[Federal Register Volume 69, Number 60 (Monday, March 29, 2004)]
[Notices]
[Pages 16316-16326]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6892]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49455; File No. SR-PCX-2003-60]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
Nos. 1, 2, and 3 by the Pacific Exchange, Inc. Relating to Rules for 
Trading Index Options

    March 22, 2004
    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 October 28, 2003, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
On December 18, 2003, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\3\ On March 2, 2004, the Exchange submitted 
Amendment No. 2 to the proposed rule change.\4\ On March 22, 2004, the 
Exchange submitted Amendment No. 3 to the proposed rule change.\5\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule, as amended, from interested persons and is approving the 
proposed rule change, as amended, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 2 CFR 240.19b-4.
    \3\ See letter from Tania J.C. Blanford, Staff Attorney, 
Regulatory Policy, PCX to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
December 17, 2003. Amendment No. 1 replaced the original rule filing 
in its entirety.
    \4\ See letter from Tania J.C. Blanford, Staff Attorney, 
Regulatory Policy, PCX to Nancy J. Sanow, Assistant Director, 
Division, Commission, dated March 1, 2004 (``Amendment No. 2''). In 
Amendment No. 2, the PCX made several changes to the proposed rule 
change to conform the proposed rule text to the existing Chicago 
Board Options Exchange, Inc. (``CBOE'') and International Securities 
Exchange, Inc. (``ISE'') rules. In addition, the Exchange clarified 
the classes of broad-based index options for which the CBOE Rules 
prescribe no position limits, and described that its proposed Rule 
6.11(b) provided for the procedure that underwriters follow when 
requesting restrictions on uncovered opening writing transactions 
during public distributions.
    \5\ See letter from Tania J.C. Blanford, Staff Attorney, 
Regulatory Policy, PCX to Nancy J. Sanow, Assistant Director, 
Division, Commission, dated March 22, 2004 (``Amendment No. 3''). In 
Amendment No. 3, the PCX corrects certain typographical errors.
---------------------------------------------------------------------------

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

    The PCX is proposing to amend the position and exercise limits with 
respect to broad-based index options, as well as a number of conforming 
changes in order to bring the PCX index option rules up to date with 
those of other Self-Regulatory Organizations (``SRO''). The proposed 
rule change is substantially similar to the proposed rules recently 
filed by the ISE, which were approved by the Commission.\6\
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 48405 (August 25, 
2003), 68 FR 52257 (September 2, 2003) (SR-ISE-2003-05) (Order 
approving the ISE's proposed rules).
---------------------------------------------------------------------------

    The text of the proposed rule change appears below. Additions are 
italicized; deletions are in [brackets].
* * * * *

Rule 6 Options Trading

Rule 6.8 Position Limits

    (a) (No change.)
    Commentary:
    .01-.03--(No change.)
    .04 The Exchange may establish higher position limits for Market 
Maker transactions than those applicable with respect to other 
accounts. Whenever a Market Maker reasonably anticipates that he or she 
may exceed such position limits in the performance of his or her 
function of assisting in the maintenance of a fair and orderly market, 
he or she must consult with and obtain the prior approval of an Options 
Floor Official. An exemption will generally be granted only to a Market 
Maker who has requested an exemption, who is appointed to the options 
class in which the exemption is requested, whose positions are near the 
current position limit, and who is significant in terms of daily 
volume. The positions must generally be within ten percent (10%) of the 
limits contained in Rule 6.8, Commentary .05 for equity options and 
twenty percent (20%) of those limits for broad-based index options.\7\
---------------------------------------------------------------------------

    \7\ See supra note 4.
---------------------------------------------------------------------------

* * * * *

Rule 6.11 Other Restrictions on Exchange Option Transactions and 
Exercises

    (a) The Exchange shall have the power to impose, from time to time 
in its discretion, such restrictions on Exchange option transactions or 
the exercise of option contracts in one or more series of options of 
any class dealt in on the Exchange as it deems advisable in the 
interests of maintaining a fair and orderly market in option contracts 
or in the underlying stocks or Exchange-Traded Fund Shares covered by 
such option contracts, or otherwise deems advisable in the public 
interest or for the protection of investors.
    (1) During the effectiveness of any such restriction, no member 
organization shall effect any Exchange option transaction or exercise 
any option contract in contravention of such restriction.
    (2) Notwithstanding the foregoing, during the ten (10) business 
days prior to the expiration date of a given series of options, other 
than index options, no restriction on the exercise of option contracts 
under this Rule shall remain in effect with respect to that series of

[[Page 16317]]

options. With respect to index options, restrictions on exercise may be 
in effect until the opening of business on the last business day before 
the expiration date.
    (3) Exercises of American-style, cash-settled index options shall 
be prohibited during any time when trading in such options is delayed, 
halted, or suspended, subject to the following exceptions:
    (A) The exercise of an American-style, cash-settled index option 
may be processed and given effect in accordance with and subject to the 
Rule of the Options Clearing Corporation while trading in the option is 
delayed, halted or suspended if it can be documented, in a form 
prescribed by the Exchange, that the decision to exercise the option 
was made during allowable time frames prior to the delay, halt, or 
suspension;
    (B) Exercises of expiring American-style, cash-settled index 
options shall not be prohibited on the last business day prior to their 
expiration;
    (C) Exercises of American-style, cash-settled index options shall 
not be prohibited during a trading halt that occurs at or after 1:00 
p.m. Pacific Time. In the event of such a trading halt, exercises may 
occur through 1:20 p.m. Pacific Time. In addition, if trading resumes 
following such a trading halt (such as by closing rotation), exercises 
may occur during the resumption of trading and for five (5) minutes 
after the close of the resumption of trading. The provisions of this 
subsection (a)(3)(C) are subject to the authority of the Board to 
impose restrictions on transactions and exercises pursuant to 
subsection (a) of this Rule; and
    (D) An Exchange officer designated by the Board may determine to 
permit the exercise of American-style, cash-settled index options while 
trading in such options is delayed, halted, or suspended. In the case 
of an American-style, cash-settled FLEX Index Option, the references in 
this paragraph (a)(3) to a trading delay, halt, suspension, resumption, 
or closing rotation shall mean the occurrence of the applicable 
condition in the standardized option on the index underlying the FLEX 
Index Option (rather than the occurrence of the applicable condition in 
the FLEX Index Option itself).\8\
---------------------------------------------------------------------------

    \8\ See supra note 4.
---------------------------------------------------------------------------

    (b) Except with respect to index options trading pursuant to Rule 
7, whenever, the issuer of a security underlying a call option traded 
on the Exchange is engaged or proposes to engage in a public 
underwritten distribution (``public distribution'') of such underlying 
security or securities exchangeable for or convertible into such 
underlying security, the underwriters may request that the Exchange 
impose restrictions upon all opening writing transactions in such 
options at a ``discount'' where the resulting short position will be 
uncovered (``uncovered opening writing transactions''). Upon receipt of 
such a request, the Exchange shall impose the requested restrictions as 
promptly as possible but no earlier than 15 minutes after it has been 
announced on the floor of the Exchange and shall terminate such 
restrictions upon request of the underwriters or when the Exchange 
otherwise discovers that the stabilizing transaction by the 
underwriters has been terminated. In addition to a request, the 
following conditions are necessary for the imposition of restrictions:
    (1) Less than a majority of the securities to be publicly 
distributed in such distribution are being sold by existing security 
holders;
    (2) The underwriters agree to notify the Exchange upon the 
termination of their stabilization activities; and
    (3) The underwriters initiate stabilization activities in such 
underlying security on a national securities exchange when the price of 
such security is either at a ``minus'' or ``zero minus'' tick.
    (c) For purposes of subsection (b) above, an uncovered opening 
writing transaction in a call option will be deemed to be effected at a 
``discount'' when the premium in such transaction is either:
    (1) In the case of a distribution of the underlying security not 
involving the issuance of rights and in the case of a distribution of 
securities exchangeable for or convertible into the underlying 
security, less than the amount by which the underwriters' stabilization 
bid for the underlying security exceeds the exercise price of such 
option; or
    (2) In the case of a distribution being offered pursuant to rights, 
less than the amount by which the underwriters' stabilization bid in 
the underlying security at the Subscription Price exceeds the exercise 
price of such option.
* * * * *

