[Federal Register: March 29, 2004 (Volume 69, Number 60)]
[Notices]
[Page 16316-16326]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29mr04-97]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49455; File No. SR-PCX-2003-60]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of a Proposed Rule Change and Amendment
Nos. 1, 2, and 3 by the Pacific Exchange, Inc. Relating to Rules for
Trading Index Options
March 22, 2004
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 October 28, 2003, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
On December 18, 2003, the Exchange submitted Amendment No. 1 to the
proposed rule change.\3\ On March 2, 2004, the Exchange submitted
Amendment No. 2 to the proposed rule change.\4\ On March 22, 2004, the
Exchange submitted Amendment No. 3 to the proposed rule change.\5\ The
Commission is publishing this notice to solicit comments on the
proposed rule, as amended, from interested persons and is approving the
proposed rule change, as amended, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 2 CFR 240.19b-4.
\3\ See letter from Tania J.C. Blanford, Staff Attorney,
Regulatory Policy, PCX to Nancy J. Sanow, Assistant Director,
Division of Market Regulation (``Division''), Commission, dated
December 17, 2003. Amendment No. 1 replaced the original rule filing
in its entirety.
\4\ See letter from Tania J.C. Blanford, Staff Attorney,
Regulatory Policy, PCX to Nancy J. Sanow, Assistant Director,
Division, Commission, dated March 1, 2004 (``Amendment No. 2''). In
Amendment No. 2, the PCX made several changes to the proposed rule
change to conform the proposed rule text to the existing Chicago
Board Options Exchange, Inc. (``CBOE'') and International Securities
Exchange, Inc. (``ISE'') rules. In addition, the Exchange clarified
the classes of broad-based index options for which the CBOE Rules
prescribe no position limits, and described that its proposed Rule
6.11(b) provided for the procedure that underwriters follow when
requesting restrictions on uncovered opening writing transactions
during public distributions.
\5\ See letter from Tania J.C. Blanford, Staff Attorney,
Regulatory Policy, PCX to Nancy J. Sanow, Assistant Director,
Division, Commission, dated March 22, 2004 (``Amendment No. 3''). In
Amendment No. 3, the PCX corrects certain typographical errors.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PCX is proposing to amend the position and exercise limits with
respect to broad-based index options, as well as a number of conforming
changes in order to bring the PCX index option rules up to date with
those of other Self-Regulatory Organizations (``SRO''). The proposed
rule change is substantially similar to the proposed rules recently
filed by the ISE, which were approved by the Commission.\6\
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\6\ See Securities Exchange Act Release No. 48405 (August 25,
2003), 68 FR 52257 (September 2, 2003) (SR-ISE-2003-05) (Order
approving the ISE's proposed rules).
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The text of the proposed rule change appears below. Additions are
italicized; deletions are in [brackets].
* * * * *
Rule 6 Options Trading
Rule 6.8 Position Limits
(a) (No change.)
Commentary:
.01-.03--(No change.)
.04 The Exchange may establish higher position limits for Market
Maker transactions than those applicable with respect to other
accounts. Whenever a Market Maker reasonably anticipates that he or she
may exceed such position limits in the performance of his or her
function of assisting in the maintenance of a fair and orderly market,
he or she must consult with and obtain the prior approval of an Options
Floor Official. An exemption will generally be granted only to a Market
Maker who has requested an exemption, who is appointed to the options
class in which the exemption is requested, whose positions are near the
current position limit, and who is significant in terms of daily
volume. The positions must generally be within ten percent (10%) of the
limits contained in Rule 6.8, Commentary .05 for equity options and
twenty percent (20%) of those limits for broad-based index options.\7\
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\7\ See supra note 4.
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* * * * *
Rule 6.11 Other Restrictions on Exchange Option Transactions and
Exercises
(a) The Exchange shall have the power to impose, from time to time
in its discretion, such restrictions on Exchange option transactions or
the exercise of option contracts in one or more series of options of
any class dealt in on the Exchange as it deems advisable in the
interests of maintaining a fair and orderly market in option contracts
or in the underlying stocks or Exchange-Traded Fund Shares covered by
such option contracts, or otherwise deems advisable in the public
interest or for the protection of investors.
(1) During the effectiveness of any such restriction, no member
organization shall effect any Exchange option transaction or exercise
any option contract in contravention of such restriction.
(2) Notwithstanding the foregoing, during the ten (10) business
days prior to the expiration date of a given series of options, other
than index options, no restriction on the exercise of option contracts
under this Rule shall remain in effect with respect to that series of
[[Page 16317]]
options. With respect to index options, restrictions on exercise may be
in effect until the opening of business on the last business day before
the expiration date.
(3) Exercises of American-style, cash-settled index options shall
be prohibited during any time when trading in such options is delayed,
halted, or suspended, subject to the following exceptions:
(A) The exercise of an American-style, cash-settled index option
may be processed and given effect in accordance with and subject to the
Rule of the Options Clearing Corporation while trading in the option is
delayed, halted or suspended if it can be documented, in a form
prescribed by the Exchange, that the decision to exercise the option
was made during allowable time frames prior to the delay, halt, or
suspension;
(B) Exercises of expiring American-style, cash-settled index
options shall not be prohibited on the last business day prior to their
expiration;
(C) Exercises of American-style, cash-settled index options shall
not be prohibited during a trading halt that occurs at or after 1:00
p.m. Pacific Time. In the event of such a trading halt, exercises may
occur through 1:20 p.m. Pacific Time. In addition, if trading resumes
following such a trading halt (such as by closing rotation), exercises
may occur during the resumption of trading and for five (5) minutes
after the close of the resumption of trading. The provisions of this
subsection (a)(3)(C) are subject to the authority of the Board to
impose restrictions on transactions and exercises pursuant to
subsection (a) of this Rule; and
(D) An Exchange officer designated by the Board may determine to
permit the exercise of American-style, cash-settled index options while
trading in such options is delayed, halted, or suspended. In the case
of an American-style, cash-settled FLEX Index Option, the references in
this paragraph (a)(3) to a trading delay, halt, suspension, resumption,
or closing rotation shall mean the occurrence of the applicable
condition in the standardized option on the index underlying the FLEX
Index Option (rather than the occurrence of the applicable condition in
the FLEX Index Option itself).\8\
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\8\ See supra note 4.
