Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Notices 27573

6 15 U.S.C. 78f(b)(5) (1988).

7Supra note 3 and accompanying text.

8 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 Securities Exchange Act Release No. 35523

(March 22, 1995), 60 FR 15947.

4Position limits impose a ceiling on the aggregate

number of options contracts on the same side of the

market that can be held or written by an investor

or group of investors acting in concert.

5Under the equity option hedge exemption pilots,

the applicable position and exercise limits can

never exceed twice the existing position limit.

Under the CBOE’s and the PSE’s broad-based index

hedge exemption pilots, the exempted positions

Continued

underwriting syndicate before or after

the date a securities depository system

is available for monitoring repurchases

of the distributed shares by syndicate

members (‘‘flipping tracking system’’).

Currently, a flipping tracking system

is being developed that will include a

securities depository service that (i) can

be activated upon the request of the

managing underwriter for a period of

time that the managing underwriter

specifies, (ii) in certain circumstances,

will require the delivering participant to

provide to the depository information

sufficient to identify the seller of such

shares as a precondition to the

processing of book-entry delivery

instructions for distributed shares, and

(iii) will report to the managing

underwriter the identity of any other

syndicate member or selling group

member whose customer(s) sold

distributed shares (but will not report to

the managing underwriter the identity

of such customer[s]) and, in certain

circumstances, will report to such

syndicate member or selling group

member the identity of such

customer(s). Prior to the availability of

a flipping tracking system, the managing

underwriter may delay the date a

security is deemed ‘‘depository eligible’’

for up to three months after trading has

commenced in the security. After the

availability of a flipping tracking

system, a new issue will be deemed to

be depository eligible upon

commencement of trading on BSE.

The proposed rule change is

consistent with Section 6(b)(5) of the

Act 6 in that it is designed to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system, and in

general, to protect investors and the

public interest. The proposed rule is

designed to reduce the number of

transactions in depository eligible

securities for which settlement is

effected by the physical delivery of

securities. By requiring that transactions

between member firms and transactions

between member firms and clients that

settle on a delivery-versus-payment or

receipt-versus-payment basis occur only

with rare exceptions in a book-entry

environment, the efficiency of the U.S.

settlement system will be enhanced and

the systemic risk of that system will be

reduced.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

BSE 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

BSE has neither solicited nor received

comments on the proposed rule change.

III. Date of Effectiveness of the

Proposed Rule Change 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 BSE 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.

BSE has requested accelerated

effectiveness of the proposed rule

change in order that the rule can

become effective on June 7, 1995.7

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

submissions, 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

Section, 450 5th Street, N.W.,

Washington, D.C. 20549. Copies of such

filings will also be available for

inspection and copying at the principal

office of BSE. All submissions should

refer to file number SR–BSE–95–09 and

should be submitted by June 14, 1995.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–12692 Filed 5–23–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35738; File Nos. SR–Amex–

95–13, SR–CBOE–95–13, SR–NYSE–95–04,

SR–PSE–95–05, and SR–PHLX–95–10]

Self-Regulatory Organizations; Order

Approving Proposed Rule Changes by

the American Stock Exchange, Inc., the

Chicago Board Options Exchange,

Inc., the New York Stock Exchange,

Inc., the Pacific Stock Exchange, Inc.,

and the Philadelphia Stock Exchange,

Inc. Relating to Permanent Approval of

the Hedge Exemption Pilot Programs

May 18, 1995.

On February 1, 1995, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’);

on February 3, 1995, the Philadelphia

Stock Exchange, Inc. (‘‘PHLX’’); on

February 21, 1995, the Pacific Stock

Exchange, Inc. (‘‘PSE’’); on February 28,

1995, the New York Stock Exchange,

Inc. (‘‘NYSE’’); and on March 14, 1995,

the American Stock Exchange, Inc.

(‘‘Amex’’) (each individually referred to

as an ‘‘Exchange’’ and two or more

collectively referred to as ‘‘Exchanges’’),

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

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

filed with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

proposed rule changes seeking

permanent approval of the Exchanges’

hedge exemption pilot programs.

The proposed rule changes were

published for comment in the Federal

Register on March 28, 1995.3 No

comments were received regarding the

Exchanges’ proposals.