Rule 6.37 Obligation of Market Makers

    (a) (No change.)
    (b)(1) (No change.)
    (2) Bidding no more than $1 lower and/or offering no more than $1 
higher than the last preceding transaction price for the particular 
option contract. However, this standard shall not ordinarily apply if 
the price per share (or other unit of trading) of the underlying 
security or Exchange-Traded Fund Share has changed since the last 
preceding transaction for the particular option contract, in which even 
a Market Maker may then bid no lower than or offer no more than $1 plus 
the aggregate change in the price per share (or other unit of trading) 
of the underlying security or Exchange-Traded Fund Share since the time 
of the last preceding transaction for the particular option contract. 
This provision applies from one day's close to the next day's opening 
and from one transaction to the next in intra-day transactions. With 
respect to inter-day transactions, this provision applies if the 
closing transaction occurred within one hour of the close and the 
opening transaction occurred within one hour after the opening. With 
respect to intra-day transactions, this provision applies to 
transactions occurring within one hour of one another.\9\ Two Floor 
Officials may waive the provisions of this paragraph in an index option 
when the primary underlying securities market for that index is not 
trading. Nothing in this subparagraph (b)(2) shall alter the maximum 
bid/ask differentials established by subparagraph (b)(1) of Rule 6.37.
---------------------------------------------------------------------------

    \9\ See supra note 4.
---------------------------------------------------------------------------

    (3)-(4) (No change.)
    (c)-(h) (No change.)
    Commentary:
    .01-.08 (No change.)
    .09 The Exchange or its authorized agent may calculate bids and 
asks for various indices for the sole purpose of determining 
permissible bid/ask differentials on options on these indices. These 
values will be calculated by determining the weighted average of the 
bids and asks for the components of the corresponding index. These bids 
and asks will be disseminated by the Exchange at least every fifteen 
(15) seconds during the trading day solely for the purpose of 
determining the permissible bid/ask differential that market-makers may 
quote on an in-the-money option on the indices. For in-the-money series 
in index options where the calculated bid/ask differential is wider 
than the applicable differential set out in subparagraph (b)(1) of this 
Rule, the bid/ask differential in the index option series may be as 
wide as the calculated bid/ask differential in the underlying index. 
The Exchange will not make a market in the basket of stock comprising 
the indices and is not guaranteeing the accuracy or the availability of 
the bid/ask values.
* * * * *

[[Page 16318]]

Rule 6.64 Trading Rotations

    (a)-(d) (No change.)
    (e) Closing Rotations. Transactions may be effected in a class of 
options after 1:02 p.m. (Pacific Time) or, 1:15 p.m. (Pacific Time) for 
certain index options, if they occur during a trading rotation. Such a 
trading rotation may be employed in connection with the opening or 
reopening of trading in the underlying security or Exchange Traded Fund 
Share after 12:30 p.m. (Pacific Time) or due to the declaration of a 
``fast market'' pursuant to Rule 6.28. The decision to employ a trading 
rotation after 12:30 p.m. will be publicly announced on the Trading 
Floor prior to the commencement of such rotation and Book Staff should 
notify Floor Brokers by 12:50 p.m., if possible, that a closing 
rotation may be necessary. The closing rotation should commence at 
least ten minutes after the Trading Floor has been notified. No more 
than one trading rotation may be commenced after 1:02 p.m. If a trading 
rotation is in progress and Floor Officials determine that a final 
trading rotation is needed to assure a fair and orderly close, the 
rotation in progress will be halted and a final rotation begun as 
promptly as possible after 1:02 p.m. Any trading rotation conducted 
after 1:02 p.m. may not begin until ten minutes after news of such 
rotation is disseminated. Only orders that have been entered before 
1:02 p.m. are eligible for execution during the closing rotation.
    (f)-(h) (No change.)
* * * * *

Rule 7 Index Options

Introduction
    In general, the Rules of the PCX's Board of Governors applicable to 
the trading of stock options, in particular Rule 6, shall be applicable 
to the trading of index options as that term is defined below. Rule 7 
supplements or replaces those rules relating to stock options where 
required by the nature of index options. In cases where Rule 7 is 
silent on an issue, the applicable section of the rules relating to 
stock options shall be read so as to apply to index option. Where the 
rule in this section indicate that particular indices or requirements 
with respect to particular indices will be ``Specified,'' the Exchange 
shall file a proposed rule change with the Commission to specify such 
indices or requirements.
* * * * *

Rule 7.1 Definitions

    (a)-(b) (No change.)
    (c) The term `` A.M.-settled index option'' means an index option 
contract for which the current index value at expiration shall be 
determined as provided in Rule 7.9(a)(7). [The term ``index'' shall 
mean the sum of the reported last sales on their primary market of 
those underlying securities which, as a group, have been designated by 
the Exchange as underlying an option contract, divided by the Divisor.]
    (d)-(f) (No change.)
    (g) The term ``index multiplier'' means the amount specified in the 
contract by which the current index value [designated by the Exchange 
by which the index] is to be multiplied to arrive at the value required 
to be delivered to the holder of a call or by the holder of a put 
option valid exercise of the contract.
    (h) The term ``current index value'' [in] with respect to a 
particular index option contract [shall] means the level of the 
underlying index reported by the reporting authority for the index, or 
any multiple or fraction of such reported level specified by the 
Exchange. The current index value with respect to a reduced-value LEAP 
is one-tenth of the current index value of the related index option. 
The ``closing index value'' shall be the last index value reported on a 
business day [sum of the prices of the underlying securities divided by 
the Divisor, and as reported by the reporting authority for the index].
    (i) Reserved. [The term ``closing index value'' shall be the last 
index value reported by the reporting authority on a business day. The 
reporting authority shall use the closing last sales of the underlying 
securities on their primary market to calculate the closing index 
value.]
    (j) (No change.)
    (k) The term ``underlying security'' or ``underlying securities'' 
with respect to an index option contract means any of the securities 
[all of the stocks] that are the basis for the calculation of the 
index.
    (l) The term ``reporting authority'' [in] with respect [of] to a 
particular index means the institution or reporting service designated 
by the Exchange as the official source for (1) calculating the level of 
the index from the reported prices of the underlying securities that 
are the basis of the index and (2) reporting such level. [and 
disseminating the value of the index.] The reporting authority for each 
index approved for options trading on the Exchange shall be specified 
in Rule 7.13.
    (m)-(u) (No change.)
    (v) The terms ``industry index'' and ``narrow-based index'' means 
an index designed to be representative of a particular industry or a 
group of related industries.
    (w) The term ``market index'' and ``broad-based index'' mean an 
index designed to be representative of a stock market as a whole or of 
a range of companies in unrelated industries.
* * * * *
[Index Multiplier]
    [Rule 7.2 The index multiplier shall be 100 unless otherwise 
determined by the Exchange.]
* * * * *
Designation of the Index

Rule 7.2[7.3] Broad-Based Index Options

    (a) (No change.)
* * * * *
Designation of the Index

Rule 7.3 Narrow-Based Index Options

    [(b)-(c)] (a)-(b) (No substantive change to the rule text).\10\
---------------------------------------------------------------------------

    \10\ Telephone conversation between Tania Blanford, Attorney, 
PCX, and Tim Fox, Attorney, Division, Commission on March 18, 2004.
---------------------------------------------------------------------------

