99-30321. Self-Regulatory Organizations; American Stock Exchange, Inc.; Philadelphia Stock Exchange; Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amex Amendment No. 1 and Phlx Amendment No. 2 ...  

  • [Federal Register Volume 64, Number 224 (Monday, November 22, 1999)]
    [Notices]
    [Pages 63837-63839]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 99-30321]
    
    
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    SECURITIES AND EXCHANGE COMMISSION
    
    [Release No. 34-42132; File Nos SR-Amex-98-39; SR-Phlx-98-39]
    
    
    Self-Regulatory Organizations; American Stock Exchange, Inc.; 
    Philadelphia Stock Exchange; Order Approving Proposed Rule Change and 
    Notice of Filing and Order Granting Accelerated Approval to Amex 
    Amendment No. 1 and Phlx Amendment No. 2 Thereto Relating to an 
    Increase in Position and Exercise Limits for Narrow-Based Index Options
    
    November 12, 1999.
    
    I. Introduction
    
        On October 13, 1998, and on September 3, 1998, the American Stock 
    Exchange, Inc. (``Amex'') and the Philadelphia Stock Exchange, Inc. 
    (``Phlx'') (collectively, the ``Exchanges'') respectively submitted to 
    the Securities and Exchange Commission (``SEC'' or ``Commission''), 
    pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
    (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
    proposed rule changes to increase position and exercise limits for 
    narrow-based index options.
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        \1\ 15 U.S.C. 78s(b)(1).
        \2\ 17 CFR 240.19b-4.
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        The proposed rule changes were published for comment in the Federal 
    Register on December 14, 1998, and December 17, 1998, respectively.\3\ 
    No comments were received on the proposal. Amex and Phlx filed 
    amendments to the proposed rule changes on September 2, 1999, and July 
    16, 1999, respectively.\4\ This order approves the proposals, as 
    amended.
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        \3\ See Exchange Act Release Nos. 40756 (December 7, 1998), 63 
    FR 68809 (December 14, 1998); 40757 (December 7, 1998), 63 FR 69704 
    (December 17, 1998). Phlx Amendment No. 1 was published for comment 
    in the Notice. See Letter to Michael Walinskas, Deputy Associate 
    Director, Division of Market Regulation, Commission, from Nandita 
    Yagnik, Attorney, Phlx, dated September 25, 1998.
        \4\ See Letter from Scott G. VanHatten, Legal Counsel, Amex, to 
    Richard Strasser, Assistant Director, Division of Market Regulation, 
    Commission, dated September 2, 1999 (``Amex Amendment No. 1''); and 
    Letter from Nadita Yagnik, Phlx, to Michael Walinskas, Associate 
    Director, Division of Market Regulation, Commission, dated July 156 
    1999 (``Phlx Amendment No. 2''). These amendments propose to set the 
    position and exercise limits at 18,000, 24,000, and 31,500 
    contracts, rather than the originally proposed tripled limits.
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    II. Description
    
        The Exchanges propose to increase position and exercise limits for 
    narrow-based index options traded on each Exchange.\5\ Specifically, 
    the Exchanges' rules provide three different position limits depending 
    on index components' relative weightings in the index.\6\ The current 
    limits for narrow-based index options are 9,000, 12,000 and 15,000 
    contracts on the same side of the market. Under the proposed changes, 
    the new limits will be 18,000, 24,000, and 31,500.
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        \5\ Amex trades options on the following narrow-based indices: 
    Airline, Biotechnology, Computer Hardware, Computer Technology, de 
    Jager Year 2000, Disk Drive, [email protected] Week Internet, Morgan 
    Stanley Commodity Related, Morgan Stanley High-Technology 35, 
    Natural Gas, Networking, North American Telecommunications, Oil, 
    Pharmaceutical, Securities Broker/Dealer, CSFB Technology Index, 
    Deutsche Bank Energy Index, TheStreet.com E-Commerce Index, and 
    TheStreet.com E-Finance Index.
        Phlx trades options on the following narrow-based indices: Gold/
    Silver Index (``XAU''); Utility Index (``UTY''); Phlx/KBW Bank Index 
    (``BKX''); Semiconductor Index (``SOX''); Forest and Paper 
    (``FPP''); Box Maker Index (``BMX''); OTC Prime Index (``OTX''); Oil 
    Service Index (``OSC''); and TheStreet.com Internet Index (``DOT'').
        \6\ See Amex Rule 904C. Amex Rule 905C establishes exercise 
    limits for the corresponding options at the same levels. See Phlx 
    Rule 1001A. Phlx Rule 1002A establishes exercise limits for the 
    corresponding option at the same levels.
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    III. Discussion
    
