Self-Regulatory Organizations; National Association of Securities Dealers, Inc; Notice of Filing of Proposed Rule Change Relating to Position Limits and Position Reporting Obligations for Conventional Index and Equity Options, 6117-6119 [E6-1541]
Download as PDF
<![CDATA[
Federal Register / Vol. 71, No. 24 / Monday, February 6, 2006 / Notices
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.11
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/ sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NASD–2006–006 on the
subject line.
rmajette on PROD1PC67 with NOTICES1
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NASD–2006–006. 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. Copies of such filing also will be
available for inspection and copying at
the principal office of Nasdaq. All
11 The effective date of the original proposed rule
change is January 20, 2006 and the effective date
of Amendment No. 1 is January 25, 2006. The
proposed rule change does not become operative for
30 days from the date of filing. 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 January 25, 2006, the date on which
Nasdaq submitted Amendment No. 1. See 15 U.S.C.
78s(b)(3)(C).
VerDate Aug<31>2005
14:55 Feb 03, 2006
Jkt 208001
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–NASD–2006–006 and
should be submitted on or before
February 27, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.12
Nancy M. Morris,
Secretary.
[FR Doc. E6–1537 Filed 2–3–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53189; File No. SR–NASD–
2006–007]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc; Notice of Filing of
Proposed Rule Change Relating to
Position Limits and Position Reporting
Obligations for Conventional Index and
Equity Options
January 30, 2006.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on January 23, 2006, the National
Association of Securities Dealers, Inc.
(‘‘NASD’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by NASD. 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
NASD is proposing to amend NASD
Rule 2860 to: (a) Revise the definition of
the term ‘‘underlying index’’ to include
indexes underlying standardized index
options and other indexes that meet
certain specified criteria; and (b) allow
members to calculate the position
limits, in accordance with volume and
float criteria specified by the options
exchanges, for conventional equity
options overlying securities that are part
of the FTSE All-World Index Series.3
12 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 The Financial Times and the London Stock
Exchange operate the FTSE All-World Index Series,
1 15
PO 00000
Frm 00085
Fmt 4703
Sfmt 4703
6117
The text of the proposed rule change is
available on the NASD’s Web site (http:
//www.nasd.com), at the NASD’s
principal office, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
NASD 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
Amendment to Definition of
‘‘Underlying Index’’: NASD Rule 2860
governs the activities of members in
standardized and conventional options
contracts. Paragraph (b)(5) of Rule 2860
imposes a position-reporting obligation
on members when they or their
customers establish options positions
that exceed certain thresholds.
Specifically, members are required to
file, or cause to be filed, a report with
NASD with respect to each account that
establishes an aggregate position of 200
or more contracts on the same side of
the market covering the same
underlying security or index. The
current definition of ‘‘underlying index’’
is limited to an index upon which a
Nasdaq index option is based.4 Since
Nasdaq no longer trades any index
options, this definition fails to require
members to report positions in
conventional index options. The
proposed rule change would require
members to report positions in
conventional 5 index options and would
require access firms to report position
limits in standardized index options.6 In
which covers approximately 30 different countries
and over 1900 stocks.
4 Nasdaq briefly traded stock index options in the
mid-1980s.
5 A ‘‘conventional option’’ is an option contract
not issued or subject to issuance by the Options
Clearing Corporation. See Rule 2860(b)(2)(N).
6 As noted in Notice to Members 01–01, the
options position reporting requirements are
applicable to all standardized options positions
established by ‘‘access’’ firms or their customers
and all conventional options positions established
by members or their customers. Access firms, in
this context, are understood to be NASD members
E:\FR\FM\06FEN1.SGM
Continued
06FEN1
6118
Federal Register / Vol. 71, No. 24 / Monday, February 6, 2006 / Notices
a separate filing, in connection with
NASD’s proposed rule changes to reflect
Nasdaq’s separation from NASD
following the Commission’s approval of
Nasdaq as a national securities
exchange,7 NASD has proposed to
amend Rule 2860 to remove all
references to Nasdaq.8
To require members to report
members’ and customers’ positions in
conventional index options, NASD
proposes amending the definition of
‘‘underlying index’’ to mean an index
underlying a ‘‘standardized index
option’’ or ‘‘conventional index option.’’
