[Federal Register Volume 70, Number 47 (Friday, March 11, 2005)]
[Notices]
[Pages 12254-12256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1019]


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SECURTITES AND EXCHANGE COMMISSION

[Release No. 34-51317; File No. SR-BSE-2005-10]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
and Amendment Nos. 1 and 2 Thereto Relating to Position Limits and 
Exercise Limits on the Boston Options Exchange Facility

March 3, 2005.
    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 March 1, 2005, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the BSE. On March 2, 2005 
the BSE filed Amendment No. 1 to the proposed rule change.\3\ On March 
3, 2005 the BSE filed Amendment No. 2 to the proposed rule change.\4\ 
The Exchange has filed the proposal as a ``non-controversial'' rule 
change pursuant to Section 19(b)(3)(A) of the Act \5\ and Rule 19b-
4(f)(6) thereunder,\6\ which renders it effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 corrected an error in Exhibit 5 to the 
filing.
    \4\ Amendment No. 2 corrected an error in Exhibit 5 to the 
filing.
    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The BSE proposes to amend Section 7 (Position Limits), Section 8 
(Exemptions from Position Limits), and Section 9 (Exercise Limits) of 
Chapter III of the Rules of the Boston Options Exchange (``BOX'') to 
increase the standard position and exercise limits for equity options 
contracts and options on the Nasdaq-100 Index Tracking Stock (``QQQQ'') 
for a pilot program of six months. The text of the proposed rule change 
is available on the BSE's Web site (http://www.bostonstock.com), at the 
BSE's Office of the Secretary, and at the Commission's Public Reference 
Room.

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 BSE 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 several changes to Section 7 (Position 
Limits), Section 8 (Exemptions from Position Limits), and Section 9 
(Exercise Limits) of Chapter III of the BOX Rules. Section 7 of Chapter 
III of the BOX Rules subjects equity options to one of five different 
position limits depending on the trading volume and outstanding shares 
of the underlying security. Section 8 of Chapter III of the BOX Rules 
establishes certain qualified hedging transactions and positions that 
are exempt from established options position limits as prescribed under 
Section 7 of Chapter III of the BOX Rules. Section 9 of Chapter III of 
the BOX Rules establishes exercise limits for the corresponding options 
at the same levels as the corresponding security's position limits. On 
February 23, 2005, the Commission granted accelerated approval of a 
rule change proposed by the Chicago Board Options Exchange, Inc. 
(``CBOE'') relating to position and exercise limits.\7\
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    \7\ See Securities Exchange Act Release No. 51244 (February 23, 
2005), 70 FR 10010 (March 1, 2005) (SR-CBOE-2003-30).
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    Standard Position and Exercise Limits. The Exchange is proposing to 
adopt for BOX a pilot program for a period of six months during which 
the standard position and exercise limits for options on the QQQQ and 
for equity option classes traded on BOX would be increased to the 
following levels:

------------------------------------------------------------------------
   Current Equity Option Contract      Proposed Equity Option Contract
               Limit                                Limit
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                         13,500                               25,000

[[Page 12255]]

 
                         22,500                               50,000
                         31,500                               75,000
                         60,000                              200,000
                         75,000                              250,000
------------------------------------
                               Current QQQQ OptProposed QQQQ Option Contract Limit
------------------------------------
                        300,000                              900,000
------------------------------------------------------------------------

