[Federal Register Volume 63, Number 58 (Thursday, March 26, 1998)]
[Notices]
[Pages 14743-14745]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7917]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39771; File No. SR-NASD-98-15]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to Elimination of
Position and Exercise Limits for FLEX Equity Options
March 19, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on February 17, 1998, NASD Regulation, Inc.
(``NASD Regulation'') 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 self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
For the reasons discussed below, the Commission is granting accelerated
approval of the proposed rule change.
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\1\ 15 U.S.C. Sec. 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
NASD Regulation is proposing to amend Rule 2860(b) of the National
Association of Securities Dealers, Inc. (``NASD'' or ``Association''),
to establish the NASD member firms and their customers shall have the
same position and exercise limits for FLEX Equity Options as the firms
that are also members of the exchange on which such FLEX Equity Options
trade. Below is the text of the proposed rule change. Proposed new
language is in italics.
Rule 2860. Options
* * * * *
(b) Requirements.
(1) General.
(A) Applicability--This Rule shall be applicable (i) to the trading
of options contracts issued by The Options Clearing Corporation and
displayed on The Nasdaq Stock Market and to the terms and conditions of
such contracts; (ii) to the extent appropriate unless otherwise stated
herein, to the conduct of accounts, the execution of transactions, and
the handling of orders in exchange-listed options by members who are
not members of an exchange on which the option executed is listed;
(iii) to the extent appropriate unless otherwise stated herein, to the
conduct of accounts, the execution of transactions, and the handling of
orders in conventional options; and (iv) other matters related to
options trading.
Unless otherwise indicated herein, subparagraphs (3) through (12)
shall apply only to options displayed on Nasdaq and standardized and
conventional on common stock and subparagraphs (13) through (24) shall
apply to transactions in all options as defined in paragraph (a),
including common stock. The position and exercise limits for FLEX
Equity Options for members who are not also members of the exchange on
which FLEX Equity Options trade shall be the same as the position and
exercise limits as applicable to members of the exchange on which such
FLEX Equity Options are traded.
* * * * *
[[Page 14744]]
(2) Definitions.
The following terms shall, unless the context otherwise requires,
have the stated meanings:
* * * * *
(W) Flex Equity Option--The term ``Flex Equity Option'' means any
options contract issued, or subject to issuance by, The Options
clearing Corporation whereby the parties to the transaction have the
ability to negotiate the terms of the contract consistent with the
rules of the exchange on which the options contract is traded.
(X)-(ZZ) Redesignated accordingly.
* * * * *
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 self-regulatory organization
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 I Item IV below. The self-regulatory organization
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
On September 5, 1997, The Nasdaq Stock Market, Inc. (``Nasdaq'')
filed a proposed rule change with the Commission to: (1) amend NASD
Rule 2860(b) to disaggregate conventional equity options from exchange-
traded equity options for position limit purposes and establish a new
conventional equity option base position limit of three times the limit
allowed for standardized options on the same underlying security; \3\
(2) amend the NASD's OTC Collar Aggregation Exemption to provide that
the exemption may be utilized with respect to an entire conventional
equity options position, not just that portion of the position that was
established pursuant to the NASD's Equity Option Hedge Exemption; and
(3) eliminate position and exercise limits on FLEX Equity Options.
Shortly thereafter, on September 9, 1997,\4\ the Commission approved a
two-year pilot program (``Pilot Program'') to eliminate position and
exercise limits for FLEX Equity Options, which are traded on the
American Stock Exchange, Inc. (``Amex''), the Chicago Board Options
Exchange, Inc. (``CBOE''), and the Pacific Exchange, Inc. (``PCX'')
(collectively ``Options Exchanges'').\5\ In light of the adoption of
the Pilot Program, NASD Regulation seeks to amend its rules to be
consistent with the rules of the Options Exchanges. The NASD has
withdrawn its proposed rule change (SR-NASD-97-67) dated September 5,
1997, and recently refiled a proposed rule change addressing items (1)
and (2) described above.\6\ The NASD determined to submit the instant
rule filing concerning FLEX Equity Options separately in order to
obtain expedited approval, which is necessary to avoid inconsistencies
between the rules of the NASD and the Options Exchanges.
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\3\ Telephone Conversation between Gary L. Goldsholle, Office of
General Counsel, NASD Regulation, and Christine Richardson, Division
of Market Regulation, Commission, February 26, 1998.
\4\ See Exchange Act Release No. 39032 (September 9, 1997), 62
FR 48683 (September 16, 1997).
\5\ FLEX Equity Options, are exchange-traded options issued by
The Options Clearing Corporation that give investors the ability,
within specified limits, to designate certain terms of the option
(i.e., the exercise price, exercise style, expiration date, or
option type), The Commission notes that it recently approved rules
to permit the Philadelphia Stock Exchange to list and trade FLEX
Equity Options. See Exchange Act Release No. 39549 (January 14,
1998), 63 FR 3601 (January 23, 1998).
\6\ See SR-NASD-98-22.
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The NASD's option position and exercise limits apply, among other
things, to ``the conduct of accounts, the execution of transactions,
and the handling of orders in exchange-listed options by members who
are not members of an exchange on which the option executed is
listed.'' \7\ As currently written, the NASD's position limits do not
provide any exemption for FLEX Equity Options. Consequently, NASD
member firms who are not members of an Options Exchange and who effect
proprietary or customer FLEX Equity Options through members of the
Options Exchanges are subject to options position and exercise limits.
