Federal Register / Vol. 60, No. 234 / Wednesday, December 6, 1995 / Notices 62517

6 17 CFR 200.30–3(a)(12) (1994).

1Position limits impose a ceiling on the number

of option contracts which an investor or group of

investors acting in concert may hold or write in

each class of options on the same side of the market

(i.e., aggregating long calls and short puts or long

puts and short calls). The PSE’s proposal is

identical to a proposal submitted by the

Philadelphia Stock Exchange, Inc. (‘‘PHLX’’), See

Securities Exchange Act Release No. 36380 (October

17, 1995), 60 FR 54403 (October 23, 1995) (File No.

SR–PHLX–95–45).

2PSE Rule 7.6(a) provides the following position

limits for industry index options: 5,500 contracts if,

during the Exchange’s semi-annual review, the

Exchange determines that any single stock in the

group accounted, on average, for 30% or more of

the index value during the 30-day period

immediately preceding the review; 7,500 contracts

if the Exchange determines that any single stock in

the group accounted, on average, for 20% or more

of the index value for that any five stocks in the

group together accounted, on average, for more than

50% of the index value, but that no single stock in

the group accounted, on average, for 30% or more

of the index value, during the 30-day period

immediately preceding the review; or 10,500

contracts if the Exchange determines that the above

conditions have not occurred.

The Exchange believes that the

proposed rule change is consistent with

Section 6(b) of the Act in general and

furthers the objectives of Section 6(b)(5)

in particular in that it is designed to

prevent fraudulent and manipulative

acts and practices, promote just and

equitable principles of trade, foster

cooperation and coordination with

persons engaged in regulating, clearing,

settling, processing information with

respect to, and facilitating transaction in

securities, and, in general protect

investors and the public interest.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The Amex believes that the proposed

rule change will not impose any burden

on competition.

(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.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street NW.,

Washington, DC 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

Section, 450 Fifth Street NW.,

Washington, DC. Copies of such filing

will also be available for inspection and

copying at the principal office of the

above-mentioned self-regulatory

organization. All submissions should

refer to File No. SR–Amex–95–43 and

should be submitted by December 27,

1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority 6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–29691 Filed 12–5–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36526; File No. SR–PSE–

95–28]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Pacific Stock Exchange, Inc.,

Relating to Establishing a Hedge

Exemption for Narrow-Based Index

Options

November 29, 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 November 1, 1995,

the Pacific Stock Exchange, Inc., (‘‘PSE’’

or ‘‘Exchange’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) the proposed rule

change as described in Items, I, II and

III below, which Items have been

prepared by the self-regulatory

organization. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The PSE proposes to amend PSE Rule

7.6, ‘‘Position Limits for Index

Options,’’ to establish a hedge

exemption from industry (narrow-based)

index option position limits which

would allow PSE members and member

organizations, as well as public

customers, to exceed the established

position limits for narrow-based index

options by three times the established

position limit for such index options,

provided that the position is ‘‘hedged’’

with shares of at least 75% of the

number of stocks comprising the index.1

The text of the proposed rule change

is available at the Office of the

Secretary, PSE 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

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 aspect of such

statements.

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

Purpose

The purpose of the proposed rule

change is to establish a hedge

exemption from the industry index

option position limits established in

PSE Rule 7.6(a).2 Specifically, the PSE

proposes to add Commentary .03 to PSE

Rule 7.6, which will provide that

industry index option positions may be

exempt from established position limits

for each contract ‘‘hedged’’ by an

equivalent dollar amount of the

underlying component securities or

securities convertible into such

components, provided that each option

position to be exempted is hedged by a

position in at least 75% of the number

of component securities underlying the

index, and that the underlying value of

the option position does not exceed the

value of the underlying portfolio. The

value of the portfolio is: (a) the total

market value of the net stock position,
62518 Federal Register / Vol. 60, No. 234 / Wednesday, December 6, 1995 / Notices

3National values are determined by adding the

number of contracts and multiplying the total by

the multiplier, expressing that number in dollar

terms.

4Exercise limits prohibit an investor or group of

investors acting in concert from exercising more

than a specified number of puts or calls in a

particular class within five consecutive business

days.

5See Securities Exchange Act Release Nos. 32900

(September 14, 1993), 58 FR 181 (September 21,

1993) (order approving hedge exemption for broadbased index options on a pilot basis); 35738 (May

18, 1995), 60 FR 27573 (May 24, 1995) (order

approving broad-based index option hedge

exemption on a permanent basis).