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(b) Except with respect to index options trading pursuant to Rule
7, whenever, the issuer of a security underlying a call option traded
on the Exchange is engaged or proposes to engage in a public
underwritten distribution (``public distribution'') of such underlying
security or securities exchangeable for or convertible into such
underlying security, the underwriters may request that the Exchange
impose restrictions upon all opening writing transactions in such
options at a ``discount'' where the resulting short position will be
uncovered (``uncovered opening writing transactions''). Upon receipt of
such a request, the Exchange shall impose the requested restrictions as
promptly as possible but no earlier than 15 minutes after it has been
announced on the floor of the Exchange and shall terminate such
restrictions upon request of the underwriters or when the Exchange
otherwise discovers that the stabilizing transaction by the
underwriters has been terminated. In addition to a request, the
following conditions are necessary for the imposition of restrictions:
(1) Less than a majority of the securities to be publicly
distributed in such distribution are being sold by existing security
holders;
(2) The underwriters agree to notify the Exchange upon the
termination of their stabilization activities; and
(3) The underwriters initiate stabilization activities in such
underlying security on a national securities exchange when the price of
such security is either at a ``minus'' or ``zero minus'' tick.
(c) For purposes of subsection (b) above, an uncovered opening
writing transaction in a call option will be deemed to be effected at a
``discount'' when the premium in such transaction is either:
(1) In the case of a distribution of the underlying security not
involving the issuance of rights and in the case of a distribution of
securities exchangeable for or convertible into the underlying
security, less than the amount by which the underwriters' stabilization
bid for the underlying security exceeds the exercise price of such
option; or
(2) In the case of a distribution being offered pursuant to rights,
less than the amount by which the underwriters' stabilization bid in
the underlying security at the Subscription Price exceeds the exercise
price of such option.
* * * * *
Rule 6.37 Obligation of Market Makers
(a) (No change.)
(b)(1) (No change.)
(2) Bidding no more than $1 lower and/or offering no more than $1
higher than the last preceding transaction price for the particular
option contract. However, this standard shall not ordinarily apply if
the price per share (or other unit of trading) of the underlying
security or Exchange-Traded Fund Share has changed since the last
preceding transaction for the particular option contract, in which even
a Market Maker may then bid no lower than or offer no more than $1 plus
the aggregate change in the price per share (or other unit of trading)
of the underlying security or Exchange-Traded Fund Share since the time
of the last preceding transaction for the particular option contract.
This provision applies from one day's close to the next day's opening
and from one transaction to the next in intra-day transactions. With
respect to inter-day transactions, this provision applies if the
closing transaction occurred within one hour of the close and the
opening transaction occurred within one hour after the opening. With
respect to intra-day transactions, this provision applies to
transactions occurring within one hour of one another.\9\ Two Floor
Officials may waive the provisions of this paragraph in an index option
when the primary underlying securities market for that index is not
trading. Nothing in this subparagraph (b)(2) shall alter the maximum
bid/ask differentials established by subparagraph (b)(1) of Rule 6.37.
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\9\ See supra note 4.
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(3)-(4) (No change.)
(c)-(h) (No change.)
Commentary:
.01-.08 (No change.)
.09 The Exchange or its authorized agent may calculate bids and
asks for various indices for the sole purpose of determining
permissible bid/ask differentials on options on these indices. These
values will be calculated by determining the weighted average of the
bids and asks for the components of the corresponding index. These bids
and asks will be disseminated by the Exchange at least every fifteen
(15) seconds during the trading day solely for the purpose of
determining the permissible bid/ask differential that market-makers may
quote on an in-the-money option on the indices. For in-the-money series
in index options where the calculated bid/ask differential is wider
than the applicable differential set out in subparagraph (b)(1) of this
Rule, the bid/ask differential in the index option series may be as
wide as the calculated bid/ask differential in the underlying index.
The Exchange will not make a market in the basket of stock comprising
the indices and is not guaranteeing the accuracy or the availability of
the bid/ask values.
* * * * *
[[Page 16318]]
Rule 6.64 Trading Rotations
(a)-(d) (No change.)
(e) Closing Rotations. Transactions may be effected in a class of
options after 1:02 p.m. (Pacific Time) or, 1:15 p.m. (Pacific Time) for
certain index options, if they occur during a trading rotation. Such a
trading rotation may be employed in connection with the opening or
reopening of trading in the underlying security or Exchange Traded Fund
Share after 12:30 p.m. (Pacific Time) or due to the declaration of a
``fast market'' pursuant to Rule 6.28. The decision to employ a trading
rotation after 12:30 p.m. will be publicly announced on the Trading
Floor prior to the commencement of such rotation and Book Staff should
notify Floor Brokers by 12:50 p.m., if possible, that a closing
rotation may be necessary. The closing rotation should commence at
least ten minutes after the Trading Floor has been notified. No more
than one trading rotation may be commenced after 1:02 p.m. If a trading
rotation is in progress and Floor Officials determine that a final
trading rotation is needed to assure a fair and orderly close, the
rotation in progress will be halted and a final rotation begun as
promptly as possible after 1:02 p.m. Any trading rotation conducted
after 1:02 p.m. may not begin until ten minutes after news of such
rotation is disseminated. Only orders that have been entered before
1:02 p.m. are eligible for execution during the closing rotation.
(f)-(h) (No change.)
* * * * *
Rule 7 Index Options
Introduction
In general, the Rules of the PCX's Board of Governors applicable to
the trading of stock options, in particular Rule 6, shall be applicable
to the trading of index options as that term is defined below. Rule 7
supplements or replaces those rules relating to stock options where
required by the nature of index options. In cases where Rule 7 is
silent on an issue, the applicable section of the rules relating to
stock options shall be read so as to apply to index option. Where the
rule in this section indicate that particular indices or requirements
with respect to particular indices will be ``Specified,'' the Exchange
shall file a proposed rule change with the Commission to specify such
indices or requirements.
* * * * *
Rule 7.1 Definitions
(a)-(b) (No change.)
(c) The term `` A.M.-settled index option'' means an index option
contract for which the current index value at expiration shall be
determined as provided in Rule 7.9(a)(7). [The term ``index'' shall
mean the sum of the reported last sales on their primary market of
those underlying securities which, as a group, have been designated by
the Exchange as underlying an option contract, divided by the Divisor.]
(d)-(f) (No change.)
(g) The term ``index multiplier'' means the amount specified in the
contract by which the current index value [designated by the Exchange
by which the index] is to be multiplied to arrive at the value required
to be delivered to the holder of a call or by the holder of a put
option valid exercise of the contract.
(h) The term ``current index value'' [in] with respect to a
particular index option contract [shall] means the level of the
underlying index reported by the reporting authority for the index, or
any multiple or fraction of such reported level specified by the
Exchange. The current index value with respect to a reduced-value LEAP
is one-tenth of the current index value of the related index option.
