[Federal Register Volume 64, Number 11 (Tuesday, January 19, 1999)]
[Notices]
[Pages 2930-2932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1044]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40932; File No. SR-NASD-98-92]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to a Change in 
Position Limits for Standardized Equity Options

January 11, 1999.
    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 December 11, 1998, the National Association of 
Securities Dealers, Inc. (``NASD''), through its wholly-owned 
subsidiary, NASD Regulation, Inc. (``NASD Regulation'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I and II 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. For the reasons discussed below, the 
Commission is granting accelerated approval of the proposed rule 
change.
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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

    NASD Regulation proposes to amend Rule 2860(b)(3)(A) of the 
National Association of Securities Dealers, Inc. (``NASD'' or 
``Association''), to triple the position limits on standardized 
(exchange-traded) equity options and make them equivalent to the limits 
on conventional (over-the-counter) equity options overlying the same 
security. Below is the text of the proposed [rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
Rule 2860. Options
    (3) Position Limits.
    (A) Stock Options--Except in highly unusual circumstances, and with 
the prior written approval of the Association pursuant to the Rule 9600 
Series for good cause shown in each instance, no member shall effect 
for any account in which such member has an interest, or for the 
account of any partner, officer, director or employee thereof, or for 
the account of any customer, an opening transaction through Nasdaq, the 
over-the-counter market or on any exchange in a stock option contract 
of any class of stock options if the member has reason to believe that 
as a result of such transaction the member or partner, officer, 
director or employee thereof, or customer would, acting alone or in 
concert with others, directly or indirectly, hold or control or be 
obligated in respect of an aggregate equity options position in excess 
of:
    (i) [4,500] 13,500 option contracts of the put class and the call 
class on the same side of the market covering the same underlying 
security, combining for purposes of this position limit long positions 
in put options with short positions in call options, and short 
positions in put options with long positions in call options; or
    (ii) [7,500] 22,500 options contracts of the put class and the call 
class on the same side of the market covering the same underlying 
security, providing that the [7,500] 22,500 contract position limit 
shall only be available for option contracts on securities which 
underlie Nasdaq or exchange-traded options qualifying under applicable 
rules for a position limit of [7,500] 22,500 option contracts; or
    (iii) [10,500] 31,500 option contracts of the put class and the 
call class on the same side of the market covering the same underlying 
security providing that the [10,500] 31,500 contract position limit 
shall only be available for option contracts on securities which 
underlie Nasdaq or exchange-traded options qualifying under applicable 
rules for a position limit of [10,500] 31,500 option contracts; or
    (iv) [20,000] 60,000 options contracts of the put and the call 
class on the same side of the market covering the same underlying 
security, providing that the [20,000] 60,000 contract position limit 
shall only be available for option contracts on securities which 
underlie Nasdaq or exchange-traded options qualifying under applicable 
rules for a position limit of [20,000] 60,000 option contracts; or
    (v) [25,000] 75,000 options contracts of the put and the call class 
on the same side of the market covering the same underlying security, 
providing that the [25,000] 75,000 contract position limit shall only 
be available for option contracts on securities which underlie Nasdaq 
or exchange-traded options qualifying under applicable rules for a 
position limit of [25,000] 75,000 option contracts; or
* * * * *
    (ix) Conventional Equity Options.
    a. For purposes of this paragraph (b), standardized equity options 
contracts of the put class and call class on the same side of the 
market overlying the same security shall not be aggregated with 
conventional equity options contracts or FLEX Equity Options contracts 
overlying the same security on the same side of the market. 
Conventional equity options contracts of the put class and call class 
on the same side of the market overlying the same security shall be 
subject to a position limit equal to the greater of:
    1. [three times] the basic limit of [4,500] 13,500 contracts, or
    2. [three times] any standardized equity options position limit as 
set forth in subparagraphs (b)(3)(A)(ii) through (v) for which the 
underlying security qualifies or would be able to qualify.
    b. In order for a security not subject to standardized equity 
options trading to qualify for an options position limit of more than 
[4,500] 13,500 contracts, a member must first demonstrate to the 
Association's Market Regulation Department that the underlying security 
meets the standards for such higher options position limit and the 
initial listing standards for standardized options trading.

II. Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purposes 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.

[[Page 2931]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASD Regulation is proposing to amend the options position limits 
prescribed by Rule 2860(b)(3)(A) to triple the position limits on 
standardized (exchange-traded) equity options and make them equivalent 
to the limits on conventional (over-the-counter) equity options 
overlying the same security.
    Position limits impose a ceiling on the number of options contracts 
of each options class on the same side of the market that can be held 
or written by a member, an investor, or a group of investors acting in 
concert for purposes of limiting the potential for manipulation that 
may be associated with options trading. NASD Rule 2860(b)(3)(A) 
provides that the position limits for equity options are determined 
according to a five-tiered system in which more actively traded stocks 
with larger public floats are subject to higher position limits. 
Currently, the five tiers for standardized equity options \3\ are 
4,500, 7,500, 10,500 20,000 and 25,000 contracts.\4\ The position 
limits for conventional equity options \5\ are three times the limits 
for standardized equity options: 13,500, 22,500, 31,500, 60,000 and 
75,000 contracts.\6\ The NASD's limits on standardized equity options 
are applicable only to those members who are not also members of the 
exchange on which the option is traded; the limits on conventional 
equity options are applicable to all members.\7\
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    \3\ Standardized equity options are exchange-traded options 
issued by the Options Clearing Corporation (``OCC'') that have 
standard terms with respect to strike prices, expiration dates, and 
the amount of the underlying security.
    \4\ NASD rules do not specifically govern how a specific equity 
option falls within one of the five position limit tiers. Rather, 
the NASD's position limit rule provides that the position limit 
established by an options exchange for a particular equity option is 
the applicable position limits for purposes of the NASD's rule.
    \5\ A conventional option is any option contract not issued, or 
subject to issuance, by the OCC.
    \6\ See Exchange Act Release No. 40087 (June 12, 1998), 63 FR 
33746 (June 19, 1998).
    \7\ NASD Rule 2860(b)(1)(A).
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    The American Stock Exchange, Inc. (``AMEX''), the Chicago Board 
Option Exchange, Inc. (``CBOE''), the Pacific Exchange, Inc. (``PCX'') 
and the Philadelphia Stock Exchange, Inc. (``PHLX'') (collectively 
``Options Exchanges'') have filed proposed rule changes with the 
Commission to increase the limits for standardized equity options to 
establish parity with the limits currently in effect for conventional 
equity options.\8\ In response to these filings, NASD Regulation is 
proposing two changes to its rules. First, the proposed rule change 
would triple the limits for standardized equity options to be 
consistent with the increase sought by the Options Exchanges. Without 
such an increase, the NASD's standardized equity options position 
limits would be lower than those established by the Options Exchanges 
and would lead to inconsistent treatment as to firms (and customers of 
such firms) that are NASD members but not members of an options 
exchange, the category of persons for whom our standardized position 
limits apply.
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    \8\ The Commission notes that it recently approved the proposed 
rule changes by the Options Exchanges. See Exchange Act Release No. 
40875 (December 31, 1998) (approving File Nos. SR-CBOE-98-25, SR-
Amex-98-22, SR-PCX-98-33, and SR-Phlx-98-36) (``Exchanges' Position 
Limit Approval Order'').
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    Second, the proposed rule change deletes the provisions of Rule 
2860(b)(3)(A) that establish that the limits for conventional equity 
options are three times the standardized equity options overlying the 
same security. This proposed rule change will not affect the position 
limits for conventional equity options in numerical terms because of 
the commensurate increase in the position limits for standardized 
equity options. The proposed rule change, however, is necessary to 
eliminate the numerical relationship between standardized and 
conventional equity options. The NASD's rules currently provide that 
the position limit for conventional equity options shall be three times 
the limits for standardized equity options overlying the same security. 
This language was added as part of a rule change designed to increase 
the limits on conventional equity options to correspond to the 
numerical limits that were previously in effect with respect to FLEX 
Equity Options.\9\
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    \9\ FLEX Equity Options are exchange-traded options issued by 
the OCC that give investors the ability, within specified limits, to 
designate certain terms of the options (i.e., exercise price, 
exercise style, expiration date, and option type). The Commission 
has approved a two-year pilot program eliminating position limits 
for FLEX Equity Options on the AMEX, CBOE and the PCX. See Exchange 
Act Release No. 39032 (September 9, 1997), 62 FR 48638 (September 
16, 1997).
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    NASD Regulation believes that the proposed rule change is necessary 
to ensure that the NASD's standardized equity options position limits 
are consistent with the limits of the Options Exchanges. Without an 
increase to the NASD's limits, the NASD's standardized equity options 
position limits would be lower than those established by the Options 
Exchanges and would lead to inconsistent treatment as to firms (and 
customers of such firms) that are NASD members but not members of an 
Options Exchange, the category of persons for whom its standardized 
position limits apply. The postponed rule change also provides NASD 
members (and their customers) with greater flexibility regarding their 
use of standardized equity options. NASD Regulation believes that the 
increased limits are appropriate in light of the surveillance by the 
Options Exchanges and the NASD's reporting requirements pursuant to 
Rule 2860(b)(3)(A)(5), which it believes provides sufficient protection 
against potential manipulation of these position levels.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\10\ 
which requires, among other things, that the Association's rules be 
designed to prevent fraudulent and manipulative acts and practices, and 
promote just and equitable principle of trade, and, in general, to 
protect investors and the public interest. Specifically, NASD 
Regulation believes that the proposed rule change to increase the 
position limits for standardized equity options, consistent with the 
increase sought by the Options Exchanges, will promote just and 
equitable principles of trade, as well as protect investors and the 
public interest by providing members and their customers with greater 
flexibility regarding their use of standardized equity options and 
ensuring that NASD members are not competitively disadvantaged vis-a-
vis members of an Options Exchange.
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    \10\15 U.S.C. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will impose no 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with

