65838 Federal Register / Vol. 62, No. 241 / Tuesday, December 16, 1997 / Notices

1 15 U.S.C. § 78s(b)(1).

2On 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.

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.

Jonathan G. Katz,

Secretary.

[FR Doc. 97–32750 Filed 12–15–97; 8:45 am]

BILLING CODE 8010–01–M

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.

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.

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.

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
Federal Register / Vol. 62, No. 241 / Tuesday, December 16, 1997 / Notices 65839

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. 5 15 U.S.C. § 78o–3. 6 17 CFR 200.30–3(a)(12).

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.

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.

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. § 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

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–32753 Filed 12–15–97; 8:45 am]

BILLING CODE 8010–01–M