Self-Regulatory Organizations; Pacific 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, 11297-11300 [E5-932]
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Federal Register / Vol. 70, No. 44 / Tuesday, March 8, 2005 / Notices
open market and a national market
system.
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
Because 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) does not become operative for 30
days from the date on which it was
filed, or such shorter time as the
Commission may designate if consistent
with the protection of investors and the
public interest, the proposed rule
change has become effective pursuant to
section 19(b)(3)(A) of the Act 9 and Rule
19b–4(f)(6) thereunder.10
A proposed rule change filed under
Rule 19b–4(f)(6) 11 normally does not
become operative prior to 30 days after
the date of filing. However, Rule 19b–
4(f)(6)(iii) permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest.
Furthermore, Rule 19b–4(f)(6)(iii)
requires a self-regulatory organization to
give the Commission written notice of
its intent to file a proposed rule change
under that subsection at least five
business days prior to the date of filing,
or such shorter time as designated by
the Commission. The Exchange has
requested that the Commission waive
the 30-day operative delay and the fiveday pre-filing notice requirement, as
specified in Rule 19b–4(f)(6)(iii), and
designate the proposed rule change
immediately operative.
The Commission believes that
waiving the 30-day operative delay and
the five-day pre-filing notice
requirement is consistent with the
protection of investors and the public
interest.12 By waiving the 30-day
9 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
11 Id.
12 For purposes only of waiving the 30-day preoperative period, the Commission has considered
10 17
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operative delay and the five-day prefiling notice requirement, the deletion of
the obsolete or unnecessary rules will
take effect as of the date the PCX filed
the proposed rule change.
At any time within 60 days of the
filing of such 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
purposes 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:
11297
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
Number SR–PCX–2005–21 and should
be submitted on or before March 29,
2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.13
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–931 Filed 3–7–05; 8:45 am]
BILLING CODE 8010–01–P
SECURTITES AND EXCHANGE
COMMISSION
[Release No. 34–51286; File No. SR–PCX–
2003–55]
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–PCX–2005–21 on the
subject line.
Self-Regulatory Organizations; Pacific
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
March 1, 2005.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
• Send paper comments in triplicate
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
to Jonathan G. Katz, Secretary,
notice is hereby given that on
Securities and Exchange Commission,
September 29, 2003, the Pacific
450 Fifth Street, NW., Washington, DC
Exchange, Inc. (‘‘PCX’’ of ‘‘Exchange’’)
20549–0609.
filed with the Securities snd Exchange
All submissions should refer to File
Commission (‘‘Commission’’) the
Number SR–PCX–2005–21. This file
proposed rule change as described in
number should be included on the
items I and II below, which items have
subject line if e-mail is used. To help the
been prepared by PCX. On February 25,
Commission process and review your
2005, the PCX filed Amendment No. 1
comments more efficiently, please use
to the proposed rule change.3 On
only one method. The Commission will
February 28, 2005, the PCX filed
post all comments on the Commission’s
Amendment No. 2 to the proposed rule
Internet Web site (https://www.sec.gov/
change.4 As amended by Amendment
rules/sro.shtml). Copies of the
No. 1, the proposal has been submitted
submission, all subsequent
as a ‘‘non-controversial’’ rule change
amendments, all written statements
pursuant to section 19(b)(3)(A) of the
with respect to the proposed rule
Act 5 and Rule 19b–4(f)(6) thereunder,6
change that are filed with the
Commission, and all written
13 17 CFR 200.30–3(a)(12).
communications relating to the
1 15 U.S.C. 78s(b)(1).
proposed rule change between the
2 17 CFR 240.19b–4.
Commission and any person, other than
3 Amendment No. 1, which replaced and
those that may be withheld from the
superseded the original filing in its entirety,
eliminated among other things, certain hedge
public in accordance with the
exemptions and the position accountability
provisions of 5 U.S.C. 552, will be
program that were proposed in the original filing,
available for inspection and copying in
established a new hedge exemption (‘‘reverse
the Commission’s Public Reference
collar’’), requested that the increases to the standard
position and exercise limits proposed in the filing
Room. Copies of the filing also will be
be adopted as a six-month pilot basis, made various
available for inspection and copying at
clarifying changes to the filing, and changed the
the principal offices of the PCX. All
statutory basis of the filing.
4 Amendment No. 2 made certain technical
comments received will be posted
Paper Comments
the proposed rule’s impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
PO 00000
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changes to the filing.
5 15 U.S.C. 78s(b)(3)(A).