The ``closing index value'' shall be the last index value reported on a
business day [sum of the prices of the underlying securities divided by
the Divisor, and as reported by the reporting authority for the index].
(i) Reserved. [The term ``closing index value'' shall be the last
index value reported by the reporting authority on a business day. The
reporting authority shall use the closing last sales of the underlying
securities on their primary market to calculate the closing index
value.]
(j) (No change.)
(k) The term ``underlying security'' or ``underlying securities''
with respect to an index option contract means any of the securities
[all of the stocks] that are the basis for the calculation of the
index.
(l) The term ``reporting authority'' [in] with respect [of] to a
particular index means the institution or reporting service designated
by the Exchange as the official source for (1) calculating the level of
the index from the reported prices of the underlying securities that
are the basis of the index and (2) reporting such level. [and
disseminating the value of the index.] The reporting authority for each
index approved for options trading on the Exchange shall be specified
in Rule 7.13.
(m)-(u) (No change.)
(v) The terms ``industry index'' and ``narrow-based index'' means
an index designed to be representative of a particular industry or a
group of related industries.
(w) The term ``market index'' and ``broad-based index'' mean an
index designed to be representative of a stock market as a whole or of
a range of companies in unrelated industries.
* * * * *
[Index Multiplier]
[Rule 7.2 The index multiplier shall be 100 unless otherwise
determined by the Exchange.]
* * * * *
Designation of the Index
Rule 7.2[7.3] Broad-Based Index Options
(a) (No change.)
* * * * *
Designation of the Index
Rule 7.3 Narrow-Based Index Options
[(b)-(c)] (a)-(b) (No substantive change to the rule text).\10\
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\10\ Telephone conversation between Tania Blanford, Attorney,
PCX, and Tim Fox, Attorney, Division, Commission on March 18, 2004.
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* * * * *
Rule 7.4 Dissemination of Information
(a) The Exchange shall assure that the current index value is
disseminated, [to the public] after the close of business and from
time-to-time on days on which transactions in index options are made
[traded] on the Exchange.
(b) The Exchange shall maintain, in files available to the public,
information identifying the stocks whose prices are the basis for
calculation of the index and the method used to determine the current
index value.
* * * * *
[Adjustments in the Divisor
Rule 7.5. The Divisor ordinarily will be adjusted in the event of a
stock dividend, stock distribution, stock split or reverse split,
rights offering, distribution, reorganization, recapitalization or
reclassification or similar event in respect of any component stock, or
in the event a stock is added to or deleted from the index, or one
stock is substituted for another. The purpose of adjusting the Divisor
in the context of such events is to maintain continuity of index
values; the Divisor will not be revised for any other purpose.]
* * * * *
Rule 7.5 Position Limits for Broad-Based Index Options
(a) Rule 6.8 generally shall govern position limits for broad-based
index options, as modified by this Rule 7.5. Except otherwise indicated
below, the
[[Page 16319]]
position limit for a broad-based index option shall be 25,000
contracts. There may be no position limit for certain Specified (as
provided in Rule 7) broad-based index option contracts.
(b) Index option contracts shall not be aggregated with option
contracts on any stocks whose price are the basis for calculation of
the index.
(c) Positions in reduced-value index options shall be aggregated
with positions in full-value index options. For such purposes, ten (10)
reduced-value options shall equal one (1) full-value contract.
(d) Capped-style index options shall be aggregated with standard
option contracts on the same stock index group.
* * * * *
Position Limits for Index Options
Rule 7.6 Narrow-Based Index Options
(a)-(c) (No change.)
* * * * *
[Broad-Based Index Options
(d) The position limit for a broad based index option shall be
15,000 contracts, except as follows:
(1) The position limit for options on the Wilshire Small Cap Index
shall be 37,500 contracts on the same side of the market, with no more
than 22,500 of such contracts in the series with the nearest expiration
date.
(2) Quarterly Index Expirations (QIXs) on the Wilshire Small Cap
Index shall be excluded from the aggregation of options on such indexes
for purposes of subsection (d)(1). In determining compliance with
applicable position limits, QIXs on the Wilshire Small Cap Index shall
be subject to a contract limitation fixed by the Exchange, which shall
not be larger than 37,500 contracts on the same side of the market. For
purposes of determining compliance with this subsection (d)(2), all
Wilshire Small Cap Index options (including all QIXs on the Wilshire
Small Cap Index) shall be aggregated. In no event shall the aggregate
of all option contracts on the Wilshire Small Cap Index exceed 37,500
contracts on the same side of the market.
(3) The position limit for options on the PCX Technology Index
shall be 37,500 contracts on the same side of the market, with no more
than 22,500 of such contracts in the series with the nearest expiration
date.
(4) The position limit for options on the Dow Jones & Co. Taiwan
Index shall be 50,000 contracts on the same side of the market, with no
more than 30,000 contracts in the series with the nearest expiration
date.
(5) The position limit for options on the Morgan Stanley Emerging
Growth Index shall be 37,500 contracts on the same side of the market,
with no more than 22,500 contracts in the series with the nearest
expiration date.
(e) Capped-style index options shall be aggregated with standard
option contracts on the same stock index group.
Commentary:
.01. All members and member organizations acquiring positions of
200 contracts or more in index options shall report such information to
the Department of Options Surveillance. The report shall be filed in
accordance with the provisions of Rule 6.6(a).]
* * * * *
Exemptions from Position Limits
Rule 7.7 [Broad-Based Index Hedge Exemption]
(a). Broad-based Index Hedge Exemptions. [.02.] The broad-based
index hedge exemption is in addition to the standard limit and other
exemptions available under Exchange rules, interpretations and
policies. The following procedures and criteria must be satisfied to
qualify for a broad-based index hedge exemption:
(1) [(a)] The account in which the exempt option positions are held
(the ``hedge exemption account'') must has received prior Exchange
approval for the hedge exemption specifying the maximum number of
contracts that may be exempt under this Rule [Commentary]. The hedge
exemption account must have provided all information required on
Exchange-approved forms and must have kept such information current.
[The] Exchange [may grant]approval may be granted on the basis of
verbal representations, in which event [case] the hedge exemption
account must, within two business days (or such other time designated
by the Exchange), furnish the Exchange with appropriate forms and
documentation substantiating the basis for the exemption. The [A] hedge
exemption account may apply from time to time for an increase in the
maximum number of contracts exempt from the position limits.
