[Federal Register: February 11, 2003 (Volume 68, Number 28)]
[Notices]
[Page 6977-6979]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11fe03-118]
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Securities and Exchange Commission
[Release No. 34-47307; File No. SR-NASD-2002-134]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Approval to Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval to Amendment
No. 1 to the Proposed Rule Change Relating to Exemptions from Options
Position and Exercise Limits
February 3, 2003.
I. Introduction
On October 1, 2002, the National Association of Securities Dealers,
Inc. (``NASD'') filed with the Securities and Exhange 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 amend NASD rule 2860(b)(3)(A) by eliminating
options position and exercise limits for positions entered into under
certain enumerated hedge strategies and establishing position and
exercise limits of five times the standard limit for certain of those
strategies when they include an over-the-counter (OTC) option contract.
On December 23, 2002, the NASD filed Amendment No. 1 to the proposed
rule change.\3\ The proposed
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rule change was published for comment in the Federal Register on
December 30, 2002.\4\ The Commission received no comments on the
proposal. This order approves the proposed rule change, and notices and
grants accelerated approval to Amendment No. 1 to the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Gary L. Goldsholle, Associate General
Counsel, Office of General Counsel, NASD, to Katherine A. England,
Assistant Director, Division of Market Regulation (``Division''),
Commission, dated December 20, 2003 (``Amendment No. 1''). In
Amendment No. 1, the NASD corrected grammatical errors in the rule
language text of the proposed rule change.
\4\ See Securities Exchange Act Release No. 47080 (December 23,
2002), 67 FR 79676 (December 30, 2002).
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II. Description of the Proposal
The proposed rule change amends NASD's options position and
exercise limits. The proposed rule change establishes six qualified
hedge strategies:
1. Where each option contract is ``hedged'' or ``covered'' by 100
shares of the underlying \5\ security or securities convertible into
the underlying security, or, in the case of an adjusted option, the
same number of shares represented by the adjusted contract: (a) Long
call and short stock; (b) short call and long stock; (c) long put and
long stock; or (d) short put and short stock.
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\5\ NASD represents that the phrase ``securities convertible
into the underlying security'' does not include single stock futures
products. Telephone Conversation between Gary L. Goldsholle,
Associate General Counsel, Office of General Counsel, NASD and Tim
Fox, Law Clerk, Division, Commission on December 6, 2002.
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2. Reverse Conversions--A long call position accompanied by a short
put position, where the long call expires with the short put, and the
strike price of the long call and short put is equal, and where each
long call and short put position is hedged with 100 shares (or other
adjusted number of shares) of the underlying security or securities
convertible into such underlying security.
3. Conversions--A short call position accompanied by a long put
position where the short call expires with the long put, and the strike
price of the short call and long put is equal, and where each short
call and long put position is hedged with 100 shares (or other adjusted
number of shares) of the underlying security or securities convertible
into such underlying security.
4. Collars--A short call position accompanied by a long put
position, where the short call expires with the long put and the strike
price of the short call equals or exceeds the strike price of the long
put position and where each short call and long put position is hedged
with 100 shares (or other adjusted number of shares) of such the
underlying security or securities convertible into such underlying
security. Neither side of the short call/long put position can be in-
the-money at the time the position is established.
5. Box Spreads--A long call position accompanied by a short put
position with the same strike price and a short call position
accompanied by a long put position with a different strike price.
6. Back-to-Back Options--A listed option position hedged on a one-
for-one basis with an OTC option position on the same underlying
security. The strike price of the listed option position and
corresponding OTC option position must be within one strike price
interval of each other and no more than one expiration month apart.
Under the proposed rule change, there would be no position and
exercise limits when such qualified hedge strategies are effected
solely with standardized equity options. In addition, the proposed rule
change establishes standardized equity option position and exercise
limits of five times the standard limit when one component of such
strategies is an OTC option contract. Further, within the list of
proposed hedge strategies, NASD proposes that the option component of a
reversal, a conversion or a collar position can be treated as one
contract rather than as two contracts.
The proposed rule change also modifies the conventional equity
options position and exercise limits. First, the proposed rule change
expands the hedge exemption for conventional options to include all of
the qualified hedge strategies. Second, the proposed rule change
increases the conventional equity options position and exercise limits
for such qualified hedge strategies to five times the standard limits.
Third, the proposed rule change provides that conventional equity
options positions under the hedge strategies not be aggregated with
other options positions similar to the way that positions under the
current equity option hedge exemption and OTC collar aggregation
exemption are not aggregated with other options positions.
Under the proposed rule change, the standard position and exercise
limits will remain in place for unhedged equity options positions. Once
an account reaches the standard limit, positions identified as a
qualified hedge strategy would be subject to the increased position
limits, or exempted from position limit calculations, as appropriate.