    The BOX's standard position limits have been in effect since the 
BOX commenced trading in February 2004. These standard position limits 
are the same as the standard position limits at the other options 
exchanges at that time, which were last increased on December 31, 
1998.\8\ Since that time, there has been a steady increase in the 
number of accounts on the options exchanges that, (a) approach the 
position limit; (b) exceed the position limit; and (c) are granted an 
exemption to the standard limit. Several member firms have petitioned 
the options exchanges to either eliminate position limits, or in lieu 
of total elimination, increase the current levels and expand the 
available hedge exemptions. A review of available data indicates that 
the majority of accounts that maintain sizable positions are in those 
option classes subject to the 60,000 and 75,000 tier limits. There also 
has been an increase in the number of accounts that maintain sizeable 
positions in the lower three tiers. In addition, overall volume in the 
options market has consistently increased over the past five years. The 
Exchange believes that the increase in options volume and lack of 
evidence of market manipulation occurrences during that same period 
justifies the proposed increases in the position and exercise limits.
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    \8\ See Securities Exchange Act Release No. 40875 (December 31, 
1998), 64 FR 1842 (January 12, 1999) (SR-CBOE-98-25) (approval of 
increase in position limits and exercise limits).
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    The Exchange also proposes the adoption of a new equity hedge 
exemption to the existing exemptions currently provided under Section 8 
of Chapter III of the BOX Rules. Specifically, new subparagraph (a)(v) 
of Section 8 of Chapter III of the BOX Rules would allow for a 
``reverse collar'' hedge exemption to apply when a long call position 
is accompanied by a short put position, and the long call expires with 
the short put. In addition, the strike price of the long call must 
equal or exceed the short put, and each long call and short put 
position must be hedged with 100 shares of the underlying security (or 
other adjusted number of shares). Neither side of the long call short 
put can be in-the-money at the time the position is established. The 
Exchange believes this is consistent with existing subparagraph (a)(iv) 
of Section 8 of Chapter III of the BOX Rules, which provides for an 
exemption for a ``collar,'' and subparagraphs (a)(ii) and (a)(iii) of 
Section 8 of Chapter III of the BOX Rules, which provide for a hedge 
exemption for reverse conversions and conversions, respectively.
    Manipulation. The Exchange believes that position and exercise 
limits, at their current levels, no longer serve their stated purpose. 
The Commission has previously stated that:

    Since the inception of standardized options trading, the options 
exchanges have had rules imposing limits on the aggregate number of 
options contracts that a member or customer could hold or exercise. 
These rules are intended to prevent the establishment of options 
positions that can be used or might create incentives to manipulate 
or disrupt the underlying market so as to benefit the options 
position. In particular, position and exercise limits are designed 
to minimize the potential for mini-manipulations and for corners or 
squeezes of the underlying market. In addition such limits serve to 
reduce the possibility for disruption of the options market itself, 
especially in illiquid options classes.\9\

    \9\ See Securities Exchange Act Release No. 39489 (December 24, 
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-11) (approval of 
increase in position limits and exercise limits for OEX index 
options).
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    The Exchange believes that the existing surveillance procedures and 
reporting requirements at the BOX, other options exchanges, and at the 
several clearing firms are capable of properly identifying unusual and/
or illegal trading activity. In addition, when the Commission reviewed 
BOX's regulatory program before allowing BOX to begin trading, the 
Commission did not uncover any material inconsistencies or shortcomings 
in the manner in which BOXR's market surveillance of BOX would be 
conducted. These procedures utilize daily monitoring of market 
movements via automated surveillance techniques to identify unusual 
activity in both options and in underlying stocks.
    Furthermore, large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G.\10\ Options positions are 
part of any reportable positions and, thus, cannot be legally hidden. 
In addition, Section 10 of Chapter III of the BOX Rules, which requires 
members to file reports with the Exchange for any customer or member 
who held aggregate long or short positions of 200 or more option 
contracts of any single class for the previous day, will remain 
unchanged and will continue to serve as an important part of the 
Exchange's surveillance efforts.
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    \10\ 17 CFR 240.13d-1.
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    The Exchange believes that restrictive equity position limits 
prevent large customers, such as mutual funds and pension funds, from 
using options to gain meaningful exposure to individual stocks. This 
can result in lost liquidity in both the options market and the stock 
market. In addition, the Exchange has found that restrictive limits and 
narrow hedge exemption relief restrict member firms from adequately 
facilitating customer order flow and offsetting the risks of such 
facilitations in the listed options market. The fact that position 
limits are calculated on a gross rather than a delta basis also is an 
impediment.
    Financial Requirements. The Exchange believes that the current 
financial requirements imposed by the Exchange and by the Commission 
adequately address concerns that a member or its customer may try to 
maintain an inordinately large unhedged position in an equity option. 
Current margin and risk-based haircut methodologies serve to limit the 
size of positions maintained by any one account by increasing the 
margin and/or capital that a member must maintain for a large position 
held by itself or by its customer. Also, the Commission's net capital 
rule, Rule 15c3-1 under the Act,\11\ imposes a capital charge on 
members to the extent of any margin deficiency resulting from the 
higher margin requirement.
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    \11\ 17 CFR 240.15c3-1.
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    Finally, equity position limits have been gradually expanded from 
1,000

