[Federal Register Volume 63, Number 75 (Monday, April 20, 1998)]
[Notices]
[Pages 19549-19554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10273]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39855; File No. SR-PCX-97-07]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Amendment No. 1 Thereto, by the Pacific Exchange, Inc.,
Relating to Position and Exercise Limits
April 13, 1998.
I. Introduction
On March 5, 1997, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``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 modify its rules on option position and
exercise limits by (a) expanding the scope of the firm facilitation
exemption, (b) increasing the position and exercise limits for narrow-
based index options, (c) expanding the broad-based index hedge
exemption to include broker-dealers, and (d) clarifying the general
rule on exercise limits. On March 27, 1997, the PCX submitted an
amendment to the Commission regarding its proposal.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Michael D. Pierson; Senior Attorney,
Regulatory Policy, PCX, to Matthew S. Morris, Office of Market
Supervision, Division of Market Regulation, Commission, dated March
26, 1997 (``Amendment No. 1'').
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The proposed rule change appeared in the Federal Register on May
20, 1997.\4\ No comments were received on the proposed rule change.
This order approves the PCX's proposal, as amended.
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\4\ See Securities Exchange Act Release No. 38612 (May 12, 1997)
62 FR 27643 (May 20, 1997).
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II. Description
The Exchange has proposed to modify several of its rules on
position and exercise limits for equity and index options as follows:
A. 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 proposes 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
[[Page 19550]]
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 proposes 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 propriety
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-96-32).
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B. 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.\8\ 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. The Exchange
proposes 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.\9\
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\8\ 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).
\9\ See, e.g., Securities Exchange Act Release Nos. 37863
(October 24, 1996) 61 FR 56599 (November 1, 1996) (FIle No. SR-Phlx-
96-33), 38202 (January 23, 1997) 62 FR 4555 (January 30, 1997) (FIle
No. SR-Amex-96-41), and 38613 (May 12, 1997) 62 FR 27638 (May 20,
1997) (File No. SR-CBOE-97-09).
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C. 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 to qualify for a hedge exemption. The
Exchange proposes to modify this provision and the subject procedures
in several respects.\10\
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\10\ 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 proposes 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 proposes 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 substantiating
the basis for the exemption.
Third, the Exchange proposes 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 or about the same time \11\ as the execution of
the exempt option positions 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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\11\ 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 proposes 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 portfolio is divided by
the correspondent 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
[[Page 19551]]
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);\12\ (6) For
non-P.M. settled, European-style index options only--a long put
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).\13\
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\12\ For purposes of determining compliance with PCX Rules 6.8
and 7.6, a collar position will be treated as one contract.
\13\ 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 proposes 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.
D. 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.\14\ The Exchange proposes 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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\14\ 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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III. Findings and Conclusions
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, with the requirements of Section 6(b).\15\ Specifically,
the Commission finds that the proposal is designed to perfect the
mechanisms of a free and open market and to protect investors and the
public interest.
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\15\ 15 U.S.C. 78f(b).
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A. Firm Facilitation Exemption
The Commission believes that by allowing member firms an exemption
from position limits to facilitate large customer orders, whether they
are firms who accept customer orders for execution only against the
member firm's proprietary account, or they are firms who carry their
own customers' accounts and positions, the depth and liquidity of the
market will be enhanced in a manner consistent with the protection of
investors and the public interest. Further, permitting a member firm
who facilitates its own customer order to qualify for the exemption
whether it executes the order itself or gives it to an independent
broker for execution should provide firms with flexibility in handling
such orders while still requiring compliance with the rule's
requirements.
Specifically, the Commission believes that the PCX's proposal to
amend its firm facilitation exemption will accommodate the needs of
investors as well as market participants without substantially
increasing concerns regarding the potential for manipulation and other
trading abuses. The Commission also believes that the proposed rule
change will further enhance the potential depth and liquidity of the
options market as well as the underlying markets by providing Exchange
members greater flexibility in executing large customer orders.
