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]

Download as PDF 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 VerDate jul<14>2003 19:54 Mar 07, 2005 Jkt 205001 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 (http://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 (http://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 Frm 00105 Fmt 4703 Sfmt 4703 changes to the filing. 5 15 U.S.C. 78s(b)(3)(A). 6 17 CFR 240.19b–4(f)(6). E:\FR\FM\08MRN1.SGM 08MRN1 11298 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 (http://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). VerDate jul<14>2003 19:54 Mar 07, 2005 Jkt 205001 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, PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 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). E:\FR\FM\08MRN1.SGM 08MRN1 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). VerDate jul<14>2003 19:54 Mar 07, 2005 Jkt 205001 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). PO 00000 12 17 13 See Frm 00107 Fmt 4703 Sfmt 4703 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 E:\FR\FM\08MRN1.SGM 08MRN1 11300 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 (http://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 (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing will also be available for inspection and copying at the principal office of the 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. VerDate jul<14>2003 19:54 Mar 07, 2005 Jkt 205001 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. PO 00000 24 17 1 15 Frm 00108 Fmt 4703 Sfmt 4703 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 (http://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 E:\FR\FM\08MRN1.SGM 08MRN1

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]


-----------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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 (http://
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      Proposed Equity Option Contract
               Limit                                Limit
------------------------------------------------------------------------
                         13,500                               25,000
                         22,500                               50,000
                         31,500                               75,000
                         60,000                              200,000
                         75,000                              250,000
------------------------------------
                               Current QQQQ OptProposed QQQQ Option Contract Limit
------------------------------------
                        300,000                              900,000
------------------------------------------------------------------------

    The 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \12\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).

---------------------------------------------------------------------------

[[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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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 (http://
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 (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 450 Fifth Street, 
NW., Washington, DC 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the 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\
---------------------------------------------------------------------------

    \24\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-932 Filed 3-7-05; 8:45 am]
BILLING CODE 8010-01-P