* * * * *

Rule 7.4 Dissemination of Information

    (a) The Exchange shall assure that the current index value is 
disseminated, [to the public] after the close of business and from 
time-to-time on days on which transactions in index options are made 
[traded] on the Exchange.
    (b) The Exchange shall maintain, in files available to the public, 
information identifying the stocks whose prices are the basis for 
calculation of the index and the method used to determine the current 
index value.
* * * * *
[Adjustments in the Divisor
    Rule 7.5. The Divisor ordinarily will be adjusted in the event of a 
stock dividend, stock distribution, stock split or reverse split, 
rights offering, distribution, reorganization, recapitalization or 
reclassification or similar event in respect of any component stock, or 
in the event a stock is added to or deleted from the index, or one 
stock is substituted for another. The purpose of adjusting the Divisor 
in the context of such events is to maintain continuity of index 
values; the Divisor will not be revised for any other purpose.]
* * * * *

Rule 7.5 Position Limits for Broad-Based Index Options

    (a) Rule 6.8 generally shall govern position limits for broad-based 
index options, as modified by this Rule 7.5. Except otherwise indicated 
below, the

[[Page 16319]]

position limit for a broad-based index option shall be 25,000 
contracts. There may be no position limit for certain Specified (as 
provided in Rule 7) broad-based index option contracts.
    (b) Index option contracts shall not be aggregated with option 
contracts on any stocks whose price are the basis for calculation of 
the index.
    (c) Positions in reduced-value index options shall be aggregated 
with positions in full-value index options. For such purposes, ten (10) 
reduced-value options shall equal one (1) full-value contract.
    (d) Capped-style index options shall be aggregated with standard 
option contracts on the same stock index group.
* * * * *
Position Limits for Index Options

Rule 7.6 Narrow-Based Index Options

    (a)-(c) (No change.)
* * * * *
[Broad-Based Index Options
    (d) The position limit for a broad based index option shall be 
15,000 contracts, except as follows:
    (1) The position limit for options on the Wilshire Small Cap Index 
shall be 37,500 contracts on the same side of the market, with no more 
than 22,500 of such contracts in the series with the nearest expiration 
date.
    (2) Quarterly Index Expirations (QIXs) on the Wilshire Small Cap 
Index shall be excluded from the aggregation of options on such indexes 
for purposes of subsection (d)(1). In determining compliance with 
applicable position limits, QIXs on the Wilshire Small Cap Index shall 
be subject to a contract limitation fixed by the Exchange, which shall 
not be larger than 37,500 contracts on the same side of the market. For 
purposes of determining compliance with this subsection (d)(2), all 
Wilshire Small Cap Index options (including all QIXs on the Wilshire 
Small Cap Index) shall be aggregated. In no event shall the aggregate 
of all option contracts on the Wilshire Small Cap Index exceed 37,500 
contracts on the same side of the market.
    (3) The position limit for options on the PCX Technology Index 
shall be 37,500 contracts on the same side of the market, with no more 
than 22,500 of such contracts in the series with the nearest expiration 
date.
    (4) The position limit for options on the Dow Jones & Co. Taiwan 
Index shall be 50,000 contracts on the same side of the market, with no 
more than 30,000 contracts in the series with the nearest expiration 
date.
    (5) The position limit for options on the Morgan Stanley Emerging 
Growth Index shall be 37,500 contracts on the same side of the market, 
with no more than 22,500 contracts in the series with the nearest 
expiration date.
    (e) Capped-style index options shall be aggregated with standard 
option contracts on the same stock index group.
    Commentary:
    .01. All members and member organizations acquiring positions of 
200 contracts or more in index options shall report such information to 
the Department of Options Surveillance. The report shall be filed in 
accordance with the provisions of Rule 6.6(a).]
* * * * *

Exemptions from Position Limits

Rule 7.7 [Broad-Based Index Hedge Exemption]

    (a). Broad-based Index Hedge Exemptions. [.02.] The broad-based 
index hedge exemption is in addition to the standard limit and other 
exemptions available under Exchange rules, interpretations and 
policies. The following procedures and criteria must be satisfied to 
qualify for a broad-based index hedge exemption:
    (1) [(a)] The account in which the exempt option positions are held 
(the ``hedge exemption account'') must has received prior Exchange 
approval for the hedge exemption specifying the maximum number of 
contracts that may be exempt under this Rule [Commentary]. The hedge 
exemption account must have provided all information required on 
Exchange-approved forms and must have kept such information current. 
[The] Exchange [may grant]approval may be granted on the basis of 
verbal representations, in which event [case] the hedge exemption 
account must, within two business days (or such other time designated 
by the Exchange), furnish the Exchange with appropriate forms and 
documentation substantiating the basis for the exemption. The [A] hedge 
exemption account may apply from time to time for an increase in the 
maximum number of contracts exempt from the position limits.
    [(b) The hedge exemption account has provided all information 
required on Exchange-approved forms and has kept such information 
current.]
    (2) [(c)] A hedge exemption account that is not carried by an 
Exchange Member Organization must be carried by a member of a self-
regulatory organization participating in the Intermarket Surveillance 
Group.
    (3) [(d)] The hedge exemption account maintains a qualified 
portfolio, or will effect transactions necessary to obtain a qualified 
portfolio concurrent with or at or about the same time as the execution 
of the exempt options positions, of:
    (A) [(1)] A net long or short position in common stocks in at least 
four industry groups and contains at least twenty (20) stocks, none of 
which accounts for more than fifteen percent (15%) of the value of the 
portfolio or in securities readily convertible, and additionally in the 
case of convertible bonds, economically convertible, into common stocks 
which would comprise a portfolio, [and/]or
    (B) [(2)]--No change.
    (4) [(e)] The exemption applies to positions in broad-based index 
options dealt in on the Exchange and is applicable to the unhedged 
value of the qualified portfolio. The unhedged value will be determined 
as follows:
    (A) [(1)] The values of the net long or short positions of all 
qualifying products in the portfolio are totaled;
    (B) [(2)] For positions in excess of the standard limit, the 
underlying market value (i)[(A)] of any economically equivalent 
opposite side of the market calls and puts in broad-based index 
options, and (ii)[(B)] of any opposite side of the market positions in 
stock index futures, options on stock index futures, and any 
economically equivalent opposite side of the market positions, assuming 
no other hedges for these contracts exist, is subtracted from the 
qualified portfolio; and
    (C) [(3)]-No change.
    (5) [(f)] Positions in broad-based index options that are traded on 
the Exchange are exempt from the standard limits to the extent 
specified in this subsection (a)(5).
    [The hedge exemption customer shall agree to, and any Member 
Organization carrying an account for the customer, shall
    (1) liquidate and establish option and stock positions or their 
equivalent in an orderly fashion; not initiate or liquidate positions 
in a manner calculated to cause unreasonable price fluctuations or 
unwarranted price changes; and not initiate or liquidate a stock 
position or its equivalent with an equivalent index option position 
with a view toward taking advantage of any differential in price 
between a group of securities and an overlying stock index option.
    (2) liquidate any options prior to or contemporaneously with a 
decrease in the hedged value of the qualified portfolio which options 
would thereby be rendered excessive.
    (3) promptly notify the Exchange of any material change in the 
stock