6 17 CFR 240.19b–4(f)(6).
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Federal Register / Vol. 70, No. 44 / Tuesday, March 8, 2005 / Notices
which renders it effective upon the
filing of the amendment with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change,
as amended, from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The PCX proposes to amend PCX
Rules 6.8 and 6.9 to increase the
standard position and exercise limits for
equity options contracts and options on
the Nasdaq-100 Index Tracking Stock
(‘‘QQQQ’’). The text of the proposed
rule change is available on the PCX’s
Web site (https://www.pacificex.com), at
the PCX’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
PCX 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 to amend
PCX Rules 6.8 and 6.9 to increase the
standard position and exercise limits for
equity option contracts and options on
the QQQQ as part of a six-month pilot
program. PCX Rule 6.8 currently
subjects equity options to one of five
different position limits depending on
the trading volume and outstanding
shares of the underlying security. PCX
Rule 6.9 establishes exercise limits for
the corresponding options at the same
levels as the corresponding option
position limits. Lastly the Exchange is
proposing a housekeeping change to
Commentary .08 to PCX Rule 6.8.
Standard Position and Exercise Limits
The Exchange proposes to increase
the standard position and exercise
limits for equity option classes traded
on the Exchange to the following levels:
Current Equity Option Contract Limit
Proposed Equity Option Contract Limit
13,500
22,500
31,500
60,000
75,000
25,000
50,000
75,000
200,000
250,000
Current QQQQ Option Contract Limit
Proposed QQQQ Option Contract Limit
300,000
900,000
The Exchange’s 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. Industry analysis shows
that several members firms have
petitioned SROs to either eliminate
position limits, or in lieu of total
elimination, increase the current levels
and expand the available hedge
exemptions. The available data
indicates that the majority of accounts
that maintain sizable positions are in
those 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
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 on the CBOE).
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justifies the proposed increase in the
position and exercise limits.
The Exchange also proposes the
adoption of a new equity hedge
exemption to the existing exemption
currently provided under Commentary
.07 of PCX Rule 6.8. Specifically, the
new provision would allow for a
‘‘reverse collar’’ hedge exemption to
apply where 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
Commentary .07(d) to PCX Rule 6.8,
which provides for an exemption for a
‘‘collar’’, and Commentary .07(b) and (c)
to PCX Rule 6.8, which provide for a
hedge exemption for reverse conversion
and conversions, respectively.
Manipulation
The PCX believes that position and
exercise limits, at their current levels,
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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 minimanipulations 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
As the anniversary of listed options
trading approaches its fortieth year, the
Exchange believes the existing
surveillance procedures and reporting
requirements at the PCX, other options
exchanges, and at the several clearing
firms are capable of properly identifying
unusual and/or illegal trading activity.
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
trading on CBOE).
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Federal Register / Vol. 70, No. 44 / Tuesday, March 8, 2005 / Notices
In addition, routine oversight
inspections of PCX’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. These procedures utilize
daily monitoring of markets via
automated surveillance techniques to
identify unusual activity in both options
and in underlying stocks. Furthermore,
the significant increases in unhedged
options capital charges resulting from
the September 1997 adoption of riskbased haircuts in combination with the
Exchange margin requirements
applicable to these products under
Exchange rules, serve as a more effective
protection than do position limits.9
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, PCX Rule 6.6(a),
which requires OTP Holders and OTP
Firms to file reports with the Exchange
for any customer 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.11
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 OTP
Holders and OTP 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
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 an
OTP Holder or OTP Firm or its customer
may try to maintain an inordinately
large unhedged position in an equity
option. Current margin and risk-based
9 See Securities Exchange Act Release No. 38248
(February 6, 1997), 62 FR 6474 (February 12, 1997)
(File No. S7–7–94) (adopting risk-based haircuts);
and PCX Rules 4.15 and 4.16.
10 17 CFR 240.13d–1.
11 See PCX Rules 1.1(p), (q), and (r) (defining
‘‘OTP’’, ‘‘OTP Holder’’, and ‘‘OTP Firm’’,
respectively).
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haircut methodologies serve to limit the
size of positions maintained by any one
account by increasing the margin and/
or capital that an OTP Holder or OTP
Firm 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 PCX Rule 4.16(a) to
impose higher margin requirements
upon a member when the exchange
determines that higher requirements are
warranted. Also, the Commission’s net
capital rule, Rule 15c3–1 under the
Act,12 imposes a capital charge on
members to the extent of any margin
deficiency resulting from the higher
margin requirement.
