[Federal Register Volume 62, Number 241 (Tuesday, December 16, 1997)]
[Notices]
[Pages 65838-65839]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32753]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39417; File No. SR-NASD-97-80]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc., 
Relating to Options Position Limits

December 9, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ notice is hereby given that on 
October 30, 1997, NASD Regulation, Inc. (``NASD Regulation'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by the self-regulatory organization. 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. Sec. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD Regulation is proposing to amend Rule 2860 of the Conduct 
Rules of the National Association of Securities Dealers, Inc. (``NASD'' 
or ``Association''), to exempt conventional equity option transactions 
that are intermediated by a member pursuant to Exchange Act Rule 15a-
6(a)(3) from options position limits provided that the member reports 
such transactions to the Association in accordance with the options 
position reporting requirements. Below is the text of the proposed rule 
change. Proposed new language is italicized.
2860. Options
    (b)(3) Position Limits;
    (A) Stock Options--Except in highly unusual circumstances, and with 
the prior written approval of the Association pursuant to the Rule 9600 
Series for good cause shown in each instance, no member shall effect 
for any account in which such member has an interest, or for the 
account of any partner, officer, director or employee thereof, or for 
the account of any customer, an opening transaction through Nasdaq, the 
over-the-counter market or on any exchange in a stock option contract 
of any class of stock options if the member has reason to believe that 
as a result of such transaction the member or partner, officer, 
director or employee thereof, or customer would, acting alone or in 
concert with others, directly or indirectly, hold or control or be 
obligated in respect of an aggregate position in excess of:
* * * * *
    (E) Conventional equity option transactions effected by a member 
pursuant to Exchange Act Rule 15a-6(a)(3) shall not be subject to 
position limits set forth in this subparagraph, provided that such 
conventional equity option transactions are reported to the Association 
in accordance with the requirements of subparagraph (5).

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 self-regulatory organization 
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 self-regulatory organization 
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 proposed rule change would exempt conventional equity option 
transactions in which members act as agent or intermediary pursuant to 
Exchange Act Rule 15a-6(a)(3) from options position limits provided 
that such conventional equity option transactions are reported to the 
Association pursuant to Rule 2860(b)(5). NASD Rule 2860(b)(3) 
establishes limits on the number of options contracts that a member, a 
customer, or a group of investors acting in concert can write or hold. 
Specifically, Rule 2860(b)(3) provides that ``no member shall effect * 
* * for the account of any customer, an opening transaction through 
Nasdaq, the over-the-counter market or on any exchange in a stock 
option contract of any class of stock options if the * * * customer 
would * * * hold or control or be obligated in respect to an aggregate 
position in excess of [certain prescribed limits].'' \2\ Members have 
expressed uncertainty as to whether U.S. broker/dealers that 
intermediate conventional equity option transactions between their 
affiliated foreign broker/dealers and U.S. institutional investors and 
major U.S. institutional investors pursuant to Rule 15a-6(a)(3), and 
that do not carry such options positions, are subject to the limits of 
the Rule. The NASD's options position limits apply to both conventional 
and standardized equity options. The proposed rule change, however, 
would affect only transactions in conventional equity options 
intermediated by a member pursuant to Rule 15a-6(a)(3). Position limits 
for all other conventional equity options transactions, as well as for 
standardized options, would remain unchanged.
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    \2\ On September 5, 1997, the NASD filed a proposed rule change 
to Rule 2860(b) to disaggregate conventional equity options from 
exchange-traded equity options for position limit purposes and to 
amend the OTC Collar Exemption to provide that the exemption may be 
utilized with respect to an entire conventional equity option 
position, not just that portion that was established pursuant to the 
NASD's position limit hedge exemption rule. SR-NASD-97-67. This 
proposed rule change is currently pending with the Commission.
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    NASD Regulation believes that Rule 2860 is ambiguous as to whether 
the limits specified in the Rule apply to option position transactions 
intermediated by a member firm under Rule 15a-6(a)(3),\3\ and 
understands that industry practice in this respect is inconsistent. 
NASD Regulation is filing this proposed rule change in order to provide 
clarity and consistency of treatment for all member firms participating 
in transactions with foreign broker/dealers under Rule 15a-6(a)(3), and 
also to ensure that such transactions are reported under paragraph 
(b)(5) of the Rule.
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    \3\ In NASD Notice to Members 94-46, the NASD answered common 
questions concerning position limits, and included the following:
    Question #5: Do the NASD options rules apply to conventional 
option transactions effected abroad by an NASD member or a foreign 
branch of an NASD member?
    Answer: Yes. If the option is booked and carried with an NASD 
member, it is subject to the NASD position-limit rule.
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    NASD Regulation proposes amending Rule 2860(b)(3) to expressly 
exempt conventional equity option transactions intermediated by U.S. 
broker/dealers pursuant to Rule 15a-6(a)(3), provided that the member 
report to the Association such transactions which establish an 
aggregate position of 200 or more option contracts pursuant to Rule 
2860(b)(5). Exchange Act Rule 15a-6(a)(3) provides that a foreign 
broker or dealer may, without registering under the Securities Exchange 
Act of 1934, induce or attempt to induce the

