33746 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 / Notices

comprehensive surveillance agreement require that

the parties to the agreement provide each other,

upon request, information about market trading

activity, clearing activity and customer identity. See

Securities Exchange Act Release No. 31529

(November 27, 1992). 19 15 U.S.C. 78s(b)(2).

20 17 CFR 200.30–3(a)(12) (1994).

1 15 U.S.C. 78s(b)(1) (1988).

2 17 CFR 240.19b–4 (1994).

3See Letter to Katherine A. England, Assistant

Director, Division of Market Regulation,

Commission, from John M. Ramsay, Vice President

and Deputy General Counsel, NASD Regulation,

dated April 29, 1998 (‘‘Amendment No. 1’’).

Amendment No. 1 makes certain technical

corrections to the text of the proposed rule change.

availability of information needed to

fully investigate a potential

manipulation if it were to occur. For

foreign stock index derivative products,

these agreements are especially

important to facilitate the collection of

necessary regulatory, surveillance and

other information from foreign

jurisdictions. In order to address the

above concerns, the Commission notes

that the Index will be maintained in

accordance with CBOE Rule 31.5(E)(7),

which states that foreign country

securities or ADRs that are not subject

to a comprehensive surveillance

agreement and have less than 50% of

their global trading volume in dollar

value in the United States, cannot, in

the aggregate, represent more than 20%

of the weight of an index.

For the reasons discussed above, the

Commission finds good cause to

approve Amendment No. 2 prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. Specifically,

Amendment No. 2 provides that the

Index value will be disseminated every

15 seconds and will be calculated based

on real-time prices, for all of the

component stocks, including those

foreign stocks that are traded during

CBOE trading hours. With respect to

foreign stock components that trade

during CBOE trading hours, each Index

calculation will use the most recent last

sale price from the appropriate home

market. For foreign stocks that do not

trade during CBOE trading hours, the

closing price will be used to calculate

the Index value. In addition,

Amendment No. 2 clarifies that

component securities will be replaced

or supplemented only under the events

discussed below. Absent unusual

circumstances involving a merger or

consolidation, conversion into another

class of securities, a spin-off, or the

termination of a depositary receipt

program, the Exchange will adhere to

the following procedures: (1) in the

event of a merger or consolidation

(whether between component stocks or

between one component stock and one

non-component stock), the original

component stock will be replaced by the

new security; (2) in the event of a

conversion into another class of

security, the original component stock

will be replaced by the new security; (3)

in the event of a spin-off of a subsidiary,

both the subsidiary issue and the

original parent security will be included

in the Index, unless the subsidiary is an

insignificant percentage of the original

security, in which case the CBOE will

consult with the SEC prior to omitting

the subsidiary issuer from the Index;

and (4) should a depositary receipt

program be terminated, for any reason,

after an ADR had already been included

in the Index, the CBOE in consultation

with the SEC staff will evaluate the

appropriate procedure to be employed

to ensure continuity of the Index. The

Commission notes that no comments

were received when the original notice

of the proposed rule change was

published and that no new regulatory

issues are presented in Amendment No.

2.

Accordingly, the Commission believes

that it is consistent with Sections 6(b)(5)

and 19(b)(2)19 of the Act, to find good

cause exists to approve Amendment No.

2 on an accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

2, 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 in

the Commission’s Public Reference

Room, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of CBOE. All submissions should

refer to File No. SR–CBOE–98–17 and

should be submitted by July 10, 1998.

For the foregoing reasons, the

Commission finds that the CBOE’s

proposal to list and trade warrants based

on the Index is consistent with the

requirements of the Act and the rules

and regulations thereunder.

It is therefore ordered, pursuant to

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

proposed rule change (SR–CBOE–98–

17), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.20

Jonathan G. Katz,

Secretary.

[FR Doc. 98–16349 Filed 6–18–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40087; File No. SR–NASD–

98–23]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc; Order Granting Approval

and Notice of Filing and Order

Granting Accelerated Approval to

Amendment No. 1 and Amendment No.

2 to Proposed Rule Change Relating to

an Amendment to the NASD’s Options

Position Limit Rule

June 12, 1998.