In contrast, Options Exchange member firms executing such orders in
FLEX Equity Options are not subject to NASD options position and
exercise limits.\8\ NASD Regulation does not believe that NASD and
Options Exchange member firms and their customers should be subject to
different position and exercise limits with respect to FLEX Equity
Options.
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\7\ NASD Rule 2860(b)(1)(A).
\8\ In other words, NASD member firms that are also members of
an Options Exchange are not subject to the NASD's options position
and exercise limits with regard to FLEX Equity Options.
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To reconcile the NASD rules with those of the Options Exchanges,
the proposed rule change provides that the position and exercise limits
for FLEX Equity Options \9\ for NASD members who are not members of an
Options Exchange shall be the same as the position and exercise limits
applicable to members of the exchange on which such FLEX Equity Options
are traded. Moreover, since the proposed rule change incorporates the
position and exercise limits for FLEX Equity Options established by the
Options Exchanges, the elimination of position and exercise limits for
FLEX Equity Options will continue only as long as the Pilot Program
remains in effect, subject, of course, to extensions by the Commission
or the adoption of a rule permanently eliminating position and exercise
limits for FLEX Equity Options.
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\9\ The proposed rule change defines FLEX Equity Options as any
options contract issued, or subject to issuance by, The Options
Clearing Corporation whereby the parties to the transaction have the
ability to negotiate the terms of the contract consistent with the
rules of the exchange on which the options contracts is traded.
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Finally, although the proposed rule change does not specify any of
the reporting, margin and capital charge requirements of the Pilot
Program, NASD members and their customers will be effectuating such
requirements through the Options Exchange member (who is subject to the
requirements of the Pilot Program) effecting the FLEX Equity Option
transaction.
2. Statutory Basis
NASD Regulation believes the proposed rule change is consistent
with Section 15A(b)(6) of the Act,\10\ which requires, among other
things, 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, and, in general, to protect
investors and the public interest. Specifically, NASD Regulation
believes that amending its rules to incorporate changes in the position
and exercise limits for FLEX Equity Options as a result of the Pilot
Program achieves these purposes.
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\10\ 15 U.S.C. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD Regulation does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
[[Page 14745]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
NASDA Regulation has requested that the Commission find good cause
pursuant to Section 19(b)(2) of the Act for approving the proposed rule
change prior to the 30th day after publication in the Federal Register.
The Commission finds that the proposed rule change is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to the NASD and, in particular, the requirements of Section
15A and the rules and regulations thereunder. Specifically, the
Commission finds that the proposed rule change promotes just and
equitable principles of trade, removes impediments to and perfects the
mechanism of a free and open market and a national market system, and
is not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.
In general, the Commission believes that the proposed rule change,
eliminating position and exercise limits for FLEX Equity Options for
members of the NASD who are not also a member of an Options Exchange,
is appropriate given that the Commission recently approved similar
proposed rule changes for the Options Exchanges.\11\ In the approval
order for the Options Exchanges, the Commission cited several reasons
for approving the elimination of position and exercise limits for FLEX
Equity Options on a pilot basis. Those reasons apply here as well.
First, the FLEX Equity Options market is characterized by large,
sophisticated institutional investors (or extremely high net worth
individuals), who have both the experience and ability to engage in
negotiated, customized transactions. For example, with a required
minimum size of 250 contracts to open a transaction in a new series,
FLEX Equity Options are designed to appeal to institutional investors,
and it is unlikely that retail investors would be able to engage in
options transactions at that size. Second, all of the Options
Exchanges' other current rules and provisions governing FLEX Equity
Options remain applicable. Third, the Options Clearing Corporation will
serve as the counter-party guarantor in every exchange-traded
transaction. Fourth, the elimination of position and exercise limits
for FLEX Equity Options potentially could expand the depth and
liquidity of the FLEX Equity Option market without significantly
increasing concerns regarding intermarket manipulations or disruptions
of the options or the underlying securities. Finally, the Exchanges'
surveillance programs and enhanced monitoring procedures will be
applicable to the trading of FLEX Equity Options and should detect and
deter trading abuses arising from the elimination of position and
exercise limits.
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\11\ See Exchange Act Release No. 39032 (September 9, 1997), 62
FR 48683 (September 16, 1997).
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The Commission finds good cause for approving the proposed rule
change prior to the 30th day after the date of publication of notice of
filing thereof in the Federal Register. The Commission notes that the
current rules have the effect of placing certain NASD member firms and
their customers at a competitive disadvantage to Options Exchange
member firms with respect to FLEX Equity Options position and exercise
limits because the latter are not subject to the NASD's position and
exercise limits. The Commission believes that accelerated approval of
the proposed rule change will conform the NASD rules concerning
position and exercise limits for FLEX Equity Options with those of the
Options Exchanges, thereby resulting in consistent application of the
position and exercise limits for FLEX Equity Options. Accordingly, the
Commission believes that it is consistent with Section 15A of the Act
to approve the proposed rule change on an accelerated basis.
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, 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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Room. Copies of such filing will also
be available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-NASD-98-15 and
should submitted by April 16, 1998.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-NASD-98-15) is approved.
\12\ 15 U.S.C. Sec. 78s(b)(2).
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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. 98-7917 Filed 3-25-98; 8:45 am]
BILLING CODE 8010-01-M
