Document ID: SEC-2007-1255-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2007-09-11T04:00Z

[Federal Register: September 11, 2007 (Volume 72, Number 175)]
[Notices]               
[Page 51875-51878]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11se07-111]                         

[[Page 51875]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56351; File No. SR-Amex-2007-81]

 
Self-Regulatory Organizations; American Stock Exchange, LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change as Modified by Amendment No. 1 Thereto To Eliminate 
Position and Exercise Limits for Options on the Russell 2000 Index, and 
To Specify That Certain Reduced-Value Options on Broad-Based Security 
Indexes Have No Position and Exercise Limits Pursuant to Section

September 4, 2007.
    19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and 
Rule 19b-4 thereunder,\2\ notice is hereby given that on August 2, 
2007, the American Stock Exchange LLC (``Amex'' or ``Exchange'') 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 the Exchange. On August 21, 2007, 
the Exchange filed Amendment No. 1 to the proposed rule change. This 
order provides notice of the proposed rule change, as modified by 
Amendment No. 1, and approves the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to eliminate position and exercise limits for 
options on the Russell 2000 Index (``RUT''), and to specify that 
reduced-value options on broad-based security indexes for which full-
value options have no position and exercise limits will similarly have 
no position and exercise limits. The text of the proposed rule change 
is available at Amex, the Commission's Public Reference Room, and 
http://www.amex.com.

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 Exchange 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 Exchange 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 Exchange proposes to amend Amex Rule 904C to eliminate position 
and exercise limits for options on RUT, a broad-based securities index 
that is multiply-listed and heavily traded.\3\ The Exchange further 
proposes to amend Rule 904C to specify that reduced-value options on 
broad-based security indexes for which full-value options have no 
position and exercise limits will similarly have no position and 
exercise limits. Currently, options on the Full Size Nasdaq-100 Index 
(``NDX'') have no position and exercise limits. In this regard, the 
Exchange also proposes to eliminate position and exercise limits for 
options on the Mini Nasdaq-100 Index (``MNX'').
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    \3\ The current position and exercise limits for RUT options are 
50,000 contracts, with no more than 30,000 of such contracts in a 
series in the nearest expiration month. See Securities Exchange Act 
Release No. 53191 (January 30, 2006), 71 FR 6111 (February 6, 2006) 
(SR-Amex-2005-061).
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Eliminate Position and Exercise Limits for RUT Options
    The Exchange believes that the circumstances and considerations 
relied upon in approving the elimination of position and exercise 
limits for other heavily traded broad-based index options (e.g., 
options on NDX, the Major Market Index (``XMI''), and the Institutional 
Index (``XII'')) equally apply to the current proposal relating to 
position and exercise limits for RUT options.\4\
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    \4\ See Securities Exchange Act Release No. 52649 (October 21, 
2005), 70 FR 62146 (October 28, 2005) (SR-Amex-2005-063) (``NDX 
Approval Order''); see also Securities Exchange Act Release No. 
46393 (August 21, 2002), 67 FR 55289 (August 28, 2002) (SR-Amex-
2002-31) (``XMI/XII Permanent Approval Order'').
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    In approving the elimination of position and exercise limits for 
NDX, XMI, and XII options, the Commission considered the capitalization 
of the each of these indexes and the deep and liquid markets for the 
securities underlying each index significantly reduced concerns of 
market manipulation or disruption in the underlying markets. The 
Commission also noted the active trading volume for options on those 
indexes. Amex believes that RUT shares these factors in common with the 
NDX and XMI. As of July 31, 2007, the approximate market capitalization 
of the NDX and XMI \5\ were $2.28 and $2.82 trillion, respectively, the 
average daily trading volume (``ADTV'') for the components of the 
indexes were 572 million and 171 million shares, respectively, and the 
ADTV for options on the indexes were 64,003 contracts per day, and 
1,338 contracts per day, respectively. Amex believes that RUT has very 
comparable characteristics. The market capitalization for RUT is $1.73 
trillion dollars, the ADTV for the underlying securities is 535 million 
shares, and the ADTV for RUT options is 79,000 contracts.
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    \5\ Options on XII are no longer listed and traded on the 
Exchange.
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    In approving the elimination of position and exercise limits for 
NDX, XMI, and XII, the Commission also noted the financial requirements 
imposed by both the Exchange and the Commission serve to address any 
concerns that an Exchange member or its customer(s) may try to maintain 
an inordinately large unhedged position in options on the indexes. 
These financial requirements also apply to RUT options. Under Amex 
rules, the Exchange also has the authority to impose additional margin 
upon accounts maintaining underhedged positions, and is further able to 
monitor accounts to determine when such action is warranted. As noted 
in the Exchange's rules, the clearing firm carrying such an account 
would be subject to capital charges under Rule 15c3-1 under the Act \6\ 
to the extent of any resulting margin deficiency.\7\
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    \6\ 17 CFR 240.15c3-1.
    \7\ See Commentary .03 to Amex Rule 904C.
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    In approving the elimination of position and exercise limits for 
NDX, XMI, and XII the Commission relied heavily on the Exchange's 
ability to provide surveillance and reporting safeguards to detect and 
deter trading abuses arising from the elimination of position and 
exercise limits in options on those indexes. The Exchange represents 
that it monitors the trading in RUT options in the same manner as 
trading in NDX and XMI options and that the current Amex surveillance 
procedures are adequate to continue monitoring RUT options. In 
addition, the Exchange intends to impose a reporting requirement on 
Amex members or member organizations (other than Amex specialists and 
registered options traders) who trade RUT options. This reporting 
requirement, which is currently imposed on members who trade NDX and 
XMI options, will require members or member organizations who maintain 
in excess of 100,000 RUT option