Moreover, the Commission is relying on the absence of discernible
manipulation problems under the PCX's current firm facilitation
exemption as an indicator that the proposal is appropriate. In
addition, the PCX's existing safeguards that apply to the current
facilitation exemption will continue to serve to minimize any potential
disruption or manipulation concerns.
In summary, the Commission continues to believe that the safeguards
built into the facilitation exemptive process will serve to minimize
the potential for disruption and manipulation concerns, while at the
same time benefiting market participants by allowing member firms
greater flexibility to facilitate large customer orders. The Commission
also notes that the facilitation exemption will be monitored in the
same manner, whether the facilitation is done by the member firm for
its own customer and executed by the firm itself or given to an
independent broker for execution, or whether the facilitation is done
by another member firm willing to facilitate the order of another
member firm's customer. Further, as noted above, any firm solicitation
to facilitate a customer order must comply with the PCX's solicitation
rules as well as with the PCX's facilitation and crossing rules.
Lastly, the Commission believes that the PCX has adequate surveillance
procedures to surveil for compliance with the rule's requirements.
Based on these reasons, the Commission believes that it is appropriate
for the PCX to amend its firm facilitation exemption.
B. Narrow-Based Index Options
Since the inception of standardized options trading, the options
exchanges have had rules imposing limits on the aggregate number of
option contracts that a member or customer can hold or exercise. These
rules 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. At
the same time, the Commission has recognized that option position and
exercise 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
specialists and market makers from adequately meeting their obligations
to maintain a fair and orderly market.
In this regard, the PCX has stated that the current position limits
discourage market participation by certain large investors and the
institutions that compete to facilitate their trading. In addition, the
PCX notes that index option trading volume has increased significantly
since 1995, when the current industry index option position limits were
established. In light of the increased volume of narrow-based index
option trading and the needs of investors and market makers, the
Commission believes that the PCX's proposal is a reasonable effort to
accommodate the needs of market participatants.
In addition, the Commission notes that the proposal, while
increasing the positions limits for narrow-based index options,
continues to reflect the unique characteristics of each index option
and to maintain the structure of the current three-tiered system.
Specifically, the lowest proposed limit, 9,000 contracts,
[[Page 19552]]
will apply to narrow-based index options in which a single underlying
stock 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 positions limits. A position limit of
12,000 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 15,000 contract limit will apply only if the Exchange determines
that the conditions requiring either the 9,000 contract limit or the
12,000 contract limit have not occurred.
The Commission believes that the proposed increases for the three
tiers of 25%, 33%, and 50%, for highest to lowest, respectively, appear
to be appropriate and consistent with the Commission's evolutionary
approach to position and exercise limits. As noted above, the
Commission also has approved previously these increased position and
exercise limits for several other exchanges.\16\ To date, there have
been no discernible manipulation problems that have arisen at the
higher three-tier position and exercise limits for narrow-based index
options on these exchanges. The Commission notes that the Exchange has
had considerable experience monitoring the current three-tiered
framework in narrow-based 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 increase in
position and exercise limits for narrow-based index options will not
cause significant problems.
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\16\ See supra note 9.
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Finally, the Commission believes that the Exchange's 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. Accordingly, the Commission concludes
that the increase in the position and exercise limits for narrow-based
index options proposed by the Exchange are warranted and should be
approved.\17\
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\17\ 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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C. Broad-Based Index Hedge Exemption
1. Expansion of Definition of Qualified Portfolio and Extension of
Broad-Based Index Hedge Exemption to Broker-Dealers
Currently, the PCX's broad-based index hedge exemption may be
granted for positions in broad-based index options that are hedged with
Exchange-approved qualified portfolios. The PCX proposes to expand the
current definition of a qualified portfolio to take into account the
broader range of hedging strategies currently used by market
participants. Specifically, the PCX has proposed to include within the
definition of a qualified portfolio products that overlay various
broad-based indexes, including index futures, options on index futures,
index options, and index warrants, where the indexes are represented in
margin or cross-margin product groups at the OCC. Under the new index
hedge exemption's requirements, a qualified portfolio may consist of:
(i) net long or short positions in common stocks, or securities readily
convertible into common stocks, in at least four industry groups, where
the portfolio contains at least twenty stocks, none of which accounts
for more than fifteen percent of the value of the portfolio; and/or
(ii) net long or short positions 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 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. In addition, the index hedge
exemption applies to positions in broad-based index options and is
applicable to the unhedged value of the qualified portfolio.\18\ The
Exchange also proposes 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 substantiating the basis for the exemption. The Exchange
further proposes to extend the broad-based index hedge exemption to
broker-dealers.
