[Federal Register Volume 62, Number 97 (Tuesday, May 20, 1997)]
[Notices]
[Pages 27643-27646]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13098]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38612; File No. SR-PCX-97-07]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc.,
Relating to Position and Exercise Limits
May 12, 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 March 5, 1997, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below,\3\
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\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
\3\ On March 26, 1997, the PCX amended its rule filing. See
letter from Michael D. Pierson, Senior Attorney, Regulatory Policy,
Pacific Exchange, Inc., to Matthew S. Morris, Office of Market
Supervision, Division of Market Regulation, Commission, dated March
26, 1997 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PCX, pursuant to Rule 19b-4 of the Act, is proposing to modify
its rules on option position and exercise limits by (a) expanding the
scope of its firm facilitation exemption, (b) clarifying its general
rule on exercise limits, (c) increasing the position and exercise
limits for narrow-based index options, and (d) expanding the broad-
based index hedge exemption to include broker-dealers.\4\
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\4\ The PCX has withdrawn those portions of its rule filing
which related to FLEX Equity options, and has refiled these changes
in File No. SR-PCX-97-09.
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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
[[Page 27644]]
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
1. Purpose
The Exchange is proposing to modify several of its rules on
position and exercise limits for equity and index options as follows:
Firm Facilitation Exemption
The PCX's firm facilitation exemption currently applies only to a
member firm that facilitates and executes an order for its own
customer.\5\ The PCX is proposing to amend the firm facilitation
exemption in two ways. First, a member firm will qualify for the
exemption if it facilitates its own customer whose account it carries,
whether the firm executes the order itself or gives the order to an
independent broker for execution. Second, the exemption will be
expanded to include member firms who facilitate another member's
customer order. Such a customer order must be for execution only
against the member firm's proprietary account. Further, unlike a member
firm that facilitates its own customer, the resulting position will not
be carried by the facilitating member firm.\6\
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\5\ The PCX defines a customer order as one that is entered,
cleared, and in which the resulting position is carried with the
firm.
\6\ The Commission notes that any solicitation of a member by
another member or customer to facilitate a customer order must
comply with the relevant Exchange rules concerning solicited
transactions.
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Specifically, PCX Rule 6.8, Commentary .08 currently provides that
for the purpose of facilitating (in accordance with the provisions of
PCX Rule 6.47(b)) orders of its own customer (one that will enter clear
and have the resulting position carried with the firm) in non-multiply-
listed Exchange options, the proprietary account of a member
organization may receive and maintain an exemption (``facilitation
exemption'') from the applicable standard position limit to the extent
that certain procedures and criteria are satisfied. The Exchange is
proposing to replace this provision with another stating that to the
extent that certain procedures and criteria are satisfied, a member
organization may receive and maintain for its proprietary account an
exemption (``facilitation exemption'') from the applicable standard
position limit in non-multiply-listed Exchange options for the purpose
of facilitating, pursuant to the provisions of PCX Rule 6.47(b), (a)
orders for its own customer (one that will have the resulting position
carried with the firm) or (b) orders received from or on behalf of a
customer for execution only against the member firm's proprietary
account.\7\
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\7\ According to the PCX, the text of the proposed rule is
substantially the same as the text of the first paragraph of
Interpretation and Policy .06 to CBOE Rule 4.11 as well as the first
paragraph of Commentary .10 to Amex Rule 904 and Commentary .02 to
Amex Rule 904C. See Securities Exchange Act Release Nos. 37808
(October 10, 1996) 61 FR 54691 (October 21, 1996) (File No. CBOE-96-
35), and 37945 (November 13, 1996) 61 FR 59122 (November 20, 1996)
(File No. Amex-86-32).
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Exercise Limits
PCX Rule 6.9 currently provides that Exchange member organizations
are prohibited from exercising certain long positions in options dealt
in on the Exchange as well as options dealt in on other options
exchanges.\8\ The Exchange is proposing to remove the phrase ``of a
class of options dealt in on the Exchange'' in PCX Rule 6.9, Commentary
.01, in order to make that Commentary consistent with current PCX Rule
6.9(a).
