Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Position Limits and Exercise Limits, 12251-12254 [E5-1023]
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Federal Register / Vol. 70, No. 47 / Friday, March 11, 2005 / Notices
20, 2004.5 The roll-out schedule
currently set forth in Rule 900(a)—
ANTE was part of an amendment to the
original proposal seeking to implement
the ANTE system.6 Filed on February 9,
2004, Amendment No. 3 to the proposal
anticipated for Commission approval of
the ANTE implementation date by
March 1, 2004 and accordingly provided
a roll-out schedule based on that date.
However, the Order describes the actual
roll-out schedule based upon the
Commission’s approval date of May 20,
2004.7 Accordingly, the Exchange seeks
to amend Rule 900(a)—ANTE to correct
where appropriate the roll-out schedule
and to set forth adjustments to the
schedule proposed by the Exchange.
2. Statutory Basis
The Exchange believes that the
proposed rule change, as amended, is
consistent with Section 6(b) of the Act 8
in general, and furthers the objectives of
Section 6(b)(5) of the Act 9 in particular,
in that it is designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest, and is
designed to prohibit unfair
discrimination between customers,
issuers, brokers and dealers.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change, as amended,
will impose any burden on competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were solicited
or received with respect to the proposed
rule change, as amended.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing proposed rule change,
as amended, has become effective
5 See
Securities Exchange Act Release No. 49747
(May 20, 2004), 69 FR 30344 (May 27, 2004) (SR–
Amex–2003–89) (‘‘Order’’).
6 See Amendment No. 3 to SR–Amex–2003–89,
supra note 5.
7 See Order, supra note 5, at 30345–30346.
8 15 U.S.C. 78f(b).
9 15 U.S.C. 78f(b)(5).
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pursuant to Section 19(b)(3)(A)(i) of the
Act 10 and Rule 19b–4(f)(1) thereunder 11
because it constitutes a stated policy,
practice, or interpretation with respect
to the meaning, administration, or
enforcement of an existing rule of the
Exchange. 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.12
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
Number SR–Amex–2005–013 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
Number SR–Amex–2005–013. 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
U.S.C. 78s(b)(3)(A)(i).
CFR 240.19b–4(f)(1).
12 For purposes of calculating the 60-day period
within which the Commission may summarily
abrogate the proposed rule change, as amended,
under Section 19(b)(3)(C) of the Act, the
Commission considers the period to commence on
February 24, 2005, the date on which the Amex
filed Partial Amendment No. 2. See 15 U.S.C.
78s(b)(3)(C).
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11 17
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12251
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of the Amex. 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
Number SR–Amex–2005–013 and
should be submitted on or before April
1, 2005.
For the Commission by the Division of
Market Regulation, pursuant to delegated
authority.13
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–1021 Filed 3–10–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51316; File No. SR–Amex–
2005–029]
Self-Regulatory Organizations;
American Stock Exchange LLC; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change Relating to
Position Limits and Exercise Limits
March 3, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 2,
2005, the American Stock Exchange LLC
(‘‘Amex’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Amex. The Exchange has filed
the proposal as a ‘‘non-controversial’’
rule change pursuant to Section
19(b)(3)(A) of the Act 3 and Rule 19b–
4(f)(6) thereunder,4 which renders it
effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Amex is proposing to amend
Exchange Rule 904 to increase the
13 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
1 15
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Federal Register / Vol. 70, No. 47 / Friday, March 11, 2005 / Notices
standard position and exercise limits for
equity options contracts and options on
the Nasdaq-100 Index Tracking Stock
(‘‘QQQQ’’) for pilot program of six
months. The text of the proposed rule
change is available on the Amex’s Web
site (https://www.amex.com), at the
Amex’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
Amex 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 Amex is proposing several
changes to Exchange Rule 904 to
increase position and exercise limits.
Exchange Rule 904 subjects equity
options to one of five different position
limits depending on the trading volume
and outstanding shares of the
underlying security. Rule 905
establishes exercise limits for the
corresponding options at the same
levels.5 On February 23, 2005, the
Commission granted accelerated
approval of a rule change proposed by
the Chicago Board Options Exchange,
Inc. (‘‘CBOE’’) relating to position and
exercise limits.6
Standard Position and Exercise
Limits. The Exchange is proposing to
adopt a pilot program for a period of six
months during which the standard
position and exercise limits for options
on the QQQQ and for equity option
classes traded on the Exchange would
be increased 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 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. Several member firms have
petitioned the options exchanges to
either eliminate position limits, or in
lieu of total elimination, increase the
current levels and expand the available
hedge exemptions. A review of available
data indicates that the majority of
accounts that maintain sizable positions
are in those option classes subject to the
60,000 and 75,000 tier limits. There also
has been an increase in the number of
accounts that maintain 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
increases in the position and exercise
limits.