I. Introduction

On March 10, 1998, NASD

Regulation, Inc. (‘‘NASD Regulation’’)

submitted to the Securities and

Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 1 and

Rule 19b–4 thereunder,2 a proposed rule

change to amend Rule 2860(b) of the

National Association of Securities

Dealers, Inc. (‘‘NASD’’) or

‘‘Association’’) to: (1) increase the

position limits on conventional equity

options to three times the basic position

limits for standardized equity options

on the same security; (2) disaggregate

conventional equity options from

standardized equity options and FLEX

Equity Options for position limit

purposes; and (3) provide that the OTC

Collar Aggregation Exemption shall be

available with respect to an entire

conventional equity options position,

not just that portion of the position that

is established pursuant to the NASD’s

Equity Option Hedge Exemption.

The proposed rule change was

published for comment in Exchange Act

Release No. 39893 (April 21, 1998), 63

FR 23317 (April 28, 1998) NASD

Regulations submitted an amendment to

the proposed rule change on April 29,

1998.3 A second amendment to the
Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 / Notices 33747

4See Letter to Katherine A. England, Assistant

Director, Division of Market Regulation,

Commission, from Gary L. Goldsholle, Assistant

General Counsel, NASD Regulation, dated June 2,

1998 (‘‘Amendment No. 2’’). Amendment No. 2

corrects a deficiency in the language of the

proposed rule change by clarifying that the tripling

aspect of the proposal will apply to all conventional

equity options. Under the current rules, the position

limits for conventional equity options overlying a

security for which there is no standardize equity

options contract is set at 4,500 contracts, or such

higher limit for which the underlying security

would qualify. As now written, the proposed rule

language establishes position limits for

conventional equity options at ‘‘three times the

applicable position limit established for

standardized equity options overlying the security,’’

but does not take into account the circumstance

where there is no standardized equity option

contract overlying the security. Amendment No. 2

proposes language that triples the position limits for

all conventional equity options, including those for

which there is no standardize equity option

contract overlying the security.

5See Letter to Jonathan G. Katz, Secretary,

Commission, from Deutsche Bank Securities, Inc.,

Merrill Lynch, Pierce Fenner & Smith, Inc., Morgan

Stanley & Co., Inc., Salomon Brothers Inc./Smith

Barney, Inc., and SBC Warburg Dillon Read, Inc.,

dated June 2, 1998 (‘‘Firms’ Letter’’). The letter

supports the approval of SR–NASD–98–23, as

amended.

The Commission notes that it received a comment

letter on a separate NASD rule filing (SR–NASD–

97–80) on January 23, 1998, that is relevant to

present filing. The letter supported the approval of

SR–NASD–97–80, as well a SR–NASD–97–67,

which was substantively very similar to the present

filing. SR–NASD–97–67, was withdrawn and

replaced by the present filing. See Letter to

Jonathan G. Katz, Secretary, Commission, from

Bear, Stearns & Co., Deutsche Morgan Grenfell, Inc.,

Goldman, Sachs & Co., Lehman Brothers, Inc.,

Merrill Lynch, Pierce Fenner & Smith, Inc., Morgan

Stanley & Co., Inc., Natwest Securities Corporation,

Salomon Brothers, Inc., SBC Warburg Dillon Read,

Inc., and Smith Barney, Inc., dated January 23,

1998.

6Position limits impose a ceiling on the number

of option contracts in each class on the same side

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

puts or long puts and short calls) that can be held

or written by an investor or group of investors

acting in concert. Exercise 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 Rules 2860(b) (3) and (4).

7Currently, the five tiers are for 4,500, 7,500,

10,500, 20,000, and 25,000 contracts NASD rules do

not specifically govern how a specific equity option

falls within one of the five position limit tiers.

Rather, the NASD’s position limit established by an

options exchange(s) for a particular equity option is

the applicable position limit for purpose of the

Government’s rule.

8Standardized options are exchange-traded

options issued by the Options Clearing Corporation

(‘‘OCC’’) that have standard terms with respect to

strike prices, expiration dates, and the amount of

the underlying security. A conventional option is

any other option contract not issued, or subject to

issuance by, OCC.