The exemption would be automatic (i.e., it will not require pre-
approval from NASD) to the extent that a member identifies that a pre-
existing qualified strategy is in place or is employed from the point
that an account's position reaches the standard limit and provides the
required supporting documentation to NASD.\6\ The exemption would
remain in effect to the extent that the exempted position remains
intact and NASD is provided with any required supporting documentation.
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\6\ Under the proposed rule change, the existing reporting
procedures that serve to identify and document hedged positions
above a certain threshold continue to apply. Paragraph (b)(5) of
NASD rule 2860 requires reporting to NASD of aggregate positions of
200 more contracts of the put class and the call class on the same
side of the market covering the same underlying security.
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III. Discussion
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 associations \7\ and, in
particular, the requirements of section 15A of the Act \8\ and the
rules and regulations thereunder. The Division finds specifically that
the proposed rule change is consistent with section 15A(b)(6) of the
Act \9\ because it is designed to promote just and equitable principles
of trade, and to protect investors and public interest.
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\7\ In approving this proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\8\ 15 U.S.C. 78o-3.
\9\ 15 U.S.C. 78o-3(b)(6).
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Position and exercise limits serve as a regulatory tool designed to
address potential manipulative schemes and adverse market impact
surrounding the use of options. The NASD proposes to expand the hedge
exemption from position and exercise limits. The NASD also proposes to
modify the conventional equity options position and exercise limits.
The Commission believes it is permissible to expand the current equity
hedge exemption without risk of disruption to the options or underlying
cash markets. The Commission believes that existing position and
exercise limits, procedures for maintaining the exemption, and the
reporting requirements imposed by the NASD will help protect against
potential manipulation. The Commission notes that the existing standard
position and exercise limits will remain in place for unhedged equity
option positions. To further ensure against market disruption, the NASD
will establish a position and exercise limit equal to no greater than
five times the standard limit for those hedge strategies that include
an OTC option component.
In addition, according to the NASD, once an account reaches the
standard
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limit, positions identified as a qualified hedge strategy would be
subject to the increased position limits, or exempted from position
limit calculations, as appropriate. The exemption would be automatic
(i.e., it will not require pre-approval from NASD) to the extent that a
member identifies that a pre-existing qualified strategy is in place or
is employed from the point that an account's position reaches the
standard limit and provides the required supporting documentation to
NASD.\10\ The exemption would remain in effect to the extent that the
exempted position remains intact and NASD is provided with any required
supporting documentation.
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\10\ Under the proposed rule change, the existing reporting
procedures that serve to identify and document hedged positions
above a certain threshold continue to apply. Paragraph (b)(5) of
NASD rule 2860 requires reporting to NASD of aggregate positions of
200 more contracts of the put class and the call class on the same
side of the market covering the same underlying security.
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The Commission notes that it has previously approved changes to
similar rules of the options exchanges that eliminated standardized
equity option position and exercise limits for certain qualified hedge
strategies and established position and exercise limits of five times
the standard limit for certain of those strategies when they include an
over-the-counter (OTC) option contract.\11\ The Commission does not
believe that the proposed rule changes raises novel regulatory issues
that were not already addressed and should benefit NASD members by
permitting them greater flexibility in using hedge strategies
advantageously, while providing an adequate level of protection against
the opportunity for manipulation of these securities and disruption in
the underlying market.
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\11\ See Securities Exchange Act Release No. 45603 (March 20,
2002), 67 FR 14751 (March 27, 2002) (CBOE-2000-12); Securities
Exchange Act Release No. 45650 (March 26, 2002), 67 FR 15638 (Apr.
2, 2002) (AMEX-2001-71); Securities Exchange Act Release No. 45737
(April 11, 2002), 67 FR 18975 (Apr. 17, 2002) (PCX-2000-45);
Securities Exchange Act Release No. 45899 (May 9, 2002), 67 FR 34980
(May 16, 2002) (PHLX-2002-33); and Securities Exchange Act Release
No. 46228 (July 18, 2002), 67 FR 48689 (July 25, 2002) (ISE-2002-
15).
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The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice thereof in the Federal Register. Amendment No. 1
merely provides technical corrections and clarification to the proposed
rule text. The Commission, therefore, believes that granting
accelerated approval of Amendment No. 1 is appropriate and consistent
with section 15A(b)(6) \12\ and section 19(b) \13\ of the Act.
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\12\ 15 U.S.C. 78o-3(b)(6).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1, including whether it is
consistent with the Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 Room. Copies of such filing will also be available for
inspection and copying at the principal office of the NASD. All
submissions should refer to File No. SR-NASD-2002-134 and should be
submitted by March 4, 2003.
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\13\ 15 U.S.C. 78s(b).
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V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\14\ that the proposed rule change (File No. SR-NASD-2002-134), as
amended, be and hereby is, approved.
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\14\ 15 U.S.C. 78s(b)(2).
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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).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-3319 Filed 2-10-03; 8:45 am]
BILLING CODE 8010-01-P