[[Page 16320]]

portfolio or its equivalent or stock index futures positions which 
materially affects the unhedged value of the qualified portfolio.
    (4) abide by prevailing exercise limits allowed pursuant to Rule 
7.7, without regard to the exemption provision, except in expiring 
series from the last business day prior to expiration until expiration. 
]
    (6) [(g)] Only the following qualified hedging transactions and 
positions are eligible for purposes of hedging a qualified portfolio 
(i.e., stocks, futures, options and warrants) pursuant to this Rule 
[Commentary]:
    (A) [(1)] Long put(s) used to hedge the holding of a qualified 
portfolio;
    (B) [(2)] Long call(s) used to hedge a short position in a 
qualified portfolio;
    (C) [(3)] Short call(s) used to hedge the holding of a qualified 
portfolio; and
    (D) [(4)] Short put(s) used to hedge a short position in a 
qualified portfolio. The following strategies may be effected only in 
conjunction with a qualified stock portfolio for non-P.M. settled, 
European style index options only:
    (i) [(5) For non-P.M. settled, European-style index options only--
a] A short call position accompanied by long put(s), where the short 
call(s) expire with the long put(s), and the strike price of the short 
call(s) equals or exceeds the strike price of the long put(s)(a 
``collar''). Neither side of the collar transaction can be in-the-money 
at the time the position is established. For purposes of determining 
compliance with Rules 6.8, 7.5 and 7.7[6], a collar position will be 
treated as one (1) contract;
    (ii) [(6) For non-P.M. settled, European-style index options only--
a] A long put position coupled with a short put position overlying the 
same broad-based index and having an equivalent underlying aggregate 
index value, where the short put(s) expire with the long put(s), and 
the strike price of the long put(s) exceeds the strike price of the 
short put(s)(a ``debit put spread position''); and
    (iii)[(7) For non-P.M. settled, European-style index options only--
a] A short call position accompanied by a debit put spread position, 
where the short call(s) expire with the puts and the strike price of 
the short call(s) equals or exceeds the strike price of the long 
put(s). Neither side of the short call, long put transaction can be in-
the-money at the time the position is established. For purposes of 
determining compliance with Rules 6.8, 7.5 and 7.7[6], the short call 
and long put positions will be treated as one (1) contract.
    (7) The hedge exemption account shall:
    (A) Liquidate and establish options, stock positions, their 
equivalent or other qualified portfolio products in an orderly fashion; 
not initiate or liquidate positions in a manner calculated to cause 
unreasonable price fluctuations or unwarranted price changes; and not 
initiate or liquidate a stock position or its equivalent with an 
equivalent index option position with a view toward taking advantage of 
any differential in price between a group of securities and an 
overlying stock index option;
    (B) Liquidate any options prior to or contemporaneously with a 
decrease in the hedged value of the qualified portfolio which options 
would thereby be rendered excessive.
    (C) Promptly notify the Exchange of any material change in the 
qualified portfolio which materially affects the unhedged value of the 
qualified portfolio.
    (8) If an exemption is granted, it will be effective at the time 
the decision is communicated. Retroactive exemptions will not be 
granted.
[(h) Compliance]
    (9) [(1)] The hedge exemption account shall promptly provide to the 
Exchange any information requested concerning the qualified portfolio.
    (10) [(2)] Positions included in a qualified portfolio that serve 
to secure an index hedge exemption may not also be used to secure any 
other position limit exemption granted by the Exchange or any other 
self regulatory organization or futures contract market.
    (11) [(3)] Any member or member organization that maintains a 
broad-based index option position in such member's or member 
organization's own account or in a customer account, and has reason to 
believe that such position is in excess of the applicable limit, shall 
promptly take the action necessary to bring the position into 
compliance. Failure to abide by this provision shall be deemed to be a 
violation of Rules 6.8, 7.5 and this Rule 7.7[6] by the member or 
member organization.
    (12) [(4)] Violation of any of the provisions of this Rule [7.6 and 
the commentaries thereunder], absent reasonable justification or 
excuse, shall result in withdrawal of the index hedge exemption and may 
form the basis for subsequent denial of an application for an index 
hedge exemption hereunder.
    (13) Each member (other than Exchange market makers) that maintains 
a broad-based index options position on the same side of the market in 
excess of a Specified (as provided in Rule 7) \11\ number of contracts 
for its own account or for the account of a customer, shall report 
information as to whether the positions are hedged and provide 
documentation as to how such contracts are hedged, in the manner and 
form required by the Exchange. The Exchange may impose other reporting 
requirements.
---------------------------------------------------------------------------

    \11\ See supra note 4.
---------------------------------------------------------------------------

    (14) Whenever the Exchange determines that additional margin is 
warranted in light of the risks associated with an under-hedged options 
position in Specified (as provided in Rule 7) \12\ broad-based indices, 
the Exchange may impose additional margin upon the account maintaining 
such under-hedged position pursuant to its authority under Rule 7.16. 
The clearing firm carrying the account also will be subject to capital 
charges under Rule 15c3-1 under the Exchange Act to the extent of any 
margin deficiency resulting from the higher margin requirements.
---------------------------------------------------------------------------

    \12\ See supra note 4.
---------------------------------------------------------------------------

[Narrow-Based Index Hedge Exemption]
    (a) Industry (Narrow-Based) Index Hedge Exemptions. [.03.]--(No 
substantive change to the rule text).
* * * * *

Rule 7.8 [7.7] Exercise Limits

    (a) In determining compliance with Rule 6.9, exercise limits for 
index option contracts shall be equivalent to the position limits 
prescribed for option contracts with the nearest expiration date in 
Rule 7.5 and 7.6. [subject to the same exercise limit as the 
established position limit for that particular index option contract.]
    (b) For a market maker granted an exemption to position limits 
pursuant to Rule 6.8(a), Commentary .04, the number of contracts that 
can be exercised over a five business day period shall equal the market 
maker's exempted position.
    (c) In determining compliance with exercise limits applicable to 
stock index options, option contracts on a stock index group shall not 
be aggregated with options contracts on an underlying stock or stocks 
included in such group, and option contracts on one stock index group 
shall not be aggregated with option contracts on any other stock index 
group.
    (d) With respect to index option contracts for which an exemption 
has been granted in accordance with the provisions of Rule 7.7, the 
exercise limit shall be equal to the amount of the exemption.
    (e) [(b)] Capped-style index options shall not be aggregated with 
standard

[[Page 16321]]

option contracts on the same stock index group.
* * * * *

Rule 7.9[7.8] Terms of Index Option Contracts

    (a) General.
    (1) Meaning of Premium Bids and Offers. Bids and offers shall be 
expressed in terms of dollars and cents per unit of the index.
    (2) Exercise Prices. The Exchange shall determine fixed point 
intervals of exercise prices for call and put options.
    (3) [(b)] Expiration Months. Index Option contracts may expire at 
three (3) month intervals or in consecutive months. The Exchange may 
list up to six (6) months at any one time, but will not list index 
options that expire more than twelve (12) months out.
    (4) ``European-Style Exercise.'' Specified European-style index 
options, some of which may be A.M.-settled as provided in subsection 
(a)(7) below, may be approved for trading on the Exchange.
    (5) [(c)] Capped-style index options. [(1)] Capped-style index 
options that are approved for trading on the Exchange shall be 
Specified in this subsection (a)(5).\13\ [on the following indexes are 
approved for trading on the Exchange:(A) Wilshire Small Cap Index. (B) 
PSE Technology Index.]
---------------------------------------------------------------------------

    \13\ See supra note 4.
---------------------------------------------------------------------------

    (A) [(2)] Unless modified by the Exchange, the cap interval shall 
be $20.
    (B) [(3)] Initially, one at-the-money call and put will be listed 
with an expiration of up to one year in the future. Additional at-the-
money series may be listed every two months with expirations up to one 
year in the future.
    (C) [(4)] Series may be added to expiration months with three or 
more months remaining to their expiration, if there has been a move of 
ten or more points in the index value.
    (6) [(d)] Quarterly Index Options (QIXs). The Exchange may open for 
trading up to eight near-term quarterly index expirations at any one 
time. The index multiplier for QIXs shall be 100. Unless otherwise 
specified, QIXs shall be p.m. settled. QIXs that are approved for 
trading on the Exchange shall be Specified in this subsection (a)(6). 
[on the following indexes are approved for trading on the Exchange: (1) 
Wilshire Small Cap Index.]
    (7) [(e)] A.M.-Settled Index Options. [(1)(A)] The last day of 
trading for A.M.-settled index options shall be the business day 
preceding the last day of trading in the underlying securities prior to 
expiration. The current index value at the expiration of A.M.-settled 
index option shall be determined, for all purposes under these Rules 
and the Rules of the Options Clearing Corporation, on the last day of 
trading in the underlying securities prior to expiration,[. The current 
index value shall be determined ] by reference to the reported level of 
such index as derived from first reported sale (opening) prices of the 
underlying securities on such day, except that [I]in the event [in any 
case where the] that the primary market for an underlying security does 
not open for trading [on that day], halts trading prematurely, or 
otherwise experiences a disruption of normal trading on that day, or in 
the event that the primary market for an underlying security is open 
for trading on that day, but that particular security does not open for 
trading, halts trading prematurely, or otherwise experiences a 
disruption of normal trading on that day the last reported sale price 
of that security shall be [used] determined, for the purposes of 
calculating the current index value at expiration, as set forth in Rule 
7.10(f). [unless the exercise settlement amount is fixed in accordance 
with the Rules and By-Laws of the Options Clearing Corporation; and]
    [(B) In any case where an exercise settlement amount is fixed for 
any series of index options pursuant to the Rules and By-Laws of The 
Options Clearing Corporation, the amount so fixed shall be the amount 
required to be paid upon exercise of options of that series 
notwithstanding any difference between the current index value used by 
The Options Clearing Corporation in fixing that amount and the index 
value determined pursuant to Exchange Rules or practices.]
    (A)[(2)] The following A.M.-settled index options are approved for 
trading on the Exchange: [(A) PSE Technology Index. (B) Wilshire Small 
Cap Index (C) Dow Jones & Co. Taiwan Index (D) Morgan Stanley Emerging 
Growth Index]
    (i) Reserved.\14\
---------------------------------------------------------------------------

