[Federal Register Volume 60, Number 235 (Thursday, December 7, 1995)]
[Notices]
[Pages 62915-62918]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29781]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36537; File Nos. SR-Amex-95-45; and SR-PSE-95-30]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the American 
Stock Exchange, Inc., and Notice of Filing and Order Granting 
Accelerated Approval of Proposed Rule Change and Amendment No. 1 to the 
Proposed Rule Change by the Pacific Stock Exchange, Inc. Relating to 
Modifications of the Position and Exercise Limits for Narrow-Based 
Index Options

November 30, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 15, 1995, the 
American Stock Exchange, Inc. (``Amex''); and on November 16, 1995, the 
Pacific Stock Exchange, Inc. (``PSE'') (each individually referred to 
as an ``Exchange'' and both 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 
organizations.\2\ The Commission is approving the proposals on an 
accelerated basis.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\On November 27, 1995, the PSE amended its proposal to submit 
its filing pursuant to Section 19(b)(2) under the Act and to request 
accelerated effectiveness of the proposal. See Letter from Michael 
Pierson, Senior Attorney, Market Regulation, PSE, to Yvonne 
Fraticelli, Office of Market Supervision, Division of Market 
Regulation, Commission, dated November 27, 1995 (``Amendment No. 
1'').
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I. Self-Regulatory Organizations' Statements of the Terms of Substance 
of the Proposed Rule Changes

    The Exchanges propose to amend their rules to increase the position 
and exercise limits\3\ for narrow-based (or industry) index options 
from the current levels of 5,500, 7,500, or 10,500 contracts to 6,000, 
9,000, or 12,000 contracts.\4\ The Commission has approved identical 
proposal by the Philadelphia Stock Exchange, Inc. (``PHLX'') and by the 
Chicago Board Options Exchange, Inc. (``CBOE'').\5\

    \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). 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.
    \4\The Amex's position and exercise limits for industry index 
options are provided in Amex Rules 904C, ``Position Limits,'' and 
905C, ``Exercise Limits.'' The PSE's position and exercise limits 
for industry index options are provided in PSE Rules 7.6, ``Position 
Limits for Index Options,'' and 7.7, ``Exercise Limits.'' Under the 
Exchanges' rules, the current position limits for industry index 
options are as follows: (1) 5,500 contracts if the Exchange 
determines in its semi-annual review that any single underlying 
stock accounted, on average, for 30% or more of the index value 
during the 30-day period immediately preceding the review; (2) 7,500 
contracts if the Exchange determines in its semi-annual review that 
any single underlying stock accounted, on average, for more than 20% 
of the index value or that any five underlying stocks accounted, on 
average, for more than 50% of the index value, but that no single 
stock in the group accounted, on average, for 30% or more of the 
index value during the 30-day period immediately preceding the 
review; or (3) 10,500 contracts if the Exchange determines that the 
conditions requiring the establishment of a lower limit have not 
occurred.
    \5\See Securities Exchange Act Release Nos. 36194 (September 6, 
1995), 60 FR 47637 (September 13, 1995) (order approving File No. 
SR-PHLX-95-16) (``PHLX Approval Order''); and 36439 (October 31, 
1995), 60 FR 56075 (November 6, 1995) (order approving File No. SR-
CBOE-95-56) (``CBOE Approval Order'').
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    The texts of the proposed rule changes are available at the offices 
of the Exchanges, and at the Commission.

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

    In their filings with the Commission, the self-regulatory 
organizations included statements concerning the purpose of and basis 
for the proposed rule changes and discussed any comments they 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' Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    The Exchanges propose to amend their rules to increase the position 
and exercise limits for narrow-based (or industry) index options from 
the current levels of 5,500, 7,500, or 10,500 contracts to 6,000, 
9,000, or 12,000 contracts. The Exchanges note that the Commission has 
approved identical proposals by the PHLX and the CBOE.\6\

    \6\Id.
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    Currently, the Exchanges' rules establish 5,500, 7,500, and 10,500 
contract levels as position limits for industry index options. The 
Exchanges propose to increase these limits to 6,000, 9,000, and 12,000 
contracts, respectively. Under the Exchanges' rules, exercise limits 
correspond to position limits.
    The Exchanges note that the current position and exercise limits 
have been in place since 1993\7\ and that there have been no further 
increases in position limits for narrow-based index options since that 
time, despite appreciable growth in index options trading. According to 
the Amex, there has been a notable increase in narrow-based index 
option trading since 1993. Specifically, the Amex states that through 
October 31, 1995, narrow-based index option volume has increased 79% 
over all of 1994.

