[Federal Register Volume 60, Number 199 (Monday, October 16, 1995)]
[Notices]
[Pages 53653-53655]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25552]



-----------------------------------------------------------------------

[[Page 53654]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36350; File No. SR-PSE-95-17]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Stock Exchange, Inc., Relating to Members' Compliance With Position and 
Exercise Limits for Non-PSE Listed Options

October 6, 1995.
    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 August 
15, 1995, the Pacific Stock Exchange, Inc. (``PSE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization.\1\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

    \1\ The PSE requested accelerated approval of the proposed rule 
change. See Letter from Michael Pierson, Senior Attorney, Market 
Regulation, PSE, to Yvonne Fraticelli, Office of Market Supervision 
(``OMS''), Division of Market Regulation (``Division''), Commission, 
dated August 21, 1995 (``Amendment No. 1''). On September 12, 1995, 
the PSE amended its proposal to clarify that in applying the 
position and exercise limit rules of another options exchange, the 
PSE will also follow the applicable exemptions, interpretations, and 
policies of that exchange. See Letter from Michael D. Pierson, 
Senior Attorney, Market Regulation, PSE, to Yvonne Fraticelli, OMS, 
Division, Commission, dated September 11, 1995 (``Amendment No. 
2'').
---------------------------------------------------------------------------

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

    The PSE proposes to amend PSE Rules 6.8, ``Position Limits,'' and 
6.9, ``Exercise Limits,'' to require PSE members who trade non-PSE-
listed option contracts and who are not members of the exchange where 
the options are traded to comply with the option position and exercise 
limits set by the exchange where the transactions are effected.\2\

    \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 or long puts and short calls) 
that can be held or written by an investor or group of investors 
acting in concert. 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.
---------------------------------------------------------------------------

    The text of the proposed rule change is available at the Office of 
the Secretary, PSE and at the Commission.

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 self-regulatory organization 
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 self-regulatory organization 
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

(a) Purpose
    The purpose of the proposed rule change is to eliminate a 
jurisdictional loophole whereby a PSE member who exceeds position or 
exercise limits on another options exchange in an options issue not 
listed on the PSE, and who is not a member of the other exchange, falls 
outside of both the PSE's and the other options exchange's jurisdiction 
for position and exercise limit purposes.\3\ The PSE notes that PSE 
Rules 6.8 and 6.9 prohibit PSE members from establishing or exercising 
excessive positions in PSE-listed options contracts; however, they do 
not prohibit PSE members from exceeding applicable position and 
exercise limits set by other options exchanges for non-PSE-listed 
option contracts. If the PSE member is not a member of the other 
exchange that lists the option contracts, then the other exchange 
cannot enforce its position and exercise requirements against the PSE 
member either.\4\

    \3\ The Commission notes that, generally, the options exchanges 
have adopted uniform options position and exercise limits.
    \4\ The proposal applies to transactions in index options as 
well as equity options. Telephone conversation between Michael 
Pierson, Senior Attorney, Market Regulation, PSE, and Yvonne 
Fraticelli, Attorney, OMS, Division, Commission, on September 22, 
1995.
---------------------------------------------------------------------------

    The proposed amendments will extend the PSE's position and exercise 
limit rules to apply to option contracts dealt in on any exchange 
(rather than only to option contracts dealt in on the PSE) by requiring 
a PSE member who is effecting transactions in non-PSE-listed option 
contracts on another exchange, of which he or she is not a member, to 
comply with the position and exercise limits set by the exchange on 
which the transaction is effected.\5\

    \5\ In applying the position and exercise limits of another 
options exchange, the PSE will also follow any applicable 
exemptions, interpretations, and policies of that exchange. See 
Amendment No. 2, supra note 1.
---------------------------------------------------------------------------

(b) Statutory Basis
    The PSE believes that the proposal is consistent with Section 6(b) 
of the Act, in general, and with Section 6(b)(5), in particular, in 
that it is designed to remove impediments to a free and open market, to 
promote just and equitable principles of trade, and to protect 
investors and the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The PSE does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

