[Federal Register Volume 63, Number 134 (Tuesday, July 14, 1998)]
[Notices]
[Pages 37913-37914]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18639]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40172; File No. SR-PCX-98-33]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to an Increase in 
Position and Exercise Limits for Standardized Equity Options

July 6, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on July 1, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PCX is proposing to modify Rule 6.8 and Rule 6.9 relating to 
position and exercise limits. The PCX proposes to increase the position 
and exercise limits on standardized equity options traded on the 
Exchange to three times their current levels.

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
    Currently, PCX Rule 6.8 subjects equity options to one of five 
different position limits depending on the trading volume and 
outstanding shares of the underlying security. The levels are: 4,500; 
7,500; 10,500;, 20,000; and 25,000 contracts on the same side of the 
market. Under the proposed changes the new limits would be: 13,500; 
22,500; 31,500; 60,000; and 75,000 contracts on the same side of the 
market. The Exchange believes that sophisticated surveillance 
techniques at the options exchanges adequately protect the integrity of 
the markets for the options that will be subject to these increased 
position and exercise limits. The Commission recently approved a 
similar request from the National Association of Securities Dealers 
(``NASD'') to triple the position and exercise limits for conventional 
equity options with new limits set at 13,500; 22,500; 31,500; 60,000; 
and 75,000 contracts on the same side of the market.\3\
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    \3\ See Exchange Act Release No. 40087 (June 12, 1998), 63 FR 
33746 (June 19, 1998). The NASD's position limit filing established 
position and exercise limits for conventional equity options 
identical to those being proposed by PCX in this filing.
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    Commentary .01 of PCX Rule 6.9 refers to the established exercise 
limits as 4,500; 7,500; 10,500; 20,000; and 25000 options contracts. 
The rule states that the exercise limits established pursuant to PCX 
Rule 6.9(a) shall be 4,500; 7,500; 10,500; 20,000; and 25,000 options 
contracts of any particular class of option and it shall be the 
responsibility of each Member or Member Organization accepting orders 
for the purchase (in opening transactions) of option contracts to 
inform customers of the applicable exercise limits. The PCX proposes to 
change the exercise limits in PCX Rule 6.9 to 13,500; 22,500; 31,500; 
60,000; and 75,000 options contracts of any particular class of option.
    The Exchange believes that the existing surveillance procedures and 
reporting requirements at options exchanges and clearing firms that 
have been developed over the years are able to properly identify 
unusual and illegal trading activity. In addition, PCX believes that 
routine oversight inspections of PCX's regulatory programs by the 
Commission have not uncovered any material inconsistencies or 
shortcomings in the manner in which the Exchange's market surveillance 
is conducted.
    Position and Exercise Limits Restrict Legitimate Options Use and 
Competition. In the Exchange's view, equity position limits prevent 
large customers like mutual funds and pension funds from using options 
to gain meaningful exposure to individual stocks, resulting in lost 
liquidity in both the options market and the stock market. The Exchange 
further believes that equity position limits also act as a barrier to 
the use of options by corporations wishing to implement options 
strategies with their own stock.\4\
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    \4\ The Commission notes that issuers would, of course, need to 
comply with all applicable provisions of the federal securities laws 
in conducting their share repurchase programs.
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    The Exchange believes that equity position limits put listed 
options at a competitive disadvantage of over-the-counter (``OTC'') 
derivatives. OTC dealers can execute options trades through overseas 
subsidiaries not subject to NASD regulation, and therefore not subject 
to position limits. As a result, the largest trades can go unobserved 
and unmonitored for regulatory and oversight purposes. An increase in 
the position limits is consistent with the Commission's reasons for the 
elimination of FLEX equity option position limits. The Commission 
recently approved the elimination of position limits for FLEX equity 
options stating that the elimination will allow the listed options 
markets to better compete with the OTC market.\5\
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    \5\ See Exchange Act Release No. 39032 (September 9, 1997) 62 FR 
48683 (September 16, 1997). The Commission stated that ``the 
elimination of position and exercise limits for FLEX equity options 
allows the Exchanges to better compete with the growing OTC market 
in customized equity options, thereby encouraging fair competition 
among brokers and exchange markets.'' Id. at 48685. The Commission 
notes that approval of the elimination of position and exercise 
limits for FLEX equity options was granted for a two-year pilot 
period and was based on several other factors including, in large 
part, additional safeguards adopted by the exchanges to allow them 
to monitor large options positions.
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    In addition, the Commission recently approved the NASD's proposed 
rule change to raise the position and exercise limit for conventional 
equity options (i.e., those options not issued, or subject to issuance 
by the Options Clearing Corporation) to three times their current 
levels (which is the same as three times the levels established by 
current exchange rules for standardized options). Because conventional 
options often have nearly identical term as standardized, exchange-
traded options, the Exchange believes the position limits for 
standardized options should be at least as high as those for 
conventional options.
2. Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) \6\ of the Act, in general, and Section 6(b)(5) \7\ of the Act, in 
particular, in that it is designed to perfect the mechanisms of a free 
and open market, to promote just and equitable principles of trade, to

[[Page 37914]]

facilitate transactions in securities, and in general, to protect 
investors and the public interest.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

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

    Within 35 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 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 such 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, including whether the proposed rule 
change is consistent with the Act. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., 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, located at the above address. 
Copies of such filing will also be available for inspection and copying 
at the principal office of the self-regulatory organization. All 
submissions should refer to File No. SR-PCX-98-33 and should be 
submitted by August 4, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18639 Filed 7-13-98; 8:45 am]
BILLING CODE 8010-01-M