[Federal Register Volume 66, Number 133 (Wednesday, July 11, 2001)]
[Notices]
[Pages 36348-36350]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17304]



[[Page 36348]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44507; File No. SR-AMEX-2001-31]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the American 
Stock Exchange LLC Relating to the Pilot Program Eliminating Position 
and Exercise Limits for Certain Broad Based Index Options

July 3, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on 
May 23, 2001, the American Stock Exchange LLC (``Amex'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to grant accelerated 
approval to 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

    The Exchange proposes to re-establish a pilot program eliminating 
position and exercise limits for the Major Market (``XMI'') and 
Institutional (``XII'') broad-based index options, as well as FLEX 
Options on these indexes for a period of six months. The Commission 
previously approved the pilot program on a two-year basis that ended on 
February 1, 2001.\3\ Unfortunately, the pilot program lapsed without 
the Exchange submitting a required rule filing for an extension of the 
program. As part of any extension, the Commission in the Pilot Program 
Release required the Exchange to submit a report detailing the size and 
different types of strategies employed with respect to positions in 
those classes not subject to position and exercise limits.\4\ The 
experience at the Amex shows that the reporting threshold of over 
100,000 contracts on the same side of the market for members and member 
organizations was never reached during the pilot program period.
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    \3\ See Securities Exchange Act Release No. 41011 (February 1, 
1999), 64 FR 6405 (February 9, 1999) (``Pilot Program Release'').
    \4\ Id.
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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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to re-establish the two-year pilot 
program eliminating position and exercise limits for XMI and XII index 
options, as well as FLEX Options on these indexes for six months. The 
Exchange will continue to apply the requirements required by the 
Commission in the Pilot Program Release. Specifically, the Exchange 
will require that each member or member organization that maintains a 
position on the same side of the market in excess of 100,000 contracts 
in XMI, XII or FLEX Options on these indexes, for its own account or 
for the account of a customer, to report certain information.\5\ In 
addition, the Amex will continue to require that member organizations 
report all index option positions exceeding 200 contracts, pursuant to 
Exchange Rule 906C.
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    \5\ This information includes the options positions, whether 
such position is hedged and if so a description of the hedge and if 
applicable the collateral used to carry the position. See Amex Rule 
906C(b).
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    Although the reporting thresholds in the lapsed pilot program were 
never met, the Exchange continues to believe that investors and member 
firms may require such flexibility in the future. In particular, the 
base limits for XMI and XII options may not be adequate for certain 
hedging needs for institutions that engage in trading strategies 
differing from those covered under the existing index hedge exemption 
policy (e.g., delta hedges; OTC vs. listed hedges). Accordingly, the 
Amex believes that, with the elimination of position and exercise 
limits for these products, staff resources could be better utilized 
elsewhere.

Manipulation

    Position and exercise limits were first imposed at the inception of 
options trading in 1973 in response to regulatory concerns over the 
potential for manipulation and market instability. The Amex believes 
that position and exercise limits in broad-based index options no 
longer serve their stated purpose largely due to increased trading in 
the underlying market and better surveillance procedures. 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 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.\6\

    \6\ See Securities Exchange Act Release No. 39489 (December 24, 
1997), 63 FR 276 (January 5, 1998).
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    The Exchange believes that the size and breadth of the market 
underlying broad-based index options is so large and liquid as to 
dispel any concerns regarding market manipulation.\7\ To date, there 
has not been a single disciplinary action involving manipulation in any 
broad-based index product listed on the Exchange. The Exchange believes 
that its eighteen years of 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. In 
addition, to date, there have been no adverse effects on markets as a 
result of the elimination of position and exercise limits for FLEX 
equity options.\8\
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    \7\ The market capitalization as of May 21, 2001 for the 
underlying stocks of the XMI and XII are approximately $2.2 trillion 
and $7.7 trillion, respectively. In the Exchange's view, the large 
capitalizations and trading volumes of these underlying stocks 
renders unnecessary the need for position and exercise limits to 
protect against possible manipulative behavior.
    \8\ See Securities Exchange Act Release No. 39032 (September 9, 
1997), 62 FR 48683 (September 16, 1997).
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    The Exchange continues to believe that financial requirements 
imposed by