        The Commission finds that the proposed rule changes are consistent 
    with the requirements of the Act and the rules and regulations 
    thereunder applicable to a national securities exchange, and, in 
    particular, with the requirements of Section 6 of the Act.\7\ 
    Specifically, the Commission believes the proposed rule changes are 
    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 facilitating transactions in 
    securities, and to remove impediments to and perfect the mechanism of a 
    free and open market and a national market system.
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        \7\ See 15 U.S.C. 78f(b). In approving this rule change, the 
    Commission notes that it has considered the proposal's impact on 
    efficiency, competition, and capital formation, consistent with 
    Section 3 of the Act. Id. at 78c(f).
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        Position limits serve as a regulatory tool designed to address 
    potential manipulative schemes and adverse market impact surrounding 
    the use of options. In the past, the Commission has stated that:
    
        Since the inception of standardized options trading, the options 
    exchanges have had rules imposing limits on the aggregate number of 
    options contracts that a member or customer could hold or exercise. 
    These rules are intended to prevent the establishment of options 
    positions that can be used or might create incentives to manipulate 
    or disrupt the underlying market
    
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    so as to benefit the options position. In particular, position and 
    exercise limits are designed to minimize the potential for mini-
    manipulations and for corners or squeezes of the underlying market. 
    In addition such limits serve to reduce the possibility for 
    disruption of the options market itself, especially in illiquid 
    options classes.\8\
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        \8\ Exchange Act Release Nos. 39489 (December 24, 1997), 63 FR 
    276 (January 5, 1998) (SR-CBOE-97-11) (order approving an increase 
    in OEX position and Exercise limits); 31330 (October 16, 1992), 57 
    FR 48408 (October 23, 1992) (SR-Amex-92-13) (order approving an 
    increase in Institutional Index Options position and exercise 
    limits).
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        In general, the Commission has taken a gradual, evolutionary 
    approach toward the expansion of position and exercise limits.\9\ The 
    Commission has been careful to balance two competing concerns when 
    considering the appropriate level at which to set option position and 
    exercise limits. The Commission has recognized that the limits must be 
    sufficient to prevent investors from disrupting the market in the 
    component securities comprising the indexes. At the same time, the 
    Commission has determined that limits must 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.\10\
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        \9\ The Commission approved increases in position limits in 
    1983, 1993, 1995, and 1996. See, e.g., Exchange Act Release No. 
    37863 (October 24, 1996), 61 FR 56599 (November 1, 1996) (SR-Phlx-
    96-33).
        \10\ See H.R. Rep. No. IFC-3, 96th Cong., 1st Sess. at 189-91 
    (Comm. Print 1978).
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        In this regard, the Exchanges have represented that the current 
    position and exercise limits impede their members; ability to execute 
    investment strategies. Given the Commission's traditional, gradual 
    approach to position and exercise limits, and that three years have 
    passed since these limits have been raised, the Commission believes 
    that it is reasonable to allow for an increase in the limits for 
    narrow-based index options to accommodate the needs of market 
    participants.
        The Commission believes that an increase in position and exercise 
    limits for narrow-based index options is appropriate for several 
    reasons. First, the Commission believes that increasing position and 
    exercise limits for narrow-based index options may bring additional 
    depth and liquidity, in terms of both volume and open interest, to 
    these index options classes without significantly increasing concerns 
    regarding intermarket manipulations or disruptions of the index options 
    or the underlying component securities.
        Second, increasing position and exercise limits for narrow-based 
    index options should better serve the hedging needs of institutions 
    that engage in trading strategies different from those covered under 
    the index hedge exemption policy.
        Third, the Commission notes that the proposals, while increasing 
    the position limits for narrow-based index options, continue to reflect 
    the unique characteristic of each index option and to maintain the 
    structure of the current three-tiered system. Specifically, the lowest 
    proposed limit, 18,000 contract 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 
    Exchanges' semi-annual review of industry index option position limits. 
    A position limit of 24,000 contracts will apply if any single 
    underlying stock accounts, on average for 20% or more of the index 
    value or any fire underlying stocks account, on average for more than 
