Document ID: SEC-2008-0361-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-03-07T05:00Z

[Federal Register: March 7, 2008 (Volume 73, Number 46)]
[Notices]               
[Page 12487-12489]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07mr08-134]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57413; File No. SR-FINRA-2008-007]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Make Permanent a Pilot Program That Increases 
Options Position and Exercise Limits

March 3, 2008.
    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 February 28, 2008, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a 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 substantially prepared by FINRA. FINRA 
has designated this proposal as non-controversial under Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders the proposed rule change effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA seeks to amend NASD Rule 2860 (Options) to make permanent a 
pilot program that increases options position and exercise limits. In 
addition, FINRA proposes to amend NASD IM-2860-1 (Position Limits) to 
revise the examples that illustrate the operation of position limits 
with the proposed permanent position limits. The text of the proposed 
rule change is available on FINRA's Web site (http://www.finra.org), at 
FINRA's principal office, and at the Commission's Public Reference 
Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA 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. FINRA 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
    FINRA is proposing amendments to its options position and exercise 
limits in NASD Rule 2860 to make permanent a pilot program that 
increases position and exercise limits for both standardized and 
conventional options.\5\ In addition, FINRA proposes to amend NASD IM-
2860-1 (Position Limits) to revise the examples that illustrate the 
operation of position limits with the proposed permanent position 
limits.
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    \5\ A ``conventional option'' is an option contract not issued, 
or subject to issuance by, the Options Clearing Corporation. See 
NASD Rule 2860(b)(2)(O). Currently, position limits for standardized 
and conventional options are the same with respect to the same 
underlying security. The proposed rule change would maintain this 
parity between standardized and conventional options. FINRA has 
maintained parity between conventional and standardized options 
since 1999. See Securities Exchange Act Release No. 40932 (January 
11, 1999), 64 FR 2930, 2931 (January 19, 1999) (SR-NASD-98-92). 
Before 1999, position limits on conventional options were three 
times greater than the limits for standardized options. See 
Securities Exchange Act Release No. 40087 (June 12, 1998), 63 FR 
33746 (June 19, 1998) (SR-NASD-98-23).
    FINRA's limits on standardized equity options are applicable 
only to those members that are not also members of the exchange on 
which the option is traded; the limits on conventional options are 
applicable to all FINRA members. NASD Rule 2860(b)(1)(A); see also 
Securities Exchange Act Release No. 40932 (January 11, 1999), 64 FR 
2930, 2931 (January 19, 1999) (SR-NASD-98-92).
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    NASD Rule 2860(b)(3) subjects standardized and conventional options 
to one of five different position limits. Options exercise limits, 
which are set forth in NASD Rule 2860(b)(4), and which incorporate by 
reference the position limits in Rule 2860(b)(3), also would increase. 
The original pilot program became effective on March 30, 2005, and has 
been extended five times. It was scheduled to expire on March 1, 
2008.\6\ FINRA is proposing to make the pilot program permanent in 
order to preserve the benefits to the marketplace from the higher 
levels. The proposed rule change also is substantively identical to a 
proposal by the Chicago Board Options Exchange, Inc. recently approved 
by the Commission.\7\ FINRA anticipates all other self-regulatory 
organizations (``SROs'') with the pilot program also will seek to make 
their program permanent. Thus, the proposed rule change will ensure 
that FINRA's position limits are consistent with those of other SROs.
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    \6\ See Securities Exchange Act Release Nos. 52271 (August 16, 
2005), 70 FR 49344 (August 23, 2005) (SR-NASD-2005-097); 53346 
(February 22, 2006), 71 FR 10580 (March 1, 2006) (SR-NASD-2006-025); 
54334 (August 18, 2006), 71 FR 50961 (August 28, 2006) (SR-NASD-
2006-097); 55225 (February 1, 2007), 72 FR 6634 (February 12, 2007) 
(SR-NASD-2007-007); and 56265 (August 15, 2007), 72 FR 47102 (August 
22, 2007) (SR-FINRA-2007-002).
    \7\ See Securities Exchange Act Release No. 57352 (February 19, 
2008), 73 FR 10076 (February 25, 2008) (SR-CBOE-2008-07).
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Position and Exercise Limits
    The standard position limits were last increased nine years ago, on 
December 31, 1998.\8\ Since that time, there has been a steady increase 
in the number of accounts that approach the position limit or have been 
granted an exemption to the applicable position limit. To the best of 
FINRA's knowledge, during the operation of the pilot program, there 
have been very few violations of the position limits or exercise limits 
and none of these violations were deemed to be a result of manipulative 
activities.
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    \8\ See Securities Exchange Act Release No. 40875 (December 31, 
1998), 64 FR 1842 (January 12, 1999).
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Growth in Options Market

