[Federal Register Volume 59, Number 227 (Monday, November 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29213]


[Federal Register: November 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34986; File Nos. SR-Amex-94-49, SR-CBOE-94-41, SR-PSE-
94-33, and SR-PHLX-94-53]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Changes by the American 
Stock Exchange, Inc., the Chicago Board Options Exchange, Inc., the 
Pacific Stock Exchange, Inc., and the Philadelphia Stock Exchange, Inc. 
Relating to an Extension of the Hedge Exemption Pilot Programs

November 18, 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 November 
2, 1994, the Pacific Stock Exchange, Inc. (``PSE''); on November 7, 
1994, the Chicago Board Options Exchange, Inc. (``CBOE''); on November 
9, 1994, the American Stock Exchange, Inc. (``Amex''); and on November 
17, 1994, the Philadelphia Stock Exchange, Inc. (``PHLX'') (each 
individually referred to as an ``Exchange'' and two or more 
collectively referred to as ``Exchanges'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
changes as described in Items I and II 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.

I. Self-Regulatory Organizations' Statement of the Terms of Substance 
of the Proposed Rule Changes

    The proposed rule changes filed by the Amex and PHLX extend for six 
months (i.e., from November 17, 1994, to May 17, 1995) the Exchanges' 
pilot programs for exemptions from equity position limits for certain 
hedged positions.\1\ The proposals filed by the CBOE and the PSE extend 
for six months (i.e., from November 17, 1994, to May 17, 1995), the 
Exchanges' pilot programs for position limit exemptions for certain 
hedged equity option positions and certain stock index option 
positions.
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    \1\Position limits impose a ceiling on the aggregate number of 
options contracts on the same side of the market that can be held or 
written by an investor or group of investors acting on concert.
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    The text of the proposals are available at the Office of the 
Secretary of the respective Exchanges and at the Commission.

II. Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In its filing with the Commission, the self-regulatory 
organizations included statements concerning the purpose of and basis 
for the proposed rule changes and discussed any comments it received on 
the proposed rule changes. The text of these statements may be examined 
at the places specified in Item IV below. The self-regulatory 
organizations have prepared summaries, set forth in sections (A), (B), 
and (C) below, of the most significant aspects of such statements.

(A) Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    The Commission has previously approved pilot programs by the Amex 
and the PHLX providing exemptions from position limits for certain 
fully hedged equity option positions.\2\ In addition, the Commission 
has previously approved pilot programs proposed by the CBOE, the New 
York Stock Exchange, Inc., and the PSE providing exemptions from 
position limits for certain fully hedged equity option positions and/or 
stock index option positions.\3\ Each of the pilot programs allow the 
underlying hedged positions to include securities that are readily 
convertible into common stock.\4\ Under all of the pilot programs, 
exercise limits continue to correspond to position limits, so that 
investors are allowed to exercise, during five consecutive business 
days, the number of option contracts set forth as the position limit, 
as well as those contracts purchased pursuant to the pilot program.\5\
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    \2\See Securities Exchange Act Release No. 25738 (May 24, 1988), 
53 20201 (June 2, 1988).
    \3\See Securities Exchange Act Release Nos. 25738 (May 24, 
1988), 53 FR 20201 (June 2, 1988) (order approving CBOE's equity 
option hedge exemption pilot programs); 25739 (May 24, 1988(, 53 FR 
20204 (June 2, 1988) (approving CBOE's stock index option hedge 
exemption pilot program); 27786 (March 8, 1990), 55 FR 9523 (March 
14, 1990) (order approving NYSE's equity option and stock index 
option hedge exemption pilot programs); 25811 (June 20, 1988), 53 FR 
23821 (June 24, 1988) (order approving PSE'e equity option hedge 
exemption pilot program); and 32900 (September 14, 1993), 58 FR 
49077 (September 21, 1993) (order approving PSE's stock index option 
hedge exemption pilot program).
    \4\The Commission expects the Exchanges to determine on a case-
by-case basis whether an instrument that is being used as the basis 
for an underlying hedged position is readily and immediately 
convertible into a security that is convertible at a future date, 
but which is not presently convertible, is not a ``convertible'' 
security for purposes of the equity option position limit hedge 
exemption until the date it becomes convertible. In addition, if the 
convertible security used to hedge an options position is called for 
redemption by the issuer, the security would have to be converted 
into the underlying security immediately or the corresponding 
options position reduced accordingly. See, e.g., Securities Exchange 
Act Release No. 32904 (September 14, 1993), 58 FR 49339.
    \5\Exercise limits prohibit the exercise by an investor or group 
of investors acting in concert of more than the number of options 
contracts specified in the position limit rule within five 
consecutive business days.
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    The Exchanges believe that the proposed rule changes are consistent 
with Section 6(b) of the Act, in general, and furthers the objectives 
of Section 6(b)(5), in particular, in that they are designed to protect 
investors and the public interest and to remove impediments and perfect 
the mechanism of a free and open market.