9See Exchange Act Release No. 39032 (September

9, 1997) 62 FR 48683 (September 16, 1997).

10SR–NASD–98–15. The Commission notes that

SR–NASD–98–15 was approved on March 19, 1998.

See Exchange Act Release No. 39771 (March 19,

1998), 63 FR 14743 (March 26, 1998).

11Rule 2860(b)(3)(A)(vii).

12 2860(b)(3)(A)(viii).

proposed rule change was submitted on

June 3, 1998.4 One comment letter was

received on the proposal 5 This order

approves the proposed rule change, as

amended.

II. Description

NASD Rule 2860(b)(3) provided that

the position limit 6 for each equity

option is determined according to a fivetiered system whereby more actively

traded securities with larger public

floats are subject to higher position

limits and less actively traded stocks are

subject to lower limits.7 Presently,

conventional and standardized equity

options are subject to the same position

limits, and all equity options overlying

a particular equity security on the same

side of the market are aggregated for

position limit purposes, regardless of

whether the option is a conventional,

standardized or FLEX Equity Option.8

On September 9, 1997, the Commission

approved a two-year pilot program

(‘‘Pilot Program’’) to eliminate position

and exercise limits for FLEX Equity

Options, which are traded on the

American Stock Exchange, Inc.

(‘‘AMEX’’), the Chicago Board Options

Exchange, Inc. (‘‘CBOE’’), and the

Pacific Exchange, Inc. (‘‘PCX’’)

(collectively ‘‘Options Exchange’’).9 In

light of the Pilot Program, NASD

Regulation is proposing to amend its

rules governing position and exercise

limits for conventional equity options.

NASD Regulation previously has filed a

proposed rule change to eliminate

position and exercise limits on FLEX

Equity Options to make its rules

consistent with the Pilot Program.10

NASD Regulation believes the proposed

rule change herein is necessary to foster

competition between the over-thecounter (‘‘OTC’’) market and the

Options Exchanges.

FLEX Equity Options are exchangetraded options issued by the OCC that

give investors the ability, within

specified limits, to designate certain

terms of the option (i.e., the exercise

price, exercise style, expiration date,

and option type). Because they are nonuniform and individually negotiated,

FLEX Equity Options closely resemble

and are economically equivalent to

conventional equity options.

Accordingly, to align more closely the

NASD’s position limit rules for

conventional equity options with the

rules for FLEX Equity Options, NASD

Regulation proposes to amend Rule

2860(b)(3) to provide that: (1) position

limits on conventional equity options

shall be increased to three times the

basic position limits for standardized

equity options on the same security, (2)

conventional equity options shall be

disaggregated from standardized equity

options FLEX Equity Options for

position limit purposes; and (3) the OTC

Collar Aggregation Exemption shall be

available with respect to an entire

conventional equity options position,

not just that portion of the position that

is established pursuant to the NASD’s

Equity Option Hedge Exemption.

The NASD’s Equity Option Hedge

Exemption 11 provides for an automatic

exemption from equity option limits for

accounts that have established hedged

positions on a limited one-for-one basis

(i.e., 100 shares of stock for one option

contract). Under the Equity Option

Hedge Exemption, the largest options

position that may be established

(combining hedged and unhedged

positions) may not exceed three times

the basic position limit. The OTC Collar

Aggregation Exemption 12 provides that

positions in conventional put and call

options establishing OTC collars need

not be aggregated for position limit

purposes. An OTC collar transaction

involves the purchase (sale) of a put and

the sale (purchase) of a call on the same

underlying security to hedge a long

(short) stock position.

At the present time, NASD Regulation

believes that the prudent regulatory

approach is to increase position limits

on conventional equity options in

conjunction with continued availability

of the Equity Option Hedge Exemption

and OTC Collar Aggregation Exemption.

NASD Regulation proposes an

incremental approach and in this case

believes increasing position limits for

conventional equity options to three

times the position limits for

standardized equity options is

appropriate. These proposed limits

correspond to the position limits in

effect for FLEX Equity Options prior to

the Pilot Program.

