19992 Federal Register / Vol. 63, No. 77 /Wednesday, April 22, 1998 / Notices

3Securities Exchange Act Release No. 36684

(January 5, 1995), 61 FR 1195 [File Nos. SR–MCC–

95–04, SR–MSTC–95–10] (order approving

proposed rule changes relating to the withdrawal of

the Chicago Stock Exchange, Incorporated [‘‘CHX’’]

from the clearance and settlement and securities

depository businesses, conducted principally

through its subsidiaries, MCC and MSTC).

4Securities Exchange Act Release No. 39603

(January 30, 1998), 63 FR 5982 (order approving a

proposed rule change relating to the structure and

composition of CHX’s board of governors).

Historically, the MCC’s and MSTC’s board of

directors have been the same as the CHX’s board

of governors.

5 In an amendment to the proposed rule changes,

MCC and MSTC reference the definition of

nonindustry as defined by the CHX’s constitution.

Id.

6Class I will consist of seven directors, class II

will consist of seven directors, and class III will

consist of eight directors.

7 15 U.S.C. 78q–1. 8 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 200.19b–4.

3See Letter from Alden S. Adkins, Senior Vice

President and General Counsel, NASD Regulation,

to Katherine A. England, Assistant Director,

Commission, dated March 17, 1998 (‘‘Amendment

No. 1’’). Amendment No. 1 shortens the requested

extension by providing for an extension of the pilot

until December 31, 1998, instead of December 31,

1999.

services 3 and to streamline the structure

and composition of their board of

directors in order to remain consistent

with the changes recently made by the

Chicago Stock Exchange, Incorporated

(‘‘CHX’’).4

The proposed rule changes will

reduce the number of directors from 27

to 24 and will realign the classes for

both MCC and MSTC. The directors will

still be divided into three classes, but

the size and composition will be

adjusted as follows. At the 1998 annual

election, class I will be reduced by two

directors. At the 1999 annual election,

class II will be reduced by four

directors. At the 2000 annual election,

class III will be reduced by one director

and class II will be increased by one

director. The board of directors will also

be increased by three additional

nonindustry 5 directors by the 1999

annual election to serve for staggered

terms so as to balance the classes as

determined by the nominating

committee.6 The result of the reduction

of board members and the realignment

of the classes will be fifty percent

representation of nonindustry directors

on MCC’s and MSTC’s board of

directors.

MCC and MSTC believe that the

proposed rule changes are consistent

with Section 17A of the Act because the

changes to the structure and

composition of their board of directors

should promote an enhanced

governance structure and thereby will

help protect investors and the public

interest.7

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

MCC and MSTC do not believe that

the proposed rule changes will have an

impact on or impose a burden on

competition.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Changes Received From

Members, Participants, or Others

No written comments relating to the

proposed rule changes have been

solicited or received.

III. Date of Effectiveness of the

Proposed Rule Changes and Timing for

Commission Action

Within thirty-five 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

ninety 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 MCC and MSTC

consent, the Commission will:

(A) By order approve such proposed

rule changes or

(B) Institute proceedings to determine

whether the rule changes 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

changes are consistent with the Act.

Persons making written submissions

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 rule changes that are

filed with the Commission, and all

written communications relating to the

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 in the

Commission’s Public Reference Room in

Washington, D.C. Copies of such filings

will also be available for inspection and

copying at the principal office of MCC

and MSTC. All submissions should refer

to the File Nos. SR–MCC–98–01 and

SR–MSTC–98–01 and should be

submitted by May 13, 1998.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–10605 Filed 4–21–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39865; File No. SR–NASD–

98–02]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the National

Association of Securities Dealers, Inc.

Relating to an Extension of the Option

Position Limit Hedge Exemption Pilot

Program

April 14, 1998.

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 January

21, 1998, NASD Regulation, Inc.

(‘‘NASD Regulation’’) 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 self-regulatory organization.

NASD Regulation filed an amendment

to the proposed rule change on March

23, 1998.3 The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons. For the reasons

discussed below, the Commission is

granting accelerated approval of the

proposed rule change, as amended.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

NASD Regulation is proposing to

amend Rule 2860(b)(3)(A)(vii)(c) of the

National Association of Securities

Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’), to extend, until

December 31, 1998, the Association’s

pilot program for exemptions from

equity option position limits for certain

hedged positions (‘‘hedge exemption

pilot program’’). Below is the text of the

proposed rule change. Proposed new

language is in italics; proposed

deletions are in brackets.