(B) Self-Regulatory Organizations' Statement on Burden on Competition

    The Exchanges do not believe that the proposed rule changes will 
impose any burden on competition.

(C) Self-Regulatory Organizations' Statements on Comments on the 
Proposed Rule Changes Received From Members, Participants or Others

    Written comments on the proposed rule changes were neither 
solicited nor received.

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

    The Exchanges have 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 changes to extend the 
pilot programs until May 17, 1995, are 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) thereunder.\6\ The Commission concludes, as it did when 
originally approving each of the pilot programs, that providing for 
increased position and exercise limits for equity options and stock 
index options in circumstances where those excess positions are fully 
hedged with offsetting stock positions will provide greater depth and 
liquidity to the market and allow investors to hedge their stock 
portfolios more effectively, without significantly increasing concerns 
regarding intermarket manipulations or disruptions of either the 
options market or the underlying stock market.
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    \6\15 U.S.C. Sec. 78f(b)(5) (1982).
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    The Commission also notes that before the pilot program of an 
Exchange can be extended or approved on a permanent basis, that 
Exchange must provide the Commission with a report on the operation of 
its pilot program since its inception by January 31, 1995. 
Specifically, an Exchange must provide the Commission details on (1) 
the frequency with which the exemptions have been used; (2) the types 
of investors using the exemptions; (3) the size of the positions 
established pursuant to the pilot program; (4) what types of 
convertible securities are being used to hedge positions and how 
frequently the convertible securities have been used to hedge; (5) 
whether the Exchange has received any complaints on the operation of 
the pilot program; (6) whether the Exchange has taken any disciplinary 
action against, or commenced any violation of any term or condition of 
the pilot program; (7) the market impact, if any, of the pilot program; 
and (8) how the Exchange has implemented surveillance procedures to 
ensure compliance with the terms and conditions of the pilot program. 
In addition, the Commission expects each Exchange to inform the 
Commission of the results of any surveillance investigations undertaken 
for apparent violations of the provisions of its position limit hedge 
exemption rules.
    The Commission finds good cause for approving the extension of the 
pilot programs prior to the thirtieth day after the date of publication 
of notice of filing thereof in the Federal Register in order to permit 
the continuation of the pilot programs. The Commission notes that the 
Exchanges have not experienced any significant programs with the pilot 
programs since their inception and that the Exchanges will continue to 
monitor the pilot programs to ensure that no problems arise. Finally, 
no adverse comments have been received by the Exchanges or the 
Commission concerning the pilot programs. Based on the above, the 
Commission believes good cause exists to approve the extension of the 
pilot programs through May 17, 1995, on an accelerated basis. 
Therefore, the Commission believes that granting accelerated approval 
of the proposal is appropriate and consistent with sections 6 and 
19(b)(2) of the Act.

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, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes 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 at the Commission's Public Reference Section, 450 Fifth Street, 
N.W., Washington, D.C. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organizations. All submissions should refer to the file 
number in the caption above and should be submitted by December 19, 
1994.
    It is therefore ordered, Pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule changes (SR-Amex-94-49, SR-CBOE-94-41, 
SR-PSE-94-33, and SR-PHLX-94-53) relating to an extension of the hedge 
exemption pilot programs until May 17, 1995, is approved.

    \7\15 U.S.C. Sec. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-29213 Filed 11-25-94; 8:45 am]
BILLING CODE 8010-01-M