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\8\ See Securities Exchange Act Release No. 36350 (October 6,
1995), 60 FR 53654 (October 16, 1995) (approval order relating to
members' compliance with position and exercise limits for non-PCX
listed options) (File No. PSE-95-17).
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Narrow-Based Index Options
Pursuant to PCX Rule 7.6, the position and exercise limits for
narrow based (industry) index options traded on the Exchange are
currently set at 6,000, 9,000, and 12,000 contracts.\9\ Specifically,
Exchange rule 7.6(a) provides that position and exercise limits for
narrow-based index options be set at one of three levels depending upon
the weightings of the component securities in such narrow-based index.
Currently, a narrow-based index option will have a 6,000 contract limit
if a single component security accounts for more than 30% of the index
value; a 9,000 contract limit if a single component security accounts
for more than 20% (but less than 30%) of the index value or any five
component securities together account for more than 50% of the index
value; and a 12,000 contract limit for those narrow-based indexes that
do not fall within any one of the other categories.
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\9\ See Securities Exchange Act Release No. 36537 (November 30,
1995), 60 FR 62916 (December 7, 1995) (order approving increases to
narrow-based index option position and exercise limits from 5,500,
7,500, and 10,500 contracts to 6,000, 9,000 and 12,000 contracts)
(File No. PSE-95-30).
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The Exchange is proposing to increase these position and exercise
limits to 9,000, 12,000, and 15,000 contracts. The Exchange notes that
the Commission has approved such increases to the position and exercise
limits of other options exchanges.\10\
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\10\ See, e.g., Securities Exchange Act Release Nos. 37863
(October 24, 1996), 61 FR 56599 (November 1, 1996) (File No. Phlx-
96-33), and 38202 (January 23, 1997), 62 FR 4555 (January 30, 1997)
(File No. Amex-96-41).
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Broad-Based Index Hedge Exemption
PCX Rule 7.6, Commentary .02, currently provides that positions in
broad-based index option issues traded on the Exchange, held in the
aggregate by a customer (who is neither a member nor a broker/dealer)
are exempt from this position limit rule to the extent that certain
procedures and criteria are met. The Exchange is proposing to modify
this provision and the subject procedures in several respects.\11\
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\11\ The Exchange notes that the Commission has approved similar
changes to the rules of the CBOE. See Securities Exchange Act
Release No. 37504 (July 31, 1996), 61 FR 40868 (August 6, 1996)
(File No. CBOE-96-01).
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First, the Exchange is proposing to extend the broad-based index
hedge exemption to broker-dealers. Accordingly, the Exchange is
replacing various references to ``customer'' in the text of Commentary
.02 with references to ``accounts,'' which refer to the accounts in
which the exempt options positions are held (i.e., the ``hedge
exemption account'').
Second, the Exchange is proposing that it be allowed to grant
approval of a broad-based index hedge exemption on the basis of verbal
representations, provided that the hedge exemption account furnishes to
the Exchange, within two business days (or such other time period
designated by the Exchange) appropriate documentation sustaining the
basis for the exemption.
Third, the Exchange is proposing to add a provision (at new
subsection (c)) stating that a hedge exemption account that is not
carried by a PCX member organization must be carried by a member of a
self-regulatory organization participating in the Intermarket
Surveillance Group (``ISG'').
Fourth, the Exchange is eliminating current subsections (c) and (d)
and replacing them with new subsection (d), which provides that the
hedge exemption account must maintain a qualified portfolio, or will
effect transactions necessary to obtain a qualified portfolio
concurrent with or at
[[Page 27645]]
or about the same time \12\ as the execution of the option position of:
(1) a net long or short position in common stocks in at least four
industry groups and contains at least twenty stocks, none of which
account for more than fifteen percent of the value of the portfolio or
in securities readily convertible, and additionally in the case of
convertible bonds, economically convertible, into common stocks which
would comprise a portfolio, and/or (2) a net long or short position in
index futures contracts or in options on index futures contracts, or
long or short positions in index options or index warrants, for which
the underlying index is included in the same margin or cross-margin
product group cleared at the Options Clearing Corporation (``OCC'') as
the index option class to which the hedge exemption applies. To remain
qualified, a portfolio must at all times meet these standards
notwithstanding trading activity.