The Exchange also proposes the
adoption of a new equity hedge
exemption to the existing exemptions
currently provided under Commentary
.09 to Exchange Rule 904. Specifically,
new Commentary .09(5) to Exchange
Rule 904 would allow for a ‘‘reverse
collar’’ hedge exemption where a long
call position is accompanied by a short
put position, where the long call expires
with the short put and the strike price
of the long call equals or exceeds the
short put and where each long call and
short put position is hedged with 100
shares of the underlying security (or
other adjusted number of shares).
Neither side of the long call short put
can be in-the-money at the time the
position is established. The Exchange
believes this is consistent with the
existing Commentary .09(4) to Exchange
Rule 904, which provides for an
exemption for a ‘‘collar,’’ and
Commentary .09(2) and (3) to Exchange
Rule 904, which provide for a hedge
exemption for reverse conversions and
conversions, respectively.
Manipulation. The Amex believes that
position and exercise limits, at their
current levels, no longer serve their
stated purpose. The Commission has
previously stated that:
5 Amex Rule 905 states ‘‘no member or member
organization shall exercise, for any account in
which such member or member organization has an
interest or for the account of any partner, officer,
director or employee thereof or for the account of
any customer, a long position in any option contract
of a class of options dealt in on the Exchange if as
a result thereof such member or member
organization, or partner, officer, director, employee
thereof or customer acting alone or in concert with
others, directly or indirectly has or will have
exercised within any five (5) business days
aggregate long positions in excess of: (i) the number
of option contracts set forth as the position limit in
[Amex] Rule 904 in a class of options for which the
underlying security is a stock * * *.’’
6 See Securities Exchange Act Release No. 51244
(February 23, 2005), 70 FR 10010 (March 1, 2005)
(SR–CBOE–2003–30) (notice of filing and order
granting accelerated approval).
7 See Securities Exchange Act Release No. 40875
(December 31, 1998), 64 FR 1842 (January 12, 1999)
(SR–Amex–98–22) (approval of increase in position
limits and exercise limits).
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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
The Exchange believes that the
existing surveillance procedures and
reporting requirements at the Amex,
other options exchanges, and at the
several clearing firms are capable of
8 See Securities Exchange Act Release No. 39489
(December 24, 1997), 63 FR 276 (January 5, 1998)
(SR–CBOE–97–11).
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Federal Register / Vol. 70, No. 47 / Friday, March 11, 2005 / Notices
properly identifying unusual and/or
illegal trading activity. In addition,
routine oversight inspections of Amex’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 with respect
to monitoring position limits. These
procedures utilize daily monitoring of
market movements via automated
surveillance techniques to identify
unusual activity in both options and in
underlying stocks.
Furthermore, large stock holdings
must be disclosed to the Commission by
way of Schedules 13D or 13G.9 Options
positions are part of any reportable
positions and, thus, cannot be legally
hidden. In addition, Exchange Rule 906,
which requires members to file reports
with the Exchange for any customer or
member who held aggregate long or
short positions of 200 or more option
contracts of any single class for the
previous day, will remain unchanged
and will continue to serve as an
important part of the Exchange’s
surveillance efforts.
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 member
firms from adequately facilitating
customer order flow and offsetting the
risks of such facilitations in the listed
options market. The fact that position
limits are calculated on a gross rather
than a delta basis also is an impediment.
Financial Requirements. The
Exchange believes that the current
financial requirements imposed by the
Exchange and by the Commission
adequately address concerns that a
member or its customer may try to
maintain an inordinately large
unhedged position in an equity option.
Current margin and risk-based haircut
methodologies serve to limit the size of
positions maintained by any one
account by increasing the margin and/
or capital that a member must maintain
for a large position held by itself or by
its customer. It also should be noted that
the Exchange has the authority under
Exchange Rule 462(F) to impose higher
margin requirements upon a member or
member organization when the
Exchange determines that higher
requirements are warranted. Also, the
Commission’s net capital rule, Rule
9 17
15c3–1 under the Act,10 imposes a
capital charge on members to the extent
of any margin deficiency resulting from
the higher margin requirement.