[[Page 12256]]

contracts in 1973 to the current level of 75,000 contracts for options 
on the largest and most active underlying securities. To date, the 
Exchange believes that there have been no adverse affects on the market 
as a result of these past increases in the limits for equity option 
contracts.
    QQQQ. The Exchange also proposes to change the references to the 
Nasdaq-100 Index Tracking Stock that are currently in Sections 7 and 9 
of Chapter III of the BOX Rules from ``QQQ'' to ``QQQQ'' to correspond 
to the symbol change that occurred when the listing moved from the 
American Stock Exchange to the Nasdaq Stock Market.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\12\ in general, and of Section 
6(b)(5) of the Act,\13\ in particular, in that it is designed to 
promote just and equitable principles of trade, and to protect 
investors and the public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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 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

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

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

    The proposed rule change has been designated by the BSE as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act 
\14\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    The foregoing rule change: (1) Does not significantly affect the 
protection of investors or the public interest, (2) does not impose any 
significant burden on competition, and (3) by its terms does not become 
operative for 30 days after the date of this filing, or such shorter 
time as the Commission may designate, if consistent with the protection 
of investors and the public interest. Consequently, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
\16\ and Rule 19b-4(f)(6) thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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    Pursuant to Rule 19b-4(f)(6)(iii), a proposed ``non-controversial'' 
rule change does not become operative for 30 days after the date of 
filing, or such shorter time as the Commission may designate, if 
consistent with the protection of investors and the public interest, 
and the BSE gave the Commission written notice of its intent to file 
the proposed rule change, along with a brief description and text of 
the proposed rule change, at least five business days prior to the date 
of filing of the proposed rule change, or such shorter time as 
designated by the Commission.\18\ The BSE has requested that the 
Commission waive the five-day pre-filing notice requirement and the 30-
day operative delay. The Commission has determined that it is 
consistent with the protection of investors and the public interest to 
waive the five-day pre-filing notice requirement and the 30-day 
operative delay.\19\ Waiving the pre-filing requirement and 
accelerating the operative date will allow the BSE to immediately 
conform the BOX's position and exercise limits and the BOX's equity 
hedge exemption strategies to those of the CBOE, which were recently 
approved by the Commission.\20\
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    \18\ 17 CFR 240.19b-4(f)(6)(iii).
    \19\ For the purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \20\ See Securities Exchange Act Release No. 51244 (February 23, 
2005), 70 FR 10010 (March 1, 2005) (SR-CBOE-2003-30).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the Act.\21\
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    \21\ For purpose of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act, the Commission considers that period 
to commence on March 3, 2005, the date that the BSE filed Amendment 
No. 2.
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IV. 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. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File No. SR-BSE-2005-10 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File No. SR-BSE-2005-10. This 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, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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, 450 Fifth Street, 
NW., Washington, DC 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the BSE. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-BSE-2005-10 and should be 
submitted on or before April 1, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1019 Filed 3-10-05; 8:45 am]
BILLING CODE 8010-01-P