[Federal Register Volume 64, Number 152 (Monday, August 9, 1999)]
[Notices]
[Pages 43233-43235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20414]



[[Page 43233]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41682; File No. SR-AMEX-99-13]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 to the Proposed Rule Change by the 
American Stock Exchange LLC Relating to Specialist Capital Requirements

August 2, 1999.
    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 April 2, 1999, the American Stock Exchange LLC (``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 Amex. On June 11, 
1999, and July 16, 1999, the Amex filed with the Commission Amendment 
Nos. 1 and 2 to the proposal.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 revised the proposal to: (1) provide an 
example comparing the financial requirements for options specialists 
under the rules of the Amex, the Pacific Exchange (``PCX''), and the 
Chicago Board Options Exchange (``CBOE''); and 92) provide examples 
demonstrating the calculation of the capital requirements for joint 
equity/options specialists. See letter from Scott G. Van Hatten, 
Legal Counsel, Derivatives and Securities, Amex, to Richard 
Strasser, Division of Market Regulation (``Division''), Commission, 
dated June 10, 1999 (``Amendment No. 1''). Amendment No. 2 to the 
proposal provides two charts setting forth specialist financial 
requirements as of two dates in May 1999. See letter from Scott G. 
Van Hatten, legal Counsel, Derivatives and Securities, Amex, to 
Richard Strasser, Division, Commission, dated July 23, 1999 
(``Amendment No. 2'').
    In addition, the Amex filed a letter describing financial 
safeguards applicable to specialists, including the clearing firm 
guarantee of specialists' transactions (for specialists who are not 
self-clearing), the Amex's daily review of each specialist's 
financial condition, and the procedures the Amex follows when the 
Exchange determines that a specialist is approaching the early 
warning financial requirements level (120% of the minimum specialist 
financial requirement). See letter form Scott G. Van Hatten, Legal 
Counsel, Derivatives and Securities, Amex, to Richard Strasser, 
Assistant Director, Division, Commission, dated June 10, 1999(``June 
10 Letter'').
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to amend Amex Rule 950(h) to revise the financial 
requirements for options specialists. Specifically, the Amex proposes 
to amend Amex Rule 950(h) to provide that the minimum financial 
requirement for an options specialist will be $600,000 plus $25,000 for 
each option issue in excess of the initial ten issues in which the 
specialist is registered. In addition, the Amex proposes to revise Amex 
Rule 950(h), Commentary .01 to specify that for an option specialist 
that is also an equity specialist, the minimum financial requirement of 
$600,000 specified in Amex Rule 171 \4\ will apply to the entirety of 
the specialist's business, in both equities and options. Under Amex 
Rule 950(h), Commentary .01, as amended, the minimum financial 
requirement for an options specialist also serving as an equity 
specialist will be $600,000, provided that the financial requirement 
for either the equity allocation or the options allocation does not 
exceed $600,000. If the financial requirement for either the equity 
allocation or the options allocation exceeds $600,000, then the 
specialist's financial requirement will be calculated by combining the 
financial requirement for equity specialists under Amex Rule 171 and 
the financial requirement for options specialists under Amex rule 
950(h).
---------------------------------------------------------------------------

    \4\ Amex Rule 171, ``Specialist Financial Requirements,'' 
requires every registered specialist to maintain a cash or liquid 
asset position in the amount of $600,000 or an amount sufficient to 
assume a position of 60 trading units of each security in which the 
specialist is registered, whichever is greater.
---------------------------------------------------------------------------

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 Amex 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 Amex 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 amend Amex Rule 950(h), which governs options 
specialist financial requirements. Currently, Amex Rule 950(h), which 
incorporates by reference the specialist financial requirements set 
forth in Amex Rule 171, requires that every registered options 
specialist maintain cash or liquid assets equal to the greater of 
$600,000 or an amount sufficient to assume a position of 60 units of 
the highest priced puts and calls for each option in which the 
specialist is registered.\5\ Because the financial requirement is in 
some cases based on current market prices of puts and calls, it 
generally fluctuates from day to day. The Amex maintains that, with the 
recent increases in premiums for certain stock options, specialist 
financial requirements have increased dramatically beyond the level of 
risk associated with a specialist's market making activities. This 
situation occurs because the financial requirements for specialists do 
not take into consideration the extent to which specialists maintain 
hedged positions in their registered option issues.
---------------------------------------------------------------------------

    \5\ The ``cost to carry'' 60 option contracts is determined 
pursuant to rule 15c3-1a(b)(2)(iii)(C) under the Act, 17 CFR 15c3-
1a(b)(2)(iii)(C), which provides that a broker or dealer that is 
long puts or calls must deduct 50 percent of the market value of the 
net long put and call positions in the same options series.
---------------------------------------------------------------------------

    The following charts provided in Amendment No. 2 illustrate the 
fluctuations in the capital requirement for an options specialist as 
calculated under current Amex Rule 950(h). Both charts are based on 
actual capital requirements for options traded on the Amex. The 
calculations in the first chart are based on premiums for six options 
as of the close of business on May 6, 1999, while the calculations in 
the second chart show the premiums for the same options as of the close 
of business on May 13, 1999. The charts demonstrate the effect that 
premium appreciation has on a specialist's minimum financial 
requirements. Specifically, because of the rise in premiums, the 
specialist's minimum capital requirement increased from $882,750 in 
Week 1 to $993,000 in Week 2.

