[Federal Register Volume 62, Number 20 (Thursday, January 30, 1997)]
[Notices]
[Pages 4555-4556]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2260]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38202; File No. SR-Amex-96-41]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendments 
Nos. 1 and 2 Thereto by the American Stock Exchange, Inc., Relating to 
an Increase in Narrow-Based Index Option Position and Exercise Limits

January 23, 1997.
    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 November 1, 1996, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') filed with the Securities Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the self-regulatory 
organization. The Amex subsequently filed Amendment No. 1 to the 
proposed rule change on November 15, 1996 \3\ and Amendment No. 2 to 
the proposed rule change on January 16, 1997.\4\ The Exchange has 
requested accelerated approval for the proposal. This order approves 
the Amex's proposal, as amended, on an accelerated basis and solicits 
comments from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Claudia Crowley, Special Counsel, Legal and 
Regulatory Policy, Amex, to Matthew Morris, Division of Market 
Regulation (``Division''), Commission, dated November 15, 1996 
(``Amendment No. 1''). In Amendment No. 1, the Amex amended its rule 
filing to restate Item 3(a) in order to correct various errors 
contained in the original filing and withdrew its request that the 
proposed rule change be given accelerated effectiveness pursuant to 
Section 19(b)(2) of the Act.
    \4\ See letter from Claudia Crowley, Special Counsel, Legal and 
Regulatory Policy, Amex, to Matthew Morris, Division, Commission, 
dated January 16, 1997 (``Amendment No. 2''). In Amendment No. 2, 
the Amex withdrew its request that the Computer Technology Index be 
given preferential treatment with respect to position and exercise 
limits and renewed its request that the proposed rule change be 
given accelerated effectiveness pursuant to Section 19(b)(2) of the 
Act.
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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 904C to increase 
position and exercise limits for narrow-based index options from 6,000, 
9,000, or 12,000 contracts to 9,000, 12,000, or 15,000 contracts.\5\
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    \5\ Position limits impose a ceiling on the number of option 
contracts which an investor or group of investors acting in concert 
may hold or write in each class of options on the same side of the 
market (i.e., aggregating long calls and short puts or long puts and 
short calls). Exercise limits prohibit an investor or group of 
investors acting in concert from exercising more than a specified 
number of puts or calls in a particular class within five 
consecutive business days.
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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 III below. The Amex 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
    Exchange Rules 904C and 905C provide that position and exercise 
limits for narrow-based index options be set at one of three levels 
depending upon the weightings of the component securities in such 
narrow-based index. Currently, a narrow-based index option will have a 
6,000 contract limit if a single component security accounts for more 
than 30% of the index value; a 9,000 contract limit if a single 
component security accounts for more than 20% (but less than 30%) of 
the index value or any five component securities together account for 
more than 50% of the index value; and a 12,000 contract limit for those 
narrow-based indexes that do not fall within any one of the other 
categories.
    According to the Exchange, stringent position limits create 
difficulties for investors in narrow-based index options, especially 
for those institutional investors who own large portfolios of the 
component securities and who generally use the options markets to hedge 
those portfolios. Therefore, the Exchange proposes an increase in the 
position and exercise limits to 9,000 for the lowest level; 12,000 for 
the middle level; and 15,000 for the highest level.
    The Exchange believes that this increase in position and exercise 
limits is appropriate in that the current limits have been in place 
since November 30, 1995,\6\ and the proposed increases are consistent 
with the Commission's gradual approach to increase position and 
exercise limits. According to the Exchange, in the past year, there has 
been a notable increase in narrow-based index option trading. For 
example, through September 1996, narrow-based index option volume has 
increased 42% over all of 1995. As discussed above, the Exchange 
believes that these increases are needed by investors and will thus 
increase the depth and liquidity of the market for narrow-based index 
options without causing any market disruption. In addition, the 
Exchange will continue to monitor and surveil for manipulation and 
violations of the position and exercise limits through the use of the 
monitoring systems currently in place.
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    \6\ See Securities Exchange Act Release No. 36537 (November 30, 
1995), 60 FR 62916 (December 7, 1995) (order establishing position 
and exercise limits for narrow-based index options at 6,000, 9,000 
or 12,000 contracts) (Amex-95-45).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5) in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and is not designed to permit unfair 
discrimination between customers, issuers, brokers or dealers.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Comments were neither solicited nor received with respect to the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W.,

[[Page 4556]]

