[Federal Register Volume 63, Number 134 (Tuesday, July 14, 1998)]
[Notices]
[Pages 37913-37914]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18639]
[[Page 37913]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40172; File No. SR-PCX-98-33]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Pacific Exchange, Inc. Relating to an Increase in
Position and Exercise Limits for Standardized Equity Options
July 6, 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 July 1, 1998, the Pacific Exchange, Inc.
(``PCX'' or ``Exchange'') 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 self-regulatory organization. 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).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The PCX is proposing to modify Rule 6.8 and Rule 6.9 relating to
position and exercise limits. The PCX proposes to increase the position
and exercise limits on standardized equity options traded on the
Exchange to three times their current levels.
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 in 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
Currently, PCX Rule 6.8 subjects equity options to one of five
different position limits depending on the trading volume and
outstanding shares of the underlying security. The levels are: 4,500;
7,500; 10,500;, 20,000; and 25,000 contracts on the same side of the
market. Under the proposed changes the new limits would be: 13,500;
22,500; 31,500; 60,000; and 75,000 contracts on the same side of the
market. The Exchange believes that sophisticated surveillance
techniques at the options exchanges adequately protect the integrity of
the markets for the options that will be subject to these increased
position and exercise limits. The Commission recently approved a
similar request from the National Association of Securities Dealers
(``NASD'') to triple the position and exercise limits for conventional
equity options with new limits set at 13,500; 22,500; 31,500; 60,000;
and 75,000 contracts on the same side of the market.\3\
---------------------------------------------------------------------------
\3\ See Exchange Act Release No. 40087 (June 12, 1998), 63 FR
33746 (June 19, 1998). The NASD's position limit filing established
position and exercise limits for conventional equity options
identical to those being proposed by PCX in this filing.
---------------------------------------------------------------------------
Commentary .01 of PCX Rule 6.9 refers to the established exercise
limits as 4,500; 7,500; 10,500; 20,000; and 25000 options contracts.
The rule states that the exercise limits established pursuant to PCX
Rule 6.9(a) shall be 4,500; 7,500; 10,500; 20,000; and 25,000 options
contracts of any particular class of option and it shall be the
responsibility of each Member or Member Organization accepting orders
for the purchase (in opening transactions) of option contracts to
inform customers of the applicable exercise limits. The PCX proposes to
change the exercise limits in PCX Rule 6.9 to 13,500; 22,500; 31,500;
60,000; and 75,000 options contracts of any particular class of option.
The Exchange believes that the existing surveillance procedures and
reporting requirements at options exchanges and clearing firms that
have been developed over the years are able to properly identify
unusual and illegal trading activity. In addition, PCX believes that
routine oversight inspections of PCX's regulatory programs by the
Commission have not uncovered any material inconsistencies or
shortcomings in the manner in which the Exchange's market surveillance
is conducted.
Position and Exercise Limits Restrict Legitimate Options Use and
Competition. In the Exchange's view, equity position limits prevent
large customers like mutual funds and pension funds from using options
to gain meaningful exposure to individual stocks, resulting in lost
liquidity in both the options market and the stock market. The Exchange
further believes that equity position limits also act as a barrier to
the use of options by corporations wishing to implement options
strategies with their own stock.\4\
---------------------------------------------------------------------------
\4\ The Commission notes that issuers would, of course, need to
comply with all applicable provisions of the federal securities laws
in conducting their share repurchase programs.
---------------------------------------------------------------------------
The Exchange believes that equity position limits put listed
options at a competitive disadvantage of over-the-counter (``OTC'')
derivatives. OTC dealers can execute options trades through overseas
subsidiaries not subject to NASD regulation, and therefore not subject
to position limits. As a result, the largest trades can go unobserved
and unmonitored for regulatory and oversight purposes. An increase in
the position limits is consistent with the Commission's reasons for the
elimination of FLEX equity option position limits. The Commission
recently approved the elimination of position limits for FLEX equity
options stating that the elimination will allow the listed options
markets to better compete with the OTC market.\5\
---------------------------------------------------------------------------
\5\ See Exchange Act Release No. 39032 (September 9, 1997) 62 FR
48683 (September 16, 1997). The Commission stated that ``the
elimination of position and exercise limits for FLEX equity options
allows the Exchanges to better compete with the growing OTC market
in customized equity options, thereby encouraging fair competition
among brokers and exchange markets.'' Id. at 48685. The Commission
notes that approval of the elimination of position and exercise
limits for FLEX equity options was granted for a two-year pilot
period and was based on several other factors including, in large
part, additional safeguards adopted by the exchanges to allow them
to monitor large options positions.
---------------------------------------------------------------------------
In addition, the Commission recently approved the NASD's proposed
rule change to raise the position and exercise limit for conventional
equity options (i.e., those options not issued, or subject to issuance
by the Options Clearing Corporation) to three times their current
levels (which is the same as three times the levels established by
current exchange rules for standardized options). Because conventional
options often have nearly identical term as standardized, exchange-
traded options, the Exchange believes the position limits for
standardized options should be at least as high as those for
conventional options.
2. Basis
The Exchange believes that the proposal is consistent with Section
6(b) \6\ of the Act, in general, and Section 6(b)(5) \7\ of the Act, in
particular, in that it is designed to perfect the mechanisms of a free
and open market, to promote just and equitable principles of trade, to
[[Page 37914]]
facilitate transactions in securities, and in general, to protect
investors and the public interest.
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change 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 self-regulatory organization 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, including whether the proposed rule
change is consistent with the Act. Persons making written submission
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., 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, 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-PCX-98-33 and should be
submitted by August 4, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18639 Filed 7-13-98; 8:45 am]
BILLING CODE 8010-01-M