[[Page 43234]]



                                                                         Week 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               CALL                                               PUT
                 Option                 ----------------------------------------------------------------------------------------------------    Total
                                           Premium                Requirement                Premium                Requirement
--------------------------------------------------------------------------------------------------------------------------------------------------------
1......................................      56\7/8\  $5,687.50  x  60 / 2                     67\1/4\  $6,725.00  x  60 / 2                    $372,375
2......................................      14\1/2\  1,450.00  x  60 / 2                       7\5/8\  762.30  x  60 / 2                         66,375
3......................................       4\1/8\  412.50  x  60 / 2                             17  1,700  x  60 / 2                          63,375
4......................................            9  900.00  x  60 / 2                         5\1/4\  525.00  x  60 / 2                         42,750
5......................................      15\1/4\  1,525.00  x  60 / 2                       5\1/4\  525.00  x  60 / 2                         61,500
6......................................      58\1/2\  5,850.00  x  60 / 2                      33\5/8\  3,362.50  x  60 / 2                      276,375
                                        ----------------------------------------------------------------------------------------------------------------
    Total..............................  ...........  ...................................  ...........  ...................................      882,750
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                                         Week 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               CALL                                               PUT
                 Option                 ----------------------------------------------------------------------------------------------------    Total
                                           Premium                Requirement                Premium                Requirement
--------------------------------------------------------------------------------------------------------------------------------------------------------
1......................................      75\3/8\  $7,537.50  x  60 / 2                     55\3/4\  $5,575.00  x  60 / 2                    $393,375
2......................................      13\7/8\  1,387.50  x  60 / 2                      16\1/8\  1,612.50  x  60 / 2                       90,000
3......................................       5\1/4\  525.00  x  60 / 2                        22\1/4\  2,225.00  x  60 / 2                       82,500
4......................................       9\1/8\  912.50  x  60 / 2                         8\3/8\  837.50  x  60 / 2                         52,500
5......................................      14\7/8\  1,487.50  x  60 / 2                       8\3/8\  837.50  x  60 / 2                         69,750
6......................................      61\3/4\  6,175.00  x  60 / 2                      39\7/8\  3,987.50  x  60 / 2                      304,875
                                        ----------------------------------------------------------------------------------------------------------------
    Total..............................  ...........  ...................................  ...........  ...................................      993,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Before the Amex's current specialist financial requirements took 
effect in June 1988, Amex rules required specialists to maintain cash 
or net liquid assets equal to the grater of $100,000 or an amount 
sufficient to assume a position of 20 trading units of each speciality 
issue. As noted above, the Amex proposes to amend Amex Rule 950(h) to 
require every registered options specialist to maintain cash or liquid 
assets in the amount of $600,000 plus $25,000 for each option issue in 
excess of ten option issues in which such specialist is registered. 
Under the proposal, a specialist's financial requirement would not 
fluctuate with the premiums of the highest priced option series, but 
would change only when the specialist unit voluntarily changes the 
number of option issues it trades. The equity specialist financial 
requirements will remain at their current levels as set forth in Amex 
Rule 171.
    The Exchange notes the existence of additional safeguards, such as 
circuit breakers, which became operative since the Exchange's last 
revision to Amex Rule 171.\6\ In addition, the Exchange's daily review 
of specialist capital reserves and the Exchange's early warning 
signals, which trigger a more intense level of surveillance of exchange 
specialists during volatile market situations, continue to remain in 
place. Further, the proposal will permit options specialists to 
maintain relative control over their level of financial requirements by 
determining their respective number of options allocations.
---------------------------------------------------------------------------

    \6\ The Amex's June 10 Letter describes additional safeguards 
relating to specialists' financial requirements. Among other things, 
the June 10 Letter notes that a specialist unit that is not self-
clearing maintains an agreement with a clearing firm that guarantees 
the specialist's transactions. A specialist that is self-clearing 
guarantees the transactions effected by its specialists on the Amex 
floor. In addition, the June 10 Letter states that the Amex reviews 
all specialist financial requirements each day and contacts the 
specialist's principal(s) to request the deposit of additional funds 
on any day when the specialist approaches the early warning 
financial requirement level (120% of the minimum specialist 
financial requirement). If the specialist is unable to deposit 
additional capital, the Amex obtains a written guarantee from the 
specialist's clearing firm stating that the clearing firm will 
guarantee the specialist's transactions. The process of obtaining a 
written guarantee serves to notify the clearing firm of the 
specialist's current financial condition. Finally, the Amex notes 
that the Exchange may reallocate the specialist's allocation to 
another specialist unit if the specialist fails to satisfy the 
Amex's financial requirements. See June 10 Letter, supra note 3.
---------------------------------------------------------------------------