    50% of the index value, but no single value in the group account, on 
    average, for 30% or more of the index value during the 30-day period 
    immediately preceding the Exchange's semi-annual review of industry 
    index option position limits. The 31,500 contract limit will apply only 
    if the Exchanges respectively determine that the conditions requiring 
    either the 18,000 contract limit or the 24,000 contract limit have not 
    occurred.\11\
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        \11\See Amex Rule 904C(c); Phlx Rule 1001A(b).
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        Fourth, the Commission believes that financial requirements imposed 
    by the Exchanges and by the Commission adequately address concerns that 
    an Amex or Phlx member or their customer may try to maintain a large 
    unhedged position in a narrow-based index option. Current margin and 
    risk-based haircut methodologies serve to limit the size of positions 
    maintained by any one account by increasing the margin and/or capital 
    that a member must maintain for a large position held by itself or by 
    its customer.\12\ The Exchanges also have the authority under its rules 
    to impose a higher margin requirement upon the member or member 
    organization when it determines a higher requirement is warranted.\13\ 
    Monitoring accounts maintaining large positions should provide the 
    Exchanges with the information necessary to determine whether to impose 
    additional margin and/or whether to assess capital charges upon a 
    member organization carrying the account. In addition, the Commission's 
    net capital rule, Rule 15c3-1 under the Exchange Act, imposes a capital 
    charge on members to the extent of any margin deficiency resulting from 
    the higher margin requirement. The significant increases in unhedged 
    options capital charges resulting from the September 1997 adoption of 
    risk-based haircuts and the Exchanges' margin requirements applicable 
    to these products under Exchange rules serves as an additional form of 
    protection.\14\ The Commission also notes that The Options Clearing 
    Corporation(``OCC'') will serve as the counter-party guarantor in every 
    exchange-traded transaction.
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        \12\ Exchange Act Rule 15c3-1 requires a capital charge equal to 
    the maximum potential loss on a broke-dealer's aggregate index 
    position over a  +  (-) 10% market move. Exchange margin rules 
    require margin on naked index options, which are in, or at-the-money 
    equal to a 15% move in the underlying index; and a minimum 10% 
    charge for naked out-of-the money contracts. At an index value of 
    9,000 this approximates of a $90,000 to $135,000 requirement per 
    each unhedged contract.
        \13\ See Amex Rule 462(d)(2)(K); and Phlx Rule 722(i)(8).
        \14\ See Exchange Act Release No. 38248 (February 6, 1997), 62 
    FR 6474 (February 12, 1997) (adopting Risk Based Haircuts); Phlx 
    Rule 722; and Amex Rule 462.
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        Fifth, the Commission notes that the index options and other types 
    of index-based derivatives (e.g., forwards and swaps) are not subject 
    to position and exercise limits in the OTC market. The Commission 
    believes that increasing position and exercise limits for narrow-based 
    index options will better allow the Exchanges to compete with the OTC 
    market.
        Sixth, the Commission notes that it recently approved rule filings 
    increasing position and exercise limits for standardized equity 
    options.\15\ The Commission also approved rule filings eliminating 
    position and exercise limits for certain broad-based index options.\16\ 
    Given these recent changes to the various exchanges' position limit 
    rules, the Commission believes it is reasonable to allow for 
    corresponding changes to the position and exercise limits for narrow-
    based index options.\17\
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        \15\ See Exchange Act Release No. 40875 (December 31, 1998), 64 
    FR 1842 (January 12, 1999) (File Nos. SR-CBOE-98-25; Amex-98-22; 
    PCX-98-33; and Phlx-98-36) (increasing position limits for 
    standardized equity options to 13,500, 22,500, 31,500, 60,000, and 
    75,000).
        \16\ See Exchange Act Release Nos. 40969 (January 22, 1999), 64 
    FR 4911 (February 1, 1999) (File No. SR-CBOE-28-23); 41011 (February 
    1, 1999), 64 FR 6405 (February 9, 1999) (File No. SR-Amex-98-38).
        \17\ The Commission notes that the trend toward increasing 
    position and exercise limits for standardized equity options and 
    eliminating them for certain broad-based index options, while a 
    factor in considering increases for narrow-based index options, does 
    not automatically dictate the need for or appropriateness of an 
    increase in position and exercise limits for narrow-based index 
    options. The fact that many narrow-based index options include non-
    options eligible components requires that the Exchanges and the 
    Commission give additional consideration to manipulation and other 
    regulatory concerns prior to any increase. The Commission has 
    considered these issues and believes that the proposed increases are 
    appropriate at this time.
    
