[Federal Register Volume 59, Number 9 (Thursday, January 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-821]


[[Page Unknown]]

[Federal Register: January 13, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33432; File No. SR-NASD-93-73]

 

Self-Regulatory Organizations; Filing and Order Granting 
Accelerated Approval of a Proposed Rule Change by the National 
Association of Securities Dealers, Inc., Relating to Increased Position 
and Exercise Limits on Individual Equity Options

January 5, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December 
3, 1993, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the NASD. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD proposes to amend Section 3 of Appendix E of the NASD's 
Rules of Fair Practice (``Section 3'') to increase certain of its 
position and exercise limit rules to conform to certain of the 
increased limits recently approved by the Commission for the options 
exchanges.\1\ Specifically, the NASD proposes to increase the current 
position and exercise limits for equity options from 3,000, 5,500, and 
8,000 contracts to 4,500, 7,500, and 10,500 contracts, respectively. 
The text of the proposed rule change is available at the Office of the 
Secretary, NASD, and at the Commission.
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    \1\See Securities Exchange Act Release Nos. 33285 (December 3, 
1993), 58 FR 65201 (December 13, 1993) (order approving File No. SR-
Amex-93-27); 33283 (December 3, 1993), 58 FR 65204 (December 13, 
1993) (order approving File No. SR-CBOE-93-43); 33284 (December 3, 
1993), 58 FR 65215 (December 13, 1993) (order approving File No. SR-
NYSE-93-41); 33282 (December 3, 1993), 58 FR 65218 (December 13, 
1993) (order approving File No. SR-PSE-92-38); and 33288 (December 
3, 1993), 58 FR 65221 (December 13, 1993) (order approving File No. 
SR-Phlx-93-07) (collectively, ``1993 Position Limit Approval 
Orders'').
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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 NASD 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 NASD 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 the 
Statutory Basis for, the Proposed Rule Change