    As noted above, under the Amex's current rules, financial 
requirements for options specialists do not take into consideration the 
extent to which the specialists maintain hedged positions in their 
registered option issues. The Amex recently compared its financial 
requirements for options specialists to similar capital requirements 
maintained by other exchanges. In contrast to the Amex's capital 
requirements, the Exchange notes that a Lead Market Maker (``LMM'') on 
the Pacific Exchange (``PCX'') that performs the function of an Order 
Book Official (``OBO'') must maintain minimum net capital of $500,000 
plus $25,000 for each issue over five issues for which the LMM performs 
the function of an OBO.\7\ An LMM that does not perform the function of 
an OBO must maintain minimum net capital of $350,000 plus $25,000 for 
each issue over eight issues that has been allocated to the LMM.\8\ 
Accordingly, to carry the same options book noted in the Amex's example 
above, an LMM that functions as an OBO in each of his options 
allocations would be required to maintain minimum net capital of 
$525,000, while an LMM that does not function as an OBO would be 
required to maintain minimum net capital of $350,000. The Exchange has 
also compared its current financial requirements for option specialists 
with those of the Chicago Board Options Exchange and the Philadelphia 
Stock Exchange. These comparisons have led the Amex to conclude that 
revisions to Amex Rule 950(h) are necessary.
---------------------------------------------------------------------------

    \7\ See PCX Rule 6.82(h), Commentary .04.
    \8\ See PCX Rule 6.82(c)(11).
---------------------------------------------------------------------------

    In the Exchange's view, the cost for options specialists to 
maintain financial reserves sufficient to satisfy the Exchange's 
financial requirements has been increasing for Amex options specialists 
relative to competing options specialists or market makers at other 
exchanges. These financial requirements effectively reduce the number 
of option

[[Page 43235]]

issues that may be allocated to an Amex options specialist and provide 
an incentive for Amex members to consider moving their business 
operations to exchanges with less restrictive financial requirements. 
The Exchange believes that the proposed change is necessary to address 
any potential and significant increase in the number of option issues 
traded on the Exchange that may occur as a result of competitive 
marketplace conditions. The Exchange believes that the proposed change 
in the specialist financial requirements will help to ensure that Amex 
options specialists continue to maintain adequate capital reserves 
while remaining competitive with their counterparts at other exchanges.
    The Amex also proposes to amend Amex Rule 950(h), Commentary .01, 
to specify the minimum capital requirement for a specialist that 
maintains a book in both equity securities and options (``an equity/
option book''). Specifically, Amex Rule 950(h), Commentary .01, as 
amended, will provide that, for an options specialist also serving as 
an equity specialist, the minimum $600,000 requirement specified in 
Amex Rule 171 will apply to the entirety of the specialist's business 
in both equities and options. The minimum financial requirement for a 
specialist with an equity/option book will be $600,000, provided that 
the financial requirement for neither the equity allocation nor the 
option allocation exceeds $600,000. Thus, under Commentary .01, the 
minimum financial requirement for a specialist who is allocated one 
equity issue and one option issue would be $600,000, provided that the 
financial requirement for neither the equity allocation nor the options 
allocation exceeds $600,000.\9\
---------------------------------------------------------------------------

    \9\ See Amendment No. 1, surpa note 3.
---------------------------------------------------------------------------

    For an equity/option book where the financial requirement of either 
the equity allocation or the options allocation exceeds $600,000, the 
minimum financial requirement will be calculated by combining the 
equity and optional financial requirement (i.e., the financial 
requirements for equity specialists under Amex Rule 171 and the 
financial requirements for options specialists under Amex Rule 950(h)). 
For example, a specialist with three equity allocations and two options 
allocations, where the financial requirement for the three equity 
allocations exceeds $600,000, would be required to maintain capital 
sufficient to assume a position of 60 trading units of each equity 
allocation plus $50,000 for the two options allocations. Similarly, a 
specialist allocated 11 options and one equity security would be 
required to maintain capital of $625,000 for the 11 option allocations 
plus the amount required to assume a position of 60 trading units of 
the equity security.\10\ The Amex indicated that Commentary .01 is 
designed to encourage new specialist books.
---------------------------------------------------------------------------

    \10\ Id.
---------------------------------------------------------------------------

2. Statutory Basis
    The Amex believes that the proposed rule change is consistent with 
Section 6(b)(5) of the Act \11\ 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.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments were neither solicited nor 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 proposal, as 
amended, is consistent with the act. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
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 form 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 
Amex. All submissions should refer to File No. SR-Amex-99-13 and should 
be submitted by August 30, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-20414 Filed 8-6-99; 8:45 am]
BILLING CODE 8010-01-M