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\18\ See new Commentary .02(c) to Rule 7.6. Under this
provision, the unhedged value is 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 correspondent closing index value and the quotient is
then divided by the index multiplier or 100.
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The Commission believes, as it did when originally approving the
PCX's index hedge exemption, that providing for increased position and
exercise limits for broad-based index options in circumstances where
those excess positions are effectively hedged with offsetting positions
will provide greater depth and liquidity to the market and will allow
investors to hedge their portfolios more effectively, without
significantly increasing concerns regarding intermarket manipulations
or disruptions of either the options market or the underlying stock
market. The Commission believes that through the expanded definition of
a qualified portfolio, an increased number of public customers with
long or short portfolios will be able to utilize the broad-based index
hedge exemption, thereby making an alternative hedging technique more
available.
Although the Exchange may, under the terms of the proposal, grant
approval on the basis of verbal representations, the Commission
believes that trading abuses are unlikely because the hedge exemption
account is required to furnish to the Exchange, within two business
days or such other time period designated by the Exchange, appropriate
documentation substantiating the basis for the exemption. The Exchange
recently adopted surveillance procedures appropriate to the new broad-
based index hedge exemption authority. The Commission also notes that
the authority to grant approval for index hedge exemptions on the basis
of verbal representations has been previously approved by the
Commission for another exchange.\19\
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\19\ See Interpretation .01(a) to CBOE's Rule 24.4.
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In addition, the Commission believes that it is reasonable for the
PCX to allow
[[Page 19553]]
broker-dealers as well as public customers to utilize the broad-based
index hedge exemption. The Commission believes that extending the
exemption to broker-dealers may help to increase the depth and
liquidity of the market for broad-based index options and may help to
ensure that public customers receive the full benefit of the exemption.
Moreover, the Commission is relying on the absence of discernible
manipulation problems under the corresponding equity hedge exemption,
which is available to both public customers and broker-dealers, as an
indicator that the proposed extension of the broad-based index hedge
exemption is appropriate. The Commission notes that the broad-based
index hedge exemption will continue to include safeguards designed to
lessen the possibility that the exempted positions could be used to
disrupt or manipulate the market.
2. Prospective Broad-Based Index Hedge Exemption for Broker-Dealers
The PCX proposes to amend the broad-based index hedge exemption so
that the Exchange may grant prospective broad-based index hedge
exemptions to broker-dealers who may not yet have established qualified
portfolios under Commentary .02(d) to Exchange Rule 7.6.
The Commission does not believe that trading abuses are likely to
result from the prospective hedge exemption for the following reasons.
First, the exemption is limited to registered broker-dealers, and
second these broker-dealers must effect the transaction(s) necessary to
obtain a qualified portfolio ``concurrent with or at or about the same
time as the execution of the exempt options positions.'' \20\ The
Commission expects that the hedge will be established immediately
following the execution of the options transaction. Moreover, broker-
dealers must provide to the Exchange appropriate documentation related
to the portfolio within two business days. The Commission believes that
the PCX's surveillance procedures are sufficient to detect and deter
trading abuses arising from the prospective hedge exemption and, in the
event a broker-dealer is found to have violated the exemption, the PCX
is authorized to take all necessary and appropriate disciplinary
actions. Accordingly, the Commission believes that it is appropriate
for the Exchange to adopt a limited prospective broad-based index hedge
exemption for broker-dealers.
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\20\ See also 11, supra, on when the hedge is expected to be
established.
