[Federal Register Volume 60, Number 188 (Thursday, September 28, 1995)]
[Notices]
[Pages 50228-50229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24027]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36257; File No. SR-PHLX-95-31]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc., Relating to Compliance with Position and Exercise 
Limits for Non-PHLX Listed Options

September 20, 1995.
    On March 22, 1995, the Philadelphia Stock Exchange, Inc. (``PHLX'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), 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 PHLX Rules 1001, 
``Position Limits,'' \3\ and 1002, ``Exercise Limits,'' \4\ to require 
PHLX members who trade non-PHLX listed options and who are not members 
of the exchange where the options transactions are effected to comply 
with the applicable option position and exercise limits of the exchange 
where the options transactions are effected.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ Position limits impose a ceiling on the number of option 
contracts which an investor or group of investors acting in concert 
may hold or write in each class of options on the same side of the 
market (i.e., aggregating long calls and short puts or long puts and 
short calls).
    \4\ Exercise limits prohibit an investor or group of investors 
acting in concert from exercising more than a specified number of 
puts or calls in a particular class within five consecutive business 
days.
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    Notice of the proposed rule change appeared in the Federal Register 
on June 26, 1995.\5\ No comments were received on the proposed rule 
change.\6\

    \5\ See Securities Exchange Act Release No. 35864 (June 19, 
1995), 60 FR 33025.
    \6\ On July 6, 1995, the PHLX clarified the text of its proposal 
by (1) deleting a reference to ``stock'' in PHLX Rule 1001; and (2) 
adding a reference in PHLX Rule 1002 to options not dealt in on the 
Exchange and noting that index option position and exercise limits 
are governed by PHLX Rules 1001A and 1002A. Letter from Gerald D. 
O'Connell, First Vice President, Market Regulation and Trading 
Operations, PHLX, to Michael Walinskas, Branch Chief, Office of 
Market Supervision, Division of Market Regulation, Commission, dated 
July 6, 1995 (``Amendment No. 1'').
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    The PHLX states that the purpose of the proposal is to eliminate a 
loophole in position and exercise limit jurisdiction among the options 
exchanges. According to the Exchange, a PHLX member entering into an 
opening transaction on another exchange in an option not listed on the 
PHLX and who is not a member of the exchange where the transaction is 
effected escapes the jurisdiction of both the PHLX and the other 
exchange for purposes of position limit compliance. The loophole occurs 
because Exchange Rule 1001 applies only to options dealt in on the 
PHLX. At the same time, the exchange where the options transaction is 
effected cannot enforce its position limit rule against a non-member.
    The PHLX believes that the proposed amendments to PHLX Rule 1001 
should enable the PHLX to exercise jurisdiction over a PHLX member 
violating the position or exercise limits in non-PHLX listed equity and 
index options. In pursuing such position and exercise limit violations, 
the PHLX will apply the position and exercise limits of the other 
exchange, together with any applicable exemption, interpretation or 
policy, to transactions in non-PHLX options by a PHLX member.\7\ When a 
PHLX member enters into an opening transaction on another exchange in a 
PHLX-listed option, the PHLX will continue to apply the position and 
exercise limits and exemptions set forth in the PHLX's rules.

    \7\ The Commission notes that the position and exercise limits 
in equity options are uniform among all options markets.
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    The Exchange believes that the proposal is consistent with Section 
6 of the Act, in general, and, in particular, with Section 6(b)(5), in 
that it is designed to remove impediments to and perfect the mechanism 
of a free and open market as well as to protect investors and the 
public interest by expanding option exchange position and exercise 
limit jurisdiction to uniformly cover excessive transactions.
    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) \8\ in that it is 
designed to prevent fraudulent and manipulative acts and practices and 
to protect investors and the public interest. Specifically, the PHLX 
has noted that Exchange rules do not currently prohibit PHLX members 
from exceeding the position and exercise limits set by another exchange 
for non-PHLX listed option contracts. Thus, if the PHLX member is not a 
member of the exchange which lists the options, then neither the PHLX 
or the exchange that lists the options is able to enforce its position 
and exercise limits against the PHLX member. The proposal eliminates 
this loophole and strengthens the Exchange's rules by requiring a PHLX 
member who trades non-PHLX listed option contracts on another exchange, 
and who is not a member of that exchange, to comply with the option 
position and exercise limits set by the exchange where the transactions 
are effected.\9\

    \8\ 15 U.S.C. 78f(b)(5) (1988 & Supp. V 1993).
    \9\ As noted above, the PHLX will also apply the exemptions, 
interpretations, and policies of the exchange where the options 
transactions are effected.
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    As the Commission has noted in the past,\10\ options position and 
exercise limits are intended to prevent the establishment of large 
options positions that can be used or might create incentives to 
manipulate or disrupt the underlying market so as to benefit the 

[[Page 50229]]
options position. In particular, position and exercise limits are 
designed to minimize the potential for mini-manipulations \11\ and for 
corners or squeezes of the underlying market. They also impose a 
ceiling on the maximum position an investor with inside corporate or 
market information can establish through the use of options. In 
addition, they serve to reduce the possibility for disruption of the 
options market itself, especially in illiquid options classes. The 
proposal extends the benefits of the position and exercise limit rules 
to include all exchange-traded options transactions entered into by 
PHLX members. The Commission also notes that violations of the PHLX's 
position and exercise limits rules for transactions that do not comply 
with the position and exercise limits of another exchange will be 
subject to the same fines or disciplinary action for position and 
exercise limit violations as those applicable to PHLX options.\12\

    \10\ See, e.g., Securities Exchange Act Release No. 33283 
(December 3, 1993), 58 FR 65204 (December 13, 1993) (order approving 
File No. SR-CBOE-93-43).
    \11\ Mini-manipulation is an attempt to influence, over a 
relatively small range, the price movement in a stock to benefit a 
previously established derivatives position.
    \12\ Minor violations of the PHLX's position and exercise limit 
rules for equity and index options are subject to Options Floor 
Procedure Advice F-15, ``Minor Infractions of Position/Exercise 
Limits and Hedge Exemptions.'' Other violations of the PHLX's 
position and exercise limits are subject to review by the Exchange's 
Business Conduct Committee in accordance with the PHLX's 
Disciplinary Rules (PHLX Rules 960.1 through 960.12).
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    The Commission finds good cause for approving Amendment No. 1 to 
the proposal prior to the thirtieth day after the date of publication 
of notice of filing thereof in the Federal Register Specifically, 
Amendment No. 1 clarifies and strengthens the PHLX's proposal and 
therefore raises no new regulatory issues. Accordingly, the Commission 
believes that it is consistent with Section 6(b)(5) of the Act to 
approve Amendment No. 1 to the proposal on an accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1. 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 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 organization. All submissions should refer to the file 
number in the caption above and should be submitted by October 19, 
1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the amended proposed rule change (File No. SR-PHLX-95-31) 
is approved.

    \13\ 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.\14\

    \14\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-24027 Filed 9-27-95; 8:45 am]
BILLING CODE 8010-01-M