[Federal Register Volume 64, Number 152 (Monday, August 9, 1999)]
[Notices]
[Pages 43233-43235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20414]
[[Page 43233]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41682; File No. SR-AMEX-99-13]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1 and 2 to the Proposed Rule Change by the
American Stock Exchange LLC Relating to Specialist Capital Requirements
August 2, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 2, 1999, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in items I, II,
and III below, which Items have been prepared by the Amex. On June 11,
1999, and July 16, 1999, the Amex filed with the Commission Amendment
Nos. 1 and 2 to the proposal.\3\ 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.
\3\ Amendment No. 1 revised the proposal to: (1) provide an
example comparing the financial requirements for options specialists
under the rules of the Amex, the Pacific Exchange (``PCX''), and the
Chicago Board Options Exchange (``CBOE''); and 92) provide examples
demonstrating the calculation of the capital requirements for joint
equity/options specialists. See letter from Scott G. Van Hatten,
Legal Counsel, Derivatives and Securities, Amex, to Richard
Strasser, Division of Market Regulation (``Division''), Commission,
dated June 10, 1999 (``Amendment No. 1''). Amendment No. 2 to the
proposal provides two charts setting forth specialist financial
requirements as of two dates in May 1999. See letter from Scott G.
Van Hatten, legal Counsel, Derivatives and Securities, Amex, to
Richard Strasser, Division, Commission, dated July 23, 1999
(``Amendment No. 2'').
In addition, the Amex filed a letter describing financial
safeguards applicable to specialists, including the clearing firm
guarantee of specialists' transactions (for specialists who are not
self-clearing), the Amex's daily review of each specialist's
financial condition, and the procedures the Amex follows when the
Exchange determines that a specialist is approaching the early
warning financial requirements level (120% of the minimum specialist
financial requirement). See letter form Scott G. Van Hatten, Legal
Counsel, Derivatives and Securities, Amex, to Richard Strasser,
Assistant Director, Division, Commission, dated June 10, 1999(``June
10 Letter'').
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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 Amex Rule 950(h) to revise the financial
requirements for options specialists. Specifically, the Amex proposes
to amend Amex Rule 950(h) to provide that the minimum financial
requirement for an options specialist will be $600,000 plus $25,000 for
each option issue in excess of the initial ten issues in which the
specialist is registered. In addition, the Amex proposes to revise Amex
Rule 950(h), Commentary .01 to specify that for an option specialist
that is also an equity specialist, the minimum financial requirement of
$600,000 specified in Amex Rule 171 \4\ will apply to the entirety of
the specialist's business, in both equities and options. Under Amex
Rule 950(h), Commentary .01, as amended, the minimum financial
requirement for an options specialist also serving as an equity
specialist will be $600,000, provided that the financial requirement
for either the equity allocation or the options allocation does not
exceed $600,000. If the financial requirement for either the equity
allocation or the options allocation exceeds $600,000, then the
specialist's financial requirement will be calculated by combining the
financial requirement for equity specialists under Amex Rule 171 and
the financial requirement for options specialists under Amex rule
950(h).
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\4\ Amex Rule 171, ``Specialist Financial Requirements,''
requires every registered specialist to maintain a cash or liquid
asset position in the amount of $600,000 or an amount sufficient to
assume a position of 60 trading units of each security in which the
specialist is registered, whichever is greater.
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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 Amex 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 Amex 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 proposes to amend Amex Rule 950(h), which governs options
specialist financial requirements. Currently, Amex Rule 950(h), which
incorporates by reference the specialist financial requirements set
forth in Amex Rule 171, requires that every registered options
specialist maintain cash or liquid assets equal to the greater of
$600,000 or an amount sufficient to assume a position of 60 units of
the highest priced puts and calls for each option in which the
specialist is registered.\5\ Because the financial requirement is in
some cases based on current market prices of puts and calls, it
generally fluctuates from day to day. The Amex maintains that, with the
recent increases in premiums for certain stock options, specialist
financial requirements have increased dramatically beyond the level of
risk associated with a specialist's market making activities. This
situation occurs because the financial requirements for specialists do
not take into consideration the extent to which specialists maintain
hedged positions in their registered option issues.
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\5\ The ``cost to carry'' 60 option contracts is determined
pursuant to rule 15c3-1a(b)(2)(iii)(C) under the Act, 17 CFR 15c3-
1a(b)(2)(iii)(C), which provides that a broker or dealer that is
long puts or calls must deduct 50 percent of the market value of the
net long put and call positions in the same options series.