NASD Regulation also believes that

conventional equity options positions

should not be aggregated with

standardized and FLEX Equity Options

on the same securities for position limit

purposes. It believes that disaggregation

of conventional and other options is

necessary to give full effect to the

proposed increase in position limits for

conventional equity options. Without

disaggregation, positions in FLEX

Equity Option or standardized option

positions would reduce or potentially

even eliminate (in the case of FLEX
33748 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 / Notices

13While the OTC Collar Aggregation Exemption

is self-effectuating with respect to the hedged

components of conventional options positions,

NASD Regulation has also permitted members to

include non-hedged positions within OTC collars

under the terms of the OTC Collar Aggregation

Exemption on a pre-approval basis. Accordingly,

the instant rule change would turn this preapproval process for non-hedged components of

OTC collars into a self-effectuating process.

14 15 U.S.C. 78o–3(b)(6).

15As stated earlier, under NASD rules

conventional and standardized equity options

currently are subject to the same position limits,

and all equity options overlying a particular equity

security on the same side of the market are

aggregated for position limit purposes, regardless of

whether the option is a conventional, standardized

of FLEX Equity Option.

16Mini-manipulation is an attempt to influence,

over a relatively small range, the price movement

in a stock to benefit a previously established

derivatives position.

17See H.R. Rep. No. IFC–3, 96th Cong., 1st Sess.

at 189–91 (Comm. Print 1978) (‘‘Options Study’’).

Equity Options) the available position

limits for conventional equity options.

To illustrate how these proposed

amendments would work, consider the

following example of stock ABCD,

which is subject to a position limit of

25,000 standardized equity option

contracts. In this example, a market

participant could establish a position of

25,000 standardized option contracts on

ABCD and an additional 75,000

conventional option contracts on ABCD

on the same side of the market, since

conventional and standardized option

positions would be disaggregated. In

addition, the market participant also

may have a position of any size in FLEX

Equity Options overlying ABCD, since

such FLEX Equity Options would not be

aggregated with either the conventional

equity options or standardized equity

options overlying ABCD. Further, by

taking advantage of the Equity Option

Hedge Exemption, which permits a

market participant to assume a hedged

options position that is three times the

otherwise applicable position limit, a

market participant could increase the

number of conventional equity options

to 225,000 contracts.

NASD Regulation proposes to modify

the terms of the OTC Collar Aggregation

Exemption to apply to an entire

conventional equity option position, not

just the portion that is established

pursuant to the Equity Option Hedge

Exemption. NASD Regulation believes

such an amendment is consistent with

the economic logic underlying the OTC

Collar Aggregation Exemption, i.e., that

if the terms of the exemption are met,

the segments of an OTC collar will

never both be in-the-money at the same

time or exercised. Under current rules,

assuming that stock ABCD is subject to

a basic position limit of 25,000

contracts, a market participant taking

advantage of the Equity Option Hedge

Exemption could establish a hedged

position on ABCD involving a total of

75,000 conventional equity option

contracts (three times the basic limit),

including 50,000 contracts that are

established under the Equity Option

Hedge Exemption. A market participant

using the OTC Collar Aggregation

Exemption could then establish a

conventional position of 50,000 long

(short) calls and 50,000 short (long)

puts, for a total of 125,000 contracts

overlying ABCD. The proposed rule

change to the OTC Collar Aggregation

Exemption would allow a market

participant to establish a collar

consisting of two segments, each of

which involves a position three times

greater than the basic position limit.

Consequently, using the example above,

a market participant could establish an

OTC collar on ABCD involving 75,000

long (short) calls and 75,000 short (long)

puts, for a total of 150,000 contracts.13

If, however, the basic position limits

for conventional options were tripled, as

proposed above, the permissible options

position established under the OTC

Collar Aggregation Exemption would be

correspondingly increased. For

example, if the market participate in the

above example had increased the size of

its conventional options position to

225,000 contracts pursuant to the Equity

Option Hedge Exemption as proposed

above (based upon a limit of three times

the 75,000 conventional equity options

position limit), the market participant

could establish an OTC collar on ABCD

involving 225,000 long (short) calls and

225,000 short (long) puts, for a total of

450,000 contracts.

