[Federal Register Volume 68, Number 12 (Friday, January 17, 2003)]
[Notices]
[Pages 2604-2606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1051]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47160; File No. SR-NYSE-2002-63]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to Amendments to 
Rules 98, 104A.50, 105, and 900 to Permit Single Stock Futures Hedging 
by Specialists

January 10, 2003.
    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 November 21, 2002, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'')

[[Page 2605]]

the proposed rule change as described in Items I, II and III 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.
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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

    This proposal is to amend NYSE Rules 98, 104A.50, 105, and 900 to 
permit specialists to use exchange-traded single stock futures to hedge 
existing specialty stock positions in a manner comparable to stock 
options.

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 Exchange 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 Exchange 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 Exchange is proposing to permit specialists to use exchange-
traded ``security futures'' \3\ overlying single securities 
(hereinafter referred to as ``single stock futures'') to hedge 
specialty stock positions in a manner comparable to stock options. 
Single stock futures are contracts of sale, traded on a national 
exchange, such as OneChicago, LLC or Nasdaq Liffe, for the future 
delivery of a single security.
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    \3\ The term ``security future'' is defined in Section 3(a)(55) 
of the Act. 15 U.S.C. 78c(a)(55).
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    Rules 105, 98, 104A.50, and 900(d)(v) are proposed to be amended to 
make reference to ``single stock futures'' wherever stock options are 
referenced.

Background

    Currently, Rule 105 permits the use by NYSE specialists of options 
on their specialty stocks subject to certain limitations and 
restrictions. The rule allows a specialist to acquire and hold, in his 
specialist trading account, a position in listed options on any of his 
specialty stocks ``where appropriate . . . to offset the risk of making 
a market in the underlying stock.'' Under the rule, a specialist may 
not establish and maintain an options position which is excessive 
either in terms of his or her existing position in the underlying 
specialty stock or in terms of a reasonable estimate of potential 
losses that may be incurred in relation to any such equity position.
    In approving previous amendments to Rule 105, the Commission 
balanced the regulatory concerns regarding possible stock/option 
manipulation and the specialists' perceived information advantages 
against the benefits to the market to be derived from the Rule, namely 
enhanced market depth and liquidity. The Commission determined that the 
use of options by NYSE specialists resulted in substantial benefits to 
the markets for these stocks as well as the options markets.\4\ By 
analogy, the Commission should determine that the use of single stock 
futures by specialists would result in similar substantial benefits to 
the markets for these stocks; this additional hedging mechanism would 
enable specialists to add to overall stock market liquidity and depth 
by taking specialty stock positions they might not otherwise assume or 
by reducing risks on positions they are required to assume.
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    \4\ See Securities Exchange Act Release No. 28971 (March 13, 
1991), 56 FR 11808 (March 20, 1991)(SR-NYSE-90-31).
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Proposed Amendments to Rule 105

    The Exchange is proposing to amend Rule 105(b) to define a ``single 
stock future'' as a contract of sale, traded on a national commodities 
exchange, for the future delivery of a single security. Appropriate 
cross-references to ``single stock futures'' have been added to Rule 
105(a)-(d) to reflect that single stock futures can be used wherever 
options transactions are made.
    In addition, paragraph (d) of the Guidelines to Rule 105 (the 
``Guidelines'') would be added to explain the conditions for single 
stock futures transactions to hedge an existing specialty stock 
position with a net futures position. As with options, no anticipatory 
hedging would be allowed; only existing specialty stock positions may 
be hedged.
    The proposed rule (paragraph (d)) states three conditions (similar 
to options conditions) that single stock futures transactions must 
meet:
    (i) The transaction must result in a net futures position on the 
opposite side of the market from the underlying specialty stock 
position;
    (ii) the transaction must be effected solely to offset the risk of 
making a market in the underlying specialty stock; and
    (iii) the resulting net futures position must not exceed the number 
of shares of the specialty stock position that the specialist is 
offsetting.

