[Federal Register Volume 67, Number 167 (Wednesday, August 28, 2002)]
[Notices]
[Pages 55289-55290]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-21960]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46393; File No. SR-Amex-2002-31]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change by the American Stock Exchange LLC Requesting 
Permanent Approval of Pilot Program Eliminating Position and Exercise 
Limits for XMI and XII Index Options and Related Flex Options

August 21, 2002.
    On April 12, 2002, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to request permanent approval of 
the pilot program that provides for the elimination of position and 
exercise limits for the Major Market (``XMI'') and Institutional 
(``XII'') broad-based index options, as well as FLEX Options on these 
indexes.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On February 1, 1999, the Commission approved the elimination 
of position and exercise limits for the XMI and XII index options, 
as well as FLEX options on these indexes on a two-year basis (the 
``Pilot Program''). See Securities Exchange Act Release No. 41011 
(February 1, 1999), 64 FR 6405 (February 9, 1999). The Pilot Program 
originally ended on February 1, 2001, with extensions for an 
additional six-month period approved on July 3, 2001 and January 3, 
2002, respectively. See Securities Exchange Act Release No. 44507 
(July 3, 2001), 66 FR 36348 (July 11, 2001); and Securities Exchange 
Act Release No. 45234 (January 3, 2002), 67 FR 1377 (January 10, 
2002).
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on May 30, 2002.\4\ The Commission received no comments on the 
proposal.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 45975 (May 23, 
2002), 67 FR 37882 (May 30, 2002).
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange \5\ and, in 
particular, the requirements of section 6 of the Act \6\ and the rules 
and regulations thereunder. The Commission finds specifically that the 
proposed rule change is consistent with section 6(b)(5) of the Act \7\ 
in that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \5\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that it is appropriate to eliminate 
position and exercise limits for XMI and XII options, as well as 
related FLEX options, on a permanent basis based on the Amex's 
experience administering the Pilot Program. The Commission's original 
order approving the elimination of position and exercise limits for the 
XMI and XII index options (as well as FLEX options on these indexes) on 
a two-year basis required the Exchange to submit a report to the 
Commission regarding the status of the Pilot Program so that the 
Commission could use this information to evaluate any effects of the 
program.\8\
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 41011 (February 1, 
1999), 64 FR 6405 (February 9, 1999).
---------------------------------------------------------------------------

    The Exchange's report indicated that from February 1, 1999 through 
March 30, 2001, no customer and/or firm accounts reached a level of 
100,000 or more options contracts in XMI or XII options. During this 
review period, the Amex did not discover any instances where an account 
maintained an unusually large unhedged position. In addition, during 
the period from April 2, 2001 through February 28, 2002, the Amex did 
not experience accounts establishing positions in excess of the 
standard limit applicable to each index at the time the Pilot Program 
was approved.\9\
---------------------------------------------------------------------------

    \9\ Telephone call between Jeffrey P. Burns, Assistant General 
Counsel, Amex, and Susie Cho, Special Counsel, Division of Market 
Regulation, Commission, August 21, 2002. At the time the Commission 
approved the Pilot Program, the position limits for XMI and XII were 
34,000 and 200,000, respectively.
---------------------------------------------------------------------------

    In addition to no identifiable problems during the pilot program, 
the Commission also believes that the factors for approval of the pilot 
program continue to be met. For example, in approving the pilot, the 
Commission stated, among other things, that the enormous capitalization 
of and deep, liquid markets for the underlying securities contained the 
XMI and XII indexes significantly reduces concerns regarding market 
manipulation or disruption in the underlying market.
    The Commission also continues to believe that the financial 
requirements imposed by the Amex and the Commission help to address 
concerns that a member or its customer may try to maintain an 
inordinately large unhedged position in a broad-based index option. The 
Amex has the authority to impose additional margin and/or assess 
capital charges and should be able to monitor accounts to determine 
when such action is warranted.
    In addition, the Commission notes that the Amex has adopted 
surveillance \10\ and reporting safeguards that will allow it to detect 
and deter trading abuses arising from the elimination of position and 
exercise limits for XMI and XII, and FLEX options on these indexes.\11\ 
The Commission continues to believe that these enhanced procedures are 
critical in our determination to permanently approve the pilot. While 
the pilot report did not note any aberrations or concerns about large 
unhedged positions, the Commission continues to believe that these 
procedures will enable the Amex to adequately assess and respond to 
market concerns at an early stage. In this regard, the Commission 
continues to expect the Amex to 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.
---------------------------------------------------------------------------

    \10\ Disclosure of specific surveillance procedures could 
provide market participants with information that could aid 
potential attempts at avoiding regulatory detection of inappropriate 
trading activity.
    \11\ The Amex's reporting requirements subject XMI and XII, and 
FLEX options on those indexes to a 100,000 contract hedge reporting 
requirement. Each member or member organization that maintains a 
position on the same side of the market in excess of these contract 
thresholds for its own account or for the account of a customer must 
file a report that includes, but is not limited to, data related to 
the option position, whether such position is hedged and if so, a 
description of the hedge. If applicable, the report must contain 
information concerning collateral used to carry the position.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (File No. SR-Amex-2002-31) be, 
and it hereby is, approved.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2).


[[Page 55290]]


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

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-21960 Filed 8-27-02; 8:45 am]
BILLING CODE 8010-01-P