    \7\See Securities Exchange Act Release Nos. 33282 (December 3, 
1993), 58 FR 65218 (December 13, 1993) (order approving File No. SR-
PSE-93-38); and 33285 (December 3, 1993), 58 FR 65201 (December 13, 
1993) (order approving File No. SR-Amex-93-27).
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    In addition, the Exchanges believe that the proposed increases are 
reasonable and consistent with the gradual, evolutionary approach 
adopted previously by the Commission and the options exchanges when 
increasing position and exercise limits.\8\ Accordingly, the Exchanges 
propose a 9% increase for the lowest tier (5,000 to 6,000 contracts); a 
20% increase for the middle level position limit (from 7,500 to 9,000 
contracts); and a 15% increase in the highest level (from 10,500 
contracts to 12,000 contracts).

    \8\According to the PSE, the most recent position limit changes 
in 1993 represented changes of 38% (from 4,000 to 5,500 contracts); 
25% (from 6,000 to 7,500 contracts); and 31% (from 8,000 to 10,500 
contracts).
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    The Exchanges also believe that the proposed increases are required 
by traders and investors to meet their investment needs. In this 
regard, the Exchanges believe that the current position limit levels 
create difficulties for investors in narrow-based index options, 
especially those institutional investors who own large portfolios of 
the component securities and who wish to use the options markets to 
hedge those portfolios. The Exchanges propose to raise the position and 
exercise limits for narrow-based index options to accommodate the 
liquidity and hedging needs of large investors and the institutions 
that compete to facilitate the trading interests of the large 
investors.
    Finally, the Exchanges believe that the proposed limits of 6,000, 
9,000, and 12,000 contracts will increase the depth and liquidity of 
the market for industry index options without causing any market 
disruption. The Exchanges represent that they will continue to monitor 
and surveill for manipulation and violations of the position and 
exercise limits. Specifically, the Amex 

[[Page 62917]]
states that it will use monitoring systems currently in place to detect 
and deter attempted manipulative activity and other trading abuses 
through the use of illegal positions by market participants. The PSE 
states that it will monitor the markets for evidence of manipulation or 
disruption caused by investors with positions at or near current 
position or exercise limits and that the proposed limits will not 
diminish the surveillance function in this regard.
    The Exchanges believe that the proposals to increase narrow-based 
index option position limits are consistent with Section 6 of the Act, 
in general, and, in particular, with Section 6(b)(5), in that they are 
designed to promote just and equitable principles of trade and to 
prevent fraudulent and manipulative acts and practices. The Amex also 
believes that the proposal is not designed to permit unfair 
discrimination between customers, issuers, brokers or dealers. The PSE 
also believes that the proposal is designed to protect investors and 
the public interest.

(B) Self-Regulatory Organizations' Statements 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

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

III. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Changes

    The Exchanges have requested that the proposed rule changes be 
given accelerated effectiveness pursuant to Section 19(b)(2) of the 
Act. As noted above, the Commission has previously approved identical 
proposals submitted by the PHLX and the CBOE.\9\

    \9\See PHLX and CBOE Approval Orders, supra note 5.
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    The Commission finds that the proposed rule changes 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).\10\ Specifically, the 
Commission finds that the proposed position and exercise limits for 
narrow-based index options should accommodate the needs of investors 
and market participants and should 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 the 
underlying securities.