The proposals filed by the Exchanges

seek permanent approval of the

Exchanges’ pilot programs for

exemptions from equity position limits

for certain hedged positions.4 In

addition, the proposals filed by the

CBOE, the NYSE, and the PSE also seek

permanent approval of the Exchanges’

pilot programs for position limit

exemptions for certain hedged broadbased stock index option positions.5
27574 Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Notices

may not exceed 75,000 same-side of the market

option contracts in a class of broad-based index

options. Under the NYSE’s broad-based index

hedge exemption pilot, the exempted positions may

not exceed 125,000 same-side of the market

contracts. Unlike the equity option hedge

exemption, each exemption to position limits under

the broad-based index option hedge exemption

must be specifically approved by the Exchange for

each customer and each position. See CBOE Rule

24.4, ‘‘Position Limits for Broad-Based Index

Options,’’ Interpretation and Policy .01; NYSE Rule

704, ‘‘Position Limits,’’ Supplementary Material .70;

and PSE Rule 7.8, ‘‘Terms of Option Contracts,’’

Commentary .02.

6See Securities Exchange Act Release No. 25738

(May 24, 1988), 53 FR 20201 (June 2, 1988) (order

approving File Nos. SR–Amex–87–13, SR–CBOE–

87–27, and SR–PHLX–87–37).

7See Securities Exchange Act Release Nos. 25738

(May 24, 1988), 53 FR 20204 (June 2, 1988) (order

approving File No. SR–CBOE–87–25) (establishing

CBOE’s stock index option hedge exemption pilot

program); 27786 (March 8, 1990), 55 FR 9523

(March 14, 1990) (order approving File No. SR–

NYSE–89–09) (establishing NYSE’s equity option

and stock index option hedge exemption pilot

programs); 25811 (June 20, 1988), 53 FR 23821

(June 24, 1988) (order approving File No. SR–PSE–

88–09) (establishing PSE’s equity option hedge

exemption pilot program); 32900 (September 14,

1993), 58 FR 49077 (September 21, 1993) (order

approving File No. SR–PSE–92–38) (extending

PSE’s stock index option hedge exemption pilot

program); and 32903 (September 14, 1993), 58 FR

49068 (September 21, 1993) (order approving File

No. SR–CBOE–91–44) (extending the CBOE’s index

option hedge exemption program).

8See Securities Exchange Act Release Nos. 34986

(November 18, 1994) 59 FR 60856 (November 28,

1994) (order approving File Nos. SR–Amex–94–49,

SR–CBOE–94–41, SR–PSE–94–33, and PHLX–94–

53); and 85194 (January 5, 1995), 60 FR 2800

(January 11, 1995) (order approving File No. SR–

NYSE–94–47).

9The CBOE’s broad-based index hedge exemption

program does not apply to A.M.-settled, Europeanstyle Standard & Poor’s (‘‘S&P’’) 500 Index options

and Quarterly Index Expiration options on the S&P

500.

10See note 5, supra.

11The Commission expects the Exchanges to

determine on a case-by-case basis whether an

instrument that is being used as the basis for an

underlying hedged position is readily and

immediately convertible into the security

underlying the corresponding option position. In

this regard, the Commission finds that an

instrument which will become convertible into a

security at a future date, but which is not presently

convertible, is not a ‘‘convertible’’ security for

purposes of the equity option position limit hedge

exemption until the date it becomes convertible. In

addition, if the convertible security used to hedge

an options position is called for redemption by the

issuer, the security would have to be converted into

the underlying security immediately or the

corresponding options position reduced

accordingly. See, e.g., Securities Exchange Act

Release No. 32903, supra note 7.

12Exercise limits prohibit the exercise by an

investor or group of investors acting in concert of

more than the number of options contracts specified

in the position limit rule within five consecutive

business days.

13 15 U.S.C. § 78f(b)(5) (1988 & Supp. V 1993).