Finally, in addition to the proposed

rule changes discussed above, the NASD

is proposing to clarify and update the

examples contained in IM–2860–1 so

that they are consistent with the instant

proposal and prior increases in the

hedge exemption.

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to the Association, and, in

particular, with the requirements of

Section 15A(b)(6).14 Specifically, the

Commission believes that the proposed

rule change 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.

The Commission also believes that the

proposed rule changes is consistent

with Section 11A of the Act in that it

will increase the position limits on

conventional equity options,

disaggregate conventional equity

options from exchange-traded equity

options for position limit purposes, and

provide that the OTC Collar Aggregation

Exemption may be utilized with respect

to any conventional equity options

position, not just that part of the

position that is established pursuant to

the NASD’s Equity Option Hedge

Exemption, and thereby allow market

participants in the OTC options market

to compete effectively with the

participants using standardized options

or with entities not subject to position

limit rules.

Since the inception of conventional

equity options trading, the NASD has

had rules imposing limits on the

aggregate number of options contracts

that a member or customer could hold

or exercise.15 These rules are intended

to prevent the establishment of options

positions that can be used or might

create incentives to manipulate or

disrupt the underlying market so as to

benefit the options position. In

particular, position and exercise limits

are designed to minimize the potential

for mini-manipulation 16 and for corners

or squeezes of the underlying market. In

addition, they serve to reduce the

possibility for disruption of the options

market itself, especially in illiquid

options classes.

The Commission has been careful to

balance two competing concerns when

considering a self-regulatory

organization’s position and exercise

limits. The Commission has recognized

that the limits must be sufficient to

prevent investors from disrupting the

market for the underlying security by

acquiring and exercising a number of

options contracts disproportionate to

the deliverable supply and average

trading volume of the underlying

security. At the same time, the

Commission has realized that 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.17

The Commission believes that the

proposed rule change will improve the

conventional equity options market for

several reasons. First, the Commission

notes that the NASD’s current reporting

requirements for all conventional equity

options transactions establishing large

options positions will apply to such

transactions effectuated under the new

rule. Rule 2860(b)(5)(ii) imposes
Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 / Notices 33749

18 In the Firms’ Letter, the commenters indicate

that they ‘‘have experienced an overwhelming

interest by institutional and other accredited

investors to enter into collar transactions and other

hedging transactions involving conventional

options.’’ On several occasions they have been

unable ‘‘to meet the demand for this hedging

activity due to the relatively low [applicable]

conventional option position limits.’’ See Firms’

Letter, supra, note 5.

19Positions in FLEX Index Options generally are

also not aggregated with options on any stocks

included in the index or with FLEX Index Option

positions on another index. See, e.g., CBOE Rule

24A.7(c).

20See supra note 9.

21Conventional equity options are not, however,

issued or subject to issuance by OCC.

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

* * *.’’ Information reported to the

NASD is used by the NASD Regulation

Market Regulation staff as part of their

ongoing market surveillance operations

and helps to minimize the risk of any

market manipulation or disruption

related to the accumulation or

disposition of large options positions. It

also enables NASD Regulation to

identify large positions held or written

by a member that could pose a financial

risk to the member or its clearing firm.

Second, the tripling of the position

limits on conventional equity options

will help those investors who utilize

conventional equity options, typically

large, sophisticated institutional

investors, or persons of extremely high

net worth, with their extensive hedging

needs.18

Third, the Commission also believes

that the proposed tripling of position

limits for conventional equity options

will expand the depth and

competitiveness of the conventional

equity option market without

significantly increasing concerns

regarding intermarket manipulations or

disruptions of the options or the

underlying securities. Broker-dealers

and banks act as dealers in the OTC

derivatives market, and compete with

each other for counterparty business.

The proposal will enable broker-dealers

to compete more effectively with banks

that are not subject to NASD rules for

OTC options transactions. It will also

enable NASD members to accommodate

better their clients’ risk management

strategies. The Commission recognizes,

however, that the proposal presents

substantial increases in OTC options

transactions. It will also enable NASD

members to accommodate better their

clients’ risk management strategies. The

Commission recognizes, however, that

the proposal present substantial

increases in OTVC options positions.