Any single stock futures transaction that does not meet all three of 
the above conditions would be deemed to be in violation of Rule 105.
    One single stock futures contract would be able to be used to hedge 
each 100 shares of the existing specialty stock position. (See proposed 
Rule 105(d), Example 5).
    As with options contracts, a hedge that subsequently exceeds the 
specialty stock position being hedged as a result of 25% or more in the 
specialist's stock position or which becomes on the same side of the 
market as the specialty stock position, must be liquidated, unless the 
equivalent share position is 5000 shares or less. (See proposed 
paragraph (e) to the Guidelines, Examples 9 and 11).
    Similarly, as with options contracts, Rule 105 has been amended to 
specify that as with options contracts, specialists may also not front-
run blocks (paragraph (h) to the Guidelines) and must record futures 
positions in a separate ``memo'' account (paragraph (i) to the 
Guidelines). Additionally, specialists must report to the Exchange: (i) 
accounts in which single stock futures positions are held (paragraph 
(j)) and (ii) their positions in single stock futures (paragraph (k)).
    Currently, paragraph (l) of the Guidelines to Exchange Rule 105 
(``Rule 105(l)'') permits an approved person of a specialist to act as 
a primary market maker or specialist with respect to an option on a 
specialty stock, provided all the requirements of the Rule 98 exemptive 
program are met.\5\ This paragraph has been re-lettered as paragraph 
(m) and incorporates references to market makers in single stock 
futures contracts. Thus, it is proposed that an approved person of an 
equity specialist may act as a primary market maker or specialist with 
respect to a stock futures contract, provided all the requirements of 
the Rule 98 exemptive program are met.
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    \5\ See Securities Exchange Act Release No. 45454 (Feb. 15, 
2002), 67 FR 8567 (Feb. 25, 2002), approving SR-NYSE-2001-43 and 
amendments thereto.
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    Paragraph (l) currently prohibits an approved person of an equity 
specialist acting as a market maker in any equity security in which the 
associated specialist is registered as such and which underlies an 
option as to which the approved person acts as an options market maker. 
Paragraph (l) has been re-

[[Page 2606]]

lettered as (m) and provides the same prohibition with respect to 
market makers in single stock futures contracts.
    Paragraph (n) is proposed to be added to explain the use of both 
options and single stock futures to hedge specialty stock positions. If 
a specialist chooses to hedge a specialty stock position with positions 
in both options and futures contracts, the resulting total market 
position, when established, may not exceed the size of the existing 
specialty stock position being hedged. Any excess or same side of the 
market equivalent position must be liquidated in accordance with the 
provisions of Rule 105.

Other Rule Amendments

    Rules 98, 104A.50, and 900(d)(v) are proposed to be amended to 
incorporate references to single stock futures, where they currently 
refer to options.
    Rule 98 would be amended to add single stock futures to the Rule's 
reference to Rule 105.
    Rule 104A.50 would be amended to add a reference to single stock 
futures as an aspect of specialists' reporting requirements. Thus, 
every specialist must keep a record of all single stock futures 
purchases and sales (as they do with options currently) to hedge his 
specialty stock positions as permitted by Rule 105. Such transactions 
would be reported in such format and with such frequency as prescribed 
by the Exchange.
    Rule 900(d)(v) currently prohibits a specialist against entering an 
order in the Exchange's Off-Hours Trading Facility if a resulting 
execution would result in the specialist having to take liquidating 
action pursuant to Rule 105. The rule would be amended to add a 
reference to single stock futures to the above prohibition against 
taking liquidating action.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b)\6\ of the Act, in general, and furthers the 
objectives of section 6(b)(5),\7\ in particular, in that it is designed 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 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 that is not necessary or appropriate 
in furtherance of the purpose of the Act.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Within 35 days of the date of 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 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 20549-0609. 
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.
    Copies of such filing will also be available for inspection and 
copying at the principal office of the NYSE. All submissions should 
refer to the file number SR-NYSE-2002-63 and should be submitted by 
February 7, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-1051 Filed 1-16-03; 8:45 am]
BILLING CODE 8010-01-P