[[Page 51876]]

contracts on the same side of the market, for their own accounts or for 
the account of customers, to report information as to whether the 
positions are hedged and provide documentation as to how such contracts 
are hedged, in a manner and form required by the Exchange's Regulation 
Department. The Exchange may also specify other reporting requirements, 
as well as the limit at which the reporting requirement may be 
triggered.
    The Exchange proposes to delete the reference to XII options in 
Rule 904C(b), Commentary .03 to Rule 904C, Rule 906C(b), and Rule 906G, 
as XII options are no longer listed and traded on the Exchange.
    For consistency, the Exchange also proposes to amend Rule 
906G(a)(i), (iv), and (v) relating to the trading of FLEX broad-based 
index options to reflect that there shall be no position or exercise 
limits on RUT options and to adopt the 100,000 contract reporting 
requirement for FLEX RUT options. All other FLEX rules applicable to 
NDX and XMI options shall also apply, where applicable, to RUT options.
    The Exchange believes that eliminating position and exercise limits 
for RUT options and FLEX RUT options is consistent with Amex rules 
relating to similar broad-based indexes and also allows Amex members 
and their customers greater hedging and investment opportunities.
Elimination of Position Limits for Reduced-Value Options on Broad-
Based-Indexes for Which There Are Not Position and Exercise Limits for 
Full-Value Options
    The Exchange lists and trades reduced-value options on broad-based 
indexes for which the Exchange also lists and trades full-value options 
(e.g., MNX options). When the exchange received approval to list and 
trade MNX options, the proscribed position and exercise limits were 
equivalent to the reduced-value contract factor (e.g., 10) multiplied 
by the applicable position and exercise limits for the full-value 
options on the same broad-based index.\8\ For example, when the 
Exchange received approval to list and trade NDX and MNX options,\9\ 
the position and exercise limits for MNX (\1/10th\ NDX value) options 
were 750,000 contracts, which was equal to the applicable factor (10) 
multiplied by the position limit for NDX options (75,000 contracts). In 
the NDX Approval Order, the Exchange noted that NDX contracts would be 
aggregated with MNX contracts to determine compliance with applicable 
position and exercise limits. Since position and exercise limits were 
eliminated for NDX options,\10\ the Exchange now proposes to eliminate 
position and exercise limits for MNX options. The Exchange further 
proposes to amend Rule 904C(b) to state that reduced-value options on 
broad-based security indexes for which full-value options have no 
position and exercise limits, would similarly have no position and 
exercise limits.
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    \8\ See Securities Exchange Act Release No. 51884 (June 20, 
2005), 70 FR 36973 (June 27, 2005) (SR-Amex-2005-038).
    \9\ See NDX Approval Order, supra note 4.
    \10\ Id.
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    In addition, because position and exercise limits for reduced-value 
options are aggregated with full-value options for purposes of 
determining compliance with position and exercise limits, the Exchange 
proposes to amend Rule 906C to reflect that such aggregation would 
apply when calculating reporting requirements (e.g., 10 MNX options 
equal 1 NDX full-value contract).
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act,\11\ in general, and Section 6(b)(5) of the Act,\12\ in 
particular, in that it is 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 facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    No written comments were solicited or 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, 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 Number SR-Amex-2007-81 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-Amex-2007-81. 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 Commission's 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, 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 
the Exchange. 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-
Amex-2007-81 and should be submitted on or before October 2, 2007.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder that are applicable to a national securities 
exchange.\13\ In

[[Page 51877]]