Finally, equity position limits have
been gradually expanded from 1,000
contracts in 1973 to the current level of
75,000 contracts for the larges and most
active stocks. 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.
Housekeeping Changes
The Exchange proposes a minor
housekeeping change to Commentary
.08 to PCX Rule 6.8 to correct the
‘‘Example’’ pertaining to the equity
hedge exemption. The current Example
inaccurately refers to the equity hedge
exemption being limited to two times
the standard limit.13 Currently, there is
no position limit restriction for qualified
hedge strategies under the equity hedge
exemption policy, thus this portion of
the example is incorrect.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with section 6(b)
if the Act 14 in general, and furthers the
objective of section 6(b)(5) of the Act 15
in particular, in that it is designed 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 and perfect
the mechanisms of a free and open
market and to protect investors and the
public interest.
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 that is not
CFR 240.15c3–1.
Securities Exchange Act Release No. 40875
(December 31, 1998), 64 FR 1842 (January 12, 1999)
(approval of increase in position limits and exercise
limits).
14 15 U.S.C. 78f(b).
15 15 U.S.C. 78f(b)(5).
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12 17
13 See
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11299
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
Written comments on the proposed
rule change 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 the PCX as a ‘‘noncontroversial’’ rule change pursuant to
section 19(b)(3)(A) of the Act 16 and
subparagraph (f)(6) of Rule 19b–4
thereunder.17
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.18
Consequently, the proposed rule
change, as amended, has become
effective pursuant to section 19(b)(3)(A)
of the Act 19 and Rule 19b–4(f)(6)
thereunder.20
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. The PCX has requested that the
Commission waive 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 30-day operative delay.21
Accelerating the operative date will
allow the PCX to immediately conform
its position and exercise limits and its
equity option hedge exemption
strategies to those of the Chicago Board
Options Exchange, which were recently
approved by the Commission.22
16 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
18 As requested by the PCX, the Commission
accepts the original filing as meeting the five-day
pre-filing notice requirement of Rule 19b–4(f)(6).
19 15 U.S.C. 78s(b)(3)(A).
20 17 CFR 240.19b–4(f)(6).
21 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).
22 See Securities Exchange Act Release No. 51244
(February 23, 2005) (SR–BOE–2003–30).
17 17
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Federal Register / Vol. 70, No. 44 / Tuesday, March 8, 2005 / Notices
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.23
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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–PCX–2003–55 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–PCX–2003–55. 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 (https://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 PCX. All comments
received will be posted without change;
the Commission does not edit personal
23 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 February 28, 2005, the
date that the PCX filed Amendment No. 2.
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identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File No. SR–PCX–2003–
55 and should be submitted on or before
March 29, 2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.24
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–932 Filed 3–7–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51280; File No. SR–PCX–
2004–72]
Self-Regulatory Organizations; Pacific
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change and
Amendments No. 1 and 2 Thereto
Relating to Clearly Erroneous
Executions on the Archipelago
Exchange
March 1, 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 July 28,
2004, the Pacific Exchange, Inc. (‘‘PCX’’
or ‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in items I, II, and
III, below, which items have been
prepared by the Exchange. PCX filed
Amendment No. 1 to the proposed rule
change on December 29, 2004,3 and
filed Amendment No. 2 to the proposed
rule change on February 15, 2005.4 The
Commission is publishing this notice to
solicit comment on the proposed rule
change, as amended, from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
PCX, through its wholly owned
subsidiary PCX Equities, Inc. (‘‘PCXE’’),
proposes to amend its rules governing
clearly erroneous executions (‘‘CEE’’) on
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Amendment No. 1, submitted by Tania
Blanford, Staff Attorney, PCX (‘‘Amendment No.
1’’). Amendment No. 1 replaces the original filing
in its entirety.
4 See Amendment No. 2, submitted by James
Draddy, Vice President, Equities Regulation, PCX
(‘‘Amendment No. 2’’). Amendment No. 2 replaces
the original filing and Amendment No 1 in their
entirety.
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1 15
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the Archipelago Exchange (‘‘ArcaEx’’),
the equities trading facility of PCXE.
Specifically, the Exchange proposes to
combine the provisions of PCXE Rules
7.10 (Cancellation of Revisions in
Transactions) and PCXE Rule 7.11
(Clearly Erroneous Policy) into one
resulting rule, PCXE Rule 7.10, ‘‘Clearly
Erroneous Executions.’’ The Exchange
also proposes to amend the procedures
that an ETP Holder would be required
to follow when seeking relief for clearly
erroneous executions. Finally, the
Exchange has revised its guideline
listing factors it may consider in making
its determinations regarding CEE. A
copy of the revised guideline is
available at the Exchange’s Web site
(https://www.pacificex.com/legal/
legal_home.html).