Finally, equity position limits have
been gradually expanded from 1,000
contracts in 1973 to the current level of
75,000 contracts for options on the
largest and most active underlying
securities. To date, the Exchange
believes that there have been no adverse
affects on the market as a result of these
past increases in the limits for equity
option contracts.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6 of the Act 11 in general and
furthers the objectives of Section 6(b)(5)
of the Act 12 in particular in that it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities,
and to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The proposed rule change will impose
no 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
No written comments were solicited
or received by the Exchange on this
proposal.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The proposed rule change has been
designated by the Amex as a ‘‘noncontroversial’’ rule change pursuant to
Section 19(b)(3)(A) of the Act 13 and
subparagraph (f)(6) of Rule 19b–4
thereunder.14
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,
CFR 240.13d–1.
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10 17
CFR 240.15c3–1.
U.S.C. 78f.
12 15 U.S.C. 78f(b)(5).
13 15 U.S.C. 78s(b)(3)(A).
14 17 CFR 240.19b–4(f)(6).
11 15
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12253
if consistent with the protection of
investors and the public interest.
Consequently, the proposed rule change
has become effective pursuant to
Section 19(b)(3)(A) of the Act 15 and
Rule 19b–4(f)(6) thereunder.16
Pursuant to Rule 19b–4(f)(6)(iii), a
proposed ‘‘non-controversial’’ rule
change does not become operative for 30
days after the date of filing, or such
shorter time as the Commission may
designate, if consistent with the
protection of investors and the public
interest, and the Amex gave the
Commission written notice of its intent
to file the proposed rule change, along
with a brief description and text of the
proposed rule change, at least five
business days prior to the date of filing
of the proposed rule change, or such
shorter time as designated by the
Commission.17 The Amex has requested
that the Commission waive the five-day
pre-filing notice requirement and the
30-day operative delay. The
Commission has determined that it is
consistent with the protection of
investors and the public interest to
waive the five-day pre-filing notice
requirement and the 30-day operative
delay.18 Waiving the pre-filing
requirement and accelerating the
operative date will allow the Amex to
immediately conform its position and
exercise limits and equity hedge
exemption strategies to those of the
CBOE, which were recently approved by
the Commission.19
At any time within 60 days of the
filing of the proposed rule change, the
Commission may summarily abrogate
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
15 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
17 17 CFR 240.19b–4(f)(6)(iii).
18 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).
19 See Securities Exchange Act Release No. 51244
(February 23, 2005), 70 FR 10010 (March 1, 2005)
(SR–CBOE–2003–30).
16 17
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Federal Register / Vol. 70, No. 47 / Friday, March 11, 2005 / Notices
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–Amex–2005–029 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–Amex–2005–029. 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 Amex. 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–Amex–
2005–029 and should be submitted on
or before April 1, 2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.20
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–1023 Filed 3–10–05; 8:45 am]
BILLING CODE 8010–01–P
SECURTITES AND EXCHANGE
COMMISSION
[Release No. 34–51317; File No. SR–BSE–
2005–10]
Self-Regulatory Organizations; Boston
Stock 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 on the Boston Options
Exchange Facility
March 3, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 1,
2005, the Boston Stock Exchange, Inc.
(‘‘BSE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the BSE. On March 2, 2005 the BSE
filed Amendment No. 1 to the proposed
rule change.3 On March 3, 2005 the BSE
filed Amendment No. 2 to the proposed
rule change.4 The Exchange has filed
the proposal 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 which renders it
effective upon filing 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 BSE proposes to amend Section
7 (Position Limits), Section 8
(Exemptions from Position Limits), and
Section 9 (Exercise Limits) of Chapter III
of the Rules of the Boston Options
Exchange (‘‘BOX’’) to increase the
standard position and exercise limits for
equity options contracts and options on
the Nasdaq-100 Index Tracking Stock
(‘‘QQQQ’’) for a pilot program of six
months. The text of the proposed rule
change is available on the BSE’s Web
site (https://www.bostonstock.com), at
the BSE’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
BSE included statements concerning the
purpose of, and basis for, the proposed
rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. The Exchange has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is proposing several
changes to Section 7 (Position Limits),
Section 8 (Exemptions from Position
Limits), and Section 9 (Exercise Limits)
of Chapter III of the BOX Rules. Section
7 of Chapter III of the BOX Rules
subjects equity options to one of five
different position limits depending on
the trading volume and outstanding
shares of the underlying security.