    Since the last position limit increase, there has been an 
exponential increase in the overall volume in options trading. Part of 
this volume is attributable to a corresponding increase in the number 
of overall market participants. This growth in market participants has 
in turn brought about additional depth and increased liquidity in 
options trading. FINRA has no reason to believe that the current 
trading volume in equity options will not continue. Rather, FINRA 
expects continued options volume growth as opportunities for investors 
to participate in the options markets increase and evolve. FINRA 
believes that the non-pilot position and exercise limits might 
constrain liquidity in the options markets.
Manipulation
    Since the last position limit increase, and throughout the duration 
of the pilot program, FINRA has not encountered any significant 
regulatory issues regarding the applicable position limits. Moreover, 
FINRA believes that there is a lack of evidence of market

[[Page 12488]]

manipulation schemes, which justifies the proposed permanent approval 
of the pilot program. FINRA believes that its existing surveillance 
procedures and reporting requirements are reasonably designed to detect 
unusual and/or illegal trading activity. FINRA represents that its 
surveillance and reporting mechanisms (which have been significantly 
enhanced since the last position limit increase in 1999) will serve to 
adequately address any concerns the Commission may have with respect to 
account(s) engaging in any manipulative schemes resulting from position 
limit violations.
No Adverse Consequences from Past Increases
    Equity option position limits have been gradually expanded from 
1,000 contracts in 1973 to the current level of 75,000 contracts for 
the largest and most actively traded equity options. To date, FINRA is 
unaware of any adverse affects on the markets as a result of these past 
increases in the limits for equity option contracts.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. The proposed rule change would make permanent a pilot 
program increasing options position and exercise limits. FINRA's 
experience administering the higher limits of the pilot program over 
the past three years has not revealed any adverse concerns or any other 
reasons to suggest that such limits should not be made permanent.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will 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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    FINRA has designated the proposed rule change as one that: (1) Does 
not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from the date of filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest. Therefore, the 
foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \10\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\11\ FINRA notes that the proposed rule change is based on a 
similar proposal recently approved by the Commission.\12\ FINRA has 
asked the Commission to waive the operative delay to permit the 
proposed rule change to become operative prior to the 30th day after 
filing.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. FINRA has fulfilled this requirement.
    \12\ See Securities Exchange Act Release No. 57352 (February 19, 
2008), 73 FR 10076 (February 25, 2008) (order granting accelerated 
approval to SR-CBOE-2008-07).
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    The pilot program expanding position and exercise limits on 
standardized and conventional options was scheduled to expire on March 
1, 2008. The Commission believes that waiving the 30-day operative 
delay of FINRA's proposal is consistent with the protection of 
investors and the public interest because it will allow the position 
and exercise limits to remain at consistent levels during the 
transition from the pilot program to permanent status.\13\ Therefore, 
the Commission designates the proposal to be operative upon filing.
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    \13\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File No. SR-FINRA-2008-007 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2008-007. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commissions Internet Web site (http://www.sec.gov/
rules/sro.shtml). 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, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2008-007 and should be 
submitted on or before March 28, 2008.

[[Page 12489]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-4513 Filed 3-6-08; 8:45 am]

BILLING CODE 8011-01-P