Federal Register / Vol. 61, No. 4 / Friday, January 5, 1996 / Notices 433

6 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1).

2 17 CFR 240.19b–4.

3The proposal was originally filed with the

Commission on October 26, 1995. The NASD

subsequently submitted Amendment No. 1 to the

filing. Letter from Elliot R. Curzon, Assistant

General Counsel, NASD, to Karl J. Varner, Over-theCounter Regulation, Division of Market Regulation,

SEC, dated November 15, 1995.

4 15 U.S.C. § 78o–3.

5The NASD noted that with the advent of same

day funds settlement (SDFS) in early 1996 and the

new settlement time frames associated with the

Depository Trust Company’s SDFS System, the

appropriate buy-in execution time in subsection

59(b) should not be prior to 3:00 P.M. Eastern Time.

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 at

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing also will be available for

inspection and copying at the principal

office of the New York Stock Exchange.

All submissions should refer to File No.

SR–NYSE–95–46 and should be

submitted by January 26, 1996.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.6

Jonathan G. Katz,

Secretary.

[FR Doc. 96–171 Filed 1–4–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 36649; File No. SR–NASD–95–

50]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

National Association of Securities

Dealers, Inc. Amending the Buy-in

Procedures in Section 59 of the

Uniform Practice Code to Clarify the

Appropriate Delivery Deadlines for

Buy-in Notices

December 28, 1995.

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

Securities Exchange Act of 1934

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

on November 15, 1995, the National

Association of Securities Dealers, Inc.

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

the Securities and Exchange

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

a proposed rule change that amends

Section 59 of the Uniform Practice Code

(‘‘UPC’’ or ‘‘Code’’) to revise the buy-in

procedures to clarify the appropriate

delivery deadlines for buy-in notices.

Notice of the proposed rule change,

together with the substance of the

proposal, was issued by Commission

release (Securities Exchange Act Release

No. 36496, November 20, 1995) and by

publication in the Federal Register (60

FR 58695, November 28, 1995).3 No

comment letters were received. The

Commission is approving the proposed

rule change.

I. Background

Under Section 59 of the Code, when

the seller has not completed a contract

of sale of securities by delivering the

securities called for in the contract on

settlement day, the buyer may close the

contract by purchasing the subject

securities in the open market (‘‘buyingin’’). When securities are bought-in to

complete a contract, the seller is liable

for any difference between the contract

price and the buy-in price.

Pursuant to subsection 59(a) of the

Code, a buy-in is initiated by the buyer

delivering a notice of buy-in to the seller

at his office not later than 12 noon, the

seller’s time, two business days

preceding the execution of the proposed

buy-in. Subsection 59(b) provides that

the notice must include the terms of the

contract to be closed and must state that

unless delivery is effected at or before

a certain specified time not earlier than

11:30 a.m., the buyer’s local time, the

security may be bought-in for the

account of the seller (meaning the seller

assumes the liability for the market

price of the security bought-in).

Subsection 59(b) also provides that if

the originator of the buy-in notice is a

participant in a registered securities

depository and the security to be

bought-in is a depository eligible

security, the buy-in may not be executed

before 2:30 p.m., Eastern Time.

The NASD has identified an

inconsistency in subsection 59(b) in that

the provisions permit a buy-in notice to

specify the seller’s delivery deadline at

a time no earlier than 11:30 a.m., the

buyer’s local time, yet the buy-in may

not be executed before 2:30 p.m.,

Eastern Time. If the seller obtained

securities and tendered them for

delivery after the notice deadline but

before the buy-in was executed, the

provisions of the rule and the notice

could permit the buyer to refuse

delivery and subject the seller to the risk

of an execution at a price higher than

the original contract price. To resolve

this anomaly, the rule change amends

subsection 59(b) of the UPC to notify the

delivery times permitted to be specified

in the buy-in notice.

II. The Terms of Substance of the

Proposed Rule Change

The rule change amends Section 59 of

the UPC to modify the delivery times

permitted to be specified in the buy-in

notice. With respect to buy-in notices

for depository eligible securities where

the originator is a depository

participant, the notice may not specify

a delivery time earlier than 3:00 p.m.,

Eastern Time.

In addition, the rule change amends

UPC subsection 59(b)(2), which permits

the recipient of a buy-in notice to

retransmit the notice to another brokerdealer from whom the subject securities

are due. A retransmitted buy-in notice

must be delivered to the recipient not

later than 12 noon, the seller’s local

time, on the business day preceding the

buy-in date and the specified delivery

time in the original notice.

III. Discussion

The Commission believes that the rule

change is consistent with the provisions

of Section 15A(b)(6) of the Act 4 in that

the rule change will refine the buy-in

provisions of the code to recognize new

developments in the clearance and

settlement system.5 Furthermore, the

rule change will facilitate the clearance

and settlement of securities by

eliminating an inconsistency in

subsection 59(b) that permitted a buy-in

notice to specify the seller’s delivery

deadline at a time no earlier than 11:30

a.m., the buyer’s local time, yet the buyin could not be executed before 2:30

p.m., Eastern Time. For depository

eligible securities where the originator

is a depository participant, the rule

change precludes the buy-in notice from

requiring the seller to deliver the

securities before 3:00 p.m., the seller’s

time. The provision will reduce the risk

of the buyer exposing the seller to an

execution at a price higher than the

original contract price. However, the

rule change permits broker-to-broker

buy-ins in nondepository eligible

securities that specify an earlier delivery

time (no earlier than 11:30 a.m. local

time).