In addition, the proposed rule change
would define the terms ‘‘standardized
index option’’ and ‘‘conventional index
option.’’ Under the proposed rule
change, the definition of ‘‘underlying
index’’ would include indexes such as
the S&P 500, Dow Jones Industrial
Average, and the Nasdaq 100, because
these indexes underlie standardized
index options that are issued, or subject
to issuance, by the Options Clearing
Corporation.
The proposed rule change also would
amend the definition of ‘‘underlying
index’’ to include certain indexes that
do not underlie standardized index
options but that meet specified criteria.
The proposed criteria for customized
indexes are based upon the standards in
place at the options exchanges for
listing narrow-based index options.9
The purpose of these criteria is to
exclude from the definition of
‘‘underlying index’’ indexes that are so
narrowly constructed that they are the
economic equivalent of, or have
attributes of, an equity option on
common stock. These criteria also serve
to prevent the creation of an index so
narrow as to subvert position limit
requirements, which do not apply to
conventional index options.10
Under the proposed rule change, a
member would have the burden of
demonstrating that an index meets the
specified criteria before it would be
considered a ‘‘conventional index
option.’’ Thus, members should
maintain detailed records to be able to
demonstrate promptly, upon a request
from NASD, that a particular
‘‘conventional index option’’ meets the
necessary criteria. Members also should
be aware that options based on a
security that do not meet the definition
of ‘‘conventional index option’’ would
continue to be subject to position limits
and position reporting requirements as
if the non-conforming index were
deconstructed into its equity security
components.
Position Limits for Conventional
Equity Options Overlying Certain
Foreign Securities: The proposed rule
change also addresses the need for
members to identify position limits for
conventional equity options on
securities that do not underlie a
standardized equity option. Under Rule
Options position limit
2860(b)(3)(viii), the position limits for
conventional equity options are the
same as the limits for the standardized
equity options overlying the same
security. For example, if standardized
equity options on ABC have a position
limit of 75,000 contracts, then
conventional equity options on ABC
also have a position limit of 75,000
contracts. On the other hand, for an
option on an equally liquid foreign
security such as DEF, for which there
are no standardized equity options, a
member must obtain prior approval
from NASD staff for any position limit
in excess of 13,500 contracts (the base
limit in the absence of a pilot
program 11). Obtaining prior approval
could place a significant burden on a
member’s ability to execute transactions
with customers given the time
difference between the foreign market
and the U.S. market and the time frame
in which customers typically desire to
trade.
The proposed rule change would
allow members to calculate on their
own the position limits for conventional
equity options overlying securities that
are part of the FTSE All-World Index
Series using the volume and float
criteria (as measured during the most
recent six-month period) established by
the option exchanges’ rules.12 The
position limit levels are described in the
chart below:
Criteria
22,500 (or 50,000 during the pilot period) ..........
31,500 (or 75,000 during the pilot period) ..........
60,000 (or 200,000 during the pilot period) ........
75,000 (or 250,000 during the pilot period) ........
Trading volume of 20,000,000 shares; or
40,000,000 shares currently outstanding.
Trading volume of 40,000,000 shares; or
120,000,000 shares currently outstanding.
Trading volume of 80,000,000 shares; or
240,000,000 shares currently outstanding.
Trading volume of 100,000,000 shares; or
300,000,000 shares currently outstanding.
trading volume of 15,000,000 shares, and
trading volume of 30,000,000 shares, and
trading volume of 60,000,000 shares, and
trading volume of 75,000,000 shares, and
rmajette on PROD1PC67 with NOTICES1
NASD has chosen the FTSE All-World
Index Series 13 in part because the
Commission staff has deemed securities
in the predecessor to this index of
foreign securities to receive comparable
treatment to U.S. equity securities under
the securities haircut provisions of the
Commission’s net capital rule as set
forth in Rule 15c3–1 under the
Exchange Act,14 and the Federal Reserve
Board recognizes this index for
determining whether stocks are eligible
for margin treatment.15 Under the
proposed rule change, a member would
make a post-trade notice filing-within
that conduct a business in standardized options but
are not themselves members of the options
exchange upon which such options are listed and
traded.
7 See In the Matter of the Application of the
Nasdaq Stock Market LLC, Securities Exchange Act
Release No. 53128 (January 13, 2006), 71 FR 3550
(January 23, 2006) (File No. 10–131).
