[Federal Register Volume 64, Number 169 (Wednesday, September 1, 1999)]
[Notices]
[Pages 47878-47881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22697]
[[Page 47878]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41783; File No. SR-AMEX-99-13]
Self-Regulatory Organizations; Order Granting Accelerated
Approval to a Proposed Rule Change and Amendment Nos. 1 and 2 and
Notice of Filing and Order Granting Accelerated Approval to Amendment
No. 3 by the American Stock Exchange LLC Relating to Specialist Capital
Requirements
August 23, 1999.
I. Introduction
On April 2, 1999, the American Stock Exchange LLC (``Amex'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Amex Rule 950(h) to
revise the minimum financial requirement for options specialists. In
addition, the Amex proposes to revise Amex Rule 950(h), Commentary .01
to codify the Amex's procedures for calculating the minimum financial
requirement for specialists that maintain a book in both equities and
options (an ``equity/option book''). On June 11, 1999, July 16, 1999,
and August 23, 1999, the Amex filed with the Commission Amendment Nos.
1, 2, and 3 to the proposal.\3\
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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, and the Chicago
Board Options Exchange; and (2) 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'').
Amendment No. 3 indicates that the changes to Commentary .01 are a
codification of the Amex's current procedures for calculating the
minimum financial requirement for a specialist that maintains an
equity/options book. See letter from Claire P. McGrath, Vice
President and Special Counsel, Derivative Securities, Amex, to
Richard Strasser, Assistant Director, Division, Commission, dated
August 23, 1999. See also telephone conversation among Claire P.
McGrath, Vice President and Special Counsel, Derivative Securities,
Amex, James McNeal, Amex, and Yvonne Fraticelli, Special Counsel,
Division, Commission, on August 23, 1999 (``August 23
Conversation'').
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 requirement level (120% of the minimum specialist
financial requirement). See letter from 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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Notice of the proposed rule change and Amendment Nos. 1 and 2 were
published for comment in the Federal Register on August 9, 1999.\4\ To
date, the Commission has received no comment letters regarding the
proposal. This order approves the proposal and Amendment Nos. 1, 2, and
3 to the proposal on an accelerated basis.
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\4\ See Securities Exchange Act Release No. 41682 (August 2,
1999), 64 FR 43233.
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II. Description of the Proposal
The Amex proposes to amend Amex Rule 950(h) and Commentary .01 to
revise the minimum financial requirements for options specialists and
to codify in Commentary .01 the Amex's procedures for calculating the
minimum financial requirement for a specialist that maintains an
equity/options book. Currently, Amex Rule 950(h), which incorporates by
reference the specialist financial requirements set forth in Amex Rule
171,\5\ requires a registered options specialist to maintain cash or
liquid assets equal to the greater of $600,000 or an amount sufficient
to assume a position of 60 units (i.e., 60 option contracts
representing 6,000 shares) of the highest priced puts and calls for
each option in which the specialist is registered.\6\ The Amex proposes
to revise 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.
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\5\ 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.
\6\ The ``cost to carry'' 60 option contracts is determined
pursuant to Rule 15c3-1a(b)(2)(iii)(C) under the Act, 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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For a specialist that maintains an equity/options book, the minimum
$600,000 financial requirement specified in Amex Rule 171 will apply to
the entirety of the specialist's business, in both equities and
options, provided that the financial requirement for neither the equity
allocation nor the options allocation exceeds $600,000.\7\ Thus, the
minimum financial requirement for a specialist allocated one equity and
one option would be $600,000, provided that the financial requirement
for neither the equity allocation nor the options allocation exceeded
$600,000.\8\
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\7\ See proposed Amex rule 950(h), Commentary .01.
\8\ See Amendment No. 1, supra note 3.
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For an equity/option book where the financial requirement for
either the equity allocation or the options allocation exceeds
$600,000, the specialist's minimum financial requirement will be
calculated by combining the requirements of Amex Rules 171 and 950(h).
For example, a specialist with three equity allocations and two options
allocations, whose financial requirement for the three equity
allocations exceeded $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. A specialist
allocated 11 options and one equity security would be required to
maintain capital of $625,000 for the 11 options allocations plus any
additional amount over $600,000 required to assume a position of 60
trading units of the equity security.\9\
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\9\ See Amendment No. 1, supra note 4. Thus, in this example, if
the cost to assume a position of 60 trading units in the equity
allocation is $700,000, then the specialist's minimum financial
requirement would be $725,000.