Although the proposed rule change

increases threefold the position limits

for conventional equity options, those

markets that are relatively less active

and not as deep in trading interest will

remain subject to the lowest existing

position limit, i.e., 4,500×3, or 13,500

option contracts. Moreover, as noted

above, the large positions will be

reported to the NASD for monitoring.

Finally, the Commission notes that the

proposed positions for conventional

equity options are still capped at a fixed

level, whereas there are no position

limits for FLEX Equity options.

Fourth, the Commission believes that

the disaggregation of conventional

equity options from standardized equity

options is warranted given that the

tripling provision will otherwise be of

limited effect. That is, if an investor has

reached the limit for standardized

equity options and is required to

aggregate those options with his

conventional equity options, he will

reach the total position limit for

conventional equity options sooner than

if the standardized and conventional

equity options were not aggregated. The

Commission also notes that, under the

rules of the Options Exchanges, FLEX

Equity Options, which are very similar

to conventional equity options, are not

aggregated with standardized equity

options for position limit purposes.19

Fifth, the Commission notes that in

September 1997, it approved the

elimination of position and exercise

limits for FLEX Equity Options on a two

year pilot basis.20 As stated above, FLEX

Equity Options are exchange-traded

options issued by the OCC that give

investors the ability, within specified

limits, to designate certain terms of the

option (i.e., the exercise price, exercise

style, expiration date, and option type).

Conventional equity options are very

similar to FLEX Equity Options given

that they are also non-uniform and

individually negotiated.21 Traditionally,

the Commission has taken a gradual,

evolutionary approach toward

expansion of position and exercise

limits. The Commission believes that

increasing position limits for

conventional equity options to three

times the position limits for

standardized equity options is

appropriate given the Commission’s

previous approach to the expansion of

position and exercise limits. The

Commission also believes that the

proposed rule change will help to foster

competition between the OTC market

and the Options Exchanges, as well as

ensure that OTC market participants are

not placed at a competitive

disadvantage vis-a`-vis the Options

Exchanges.

The Commission finds good cause to

approve Amendment No. 1 to the

proposed rule change prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. Amendment No. 1

makes minor technical changes to the

text of the proposed rule. Specifically,

Amendment No. 1 clarifies in the rule

language that the Equity Option Hedge

Exemption program was approved by

the Commission on a pilot basis only

until December 31, 1998. Amendment

No. 1 also makes certain clerical

corrections. Accordingly, the

Commission believes that it is

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

Act to approve Amendment No. 1 to the

proposed rule change on an accelerated

basis.

The Commission finds good cause to

approve Amendment No. 2 to the

proposed rule change prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. Amendment No 2

corrects a deficiency in the text of the

proposed rule. Specifically, Amendment

No. 2 clarifies in the rule language that

position limits for conventional equity

for which there is not standardized

equity option contract overlying the

security are also to be tripled. Under the

current rules, the position limits for

conventional equity options overlying a

security for which there is no

standardized equity options contract is

set at 4,500 contracts, or such higher

limit for which the underlying security

would qualify. As now written, the

proposed rule language establishes

position limits for conventional equity

options at ‘‘three times the applicable

position limit established for

standardized equity options overlying

the security,’’ but does not take into

account the circumstance where there is

no standardized equity option contract

overlying the security. Amendment No.

2 proposes language that triples these

limits. The Commission believes that

accelerated approval of Amendment No.

2 is appropriate given that it clarifies the

application of the new position limits in

a manner that is consistent with the

approach established in the original rule

filing. Accordingly, the Commission

believes that it is consistent with

Section 15A(b)(6) of the Act to approve

Amendment No. 2 to the proposed rule

change on an accelerated basis.

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

1 and Amendment No. 2 to the

proposed rule change, including

whether the amendments are consistent
33750 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 / Notices

22 15 U.S.C. 78s(b)(2).

23 17 CFR 200.30–3(a)(12) (1994).

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

2The Commission has modified the text of the

summaries prepared by NSCC.

