[Federal Register Volume 62, Number 80 (Friday, April 25, 1997)]
[Notices]
[Pages 20235-20237]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10763]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38528; File No. SR-PCX-97-10]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Margin Requirements 
for Options

April 18, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 14, 1997, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'' or 
``SEC'') the proposed rule change as described in Items I, II and III 
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.
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    \1\ U.S.C. 78s(b)(1) (1982).
    \2\ 17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend its Rule 2.16 (``Margin 
Requirements''). The proposed amendments include codification of 
permitted market maker and specialist offset positions that are being 
eliminated from Regulation T of the Federal Reserve Board (``FRB'') and 
an incorporation of specific provisions of Rule 15c3-1 under the Act 
(``the Net Capital Rule''). The proposed rule change also incorporates 
in Rule 2.16 cash account transactions permitted by the FRB and the 
Commission, as well as incorporating several definitions. Proposed new 
language is italicized; proposed deletions are in brackets.

Text of the Proposed Rule Change

Margins
para.3423
    Rule 2.15(a)-(e)--No change.

para.3437  Margin Requirements
    Rule 2.16(a)-(d)(2)(I)--No change.
    (J) Option Specialists, Market Makers and Traders. Notwithstanding 
the other provisions of this sub-section (d)(2), a member organization 
may clear and carry the listed option transactions of one or more 
registered specialists, registered market makers or registered traders 
in options (which registered traders are deemed specialists for all 
purposes under the Securities Exchange Act of 1934 pursuant to the 
rules of a national securities exchange) (hereafter referred to as 
``specialist(s)''), upon a ``Good Faith'' margin basis satisfactory to 
the concerned parties, provided the ``Good Faith'' margin requirement 
is not less than the Net Capital haircut deduction of the member 
organization carrying the transaction pursuant to SEC Rule 15c3-1. In 
lieu of collecting the ``Good Faith'' margin requirement, a carrying 
member organization may elect to deduct in computing its Net Capital 
the amount of any deficiency between the equity maintained in the 
account and the ``Good Faith'' margin required.
    For purposes of the subsection (d)(2)(J), a permitted offset 
position means, in the case of an option in which a specialist makes a 
market, a position in the underlying asset or other related assets, and 
in the case of other securities in which a specialist makes a market, a 
position in options overlying the securities in which a specialist 
makes a market. Accordingly, a specialist in options may establish, on 
a share-for-share basis, a long, or short position in the securities 
underlying the

[[Page 20236]]

options in which the specialist makes a market, and a specialist in 
securities other than options may purchase or write options overlying 
the securities in which the specialist makes a market, if the account 
holds the following permitted offset positions:
    (i) A short option that is ``in or at the money'' and is not offset 
by a long or short option position for an equal or greater number of 
shares of the same underlying security that is ``in the money'';
    (ii) A long option position that is ``in or at the money'' and is 
not offset by a long or short option position for an equal or greater 
number of shares of the same underlying security that is ``in the 
money'';
    (iii) A short option position against which an exercise notice was 
tendered;
    (iv) A long option position that was exercised;
    (v) A net long position in a security (other than a option) in 
which a specialist makes a market;
    (vi) A net short position in a security (other than an option) in 
which a specialist makes a market; or
    (vii) A specified portfolio type as referred to in SEC Rule 15c3-1, 
Appendix A.
    For purposes of this paragraph (d)(2)(J), the term ``in or at the 
money'' means the current market price of the underlying security is 
not more than two standard exercise intervals below (with respect to a 
call option) or above (with respect to a put option) the exercise price 
of the option; the term ``in the money'' means the current market price 
of the underlying asset or index is not below (with respect to a call 
option) or above (with respect to a put option) the exercise price of 
the option; and, the term ``overlying option'' means a put option 
purchased or a call option written against a long position in an 
underlying asset; or a call option purchased or a put option written 
against a short position in an underlying asset.
    Securities, including options, in such accounts shall be valued 
conservatively in the light of current market prices and the amount 
that might be realized upon liquidation. Substantial additional margin 
must be required or excess Net Capital maintained in all cases where 
the securities carried: (i) Are subject to unusually rapid or violent 
changes in value including volatility in the expiration months of 
options, (ii) do not have an active market, or (iii) in one or more or 
all accounts, including proprietary accounts combined, are such that 
they cannot be liquidated promptly or represent under concentration of 
risk in view of the carrying organization's Net Capital and its overall 
exposure to material loss.
    [(i) Notwithstanding the other provisions of this section, a member 
or member firm may clear and carry the listed option transactions of 
one or more registered specialists, registered market makers or 
registered traders in options upon a margin basis which is mutually 
satisfactory.
    (ii) In the case of a joint account carried by a member firm for a 
registered specialist, registered market-maker or registered trader in 
listed options in which the member firm participates, the margin 
deposited by the other participants may be in any amount which is 
mutually satisfactory.]
    (K) The Exchange may at any time impose higher margin requirements 
with respect to any option or warrant position(s) if it deems such 
higher margin requirements are appropriate.
    (L) Exclusive designation.--A customer may designate at the time an 
option order is entered which security position held in the account is 
to serve in lieu of the required margin, if such service is offered by 
the member organization; or the customer may have a standing agreement 
with the member organization as to the method to be used for 
determining on any given day which security position will be used in 
lieu of the margin to support an option transaction. Any security held 
in the account that serves in lieu of the required margin for a short 
put or short call shall be unavailable to support any other option 
transaction in the account.
    (M) Cash account transactions.--A member organization may make 
option transactions in a customer's cash account, providing:
    (i) The transaction is permissible under Section 220.8 of 
Regulation T of the Board of Governors of the Federal Reserve System; 
or
    (ii) the transaction is a debit put spread in listed broad-based 
index options with European-style exercise comprised of a long put(s) 
coupled with a short put(s) overlying the same broad-based index with 
an equivalent underlying aggregate index value and the short put(s) and 
long put(s) expire simultaneously, and the strike price of the long 
put(s) exceed the strike price of the short put(s).
    Rule 2.16(d) (3)-(9)--No change.

