[Federal Register Volume 63, Number 131 (Thursday, July 9, 1998)]
[Notices]
[Pages 37151-37153]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18147]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40159; File No. SR-Amex-98-22]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange, Inc., Relating to an Increase in
Position and Exercise Limits for Standardized Equity Options
July 1, 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 June 24, 1998, the American Stock Exchange,
Inc. (``Amex'' 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.
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\1\ 15 U.S.C. 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
The Amex proposes to amend Exchange Rule 904 to increase position
and exercise limits for standardized equity options 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
The Amex is proposing to increase the position and exercise limits
for equity options traded on the Exchange to three times their current
levels. Currently, Amex Rule 904 subjects equity options to one of the
five different position limits depending on the trading volume and
outstanding shares for the underlying security. Rule 905 establishes
exercise limits for the corresponding options at the same levels.\3\
The limits 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
will be: 13,500; 22,500; 31,500; 60,000; and 75,000. The Exchange
believes sophisticated surveillance techniques at options exchanges
adequately protect the integrity of the markets for the options that
will be subject to these increased position and exercise limits.
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\3\ Rule 905 states ``no member or member organization shall
exercise, for any account in which such member or member
organization has an interest or for the account of any partner,
officer, director or employee thereof or for the account of any
customer, a long position in any option contract of a class of
options dealt in on the Exchange if as a result thereof such member
or member organization, or partner, officer, director or employee
thereof or customer acting alone or in concert with others, directly
or indirectly has or will have exercised within any five (5)
consecutive business days aggregate long positions in excess of: (i)
the number of option contracts set forth as the position limit in
Rule 904 in a class of options for which the underlying security is
a stock. * * *''
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Manipulation. The Amex believes that position and exercise limits,
at their current levels, no longer serve their stated purpose. 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 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 of disruption of the options market itself,
especially, illiquid options classes.\4\
\4\ Exchange Act Release No. 39489 (December 24, 1997), 63 FR
276 (January 5, 1998).
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On the twenty-fifth anniversary of listed options trading, 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, Amex believes that
routine oversight inspections of Amex'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. These procedures entail a daily monitoring of market
movements via automated surveillance techniques to identify unusual
activity in both the options and underlying stock. Further, the
Exchange believes the significant increases in unhedged options capital
charges resulting from a September 1997 adoption of risk-based haircuts
and the Exchange margin requirements applicable to these products under
Exchange rules serves as a more effective protection than position
limits.\5\
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\5\ See Exchange Act Release No. 38248 (February 6, 1997), 62 FR
6474 (February 12, 1997) (adopting Risk Based Haircuts); and Amex
Rule 462.
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Further, large stock holdings must be disclosed to the Commission
by way of Schedule 13D or 13G.\6\ Options positions are part of any
reportable positions and cannot be legally hidden. In addition,
Exchange Rule 906--which requires members to file reports with the
Exchange for any customer who held aggregate long or short positions of
200 or more option contracts of any single class for the previous day--
will remain unchanged and an important part of the Exchange's
surveillance efforts.
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\6\ Exchange Act Rule 13d-1.
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Position and exercise limits restrict legitimate options use. 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. For example, existing equity position limits could
restrict the number of put options that could be sold under a corporate
buyback program.\7\
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\7\ 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.
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Financial requirements. The Exchange believes that financial
requirements imposed by the Exchange and by the Commission adequately
address concerns that a member or its customer may try to maintain an
[[Page 37152]]
inordinately large unhedged position in an equity 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. It should also be noted that the Exchange has the
authority under paragraph (d)(2)(K) of Rule 462 to impose a higher
margin requirement upon member or member organization when the Exchange
determines a higher requirement is warranted. 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.
Past increases have had no adverse consequences. Equity position
limits have been gradually expanded from 1,000 contracts in 1973 to the
current level of 25,000 contracts for the largest and most active
stocks. In 1997, the SEC approved the elimination of position and
exercise limits in FLEX Equity options under a two-year pilot
program.\8\ To date, there have been no adverse effects on the market
as a result of the past increases in the limits for equity options or
the elimination of position and exercise limits for FLEX Equity
options.
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\8\ Exchange Act Release No. 39032 (September 9, 1997), 62 FR
48683 (September 16, 1997).
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Changes will allow options exchanges to compete more fairly with
OTC markets. The Commission has stated that ``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.'' \9\ However, in today's market, equity position limits put
listed options at a competitive disadvantage to over-the-counter
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. Member firms
continue to express concern to the Exchange that position limits on
Amex products are an impediment to their business and that they have no
choice but to move their business to off-shore markets where position
limits are not an issue.
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\9\ See H.R. Rep. No. IFC-3, 96th Cong., 1st Sess. At 198-91
(Comm. Print 1978).
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In addition, the Commission has recently approved the NASD's
proposed rule change to raise position limits 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).\10\
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\10\ 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 Amex in this filing.
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Because conventional options often have nearly the identical terms
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. The proposed rule changes should help
to attract business back to the Exchange where the trades will be
subject to reporting requirements and surveillance. In its release
approving the elimination of FLEX equity option limits for a two-year
pilot period, the Commission states that the elimination of position
limits will allow the listed options markets to better compete with the
OTC market.\11\
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\11\ Exchange Act Release No. 39032 (September 9, 1997), 62 FR
48683 (September 16, 1997).
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[T]he 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. The attributes
of the Exchanges' options markets versus an OTC market include, but
are not limited to, a centralized market center, an auction market
with posted transparent market quotations and transaction reporting,
parameters and procedures for clearance and settlement, and the
guarantee of the OCC for all contracts traded on the Exchanges.\12\
\12\ 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.
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It should also be noted that individual stocks are not subject to
position limits. Investors can theoretically hold 100% of a company's
shares outstanding as long as they file the appropriate Schedule 13D or
13G. The Exchange believes the increase in the position and exercise
limits will better enable the Exchange to complete against the OTC
markets and is an appropriate and responsible increase given the nature
of the Exchange's surveillance.
2. Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) \13\ of the Act, in general, and furthers the
objectives of Section 6(b)(5),\14\ in particular, in that it is
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, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, to protect investors
and the public interest and is not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
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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 Other
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 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
[[Page 37153]]
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-98-22 and should be submitted by July
30, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18147 Filed 7-8-98; 8:45 am]
BILLING CODE 8010-01-M