8 See Securities Exchange Act Release No. 52049
(July 15, 2005), 70 FR 42398 (July 22, 2005) (SR–
NASD–2005–087).
9 See, e.g., Chicago Board Options Exchange
(‘‘CBOE’’) Rule 24.2(b).
10 See NASD Notice to Members 94–46 (June
1994).
11 The six national securities exchanges that list
and trade options have adopted pilot rules
establishing higher position limits for standardized
options. These pilots expire between February 23,
2006 and March 3, 2006. See infra note 12.
12 See Commentary .07 to American Stock
Exchange Rule 904, section 7(c) of Chapter III of the
Boston Options Exchange Rules, Interpretation .02
to CBOE Rule 4.11; International Securities
Exchange Rule 412(d); Commentary .06 to Pacific
Exchange Rule 6.8; Commentary .05 to Philadelphia
Stock Exchange Rule 1001.
13 In the event NASD designates another index in
addition to or instead of the FTSE All-World Index
Series, NASD will publish the designation of the
new applicable index in a Notice to Members and
provide members at least 30 days written notice of
the change.
14 Letter to Dominic A. Carone, Capital
Committee Chairman, Securities Industry
Association from Michael Macchiaroli, Assistant
Director, Division of Market Regulation,
Commission, dated August 13, 1993. See 1993 SEC
No-Act LEXIS 967 (Aug. 13, 1993).
15 See section 220.11(c) and (d) of Regulation T,
12 CFR part 220.11(c) and (d). See also 69 FR 10601
(March 8, 2004) (removing certain foreign securities
from the list of securities that meet the financial
requirements of section 220.11(c) and (d) of
Regulation T).
VerDate Aug<31>2005
14:55 Feb 03, 2006
Jkt 208001
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
E:\FR\FM\06FEN1.SGM
06FEN1
Federal Register / Vol. 71, No. 24 / Monday, February 6, 2006 / Notices
one business day—to NASD staff
providing the necessary trade data and/
or current float data to support the
member’s position limit calculation.
Thus, in the example above, a
conventional equity option on DEF
would be subject to a position limit of
75,000 contracts rather than 13,500
contracts because the underlying
securities’ characteristics meet the
volume and float thresholds established
by the options exchanges necessary to
raise the position limits from 13,500
contracts to 75,000 contracts, provided
the member makes the necessary filing
within the prescribed time.
Under the proposed rule change,
NASD staff would review the member’s
notice filing, and, if the staff determined
that a member incorrectly assigned a
position limit, it would notify the firm
and instruct the firm to reduce its
position promptly to fall below the
appropriate limits determined by the
NASD staff.
NASD would announce the effective
date of the proposed rule change in a
Notice to Members to be published no
later than 60 days following
Commission approval, if the
Commission approves this proposal.
The effective date would be 30 days
following publication of the Notice to
Members announcing any Commission
approval.
2. Statutory Basis
NASD believes that the proposed rule
change is consistent with the provisions
of section 15A(b)(6) of the Exchange
Act,16 which requires, among other
things, that NASD’s rules must be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, and, in general, to protect
investors and the public interest. NASD
believes that amending the definition of
‘‘underlying index’’ would ensure more
complete reporting of options positions.
NASD also believes that permitting
members to calculate position limits for
certain foreign securities would enable
members to effect options transaction in
such securities without unnecessary
delay.
rmajette on PROD1PC67 with NOTICES1
B. Self-Regulatory Organization’s
Statement on Burden on Competition
NASD does not believe that the
proposed rule change would result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Exchange Act.
16 15
U.S.C. 78o–3(b)(6).
VerDate Aug<31>2005
14:55 Feb 03, 2006
Jkt 208001
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding, or
(ii) as to which the NASD consents, the
Commission will:
A. By order approve such proposed
rule change; or
B. Institute proceedings to determine
whether the proposed rule change
should be disapproved.
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 Exchange
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 rulescomments@sec.gov. Please include File
No. SR–NASD–2006–007 on the subject
line.
6119
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 will also be
available for inspection and copying at
the principal office of the NASD. 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–NASD–2006–007 and should be
submitted on or before February 27,
2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.17
Nancy M. Morris,
Secretary.
[FR Doc. E6–1541 Filed 2–3–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53190; File No. SR–NFA–
2005–02]
Self-Regulatory Organization; National
Futures Association; Notice of Filing
and Immediate Effectiveness of a
Proposed Amendment to NFA
Compliance Rule 2–10 Regarding
Recordkeeping
January 30, 2006.