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3. Treatment of Collar and Debit Put Spread Transaction as One Contract
for Hedging and Position Limit Purposes and Neither Side of Collar
Transaction Can Be In-the-Money When Established for Broad-Based Index
Hedge Exemption Purposes
The PCX proposes to treat a collar position as one contract rather
than as two contracts in Commentary .02(g)(5) to Exchange Rule 7.6.
Under the PCX's rules, a collar is defined as a short call position
accompanied by long put(s), where the short call(s) expires 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). Within a limited range,
the collar has less opportunity to benefit from upward and downward
price changes than either of the collar's components. If the market
climbs, the collar is equivalent to a covered write position. If the
market declines, the collar is equivalent to a long put position.
Because the strategy requires both the purchase of puts and the sale of
calls, the PCX believes that the position is more appropriately treated
as one contract for hedging purposes rather than two separate put and
call components. In adopting this interpretation of a collar, the PCX
is also proposing that new language in Commentary .02(g)(5) and
.02(g)(7) to Exchange Rule 7.6 will be added to require that neither
side of the collar transaction (or the short call, long put
transaction) can be in-the-money at the time the position is
established. Similarly, because a strategy involving a covered write
accompanied by a debit put spread requires a collar component, the PCX
also believes that the short call and long put should be treated as one
contract in Commentary .02(g)(7) to Exchange Rule 7.6.\21\
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\21\ The PCX defines a debit put spread position as a long put
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) expires with the long put(s), and the
strike price of the long put(s) exceeds the strike price of the
short put(s).
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The Commission believes that the increased number of options
positions available by virtue of the Exchange's proposal will not
result in disruptions to either the options or underlying stock market
due to the conditions and limitations that must be met to be eligible
for the exemption.\22\ For example, the broad-based index hedge
exemption collar strategy can only be effected in conjunction with a
qualified stock portfolio; the exemption is available only for non-p.m.
settled, European-style index options; the short call(s) must expire
with the long put(s); the strike price of the short call(s) must equal
or exceed the strike price of the long put(s); and neither side of the
collar transaction can be in-the-money at the time the position is
established.
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\22\ The Commission notes that it has previously approved
identical changes to the rules of CBOE. See supra note 10.
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4. Miscellaneous Changes
The PCX is also proposing several other changes to its rules,
including a requirement in Commentary .02(c) to Exchange Rule 7.6 that
a hedge exemption account can be carried by a member of a SRO
participating in the ISG. The Commission believes that through the
Exchange's ISG information sharing arrangements, the hedge exemption
account will continue to be adequately monitored. Other changes to the
Exchange's rules include: (1) clarifying language to reflect the change
in the Exchange corporate name; (2) removing superfluous language from
Commentary .02 to Rule 7.6; (3) changing a cross-reference from ``Rule
6.74(b)'' to ``Rule 6.47(b)'' in Commentary .08 to Rule 6.8; and (4)
changing the first character of the words ``member,'' ``firm,'' and
``organization'' to upper case. Because these changes are non-
substantive or technical in nature or raise no additional regulatory
issues, the Commission believes that they are consistent with Section
6(b)(5) of the Act.\23\
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\23\ 15 U.S.C. 78f(b)(5).
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D. Exercise Limits
The Exchange proposes 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). The
Commission believes that the Exchange's rule change clarifies and
strengthens the PCX's proposal, as originally intended, and raises no
new regulatory issues.\24\
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\24\ See discussion in order approving changes to PCX Rule 6.8
and 6.9 in Securities Exchange Act Release No. 36350 (October 6,
1995) 60 FR 53654 (October 16, 1995).
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IV. Conclusion
For the foregoing reasons, the Commission finds that the PCX's
proposal relating to position and exercise limits is consistent with
the requirements of the Act and the rules and regulations thereunder.
It is Therefore Ordered, pursuant to section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-PCX-97-07), as amended, is
approved.
\26\ 15 U.S.C. 78s(b)(2).
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[[Page 19554]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-10273 Filed 4-17-98; 8:45 am]
BILLING CODE 8010-01-M