Section 8 of Chapter III of the BOX
Rules establishes certain qualified
hedging transactions and positions that
are exempt from established options
position limits as prescribed under
Section 7 of Chapter III of the BOX
Rules. Section 9 of Chapter III of the
BOX Rules establishes exercise limits
for the corresponding options at the
same levels as the corresponding
security’s position limits. On February
23, 2005, the Commission granted
accelerated approval of a rule change
proposed by the Chicago Board Options
Exchange, Inc. (‘‘CBOE’’) relating to
position and exercise limits.7
Standard Position and Exercise
Limits. The Exchange is proposing to
adopt for BOX a pilot program for a
period of six months during which the
standard position and exercise limits for
options on the QQQQ and for equity
option classes traded on BOX would be
increased to the following levels:
Current Equity Option Contract Limit
Proposed Equity Option Contract Limit
13,500
25,000
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Amendment No. 1 corrected an error in Exhibit
5 to the filing.
4 Amendment No. 2 corrected an error in Exhibit
5 to the filing.
5 15 U.S.C. 78s(b)(3)(A).
1 15
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6 17
CFR 240.19b–4(f)(6).
Securities Exchange Act Release No. 51244
(February 23, 2005), 70 FR 10010 (March 1, 2005)
(SR–CBOE–2003–30).
7 See
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]]>Agencies
[Federal Register Volume 70, Number 47 (Friday, March 11, 2005)]
[Notices]
[Pages 12251-12254]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-1023]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51316; File No. SR-Amex-2005-029]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to Position Limits and Exercise Limits
March 3, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 2, 2005, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Amex. The Exchange has
filed the proposal as a ``non-controversial'' rule change pursuant to
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\
which renders it effective upon filing with the Commission. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex is proposing to amend Exchange Rule 904 to increase the
[[Page 12252]]
standard position and exercise limits for equity options contracts and
options on the Nasdaq-100 Index Tracking Stock (``QQQQ'') for pilot
program of six months. The text of the proposed rule change is
available on the Amex's Web site (https://www.amex.com), at the Amex'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 Amex 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 Amex is proposing several changes to Exchange Rule 904 to
increase position and exercise limits. Exchange Rule 904 subjects
equity options to one of five different position limits depending on
the trading volume and outstanding shares of the underlying security.
Rule 905 establishes exercise limits for the corresponding options at
the same levels.\5\ On February 23, 2005, the Commission granted
accelerated approval of a rule change proposed by the Chicago Board
Options Exchange, Inc. (``CBOE'') relating to position and exercise
limits.\6\
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\5\ Amex Rule 905 states ``no member or member organization
shall exercise, for any account in which such member or member
organization has an interest or for the account of any partner,
officer, director or employee thereof or for the account of any
customer, a long position in any option contract of a class of
options dealt in on the Exchange if as a result thereof such member
or member organization, or partner, officer, director, employee
thereof or customer acting alone or in concert with others, directly
or indirectly has or will have exercised within any five (5)
business days aggregate long positions in excess of: (i) the number
of option contracts set forth as the position limit in [Amex] Rule
904 in a class of options for which the underlying security is a
stock * * *.''
\6\ See Securities Exchange Act Release No. 51244 (February 23,
2005), 70 FR 10010 (March 1, 2005) (SR-CBOE-2003-30) (notice of
filing and order granting accelerated approval).
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Standard Position and Exercise Limits. The Exchange is proposing to
adopt a pilot program for a period of six months during which the
standard position and exercise limits for options on the QQQQ and for
equity option classes traded on the Exchange would be increased 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
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The 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. Several member firms have petitioned the options exchanges to
either eliminate position limits, or in lieu of total elimination,
increase the current levels and expand the available hedge exemptions.
A review of available data indicates that the majority of accounts that
maintain sizable positions are in those option classes subject to the
60,000 and 75,000 tier limits. There also has been an increase in the
number of accounts that maintain 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 increases 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-Amex-98-22) (approval of
increase in position limits and exercise limits).
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The Exchange also proposes the adoption of a new equity hedge
exemption to the existing exemptions currently provided under
Commentary .09 to Exchange Rule 904. Specifically, new Commentary
.09(5) to Exchange Rule 904 would allow for a ``reverse collar'' hedge
exemption where a long call position is accompanied by a short put
position, where the long call expires with the short put and the strike
price of the long call equals or exceeds the short put and where each
long call and short put position is hedged with 100 shares of the
underlying security (or other adjusted number of shares). Neither side
of the long call short put can be in-the-money at the time the position
is established. The Exchange believes this is consistent with the
existing Commentary .09(4) to Exchange Rule 904, which provides for an
exemption for a ``collar,'' and Commentary .09(2) and (3) to Exchange
Rule 904, which provide for a hedge exemption for reverse conversions
and conversions, respectively.
Manipulation. The Amex 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).