[[Page 65839]]

purchase or sale of any security by a U.S. institutional investor or 
major U.S. institutional investor so long as a registered U.S. broker/
dealer intermediates such transaction.\4\ By intermediating 
transactions, the U.S. broker/dealer is responsible for: (1) Effecting 
the transactions, other than negotiating their terms; (2) issuing all 
required confirmations and statements; (3) extending or arranging any 
credit to the U.S. institutional investor or major U.S. institutional 
investor in connection with the transactions; (4) maintaining required 
books and records relating to the transactions; (5) complying with the 
net capital requirements of Exchange Act Rule 15c3-1 with respect to 
the transactions; and (6) receiving, delivering, and safeguarding funds 
and securities in connection with the transactions on behalf of the 
U.S. institutional investor or the major U.S. institutional investor in 
compliance with Exchange Act Rule 15c3-3. While the responsibilities of 
a U.S. broker/dealer under Rule 15a-6(a)(3) may be significant, they do 
not otherwise change what is essentially a foreign transaction between 
a U.S. institutional customer and a foreign broker/dealer. Further, as 
a jurisdictional matter, the NASD's options position limits do not 
apply to transactions that occur directly between a U.S. customer and a 
foreign broker/dealer.
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    \4\ In a no-action letter dated April 9, 1997, 1997 SEC No-Act. 
LEXIS 525, the Commission expanded the exemption under Rule 15a-6 to 
include transactions with any entity that owns or controls in excess 
of $100 million in aggregate financial assets and modified the 
clearance and settlement requirements of an intermediating U.S. 
broker/dealer with respect to foreign securities and U.S. Government 
securities. Additionally, the no-action letter expanded the range of 
permissible contacts between foreign broker/dealers and U.S. 
institutional investors.
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    The proposed rule change would require Rule 15a-6(a)(3) 
conventional equity option transactions to be reported to the NASD in 
accordance with the reporting requirements for large options positions 
generally. Rule 2860(b)(5)(ii) imposes reporting obligations on ``each 
account in which the member has an interest * * * and each customer 
account, which has established an aggregate position of 200 or more 
option contracts * * *.'' Under the proposed rule change, conventional 
equity option transactions intermediated by a member pursuant to Rule 
15a-6(a)(3) that establish an aggregate position of 200 or more option 
contracts would be reported to the Association. Although an 
institutional investor entering into an option transaction with a 
foreign broker/dealer that is booked with a member pursuant to Rule 
15a-6(a)(3) is a customer of the foreign broker/dealer, and not the 
member, the proposed rule change would require the member to report the 
identity of the person or persons having an interest in an option 
position and the total of number of contracts in accordance with Rule 
2860(b)(5)(ii). The information reported to the Association would be 
used by the NASD Regulation Market Regulation staff as part of their 
ongoing market surveillance operations and should minimize the risk of 
any market manipulation or disruption related to the accumulation or 
disposition of large options positions.
    The proposed rule change may raise concerns that it could motivate 
members to move their existing conventional equity options business to 
off-shore broker/dealer affiliates to avoid position limits entirely. 
In response to these concerns, NASD Regulation notes that the proposed 
rule change is limited to transactions ``effected pursuant to Exchange 
Act Rule 15a-6(a)(3)''--i.e., trades negotiated between a foreign 
broker/dealer and a U.S. institutional investor or major U.S. 
institutional investor for which the U.S. broker/dealer is acting 
solely in the limited capacity prescribed by Rule 15a-6(a)(3). The 
proposed rule change would not allow a member to negotiate an option 
transaction with a U.S. institutional customer and then book such 
transaction with a foreign broker/dealer affiliate and thereby avoid 
position limits because such transaction would not be ``effected 
pursuant to Exchange Act Rule 15a-6(a)(3).''
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act \5\ in 
that it promotes just and equitable principles of trade, removes 
impediments to and perfects the mechanism of a free and open market and 
a national market system, and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \5\ 15 U.S.C. Sec. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Association 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

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the 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 self-regulatory organization consents, the Commission will:
    (A) By order approve the 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. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Room. Copies of such filing will also 
be available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-NASD-97-80 and 
should be submitted by January 6, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-32753 Filed 12-15-97; 8:45 am]
BILLING CODE 8010-01-M