Washington, D.C. 20549. Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
changes that are filed with the Commission, and all written 
communications relating to the proposed rule changes between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying at the Commission's Public 
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of such filings also will be available for inspection and 
copying at the principal office of the Amex. All submissions should 
refer to File No. SR-Ames-96-41 and should be submitted by February 20, 
1997.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities exchange, and, in particular, the requirements of 
Section 6(b)(5) thereunder.
    Since the inception of standardized options trading, the options 
exchanges have had rules imposing limits on the aggregate number of 
option contracts that a member or customer can hold or exercise. These 
rules are intended to prevent the establishment of large options 
positions that can be used or might create incentives to manipulate or 
disrupt the underlying market so as to benefit the options position. At 
the same time, the Commission has recognized that option position and 
exercise limits must not be established at levels that are so low as to 
discourage participation in the options market by institutions and 
other investors with substantial hedging needs or to prevent 
specialists and market makers from adequately meeting their obligations 
to maintain a fair and orderly market.
    In this regard, the Amex has stated that the current position 
limits discourage market participation by certain large investors and 
the institutions that compete to facilitate their trading. In addition, 
the Amex notes that index option trading volume has increased 
significantly since 1995, when the current industry index option 
position limits were established. In light of the increased volume of 
narrow-based index option trading and the needs of investors and market 
makers, the Commission believes that the Amex's proposal is a 
reasonable effort to accommodate the needs of market participants.
    In addition, the Commission notes that the proposal, while 
increasing the positions limits for narrow-based index options, 
continues to reflect the unique characteristics of each index option 
and maintains the structure of the current three-tiered system. 
Specifically, the lowest proposed limit, 9,000 contracts, will apply to 
narrow-based index options in which a single underlying stock accounts 
for 30% or more of the index value during the 30-day period immediately 
preceding the Exchange's review of industry index option positions 
limits. A position limit of 12,000 contracts will apply if any single 
underlying stock accounts, on average, for 20% or more of the index 
value or any five underlying stocks account, on average for more than 
50% of the index value, but no single stock in the group accounts, on 
average, for 30% or more of the index value during the 30-day period 
immediately preceding the Exchange's review of industry index option 
position limits. The 15,000 contract limit will apply only if the 
Exchange determines that the conditions requiring either the 9,000 
contract limit or the 12,000 contract limit have not occurred.
    The Commission believes that the proposed increases for the three 
tiers of 25%, 33%, and 50%, for highest to lowest, respectively, appear 
to be appropriate and consistent with the Commission's evolutionary 
approach to position and exercise limits. In this regard, the absence 
of discernible manipulative problems under the current three-tiered 
position and exercise limit system for narrow-based index options leads 
the Commission to conclude that the increases proposed by the Exchange 
are warranted. The Commission recognizes that there are no ideal limits 
in the sense that options positions of any given size can be stated 
conclusively to be free of any manipulative concerns. Based upon the 
absence of discernible manipulation or disruption problems under 
current limits, however, the Commission believes that the proposed 
limits can be safely considered. Accordingly, the Commission believes 
that the Amex's proposed increases of existing position and exercise 
limits for narrow-based index options is appropriate.\7\
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    \7\ The Commission continues to believe that proposals to 
increase position limits and exercise limits must be justified and 
evaluated separately. After reviewing the proposed exercise limits, 
along with the eligibility criteria for each tier, the Commission 
has concluded that the proposed exercise limit increases for the 
three-tiered framework do not raise manipulation problems or 
increase concerns over market disruption in the underlying 
securities.
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    The Commission notes that the Exchange has had considerable 
experience monitoring the current three-tiered framework in narrow-
based index options. The Commission has not found that differing 
position and exercise limit requirements based on the particular 
options product to have created programming or monitoring problems for 
securities firms, or to have led to significant customer confusion. 
Based on the current experience in handling position and exercise 
limits, the Commission believes that the proposed increase in position 
and exercise limits for narrow-based index options will not cause 
significant problems.
    Finally, the Commission believes that the Exchange's surveillance 
programs are adequate to detect and to deter violations of position and 
exercise limits as well as to detect and deter attempted manipulative 
activity and other trading abuses through the use of such illegal 
positions by market participants.
    The Commission finds good cause to approve the proposal, as 
amended, prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. On October 24, 1996, 
the Commission approved an identical proposal for the Philadelphia 
Stock Exchange, Inc. (``Phlx'').\8\ The Phlx's proposal was subject to 
the full comment period and generated no responses. Amendments Nos. 1 
and 2 conformed the Amex's rule filing to the Phlx's proposal. 
Accordingly, the Commission believes that it is consistent with 
Sections 6(b)(5) and 19(b)(2) of the Act to approve the proposed rule 
change, as amended, on an accelerated basis.
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    \8\ See Securities Exchange Act Release No. 37863 (October 24, 
1996), 61 FR 56599 (November 1, 1996) (order establishing position 
and exercise limits for narrow-based index options at 9,000, 12,000, 
or 15,000 contracts) (Phlx-96-33).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) \9\ of the 
Act, that the proposed rule change (File No. SR-Amex-96-41), as 
amended, is hereby approved on an accelerated basis.
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    \9\ 15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2260 Filed 1-29-97; 8:45 am]
BILLING CODE 8010-01-M