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The following charts provided in Amendment No. 2 illustrate the
fluctuations in the capital requirement for an options specialist as
calculated under current Amex Rule 950(h). Both charts are based on
actual capital requirements for options traded on the Amex. The
calculations in the first chart are based on premiums for six options
as of the close of business on May 6, 1999, while the calculations in
the second chart show the premiums for the same options as of the close
of business on May 13, 1999. The charts demonstrate the effect that
premium appreciation has on a specialist's minimum financial
requirements. Specifically, because of the rise in premiums, the
specialist's minimum capital requirement increased from $882,750 in
Week 1 to $993,000 in Week 2.
[[Page 43234]]
Week 1
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CALL PUT
Option ---------------------------------------------------------------------------------------------------- Total
Premium Requirement Premium Requirement
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1...................................... 56\7/8\ $5,687.50 x 60 / 2 67\1/4\ $6,725.00 x 60 / 2 $372,375
2...................................... 14\1/2\ 1,450.00 x 60 / 2 7\5/8\ 762.30 x 60 / 2 66,375
3...................................... 4\1/8\ 412.50 x 60 / 2 17 1,700 x 60 / 2 63,375
4...................................... 9 900.00 x 60 / 2 5\1/4\ 525.00 x 60 / 2 42,750
5...................................... 15\1/4\ 1,525.00 x 60 / 2 5\1/4\ 525.00 x 60 / 2 61,500
6...................................... 58\1/2\ 5,850.00 x 60 / 2 33\5/8\ 3,362.50 x 60 / 2 276,375
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Total.............................. ........... ................................... ........... ................................... 882,750
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Week 2
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CALL PUT
Option ---------------------------------------------------------------------------------------------------- Total
Premium Requirement Premium Requirement
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1...................................... 75\3/8\ $7,537.50 x 60 / 2 55\3/4\ $5,575.00 x 60 / 2 $393,375
2...................................... 13\7/8\ 1,387.50 x 60 / 2 16\1/8\ 1,612.50 x 60 / 2 90,000
3...................................... 5\1/4\ 525.00 x 60 / 2 22\1/4\ 2,225.00 x 60 / 2 82,500
4...................................... 9\1/8\ 912.50 x 60 / 2 8\3/8\ 837.50 x 60 / 2 52,500
5...................................... 14\7/8\ 1,487.50 x 60 / 2 8\3/8\ 837.50 x 60 / 2 69,750
6...................................... 61\3/4\ 6,175.00 x 60 / 2 39\7/8\ 3,987.50 x 60 / 2 304,875
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Total.............................. ........... ................................... ........... ................................... 993,000
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Before the Amex's current specialist financial requirements took
effect in June 1988, Amex rules required specialists to maintain cash
or net liquid assets equal to the grater of $100,000 or an amount
sufficient to assume a position of 20 trading units of each speciality
issue. As noted above, the Amex proposes to amend Amex Rule 950(h) to
require every registered options specialist to maintain cash or liquid
assets in the amount of $600,000 plus $25,000 for each option issue in
excess of ten option issues in which such specialist is registered.
Under the proposal, a specialist's financial requirement would not
fluctuate with the premiums of the highest priced option series, but
would change only when the specialist unit voluntarily changes the
number of option issues it trades. The equity specialist financial
requirements will remain at their current levels as set forth in Amex
Rule 171.
The Exchange notes the existence of additional safeguards, such as
circuit breakers, which became operative since the Exchange's last
revision to Amex Rule 171.\6\ In addition, the Exchange's daily review
of specialist capital reserves and the Exchange's early warning
signals, which trigger a more intense level of surveillance of exchange
specialists during volatile market situations, continue to remain in
place. Further, the proposal will permit options specialists to
maintain relative control over their level of financial requirements by
determining their respective number of options allocations.
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\6\ The Amex's June 10 Letter describes additional safeguards
relating to specialists' financial requirements. Among other things,
the June 10 Letter notes that a specialist unit that is not self-
clearing maintains an agreement with a clearing firm that guarantees
the specialist's transactions. A specialist that is self-clearing
guarantees the transactions effected by its specialists on the Amex
floor. In addition, the June 10 Letter states that the Amex reviews
all specialist financial requirements each day and contacts the
specialist's principal(s) to request the deposit of additional funds
on any day when the specialist approaches the early warning
financial requirement level (120% of the minimum specialist
financial requirement). If the specialist is unable to deposit
additional capital, the Amex obtains a written guarantee from the
specialist's clearing firm stating that the clearing firm will
guarantee the specialist's transactions. The process of obtaining a
written guarantee serves to notify the clearing firm of the
specialist's current financial condition. Finally, the Amex notes
that the Exchange may reallocate the specialist's allocation to
another specialist unit if the specialist fails to satisfy the
Amex's financial requirements. See June 10 Letter, supra note 3.