    \14\ See supra note 4.
---------------------------------------------------------------------------

    (b) Index LEAPS Options Series.
    (1) Notwithstanding the provisions of subsection (a)(3) above, the 
Exchange may list index LEAPS options series that expire from twelve 
(12) to sixty (60) months from the date of issuance.
    (A) Index LEAPS options series may be based on either the full or 
reduced value of the underlying index. There may be up to ten (10) 
expiration months, none further out than sixty (60) months. Strike 
price interval, bid/ask differential and continuity Rules shall not 
apply to such options series until the time to expiration is less than 
twelve (12) months.
    (B) When a new Index LEAPS options series is listed, such series 
will be opened for trading either when there is buying or selling 
interest, or forty (40) minutes prior to the close, whichever occurs 
first. No quotations will be posted for such options series until they 
are open for trading.
    (2) Reduced-Value LEAPS Options Series.
    (A) Reduced-value LEAPS options series on the following stock 
indices are approved for trading on the Exchange:
    (i) Reserved.\15\
---------------------------------------------------------------------------

    \15\ See supra note 4.
---------------------------------------------------------------------------

    (B) Expiration Months. Reduced-value LEAPS options series may 
expire at six-month intervals. When a new expiration month is listed, 
series may be near or bracketing the current index value. Additional 
series may be added when the value of the underlying index increases or 
decreases by ten (10) to fifteen (15) percent.
    (c) Procedures for Adding and Deleting Strike Prices. The 
procedures for adding and deleting strike prices for index options are 
provided in Rule 6.4, as amended by the following:
    (1) The interval between strike prices will be no less than $5.00; 
provided, that in the case of the certain specified classes of index 
options, the interval between strike prices will be no less than $2.50.
    (2) New series of index option contracts may be added up to the 
fifth business day prior to expiration.
    (3) When a new series of index options with a new expiration date 
are opened for trading, or when additional series of index options in 
an existing expiration date are opened for trading as the current value 
of the underlying index to which such series relate moves substantially 
from the exercise prices of series already opened, the exercise prices 
of such new or additional series shall be reasonably related to the 
current value of the underlying index at the time such series are first 
opened for trading. In the case of all classes of index options, the 
term ``reasonably related to the current value of the underlying 
index'' shall have the meaning set forth in subsection (c)(4) below.
    (4) Notwithstanding any other provision of this subsection (c), the 
Exchange may open for trading additional series of the same class of 
index options as the current index value of the underlying index moves 
substantially from the exercise price of those index options that 
already have been opened for trading on the

[[Page 16322]]

Exchange. The exercise price of each series of index options opened for 
trading on the Exchange shall be reasonably related to the current 
index value of the underlying index to which such series relates at or 
about the time such series of options is first opened for trading on 
the Exchange. The term ``reasonably related to the current value of the 
underlying index'' means that the exercise price is within thirty 
percent (30%) of the current index value. The Exchange may also open 
for trading additional series of index options that are more than 
thirty percent (30%) away from the current index value, provided that 
demonstrated customer interest exists for such series, as expressed by 
institutional, corporate, or individual customers or their broker. 
Market makers trading for their own account shall not be considered 
when determining customer interest under this provision.
    (d) Index Level on the Last Day of Trading. The reported level of 
the underlying index that is calculated by the reporting authority on 
the last day of trading in the underlying securities prior to 
expiration for purposes of determining the current index value at the 
expiration of an A.M.-settled index option may differ from the level of 
the index that is separately calculated and reported by the reporting 
authority and that reflects trading activity subsequent to the opening 
of trading in any of the underlying securities.
    (e) Index Values for Settlement. The Rules of the Options Clearing 
Corporation specify that, unless the Rules of the Exchange provide 
otherwise, the current index value used to settle the exercise of an 
index option contract shall be the closing index for the day on which 
the index option contract is exercised in accordance with the Rules of 
the Options Clearing Corporation or, if such day is not a business day, 
for the most recent business day.
* * * * *
[Meaning of Premium Bids and Offers
    Rule 7.9 Bids and offers shall be expressed in terms of dollars and 
fractions per unit of the index.]
* * * * *

Trading Sessions

Rule 7.10 [Trading Rotations]

    (a) Days and Hours of Business. The Board of Governors has resolved 
that, except as otherwise provided in this Rule or under unusual 
conditions as may be determined by the Board or its designee, 
transactions in index options may be effected on the Exchange between 
the hours of 6:30 a.m. and 1:15 p.m. Pacific time. With respect to 
options on foreign indexes, the Board or its designee shall determine 
the days and hours of business.
[Rule 7.10]
    (b) Trading Rotations. The provisions of Rule 6.64 regarding 
trading rotations shall apply to index options, except as otherwise 
provided in Rule 7. [The Order Book Official shall open first those 
series of a class which have the nearest expiration. Thereafter the 
Order Book Official shall open the remaining series in a manner he 
deems appropriate under the circumstances. One and one-half hours after 
the opening rotation, trading shall become subject to Rule 7.11, unless 
the Exchange determines it is in the public interest to suspend trading 
at an earlier time.] Two Floor Officials may delay the commencement of 
the opening rotation in an index options whenever in their judgment 
such action is appropriate in the interests of a fair and orderly 
market. Among the factors that may be considered in making these 
determinations are:
    (1) Unusual conditions or circumstances in other markets;
    (2) An influx of orders that has adversely affected the ability of 
the Lead Market Maker to provide and to maintain fair and orderly 
markets;
    (3) Activation of opening price limits in stock index futures on 
one or more futures exchanges;
    (4) Activation of daily price limits in stock index futures on one 
or more futures exchanges;
    (5) The extent to which either there has been a delay in opening or 
trading is not occurring in stocks underlying the index; and
    (6) Circumstances such as those which would result in the 
declaration of a fast market under Rule 6.28.
* * * * *
[Trading Halts or Suspensions]
    (c) [Rule 7.11.] Instituting Trading Halts or Suspensions. Trading 
on the Exchange in any index option shall be halted or suspended 
whenever trading in underlying securities whose weighted value 
represents more than 20%, in the case of a broad based index, and 10% 
for all other indices, of the index value is halted or is suspended. 
Trading in an index option shall also be halted whenever Two Floor 
Officials or the Exchange deem[s] such action appropriate in the 
interests of a fair and orderly market or to protect investors. Among 
the factors that may be considered by the Exchange are the following:
    (1) [(i)] All trading has been halted or suspended in the market 
that is the primary market for a plurality of the underlying stocks;
    (2) [(ii)] The current calculation of the index derived from the 
current market prices of the stocks is not available; or
    (3) The extent to which the rotation has been completed or other 
factors regarding the status of the rotation.
    (4) [(iii)] Other unusual conditions or circumstances detrimental 
to the maintenance of a fair and orderly market are present, including, 
but not limited to the activation of price limits on futures exchanges.
    (d) Resumption of Trading Following a Halt or Suspension. Trading 
in index options of a class or series that has been the subject of a 
halt or suspension by the Exchange may resume if the Exchange 
determines that the conditions which led to the halt or suspension are 
no longer present, or that the interests of a fair and orderly market 
are best served by a resumption of trading. Among the factors to be 
considered in making this determination are whether the conditions that 
led to the halt or suspension are no longer present, and the extent to 
which trading is occurring in stocks underlying the index. Upon 
reopening, a rotation shall be held in each class of index options 
unless Two Floor Officials conclude that a different method of 
reopening is appropriate under the circumstances, including, but not 
limited to, no rotation, an abbreviated rotation or any other variation 
in the manner of the rotation.
    (e) Circuit Breakers. Rule 4.22 applies to index options trading 
with respect to the initation of a market-wide trading halt commonly 
known as a ``circuit breaker.''
    (f) Special Provisions for Foreign Indices. When the hours of 
trading of the underlying primary securities market for an index option 
do not overlap or coincide with those of the Exchange, all of the 
provisions as described in subsections (b) through (d) above shall not 
apply except for (b)(4).
    (g) Pricing When Primary Market Does Not Open. When the primary 
market for a security underlying the current index value of an index 
option does not open for trading, halts trading prematurely, or 
otherwise experiences a disruption of normal trading on a given day, or 
if a particular security underlying the current index value of an index 
option does not open for trading, halts trading prematurely, or 
otherwise experiences a disruption of normal trading on a given day in 
its primary market, the price of that security shall be determined, for 
the purposes of calculating the current