[[Page 2932]]

the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities association and, in particular, 
with the requirements of section 15A(b)(6).\11\ Specifically, the 
Commission believes that the proposed rule change is designed to 
prevent just and equitable principles of trade, and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.\12\
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    \11\ 15 U.S.C. 78o-3(b)(6).
    \12\ In approving this rule change, the Commission notes that it 
has considered the proposal's impact on efficiency, competition, and 
capital formation, consistent with section 3 of the Act. 15 U.S.C. 
78c(f).
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    The Commission finds good cause to approve the proposed rule change 
prior to the 30th day after the date of publication of notice of filing 
thereof in the Federal Register. Specifically, the Commission notes 
that the proposed rule change would make the NASD's position limits for 
standardized equity options equivalent to the increases of the Options 
Exchanges that were recently approved by the Commission.\13\ 
Accelerating the NASD proposed rule change will ensure consistent 
treatment for persons trading in standardized equity options in that an 
NASDs member from that is not a member of an Options Exchange and its 
customers will have the same position limits for standardized equity 
option as an NASD member firm that is also a member of an Options 
Exchange. The Commission believes that failing to approve the 
conforming rule change for position limits for standardized equity 
options would result in confusion, as well as inconsistent treatment as 
to firms that are NASD's member but not members of an Options Exchange, 
the category of persons for whom the NASD's standardized equity option 
position limits apply. Accordingly, the Commission believes it is 
consistent with section 15A of the Act to approve the proposed rule 
change on an accelerated basis.
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    \13\ See Exchanges' Position Limit Approval Order, supra note 8. 
The Commission incorporates by reference into this discussion its 
findings and rationale set forth in the Exchanges' Position Limit 
Approval Order See id.
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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, 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 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-NASD-98-92 and 
should be submitted by February 9, 1999.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NASD-98-92) is approved.

    \14\ 15 U.S.C. 78s(b)(2).
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    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-1044 Filed 1-15-99; 8:45 am]
BILLING CODE 8010-01-M