[(b) The hedge exemption account has provided all information
required on Exchange-approved forms and has kept such information
current.]
(2) [(c)] A hedge exemption account that is not carried by an
Exchange Member Organization must be carried by a member of a self-
regulatory organization participating in the Intermarket Surveillance
Group.
(3) [(d)] The hedge exemption account maintains a qualified
portfolio, or will effect transactions necessary to obtain a qualified
portfolio concurrent with or at or about the same time as the execution
of the exempt options positions, of:
(A) [(1)] A net long or short position in common stocks in at least
four industry groups and contains at least twenty (20) stocks, none of
which accounts for more than fifteen percent (15%) of the value of the
portfolio or in securities readily convertible, and additionally in the
case of convertible bonds, economically convertible, into common stocks
which would comprise a portfolio, [and/]or
(B) [(2)]--No change.
(4) [(e)] The exemption applies to positions in broad-based index
options dealt in on the Exchange and is applicable to the unhedged
value of the qualified portfolio. The unhedged value will be determined
as follows:
(A) [(1)] The values of the net long or short positions of all
qualifying products in the portfolio are totaled;
(B) [(2)] For positions in excess of the standard limit, the
underlying market value (i)[(A)] of any economically equivalent
opposite side of the market calls and puts in broad-based index
options, and (ii)[(B)] of any opposite side of the market positions in
stock index futures, options on stock index futures, and any
economically equivalent opposite side of the market positions, assuming
no other hedges for these contracts exist, is subtracted from the
qualified portfolio; and
(C) [(3)]-No change.
(5) [(f)] Positions in broad-based index options that are traded on
the Exchange are exempt from the standard limits to the extent
specified in this subsection (a)(5).
[The hedge exemption customer shall agree to, and any Member
Organization carrying an account for the customer, shall
(1) liquidate and establish option and stock positions or their
equivalent in an orderly fashion; not initiate or liquidate positions
in a manner calculated to cause unreasonable price fluctuations or
unwarranted price changes; and not initiate or liquidate a stock
position or its equivalent with an equivalent index option position
with a view toward taking advantage of any differential in price
between a group of securities and an overlying stock index option.
(2) liquidate any options prior to or contemporaneously with a
decrease in the hedged value of the qualified portfolio which options
would thereby be rendered excessive.
(3) promptly notify the Exchange of any material change in the
stock
[[Page 16320]]
portfolio or its equivalent or stock index futures positions which
materially affects the unhedged value of the qualified portfolio.
(4) abide by prevailing exercise limits allowed pursuant to Rule
7.7, without regard to the exemption provision, except in expiring
series from the last business day prior to expiration until expiration.
]
(6) [(g)] Only the following qualified hedging transactions and
positions are eligible for purposes of hedging a qualified portfolio
(i.e., stocks, futures, options and warrants) pursuant to this Rule
[Commentary]:
(A) [(1)] Long put(s) used to hedge the holding of a qualified
portfolio;
(B) [(2)] Long call(s) used to hedge a short position in a
qualified portfolio;
(C) [(3)] Short call(s) used to hedge the holding of a qualified
portfolio; and
(D) [(4)] Short put(s) used to hedge a short position in a
qualified portfolio. The following strategies may be effected only in
conjunction with a qualified stock portfolio for non-P.M. settled,
European style index options only:
(i) [(5) For non-P.M. settled, European-style index options only--
a] A short call position accompanied by long put(s), where the short
call(s) expire with the long put(s), and the strike price of the short
call(s) equals or exceeds the strike price of the long put(s)(a
``collar''). Neither side of the collar transaction can be in-the-money
at the time the position is established. For purposes of determining
compliance with Rules 6.8, 7.5 and 7.7[6], a collar position will be
treated as one (1) contract;
(ii) [(6) For non-P.M. settled, European-style index options only--
a] A long put position coupled with a short put position overlying the
same broad-based index and having an equivalent underlying aggregate
index value, where the short put(s) expire with the long put(s), and
the strike price of the long put(s) exceeds the strike price of the
short put(s)(a ``debit put spread position''); and
(iii)[(7) For non-P.M. settled, European-style index options only--
a] A short call position accompanied by a debit put spread position,
where the short call(s) expire with the puts and the strike price of
the short call(s) equals or exceeds the strike price of the long
put(s). Neither side of the short call, long put transaction can be in-
the-money at the time the position is established. For purposes of
determining compliance with Rules 6.8, 7.5 and 7.7[6], the short call
and long put positions will be treated as one (1) contract.
(7) The hedge exemption account shall:
(A) Liquidate and establish options, stock positions, their
equivalent or other qualified portfolio products in an orderly fashion;
not initiate or liquidate positions in a manner calculated to cause
unreasonable price fluctuations or unwarranted price changes; and not
initiate or liquidate a stock position or its equivalent with an
equivalent index option position with a view toward taking advantage of
any differential in price between a group of securities and an
overlying stock index option;
(B) Liquidate any options prior to or contemporaneously with a
decrease in the hedged value of the qualified portfolio which options
would thereby be rendered excessive.
(C) Promptly notify the Exchange of any material change in the
qualified portfolio which materially affects the unhedged value of the
qualified portfolio.
(8) If an exemption is granted, it will be effective at the time
the decision is communicated. Retroactive exemptions will not be
granted.
[(h) Compliance]
(9) [(1)] The hedge exemption account shall promptly provide to the
Exchange any information requested concerning the qualified portfolio.
(10) [(2)] Positions included in a qualified portfolio that serve
to secure an index hedge exemption may not also be used to secure any
other position limit exemption granted by the Exchange or any other
self regulatory organization or futures contract market.
(11) [(3)] Any member or member organization that maintains a
broad-based index option position in such member's or member
organization's own account or in a customer account, and has reason to
believe that such position is in excess of the applicable limit, shall
promptly take the action necessary to bring the position into
compliance. Failure to abide by this provision shall be deemed to be a
violation of Rules 6.8, 7.5 and this Rule 7.7[6] by the member or
member organization.
(12) [(4)] Violation of any of the provisions of this Rule [7.6 and
the commentaries thereunder], absent reasonable justification or
excuse, shall result in withdrawal of the index hedge exemption and may
form the basis for subsequent denial of an application for an index
hedge exemption hereunder.
(13) Each member (other than Exchange market makers) that maintains
a broad-based index options position on the same side of the market in
excess of a Specified (as provided in Rule 7) \11\ number of contracts
for its own account or for the account of a customer, shall report
information as to whether the positions are hedged and provide
documentation as to how such contracts are hedged, in the manner and
form required by the Exchange. The Exchange may impose other reporting
requirements.