[[Page 36349]]

the Exchange and by the Commission adequately address concerns that a 
membe or its customer may try to maintain an inordinately large 
unhedged position in XMI and XII. As previously indicated in the Pilot 
Program Release, current margin, and risk-based haircut methoologies 
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.\9\

Reporting Requirements
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    \9\ 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.
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    As previously required under the Pilot Program Release, the 
Exchange will require that each member or member organization that 
maintains a position on the same side of the market in excess of 
100,000 contracts in XMI or XII index options, for its own account or 
for the account of a customer, report certain information. This data 
would include, but would not be limited to, the option position, 
whether such position is hedged and if so, a description of the hedge 
and if applicable, the collateral used to carry the position. Exchange 
market makers would continue to be exempt from this reporting 
requirement as market-maker information can be accessed through the 
Exchange's market surveillance systems. In addition, the general 
reporting requirement for customer accounts that maintain a position in 
excess of 200 contracts will remain at this level for broad-based index 
options.\10\
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    \10\ See Amex Rule 906C(a).
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2. Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\11\ in general and furthers the objectives of Section 6(b)(5)\12\ 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 coordiantion 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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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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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 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 solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The Commission has reviewed carefully the Amex's proposed rule 
change and believes, for the reasons set forth below, the proposal is 
consistent with the requirements of Section 6(b) of the Act \13\ and 
the rules and regulations thereunder applicable to a national 
securities exchange. Specifically, the Commission believes the proposal 
is consistent with Section 6(b)(5) of the Act \14\ because it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just 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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    \13\ 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).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that an elimination of position and 
exercise limits for certain broad-based index options on a pilot basis 
is appropriate for the same reasons noted in the approval of the 
original pilot.\15\ Overall, the Commission believes that the pilot 
will allow Amex to allocate certain of its surveillance resources 
differently, focusing on enhanced reporting and surveillance of trading 
to detect potential manipulation and risky positions that may unduly 
affect the cash market, rather than focusing on the strict enforcement 
of position limits. Although this regulatory approach deviates from the 
structure that has been in place since the beginning of index options 
trading, the Commission believes that the enhanced reporting and 
surveillance Amex is providing, as well as the fact that the pilot is 
limited to two of Amex's most highly capitalized and actively traded 
index options, provides a sound basis for approving a six-month pilot 
program eliminating position and exercise limits.
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    \15\ See note 3, supra. The Commission incorporates by reference 
the basis for approving the original pilot as set forth in the Pilot 
Program Release.
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    The Amex requests that the proposed rule change be given expedited 
review and accelerated effectiveness pursuant to Section 19(b)(2) of 
the Act because it is an extension of a lapsed pilot program previously 
approved y the Commission.\16\ The Exchange believes that the arguments 
set forth by the Exchange, and the basis for the Commission's prior 
approval, are equally applicable to this filing.
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    \16\ 15 U.S.C. 78s(b)(2).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice of filing thereof in the Federal Register as the proposal does 
not significantly affect the protection of investors or the public 
interest, and does not impose any significant burden on competition. 
There is good cause for the Commission to accelerate effectiveness of 
this rule filing because the proposal raises no new or novel issues and 
is an extension of the XMI/XII Position Limit Pilot Program under the 
same terms and conditions previously approved by the Commission.\17\ 
Accordingly, the Commission believes that it is consistent with 
Sections 6(b)(5) \18\ and 19(b)(2)\19\ of the Act to approve the 
proposal on an accelerated basis.\20\
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    \17\ See note 3, supra.
    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78s(b)(2).
    \20\ The Commission requests that the Amex update the Commission 
on any problems that have developed with the pilot since the last 
extension, including any compliance issues, and whether there have 
been any large unhedged positions that have raised concerns for the 
Amex. In addition, the Commission expects that the Amex will take 
prompt action, including timely communication with the Commission 
and other marketplace self-regulatory organizations responsible for 
oversight of trading in component stocks, should any unanticipated 
adverse market effects develop.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether it 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 20549-0609. 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

[[Page 36350]]

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 Section. 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-2001-31 and should be submitted by August 1, 2001.

V. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change is hereby approved on an 
accelerated basis on a six-month pilot basis until January 3, 2002.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
Pursuant to delegated authority.\22\
Margaret H. McFarland,
Deputy Secretary.
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    \22\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 01-17304 Filed 7-10-01; 8:45 am]
BILLING CODE 8010-01-M