[[Page 16323]]

index value at expiration, in accordance with the Rules and By-Laws of 
the Options Clearing Corporation.
* * * * *

Rule 7.11 Reserved

* * * * *

Debit Put Spread Cash Account Transactions

Rule 7.12 [Reserved.]

    Debit put spread positions in European-style, broad-based index 
options traded on the Exchange (hereinafter ``debit put spreads'') may 
be maintained in a cash account as defined by Federal Reserve Board 
Regulation T Section 220.8 by a public customer, provided that the 
following procedures and criteria are met:
    (a) The customer has received Exchange approval to maintain debit 
put spreads in a cash account carried by an Exchange member 
organization. A customer so approved is hereinafter referred to as a 
``spread exemption customer.''
    (b) The spread exemption customer has provided all information 
required on Exchange-approved forms and has kept such information 
current.
    (c) The customer holds a net long position in each of the stocks of 
a portfolio that has been previously established or in securities 
readily convertible, and additionally in the case of convertible bonds 
economically convertible, into common stocks would comprise a 
portfolio. The debit put spread position must be carried in an account 
with a member of a self-regulatory organization participating in the 
Intermarket Surveillance Group.
    (d) The stock portfolio or its equivalent is composed of net long 
positions in common stocks in at least four industry groups and 
contains at least twenty (20) stocks, none of which accounts for more 
than fifteen percent (15%) of the value of the portfolio (hereinafter 
``qualified portfolio''). To remain qualified, a portfolio must at all 
times meet these standards notwithstanding trading activity in the 
stocks.
    (e) The exemption applies to European-style, broad-based index 
options dealt in on the Exchange to the extent the underlying value of 
such options positions does not exceed the unhedged value of the 
qualified portfolio. The unhedged value would be determined as follows:
    (1) The values of the net long or short positions of all qualifying 
products in the portfolio are totaled;
    (2) For positions in excess of the standard limit, the underlying 
market value (A) of any economically equivalent opposite side of the 
market calls and puts in broad-based index options, and (B) of any 
opposite side of the market positions in stock index futures, options 
on stock index futures, and any economically equivalent opposite side 
of the market positions, assuming no other hedges for these contracts 
exist, is subtracted from the qualified portfolio; and
    (3) The market value of the resulting unhedged portfolio is equated 
to the appropriate number of exempt contracts as follows: the unhedged 
qualified portfolio is divided by the correspondent closing index value 
and the quotient is then divided by the index multiplier or 100.
    (f) A debit put spread in Exchange-traded, broad-based index 
options with European-style exercises is defined as a long put position 
coupled with a short put position overlying the same broad-based index 
and having an equivalent underlying aggregate index value, where the 
short put(s) expires with the long put(s), and the strike price of the 
long put(s) exceeds the strike price of the short put(s). A debit put 
spread will be permitted in the cash account as long as it is 
continuously associated with a qualified portfolio of securities with a 
current market value at least to the underlying aggregate index value 
of the long side of the debit put spread.
    (g) The qualified portfolio must be maintained with either a 
member, another broker-dealer, a bank, or securities depository.
    (h) The spread exemption customer shall agree promptly to provide 
the Exchange any information requested concerning the dollar value and 
composition of the customer's stock portfolio, and the current debit 
put spread positions.
    (1) The spread exemption customer shall agree to and any member 
carrying an account for the customer shall:
    (A) Comply with all Exchange Rules and regulations;
    (B) Liquidate any debit put spreads prior to or contemporaneously 
with a decrease in the market value of the qualified portfolio, which 
debit spreads would thereby be rendered excessive; and
    (C) Promptly notify the Exchange of any change in the qualified 
portfolio or the debit put spread position which causes the debit put 
spreads maintained in the cash account to be rendered excessive.
    (i) If any member carrying a cash account for a spread exemption 
customer with a debit put spread position dealt in on the Exchange has 
a reason to believe that as a result of an opening options transaction 
the customer would violate this spread exemption, and such opening 
transaction occurs, then the member has violated this Rule 7.12.
    (j) Violation of any of these provisions, absent reasonable 
justification or excuse, shall result in withdrawal of the spread 
exemption and may form the basis for subsequent denial of an 
application for a spread exemption hereunder.
* * * * *

Disclaimers

Rule 7.13 [Limitation of Liability]

    (a). Disclaimer. No reporting authority, no affiliate of a 
reporting authority (each such reporting authority, its affiliates, and 
any other entity identified in this Rule are referred to collectively 
as a ``Reporting Authority'') makes any warranty, express or implied, 
as to the results to be obtained by any person or entity from the use 
of such index, any opening, intra-day or closing value therefor, or any 
data included therein or relating thereto, in connection with the 
trading of any option contract based thereon or for any other purpose. 
The Reporting Authority shall obtain information for inclusion in, or 
for use in the calculation of such index from sources it believes to be 
reliable, but the Reporting Authority does not guarantee the accuracy 
or completeness of such index, any opening, intra-day or closing value 
therefor, or any date included therein or related thereto. The 
Reporting Authority hereby disclaims all warranties of merchantability 
or fitness for a particular purpose or use with respect to such index, 
any opening, intra-day, or closing value therefor, any data included 
therein or elating thereto, or any option contract based upon thereon. 
The Reporting Authority shall have no liability for any damages, 
claims, losses (including any indirect or consequential losses), 
expenses, or delays, whether direct or indirect, foreseen or 
unforeseen, suffered by any person arising out of any circumstance or 
occurrence relating to the person's use of such index, any opening, 
intra-day or closing value therefor, any data included therein or 
relating thereto, or any option contract based upon thereon, or arising 
out of any errors or delays in calculating or disseminating such index.
    [Each reporting authority with respect to any index underlying an 
option traded on the Exchange, and any affiliate of such reporting 
authority (together, the ``Reporting Authority'') does not guarantee 
the accuracy and/or completeness of such index or any data