3Proposed Addendum T sets forth three

categories where changes may warrant

reconsideration: (1) material changes in ownership,

control of management, (2) material changes in

business lines, including but not limited to, new

business lines undertaken, or (3) participation as a

defendant in litigation which could reasonably have

a direct negative impact on the participant’s

business. Proposed Addendum T states that these

categories are listed as examples and should not be

viewed as exclusive in the process.

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–98–23 and should be

submitted July 10, 1998.

IV. Conclusion

For the foregoing reasons, the

Commission finds that NASD

Regulation’s proposal, as amended, is

consistent with the requirements of the

Act and the rules and regulations

thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,22 that the

proposed rule change (SR–NASD–98–

23) is approved, as amended.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.23

Jonathan G. Katz,

Secretary.

[FR Doc. 98–16351 Filed 6–18–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40086; File No. SR–NSCC–

98–4]

Self-Regulatory Organizations;

National Securities Clearing

Corporation; Notice of Filing of a

Proposed Rule Change Adopting an

Interpretation of the Board of Directors

Regarding NSCC’s Obligation to

Continuously Review Participants to

Determine if Participants Are Required

to Reapply for Membership Due to a

Material Change in Conditions

June 12, 1998.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

April 24, 1998, the National Securities

Clearing Corporation (‘‘NSCC’’) filed

with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change (File No. SR–

NSCC–98–4) as described in Items I, II,

and II below, which items have been

prepare primarily by NSCC. The

Commission is publishing this notice to

solicit comments from interested

persons on the proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change would add

Addendum T to NSCC’s Rules and

Procedures regarding NSCC’s obligation

to continuously review participants to

determine if they are required to reapply

for membership due to a material

change in conditions. A copy of

proposed Addendum T is attached as

Exhibit A to the rule filing.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

NSCC 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. NSCC has prepared

summaries, set forth in sections (A), (B),

and (C) below, of the most significant

aspects of such statements.2

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

Under the proposed rule change,

NSCC will be permitted to (i) reexamine

a participant who has undergone a

material change in circumstances,3 (ii)

reconsider the participant’s continuing

status as a participant as if such entity

was initially applying for membership

when conditions originally in existence

at the time a participant was accepted

for membership have materially

changed, and (iii) require the participant

to satisfy any concerns NSCC may have

as to the participant’s ongoing

membership in NSCC as part of such

reevaluation. In addition, Addendum T

explicitly states that participants have

the affirmative obligation to advise

NSCC if such material change occurs.

Under the Act and the rules and

regulations thereunder, NSCC is

obligated to safeguard securities and

funds in the possession and control.

NSCC believes that this obligation,

coupled with the fact that NSCC is the

guarantor of participants’ transaction

submitted to it for clearance and

settlement, require that NSCC have

flexibility to consider material changes

pertaining to such participants and have

the ability to take appropriate steps in

light of such changes.

When a material change occurs with

respect to an existing participant’s

ownership, control or management, mix

of business, use of third party service

provides, or regulatory history, among

other areas, NSCC is faced with a

different risk perspective than that

which it faced at the time it approved

such participant’s application for

membership. The NSCC board has

concluded that it is in the best interests

of NSCC and its membership as a whole

that NSCC address these types of

changes, including the ability to require

the participants to reapply for

membership, as if the participant was

not already a participant.

NSCC believes that participants

change their business mix as their focus

in the financial industry change.

According to NSCC, enter new

businesses, discontinue old ones,

change management, change risk

policies, or take other actions or steps

which could result in an entirely

different entity (other than changing the

corporate name of such entity) from the

one which was approved for NSCC

membership. NSCC believes that if it

did not have the ability to continually

reexamine participants’ status, the

purpose behind scrutinizing

applications and the comfort level

provided by such process, would be

undermined.

NSCC believes that the proposed rule

change is consistent with the

requirements of the Act and the rules

and regulations thereunder because it

will clarify the rules of NSCC relating to

the continuing standards required for

membership and NSCC’s obligation to

safeguard securities and fund within its

control.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

NSCC does not believe that the

proposed rule change will impact or

impose a burden on competition that is