    \10\15 U.S.C. 78f(b) (1988 & Supp. V 1993).
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    As noted above, the Commission believes that although the position 
and exercise limits for options must be sufficient to protect the 
options and related markets from disruptions by manipulation, the 
limits must not be established at levels that are so low as to 
discourage participation in the options market by institutions and 
other investors with substantial hedging needs or to prevent market 
makers from adequately meeting their obligations to maintain a fair and 
orderly market. In this regard, the Exchanges have stated that they 
believe that the proposals will increase the depth and liquidity or the 
market for industry index options without causing any market 
disruption. In addition, the Exchanges represent that they will 
continue to conduct surveillance for manipulation and other trading 
abuses.
    The Commission notes that the proposals, while increasing the 
applicable position and exercise limits for narrow-based index options, 
continue to reflect the unique characteristics of each index option and 
maintain the structure of the current three-tiered system. 
Specifically, the lowest proposed limit, 6,000 contracts, will apply to 
narrow-based index options in which a single underlying stock accounts 
for 30% or more of the index value during the 30-day period immediately 
preceding the Exchange's semi-annual review of industry index option 
positions limits. Limits of 9,000 contracts will apply if any single 
underlying stock accounts, on average, for 20% or more of the index 
value or any five underlying stocks account, on average for more than 
50% of the index value, but no single stock in the group accounts, on 
average, for 30% or more of the index value during the 30-day period 
immediately preceding the Exchange's semi-annual review of industry 
index option position limits. The 12,000-contract limit will apply only 
if the Exchange determines that the conditions requiring either the 
6,000-contract limit or the 9,000-contract limit have not occurred. 
Accordingly, the proposal allows the Exchanges to avoid placing 
unnecessary restraints on those narrow-based index options where the 
manipulative potential is the least and the need for increased 
positions, both by traders and institutional investors, may be the 
greatest.
    The Commission believes that the proposed increases for the three 
tiers of 9%, 20%, and 15%, for lowest to highest, respectively, appear 
to be appropriate and consistent with the Commission's evolutionary 
approach to position and exercise limits. In this regard, the absence 
of discernible manipulative problems under the current three-tiered 
position and exercise limit system for narrow-based index options leads 
the Commission to conclude that the modest increases proposed by the 
Exchanges are warranted. The Commission recognizes that there are no 
ideal limits in the sense the options positions of any given size can 
be stated conclusively to be free of any manipulative concerns. 
However, based upon the absence of discernible manipulation or 
disruption problems under current limits, the Commission believes that 
the proposed limits can be safely considered. Accordingly, the 
Commission believes that the liberalization of existing position and 
exercise limits for narrow-based index options is now appropriate.\11\

    \11\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 proposed 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 Exchanges have had considerable 
experience monitoring the current three-tiered framework in narrow-
based stock index options. 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 proposed increases in position 
and exercise limits for narrow-based index options will not cause 
significant problems.
    Finally, the Exchanges have indicated that they will continue to 
conduct surveillance for manipulation. The Commission believes that the 
Exchanges' surveillance programs are adequate to detect and deter 
violations of position and exercise limits as well as to detect and 
deter attempted manipulative activity and other trading abuses through 
the use of such illegal positions by market participants.
    For the foregoing reasons, the Commission finds that the proposals 
to increase the position and exercise limits 

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for narrow-based index options to 6,000, 9,000, or 12,000 contracts, 
depending on the percentage stock concentrations within the index, are 
consistent with the requirements of the Act and the rules and 
regulations thereunder.
    The Commission finds good cause for approving the proposed rule 
changes prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. As noted above, the 
Commission has previously approved identical proposals submitted by the 
PHLX and the CBOE.\12\ The PHLX's proposals was published for the full 
notice and comment period and the Commission received no comments on 
the PHLX's proposal. The Exchanges' proposals raise no new regulatory 
issues. Accordingly, the Commission believes it is consistent with 
Sections 6(b)(5) and 19(b)(2) of the Act to approve the proposed rule 
changes on an accelerated basis. In addition, the Commission believes 
it is consistent with Sections 6(b)(5) and 19(b)(2) of the Act to 
approve Amendment No. 1 to the PSE's proposal on an accelerated basis 
so that both proposals may become effective simultaneously.

    \12\See PHLX and CBOE Approval Orders, supra note 5.
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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, 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 filings 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 numbers in the caption above and should be submitted by 
December 28, 1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule changes (SR-Amex-95-45 and SR-PSE-95-
30) are approved.

    \13\15 U.S.C. 78f(b)(2) (1988).

    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. 95-29781 Filed 12-6-95; 8:45 am]
BILLING CODE 8010-01-M