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
Federal Register / Vol. 61, No. 4 / Friday, January 5, 1996 / Notices 435

9The NASD notes that if File No. SR–NASD–95–

55 is approved by the Commission, market

participants could establish hedged positions of up

to 60,000 contracts or 75,000 contracts,

respectively, in those securities that qualify for the

20,000-contract position limit tier or the 25,000-

contract position limit tier. In addition, under the

OTC Collar Exemption, market participants could

establish OTC collars where each ‘‘leg’’ of the collar

is 50,000 contracts, in the case of a security eligible

for the 20,000-contract position limit, or 62,500

contracts, in the case of a security eligible for the

25,000-contract position limit.

10 15 U.S.C. § 78f(b)(5) (1988).

11See Securities Exchange Act Release Nos.

36371 (October 13, 1995), 60 FR 54269 (October 20,

1995) (order approving File No. SR–CBOE–95–42);

and 36409 (October 23, 1995), 60 FR 55399 (October

31, 1995) (order approving File Nos. SR–NYSE–95–

31, SR–PSE–95–25, SR–Amex–95–42, and SR–

Phlx–95–71).

12 In addition, should the NASD seek permanent

approval of its hedge exemption pilot program, the

NASD is aware of and will comply with the

Commission’s request for a request on the operation

of the program.

proposing to extend the pilot program

until December 31, 1997. Second, the

NASD is proposing to modify the hedge

exemption to permit the establishment

of hedged equity option positions up to

three times the applicable basic position

limit (i.e., 13,500, 22,500, or 31,500

contracts).9 As noted above, the hedge

exemption rule currently permits the

establishment of hedged equity option

positions up to twice the applicable

basic position limit.

2. Statutory Basis

The NASD believes that the proposed

rule change is consistent with Section

15A(b)(6) of the Act.10 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.

In particular, the NASD believes that

the proposed expansion of the equity

option position limit hedge exemption

pilot program is warranted for the

following reasons. First, permitting

market participants, particularly

investors with sizeable holdings,

accounts, or assets, to establish larger

hedged equity option positions will

afford them greater flexibility to employ

larger options positions when effecting

their hedging strategies. Second, the

higher hedged position limit exemption

will likely facilitate greater activity in

exchange-listed options and

conventional equity options, thereby

enhancing liquidity in the markets for

exchange-traded options, conventional

equity options, and the securities

underlying those options. Third, by

conforming the NASD’s equity option

hedge exemption rule to the hedge

exemption rules in place at the options

exchanges, there will be no confusion

by market participants concerning

applicable position and exercise

limits.11

In addition, the NASD believes that

the proposed expansion of the equity

option position limit hedge exemption

will not compromise the integrity of the

options markets or jeopardize the

stability of the securities markets

underlying exchange-traded equity

options or conventional equity options.

As options positions established

pursuant to the hedge exemption pilot

program will continue to be hedged on

a one-for-one basis with the underlying

stock, the NASD does not believe that

the proposed expansion of the hedge

exemption pilot program will have an

adverse impact on the market. In this

regard, the NASD notes that the higher

position limits currently available by

virtue of the NASD’s hedge exemption

pilot program have not resulted in

disruptions of the underlying stock

market. Moreover, the NASD will

continue to monitor the use of the

position limit hedge exemption to

ensure that NASD members comply

with the requirements of the exemption,

as well as to monitor the exemption’s

effect, if any, on the market.12

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD does not believe that the

proposed rule change will impose any

inappropriate burden on competition.

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 with respect to the proposed

rule change.

III. 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

changes that are filed with the

Commission, and all written

communications relating to the

proposed rule changes 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

filings also will be available for

inspection and copying at the principal

office of the NASD. All submissions

should refer to File No. SR–NASD–95–

56 and should be submitted by January

26, 1996.

IV. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

association, and, in particular, with the

requirements of Section 15A(b)(6).

Specifically, the Commission believes

that the proposed extension and

expansion of the NASD’s equity option

position limit hedge exemption pilot

program will accommodate the needs of

investors and market participants while

at the same time furthering investor

protection and the public interest.

The Commission also believes that the

proposed rule change will increase the

potential depth and liquidity of the

equity options market as well as the

underlying cash market without

significantly increasing concerns

regarding intermarket manipulations or

disruptions of the market for the options

or the underlying securities.

In addition, to the extent the potential

for manipulation does increase due to

the expanded hedge exemption, the

Commission believes that the NASD’s

surveillance programs will be adequate

to detect as well as to deter attempted

manipulative activity. Moreover, the

Commission will continue to monitor

the NASD’s surveillance programs to

ensure that problems do not arise.

