[Federal Register Volume 63, Number 239 (Monday, December 14, 1998)]
[Notices]
[Pages 68809-68810]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33070]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40756; File No. SR-Amex-98-39]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange, Inc. Relating to an Increase in 
Position and Exercise Limits for Narrow-Based Index Options

December 7, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on October 13, 1998, the American Stock Exchange, 
Inc. (``Amex'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') 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\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to amend Exchange Rule 904C to increase position 
and exercise limits for narrow-based index options.

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

1. Purpose
    The Amex proposes to increase position and exercise limits for 
narrow-based index options traded on the Exchange.\3\ Amex Rule 904C(c) 
provides three different position limits depending on index components' 
relative weightings in the index. Rule 905C establishes exercise limits 
for the corresponding options at the same levels. Currently, the limits 
are 9,000, 12,000 and 15,000 contracts on the same side of the market. 
Under the proposed changes the new limits will be 25,000, 35,000 and 
45,000. The Exchange believes the proposed expansion of position and 
exercise limits for narrow-based indices is reasonable and appropriate 
considering position and exercise limits for over-the-counter 
conventional options overlying individual securities have recently been 
expanded and currently range from 13,500 to 75,000 contracts.\4\ 
Further, the Exchange believes the proposed increase is consistent with 
the options exchanges' proposed increase in

[[Page 68810]]

position and exercise limits for standardized equity options.\5\
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    \3\ Amex trades options on the following narrow-based indices: 
Airline, GoldBUGS, Biotechnology, Computer Hardware, Computer 
Technology, de Jager Year 2000, Disk Drive, Inter@ctive Week 
Internet, Morgan Stanley Commodity Related, Morgan Stanley 
Healthcare Payor, Morgan Stanley Healthcare Product, Morgan Stanley 
Healthcare Provider, Morgan Stanley High-Technology 35, Natural Gas, 
NatWest Energy, Networking, North American Telecommunications, Oil, 
Pharmaceutical, Securities Broker/Dealer and Tobacco.
    \4\ Exchange Act Release No. 40087 (June 12, 1998), 63 FR 33746 
(June 19, 1998).
    \5\ See Exchange Act Release Nos. 40159 (July 1, 1998), 63 FR 
37151 (July 9, 1998); 40160 (July 1, 1998), 63 FR 37155 (July 9, 
1998); 40400 (September 3, 1998), 63 FR 48777 (September 11, 1998).
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    The Amex believes that an increase in position and exercise limits 
is also appropriate because existing surveillance techniques at options 
exchanges adequately protect the integrity of the markets for the 
options that will be subject to these increased position and exercise 
limits. The Commission has stated that, ``[p]osition limit rules were 
adopted by the options exchanges primarily to minimize manipulative 
potential and to prevent the accumulation of large options positions 
that, if exercised, might affect the price of the underlying stock.'' 
\6\ To date, there have been no disciplinary actions involving 
manipulation in any narrow-based index product listed on the Exchange. 
The Exchange believes that its experience conducting surveillance of 
index options and program trading activity is sufficient to identify 
improper activity. Routine oversight inspections of Amex's regulatory 
programs by the Commission have not uncovered any inconsistencies or 
shortcomings in the manner in which index option surveillance is 
conducted. These procedures entail a daily monitoring of market 
movements via automated surveillance techniques to identify unusual 
activity in both the options and underlying stock basket components.
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    \6\ H.R. Rep. No. IFC-3, 96th Cong., 1st Sess. at 41 (Comm. 
Print 1978).
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    Lastly, given the gradual, evolutionary approach that has been 
adopted by the Commission and the various options exchanges in 
increasing position and exercise limits, the Exchange believes that the 
proposed increases are reasonable and appropriate and would further 
accommodate the hedging needs of Exchange market makers, specialists, 
large investors and the facilitators of those investors who are 
restricted by the current levels.
Competition
    The Commission has stated that, ``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.'' \7\ 
However, in today's market, the Exchange believes that position and 
exercise limits severely hamper Amex's ability to compete with the over 
the counter (OTC) markets. Investors who trade listed options on the 
Amex are placed at a serious disadvantage in comparison to the OTC 
market where index options are not subject to position and exercise 
limits. Member firms continue to express concern to the Exchange that 
position limits on Amex products are an impediment to their business 
and that they have no choice but to move their business to the OTC 
market where position limits are not an issue.
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    \7\ See H.R. Rep. No. IFC-3, 96th Cong., 1st Sess. At 189-91 
(Comm. Print 1978).
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    Financial requirements. The Exchange believes that financial 
requirements imposed by the Exchange and by the Commission adequately 
address concerns that a member or its customer may try to maintain an 
inordinately large unhedged position in a narrow-based index option. 
Current margin, and risk-based haircut methodologies serve to limit the 
size of positions maintained by any one account by increasing the 
margin and/or capital that a member must maintain for a large position 
held by itself or by its customer. It should also be noted that the 
Exchange has the authority under paragraph (d)(2)(K) of Rule 462 to 
impose a higher margin requirement upon the member or member 
organization when the Exchange determines a higher requirement is 
warranted.
2. Statutory Basis
    The Exchange represents that the proposed rule change is consistent 
with Section 6(b) of the Act \8\ in general and furthers the objectives 
of Section 6(b)(5) in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \8\ 15 U.S.C. 78f(b).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 either solicited or received.

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, including whether the proposed rule 
change is consistent with the Act. 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 Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-Amex-98-39 and 
should be submitted by January 4, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-33070 Filed 12-11-98; 8:45 am]
BILLING CODE 8010-01-M