[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