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The Amex recently compared its financial requirements for options
specialists to the capital requirements of other exchanges. For
example, the Amex 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.\10\ 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.\11\ The
Chicago Board Options Exchange (``CBOE'') currently requires a
Designated Primary Market Maker (``DPM'') to maintain cash or liquid
assets equal to the greater of $100,000 or an amount sufficient to
assume a position of 20 trading units of each security in which the DPM
holds an appointment.\12\ The Philadelphia Stock Exchange (``PHLX'')
requires an options
[[Page 47879]]
specialist exempt from Securities Exchange Act Rule 15c3-1 to maintain
a minimum of $75,000 in net liquid assets, and requires an equity and
options specialist exempt from Securities Exchange Act Rule 15c3-1 to
maintain a minimum of $100,000 in net liquid assets.\13\
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\10\ See PCX Rule 6.82(h), Commentary .04.
\11\ See PCX Rule 6.82(c)(11).
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The Amex submits that the cost to Amex options specialists to
satisfy the Amex's financial requirements has been increasing relative
to the financial requirements for competing options specialists or
market makers at other exchanges. The Amex maintains that its current
financial requirements effectively reduce the number of options 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 rule change is necessary to address any
increase in the number of options 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
requirement will help to ensure that Amex options specialists continue
to maintain adequate capital reserve while remaining competitive with
their counterparts at other exchanges.
In addition, the Amex believes that because the financial
requirements for specialists do not consider the extent to which a
specialist maintains a hedged position in his registered options, the
recent increases in premiums for some stock options have caused
specialist financial requirements to increase dramatically beyond the
level of risk associated with a specialist's market making activities.
The following charts illustrate the fluctuations in the capital
requirement for an options specialist as calculated under the Amex's
current rule and the impact of premium appreciation on the specialist's
minimum financial requirements.14 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.
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/ 67\1/4\ $6,725.00 x \60/ $372,375
2\ 2\
2.......................................... 14\1/2\ 1,450.00 x \60/ 7\5/8\ 762.50 x \60/2\ 66,375
2\
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/ 5\1/4\ 525.00 x \60/2\ 61,500
2\
6.......................................... 58\1/2\ 5,850.00 x \60/ 33\5/8\ 33,362.50 x \60/ 276,375
2\ 2\
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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/ 55\3/4\ $5,575.00 x \60/ $393,375
2\ 2\
2.......................................... 13\7/8\ 1,387.50 x \60/ 16\1/8\ 1,612.50 x \60/ 90,000
2\ 2\
3.......................................... 5\1/4\ 525.00 x \60/2\ 22\1/4\ 2,225.00 x \60/ 82,500
2\
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/ 8\3/8\ 837.50 x \60/2\ 69,750
2\
6.......................................... 61\3/4\ 6,175.00 x \60/ 39\7/8\ 3,987.50 x \60/ 304,875
2\ 2\
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Total.................................. ......... ................ ......... ................ 993,000
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The Amex notes that, 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. Thus, the
proposal will allow options specialists to maintain relative control
over their level of financial requirements by determining their
respective number of options allocations.
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\12\ See CBOE Rule 8.80, Interpretation and Policy .01. The CBOE
has filed a proposal with the Commission that would require a DPM to
maintain: (1) Net liquidating equity in its DPM account of not less
than $100,000; and (2) net capital sufficient to comply with
Securities Exchange Act Rule 15c3-1. See Securities Exchange Act
Release No. 41325 (April 22, 1999), 64 FR 23691 (May 3, 1999)
(notice of filing of File No. SR-CBOE-98-54). The Commission has not
acted on the CBOE's proposal.
\13\ See PHLX Rule 703.
14 See Amendment No. 2, supra note 3.
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The Exchange also notes the presence of various safeguards,
including circuit breakers, the Amex'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.\15\
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\15\ 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 directly to the National Securities Clearing Corporation
and the Options Clearing Corporation all 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 requirement. See June 10
Letter, supra note 3.
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III. Discussion
For the reasons discussed below, the Commission finds that the
proposed rule change is consistent with the Act and the rules and
regulations under the Act applicable to a national securities exchange.
In particular, the Commission finds that the proposed rule change is
consistent with the Section 6(b)(5) \16\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, to remove impediments to and perfect the mechanism of a free and
open market, and to protect investors and the public interest.
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\16\ 15 U.S.C. 78f(b)(5).
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The Amex proposes to amend its rules to revise the minimum
financial requirement for options specialists and to codify the
Exchange's procedures for calculating the minimum financial requirement
for specialists that maintain an equity/options book. Under the
proposal, 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. For a
specialist with an equity/options book, the minimum $600,000 financial
requirement specified in Amex Rule 171 will apply to the entirety of
the specialist's business, in both equities and options, provided that
the financial requirement for neither the equity allocation nor the
options allocation exceeds $600,000. If either allocation exceeds
$600,000, the specialist's minimum financial requirement of Amex Rules
171 and 950(h). Thus, as described more fully above, an equity/options
specialist with a financial requirement over $600,000 for his equity
allocation will be subject to a capital requirement of $25,000 for each
options allocation. Similarly, an equity/options specialist with a
financial requirement of $625,000 for his options allocation and
$700,000 for his equity allocation will have a financial requirement of
$725,00.\17\ The proposal will lower the minimum financial requirement
for most Amex options specialists.\18\
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\17\ See Amendment No. 1, supra note 3.