Rule 2860. Options

* * * * *

(b)(3)(A)(vii) Equity Option Hedge

Exemption

a. The following positions, where

each option contract is ‘‘hedged’’ by 100
Federal Register / Vol. 63, No. 77 /Wednesday, April 22, 1998 / Notices 19993

4Position limits impose a ceiling on the number

of options contracts in each class on the same side

of the market, i.e., aggregating long calls and short

puts and long puts and short calls, that can be held

or written by an investor or group of investors

acting in concert. Rule 2860(b)(3)(A) currently

provides that equity option position limits are

4,500, 7,500, 10,500, 20,000, and 25,000 contracts,

depending on the trading volume and number of

outstanding shares of the underlying stock.

5Exercise limits restrict the number of options

contracts that an investor or group of investors

acting in concert can exercise within five

consecutive business days. Under NASD Rules,

exercise limits correspond to position limits, such

that investors in options classes on the same side

of the market are allowed to exercise, during any

five consecutive business days, only the number of

options contracts set forth as the applicable position

limit for those options classes. See NASD rule

2860(b)(3).

6Exchange Act Release No. 33783 (March 18,

1994), 59 FR 14229 (March 25, 1994).

7Exchange Act Release No. 36657 (December 29,

1995), 61 FR 434 (January 5, 1996).

8The four exempted hedge positions are: (1) long

stock and short calls; (2) long stock and long puts;

(3) short stock and long calls; and (4) short stock

and short puts.

9The Commission notes that NASD Regulation

determines on a case-by-case basis whether an

instrument that is being used as the basis for the

underlying hedged positions is readily convertible

into, or economically equivalent to, the security

underlying the corresponding option position. In

this regard, NASD Regulation generally finds that

an instrument that is not presently convertible into

a security, but which will be at a future date, is not

a ‘‘convertible’’ security for purposes of the hedge

exemption. In addition, NASD Regulation notes that

if a convertible security used to hedge an option

position is called for redemption by the issuer, the

security would have to be converted into the

underlying security immediately or the

corresponding option position would have to be

reduced accordingly.

10See, e.g., American Stock Exchange Rule 904;

Chicago Board Options Exchange Rule 4.11;

Philadelphia Stock Exchange Rule 1001; Pacific

Stock Exchange Rule 6.8.

11 15 U.S.C. § 78o–3.

shares of stock or securities readily

convertible into or economically

equivalent to such stock, or, in the case

of an adjusted option contract, the same

number of shares represented by the

adjusted contract, shall be exempted

from established limits contained in (i)

through (vi) above:

1. long call and short stock;

2. short call and long stock;

3. long put and long stock;

4. short put and short stock.

b. Except as provided under the OTC

Collar Exemption contained in

paragraph (b)(3)(A)(viii), in no event

may the maximum allowable position,

inclusive of options contracts hedged

pursuant to the equity option position

limit hedge exemption in subparagraph

a. above, exceed three times the

applicable position limit established in

paragraph (b)(3)(A)(i)–(v).

c. The Equity Option Hedge

Exemption is a pilot program authorized

by the Commission through December

31, 1998[7].

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

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

On February 9, 1990, the Commission

approved the NASD’s proposal to

implement a pilot program pursuant to

which certain fully hedged equity

option positions would be automatically

exempt from established position 4 and

exercise 5 limits. On March 18, 1994, the

Commission extended the NASD’s

hedge exemption pilot program through

December 31, 1995.6 On December 29,

1995, the Commission again extended

the NASD’s hedge exemption pilot

program through December 31, 1997.7

The proposed rule change herein would

extend the hedge exemption pilot

program for an additional one year, or

through December 31, 1998.

The NASD’s hedge exemption

provides for an automatic exemption

from equity option position limits for

accounts that have established one of

the four most commonly used hedged

positions 8 and where each option

contract is either (i) hedged by 100

shares of stock, (ii) hedged by securities

that are readily convertible into, or

economically equivalent to, such stock,9

or (iii) in the case of an adjusted options

contract, hedged by the number of

shares represented by the adjusted

contract.

Under the NASD’s hedge exemption,

the largest options position (combining

hedged and unhedged positions) that

may be established may not exceed

three times the basic position limits, i.e.,

13,500, 22,500, 31,500, 60,000, or

75,000 contracts, depending on the

basic position limit of the underlying

security. The exercise limit for options

positions established pursuant to the

hedge exemption are commensurate

with the position limits that may be

established pursuant to the hedge

exemption. Thus, for example, if the

position limit for an option is 25,000

contracts and an investor has

established a position of 75,000

contracts pursuant to the hedge

exemption, the investor may exercise all

75,000 contracts during five consecutive

business days.

The proposed rule change to extend

the effective date of the pilot program is

necessary to enable market participants

to continue to avail themselves of the

hedge exemption and to create parity

and consistency with the other selfregulatory organizations which have in

effect an equity hedge exemption.10 The

proposed rule change extends the

effective date until December 31, 1998.