In 1988, the Commission approved

pilot programs by the Amex, and the

PHLX providing exemptions from

position limits for certain fully hedged

equity option positions.6 In addition,

the Commission approved pilot

programs proposed by the CBOE, the

NYSE, and the PSE providing

exemptions from position limits for

certain fully hedged equity option

positions and/or stock index option

positions.7 Most recently, the

Exchanges’ pilot programs were

extended through May 17, 1995.8

The pilot programs for equity option

positions allow an exemption from

equity option position and exercise

limits for accounts that have established

one of the four most commonly used

hedged positions on a limited one-forone basis (i.e., 100 shares of stock for

one option contract). The four hedged

positions are: (1) Long stock and short

call; (2) long stock and long put; (3)

short stock and long call; and (4) short

stock and short put. Under the equity

option programs, the maximum position

limit (including the allowed

exemptions) may not exceed twice the

established option position limit.

The index hedge exemption programs

allow public customers to apply for

position limit exemptions for positions

in broad-based index options that are

hedged with Exchange-approved

qualified portfolios of stock.9 Under the

broad-based index option hedge

exemption program a public customer

must receive specific Exchange approval

to exceed the position limits by a

specified amount before establishing a

position in reliance upon the hedge

exemption requirements. Under these

requirements, a qualified portfolio is

comprised of net long or short positions

in common stocks or securities readily

convertible into common stocks in at

least four industry groups and contains

at least twenty stocks, none of which

accounts for more than 15% of the value

of the portfolio. To remain qualified, a

portfolio must meet these standards at

all times, regardless of trading activity

in the stocks.

Subject to the maximum number of

exempt option contracts allowed under

the Exchanges’ broad-based index

option hedge exemption programs,10 the

broad-based index option hedge

exemption applies to positions in broadbased index options to the extent that

the underlying value of the option

positions does not exceed the unhedged

value of the qualified portfolio. The

unhedged value is determined as

follows: (1) The value of the net long or

short positions for each of the stocks or

their equivalents are totaled; and (2) the

value of (a) any opposite side of the

market calls and puts in broad-based

index options, (b) any opposite side of

the market positions in stock index

futures, and (c) any economically

equivalent opposite side of the market

positions in other stock index options

and in options on stock index futures,

is subtracted from the total.

Under the broad-based index option

hedge exemption programs, hedge

exemption customers agree to, among

other things, establish and liquidate

options and stock positions or their

equivalents in an orderly fashion; not

establish or liquidate positions in a

manner calculated to cause

unreasonable price fluctuations or

unwarranted price changes; not

establish or liquidate a stock position or

its equivalent contemporaneously with

the establishment or liquidation of an

equivalent broad index stock group

option position with a view toward

taking advantage of any differential

between the prices of the stocks or their

equivalents and the options; and

liquidate an offsetting portion of the

options position prior to or

contemporaneously with any decrease

in the available hedge value of the

qualified portfolio.

Each of the pilot programs allow the

underlying hedged positions to include

securities that are readily convertible

into common stock.11 Under all of the

pilot programs, exercise limits continue

to correspond to position limits, so that

investors are allowed to exercise, during

five consecutive business days, the

number of option contracts set forth as

the position limit, as well as those

contracts purchased pursuant to the

pilot program.12

The Exchanges believe that the

proposed rule changes are consistent

with Section 6(b) of the Act, in general,

and further the objectives of Section

6(b)(5), in particular, in that they are

designed to protect investors and the

public interest and to remove

impediments to and perfect the

mechanism of a free and open market.

The Commission finds that the

proposed rule changes seeking

permanent approval of the Exchanges’

hedge exemption pilot programs are

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to a national

securities exchange, and, in particular,

the requirements of Section 6(b)(5)

thereunder.13 The Commission

concludes, as it did when originally

approving each of the pilot programs,

that providing for increased position

and exercise limits for equity options

and broad-based stock index options in

circumstances where those excess

positions are fully hedged with

offsetting stock positions will provide

greater depth and liquidity to the market

and will allow investors to hedge their

stock portfolios more effectively,
Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Notices 27575

14See Securities Exchange Act Release No. 25738,

supra note 6.

15See Securities Exchange Act Release Nos.

32903 and 32900, supra note 7.

16 15 U.S.C. 78s(b)(2)(1982).

17 17 CFR 200.30–3(a)(12) (1994).

without significantly increasing

concerns regarding intermarket

manipulations or disruptions of either

the options market or the underlying

stock market.