[[Page 16324]]

included therein. The Reporting Authority makes no warranty, express or 
implied, as to the results to be obtained by any person or any entity 
from the use of such index or any data included therein. The Reporting 
Authority makes no express or implied warranties, and expressly 
disclaims all warranties of merchantability and fitness for a 
particular purpose or use with respect to such index or any data 
contained therein. Without limiting any of the foregoing, in no event 
shall the Reporting Authority have any liability for any direct, 
special, punitive, indirect, or consequential damages (including lost 
profits), even if notified of the possibility of such damages. In 
addition, the Reporting Authority shall have no liability for any 
damages, claims, losses or expenses caused by any errors or delays in 
calculating or disseminating such index.]
    (b) Applicability of Disclaimers. The disclaimers in subsection (a) 
shall apply to the reporting authorities identified in the Commentary 
to this Rule.
    [Commentary:
    .01 The disclaimers set forth in Rule 7.13 shall apply to Dow Jones 
& Company, Inc. with respect to the Dow Jones Taiwan Stock Index and 
the Dow Jones Asia Pacific ex-Japan Stock Index, and Morgan Stanley & 
Co. Incorporated with respect to the Morgan Stanley Emerging Growth 
Index, the Exchange in respect to the indexes for which it is the 
designated reporting authority, and any other index reporting authority 
in respect to any index for which it acts as such.]
* * * * *

Rule 7.14. [Reserved]

Exercise of American-Style Options

    No member may prepare, time stamp or submit an ``exercise advice'' 
for an American-style index option series if the Member knows or has 
reason to know that the exercise instruction calls for the exercise of 
more contracts than the then ``net long position'' of the account for 
which the exercise instruction is to be tendered. For purposes of this 
rule: (i) the term ``net long position'' shall mean the net position of 
the account in such option at the opening of business of the day of 
such exercise instruction, plus the total number of such options 
purchased that day in opening purchase transactions up to the time of 
exercise, less the total number of such options sold that day in 
closing sale transactions up to the time of exercise; (ii) the 
``account'' shall be the individual account of the particular customer, 
Market Maker or ``non-customer'' (as that term is defined in the By-
Laws of the Clearing Corporation) who wishes to exercise; and (iii) 
every transaction in an options series effected by a Market Maker in a 
Market Maker's account shall be deemed to be a closing transaction in 
respect of the Market Maker's then positions in such options series. No 
Member may adjust the designation of an ``opening transaction'' in any 
such option to a ``closing transaction'' except to remedy mistakes or 
errors made in good faith.\16\
---------------------------------------------------------------------------

    \16\ See supra note 4.
---------------------------------------------------------------------------

* * * * *

Rule 7.15 Exercise of Option Contracts

    (a) The provisions of Rule 6.24 shall apply to index options, 
except as follows:
    (1) Clearing Members must follow the procedures of the Options 
Clearing Corporation when exercising American-style cash-settled index 
option contracts issued or to be issued in any account at the Options 
Clearing Corporation. [With respect to all index option contracts 
except European-style index option contracts, Clearing Members must 
follow the procedures of the Clearing Corporation for tendering 
exercise notices.] Members or Member Organizations also must follow the 
procedures set forth below with respect to American-style, cash-settled 
index options:
    (A) Or all contracts exercised by the member or by any customer of 
the member, an ``exercise advice'' must be delivered by the member in 
such form or manner prescribed by the Exchange no later than 1:20 p.m. 
Pacific time, or if trading hours are extended or modified in the 
applicable options class, [a memorandum to exercise any contract issued 
or to be issued in a customer or Market-Maker account at the Clearing 
Corporation must be received or prepared by the Member Organization] no 
later than five (5) minutes after the close of trading on that day. [, 
and must be time-stamped at the time it is received or prepared. Member 
Organizations must accept exercise instructions until five (5) minutes 
after the close of trading on that day;]
    (B) Subsequent to the delivery of an ``exercise,'' should the 
member or a customer of the member determine not to exercise all or 
part of the advised contracts, the member must also deliver an ``advice 
cancel'' in such form or manner prescribed by the Exchange no later 
than 1:20 p.m. Pacific time, or if trading hours are extended or 
modified in the applicable options class, [a memorandum to exercise any 
contract issue or to be issued in a firm account at the Clearing 
Corporation must be prepared by the Member Organization] no later than 
five (5) minutes after the close of trading on that day.[, and must be 
time-stamped at the time it is prepared;]
    (C) An Exchange official designated by the Board may determine to 
extend the applicable deadline for the delivery of ``exercise advice'' 
and ``advice cancel'' notifications pursuant to this Rule if unusual 
circumstances are present.
    (D) No Member may prepare, time stamp or submit an ``exercise 
advice'' prior to the purchase of the contracts to be exercised if the 
Member knew or had reason to know that the contracts had not yet been 
purchased.\17\
---------------------------------------------------------------------------

    \17\ See supra note 4.
---------------------------------------------------------------------------

    (E) [(C)] The failure of any member to follow the procedures in 
this Rule may result in the assessment of a fine, which may include but 
is not limited to disgorgement of potential economic gain obtained or 
loss avoided by the subject exercise, as determined by the Exchange. 
[and meet the deadlines in this Section 15 may result in the assessment 
of fines in an amount determined by the Exchange, and further 
disciplinary action as may be appropriate;]
    (F) Preparing or submitting an ``exercise advice'' or ``advice 
cancel'' after the applicable deadline on the basis of material 
information released after such deadline, in addition to constituting a 
violation of this Rule, is activity inconsistent with just and 
equitable principles of trade.
    [(D) all memoranda of exercise instructions are subject to SEC 
Rules 17a-3(a)(6) and 17a-4(b); and
    (E) any member or member organization that intends to submit an 
exercise notice for 25 or more contracts in the same series on the same 
business day on behalf of an individual customer, market maker or firm 
account must deliver an ``exercise advice,'' on a form prescribed by 
the Exchange, to a place designated by the Exchange, no later than five 
(5) minutes after the close of trading on that day. For purposes of 
this rule, exercises for all accounts controlled by same individual 
must be aggregated.]
    (G) [(F)] The procedures set forth in subsections (A) and (B) of 
this Rule do not apply (i) on the business day prior to expiration in 
series expiring on a day other than a business day or (ii) on the 
expiration day in series expiring on a business day. [The above 
provisions specified in Rule 6.24(a) through Rule 6.24(e) are not 
applicable to expiring series on the business day prior to expiration.]

[[Page 16325]]

    (H) Exercises of American-style, cash-settled index options (and 
the submission of corresponding ``exercise advice'' and ``advice 
cancel'' forms) shall be prohibited during any time when trading in 
such options is delayed, halted, or suspended, subject to the following 
exceptions:
    (i) The exercises of an American-style, cash-settled index option 
may be processed and given effect in accordance with and subject to the 
rules of the Options Clearing Corporation while trading in the option 
is delayed, halted, or suspended if it can be documented, in a form 
prescribed by the Exchange, that the decision to exercise the option 
was made during allowable time frames prior to the delay, halt, or 
suspension.
    (ii) Exercises of expiring American-styled, cash-settled index 
options shall not be prohibited on the last business day prior to their 
expiration.
    (iii) Exercises of American-style, cash-settled index options shall 
not be prohibited during a trading halt that occurs at or after 1:00 
p.m. Pacific Time. In the event of such a trading halt, exercises may 
occur through 1:20 p.m. Pacific Time. In addition, if trading resumes 
following such a trading halt (such as by closing rotation), exercises 
may occur during the resumption of trading and for five (5) minutes 
after the close of the resumption of trading. The provisions of this 
subparagraph (iii) are subject to the authority of the Board of 
Governors to impose restrictions on transactions and exercises pursuant 
to Rule 6.10.
    (iv) An Exchange official designated by the Board of Governors may 
determine to permit the exercise of American-style, cash-settled index 
options while trading in such options is delayed, halted, or suspended.
    (2) (No changes).
* * * * *

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 PCX 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 III below. The PCX 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
    a. Position and Exercise Limits. The PCX is proposing to amend PCX 
Rules 7.5 and 7.6 in order to increase the position and exercise limits 
for broad-based index options to the levels currently in place at the 
CBOE. Specifically, the Exchange proposes to amend the current broad-
based position and exercise limits to 25,000.\18\ In certain 
circumstances, however, there may be no position limits for certain 
specified broad-based option contracts.\19\
---------------------------------------------------------------------------

