regulatory organizations; proposed rule changes: American Stock Exchange, Inc.,
[Federal Register: December 14, 1998 (Volume 63, Number 239)]
[Notices]
[Page 68809-68810]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14de98-94]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40756; File No. SR-Amex-98-39]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the American Stock Exchange, Inc. Relating to an Increase in Position and Exercise Limits for Narrow-Based Index Options
December 7, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on October 13, 1998, the American Stock Exchange, Inc. (``Amex'' or ``Exchange'') filedwith the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self- regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Amex proposes to amend Exchange Rule 904C to increase position and exercise limits for narrow-based index options.
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Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization 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 self-regulatory organization has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.
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Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
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Purpose
The Amex proposes to increase position and exercise limits for narrow-based index options traded on the Exchange.\3\ Amex Rule 904C(c) provides three different position limits depending on index components' relative weightings in the index. Rule 905C establishes exercise limits for the corresponding options at the same levels. Currently, the limits are 9,000, 12,000 and 15,000 contracts on the same side of the market. Under the proposed changes the new limits will be 25,000, 35,000 and 45,000. The Exchange believes the proposed expansion of position and exercise limits for narrow-based indices is reasonable and appropriate considering position and exercise limits for over-the-counter conventional options overlying individual securities have recently been expanded and currently range from 13,500 to 75,000 contracts.\4\ Further, the Exchange believes the proposed increase is consistent with the options exchanges' proposed increase in
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position and exercise limits for standardized equity options.\5\
\3\ Amex trades options on the following narrow-based indices: Airline, GoldBUGS, Biotechnology, Computer Hardware, Computer Technology, de Jager Year 2000, Disk Drive, Inter@ctive Week Internet, Morgan Stanley Commodity Related, Morgan Stanley Healthcare Payor, Morgan Stanley Healthcare Product, Morgan Stanley Healthcare Provider, Morgan Stanley High-Technology 35, Natural Gas, NatWest Energy, Networking, North American Telecommunications, Oil, Pharmaceutical, Securities Broker/Dealer and Tobacco.
\4\ Exchange Act Release No. 40087 (June 12, 1998), 63 FR 33746 (June 19, 1998).
\5\ See Exchange Act Release Nos. 40159 (July 1, 1998), 63 FR 37151 (July 9, 1998); 40160 (July 1, 1998), 63 FR 37155 (July 9, 1998); 40400 (September 3, 1998), 63 FR 48777 (September 11, 1998).
The Amex believes that an increase in position and exercise limits is also appropriate because existing surveillance techniques at options exchanges adequately protect the integrity of the markets for the options that will be subject to these increased position and exercise limits. The Commission has stated that, ``[p]osition limit rules were adopted by the options exchanges primarily to minimize manipulative potential and to prevent the accumulation of large options positions that, if exercised, might affect the price of the underlying stock.'' \6\ To date, there have been no disciplinary actions involving manipulation in any narrow-based index product listed on the Exchange. The Exchange believes that its experience conducting surveillance of index options and program trading activity is sufficient to identify improper activity. Routine oversight inspections of Amex's regulatory programs by the Commission have not uncovered any inconsistencies or shortcomings in the manner in which index option surveillance is conducted. These procedures entail a daily monitoring of market movements via automated surveillance techniques to identify unusual activity in both the options and underlying stock basket components.
\6\ H.R. Rep. No. IFC-3, 96th Cong., 1st Sess. at 41 (Comm. Print 1978).
Lastly, given the gradual, evolutionary approach that has been adopted by the Commission and the various options exchanges in increasing position and exercise limits, the Exchange believes that the proposed increases are reasonable and appropriate and would further accommodate the hedging needs of Exchange market makers, specialists, large investors and the facilitators of those investors who are restricted by the current levels. Competition
The Commission has stated 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 or to prevent specialists and market-makers from adequately meeting their obligations to maintain a fair and orderly market.'' \7\ However, in today's market, the Exchange believes that position and exercise limits severely hamper Amex's ability to compete with the over the counter (OTC) markets. Investors who trade listed options on the Amex are placed at a serious disadvantage in comparison to the OTC market where index options are not subject to position and exercise limits. Member firms continue to express concern to the Exchange that position limits on Amex products are an impediment to their business and that they have no choice but to move their business to the OTC market where position limits are not an issue.
\7\ See H.R. Rep. No. IFC-3, 96th Cong., 1st Sess. At 189-91 (Comm. Print 1978).
Financial requirements. The Exchange believes that 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 a narrow-based index 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 should also be noted that the Exchange has the authority under paragraph (d)(2)(K) of Rule 462 to impose a higher margin requirement upon the member or member organization when the Exchange determines a higher requirement is warranted. 2. Statutory Basis
The Exchange represents that the proposed rule change is consistent with Section 6(b) of the Act \8\ in general and furthers the objectives of Section 6(b)(5) 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.
\8\ 15 U.S.C. 78f(b).
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Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any inappropriate burden on competition.
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Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
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Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 35 days of the publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule change should be disapproved.
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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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filedwith 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 at the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to File No. SR-Amex-98-39 and should be submitted by January 4, 1999.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\9\
\9\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland, Deputy Secretary.
[FR Doc. 98-33070Filed12-11-98; 8:45 am]
BILLING CODE 8010-01-M