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\12\ The Exchange expects that the hedge will be established
concurrently with or immediately following the execution of the
option transaction absent good cause. In this regard, the Exchange
notes that extreme market conditions, the implementation of circuit
breakers, or the lack of liquidity may affect a market participant's
ability to establish a hedge within the noted time-frame.
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Fifth, the Exchange is proposing to clarify the method of
determining the unhedged value of a ``qualified portfolio.''
Accordingly, subsection (e) of Commentary .02 will provide that the
unhedged value will be determined as follows: (1) the values of the net
long or short positions of all qualifying products in the portfolio are
totaled; (2) for positions in excess of the standard limit, the
underlying market value (A) of any economically equivalent opposite
side of the market calls and puts in broad-based index options, and (B)
of any opposite side of the market positions in stock index futures,
options on stock index futures, and any economically equivalent
opposite side of the market positions, assuming no other hedges for
these contracts exist, is subtracted from the qualified portfolio; and
(3) the market value of the resulting unhedged portfolio is equated to
the appropriate number of exempt contracts as follows: the unhedged
qualified portfolio is divided by the corresponding closing index value
and the quotient is then divided by the index multiplier or 100.
Sixth, the proposal specifies that only the following qualified
hedging transactions and positions are eligible for purposes of hedging
a qualified portfolio (i.e., stocks, futures, options, and warrants):
(1) Long put(s) used to hedge the holding of a qualified portfolio; (2)
Long call(s) used to hedge a short position in a qualified portfolio;
(3) Short call(s) used to hedge the holding of a qualified portfolio;
and (4) Short put(s) used to hedge a short position in a qualified
portfolio. In addition, the proposal states that the following
strategies may be effected only in conjunction with a qualified stock
portfolio: (5) For non-P.M. settled, European-style index options
only--a short call position accompanied by long put(s), where the short
call(s) expire with the long put(s), and the strike price of the short
call(s) equals or exceeds the strike price of the long put(s) (a
``collar'') (provided that neither side of the collar transaction can
be in-the-money at the time the position is established;\13\ (6) For
non-P.M. settled, European-style index options only--a long position
coupled with a short put position overlying the same broad-based index
and having an equivalent underlying aggregate index value, where the
short put(s) expire with the long put(s), and the strike price of the
long put(s) exceed the strike price of the short put(s) (a ``debit put
spread position''); and (7) For non-P.M. settled, European-style index
options only--a short call position accompanied by a debit put spread
position, where the short call(s) expire with the puts and the strike
price of the short call(s) equals or exceeds the strike price of the
long put(s) (provided that neither side of the short call, long put
transaction can be in-the-money at the time the position is
established.\14\
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\13\ For purposes of determining compliance with PCX Rules 6.8
and 7.6, a collar position will be treated as one contract.
\14\ For purposes of determining compliance with PCX Rules 6.8
and 7.6, the short call and long put positions will be treated as
one contract.
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Finally, the Exchange is proposing to add a new provision stating
that positions included in a qualified portfolio that serve to secure
an index hedge exemption may not also be used to secure any other
position limit exemption granted by the Exchange or any other self-
regulatory organization or futures contract market.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act, in general, and furthers the objectives
of Section 6(b)(5), in particular, in that it is designed to perfect
the mechanisms of a free and open market and to protect investors and
the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The self-regulatory organization does not believe that the proposed
rule change will impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed new change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the 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 the proposed 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 submission
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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of the PCX. All
submissions should refer to File No. SR-PCX-97-07 and should be
submitted by June 10, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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[[Page 27646]]
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13098 Filed 5-19-97; 8:45 am]
BILLING CODE 8010-01-M