    \18\ The 25,000 contract position and exercise limit for broad-
based index options is derived from CBOE Rule 24.4. In CBOE Rule 
24.4, 25,000 contracts serves as the base position limit for broad-
based index options.
    \19\ For example, CBOE Rule 24.4 states that there are no 
position limits on DJX, OEX and SPX classes. See supra note 4.
---------------------------------------------------------------------------

    b. Other Index Options Related Rules. The Exchange is proposing to 
amend the following rules related to index options in order to bring 
the PCX rules up to date and consistent with other SROs. These changes 
also include several re-numbering and cosmetic changes.
    (a) Amendment to PCX Rules 7 and 7.1: This proposed amendment is 
intended to clarify that the Exchange will file additional proposed 
rule changes with the Commission with respect to particular indices 
that are product specific. The proposed amendment also contains several 
updates to definitions with respect to index options.
    (b) Amendment to PCX Rule 7.7: This proposed amendment outlines the 
exemptions for position limits for broad-based index options and the 
procedures for requesting such exemptions.
    (c) Amendment to PCX Rules 7.9 and 7.12: The proposed amendment to 
PCX Rule 7.9 (currently PCX Rule 7.8(a)) outlines the terms of index 
options contracts, while proposed PCX Rule 7.12 applies to debit put 
spreads.
    (d) Amendment to PCX Rule 7.10: The proposed amendments to PCX Rule 
7.10 apply to trading sessions, trading rotations, and trading halts or 
suspensions for index options.
    (e) Amendment to PCX Rule 7.13: This proposed amendment updates the 
provisions for liability for index reporting authorities.
    (f) Amendment to PCX Rules 6.11, 7.14 and 7.15: These proposed 
amendments apply to the exercise of index options, exercise of 
American-style index options, and the procedure for underwriter 
requests for restrictions on uncovered opening writing transactions 
during public distributions.\20\
---------------------------------------------------------------------------

    \20\ See supra note 4.
---------------------------------------------------------------------------

    (g) Amendment to PCX Rule 6.37: This proposed amendment provides 
the Exchange with greater flexibility on applying market making 
obligations when the primary underlying securities market is not open 
for trading. The proposed amendment also addresses calculation of bid/
ask differentials on options on indices.
    (h) Amendment to PCX Rule 6.8: This proposed amendment adds broad-
based index options to the market maker exemption from position limits.
    (i) Amendment to PCX Rule 6.64(e): This proposed amendment includes 
index options to the closing rotation provision.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\21\ in general, and furthers the 
objectives of section 6(b)(5),\22\ in particular, in that it is 
designed to facilitate transactions in securities, to promote just and 
equitable principles of trade, to enhance competition, and to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 purposes of the Act.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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. Comments may also be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No.

[[Page 16326]]

SR-PCX-2003-60. The file number should be included on the subject line 
if e-mail is used. To help the Commission process and review your 
comments more efficiently, comments should be sent in hardcopy or by e-
mail but not by both methods. 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 PCX. All 
submissions should refer to the File No. SR-PCX-2003-60 and should be 
submitted by April 19, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of section 
6(b)(5) of the Act \23\ and the rules and regulations thereunder 
applicable to a national securities exchange.\24\ The Commission 
believes that the PCX's proposal to update its trading rules and 
certain standards related to index options strikes a reasonable balance 
between the Commission's mandates under section 6(b)(5) of the Act \25\ 
to remove impediments to and perfect the mechanisms of a free and open 
market and a national market system while protecting investors and the 
public interest.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b)(5).
    \24\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \25\ See note 21 supra.
---------------------------------------------------------------------------

    The proposed rule, among other things, updates the rules that 
govern the trading sessions of index options, including the days and 
hours of business, the rules governing trading rotations at the 
opening, and the rules related to the trading halts or suspensions.\26\ 
The proposed rule change provides updated definitions for terms related 
to index options.\27\ The proposed rule further updates the procedures 
PCX members must follow with respect to the exercise of American-style, 
cash settled index options.\28\ The proposed rule also updates position 
limits for broad-based index options \29\ and exercise limits for 
broad-based and narrow-based index options.\30\ In addition, the 
proposed rule updates the hedge exemption standards from position and 
exercise limits and procedures for requesting exemptions from the 
proposed rule.\31\ The Commission notes that the PCX has not amended 
its Rule 7.3 to provide for generic listing standards for narrow-based 
index options that would be eligible for streamlined listing and 
trading pursuant to Rule 19b-4(e) under the Act.\32\ Because the PCX 
has not established generic listing standards for narrow-based index 
options, the Exchange would be required to submit a proposed rule 
change pursuant to section 19(b)(2) of the Act,\33\ if it were to seek 
the listing and trading of a class of a new narrow-based index 
option,\34\ notwithstanding the provision of PCX Rule 7.3(b), which 
suggests that the Exchange can list a class of certain narrow-based 
index options pursuant to section 19(b)(3)(A) of the Act.\35\
---------------------------------------------------------------------------

    \26\ See Proposed PCX Rule 7.10.
    \27\ See Proposed PCX Rule 7.1.
    \28\ See Proposed PCX Rule 6.11 and 7.15.
    \29\ See Proposed PCX Rule 7.5.
    \30\ See Proposed PCX Rule 7.8.
    \31\ See Proposed PCX Rule 7.7.
    \32\ 17 CFR 240.19b-4(e). Rule 19b-4(e) provides that the 
listing and trading of a new derivative securities product by an SRO 
shall not be deemed a proposed rule change, pursuant to paragraph 
(c)(1) of Rule 19b-4, if the Commission has approved, pursuant to 
section 19(b) of the Act, the SRO's trading rules, procedures, and 
listing standards for the product class that include the new 
derivative securities product and the SRO has a surveillance program 
for the product class. When relying on Rule 19b-4(e), the SRO must 
submit Form 19b-4(e) to the Commission within five business days 
after the SRO begins trading the new derivative securities products. 
See Securities Exchange Act Release No. 40761 (December 8, 1998), 63 
FR 70952 (December 22, 1998) (File No. S7-13-98) (``19b-4(e) 
Release'').
    \33\ 15 U.S.C. 78s(b)(2).
    \34\ See 19b-4(e) Release, supra note 32, at fn 135.
    \35\ 15 U.S.C. 78s(b)(3)(A).
---------------------------------------------------------------------------

    The Commission believes that trading options on an index of 
securities permits investors to participate in the price movements of 
indexes' underlying securities and allows investors holding positions 
in some or all of such securities to hedge the risks associated with 
their portfolios. The Commission further believes that trading options 
on an index provides investors with an important trading and hedging 
mechanism that is designed to reflect accurately the overall movement 
of the component stocks.
    The Commission finds good cause, pursuant to section 19(b)(2) of 
the Act,\36\ for approving the proposed rule change prior to the 
thirtieth day after the date of publication of the notice of the filing 
thereof in the Federal Register. The Commission believes that granting 
accelerated approval will provide PCX members with updated trading 
rules and standards that should serve to protect the interests of 
investors. In making this finding, the Commission notes that all of the 
proposed new Exchange Rules and changes to existing Exchange Rules are 
comparable to the existing rules of the other options exchanges.\37\
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78s(b)(2).
    \37\ See, e.g., CBOE Rules 4.11, 4.16, 6.2, 6.7, 8.7, 11.1, and 
24.1 through 24.14; ISE Rules 413, 418, 701, 705, 803, 1100, and 
2000 through 2012.
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\38\ that the proposed rule change (SR-PCX-2003-60) is hereby 
approved, as amended, on an accelerated basis.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\39\
---------------------------------------------------------------------------

    \39\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-6892 Filed 3-26-04; 8:45 am]
BILLING CODE 8010-01-P