Pursuant to section 19(b)(7) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–7 under the
Act,2 notice is hereby given that on
December 6, 2005, National Futures
Paper Comments
Association (‘‘NFA’’) filed with the
• Send paper comments in triplicate
Securities and Exchange Commission
to Nancy M. Morris, Secretary,
(‘‘SEC’’ or ‘‘Commission’’) the proposed
Securities and Exchange Commission,
rule change described in Items I, II, and
100 F Street, NE., Washington, DC
III below, which Items have been
20549–1090.
prepared by NFA. The Commission is
All submissions should refer to File
publishing this notice to solicit
No. SR–NASD–2006–007. This file
comments on the proposed rule change
number should be included on the
from interested persons. NFA also has
subject line if e-mail is used. To help the
filed the proposed rule change with the
Commission process and review your
Commodity Futures Trading
comments more efficiently, please use
Commission (‘‘CFTC’’).
only one method. The Commission will
NFA, on December 6, 2005, submitted
post all comments on the Commission’s the proposed rule change to the CFTC
Internet Web site (https://www.sec.gov/
for approval. The CFTC approved the
rules/sro.shtml). Copies of the
proposed rule change on January 5,
submission, all subsequent
2006.3
amendments, all written statements
with respect to the proposed rule
17 17 CFR 200.30–3(a)(12).
change that are filed with the
1 15 U.S.C. 78s(b)(7).
2 17 CFR 240.19b–7.
Commission, and all written
3 See Letter from Thomas W. Sexton, Vice
communications relating to the
President and General Counsel, NFA, to Elizabeth
proposed rule change between the
Commission and any person, other than King, Associate Director, Division of Market2006
Regulation, Commission, dated January 26,
those that may be withheld from the
(enclosing letter from Jean A. Webb, Secretary,
Continued
public in accordance with the
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
E:\FR\FM\06FEN1.SGM
06FEN1
]]>Agencies
[Federal Register Volume 71, Number 24 (Monday, February 6, 2006)]
[Notices]
[Pages 6117-6119]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-1541]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53189; File No. SR-NASD-2006-007]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc; Notice of Filing of Proposed Rule Change Relating to
Position Limits and Position Reporting Obligations for Conventional
Index and Equity Options
January 30, 2006.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on January 23, 2006, the National Association of Securities
Dealers, Inc. (``NASD'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by NASD. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to amend NASD Rule 2860 to: (a) Revise the
definition of the term ``underlying index'' to include indexes
underlying standardized index options and other indexes that meet
certain specified criteria; and (b) allow members to calculate the
position limits, in accordance with volume and float criteria specified
by the options exchanges, for conventional equity options overlying
securities that are part of the FTSE All-World Index Series.\3\ The
text of the proposed rule change is available on the NASD's Web site
(http: //www.nasd.com), at the NASD's principal office, and at the
Commission's Public Reference Room.
---------------------------------------------------------------------------
\3\ The Financial Times and the London Stock Exchange operate
the FTSE All-World Index Series, which covers approximately 30
different countries and over 1900 stocks.
---------------------------------------------------------------------------
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 NASD 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
Amendment to Definition of ``Underlying Index'': NASD Rule 2860
governs the activities of members in standardized and conventional
options contracts. Paragraph (b)(5) of Rule 2860 imposes a position-
reporting obligation on members when they or their customers establish
options positions that exceed certain thresholds. Specifically, members
are required to file, or cause to be filed, a report with NASD with
respect to each account that establishes an aggregate position of 200
or more contracts on the same side of the market covering the same
underlying security or index. The current definition of ``underlying
index'' is limited to an index upon which a Nasdaq index option is
based.\4\ Since Nasdaq no longer trades any index options, this
definition fails to require members to report positions in conventional
index options. The proposed rule change would require members to report
positions in conventional \5\ index options and would require access
firms to report position limits in standardized index options.\6\ In
[[Page 6118]]
a separate filing, in connection with NASD's proposed rule changes to
reflect Nasdaq's separation from NASD following the Commission's
approval of Nasdaq as a national securities exchange,\7\ NASD has
proposed to amend Rule 2860 to remove all references to Nasdaq.\8\
---------------------------------------------------------------------------
\4\ Nasdaq briefly traded stock index options in the mid-1980s.