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The Exchange believes that the existing surveillance procedures and
reporting requirements at the Amex, other options exchanges, and at the
several clearing firms are capable of
[[Page 12253]]
properly identifying unusual and/or illegal trading activity. In
addition, routine oversight inspections of Amex'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 with respect to monitoring position limits. These
procedures utilize daily monitoring of market movements via automated
surveillance techniques to identify unusual activity in both options
and in underlying stocks.
Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\9\ Options positions are
part of any reportable positions and, thus, cannot be legally hidden.
In addition, Exchange Rule 906, which requires members to file reports
with the Exchange for any customer or member who held aggregate long or
short positions of 200 or more option contracts of any single class for
the previous day, will remain unchanged and will continue to serve as
an important part of the Exchange's surveillance efforts.
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\9\ 17 CFR 240.13d-1.
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The Exchange believes that restrictive equity position limits
prevent large customers, such as mutual funds and pension funds, from
using options to gain meaningful exposure to individual stocks. This
can result in lost liquidity in both the options market and the stock
market. In addition, the Exchange has found that restrictive limits and
narrow hedge exemption relief restrict member firms from adequately
facilitating customer order flow and offsetting the risks of such
facilitations in the listed options market. The fact that position
limits are calculated on a gross rather than a delta basis also is an
impediment.
Financial Requirements. The Exchange believes that the current
financial requirements imposed by the Exchange and by the Commission
adequately address concerns that a member or its customer may try to
maintain an inordinately large unhedged position in an equity option.
Current margin and risk-based haircut methodologies serve to limit the
size of positions maintained by any one account by increasing the
margin and/or capital that a member must maintain for a large position
held by itself or by its customer. It also should be noted that the
Exchange has the authority under Exchange Rule 462(F) to impose higher
margin requirements upon a member or member organization when the
Exchange determines that higher requirements are warranted. Also, the
Commission's net capital rule, Rule 15c3-1 under the Act,\10\ imposes a
capital charge on members to the extent of any margin deficiency
resulting from the higher margin requirement.
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\10\ 17 CFR 240.15c3-1.
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Finally, equity position limits have been gradually expanded from
1,000 contracts in 1973 to the current level of 75,000 contracts for
options on the largest and most active underlying securities. To date,
the Exchange believes that there have been no adverse affects on the
market as a result of these past increases in the limits for equity
option contracts.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act \11\ in general and furthers the objectives
of Section 6(b)(5) of the Act \12\ in particular in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, and to remove impediments to and perfect the mechanism of a
free and open market and a national market system.
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\11\ 15 U.S.C. 78f.
\12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change will impose no 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
No written comments were solicited or received by the Exchange on
this proposal.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The proposed rule change has been designated by the Amex as a
``non-controversial'' rule change pursuant to Section 19(b)(3)(A) of
the Act \13\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(6).
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The foregoing rule change: (1) Does not significantly affect the
protection of investors or the public interest, (2) does not impose any
significant burden on competition, and (3) by its terms does not become
operative for 30 days after the date of this filing, or such shorter
time as the Commission may designate, if consistent with the protection
of investors and the public interest. Consequently, the proposed rule
change has become effective pursuant to Section 19(b)(3)(A) of the Act
\15\ and Rule 19b-4(f)(6) thereunder.\16\
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6).
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Pursuant to Rule 19b-4(f)(6)(iii), a proposed ``non-controversial''
rule change does not become operative for 30 days after the date of
filing, or such shorter time as the Commission may designate, if
consistent with the protection of investors and the public interest,
and the Amex gave the Commission written notice of its intent to file
the proposed rule change, along with a brief description and text of
the proposed rule change, at least five business days prior to the date
of filing of the proposed rule change, or such shorter time as
designated by the Commission.\17\ The Amex has requested that the
Commission waive the five-day pre-filing notice requirement and the 30-
day operative delay. The Commission has determined that it is
consistent with the protection of investors and the public interest to
waive the five-day pre-filing notice requirement and the 30-day
operative delay.\18\ Waiving the pre-filing requirement and
accelerating the operative date will allow the Amex to immediately
conform its position and exercise limits and equity hedge exemption
strategies to those of the CBOE, which were recently approved by the
Commission.\19\
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\17\ 17 CFR 240.19b-4(f)(6)(iii).
\18\ 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).
\19\ See Securities Exchange Act Release No. 51244 (February 23,
2005), 70 FR 10010 (March 1, 2005) (SR-CBOE-2003-30).
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
[[Page 12254]]
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-Amex-2005-029 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-Amex-2005-029. 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
Amex. 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-Amex-
2005-029 and should be submitted on or before April 1, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1023 Filed 3-10-05; 8:45 am]
BILLING CODE 8010-01-P