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\11\ See supra note 4.
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(14) Whenever the Exchange determines that additional margin is
warranted in light of the risks associated with an under-hedged options
position in Specified (as provided in Rule 7) \12\ broad-based indices,
the Exchange may impose additional margin upon the account maintaining
such under-hedged position pursuant to its authority under Rule 7.16.
The clearing firm carrying the account also will be subject to capital
charges under Rule 15c3-1 under the Exchange Act to the extent of any
margin deficiency resulting from the higher margin requirements.
---------------------------------------------------------------------------
\12\ See supra note 4.
---------------------------------------------------------------------------
[Narrow-Based Index Hedge Exemption]
(a) Industry (Narrow-Based) Index Hedge Exemptions. [.03.]--(No
substantive change to the rule text).
* * * * *
Rule 7.8 [7.7] Exercise Limits
(a) In determining compliance with Rule 6.9, exercise limits for
index option contracts shall be equivalent to the position limits
prescribed for option contracts with the nearest expiration date in
Rule 7.5 and 7.6. [subject to the same exercise limit as the
established position limit for that particular index option contract.]
(b) For a market maker granted an exemption to position limits
pursuant to Rule 6.8(a), Commentary .04, the number of contracts that
can be exercised over a five business day period shall equal the market
maker's exempted position.
(c) In determining compliance with exercise limits applicable to
stock index options, option contracts on a stock index group shall not
be aggregated with options contracts on an underlying stock or stocks
included in such group, and option contracts on one stock index group
shall not be aggregated with option contracts on any other stock index
group.
(d) With respect to index option contracts for which an exemption
has been granted in accordance with the provisions of Rule 7.7, the
exercise limit shall be equal to the amount of the exemption.
(e) [(b)] Capped-style index options shall not be aggregated with
standard
[[Page 16321]]
option contracts on the same stock index group.
* * * * *
Rule 7.9[7.8] Terms of Index Option Contracts
(a) General.
(1) Meaning of Premium Bids and Offers. Bids and offers shall be
expressed in terms of dollars and cents per unit of the index.
(2) Exercise Prices. The Exchange shall determine fixed point
intervals of exercise prices for call and put options.
(3) [(b)] Expiration Months. Index Option contracts may expire at
three (3) month intervals or in consecutive months. The Exchange may
list up to six (6) months at any one time, but will not list index
options that expire more than twelve (12) months out.
(4) ``European-Style Exercise.'' Specified European-style index
options, some of which may be A.M.-settled as provided in subsection
(a)(7) below, may be approved for trading on the Exchange.
(5) [(c)] Capped-style index options. [(1)] Capped-style index
options that are approved for trading on the Exchange shall be
Specified in this subsection (a)(5).\13\ [on the following indexes are
approved for trading on the Exchange:(A) Wilshire Small Cap Index. (B)
PSE Technology Index.]
---------------------------------------------------------------------------
\13\ See supra note 4.
---------------------------------------------------------------------------
(A) [(2)] Unless modified by the Exchange, the cap interval shall
be $20.
(B) [(3)] Initially, one at-the-money call and put will be listed
with an expiration of up to one year in the future. Additional at-the-
money series may be listed every two months with expirations up to one
year in the future.
(C) [(4)] Series may be added to expiration months with three or
more months remaining to their expiration, if there has been a move of
ten or more points in the index value.
(6) [(d)] Quarterly Index Options (QIXs). The Exchange may open for
trading up to eight near-term quarterly index expirations at any one
time. The index multiplier for QIXs shall be 100. Unless otherwise
specified, QIXs shall be p.m. settled. QIXs that are approved for
trading on the Exchange shall be Specified in this subsection (a)(6).
[on the following indexes are approved for trading on the Exchange: (1)
Wilshire Small Cap Index.]
(7) [(e)] A.M.-Settled Index Options. [(1)(A)] The last day of
trading for A.M.-settled index options shall be the business day
preceding the last day of trading in the underlying securities prior to
expiration. The current index value at the expiration of A.M.-settled
index option shall be determined, for all purposes under these Rules
and the Rules of the Options Clearing Corporation, on the last day of
trading in the underlying securities prior to expiration,[. The current
index value shall be determined ] by reference to the reported level of
such index as derived from first reported sale (opening) prices of the
underlying securities on such day, except that [I]in the event [in any
case where the] that the primary market for an underlying security does
not open for trading [on that day], halts trading prematurely, or
otherwise experiences a disruption of normal trading on that day, or in
the event that the primary market for an underlying security is open
for trading on that day, but that particular security does not open for
trading, halts trading prematurely, or otherwise experiences a
disruption of normal trading on that day the last reported sale price
of that security shall be [used] determined, for the purposes of
calculating the current index value at expiration, as set forth in Rule
7.10(f). [unless the exercise settlement amount is fixed in accordance
with the Rules and By-Laws of the Options Clearing Corporation; and]
[(B) In any case where an exercise settlement amount is fixed for
any series of index options pursuant to the Rules and By-Laws of The
Options Clearing Corporation, the amount so fixed shall be the amount
required to be paid upon exercise of options of that series
notwithstanding any difference between the current index value used by
The Options Clearing Corporation in fixing that amount and the index
value determined pursuant to Exchange Rules or practices.]
(A)[(2)] The following A.M.-settled index options are approved for
trading on the Exchange: [(A) PSE Technology Index. (B) Wilshire Small
Cap Index (C) Dow Jones & Co. Taiwan Index (D) Morgan Stanley Emerging
Growth Index]
(i) Reserved.\14\
---------------------------------------------------------------------------
\14\ See supra note 4.
---------------------------------------------------------------------------
(b) Index LEAPS Options Series.
(1) Notwithstanding the provisions of subsection (a)(3) above, the
Exchange may list index LEAPS options series that expire from twelve
(12) to sixty (60) months from the date of issuance.
(A) Index LEAPS options series may be based on either the full or
reduced value of the underlying index. There may be up to ten (10)
expiration months, none further out than sixty (60) months. Strike
price interval, bid/ask differential and continuity Rules shall not
apply to such options series until the time to expiration is less than
twelve (12) months.
(B) When a new Index LEAPS options series is listed, such series
will be opened for trading either when there is buying or selling
interest, or forty (40) minutes prior to the close, whichever occurs
first. No quotations will be posted for such options series until they
are open for trading.
(2) Reduced-Value LEAPS Options Series.
