[Federal Register Volume 64, Number 224 (Monday, November 22, 1999)]
[Notices]
[Pages 63837-63839]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30321]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42132; File Nos SR-Amex-98-39; SR-Phlx-98-39]
Self-Regulatory Organizations; American Stock Exchange, Inc.;
Philadelphia Stock Exchange; Order Approving Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval to Amex
Amendment No. 1 and Phlx Amendment No. 2 Thereto Relating to an
Increase in Position and Exercise Limits for Narrow-Based Index Options
November 12, 1999.
I. Introduction
On October 13, 1998, and on September 3, 1998, the American Stock
Exchange, Inc. (``Amex'') and the Philadelphia Stock Exchange, Inc.
(``Phlx'') (collectively, the ``Exchanges'') respectively submitted to
the Securities and Exchange Commission (``SEC'' or ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\
proposed rule changes to increase position and exercise limits for
narrow-based index options.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule changes were published for comment in the Federal
Register on December 14, 1998, and December 17, 1998, respectively.\3\
No comments were received on the proposal. Amex and Phlx filed
amendments to the proposed rule changes on September 2, 1999, and July
16, 1999, respectively.\4\ This order approves the proposals, as
amended.
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\3\ See Exchange Act Release Nos. 40756 (December 7, 1998), 63
FR 68809 (December 14, 1998); 40757 (December 7, 1998), 63 FR 69704
(December 17, 1998). Phlx Amendment No. 1 was published for comment
in the Notice. See Letter to Michael Walinskas, Deputy Associate
Director, Division of Market Regulation, Commission, from Nandita
Yagnik, Attorney, Phlx, dated September 25, 1998.
\4\ See Letter from Scott G. VanHatten, Legal Counsel, Amex, to
Richard Strasser, Assistant Director, Division of Market Regulation,
Commission, dated September 2, 1999 (``Amex Amendment No. 1''); and
Letter from Nadita Yagnik, Phlx, to Michael Walinskas, Associate
Director, Division of Market Regulation, Commission, dated July 156
1999 (``Phlx Amendment No. 2''). These amendments propose to set the
position and exercise limits at 18,000, 24,000, and 31,500
contracts, rather than the originally proposed tripled limits.
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II. Description
The Exchanges propose to increase position and exercise limits for
narrow-based index options traded on each Exchange.\5\ Specifically,
the Exchanges' rules provide three different position limits depending
on index components' relative weightings in the index.\6\ The current
limits for narrow-based index options 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 18,000, 24,000, and 31,500.
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\5\ Amex trades options on the following narrow-based indices:
Airline, Biotechnology, Computer Hardware, Computer Technology, de
Jager Year 2000, Disk Drive, Inter@ctive Week Internet, Morgan
Stanley Commodity Related, Morgan Stanley High-Technology 35,
Natural Gas, Networking, North American Telecommunications, Oil,
Pharmaceutical, Securities Broker/Dealer, CSFB Technology Index,
Deutsche Bank Energy Index, TheStreet.com E-Commerce Index, and
TheStreet.com E-Finance Index.
Phlx trades options on the following narrow-based indices: Gold/
Silver Index (``XAU''); Utility Index (``UTY''); Phlx/KBW Bank Index
(``BKX''); Semiconductor Index (``SOX''); Forest and Paper
(``FPP''); Box Maker Index (``BMX''); OTC Prime Index (``OTX''); Oil
Service Index (``OSC''); and TheStreet.com Internet Index (``DOT'').
\6\ See Amex Rule 904C. Amex Rule 905C establishes exercise
limits for the corresponding options at the same levels. See Phlx
Rule 1001A. Phlx Rule 1002A establishes exercise limits for the
corresponding option at the same levels.
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III. Discussion
The Commission finds that the proposed rule changes are 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 of the Act.\7\
Specifically, the Commission believes the proposed rule changes are
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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\7\ See 15 U.S.C. 78f(b). 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. Id. at 78c(f).
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Position limits serve as a regulatory tool designed to address
potential manipulative schemes and adverse market impact surrounding
the use of options. In the past, the Commission has stated that:
Since the inception of standardized options trading, the options
exchanges have had rules imposing limits on the aggregate number of
options contracts that a member or customer could hold or exercise.
These rules are intended to prevent the establishment of options
positions that can be used or might create incentives to manipulate
or disrupt the underlying market
[[Page 63838]]
so as to benefit the options position. In particular, position and
exercise limits are designed to minimize the potential for mini-
manipulations and for corners or squeezes of the underlying market.
