of whether the security is subject to standardized options
trading.\7\
\7\To ensure that the higher position limits for conventional
options overlying securities not subject to standardized options
trading are only available for securities qualifying for a position
limit of 7,500 or 10,500 contracts, a member must demonstrate to the
NASD's Market Surveillance Department that the security satisfies
the standards for such higher options position limit prior to
establishing an unhedged options position on that security in excess
of 4,500 contracts.
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The NASD believes its proposal is warranted for the following
reasons. First, if a security has sufficient trading volume and public
float to satisfy the standards for a position limit of 7,500 contracts
or 10,500 contracts, the NASD does not believe that raising the
position and exercise limits for conventional options on the security
will adversely affect the cash market for the security. In the NASD's
view, if the cash market for a security is large enough to qualify for
an options position limit of 7,500 contracts or 10,500 contracts, it is
irrelevant whether that security is only subject to conventional
options trading and not standardized options trading. The NASD believes
the primary consideration governing the appropriate position limit
level for options on a security should be the characteristics and size
of the underlying cash market for that security, not whether the
options overlying the security are standardized or conventional.
Second, the NASD does not believe its members' activities in the
conventional options market should be linked to or constrained by
decisions of the options exchanges concerning whether or not to trade
options on particular securities.
Moreover, the NASD believes that its proposal will not compromise
the stability of the securities markets underlying the conventional
options eligible for the higher position limits. In this regard, for
those securities that will be eligible for higher position limits under
the proposal, there will only be a slight increase in the percentage of
their capitalization that an investor or group of investors acting in
concert can control under the new position limits.
Therefore, the NASD believes the proposed rule change is consistent
with Section 15A(b)(6) of the Act. 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 the proposal will promote the maintenance of fair and orderly
markets because it will serve to facilitate the use [[Page 2415]] of
conventional equity options by investors seeking to satisfy their
legitimate hedging needs, without compromising the integrity of the
underlying securities markets. In addition, to the extent that
investors have greater assurance that they can hedge larger stock
positions through the use of conventional options, liquidity in the
underlying cash market may be enhanced by the proposal.
B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD believes that the proposed rule change will not result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act
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.
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 NASD 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 Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to File Number SR-NASD-94-54 and
should be submitted by January 30, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
\8\17 CFR 200.30-3(a)(12)(1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-430 Filed 1-6-95; 8:45 am]
BILLING CODE 8010-01-M