(A) Reduced-value LEAPS options series on the following stock
indices are approved for trading on the Exchange:
(i) Reserved.\15\
---------------------------------------------------------------------------
\15\ See supra note 4.
---------------------------------------------------------------------------
(B) Expiration Months. Reduced-value LEAPS options series may
expire at six-month intervals. When a new expiration month is listed,
series may be near or bracketing the current index value. Additional
series may be added when the value of the underlying index increases or
decreases by ten (10) to fifteen (15) percent.
(c) Procedures for Adding and Deleting Strike Prices. The
procedures for adding and deleting strike prices for index options are
provided in Rule 6.4, as amended by the following:
(1) The interval between strike prices will be no less than $5.00;
provided, that in the case of the certain specified classes of index
options, the interval between strike prices will be no less than $2.50.
(2) New series of index option contracts may be added up to the
fifth business day prior to expiration.
(3) When a new series of index options with a new expiration date
are opened for trading, or when additional series of index options in
an existing expiration date are opened for trading as the current value
of the underlying index to which such series relate moves substantially
from the exercise prices of series already opened, the exercise prices
of such new or additional series shall be reasonably related to the
current value of the underlying index at the time such series are first
opened for trading. In the case of all classes of index options, the
term ``reasonably related to the current value of the underlying
index'' shall have the meaning set forth in subsection (c)(4) below.
(4) Notwithstanding any other provision of this subsection (c), the
Exchange may open for trading additional series of the same class of
index options as the current index value of the underlying index moves
substantially from the exercise price of those index options that
already have been opened for trading on the
[[Page 16322]]
Exchange. The exercise price of each series of index options opened for
trading on the Exchange shall be reasonably related to the current
index value of the underlying index to which such series relates at or
about the time such series of options is first opened for trading on
the Exchange. The term ``reasonably related to the current value of the
underlying index'' means that the exercise price is within thirty
percent (30%) of the current index value. The Exchange may also open
for trading additional series of index options that are more than
thirty percent (30%) away from the current index value, provided that
demonstrated customer interest exists for such series, as expressed by
institutional, corporate, or individual customers or their broker.
Market makers trading for their own account shall not be considered
when determining customer interest under this provision.
(d) Index Level on the Last Day of Trading. The reported level of
the underlying index that is calculated by the reporting authority on
the last day of trading in the underlying securities prior to
expiration for purposes of determining the current index value at the
expiration of an A.M.-settled index option may differ from the level of
the index that is separately calculated and reported by the reporting
authority and that reflects trading activity subsequent to the opening
of trading in any of the underlying securities.
(e) Index Values for Settlement. The Rules of the Options Clearing
Corporation specify that, unless the Rules of the Exchange provide
otherwise, the current index value used to settle the exercise of an
index option contract shall be the closing index for the day on which
the index option contract is exercised in accordance with the Rules of
the Options Clearing Corporation or, if such day is not a business day,
for the most recent business day.
* * * * *
[Meaning of Premium Bids and Offers
Rule 7.9 Bids and offers shall be expressed in terms of dollars and
fractions per unit of the index.]
* * * * *
Trading Sessions
Rule 7.10 [Trading Rotations]
(a) Days and Hours of Business. The Board of Governors has resolved
that, except as otherwise provided in this Rule or under unusual
conditions as may be determined by the Board or its designee,
transactions in index options may be effected on the Exchange between
the hours of 6:30 a.m. and 1:15 p.m. Pacific time. With respect to
options on foreign indexes, the Board or its designee shall determine
the days and hours of business.
[Rule 7.10]
(b) Trading Rotations. The provisions of Rule 6.64 regarding
trading rotations shall apply to index options, except as otherwise
provided in Rule 7. [The Order Book Official shall open first those
series of a class which have the nearest expiration. Thereafter the
Order Book Official shall open the remaining series in a manner he
deems appropriate under the circumstances. One and one-half hours after
the opening rotation, trading shall become subject to Rule 7.11, unless
the Exchange determines it is in the public interest to suspend trading
at an earlier time.] Two Floor Officials may delay the commencement of
the opening rotation in an index options whenever in their judgment
such action is appropriate in the interests of a fair and orderly
market. Among the factors that may be considered in making these
determinations are:
(1) Unusual conditions or circumstances in other markets;
(2) An influx of orders that has adversely affected the ability of
the Lead Market Maker to provide and to maintain fair and orderly
markets;
(3) Activation of opening price limits in stock index futures on
one or more futures exchanges;
(4) Activation of daily price limits in stock index futures on one
or more futures exchanges;
(5) The extent to which either there has been a delay in opening or
trading is not occurring in stocks underlying the index; and
(6) Circumstances such as those which would result in the
declaration of a fast market under Rule 6.28.
* * * * *
[Trading Halts or Suspensions]
(c) [Rule 7.11.] Instituting Trading Halts or Suspensions. Trading
on the Exchange in any index option shall be halted or suspended
whenever trading in underlying securities whose weighted value
represents more than 20%, in the case of a broad based index, and 10%
for all other indices, of the index value is halted or is suspended.
Trading in an index option shall also be halted whenever Two Floor
Officials or the Exchange deem[s] such action appropriate in the
interests of a fair and orderly market or to protect investors. Among
the factors that may be considered by the Exchange are the following:
(1) [(i)] All trading has been halted or suspended in the market
that is the primary market for a plurality of the underlying stocks;
(2) [(ii)] The current calculation of the index derived from the
current market prices of the stocks is not available; or
(3) The extent to which the rotation has been completed or other
factors regarding the status of the rotation.
(4) [(iii)] Other unusual conditions or circumstances detrimental
to the maintenance of a fair and orderly market are present, including,
but not limited to the activation of price limits on futures exchanges.
(d) Resumption of Trading Following a Halt or Suspension. Trading
in index options of a class or series that has been the subject of a
halt or suspension by the Exchange may resume if the Exchange
determines that the conditions which led to the halt or suspension are
no longer present, or that the interests of a fair and orderly market
are best served by a resumption of trading. Among the factors to be
considered in making this determination are whether the conditions that
led to the halt or suspension are no longer present, and the extent to
which trading is occurring in stocks underlying the index. Upon
reopening, a rotation shall be held in each class of index options
unless Two Floor Officials conclude that a different method of
reopening is appropriate under the circumstances, including, but not
limited to, no rotation, an abbreviated rotation or any other variation
in the manner of the rotation.
(e) Circuit Breakers. Rule 4.22 applies to index options trading
with respect to the initation of a market-wide trading halt commonly
known as a ``circuit breaker.''