In addition such limits serve to reduce the possibility for
disruption of the options market itself, especially in illiquid
options classes.\8\
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\8\ Exchange Act Release Nos. 39489 (December 24, 1997), 63 FR
276 (January 5, 1998) (SR-CBOE-97-11) (order approving an increase
in OEX position and Exercise limits); 31330 (October 16, 1992), 57
FR 48408 (October 23, 1992) (SR-Amex-92-13) (order approving an
increase in Institutional Index Options position and exercise
limits).
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In general, the Commission has taken a gradual, evolutionary
approach toward the expansion of position and exercise limits.\9\ The
Commission has been careful to balance two competing concerns when
considering the appropriate level at which to set option position and
exercise limits. The Commission has recognized that the limits must be
sufficient to prevent investors from disrupting the market in the
component securities comprising the indexes. At the same time, the
Commission has determined that limits must 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.\10\
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\9\ The Commission approved increases in position limits in
1983, 1993, 1995, and 1996. See, e.g., Exchange Act Release No.
37863 (October 24, 1996), 61 FR 56599 (November 1, 1996) (SR-Phlx-
96-33).
\10\ See H.R. Rep. No. IFC-3, 96th Cong., 1st Sess. at 189-91
(Comm. Print 1978).
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In this regard, the Exchanges have represented that the current
position and exercise limits impede their members; ability to execute
investment strategies. Given the Commission's traditional, gradual
approach to position and exercise limits, and that three years have
passed since these limits have been raised, the Commission believes
that it is reasonable to allow for an increase in the limits for
narrow-based index options to accommodate the needs of market
participants.
The Commission believes that an increase in position and exercise
limits for narrow-based index options is appropriate for several
reasons. First, the Commission believes that increasing position and
exercise limits for narrow-based index options may bring additional
depth and liquidity, in terms of both volume and open interest, to
these index options classes without significantly increasing concerns
regarding intermarket manipulations or disruptions of the index options
or the underlying component securities.
Second, increasing position and exercise limits for narrow-based
index options should better serve the hedging needs of institutions
that engage in trading strategies different from those covered under
the index hedge exemption policy.
Third, the Commission notes that the proposals, while increasing
the position limits for narrow-based index options, continue to reflect
the unique characteristic of each index option and to maintain the
structure of the current three-tiered system. Specifically, the lowest
proposed limit, 18,000 contract will apply to narrow-based index
options in which a single underlying stock accounts for 30% or more of
the index value during the 30-day period immediately preceding the
Exchanges' semi-annual review of industry index option position limits.
A position limit of 24,000 contracts will apply if any single
underlying stock accounts, on average for 20% or more of the index
value or any fire underlying stocks account, on average for more than
50% of the index value, but no single value in the group account, 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 31,500 contract limit will apply only
if the Exchanges respectively determine that the conditions requiring
either the 18,000 contract limit or the 24,000 contract limit have not
occurred.\11\
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\11\See Amex Rule 904C(c); Phlx Rule 1001A(b).
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Fourth, the Commission believes that financial requirements imposed
by the Exchanges and by the Commission adequately address concerns that
an Amex or Phlx member or their customer may try to maintain a 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.\12\ The Exchanges also have the authority under its rules
to impose a higher margin requirement upon the member or member
organization when it determines a higher requirement is warranted.\13\
Monitoring accounts maintaining large positions should provide the
Exchanges with the information necessary to determine whether to impose
additional margin and/or whether to assess capital charges upon a
member organization carrying the account. In addition, the Commission's
net capital rule, Rule 15c3-1 under the Exchange Act, imposes a capital
charge on members to the extent of any margin deficiency resulting from
the higher margin requirement. The significant increases in unhedged
options capital charges resulting from the September 1997 adoption of
risk-based haircuts and the Exchanges' margin requirements applicable
to these products under Exchange rules serves as an additional form of
protection.\14\ The Commission also notes that The Options Clearing
Corporation(``OCC'') will serve as the counter-party guarantor in every
exchange-traded transaction.
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\12\ Exchange Act Rule 15c3-1 requires a capital charge equal to
the maximum potential loss on a broke-dealer's aggregate index
position over a + (-) 10% market move. Exchange margin rules
require margin on naked index options, which are in, or at-the-money
equal to a 15% move in the underlying index; and a minimum 10%
charge for naked out-of-the money contracts. At an index value of
9,000 this approximates of a $90,000 to $135,000 requirement per
each unhedged contract.
