[Federal Register Volume 70, Number 72 (Friday, April 15, 2005)]
[Notices]
[Pages 19977-19979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1783]


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SECURTITES AND EXCHANGE COMMISSION

[Release No. 34-51520; File No. SR-NASD-2005-040]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Establishing a Pilot Period to Increase 
Position and Exercise Limits for Equity Options and Establishing a 
Reverse Collar Hedge Exemption

April 11, 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 30, 2005, the National Association of Securities Dealers, Inc. 
(``NASD'') 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 NASD. NASD 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

    NASD is proposing to amend NASD Rule 2860 to increase certain 
options position limits for a pilot period and to expand the available 
equity option hedge exemptions to include ``reverse collars.'' The text 
of the proposed rule change is available on NASD's Web site (http://www.nasd.com), at NASD's

[[Page 19978]]

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, NASD 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. NASD 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
    NASD is proposing amendments to its options position and exercise 
limits in NASD Rule 2860 to conform to similar changes recently 
approved by the Commission or adopted by other self-regulatory 
organizations (``SROs'') with options rules.\5\ The proposed rule 
change would increase, as part of a pilot program ending September 2, 
2005 (unless extended) (``Pilot Period''), position limits for both 
standardized and conventional options.\6\ Specifically, standardized 
and conventional options subject to a position limit of 13,500 
contracts would increase to 25,000 contracts; standardized and 
conventional options subject to a position limit of 22,500 contracts 
would increase to 50,000 contracts; standardized and conventional 
options subject to a position limit of 31,500 contracts would increase 
to 75,000 contracts; standardized and conventional options subject to a 
position limit of 60,000 contracts would increase to 200,000 contracts; 
and standardized and conventional options subject to a position limit 
of 75,000 contracts would increase to 250,000 contracts. Options 
exercise limits, which are set forth in NASD Rule 2860(b)(4), and which 
incorporate by reference the position limits in NASD Rule 2860(b)(3), 
also would increase during the Pilot Period.
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    \5\ See Securities Exchange Act Release No. 51322 (March 4, 
2005), 70 FR 12260 (March 11, 2005) (SR-PHLX-2005-17); Securities 
Exchange Act Release No. 51317 (March 3, 2005), 70 FR 12254 (March 
11, 2005) (SR-BSE-2005-10); Securities Exchange Act Release No. 
51316 (March 3, 2005), 70 FR 12251 (March 11, 2005) (SR-AMEX-2005-
029); Securities Exchange Act Release No. 51295 (March 2, 2005), 70 
FR 11292 (March 8, 2005) (SR-ISE-2005-14); Securities Exchange Act 
Release No. 51286 (March 1, 2005), 70 FR 11297 (March 8, 2005) (SR-
PCX-2003-55) (collectively ``Exchange Notices''); Securities 
Exchange Act Release No. 51244 (February 23, 2005), 70 FR 10010 
(March 1, 2005) (SR-CBOE-2003-30) (``Approval Order'' and filers 
collectively referred to as ``Options Exchanges'').
    \6\ A ``conventional option'' is an option contract not issued, 
or subject to issuance by, The Options Clearing Corporation. NASD 
Rule 2860(b)(2)(N). Currently, position limits for standardized and 
conventional options are the same with respect to the same 
underlying security. The proposed rule change would maintain this 
parity between standardized and conventional options. NASD has 
maintained parity between conventional and standardized options 
since 1999. See Securities Exchange Act Release No. 40932 (January 
11, 1999), 64 FR 2930 (January 19, 1999) (SR-NASD-98-92). Before 
1999, position limits on conventional options were three times 
greater than the limits for standardized options. See Securities 
Exchange Act Release No. 40087 (June 12, 1998), 63 FR 33746 (June 
19, 1998) (SR-NASD-98-23).
    The NASD's limits on standardized equity options are applicable 
only to those members that are not also members of the exchange on 
which the option is traded; the limits on conventional options are 
applicable to all NASD members. NASD Rule 2860(b)(1)(A); see also 
Securities Exchange Act Release No. 40932 (January 11, 1999), 64 FR 
2930 (January 19, 1999) (SR-NASD-98-92).
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    In addition, the proposed rule change would expand the available 
equity option hedge exemptions to include ``reverse collars.'' Options 
positions hedged pursuant to one of the qualified equity option hedge 
strategies are exempt from position limits for standardized options, 
and subject to position limits of five times the standardized limits 
for conventional options. The equity option hedge exemption for a 
reverse collar applies to a long call position 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 position can be in-the-money at the time 
the position is established. The addition of the reverse collar equity 
option hedge exemption is not part of the pilot program and would be 
permanent.
    NASD has proposed increasing the applicable position limits during 
the Pilot Period because, without such an increase, NASD's position 
limits would be lower than those of the Options Exchanges during the 
Pilot Period. This would result, with respect to standardized options, 
in inconsistent treatment of NASD member firms that are not members of 
an Options Exchange as well as the customers of such firms.\7\ The 
proposed rule change also is necessary to maintain parity between the 
option position limits for conventional and standardized equity options 
as currently reflected in NASD rules.
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    \7\ See Securities Exchange Act Release No. 40932 (January 11, 
1999), 64 FR 2930, 2931 (January 19, 1999) (SR-NASD-98-92) 
(``Without such an increase, the NASD's standardized equity options 
position limits would be lower than those established by the Options 
Exchanges and would lead to inconsistent treatment as to firms (and 
customers of such firms) that are NASD members but not members of an 
options exchange, the category of persons for whom our standardized 
position limits apply.'').
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    NASD believes that the rationales articulated by the Options 
Exchanges in their rule filings filed with the Commission apply equally 
to the proposed rule change.\8\ Position and exercise limits serve as a 
regulatory tool designed to address potential manipulative schemes and 
adverse market impact surrounding the use of options. NASD also agrees 
with the reasoning articulated by the Commission when approving changes 
to certain position limits in 1999:
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    \8\ See generally Exchange Notices and Approval Order.
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    [T]he Commission has been careful to balance two competing concerns 
when considering the appropriate level at which to set equity option 
position and exercise limits. The Commission has recognized that the 
limits must be sufficient to prevent investors from disrupting the 
market for the underlying security * * * At the same time, the 
Commission has determined that limits must not be established at levels 
that are so low as to discourage participation in the options market by 
institutions and other investors with substantial hedging needs * * * 
\9\ NASD submits that the proposed rule change is consistent with these 
Commission policies.
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    \9\ Securities Exchange Act Release No. 40875 (December 31, 
1998), 64 FR 1842, 1843 (January 12, 1999) (File Nos. SR-CBOE-98-25; 
SR-Amex-98-22; SR-PCX-98-33; SR-Phlx-98-36).
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    Also, as was emphasized by the Options Exchanges, there are 
financial and other regulatory protections in place to protect the 
markets from potential manipulations or other dislocations caused by 
holding or exercising excessive options positions.\10\ NASD agrees with 
the Options Exchanges and also believes that increasing position limits 
during the Pilot Period should aid members in facilitating customer 
order flow and offsetting the risks that arise with such facilitation.
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    \10\ See generally Exchange Notices and Approval Order (each of 
the Options Exchanges asserts that an increase in position limits 
does not present market manipulation concerns because of a 
combination of Commission oversight, SRO and member firm 
surveillance, and net capital, margin, and large position reporting 
requirements).
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    NASD has filed the proposed rule change for immediate 
effectiveness, and has requested that the Commission waive the 5-day 
pre-filing requirement