(f) Special Provisions for Foreign Indices. When the hours of
trading of the underlying primary securities market for an index option
do not overlap or coincide with those of the Exchange, all of the
provisions as described in subsections (b) through (d) above shall not
apply except for (b)(4).
(g) Pricing When Primary Market Does Not Open. When the primary
market for a security underlying the current index value of an index
option does not open for trading, halts trading prematurely, or
otherwise experiences a disruption of normal trading on a given day, or
if a particular security underlying the current index value of an index
option does not open for trading, halts trading prematurely, or
otherwise experiences a disruption of normal trading on a given day in
its primary market, the price of that security shall be determined, for
the purposes of calculating the current
[[Page 16323]]
index value at expiration, in accordance with the Rules and By-Laws of
the Options Clearing Corporation.
* * * * *
Rule 7.11 Reserved
* * * * *
Debit Put Spread Cash Account Transactions
Rule 7.12 [Reserved.]
Debit put spread positions in European-style, broad-based index
options traded on the Exchange (hereinafter ``debit put spreads'') may
be maintained in a cash account as defined by Federal Reserve Board
Regulation T Section 220.8 by a public customer, provided that the
following procedures and criteria are met:
(a) The customer has received Exchange approval to maintain debit
put spreads in a cash account carried by an Exchange member
organization. A customer so approved is hereinafter referred to as a
``spread exemption customer.''
(b) The spread exemption customer has provided all information
required on Exchange-approved forms and has kept such information
current.
(c) The customer holds a net long position in each of the stocks of
a portfolio that has been previously established or in securities
readily convertible, and additionally in the case of convertible bonds
economically convertible, into common stocks would comprise a
portfolio. The debit put spread position must be carried in an account
with a member of a self-regulatory organization participating in the
Intermarket Surveillance Group.
(d) The stock portfolio or its equivalent is composed of net long
positions in common stocks in at least four industry groups and
contains at least twenty (20) stocks, none of which accounts for more
than fifteen percent (15%) of the value of the portfolio (hereinafter
``qualified portfolio''). To remain qualified, a portfolio must at all
times meet these standards notwithstanding trading activity in the
stocks.
(e) The exemption applies to European-style, broad-based index
options dealt in on the Exchange to the extent the underlying value of
such options positions does not exceed the unhedged value of the
qualified portfolio. The unhedged value would be determined as follows:
(1) The values of the net long or short positions of all qualifying
products in the portfolio are totaled;
(2) For positions in excess of the standard limit, the underlying
market value (A) of any economically equivalent opposite side of the
market calls and puts in broad-based index options, and (B) of any
opposite side of the market positions in stock index futures, options
on stock index futures, and any economically equivalent opposite side
of the market positions, assuming no other hedges for these contracts
exist, is subtracted from the qualified portfolio; and
(3) The market value of the resulting unhedged portfolio is equated
to the appropriate number of exempt contracts as follows: the unhedged
qualified portfolio is divided by the correspondent closing index value
and the quotient is then divided by the index multiplier or 100.
(f) A debit put spread in Exchange-traded, broad-based index
options with European-style exercises is defined as a long put position
coupled with a short put position overlying the same broad-based index
and having an equivalent underlying aggregate index value, where the
short put(s) expires with the long put(s), and the strike price of the
long put(s) exceeds the strike price of the short put(s). A debit put
spread will be permitted in the cash account as long as it is
continuously associated with a qualified portfolio of securities with a
current market value at least to the underlying aggregate index value
of the long side of the debit put spread.
(g) The qualified portfolio must be maintained with either a
member, another broker-dealer, a bank, or securities depository.
(h) The spread exemption customer shall agree promptly to provide
the Exchange any information requested concerning the dollar value and
composition of the customer's stock portfolio, and the current debit
put spread positions.
(1) The spread exemption customer shall agree to and any member
carrying an account for the customer shall:
(A) Comply with all Exchange Rules and regulations;
(B) Liquidate any debit put spreads prior to or contemporaneously
with a decrease in the market value of the qualified portfolio, which
debit spreads would thereby be rendered excessive; and
(C) Promptly notify the Exchange of any change in the qualified
portfolio or the debit put spread position which causes the debit put
spreads maintained in the cash account to be rendered excessive.
(i) If any member carrying a cash account for a spread exemption
customer with a debit put spread position dealt in on the Exchange has
a reason to believe that as a result of an opening options transaction
the customer would violate this spread exemption, and such opening
transaction occurs, then the member has violated this Rule 7.12.
(j) Violation of any of these provisions, absent reasonable
justification or excuse, shall result in withdrawal of the spread
exemption and may form the basis for subsequent denial of an
application for a spread exemption hereunder.
* * * * *
Disclaimers
Rule 7.13 [Limitation of Liability]
(a). Disclaimer. No reporting authority, no affiliate of a
reporting authority (each such reporting authority, its affiliates, and
any other entity identified in this Rule are referred to collectively
as a ``Reporting Authority'') makes any warranty, express or implied,
as to the results to be obtained by any person or entity from the use
of such index, any opening, intra-day or closing value therefor, or any
data included therein or relating thereto, in connection with the
trading of any option contract based thereon or for any other purpose.
The Reporting Authority shall obtain information for inclusion in, or
for use in the calculation of such index from sources it believes to be
reliable, but the Reporting Authority does not guarantee the accuracy
or completeness of such index, any opening, intra-day or closing value
therefor, or any date included therein or related thereto. The
Reporting Authority hereby disclaims all warranties of merchantability
or fitness for a particular purpose or use with respect to such index,
any opening, intra-day, or closing value therefor, any data included
therein or elating thereto, or any option contract based upon thereon.
The Reporting Authority shall have no liability for any damages,
claims, losses (including any indirect or consequential losses),
expenses, or delays, whether direct or indirect, foreseen or
unforeseen, suffered by any person arising out of any circumstance or
occurrence relating to the person's use of such index, any opening,
intra-day or closing value therefor, any data included therein or
relating thereto, or any option contract based upon thereon, or arising
out of any errors or delays in calculating or disseminating such index.
[Each reporting authority with respect to any index underlying an
option traded on the Exchange, and any affiliate of such reporting
authority (together, the ``Reporting Authority'') does not guarantee
the accuracy and/or completeness of such index or any data
[[Page 16324]]
included therein. The Reporting Authority makes no warranty, express or
implied, as to the results to be obtained by any person or any entity
from the use of such index or any data included therein. The Reporting
Authority makes no express or implied warranties, and expressly
disclaims all warranties of merchantability and fitness for a
particular purpose or use with respect to such index or any data
contained therein. Without limiting any of the foregoing, in no event
shall the Reporting Authority have any liability for any direct,
special, punitive, indirect, or consequential damages (including lost
profits), even if notified of the possibility of such damages. In
addition, the Reporting Authority shall have no liability for any
damages, claims, losses or expenses caused by any errors or delays in
calculating or disseminating such index.]