\5\ A ``conventional option'' is an option contract not issued
or subject to issuance by the Options Clearing Corporation. See Rule
2860(b)(2)(N).
\6\ As noted in Notice to Members 01-01, the options position
reporting requirements are applicable to all standardized options
positions established by ``access'' firms or their customers and all
conventional options positions established by members or their
customers. Access firms, in this context, are understood to be NASD
members that conduct a business in standardized options but are not
themselves members of the options exchange upon which such options
are listed and traded.
\7\ See In the Matter of the Application of the Nasdaq Stock
Market LLC, Securities Exchange Act Release No. 53128 (January 13,
2006), 71 FR 3550 (January 23, 2006) (File No. 10-131).
\8\ See Securities Exchange Act Release No. 52049 (July 15,
2005), 70 FR 42398 (July 22, 2005) (SR-NASD-2005-087).
---------------------------------------------------------------------------
To require members to report members' and customers' positions in
conventional index options, NASD proposes amending the definition of
``underlying index'' to mean an index underlying a ``standardized index
option'' or ``conventional index option.'' In addition, the proposed
rule change would define the terms ``standardized index option'' and
``conventional index option.'' Under the proposed rule change, the
definition of ``underlying index'' would include indexes such as the
S&P 500, Dow Jones Industrial Average, and the Nasdaq 100, because
these indexes underlie standardized index options that are issued, or
subject to issuance, by the Options Clearing Corporation.
The proposed rule change also would amend the definition of
``underlying index'' to include certain indexes that do not underlie
standardized index options but that meet specified criteria. The
proposed criteria for customized indexes are based upon the standards
in place at the options exchanges for listing narrow-based index
options.\9\ The purpose of these criteria is to exclude from the
definition of ``underlying index'' indexes that are so narrowly
constructed that they are the economic equivalent of, or have
attributes of, an equity option on common stock. These criteria also
serve to prevent the creation of an index so narrow as to subvert
position limit requirements, which do not apply to conventional index
options.\10\
---------------------------------------------------------------------------
\9\ See, e.g., Chicago Board Options Exchange (``CBOE'') Rule
24.2(b).
\10\ See NASD Notice to Members 94-46 (June 1994).
---------------------------------------------------------------------------
Under the proposed rule change, a member would have the burden of
demonstrating that an index meets the specified criteria before it
would be considered a ``conventional index option.'' Thus, members
should maintain detailed records to be able to demonstrate promptly,
upon a request from NASD, that a particular ``conventional index
option'' meets the necessary criteria. Members also should be aware
that options based on a security that do not meet the definition of
``conventional index option'' would continue to be subject to position
limits and position reporting requirements as if the non-conforming
index were deconstructed into its equity security components.
Position Limits for Conventional Equity Options Overlying Certain
Foreign Securities: The proposed rule change also addresses the need
for members to identify position limits for conventional equity options
on securities that do not underlie a standardized equity option. Under
Rule 2860(b)(3)(viii), the position limits for conventional equity
options are the same as the limits for the standardized equity options
overlying the same security. For example, if standardized equity
options on ABC have a position limit of 75,000 contracts, then
conventional equity options on ABC also have a position limit of 75,000
contracts. On the other hand, for an option on an equally liquid
foreign security such as DEF, for which there are no standardized
equity options, a member must obtain prior approval from NASD staff for
any position limit in excess of 13,500 contracts (the base limit in the
absence of a pilot program \11\). Obtaining prior approval could place
a significant burden on a member's ability to execute transactions with
customers given the time difference between the foreign market and the
U.S. market and the time frame in which customers typically desire to
trade.
---------------------------------------------------------------------------
\11\ The six national securities exchanges that list and trade
options have adopted pilot rules establishing higher position limits
for standardized options. These pilots expire between February 23,
2006 and March 3, 2006. See infra note 12.
---------------------------------------------------------------------------
The proposed rule change would allow members to calculate on their
own the position limits for conventional equity options overlying
securities that are part of the FTSE All-World Index Series using the
volume and float criteria (as measured during the most recent six-month
period) established by the option exchanges' rules.\12\ The position
limit levels are described in the chart below:
---------------------------------------------------------------------------
\12\ See Commentary .07 to American Stock Exchange Rule 904,
section 7(c) of Chapter III of the Boston Options Exchange Rules,
Interpretation .02 to CBOE Rule 4.11; International Securities
Exchange Rule 412(d); Commentary .06 to Pacific Exchange Rule 6.8;
Commentary .05 to Philadelphia Stock Exchange Rule 1001.