[[Page 19979]]

and the 30-day period for the proposed rule change to become operative, 
in order to allow NASD's position limits more quickly to conform to 
those of the Options Exchanges and allow conventional options position 
limits to maintain parity with position limits for standardized 
options.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ which requires, among 
other things, that NASD's rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. The proposed rule change is being made to achieve 
consistency between NASD's options position limits and those published 
in the Exchange Notices and approved in the Approval Order and thereby 
avoid inconsistent treatment of NASD member firms that are not members 
of an Options Exchange as well as the customers of such firms. In 
addition, the proposed rule change would maintain parity between the 
position limits for standardized and conventional options, during the 
Pilot Period.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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

    Written comments were neither solicited nor received.

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

    The proposed rule change has been designated by NASD as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act 
\12\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 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 
\14\ and Rule 19b-4(f)(6) 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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    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 NASD 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.\16\ NASD 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.\17\ Waiving the pre-
filing requirement and accelerating the operative date will allow NASD 
to more quickly conform its position and exercise limits and equity 
hedge exemption provisions , as described above, with those of the 
Options Exchanges.
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    \16\ 17 CFR 240.19b-4(f)(6)(iii).
    \17\ 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).
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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:

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-NASD-2005-040 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-NASD-2005-040. 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 NASD. 
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-NASD-2005-040 and 
should be submitted on or before May 6, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-1783 Filed 4-14-05; 8:45 am]
BILLING CODE 8010-01-P