6The Exchange proposes to apply only the

proposed narrow-based industry index option

hedge exemption, and not the existing broad-based

index option hedge exemption, to firms and

proprietary traders as well as public customers.

Telephone conversation between Michael Pierson,

Senior Attorney, Market Regulation, PSE, and

Yvonne Fraticelli, Attorney, Office of Market

Supervision, Commission, on November 14, 1995.

7To determine the share amount of each

component required to hedge an index option

position: index value × index multiplier ×

component’s weighing = dollar amount of

component. That amount divided by price =

number of shares of component. Conversely, to

determine how many options can be purchased

based on a certain portfolio, divide the dollar

amount of the basket by the index value × the index

multiplier.

less (b) the national value of (1) any

offsetting calls and puts in the

respective index option; and (2) any

offsetting positions in related stock

index futures.3 The values of any such

index option position or related futures

position are determined by aggregating

the national value of each option

contract comprising the position. Under

the proposed exemption, position limits

for any hedged industry index option

may not exceed three times the limits

established under PSE Rule 7.6(a).

Members, member organizations, and

public customers seeking to use the

proposed exemption must obtain prior

Exchange approval. In addition, the

exemption requires that both the option

and stock positions be initiated and

liquidated in an orderly manner.

Specifically, a reduction of the option

position must occur at or before the

corresponding reduction in the stock

portfolio position.

Under the proposal, exercise limits

will continue to correspond to position

limits, so that investors may exercise the

number of contracts set forth as the

position limit, as well as those contracts

exempted by the proposal, during five

consecutive business days.4

Currently, PSE Rule 7.6, Commentary

.02, allows public customers to apply

for position limit exemptions in broadbased index options that are hedged

with exchange-approved qualified stock

portfolios.5 Under the broad-based

index option hedge exemption, a

qualified portfolio is comprised of net

long or short positions in common

stocks or securities readily convertible

into common stock in at least four

industry groups and contains at least 20

stocks, none of which accounts for more

than 15% of the value of the portfolio.

To remain qualified, a portfolio must

meet the standards at all time,

notwithstanding the trading activity in

the stocks or their equivalents.

Although the broad-based index

option hedge exemption applies only to

public customers, the Exchange believes

it is appropriate to expand the

availability of the proposed narrowbased index option position limit

exemption beyond public customers.6

The PSE believes that significant

increases in the depth and liquidity of

these index options could result from

permitting firm and proprietary traders

to be eligible for the exemption.

According to the PSE, because

customers rely, for the most part, on a

limited number of proprietary traders to

facilitate large-sized orders, not

including such traders in the exemption

effectively reduces the benefit of the

exemption to customers. While largesized positions in industry index

options are most commonly initiated by

institutional traders hedging stock

portfolios on behalf of public customers,

the PSE believes that proprietary traders

should be afforded the same exemption

so that they may fulfill their role as

facilitators.

The Exchange believes that its

proposed narrow-based index option

hedge exemption should not increase

the potential for disruption or

manipulation in the markets for the

stocks underlying each index. The PSE

notes that the position limits for narrowbased index options, even tripled, are

far less than the position limits for most

broad-based index options. In addition,

the proposal incorporates several

surveillance safeguards, which the

Exchange will employ to monitor the

use of this exemption. Specifically, the

Exchange will require that member

firms and their customers who seek

exemptions file a form with the PSE, in

lieu of granting an automatic exemption

similar to that for equity options. The

PSE’s Options Surveillance Department

will monitor trading activity in PSEtraded index options and the stocks

underlying those indexes to detect

potential frontrunning and

manipulation abuses, as well as review

to ensure that the closing of positions

subject to an exemption is conducted in

a fair and orderly manner.

And lastly, the PSE notes that the

provision itself contains several built-in

safeguards. First, the hedge must consist

of a position in at least 75% of the

stocks underlying the index, so that the

‘‘basket’’ of stocks constituting the

hedge will resemble the underlying

index.7 Secondly, position limits may

not exceed three times the limit

established under PSE Rule 7.6(a). This

places a ceiling on the maximum size of

the option position. Third, both the

options and stock positions must be

initiated and liquidated in an orderly

manner, such that a reduction of the

options position must occur at or before

the corresponding reduction in the stock

portfolio position. Lastly, the value of

the industry index option position may

not exceed the dollar value of the

underlying portfolio. The purpose of

this requirement is to ensure that stock

transactions are not used to manipulate

the market in a manner benefitting the

option position. In addition, these

safeguards prevent the increased

positions from being used in a leveraged

manner.