The text of the proposed rule change
is set forth below. Additions are in
italics. Deletions are in [brackets].
*
*
*
*
*
Rule 7: Equities Trading
Rule 7.10. Clearly Erroneous
Executions [Cancellation of Revisions
in Transactions]
(a) Definition. For purposes of this
Rule, the terms of a transaction
executed on the Corporation are
‘‘clearly erroneous’’ when there is an
obvious error in any term, such as price,
number of shares or other unit of
trading, or identification of the security.
A transaction [sale] made in clearly
erroneous [demonstrable] error and
cancelled by both parties may be
removed, if the parties do not object,
subject to the approval of the
Corporation. [Disagreements with
respect thereto shall be referred to the
appropriate trading authority of the
Corporation. A dispute arising on bids,
offers or sales, if not settled by
agreement between the parties
interested, shall be settled by the
Corporation.]
(b) Request for Corporation Review.
An ETP Holder that receives an
execution on an order that was
submitted erroneously to the
Corporation for its own or customer
account may request that the
Corporation review the transaction
under this Rule. Such request for review
shall be made via telephone, facsimile
or e-mail and submitted within fifteen
(15) minutes of the trade in question.
Upon receipt, the counterparty to the
trade, if any, shall be notified by the
Corporation as soon as practicable.
Thereafter, an Officer of the Corporation
or such other designee of the
Corporation (‘‘Officer’’) shall review the
transaction under dispute and
determine whether it is clearly
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]]>Agencies
[Federal Register Volume 70, Number 44 (Tuesday, March 8, 2005)]
[Notices]
[Pages 11297-11300]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-932]
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SECURTITES AND EXCHANGE COMMISSION
[Release No. 34-51286; File No. SR-PCX-2003-55]
Self-Regulatory Organizations; Pacific 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
March 1, 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 September 29, 2003, the Pacific Exchange, Inc. (``PCX'' of
``Exchange'') filed with the Securities snd Exchange Commission
(``Commission'') the proposed rule change as described in items I and
II below, which items have been prepared by PCX. On February 25, 2005,
the PCX filed Amendment No. 1 to the proposed rule change.\3\ On
February 28, 2005, the PCX filed Amendment No. 2 to the proposed rule
change.\4\ As amended by Amendment No. 1, the proposal has been
submitted 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\
[[Page 11298]]
which renders it effective upon the filing of the amendment 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, which replaced and superseded the original
filing in its entirety, eliminated among other things, certain hedge
exemptions and the position accountability program that were
proposed in the original filing, established a new hedge exemption
(``reverse collar''), requested that the increases to the standard
position and exercise limits proposed in the filing be adopted as a
six-month pilot basis, made various clarifying changes to the
filing, and changed the statutory basis of the filing.
\4\ Amendment No. 2 made certain technical changes 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 PCX proposes to amend PCX Rules 6.8 and 6.9 to increase the
standard position and exercise limits for equity options contracts and
options on the Nasdaq-100 Index Tracking Stock (``QQQQ''). The text of
the proposed rule change is available on the PCX's Web site (https://
www.pacificex.com), at the PCX'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 PCX 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 to amend PCX Rules 6.8 and 6.9 to
increase the standard position and exercise limits for equity option
contracts and options on the QQQQ as part of a six-month pilot program.
PCX Rule 6.8 currently subjects equity options to one of five different
position limits depending on the trading volume and outstanding shares
of the underlying security. PCX Rule 6.9 establishes exercise limits
for the corresponding options at the same levels as the corresponding
option position limits. Lastly the Exchange is proposing a housekeeping
change to Commentary .08 to PCX Rule 6.8.
Standard Position and Exercise Limits
The Exchange proposes to increase the standard position and
exercise limits for equity option classes traded on the Exchange to the
following levels:
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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
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Current QQQQ OptProposed QQQQ Option Contract Limit
------------------------------------
300,000 900,000
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The Exchange's 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. Industry analysis shows that several members firms have
petitioned SROs to either eliminate position limits, or in lieu of
total elimination, increase the current levels and expand the available
hedge exemptions. The available data indicates that the majority of
accounts that maintain sizable positions are in those 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 increase 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-CBOE-98-25) (approval of
increase in position limits and exercise limits on the CBOE).
