[Federal Register Volume 70, Number 47 (Friday, March 11, 2005)]
[Notices]
[Pages 12251-12254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1023]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51316; File No. SR-Amex-2005-029]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Position Limits and Exercise Limits

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 2, 2005, the American Stock Exchange LLC (``Amex'' 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 Amex. The Exchange has 
filed the proposal as a ``non-controversial'' rule change pursuant to 
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders it effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 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 Amex is proposing to amend Exchange Rule 904 to increase the

[[Page 12252]]

standard position and exercise limits for equity options contracts and 
options on the Nasdaq-100 Index Tracking Stock (``QQQQ'') for pilot 
program of six months. The text of the proposed rule change is 
available on the Amex's Web site (http://www.amex.com), at the Amex'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 Amex included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The 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 Amex is proposing several changes to Exchange Rule 904 to 
increase position and exercise limits. Exchange Rule 904 subjects 
equity options to one of five different position limits depending on 
the trading volume and outstanding shares of the underlying security. 
Rule 905 establishes exercise limits for the corresponding options at 
the same levels.\5\ 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.\6\
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    \5\ Amex Rule 905 states ``no member or member organization 
shall exercise, for any account in which such member or member 
organization has an interest or for the account of any partner, 
officer, director or employee thereof or for the account of any 
customer, a long position in any option contract of a class of 
options dealt in on the Exchange if as a result thereof such member 
or member organization, or partner, officer, director, employee 
thereof or customer acting alone or in concert with others, directly 
or indirectly has or will have exercised within any five (5) 
business days aggregate long positions in excess of: (i) the number 
of option contracts set forth as the position limit in [Amex] Rule 
904 in a class of options for which the underlying security is a 
stock * * *.''
    \6\ See Securities Exchange Act Release No. 51244 (February 23, 
2005), 70 FR 10010 (March 1, 2005) (SR-CBOE-2003-30) (notice of 
filing and order granting accelerated approval).
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    Standard Position and Exercise Limits. The Exchange is proposing to 
adopt 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 the Exchange 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
                         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 standard position limits were last increased on December 31, 
1998.\7\ Since that time, there has been a steady increase in the 
number of accounts 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 
continually increased over the past five years. The Exchange believes 
that the increase in options volume and lack of evidence of market 
manipulation occurrences over the past twenty years justifies the 
proposed increases in the position and exercise limits.
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    \7\ See Securities Exchange Act Release No. 40875 (December 31, 
1998), 64 FR 1842 (January 12, 1999) (SR-Amex-98-22) (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 
Commentary .09 to Exchange Rule 904. Specifically, new Commentary 
.09(5) to Exchange Rule 904 would allow for a ``reverse collar'' hedge 
exemption where a long call position is accompanied by a short put 
position, where the long call expires with the short put and the strike 
price of the long call equals or exceeds the short put and where each 
long call and short put position is 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 the 
existing Commentary .09(4) to Exchange Rule 904, which provides for an 
exemption for a ``collar,'' and Commentary .09(2) and (3) to Exchange 
Rule 904, which provide for a hedge exemption for reverse conversions 
and conversions, respectively.
    Manipulation. The Amex 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.\8\

    \8\ See Securities Exchange Act Release No. 39489 (December 24, 
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-11).
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    The Exchange believes that the existing surveillance procedures and 
reporting requirements at the Amex, other options exchanges, and at the 
several clearing firms are capable of

[[Page 12253]]

properly identifying unusual and/or illegal trading activity. In 
addition, routine oversight inspections of Amex's regulatory programs 
by the Commission have not uncovered any material inconsistencies or 
shortcomings in the manner in which the Exchange's market surveillance 
is conducted with respect to monitoring position limits. 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.\9\ Options positions are 
part of any reportable positions and, thus, cannot be legally hidden. 
In addition, Exchange Rule 906, 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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    \9\ 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. It also should be noted that the 
Exchange has the authority under Exchange Rule 462(F) to impose higher 
margin requirements upon a member or member organization when the 
Exchange determines that higher requirements are warranted. Also, the 
Commission's net capital rule, Rule 15c3-1 under the Act,\10\ imposes a 
capital charge on members to the extent of any margin deficiency 
resulting from the higher margin requirement.
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    \10\ 17 CFR 240.15c3-1.
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    Finally, equity position limits have been gradually expanded from 
1,000 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.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \11\ in general and furthers the objectives 
of Section 6(b)(5) of the Act \12\ in particular in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will impose no 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

    No written comments were solicited or received by the Exchange on 
this proposal.

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

    The proposed rule change has been designated by the Amex as a 
``non-controversial'' rule change pursuant to Section 19(b)(3)(A) of 
the Act \13\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 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 
\15\ and Rule 19b-4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 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 Amex 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.\17\ The Amex 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.\18\ Waiving the pre-filing requirement and 
accelerating the operative date will allow the Amex to immediately 
conform its position and exercise limits and equity hedge exemption 
strategies to those of the CBOE, which were recently approved by the 
Commission.\19\
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    \17\ 17 CFR 240.19b-4(f)(6)(iii).
    \18\ 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).
    \19\ 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 12254]]

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-Amex-2005-029 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-Amex-2005-029. 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 
Amex. 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-Amex-
2005-029 and should be submitted on or before April 1, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1023 Filed 3-10-05; 8:45 am]
BILLING CODE 8010-01-P