[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