[Federal Register Volume 60, Number 5 (Monday, January 9, 1995)]
[Notices]
[Pages 2413-2415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-430]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35180; File No. SR-NASD-94-54]


Self-Regulatory Organizations; Notice of Proposed Rule Change by 
the National Association of Securities Dealers, Inc. Relating to 
Position and Exercise Limits for Equity Options Overlying Securities 
Not Subject to Standardized Options Trading

December 30, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 12, 1994, 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, II, and III 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.

    \1\15 U.S.C. 78s(b)(1) (1988). [[Page 2414]] 
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Propose Rule Change

    The NASD proposes to amend Section 33 of the NASD's Rules of Fair 
Practice, the NASD's position limit rule for standardized and 
conventional options, to increase the position and exercise limits for 
certain equity securities that are not subject to standardized options 
trading.\2\ In particular, under the proposal, if a security qualifies 
for a position limit of 7,500 contracts or 10,500 contracts,\3\ it will 
be subject to that higher position limit, regardless of whether it has 
standardized options traded on it or not.

    \2\Position 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 and 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 which 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 fourth as the applicable 
position limit for those options classes. See Sections 33(b)(3) and 
(4) of the NASD Rules of Fair Practice.
    \3\See infra note 4 for a description of how the position limit 
for a particular equity security is determined.
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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

    Currently, under NASD rules, position and exercise limits for 
exchange-listed options traded by access firms\4\ or their customers 
are determined according to a ``three-tiered'' system, where, depending 
upon the float and trading volume of the underlying security, the 
position limit for options on that security is 4,500, 7,500, or 10,500 
contracts.\5\ For conventional equity options trading by any NASD 
member,\6\ if the underlying security is subject to standardized 
options trading, the NASD's position limit for conventional options on 
that security is the same position limit imposed by the options 
exchange(s) trading the option. However, if the security underlying the 
option is not subject to standardized options trading, the applicable 
position limit for conventional options on the security is the lowest 
tier, i.e., 4,500 contracts.

    \4\``Access'' firms are NASD members which conduct a business in 
exchange-listed options but which are not members of any of the 
options exchanges upon which the options are listed and traded.
    \5\In this connection, the NASD's rules do not specifically 
govern how a specific equity option falls within one of the three 
position limit tiers. Rather, the NASD's position limit rule 
provides that the position limit established by an options 
exchange(s) for a particular equity option is the applicable 
position limit for purposes of the NASD's rule. Under the rules of 
each of the options exchanges, if the security underlying a 
standardized option has trading volume of 40,000,000 shares over the 
most recent six-month period or trading volume of 30,000,000 shares 
over the most recent six-month period and float of 120,000,000, it 
is subject to a position limit of 10,500 contracts; if the security 
underlying a standardized option has trading volume of 20,000,000 
shares over the most recent six-month period or trading volume of 
15,000,000 shares over the most recent six-month period and float 
40,000,000, it is subject to a position limit of 7,500 contracts; 
and, if the underlying security is ineligible for a 10,500 or 7,500 
contract position limit, it is subject to a 4,500-contract position 
limit. The rules of each options exchange are uniform in regard to 
the above. See e.g., Commentary .07 to American Stock Exchange Rule 
904 and Interpretation and Policy .02 to Chicago Board Options 
Exchange Rule 4.11.
    \6\Conventional equity options are defined in Section 
33(b)(2)(GG) of the NASD Rules of Fair Practice to mean ``any option 
contract not issued, or subject to issuance, by The Options Clearing 
Corporation.''
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    In some instances, however, a security may qualify for an options 
position limit of 7,500 or 10,500 contracts but it is subject to a 
position and exercise limit of 4,500 contracts because it does not 
underlie a standardized option. Given that these securities qualify for 
higher position limits but are not eligible for them solely because 
there is no standardized option traded on them in the U.S., the NASD 
believes its option position limit rule may be unduly restrictive for 
these securities and unnecessarily constrain members' legitimate 
hedging activity. Accordingly, the NASD proposes to amend Section 33 to 
provide that the position limit for options on a security shall be 
determined by the position limit tier the security falls under, 
regardless of whether the security is subject to standardized options 
trading.\7\

    \7\To ensure that the higher position limits for conventional 
options overlying securities not subject to standardized options 
trading are only available for securities qualifying for a position 
limit of 7,500 or 10,500 contracts, a member must demonstrate to the 
NASD's Market Surveillance Department that the security satisfies 
the standards for such higher options position limit prior to 
establishing an unhedged options position on that security in excess 
of 4,500 contracts.
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    The NASD believes its proposal is warranted for the following 
reasons. First, if a security has sufficient trading volume and public 
float to satisfy the standards for a position limit of 7,500 contracts 
or 10,500 contracts, the NASD does not believe that raising the 
position and exercise limits for conventional options on the security 
will adversely affect the cash market for the security. In the NASD's 
view, if the cash market for a security is large enough to qualify for 
an options position limit of 7,500 contracts or 10,500 contracts, it is 
irrelevant whether that security is only subject to conventional 
options trading and not standardized options trading. The NASD believes 
the primary consideration governing the appropriate position limit 
level for options on a security should be the characteristics and size 
of the underlying cash market for that security, not whether the 
options overlying the security are standardized or conventional. 
Second, the NASD does not believe its members' activities in the 
conventional options market should be linked to or constrained by 
decisions of the options exchanges concerning whether or not to trade 
options on particular securities.
    Moreover, the NASD believes that its proposal will not compromise 
the stability of the securities markets underlying the conventional 
options eligible for the higher position limits. In this regard, for 
those securities that will be eligible for higher position limits under 
the proposal, there will only be a slight increase in the percentage of 
their capitalization that an investor or group of investors acting in 
concert can control under the new position limits.
    Therefore, the NASD believes the proposed rule change is consistent 
with Section 15A(b)(6) of the Act. Section 15A(b)(6) requires that the 
rules of a national securities association be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, 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. Specifically, the NASD 
believes the proposal will promote the maintenance of fair and orderly 
markets because it will serve to facilitate the use [[Page 2415]] of 
conventional equity options by investors seeking to satisfy their 
legitimate hedging needs, without compromising the integrity of the 
underlying securities markets. In addition, to the extent that 
investors have greater assurance that they can hedge larger stock 
positions through the use of conventional options, liquidity in the 
underlying cash market may be enhanced by the proposal.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD believes that the proposed rule change will not result in 
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

    Comments 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 NASD 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, 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. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File Number SR-NASD-94-54 and 
should be submitted by January 30, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\

    \8\17 CFR 200.30-3(a)(12)(1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-430 Filed 1-6-95; 8:45 am]
BILLING CODE 8010-01-M