In addition, the rule change amends

UPC subsection 59(b)(2) to require the

recipient of a buy-in notice to retransmit
434 Federal Register / Vol. 61, No. 4 / Friday, January 5, 1996 / Notices

1 15 U.S.C. § 78s(b)(1) (1988).

2 17 CFR 240.18b–4 (1994).

3See Securities Exchange Act Release No. 27697

(February 9, 1990), 55 FR 5535 (February 15, 1990).

4Position 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. Article III, Section 33(b)(3)(A) of

the NASD Rules of Fair Practice currently provides

that equity option position limits are 4,500, 7,500,

or 10,500 contracts, depending upon the trading

volume and number of outstanding shares of the

underlying stock. In addition, the NASD has

recently submitted to the Commission a rule

proposal that would add a 20,000-contract position

limit tier and a 25,000-contract position limit tier.

See File No. SR–NASD–95–55.

5Exercise 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 forth as the applicable position

limit for those options classes. See Article III,

Section 33(b)(4) of the NASD Rules of Fair Practice.

6See Securities Exchange Act Release No. 33783

(March 18, 1994), 59 FR 14229 (March 25, 1994).

7The four exempted hedge positions are: (1) Long

stock and short calls; (2) long stock and long puts;

(3) short stock and long calls; and (4) short stock

and short puts.

8The Commission notes that the NASD

determines on a case-by-case basis whether an

instrument that is being used as the basis for the

underlying hedged positions is readily convertible

into, or economically equivalent to, the security

underlying the corresponding option position. In

this regard, the NASD generally finds that an

instrument that is not presently convertible into a

security, but which will be at a future date, is not

a ‘‘convertible’’ security for purposes of the hedge

exemption. In addition, the NASD notes that if a

convertible security used to hedge an option

position is called for redemption by the issuer, the

security would have to be converted into the

underlying security immediately or the

corresponding option position would have to be

reduced accordingly.

the notice to another broker-dealer from

whom the securities are due not later

than 12 noon, the seller’s local time, on

the business day preceding the date of

execution of the buy-in. The specified

delivery time in the retransmitted notice

must not be earlier than the time

specified in the original notice. The rule

change modifies the existing language to

provide the seller with 231⁄2 hours to

deliver the securities to the recipient

that retransmitted the buy-in notice and

is an improvement to the current

procedures that arguably permit

retransmittal to occur at the end of the

previous business day, which provided

the recipient with as little as 181⁄2 hours

notice.

It is therefore ordered, pursuant to

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

proposed rule change SR–NASD–95–50

be, and hereby is, approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority, 17 CFR 200.30–3(a)(12).

Jonathan G. Katz,

Secretary.

[FR Doc. 96–168 Filed 1–4–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36657; File No. SR–NASD–

95–56]

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 an Extension and

Expansion of the NASD’s Equity

Option Position Limit Hedge

Exemption Pilot Program

December 29, 1995.

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

Securities Exchange Act of 1934

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

notice is hereby given that on November

21, 1995, the National Association of

Securities Dealers, Inc. (‘‘NASD’’) filed

with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change as described in

Items I and II below, which Items have

been prepared by the self-regulatory

organization. The NASD has requested

accelerated approval for the proposal.

This order approves the NASD’s

proposal on an accelerated basis and

solicits comments from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD is proposing to amend

Article III, Section 33(b)(3)(A)(5) of the

NASD Rules of Fair Practice to extend,

until December 31, 1997, the NASD’s

equity option position limit hedge

exemption pilot program. The NASD is

also proposing to expand the hedge

exemption pilot program to permit the

establishment of hedged positions up to

three times the applicable basic position

limit.

In addition, the NASD is requesting

that the Commission find good cause,

pursuant to Section 19(b)(2) of the Act,

to approve the proposed rule change

prior to the thirtieth day after

publication in the Federal Register.

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 III 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

1. Purpose

On February 9, 1990, the Commission

approved a NASD proposal 3 to

implement a two-year pilot program

during which certain fully hedged

equity option positions would be

automatically exempt from established

position 4 and exercise limits.5 On

March 18, 1994, the Commission

extended the NASD’s hedge exemption

pilot program through December 31,

1995.6

The NASD’s hedge exemption

provides for an automatic exemption

from equity option position limits for

accounts that have established one of

the four most commonly used hedged

positions 7 and where each option

contract is either (i) hedged by 100

shares of stock, (ii) hedged by securities

that are readily convertible into, or

economically equivalent to, such stock,8

or (iii) in the case of an adjusted options

contract, hedged by the number of

shares represented by the adjusted

contract.

Under the NASD’s current hedge

exemption, the largest options position

(combining hedged and unhedged

positions) that may be established may

not exceed twice the basic position limit

(i.e., 9,000, 15,000, or 21,000 contracts,

respectively). In addition, the hedge

exemption does not change the exercise

limits contained in Article III, Section

33(b)(4) of the NASD Rules of Fair

Practice. Therefore, market participants

are allowed to exercise, during any five

consecutive business days, the same

number of options contracts as set forth

in the position limit for that option,

including those options positions that

are hedged (i.e., if the position limit for

an option is 10,500 contracts and an

investor has established a position of

21,000 contracts (10,500 unhedged and

10,500 hedged), the investor may

exercise all 21,000 contracts during five

consecutive business days).

The NASD is currently proposing two

amendments to its hedge exemption

pilot program. First, the NASD is