2. Statutory Basis

NASD Regulation believes the

proposed rule change is consistent with

Section 15A(b)(6) of the Act.11 Section

15A(b)(6) requires that the rules of a

national securities association be

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 transaction in securities, to

remove impediments to and perfect the

mechanism of a free and open market

and a national system and, in general,

to protect investors and the public

interest. Specifically, the NASD believes

that extending the effectiveness of the

hedge exemption pilot program may

increase the depth and liquidity of the

options markets by permitting investors

to hedge greater amounts of stock than

would otherwise be permitted under

NASD rules. Extending the effectiveness

also will promote consistency among

the rules of the NASD and the other

options self-regulatory organizations.

The NASD notes that the higher

position limits currently available by

virtue of the hedge exemption have not

resulted in the disruptions of the

underlying stock market. However, the

NASD will continue to monitor the

market effects, if any, from the hedge

exemption to ensure that members are

complying with all applicable

requirements.

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.
19994 Federal Register / Vol. 63, No. 77 /Wednesday, April 22, 1998 / Notices

12 In approving this rule, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

13See Exchange Act Release Nos. 36657

(December 29, 1995), 61 FR 434 (January 5, 1996)

(accelerated approval extending effectiveness of

hedge exemption pilot program through December

31, 1997); 33783 (March 18, 1994), 59 FR 14229

(March 25, 1994) (accelerated approval extending

effectiveness of hedge exemption pilot program

through December 31, 1995).

14The Commission notes that NASD Regulation

initially requested that the equity option hedge

exemption pilot program be extended until

December 31, 1999. At the Commission’s request,

the proposed rule change was amended to shorten

the requested extension only until December 31,

1998. Given that the equity option hedge exemption

program has been running on a pilot basis for eight

years, the Commission recommends that NASD

Regulation either take steps to adopt the program

on a permanent basis in the near future or eliminate

it.

15 15 U.S.C. 78s(b)(2).

16 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3On April 13, 1998, the PCX submitted a letter,

in response to Commission staff questions,

providing a brief explanation of its proposed

method for admitting employees to participate in

the LMM Program and concerning its proposed

surveillance of the LMM Program employees and

operations. See Letter from Michael D. Pierson,

Senior Attorney, Regulatory Policy, PCX, to Marie

D’Aguanno Ito, Special Counsel, Division of Market

Regulation, Commission, dated April 13, 1998.

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.

III. Commission’s Findings and Order

Granting Accelerated Approval of the

Proposed Rule Change

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

association and, in particular, with the

requirements of Section 15A(b)(6).

Specifically, the Commission believes

that the proposed extension of the

NASD’s equity option position limit

hedge exemption pilot program will

accommodate the needs of investors and

market participants while at the same

time furthering investor protection and

the public interest.12

The Commission finds good cause to

approve the proposed rule change, as

amended prior to the 30th day after the

date of publication of notice of filing

thereof in the Federal Register.

Specifically, by accelerating the

approval of the NASD’s rule proposal,

the operation of the hedge exemption

pilot program, which as been in place

since 1990, will continue on an

uninterrupted basis until December 31,

1998. The Commission previously

extend the effectiveness of the equity

option hedge exemption pilot program

on an accelerated basis on two prior

occasions.13 The Commission believes

that Amendment No. 1 improves the

proposed rule change by shortening the

extension of the pilot program only

until December 31, 1998, instead of

December 31, 1999. An extension until

December 31, 1998 will give NASD

Regulation sufficient time to consider

the operation of the equity option hedge

exemption program without allowing

the program to drag on for another two

years on a pilot basis.14 The

Commission believes that good cause

exists to accelerate approval of the

proposed rule change, as amended,

because expressly continuing the hedge

exemption pilot program by rule will

reduce the potential for confusion about

the status of such exemption, which

expired on December 31, 1997, and will

promote consistency among the options

markets all of which are a similar

exemption. Accordingly, the

Commission believes that it is

consistent with Section 15A(b)(6) of the

Act to approve the proposed rule change

on an accelerated basis.

IV. Solicitation of Comments

Interested person are invited to

submit written data, views and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

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–98–02 and should be

submitted by May 13, 1998.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,15 that the

proposed rule change (SR–NASD–98–

02) is approved on a pilot basis until

December 31, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.16

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–10600 Filed 4–21–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39875; File No. SR–PCX–

98–02]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Pacific Exchange, Inc. Relating to

LMM Book Pilot Program Expansion to

Allow Book Staffing by Employees of

the LMM

April 15, 1998.

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 January

23, 1998, the Pacific Exchange, Inc.

(‘‘PCX’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) 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.3

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

PCX is proposing to expand its Lead

Market Maker (‘‘LMM’’) Book Pilot

Program by allowing qualified LMMs to

manage their own employees in

operating the options public limit order

book under the pilot program.

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.