------------------------------------------------------------------------
Options position limit Criteria
------------------------------------------------------------------------
22,500 (or 50,000 during the Trading volume of 20,000,000 shares; or
pilot period). trading volume of 15,000,000 shares, and
40,000,000 shares currently outstanding.
31,500 (or 75,000 during the Trading volume of 40,000,000 shares; or
pilot period). trading volume of 30,000,000 shares, and
120,000,000 shares currently
outstanding.
60,000 (or 200,000 during the Trading volume of 80,000,000 shares; or
pilot period). trading volume of 60,000,000 shares, and
240,000,000 shares currently
outstanding.
75,000 (or 250,000 during the Trading volume of 100,000,000 shares; or
pilot period). trading volume of 75,000,000 shares, and
300,000,000 shares currently
outstanding.
------------------------------------------------------------------------
NASD has chosen the FTSE All-World Index Series \13\ in part
because the Commission staff has deemed securities in the predecessor
to this index of foreign securities to receive comparable treatment to
U.S. equity securities under the securities haircut provisions of the
Commission's net capital rule as set forth in Rule 15c3-1 under the
Exchange Act,\14\ and the Federal Reserve Board recognizes this index
for determining whether stocks are eligible for margin treatment.\15\
Under the proposed rule change, a member would make a post-trade notice
filing-within
[[Page 6119]]
one business day--to NASD staff providing the necessary trade data and/
or current float data to support the member's position limit
calculation. Thus, in the example above, a conventional equity option
on DEF would be subject to a position limit of 75,000 contracts rather
than 13,500 contracts because the underlying securities'
characteristics meet the volume and float thresholds established by the
options exchanges necessary to raise the position limits from 13,500
contracts to 75,000 contracts, provided the member makes the necessary
filing within the prescribed time.
---------------------------------------------------------------------------
\13\ In the event NASD designates another index in addition to
or instead of the FTSE All-World Index Series, NASD will publish the
designation of the new applicable index in a Notice to Members and
provide members at least 30 days written notice of the change.
\14\ Letter to Dominic A. Carone, Capital Committee Chairman,
Securities Industry Association from Michael Macchiaroli, Assistant
Director, Division of Market Regulation, Commission, dated August
13, 1993. See 1993 SEC No-Act LEXIS 967 (Aug. 13, 1993).
\15\ See section 220.11(c) and (d) of Regulation T, 12 CFR part
220.11(c) and (d). See also 69 FR 10601 (March 8, 2004) (removing
certain foreign securities from the list of securities that meet the
financial requirements of section 220.11(c) and (d) of Regulation
T).
---------------------------------------------------------------------------
Under the proposed rule change, NASD staff would review the
member's notice filing, and, if the staff determined that a member
incorrectly assigned a position limit, it would notify the firm and
instruct the firm to reduce its position promptly to fall below the
appropriate limits determined by the NASD staff.
NASD would announce the effective date of the proposed rule change
in a Notice to Members to be published no later than 60 days following
Commission approval, if the Commission approves this proposal. The
effective date would be 30 days following publication of the Notice to
Members announcing any Commission approval.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of section 15A(b)(6) of the Exchange Act,\16\ which
requires, among other things, that NASD's rules must be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest. NASD believes that amending the
definition of ``underlying index'' would ensure more complete reporting
of options positions. NASD also believes that permitting members to
calculate position limits for certain foreign securities would enable
members to effect options transaction in such securities without
unnecessary delay.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
NASD does not believe that the proposed rule change would result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which the NASD consents, the Commission will:
A. By order approve such proposed rule change; or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
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 Exchange 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 rules-comments@sec.gov. Please include
File No. SR-NASD-2006-007 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-NASD-2006-007. 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. Copies of such
filing will also be available for inspection and copying at the
principal office of the NASD. 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-NASD-2006-007 and should be submitted on or before February
27, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------
\17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Nancy M. Morris,
Secretary.
[FR Doc. E6-1541 Filed 2-3-06; 8:45 am]
BILLING CODE 8010-01-P