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        Finally, the absence of any discernable manipulative problems for 
    narrow-based index options at existing levels leads the Commission to 
    conclude that the proposed increases are reasonable and that they can 
    be safely implemented. The Commission believes that the Exchanges' 
    surveillance programs are adequate to detect and deter violations of 
    position and exercise limits, as well as to detect and deter attempted 
    manipulation and other trading abuses through the use of such illegal 
    positions by market participants.\18\
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        \18\ The Commission emphasizes that the Exchanges must closely 
    monitor compliance with position and exercise limits and impose 
    appropriate sanctions for failures to comply with the Exchanges' 
    position and exercise limit rules.
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        The Commission finds good cause to approve Amex Amendment No. 1 and 
    Phlx Amendment No. 2 to the proposed rule change prior to the 30th day 
    after the date of publication of notice of filing thereof in the 
    Federal Register. These amendments set the new position and exercise 
    limits at 18,000, 24,000, and 31,500 contracts. In light of the 
    Commission's traditional, gradual approach to position limits, the 
    Commission believes that these limits are more appropriate than those 
    initially proposed. The Commission also notes that the limits being 
    approved reflect percent increases that more closely correspond to 
    previous increases. Finally, the Commission notes that the higher 
    limits were noticed for comment and no comments were received. Given 
    that no regulatory issues were raised with the higher limits, the 
    Commission believes approving the lower limits on an accelerated basis 
    is appropriate under the Act. Accordingly, the Commission finds that, 
    consistent with Sections 6(b) and 19(b)(2) of the Act, there is good 
    cause to approve Amex Amendment No. 1 and Phlx Amendment No. 2 to the 
    proposed rule changes on an accelerated basis.
    
    IV. Solicitation of Comments
    
        Interested persons are invited to submit written data, views and 
    arguments concerning Amex Amendment No. 1 and Phlx Amendment No. 2, 
    including whether the amendments are consistent with the Exchange Act. 
    Persons making written submissions should file six copies thereof with 
    the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
    N.W., Washington, D.C. 20549-0609. 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 Room, located at the above address. Copies of such filing 
    will also be available for inspection and copying at the principal 
    office of the self-regulatory organization. All submissions should 
    refer to File No. SR-Amex-98-39 or SR-Phlx-98-39 and should be 
    submitted by December 13, 1999.
    
    V. Conclusion
    
        It is therefore ordered, pursuant to Section 19(b)(2) of the 
    Act,\19\ that the proposed rule changes (SR-Amex-98-39; SR-Phlx-98-39) 
    are approved, as amended.
    
        \19\ 15 U.S.C. 78s(b)(2).
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        For the Commission, by the Division of Market Regulation, 
    pursuant to delegated authority.\20\
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        \20\ 17 CFR 200.30-3(a)(12).
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    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 99-30321 Filed 11-19-99; 8:45 am]
    BILLING CODE 8010-01-M
    
    
    

Document Information

Published:
11/22/1999
Department:
Securities and Exchange Commission
Entry Type:
Notice
Document Number:
99-30321
Pages:
63837-63839 (3 pages)
Docket Numbers:
Release No. 34-42132, File Nos SR-Amex-98-39, SR-Phlx-98-39
PDF File:
99-30321.pdf