For the above reasons, the Exchange

believes that the proposed narrow-based

index option hedge exemption should

increase the depth and liquidity of

narrow-based index option markets and

allow more effective hedging with

underlying stock portfolios, without

increasing the potential for market

manipulation or disruption, consistent

with the purposes of position limits. For

the same reasons, the Exchange believes

that exercise limits should correspond

to the position limit exempted granted

by this proposal.

Statutory Basis

The PSE believes that the proposal is

consistent with Section 6(b) of the Act,

in general, and with Section 6(b)(5), in

particular, in that it is designed to

remove impediments to and perfect the

mechanism of a free and open market in

a manner consistent with the protection

of investors and the public interest.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The PSE 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.
Federal Register / Vol. 60, No. 234 / Wednesday, December 6, 1995 / Notices 62519

8 17 CFR 200.30–3(a)(12) (1994). 1 15 U.S.C. § 78s(b)(1) (1988).

2See Securities Exchange Act Release No. 34277

(June 29, 1994), 59 FR 34885 (July 7, 1994).

3A short sale is a sale of a security which the

seller does not own or any sale which is

consummated by the delivery of a security

borrowed by, or for the account of, the seller.

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 reason 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.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 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

Section, 450 Fifth Street, NW.,

Washington, DC. Copies of such filing

will also be available for inspection any

copying at the principal office of the

above-mentioned self-regulatory

organization. All submissions should

refer to the file number in the caption

above and should be submitted by

December 27, 1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–29685 Filed 12–5–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36532; File No. SR–NASD–

95–58]

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 the Date of Implementation

of the NASD’s Primary Market Maker

Standards and the Duration of the Pilot

Program for the NASD’s Short Sale

Rule

November 30, 1995.

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

Securities Exchange Act of 1934

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

November 27, 1995, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) filed with

the Securities and Exchange

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

the proposed rule change as described

in Items I and II below, which Items

have been prepared by the NASD. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons. As

discussed below, the Commission has

also granted accelerated approval of the

proposal.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

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

Act, the NASD is proposing to delay,

from December 1, 1995 to February 1,

1996, the implementation date of the

Primary Market Maker standards to be

used to determine the eligibility of

market makers for an exemption from

the NASD’s short-sale rule. The NASD

also proposes to extend the termination

date for the pilot period to August 3,

1996 instead of June 3, 1996. The text

of the proposed rule change is as

follows (additions are italicized;

deletions are bracketed):

Article III, Section 1

* * * * *

Section 48

(1)(3) Until February 1, 1996 [December 1,

1995], the term ‘‘qualified market maker’’

shall mean a registered Nasdaq market maker

that has maintained, without interruption,

quotations in the subject security for the

preceding 20 business days.

* * * * *

Beginning February 1, 1996 [December 1,

1995], the term ‘‘qualified market maker’’

shall mean a registered Nasdaq market maker

that meets the criteria for a Primary Nasdaq

Market Maker as set forth in Article III,

Section 49 of the Rules of Fair Practice.

* * * * *

(m) This section shall be in effect until

August 3, 1996 [June 3, 1996].

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

NASD 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 NASD 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

On June 29, 1994, the SEC approved

the NASD’s short-sale rule applicable to

short sales in Nasdaq National Market

securities on an eighteen-month pilot

basis through March 5, 1996.2 The

NASD’s short-sale rule prohibits

member firms from effecting short sales

at or below the current inside bid as

disseminated by the Nasdaq system

whenever that bid is lower than the

previous inside bid.3 The rule is in

effect during normal domestic market

hours (9:30 a.m. to 4:00 p.m., Eastern

Time). As approved by the Commission,

during the first year that the rule has

been in effect (from September 6, 1994

to September 6, 1995), Nasdaq market

makers who maintained a quotation in

a particular Nasdaq National Market

security for 20 consecutive business

days without interruption are exempt

from the rule for short sales in that

security, provided that the short sales

were made in connection with bona fide

market making activity (‘‘the 20-day’’

test). For the next six months of the 18-

month pilot period (i.e., September 6,

1995 through March 5, 1996), the ‘‘20-

day’’ test for market maker exemptions

from the rule was scheduled to be

replaced with a four-part quantitative

test known as the ‘‘Primary Market

Maker (PMM) Standards.’’

Under the PMM Standards, to be

eligible for an exemption from the shortsale rule, a market maker must satisfy at

least two of the following four criteria:

(1) The market maker must be at the best

bid or best offer as shown on the Nasdaq