Document ID: SEC-2005-0164-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2005-10-28T04:00Z

[Federal Register: October 28, 2005 (Volume 70, Number 208)]
[Notices]               
[Page 62146-62147]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28oc05-75]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52649; File No. SR-Amex-2005-063]

 
Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving Proposed Rule Change Relating to the Elimination of Position 
and Exercise Limits on NDX Options

October 21, 2005.

I. Introduction

    On June 9, 2005, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to eliminate position and exercise limits for 
options on the Nasdaq 100 Index (``NDX''). The Commission published the 
proposed rule change for comment in the Federal Register on August 26, 
2005.\3\ The Commission received no comments on the proposal. This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 52312 (August 22, 2005), 
70 FR 50431 (``Notice'').
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II. Description of the Proposal

    The Amex proposes to amend its rules to eliminate position and 
exercise limits for options on the NDX. In connection with this change, 
options on the NDX would be subject to specific reporting requirements 
and additional margin provisions imposed by the Amex with respect to 
options on the Major Market Index (``XMI'') and the Institutional Index 
(``XII''), the two broad-based index options that, under the Exchange's 
current rules, are not subject to position and exercise limits.\4\
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    \4\ According to the Amex, options on the XII are no longer 
listed and traded on the Exchange.
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    The Exchange noted that in approving the elimination of position 
limits for XMI and XII options, the Commission considered the enormous 
capitalization of 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.\5\ The 
Amex noted that the market capitalization of NDX, as of June 1, 2005, 
was $1.86 trillion and the average daily trading volume (``ADTV''), in 
the aggregate, for the component securities of the NDX, for the period 
from January 1, 2005 through May 31, 2005 was 425.8 million shares. For 
the same period, the ADTV for options on the NDX was 45,820 contracts.
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    \5\ See Securities Exchange Act Release No. 46393 (August 21, 
2002), 67 FR 55289 (August 28, 2002) (order granting permanent 
approval to the elimination of position and exercise limits on the 
Major Market index and the Institutional Index) (``XMI/XII Permanent 
Approval Order'').
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    The Exchange also stated that in the XMI/XII Permanent Approval 
Order, the Commission noted that 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 XMI/XII options. The Amex noted 
that these same financial requirements would apply equally to NDX 
options. The Exchange further noted that it 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. Clarified as per 
telephone conversation between Ira Brandriss, Special Counsel, and 
Theodore Venuti, Attorney, Division of Market Regulation, 
Commission, and Jeffery P. Burns, Associate General Counsel, Amex, 
on August 16, 2005.
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    The Amex indicated that the Commission, in the XMI/XII Permanent 
Approval Order, relied substantially 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 on XMI and XII options. The Exchange represents that it monitors 
the trading in NDX options in the same manner as trading in XMI options 
and that the current Amex surveillance procedures are adequate to 
continue monitoring NDX options. In addition, the Exchange intends to 
impose a reporting requirement on Amex members (other than Amex 
specialists and registered options traders) or member organizations who 
trade NDX options. This reporting requirement, which is currently 
imposed on members who trade XMI options, would require members or 
member organizations who maintain in excess of 100,000 NDX option 
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 also would be permitted to specify other 
reporting requirements, as well as the limit at which the reporting 
requirement may be triggered.\8\
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    \8\ Pursuant to Amex Rule 906, as referenced in Amex Rule 
906C(a). Telephone conversation between Ira Brandriss, Special 
Counsel, and Theodore Venuti, Attorney, Division of Market 
Regulation, Commission, and Jeffery P. Burns, Associate General 
Counsel, Amex, on August 18, 2005.
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    Finally, the Amex proposes to amend Exchange rules relating to the 
trading of FLEX broad-based index options to eliminate position and 
exercise limits on FLEX NDX options, and to adopt for NDX FLEX options 
the same 100,000 contract reporting requirement and additional margin 
provisions that apply for XMI FLEX options.
    The Exchange believes that eliminating position and exercise limits

[[Page 62147]]

for NDX options and FLEX options is consistent with Amex rules relating 
to similar broad-based indexes and would also allow Amex members and 
their customers greater hedging and investment opportunities.

III. Discussion

    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 applicable to a national securities exchange.\9\ 
The Commission believes the proposed rule change is consistent with 
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.\10\
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    \9\ In approving this rule proposal, the Commission notes that 
it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \10\ 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 
the XMI and XII.\11\
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    \11\ See XMI/XII Permanent Approval Order, supra note 5.
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    The Commission believes that the considerations upon which it 
relied in approving the elimination of position and exercise limits for 
XMI and XII options equally apply with respect to options on the NDX.
    As noted by the Amex, the market capitalization of the NDX as of 
the date of filing of the proposal was $1.86 trillion. The ADTV for the 
period from January 1, 2005 through May 31, 2005 for all underlying 
components of the index was 425.8 million shares. The Commission 
believes that the enormous market capitalization of the NDX 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 NDX options may also bring additional depth and liquidity, 
in terms of both volume and open interest, to NDX 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 NDX 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.\12\ Under the proposal, the 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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    \12\ See Securities Exchange Act Release No. 41011 (February 1, 
1999), 64 FR 6405 (February 9, 1999) (notice of filing and order 
granting accelerated approval to proposed rule change implementing 
pilot program to eliminated position and exercise limits for XMI and 
XII options) (``XMI/XII Pilot Approval Order'').
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    Finally, in approving the elimination of position and exercise 
limits for options on the XMI and XII, the Commission took note of the 
enhanced surveillance and reporting safeguards that the Amex had 
adopted to allow it to detect and deter trading abuses that might arise 
as a result.\13\ The Amex represents that it monitors trading in NDX 
options in the same manner as trading in XMI options. These safeguards, 
including the 100,000-contract reporting requirement described above, 
would allow the 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 the 
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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    \13\ See, in particular, XMI/XII Pilot Approval Order, supra 
note 12.
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    The Commission further notes that in eliminating position and 
exercise limits for FLEX NDX options, the Amex is adopting the same 
additional rules for these options as for FLEX XMI options.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-Amex-2005-063) be, and it 
hereby is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-5974 Filed 10-27-05; 8:45 am]

BILLING CODE 8010-01-P