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The Exchange also proposes the adoption of a new equity hedge
exemption to the existing exemption currently provided under Commentary
.07 of PCX Rule 6.8. Specifically, the new provision would allow for a
``reverse collar'' hedge exemption to apply where 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 Commentary .07(d) to
PCX Rule 6.8, which provides for an exemption for a ``collar'', and
Commentary .07(b) and (c) to PCX Rule 6.8, which provide for a hedge
exemption for reverse conversion and conversions, respectively.
Manipulation
The PCX 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 trading on CBOE).
As the anniversary of listed options trading approaches its
fortieth year, the Exchange believes the existing surveillance
procedures and reporting requirements at the PCX, other options
exchanges, and at the several clearing firms are capable of properly
identifying unusual and/or illegal trading activity.
[[Page 11299]]
In addition, routine oversight inspections of PCX'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. These procedures utilize daily monitoring of markets via
automated surveillance techniques to identify unusual activity in both
options and in underlying stocks. Furthermore, the significant
increases in unhedged options capital charges resulting from the
September 1997 adoption of risk-based haircuts in combination with the
Exchange margin requirements applicable to these products under
Exchange rules, serve as a more effective protection than do position
limits.\9\
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, PCX Rule 6.6(a), which requires OTP Holders and OTP Firms
to file reports with the Exchange for any customer 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.\11\
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\9\ See Securities Exchange Act Release No. 38248 (February 6,
1997), 62 FR 6474 (February 12, 1997) (File No. S7-7-94) (adopting
risk-based haircuts); and PCX Rules 4.15 and 4.16.
\10\ 17 CFR 240.13d-1.
\11\ See PCX Rules 1.1(p), (q), and (r) (defining ``OTP'', ``OTP
Holder'', and ``OTP Firm'', respectively).
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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 OTP Holders and OTP 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 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 an OTP Holder or OTP Firm 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 an OTP Holder or OTP Firm 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 PCX Rule 4.16(a) to
impose higher margin requirements upon a member when the exchange
determines that higher requirements are warranted. Also, the
Commission's net capital rule, Rule 15c3-1 under the Act,\12\ imposes a
capital charge on members to the extent of any margin deficiency
resulting from the higher margin requirement.
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\12\ 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
the larges and most active stocks. 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.
Housekeeping Changes
The Exchange proposes a minor housekeeping change to Commentary .08
to PCX Rule 6.8 to correct the ``Example'' pertaining to the equity
hedge exemption. The current Example inaccurately refers to the equity
hedge exemption being limited to two times the standard limit.\13\
Currently, there is no position limit restriction for qualified hedge
strategies under the equity hedge exemption policy, thus this portion
of the example is incorrect.
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\13\ See Securities Exchange Act Release No. 40875 (December 31,
1998), 64 FR 1842 (January 12, 1999) (approval of increase in
position limits and exercise limits).
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2. Statutory Basis
The Exchange believes that its proposal is consistent with section
6(b) if the Act \14\ in general, and furthers the objective of section
6(b)(5) of the Act \15\ in particular, in that it is designed 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 and perfect the mechanisms of a
free and open market and to protect investors and the public interest.
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\14\ 15 U.S.C. 78f(b).
\15\ 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 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
Written comments on the proposed rule change 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 the PCX as a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) of the Act
\16\ and subparagraph (f)(6) of Rule 19b-4 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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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.\18\ Consequently, the proposed
rule change, as amended, has become effective pursuant to section
19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(6) thereunder.\20\
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\18\ As requested by the PCX, the Commission accepts the
original filing as meeting the five-day pre-filing notice
requirement of Rule 19b-4(f)(6).
\19\ 15 U.S.C. 78s(b)(3)(A).
\20\ 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.
The PCX has requested that the Commission waive 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 30-day
operative delay.\21\ Accelerating the operative date will allow the PCX
to immediately conform its position and exercise limits and its equity
option hedge exemption strategies to those of the Chicago Board Options
Exchange, which were recently approved by the Commission.\22\
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\21\ 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).
\22\ See Securities Exchange Act Release No. 51244 (February 23,
2005) (SR-BOE-2003-30).
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[[Page 11300]]
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.\23\
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\23\ 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 February 28, 2005, the date that the PCX 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 (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-PCX-2003-55 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-PCX-2003-55. 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 (https://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 PCX. 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-PCX-2003-55 and should be
submitted on or before March 29, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-932 Filed 3-7-05; 8:45 am]
BILLING CODE 8010-01-P