    The NASD proposes to amend its rules governing position and 
exercise limits for equity options\2\ to conform to similar proposals 
by the options exchanges which were recently approved by the 
Commission.\3\ Currently, under NASD rules, position and exercise 
limits are determined according to a ``three-tiered'' system. 
Specifically, depending upon the trading volume and float of the 
underlying security and whether the underlying security underlies an 
exchange-traded option, the position limit for an equity option is 
either 3,000, 5,500, or 8,000 contracts.\4\ In particular, under 
Section 3, the 8,000 contract position limit applies to: (1) Exchange-
listed options traded by ``access''\5\ firms with a corresponding 8,000 
contract position limit imposed by the options exchange(s) on which the 
option is traded; and (2) all conventional options\6\ overlying equity 
securities which underlie exchange-traded options that have an 8,000 
contract position limit. Similarly, the 5,500 contract position limit 
applies to: (1) Exchange-listed options traded by access firms with a 
corresponding 5,500 contract position limit imposed by the options 
exchange(s) on which the option is traded; and (2) all conventional 
options overlying equity securities which underlie exchange-traded 
options that have a 5,500 contract position limit. Lastly, the 3,000 
contract position limit applies to: (1) Exchange-listed options traded 
by access firms with a corresponding 3,000 contract position limit 
imposed by the options exchange(s) on which the option is traded; and 
(2) all conventional options overlying equity securities which either 
underlie exchange-traded options that have a 3,000 contract position 
limit or do not underlie an exchange-traded option.
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    \2\Position limits impose a ceiling on the number of option 
contracts in each class on the same side of the market (i.e., 
aggregating long calls and short puts, and long puts and short 
calls) that can be held or written by an investor or group of 
investors acting in concert. Exercise limits restrict the number of 
options contracts which an investor or group of investors acting in 
concert can exercise within five consecutive business days. Under 
NASD Rules, exercise limits correspond to position limits, such that 
investors in options classes on the same side of the market are 
allowed to exercise, during any five consecutive business days, only 
the number of options contracts set forth as the applicable position 
limit for those options classes. See Sections 3 and 4 of Appendix E 
of the NASD's Rules of Fair Practice.
    \3\See supra note 1.
    \4\In this connection, the NASD's rules do not specifically 
govern how a specific equity option falls within one of the three 
position limit tiers. Rather, the NASD's position limit rule 
provides that the position limit established by an options exchange 
for a particular equity option is the applicable position limit for 
purposes of the NASD's rule. See, e.g., Commentary .07 to American 
Stock Exchange, Inc. Rule 904.
    \5\``Access'' firms are NASD members which conduct a business in 
exchange-listed options but which are not members of any of the 
options exchanges upon which the options are listed and traded.
    \6\Conventional equity options are defined in Section (1)(gg) of 
Appendix E to the NASD's Rules of Fair Practice to mean ``any option 
contract not issued, or subject to issuance, by The Options Clearing 
Corporation.''
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    Under the proposal, the NASD proposes to increase the current 
position and exercise limits for equity options from 3,000, 5,500, and 
8,000 contracts to 4,500, 7,500, and 10,500 contracts, respectively. 
Thus, for NASD members that are access firms and all NASD members 
involved in transactions in conventional options on securities which 
underlie exchange-traded options, the proposal will conform the NASD's 
position and exercise limits to the limits of the options exchanges. 
The proposed amendments also will raise position and exercise limits 
for conventional options on securities that do not underlie exchange-
traded options from 3,000 contracts to 4,500 contracts.
    The NASD believes the proposed increases in equity option position 
and exercise limits are warranted for the following reasons. First, the 
proposed increases will afford market participants greater flexibility 
to employ larger options positions when effectuating their investment 
strategies. Second, the NASD believes that the proposed increases 
likely will facilitate greater activity in exchange-traded options, 
thereby enhancing liquidity in the markets for exchange-traded options 
and the securities underlying those options. Third, by conforming the 
NASD's position and exercise limits to the limits of the options 
exchanges, the NASD believes there will be no confusion among market 
participants concerning applicable position and exercise limits. 
Finally, with respect to equity securities underlying exchange-traded 
options, market participants will continue to be able to establish 
conventional options positions on these securities equivalent in size 
to standardized options position on these securities.
    Moreover, the NASD believes that the adoption of increased equity 
option position and exercise limits will not compromise the integrity 
of the options markets or jeopardize the stability of the securities 
markets underlying exchange-traded equity options or conventional 
equity options. In this regard, because the proposal will result in 
only a modest increase in the percentage of the capitalization of the 
underlying equity security that an investor or group of investors 
acting in concert can control under the new position limits for any 
given equity security, the NASD believes the proposed position limit 
increases are very modest. Furthermore, the NASD notes that it will 
continue to apply its options surveillance procedures, that the options 
exchanges will continue to apply their surveillance procedures, and 
that the NASD and the options exchanges will continue to be members on 
the Intermarket Surveillance Group.
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act, in general, and section 6(b)(5), in 
particular, in that it is designed to promote just and equitable 
principles of trade, remove impediments to and perfect the mechanism of 
a free and open market and a national market system.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will impose 
any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were either solicited or received with respect 
to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The NASD has requested that the proposed rule changes be given 
accelerated effectiveness pursuant to Section 19(b)(2) of the Act.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, the requirements of section 6(b)(5).\7\ Specifically, the 
Commission concludes that the proposed position and exercise limits of 
4,500 contracts, 7,500 contracts, and 10,500 contracts for equity 
options will further increase the potential depth and liquidity of the 
options market as well as the underlying cash market without 
significantly increasing concerns regarding intermarket manipulations 
or disruptions of the market for the options or underlying securities.
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    \7\15 U.S.C. 78f(b)(5) (1982).
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    The discussion articulated in the 1993 Position Limit Approval 
Orders,\8\ is incorporated herein.
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    \8\See supra note 1.
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    In addition, the absence of discernible manipulative problems under 
the current three-tiered limit system for individual equity options 
leads the Commission to conclude that the increases being proposed by 
the NASD are warranted. The Commission recognizes that there are no 
ideal limits in the sense that options positions of any given size can 
be stated conclusively to be free of any manipulative concerns. The 
options exchanges, the NASD, and the Commission, however, have relied 
largely on the absence of discernible manipulation or disruption 
problems under current limits as an indicator that additional increases 
can be safely considered. The Commission believes for these reasons 
that the liberalization of existing position and exercise limits is now 
appropriate.\9\
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    \9\The Commission continues to believe that proposals to 
increase position limits and exercise limits must be justified and 
evaluated separately. After reviewing the proposed exercise limits, 
along with the eligibility criteria for each tier, the Commission 
has concluded that the exercise limit increases for the three-tiered 
framework, do not raise manipulation problems or increase concerns 
over market disruption in the underlying securities.
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    The Commission notes that the NASD has had considerable experience 
monitoring the current three-tiered framework in individual equity 
options.\10\ The Commission has not found that differing position and 
exercise limit requirements based on the particular options product to 
have created programming or monitoring problems for securities firms, 
or to have led to significant customer confusion. Based on the current 
experience in handling position and exercise limits, the Commission 
believes that the increase in position and exercise limits for 
individual equity options will not cause significant problems. 
Additionally, the Commission believes that the NASD's surveillance 
program will be adequate to detect and deter the use of illegal 
position limits by market participants as well as attempted 
manipulative activity and other trading abuses.
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    \10\Currently, for example, position and exercise limits for 
individual equity options are limited to positions of 8,000, 5,500, 
and 3,000 contracts.
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register because, in light of the 
Commission's recent approval of similar proposals by the options 
exchanges,\11\ accelerating approval of this proposal will permit the 
position and exercise limit framework for individual equity options 
across options exchanges and the NASD to remain uniform.
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    \11\See supra note 1.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 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 Section, 450 Fifth Street NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to File Number SR-NASD-93-73 and should be 
submitted by February 3, 1994.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-NASD-93-73) relating to an 
increase in position and exercise limits is approved.

    \12\15 U.S.C. 78s(b)(2) (1982).
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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) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-821 Filed 1-12-93; 8:45 am]
BILLING CODE 8010-01-M