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

    Regulation T of the FRB currently prescribes option margin 
requirements. In April 1996, the FRB amended Regulation T effectively 
to delegate margin requirements for options transactions for both 
customers and market makers/specialists, shifting responsibility for 
establishing margin requirements for such transactions to the self-
regulatory organizations. This amendment to Regulation T will become 
effective June 1, 1997. Accordingly, the proposed amendments 
incorporate the current FRB requirements into Exchange Rule 2.16 so 
that they may remain in effect after June 1, 1997. The proposed 
amendments also incorporate certain treatments of positions recognized 
under the Net Capital Rule.
    More specifically, the proposed amendments to Rule 2.16 adopt 
provisions regarding permitted market maker and specialist offset 
positions from Regulation T and the Net Capital Rule. These offset 
positions would be subject to the same ``good faith'' margin treatment 
as currently afforded under Regulation T and would require the 
clearing/carrying firm to comply with the applicable haircut 
requirements of the Net Capital Rule for any cash margin deficiency 
(e.g., the difference between the margin required under Rule 2.16 and 
the amount received from the specialist/market maker). The proposal 
also incorporates the current Regulation R definitions of the terms 
``in or at the money,'' ``in the money'' and ``overlying options.'' The 
parameters for permitted offsets within the ``in or at the money'' 
definition have been expanded from one to two ``standard exercise 
intervals.'' In addition, Section (d)(2)(J) of the rule has been 
revised in order to clarify the existing definition of ``good faith'' 
margin requirements. Moreover, a new subsection (d)(2)(K) has been 
added, stating that the Exchange may at any time impose higher margin 
requirements with respect to any option or warrant position(s) if it 
deems such higher margin requirements are appropriate. Furthermore, a 
new provision has been added (Section (d)(2)(L)) to incorporate the 
provisions currently contained in Regulation T

[[Page 20237]]

regarding ``exclusive designation'' that allow a customer to designate 
which security position in an account is to be utilized to cover the 
required margin at the time an option order is entered; provided the 
member organization offers such a service. Finally, Section (d)(2)(M) 
has been added to incorporate those cash account transactions currently 
permitted under Regulation T and the debit put spread currently allowed 
pursuant to the Commission's no-action letter on ``theoretical 
pricing.''
Statutory Basis
    The proposed rule change is consistent with the requirements of 
Section 6(b)(5) of the Act which provides that the rules of the 
Exchange be designed to promote just and equitable principles of trade 
and to protect the investing public. The proposed rule change is also 
consistent with the rules and regulations of the Board of Governors of 
the Federal Reserve System for the purpose of preventing the excessive 
use of credit for the purchase or carrying of securities, pursuant to 
Section 7(a) of the Act.

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

    The Exchange 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will--
    (A) By order approve such rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 Room, 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 PCX. All submissions should 
refer to File No. SR-PCX-97-10 and should be submitted by May 16, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10763 Filed 4-24-97; 8:45 am]
BILLING CODE 8010-01-M