The Commission finds good cause to

approve the proposed rule changes prior

to the thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. Specifically, by

accelerating the approval of the NASD’s

rule proposal, the Commission is

conforming the NASD’s equity option

hedge exemption to identical proposals

that were recently approved for the

options exchanges by the
436 Federal Register / Vol. 61, No. 4 / Friday, January 5, 1996 / Notices

13See supra note 11.

14 Id.

15 15 U.S.C. § 78s(b)(2) (1988).

16 17 CFR 200.30–3(a)(12) (1994).

1 15 U.S.C. 78s(b)(1).

2Securities Exchange Act Release No. 36659

(December 29, 1995). The Commission notes that

pursuant to File No. SR–95–46, the NYSE revised

its equity transaction charges, effective January 2,

1996, to eliminate the exclusion currently in place

that precludes orders for competing market makers

from the no charge provision for system orders

between 100 to 2099 shares. This revision had the

effect of removing all NYSE equity transaction

charges on competing market maker system orders

between 100 to 2099 shares. If approved, the

NYSE’s current filing (SR–NYSE–95–47) would

reimpose a charge of $0.00190 on such share

volume, retroactive to January 2, 1996.

3The Commission notes that the equity

transaction charge of $0.00190 that this filing would

impose upon competing market maker system share

volume on orders between 100 to 2099 shares was

first introduced by the NYSE pursuant to File No.

SR–NYSE–95–38, which was noticed for comment

in Securities Exchange Act Release No. 36465

(November 8, 1995) 60 FR 57473. The Commission

received three comment letters in connection with

that filing. These letters are available in File No.

SR–NYSE–95–38.

Commission.13 Accelerated approval of

the proposed rule change will thereby

provide for the desired uniformity of

equity option hedge exemptions within

the exchange traded options market.

Any other course of action could lead to

unnecessary investor confusion. In

addition, the Chicago Board Options

Exchange, Inc.’s (‘‘CBOE’’) proposal was

noticed for the entire twenty-one day

comment period and generated no

negative responses.14 Lastly, accelerated

approval of the rule proposal will allow

the NASD’s hedge exemption pilot

program to continue on an

uninterrupted basis. Accordingly, the

Commission believes that it is

consistent with Section 15A(b)(6) of the

Act to approve the proposed rule change

on an accelerated bais.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) 15 of the Act that the

proposed rule change (File No. SR–

BASD–85–56) is hereby approved on an

accelerated basis, and, accordingly, the

hedge exemption pilot program as

expanded herein is extended until

December 31, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.16

Jonathan G. Katz,

Secretary.

[FR Doc. 96–169 Filed 1–4–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36658; File No. SR–NYSE–

95–47]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

New York Stock Exchange, Inc.,

Relating to the Exclusion of Certain

Orders From Trading at No Charge

December 29, 1995.

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

Securities Exchange Act of 1934

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

December 29, 1995, the New York Stock

Exchange, Inc. (‘‘NYSE’’ 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 selfregulatory 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 Exchange proposes that, effective

January 2, 1996, certain orders be

excluded from the specified system

orders between 100 and 2,099 shares

that are eligible to be traded at no charge

as set forth in companion filing (SR–

NYSE–95–46).2 The ineligible orders to

be excluded are those with the

following descriptions:

An order of a member or member

organization trading as agent for the account

of a non-member competing market maker.

Competing Market Maker: a specialist or

market maker registered as such on a

registered stock exchange (other than the

NYSE), or a market maker bidding and

offering over-the-counter, in a New York

Stock Exchange-traded security.

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

The purpose of this filing is to seek

approval to exclude specific orders

defined in Item I. above from those

eligible system orders to be traded at no

charge.

2. Statutory Basis

The basis under the Act for the

proposed rule change is the requirement

under Section 6(b)(4) that an Exchange

have rules that provide for the equitable

allocation of reasonable dues, fees, and

other charges among its members,

issuers and other persons using its

services.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange believes that this

proposed fee change will not impose

any burden on competition that is not

necessary or appropriate in the

furtherance of the purposes of the Act.

The proposed fee change is structured to

maintain the current relationship

between member proprietary and nonmember market maker activities in

Exchange-listed securities. In this

regard, the Exchange is not seeking to

give additional encouragement to

members to send to the Exchange

proprietary orders of competing market

makers, which the Exchange believes

would inappropriately promote the

direct competitive activities of nonmember market makers.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants or Others

The Exchange has not solicited, and

does not intend to solicit, comments

regarding the proposed rule change. The

Exchange has not received any

unsolicited written comments from

members or other interested parties.3

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 the 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.