[Federal Register Volume 70, Number 161 (Monday, August 22, 2005)]
[Notices]
[Pages 48992-48994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4552]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52264; File No. SR-BSE-2005-37]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Its Boston Options Exchange Trading Rules Regarding the 
Extension of a Pilot Program That Increases the Standard Position and 
Exercise Limits for Certain Options Traded

August 15, 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 August 11, 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 BSE. 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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[[Page 48993]]

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

    The BSE proposes to amend the rules of the Boston Options Exchange 
(``BOX''), an options trading facility of the BSE, to extend its 
current pilot program to increase the standard position and exercise 
limits for equity option contracts and options on the Nasdaq-100 Index 
Tracking Stock (``QQQQ'') (``Pilot Program'') for another six months, 
from September 4, 2005, to March 3, 2006. The text of the proposed rule 
change is available on the BSE's Web site (http://www.bostonstock.com), 
at the BSE's principal office, 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 proposes to extend the Pilot Program, which includes 
changes to section 7 (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 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 March 3, 
2005, the Exchange issued notice of the proposed rule change 
establishing the Pilot Program, which was effective upon filing with 
the Commission.\5\
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    \5\ See Securities Exchange Act Release No. 51317 (March 3, 
2005), 70 FR 12254 (March 11, 2005) (notice and immediate 
effectiveness of File No. SR-BSE-2005-10).
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Standard Position and Exercise Limits

    The Exchange proposes to extend for BOX the 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: \6\

------------------------------------------------------------------------
                                             Pilot Program equity option
   Current equity option contract limit            contract limit
------------------------------------------------------------------------
13,500 contracts..........................  25,000 contracts.
22,500 contracts..........................  50,000 contracts.
31,500 contracts..........................  75,000 contracts.
60,000 contracts..........................  200,000 contracts.
75,000 contracts..........................  250,000 contracts.
-------------------------------------------
Current QQQQ Option Contract Limit........  Pilot Program QQQQ Option
                                             Contract Limit
-------------------------------------------
300,000 contracts.........................  900,000 contracts.
------------------------------------------------------------------------

    BOX's standard position limits have been in effect since 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.\7\ 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. Currently all of the options exchanges are operating under 
a similar pilot program which increases the standard position and 
exercise limits for options on the QQQQ and for equity option classes. 
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 sizable 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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    \6\ Except when the Pilot Program is in effect.
    \7\ 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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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.\8\
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    \8\ 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).

    The Exchange believes that the existing surveillance procedures and 
reporting requirements at BOX and other options exchanges and at the 
several clearing firms are capable of properly identifying unusual and/
or illegal trading activity. In addition, the Exchange states that 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 BOX Regulation'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.\9\ 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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    \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

[[Page 48994]]

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,\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 its proposal is consistent with section 
6(b) of the Act,\11\ in general, and furthers the objective of section 
6(b)(5) of the Act,\12\ 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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    \11\ 15 U.S.C. 78f(b).
    \12\ 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.

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

    Because the forgoing rule change does not: (1) Significantly affect 
the protection of investors or the public interest; (2) impose any 
significant burden on competition; and (3) become operative for 30 days 
after the date of this filing, or such shorter time as the Commission 
may designate, it has become effective pursuant to section 19(b)(3)(A) 
of the Act \13\ and Rule 19b-4(f)(6) 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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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\15\ 
However, Rule 19b-4(f)(6)(iii) \16\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the five-day pre-filing notice requirement and the 30-
day pre-operative delay. The Commission is exercising its authority to 
waive the five-day pre-filing requirement and believes that waiver of 
the 30-day pre-operative delay is consistent with the protection of 
investors and in the public interest. Waiving the five-day pre-filing 
requirement and 30-day pre-operative delay will allow the Pilot Program 
to continue uninterrupted.\17\
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    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ Id.
    \17\ For the purposes only of waiving 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-BSE-2005-37 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File No. SR-BSE-2005-37. 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, 100 F Street, NE., 
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-2005-37 and should be 
submitted on or before September 12, 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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4552 Filed 8-19-05; 8:45 am]
BILLING CODE 8010-01-P