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As noted above, under the Amex's current rules, financial
requirements for options specialists do not take into consideration the
extent to which the specialists maintain hedged positions in their
registered option issues. The Amex recently compared its financial
requirements for options specialists to similar capital requirements
maintained by other exchanges. In contrast to the Amex's capital
requirements, the Exchange notes that a Lead Market Maker (``LMM'') on
the Pacific Exchange (``PCX'') that performs the function of an Order
Book Official (``OBO'') must maintain minimum net capital of $500,000
plus $25,000 for each issue over five issues for which the LMM performs
the function of an OBO.\7\ An LMM that does not perform the function of
an OBO must maintain minimum net capital of $350,000 plus $25,000 for
each issue over eight issues that has been allocated to the LMM.\8\
Accordingly, to carry the same options book noted in the Amex's example
above, an LMM that functions as an OBO in each of his options
allocations would be required to maintain minimum net capital of
$525,000, while an LMM that does not function as an OBO would be
required to maintain minimum net capital of $350,000. The Exchange has
also compared its current financial requirements for option specialists
with those of the Chicago Board Options Exchange and the Philadelphia
Stock Exchange. These comparisons have led the Amex to conclude that
revisions to Amex Rule 950(h) are necessary.
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\7\ See PCX Rule 6.82(h), Commentary .04.
\8\ See PCX Rule 6.82(c)(11).
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In the Exchange's view, the cost for options specialists to
maintain financial reserves sufficient to satisfy the Exchange's
financial requirements has been increasing for Amex options specialists
relative to competing options specialists or market makers at other
exchanges. These financial requirements effectively reduce the number
of option
[[Page 43235]]
issues that may be allocated to an Amex options specialist and provide
an incentive for Amex members to consider moving their business
operations to exchanges with less restrictive financial requirements.
The Exchange believes that the proposed change is necessary to address
any potential and significant increase in the number of option issues
traded on the Exchange that may occur as a result of competitive
marketplace conditions. The Exchange believes that the proposed change
in the specialist financial requirements will help to ensure that Amex
options specialists continue to maintain adequate capital reserves
while remaining competitive with their counterparts at other exchanges.
The Amex also proposes to amend Amex Rule 950(h), Commentary .01,
to specify the minimum capital requirement for a specialist that
maintains a book in both equity securities and options (``an equity/
option book''). Specifically, Amex Rule 950(h), Commentary .01, as
amended, will provide that, for an options specialist also serving as
an equity specialist, the minimum $600,000 requirement specified in
Amex Rule 171 will apply to the entirety of the specialist's business
in both equities and options. The minimum financial requirement for a
specialist with an equity/option book will be $600,000, provided that
the financial requirement for neither the equity allocation nor the
option allocation exceeds $600,000. Thus, under Commentary .01, the
minimum financial requirement for a specialist who is allocated one
equity issue and one option issue would be $600,000, provided that the
financial requirement for neither the equity allocation nor the options
allocation exceeds $600,000.\9\
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\9\ See Amendment No. 1, surpa note 3.
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For an equity/option book where the financial requirement of either
the equity allocation or the options allocation exceeds $600,000, the
minimum financial requirement will be calculated by combining the
equity and optional financial requirement (i.e., the financial
requirements for equity specialists under Amex Rule 171 and the
financial requirements for options specialists under Amex Rule 950(h)).
For example, a specialist with three equity allocations and two options
allocations, where the financial requirement for the three equity
allocations exceeds $600,000, would be required to maintain capital
sufficient to assume a position of 60 trading units of each equity
allocation plus $50,000 for the two options allocations. Similarly, a
specialist allocated 11 options and one equity security would be
required to maintain capital of $625,000 for the 11 option allocations
plus the amount required to assume a position of 60 trading units of
the equity security.\10\ The Amex indicated that Commentary .01 is
designed to encourage new specialist books.
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\10\ Id.
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2. Statutory Basis
The Amex believes that the proposed rule change is consistent with
Section 6(b)(5) of the Act \11\ 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, and to
remove impediments to and perfect the mechanism of a free and open
market and a national market system.
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\11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex does not believe that the proposed rule change will impose
any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on the Proposed Rule Change
Received From Members, Participants, or Others
Written 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 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 the 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 proposal, as
amended, 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, DC 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 form the public in accordance with the provisions
of 5 U.S.C. 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
Amex. All submissions should refer to File No. SR-Amex-99-13 and should
be submitted by August 30, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-20414 Filed 8-6-99; 8:45 am]
BILLING CODE 8010-01-M