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

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

    The PSE has requested that the proposed rule change be given 
accelerated effectiveness pursuant to Section 19(b)(2) of the Act.\6\

    \6\ See Amendment No. 1, supra note 1.
---------------------------------------------------------------------------

    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) thereunder \7\ in that 
it is designed to prevent fraudulent and manipulative acts and 
practices and to protect investors and the public interest. 
Specifically, the PSE has noted that Exchange rules do not currently 
prohibit PSE members from exceeding the position and exercise limits 
set by another exchange for non-PSE listed option contracts. Thus, if 
the PSE member is not a member of the exchange which lists the options, 
then neither the PSE nor the exchange that lists the options is able to 
enforce its position and exercise limits against the PSE member. The 
proposal eliminates this loophole and strengthens the Exchange's rules 
by requiring a PSE member who trades non-PSE listed 

[[Page 53655]]
option contracts on another exchange, and who is not a member of that 
exchange, to comply with the options position and exercise limits set 
by the exchange where the transactions are effected.\8\

    \7\ 15 U.S.C. 78f(b)(5) (1982).
    \8\ In applying the position and exercise limits of another 
options exchange, the PSE will also follow any applicable 
exemptions, interpretations, and policies of that exchange. See 
Amendment No. 2, supra note 1.
---------------------------------------------------------------------------

    As the Commission has noted in the past,\9\ 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 
options position. In particular, position exercise limits are designed 
to minimize the potential for mini-manipulations \10\ and for corners 
or squeezes of the underlying market. In addition, they serve to reduce 
the possibility for disruption of the options market itself, especially 
in illiquid option classes. The proposal extends the benefits of the 
position and exercise limit rules to include all options transactions 
entered into by PSE members.

    \9\ See, e.g., Securities and Exchange Act Release No. 33283 
(December 3, 1993), 58 FR 65204 (December 13, 1993) (order approving 
File No. SR-CBOE-93-43).
    \10\ 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.
---------------------------------------------------------------------------

    As noted above, the proposed amendments will extend PSE Rules 6.8 
and 6.9 to apply to option contracts dealt in on any exchange (rather 
than only to option contracts dealt in on the PSE) by requiring a PSE 
member who effects transactions in non-PSE-listed option contracts on 
another exchange, of which he or she is not a member, to comply with 
the position and exercise limits set by the exchange on which the 
transaction is effected. Such violations, consistent with any violation 
of the PSE's position and exercise limit rules, will be subject to 
fines imposed pursuant to PSE Rule 10.13, ``Minor Rule Plan'' or any 
other disciplinary action the PSE deems appropriate.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register because the proposal 
is identical to approved proposals submitted by the Chicago Board 
Options Exchange, Inc. (``CBOE'') and the Philadelphia Stock Exchange, 
Inc.\11\ The CBOE and PHLX proposals were subject to the full notice 
and comment period and the Commission received no comments on those 
proposals. Therefore, the Commission believes it is consistent with 
Sections 6(b)(5) and 19(b)(2) of the Act to approve the PSE's proposal 
on an accelerated basis.

    \11\ See Securities Exchange Act Release Nos. 3642 (September 
18, 1995), 60 FR 49305 (September 22, 1995) (order approving File 
No. SR-CBOE-22) and 36257 (September 20, 1995), 60 FR 50228 
(September 28, 1995) (order approving File No. SR-PHLX-95-31).
---------------------------------------------------------------------------

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 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 November 6, 
1995.
    It is therefore ordered, pursuant to Section 19( )(2) of the 
Act,\12\ that the proposed rule change (File No. SR-PSE-95-17), as 
amended, is approved on an accelerated basis.

    \12\ 15 U.S.C. 78s(b)(2) (1982).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\

    \13\ 17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 95-25552 Filed 10-13-95; 8:45 am]
BILLING CODE 8010-01-M