In this regard, the Commission notes

that the Exchanges’ hedge exemption

programs have operated on a pilot basis

since 1988 and that the Exchanges have

not experienced any significant

difficulties with the pilots since their

inception or observed any market

disruptions resulting from the increased

positions. In addition, the Exchanges

have submitted reports to the

Commission describing, among other

things, the frequency with which the

exemptions have been utilized, the

types of investors using the exemptions,

the size of the positions assumed

pursuant to the programs, and the

market impact of the programs. The

reports indicate that the Exchanges have

not observed any negative impact on

their markets as a result of the hedge

exemption programs. Finally, the

Exchanges have established surveillance

procedures designed to monitor

compliance with the position limit

hedge exemption programs. The

Commission expects the Exchanges to

continue to monitor utilization of the

hedge exemptions to ensure compliance

with the programs’ requirements.

With regard to the equity option

hedge exemption, the Commission

believes, as it has concluded in the

past,14 that the exemption will not

disrupt the options or equity markets or

substantially increase the possibility of

manipulation in the underlying stocks

or options. In this regard, the

Commission notes that the position and

exercise limit exemption is limited to

accounts that have established one of

four hedged positions. Moreover, market

disruption concerns are lessened

because any option positions in excess

of current position limits must be

hedged fully with an offsetting stock

position on a one-for-one basis; thus, the

holder of the options position would not

be required to enter the market to buy

or sell the stock if the options were

exercised or assigned. The Commission

also believes that a maximum position

of double the existing position and

exercise limits will help to ensure that

any potential market disruptions are

minimal.

With regard to the broad-based index

option hedge exemption programs, the

Commission believes, as it has

concluded previously,15 that the

programs will allow more effective

hedging of stock portfolios and may

increase the depth and liquidity of the

stock index options market. In this

regard, public customers with long or

short stock portfolios (or instruments

convertible into such securities) will be

able to utilize the broad-based index

hedge exemption, thereby making an

alternative hedging technique more

available to such customers and

facilitating their use of index options to

hedge their portfolios, rather than

financially equivalent index futures

products.

As noted above, the broad-based

index option hedge exemption applies

only to public customers and each

request for the exemption must be

specifically approved by the appropriate

Exchange. This should ensure that the

hedges are appropriate for the position

being taken and in compliance with

Exchange rules.

In addition, the Commission notes

that the broad-based index option hedge

exemptions have additional safeguards

that will make it difficult to use the

exempted positions to disrupt or

manipulate the market. In this regard,

the qualified stock portfolio must be

broad-based, and correspond in value to

the value of the options hedge so that

the increased positions could not be

used in a leveraged manner. Both the

options and stock positions must be

initiated and liquidated in an orderly

manner. The requirement that a

reduction in the options position must

occur at or before the corresponding

reduction in the stock portfolio position

should ensure that the stock

transactions are not used to impact the

market so as to benefit the options

position. Moreover, because the

exemption may not be used for arbitrage

in stock baskets and overlying stock

index options, the broad-based index

option hedge exemption should not

exacerbate stock market volatility.

Finally, the Commission notes that the

index option hedge exemption applies

only to options on broad-based indexes,

where the potential for manipulation is

minimal and thus regulatory concerns

are decreased.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,16 that the

proposed rule changes (SR–Amex–95–

13, SR–CBOE–95–13, SR–NYSE–95–04,

SR–PSE–95–09, and SR–PHLX–95–10)

are approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.17

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–12690 Filed 5–23–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35725; File No. SR–CBOE–

95–15]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Chicago Board Options Exchange, Inc.

Relating to Telephones at the S&P 100

Index Option Trading Post on the Floor

of the Exchange

May 17, 1995.

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

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on May 12, 1995, the

Chicago Board Options Exchange, Inc.

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

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by the Exchange. 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

The CBOE proposes to treat as a rule

of the Exchange the conditions

governing the use of member-owned

and Exchange-owned telephones

located at the S&P 100 Index option

(‘‘OEX’’) trading post on the floor of the

Exchange. The text of the proposed rule

change is available at the Office of the

Secretary, the CBOE, and at the

Commission.

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

CBOE included statements concerning

the purpose of and basis for the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below. The

Exchange has prepared summaries, set

forth in Section (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

The purpose of the proposed rule

change is to apply the policy currently

governing the use of telephones at