particular, the Commission believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act, which 
requires that the rules of a national securities exchange 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 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.\14\
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    \13\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    Since the inception of standardized options trading, the options 
exchanges have had rules imposing limits on the aggregate number of 
options contracts that a member or customer could hold or exercise. 
These rules are intended to prevent the establishment of options 
positions that can be used or might create incentives to manipulate or 
disrupt the underlying market so as to benefit the options position.
    The Commission notes that it continues to believe that the 
fundamental purposes of position and exercise limits remain valid. 
Nevertheless, the Commission believes that experience with the trading 
of index options as well as enhanced reporting requirements and the 
Exchange's surveillance capabilities have made it possible to approve 
the elimination of position and exercise limits on certain broad-based 
index options. Thus, in 2002, the Commission approved an Amex proposal 
to eliminate permanently position and exercise limits for options on 
XMI and XII,\15\ and, in 2005, the Commission approved an Amex proposal 
to eliminate permanently the position and exercise limits for options 
on NDX.\16\ The Commission believes that the considerations upon which 
it relied in approving the elimination of position and exercise limits 
for XMI, XII, and NDX options equally apply with respect to options on 
RUT.
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    \15\ See XMI/XII Permanent Approval Order, supra note 4.
    \16\ See NDX Approval Order, supra note 4.
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    As noted by Amex, the market capitalization of the RUT as of July 
31, 2007, was $1.73 trillion. The ADTV for all underlying components of 
the index was 535 million shares. The Commission believes that the 
enormous market capitalization of RUT and the deep, liquid market for 
the underlying component securities significantly reduce concerns 
regarding market manipulation or disruption in the underlying market. 
Removing position and exercise limits for RUT options may also bring 
additional depth and liquidity, in terms of both volume and open 
interest, to RUT options without significantly increasing concerns 
regarding intermarket manipulation or disruption of the options or the 
underlying securities.
    In addition, the Commission believes that financial requirements 
imposed by both the Exchange and the Commission adequately address 
concerns that an Amex member or its customer may try to maintain an 
inordinately large unhedged position in RUT options. Current risk-based 
haircut and margin methodologies serve to limit the size of positions 
maintained by any one account by increasing the margin and/or capital 
that a member must maintain for a large position held by itself or by 
its customer.\17\ Under the proposal, Amex also would have the 
authority under its rules to impose a higher margin requirement upon an 
account maintaining an under-hedged position when it determines a 
higher requirement is warranted. As noted in the Amex rules, the 
clearing firm carrying the account would be subject to capital charges 
under Rule 15c3-1 under the Act to the extent of any margin deficiency 
resulting from the higher margin requirement.
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    \17\ See Securities Exchange Act Release No. 41011 (February 1, 
1999), 64 FR 6405 (February 9, 1999) (SR-Amex-98-38) (``XMI/XII 
Pilot Approval Order'').
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    In approving the elimination of position and exercise limits for 
options on XMI, XII, and NDX, the Commission took note of the enhanced 
surveillance and reporting safeguards that Amex had adopted to allow it 
to detect and deter trading abuses that might arise as a result.\18\ 
Amex represents that it monitors trading in RUT options in much the 
same manner as trading in XMI and NDX options. These safeguards, 
including the 100,000-contract reporting requirement described above, 
would allow Amex to monitor large positions in order to identify 
instances of potential risk and to assess and respond to any market 
concerns at an early stage. In this regard, the Commission expects Amex 
to take prompt action, including timely communication with the 
Commission and other marketplace self-regulatory organizations 
responsible for oversight of trading in component stocks, should any 
unanticipated adverse market effects develop. Moreover, as previously 
noted, the Exchange has the flexibility to specify other reporting 
requirements, as well as to vary the limit at which the reporting 
requirements may be triggered.
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    \18\ See id. and NDX Approval Order, supra note 4.
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    The Commission further notes that in eliminating position and 
exercise limits for FLEX RUT options, Amex is adopting the same 
additional rules for these options that currently exist for FLEX XMI 
and NDX options.
    In addition, the Commission notes that the Exchange's existing 
rules applicable to position and exercise limits for full-value broad-
based index options are used to calculate the position and exercise 
limits for reduced-value options. The Exchange proposes to amend its 
rules for those specified broad-based index options that do not have 
position and exercise limits to specifically state that there will not 
be position and exercise limits on the reduced-value options on those 
same broad-based index options. The Exchange also proposes to amend its 
rules to state that reduced-value options will be aggregated with full-
value options when calculating reporting requirements.
    The Commission finds good cause, consistent with Section 19(b)(2) 
of the Act, to grant accelerated approval of the proposed rule change 
prior to the thirtieth day after the date of publication of notice 
thereof in the Federal Register. The Commission notes that it recently 
approved a substantially similar proposal filed by the Chicago Board 
Options Exchange, Incorporated (``CBOE'').\19\ The Commission received 
no comments regarding the CBOE proposal.\20\ The Commission believes 
that Amex's proposal to eliminate position and exercise limits for RUT 
options raises no new regulatory issues. Moreover, accelerating 
approval of the proposed rule change will allow Amex members and their 
customers greater hedging and investment opportunities in RUT options 
without further delay.
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    \19\ See Securities Exchange Act Release No. 56350 (September 4, 
2007) (SR-CBOE-2007-79).
    \20\ See Securities Exchange Act Release No. 56191 (August 2, 
2007), 72 FR 44894 (August 9, 2007) (SR-CBOE-2007-79).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-Amex-2007-81), as modified 
by Amendment No. 1, be, and it hereby is, approved on an accelerated 
basis.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\

[[Page 51878]]

Florence E. Harmon,
Deputy Secretary.
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    \22\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E7-17785 Filed 9-10-07; 8:45 am]

BILLING CODE 8010-01-P