\13\ See Amex Rule 462(d)(2)(K); and Phlx Rule 722(i)(8).
\14\ See Exchange Act Release No. 38248 (February 6, 1997), 62
FR 6474 (February 12, 1997) (adopting Risk Based Haircuts); Phlx
Rule 722; and Amex Rule 462.
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Fifth, the Commission notes that the index options and other types
of index-based derivatives (e.g., forwards and swaps) are not subject
to position and exercise limits in the OTC market. The Commission
believes that increasing position and exercise limits for narrow-based
index options will better allow the Exchanges to compete with the OTC
market.
Sixth, the Commission notes that it recently approved rule filings
increasing position and exercise limits for standardized equity
options.\15\ The Commission also approved rule filings eliminating
position and exercise limits for certain broad-based index options.\16\
Given these recent changes to the various exchanges' position limit
rules, the Commission believes it is reasonable to allow for
corresponding changes to the position and exercise limits for narrow-
based index options.\17\
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\15\ See Exchange Act Release No. 40875 (December 31, 1998), 64
FR 1842 (January 12, 1999) (File Nos. SR-CBOE-98-25; Amex-98-22;
PCX-98-33; and Phlx-98-36) (increasing position limits for
standardized equity options to 13,500, 22,500, 31,500, 60,000, and
75,000).
\16\ See Exchange Act Release Nos. 40969 (January 22, 1999), 64
FR 4911 (February 1, 1999) (File No. SR-CBOE-28-23); 41011 (February
1, 1999), 64 FR 6405 (February 9, 1999) (File No. SR-Amex-98-38).
\17\ The Commission notes that the trend toward increasing
position and exercise limits for standardized equity options and
eliminating them for certain broad-based index options, while a
factor in considering increases for narrow-based index options, does
not automatically dictate the need for or appropriateness of an
increase in position and exercise limits for narrow-based index
options. The fact that many narrow-based index options include non-
options eligible components requires that the Exchanges and the
Commission give additional consideration to manipulation and other
regulatory concerns prior to any increase. The Commission has
considered these issues and believes that the proposed increases are
appropriate at this time.
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[[Page 63839]]
Finally, the absence of any discernable manipulative problems for
narrow-based index options at existing levels leads the Commission to
conclude that the proposed increases are reasonable and that they can
be safely implemented. The Commission believes that the Exchanges'
surveillance programs are adequate to detect and deter violations of
position and exercise limits, as well as to detect and deter attempted
manipulation and other trading abuses through the use of such illegal
positions by market participants.\18\
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\18\ The Commission emphasizes that the Exchanges must closely
monitor compliance with position and exercise limits and impose
appropriate sanctions for failures to comply with the Exchanges'
position and exercise limit rules.
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The Commission finds good cause to approve Amex Amendment No. 1 and
Phlx Amendment No. 2 to the proposed rule change prior to the 30th day
after the date of publication of notice of filing thereof in the
Federal Register. These amendments set the new position and exercise
limits at 18,000, 24,000, and 31,500 contracts. In light of the
Commission's traditional, gradual approach to position limits, the
Commission believes that these limits are more appropriate than those
initially proposed. The Commission also notes that the limits being
approved reflect percent increases that more closely correspond to
previous increases. Finally, the Commission notes that the higher
limits were noticed for comment and no comments were received. Given
that no regulatory issues were raised with the higher limits, the
Commission believes approving the lower limits on an accelerated basis
is appropriate under the Act. Accordingly, the Commission finds that,
consistent with Sections 6(b) and 19(b)(2) of the Act, there is good
cause to approve Amex Amendment No. 1 and Phlx Amendment No. 2 to the
proposed rule changes on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amex Amendment No. 1 and Phlx Amendment No. 2,
including whether the amendments are consistent with the Exchange 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. 20549-0609. 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 from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Room, located at the above address. Copies of such filing
will also be available for inspection and copying at the principal
office of the self-regulatory organization. All submissions should
refer to File No. SR-Amex-98-39 or SR-Phlx-98-39 and should be
submitted by December 13, 1999.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule changes (SR-Amex-98-39; SR-Phlx-98-39)
are approved, as amended.
\19\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-30321 Filed 11-19-99; 8:45 am]
BILLING CODE 8010-01-M