\18\ See August 23 Conversation, supra note 3.
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The Commission finds that the proposed capital requirements are
designed to assure that Amex options specialists and specialists
maintaining an equity/options book are capable of making deep, liquid,
and competitive markets. Although the proposal will reduce the minimum
financial requirement for most Amex options specialists, the Commission
finds, based on the representatives of the Amex, that there are
sufficient safeguards (in addition to the proposed minimum capital
requirement) to assure that the Amex's options specialists are
adequately capitalized. In this regard, the Amex in its June 10 Letter
notes, first, that the transactions of a specialist unit that is not
self-clearing are guaranteed by the specialist's clearing firm. Second,
the Amex states that it reviews all specialist financial requirements
each day and, on any day when it determines that a specialist is close
to the early warning financial requirement level (120% of the minimum
specialist financial requirement), the Amex contacts the specialist's
principal(s) and requests the deposit of additional cash or liquid
assets. If the specialist fails to deposit additional capital, the Amex
contacts the specialist's clearing firm and obtains a written guarantee
from the clearing firm that it will guarantee the specialist's
transactions; this process ensures that the clearing firm is aware of
the specialist's current financial condition and that the clearing
firm's guarantee is based upon current market conditions. Third, the
Amex believes that the proposed financial requirements will help to
ensure that Amex specialists are able to make deep, liquid, and
competitive markets, while competing vigorously with specialists on
other options exchanges in multiply-traded issues.\19\
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\19\ See June 10 Letter, supra note 3.
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The Commission finds that the proposed financial requirements are
comparable to the financial requirements at other options
exchanges.\20\ Accordingly, the Commission believes that the proposal
will help Amex options specialists compete effectively with specialists
at other exchanges in multiply-traded issues. Increased competition, in
turn, should benefit investors by producing a more efficient
marketplace.
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\20\ For example, as noted above, an LMM on the PCX that
performs the function of an 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. 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. The CBOE currently requires a DPM to maintain
cash or liquid assets equal to the greater of $100,000 or an amount
sufficient to assume a position of 20 trading units of each security
in which the DPM holds an appointment. The PHLX requires an option
specialist exempt from Securities Exchange Act Rule 15c3-1 to
maintain a minimum of $75,000 in net liquid assets, and requires an
equity and options specialist exempt from Securities Exchange Act
Rule 15c3-1 to maintain a minimum of $100,000 in net liquid assets.
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The Amex also notes that under its current rule the financial
requirement for options specialists fluctuates with the options
premiums. The proposed capital requirement for options specialists will
be based on the number of issues a specialist trades rather than on the
fluctuating prices of the options premiums. This method for determining
the minimum financial requirement has the advantages of simplifying the
specialist's capital calculation and avoiding a significant increase in
the capital requirement that occurs under the Amex's current rule if
the price of the underlying stock rises dramatically.
Finally, the Commission finds that it is reasonable for the Amex to
codify in Amex Rule 950(h), Commentary .01, its existing procedures for
calculating the minimum financial requirement for specialists that
maintain an equity/options book.\21\ The Commission believes that
codifying these provisions will clarify the Amex's procedures and help
to ensure compliance with the Amex's financial requirements.
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\21\ See Amendment No. 3 and August 23 Conversation, supra note
3.
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The Commission finds good cause for approving the proposed rule
change and Amendment Nos. 1, 2, and 3 to the proposed rule change prior
to the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. The Commission finds that accelerated
approval of the proposal will help Amex options specialists to compete
effectively with specialists and market makers on other options
exchanges in multiply-traded issues. The Commission finds that
Amendment Nos. 1 and 2 clarify the Amex's proposal by providing
examples and additional explanations of the operation of the proposed
rule. Amendment No. 3 clarifies the Amex's proposal by indicating that
the provisions of the proposal relating to the minimum financial
requirement for a specialist that maintains an equity/options book
codify the Exchange's current procedures for calculating the minimum
financial requirement for an equity/options book. Accordingly, the
Commission believes that granting accelerated approval of the proposal
and Amendment Nos. 1, 2, and 3 is appropriate and consistent with
Sections 6(b)(5) and 19(b)(2) of the Act.\22\
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\22\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
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arguments concerning Amendment No. 3, including whether Amendment No. 3
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.
552, will be available for inspection and copying in 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 September 22, 1999.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-Amex-99-13), as amended, is
approved on an accelerated basis.
\23\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-22697 Filed 8-31-99; 8:45 am]
BILLING CODE 8010-01-M