(b) Applicability of Disclaimers. The disclaimers in subsection (a)
shall apply to the reporting authorities identified in the Commentary
to this Rule.
[Commentary:
.01 The disclaimers set forth in Rule 7.13 shall apply to Dow Jones
& Company, Inc. with respect to the Dow Jones Taiwan Stock Index and
the Dow Jones Asia Pacific ex-Japan Stock Index, and Morgan Stanley &
Co. Incorporated with respect to the Morgan Stanley Emerging Growth
Index, the Exchange in respect to the indexes for which it is the
designated reporting authority, and any other index reporting authority
in respect to any index for which it acts as such.]
* * * * *
Rule 7.14. [Reserved]
Exercise of American-Style Options
No member may prepare, time stamp or submit an ``exercise advice''
for an American-style index option series if the Member knows or has
reason to know that the exercise instruction calls for the exercise of
more contracts than the then ``net long position'' of the account for
which the exercise instruction is to be tendered. For purposes of this
rule: (i) the term ``net long position'' shall mean the net position of
the account in such option at the opening of business of the day of
such exercise instruction, plus the total number of such options
purchased that day in opening purchase transactions up to the time of
exercise, less the total number of such options sold that day in
closing sale transactions up to the time of exercise; (ii) the
``account'' shall be the individual account of the particular customer,
Market Maker or ``non-customer'' (as that term is defined in the By-
Laws of the Clearing Corporation) who wishes to exercise; and (iii)
every transaction in an options series effected by a Market Maker in a
Market Maker's account shall be deemed to be a closing transaction in
respect of the Market Maker's then positions in such options series. No
Member may adjust the designation of an ``opening transaction'' in any
such option to a ``closing transaction'' except to remedy mistakes or
errors made in good faith.\16\
---------------------------------------------------------------------------
\16\ See supra note 4.
---------------------------------------------------------------------------
* * * * *
Rule 7.15 Exercise of Option Contracts
(a) The provisions of Rule 6.24 shall apply to index options,
except as follows:
(1) Clearing Members must follow the procedures of the Options
Clearing Corporation when exercising American-style cash-settled index
option contracts issued or to be issued in any account at the Options
Clearing Corporation. [With respect to all index option contracts
except European-style index option contracts, Clearing Members must
follow the procedures of the Clearing Corporation for tendering
exercise notices.] Members or Member Organizations also must follow the
procedures set forth below with respect to American-style, cash-settled
index options:
(A) Or all contracts exercised by the member or by any customer of
the member, an ``exercise advice'' must be delivered by the member in
such form or manner prescribed by the Exchange no later than 1:20 p.m.
Pacific time, or if trading hours are extended or modified in the
applicable options class, [a memorandum to exercise any contract issued
or to be issued in a customer or Market-Maker account at the Clearing
Corporation must be received or prepared by the Member Organization] no
later than five (5) minutes after the close of trading on that day. [,
and must be time-stamped at the time it is received or prepared. Member
Organizations must accept exercise instructions until five (5) minutes
after the close of trading on that day;]
(B) Subsequent to the delivery of an ``exercise,'' should the
member or a customer of the member determine not to exercise all or
part of the advised contracts, the member must also deliver an ``advice
cancel'' in such form or manner prescribed by the Exchange no later
than 1:20 p.m. Pacific time, or if trading hours are extended or
modified in the applicable options class, [a memorandum to exercise any
contract issue or to be issued in a firm account at the Clearing
Corporation must be prepared by the Member Organization] no later than
five (5) minutes after the close of trading on that day.[, and must be
time-stamped at the time it is prepared;]
(C) An Exchange official designated by the Board may determine to
extend the applicable deadline for the delivery of ``exercise advice''
and ``advice cancel'' notifications pursuant to this Rule if unusual
circumstances are present.
(D) No Member may prepare, time stamp or submit an ``exercise
advice'' prior to the purchase of the contracts to be exercised if the
Member knew or had reason to know that the contracts had not yet been
purchased.\17\
---------------------------------------------------------------------------
\17\ See supra note 4.
---------------------------------------------------------------------------
(E) [(C)] The failure of any member to follow the procedures in
this Rule may result in the assessment of a fine, which may include but
is not limited to disgorgement of potential economic gain obtained or
loss avoided by the subject exercise, as determined by the Exchange.
[and meet the deadlines in this Section 15 may result in the assessment
of fines in an amount determined by the Exchange, and further
disciplinary action as may be appropriate;]
(F) Preparing or submitting an ``exercise advice'' or ``advice
cancel'' after the applicable deadline on the basis of material
information released after such deadline, in addition to constituting a
violation of this Rule, is activity inconsistent with just and
equitable principles of trade.
[(D) all memoranda of exercise instructions are subject to SEC
Rules 17a-3(a)(6) and 17a-4(b); and
(E) any member or member organization that intends to submit an
exercise notice for 25 or more contracts in the same series on the same
business day on behalf of an individual customer, market maker or firm
account must deliver an ``exercise advice,'' on a form prescribed by
the Exchange, to a place designated by the Exchange, no later than five
(5) minutes after the close of trading on that day. For purposes of
this rule, exercises for all accounts controlled by same individual
must be aggregated.]
(G) [(F)] The procedures set forth in subsections (A) and (B) of
this Rule do not apply (i) on the business day prior to expiration in
series expiring on a day other than a business day or (ii) on the
expiration day in series expiring on a business day. [The above
provisions specified in Rule 6.24(a) through Rule 6.24(e) are not
applicable to expiring series on the business day prior to expiration.]
[[Page 16325]]
(H) Exercises of American-style, cash-settled index options (and
the submission of corresponding ``exercise advice'' and ``advice
cancel'' forms) shall be prohibited during any time when trading in
such options is delayed, halted, or suspended, subject to the following
exceptions:
(i) The exercises of an American-style, cash-settled index option
may be processed and given effect in accordance with and subject to the
rules of the Options Clearing Corporation while trading in the option
is delayed, halted, or suspended if it can be documented, in a form
prescribed by the Exchange, that the decision to exercise the option
was made during allowable time frames prior to the delay, halt, or
suspension.
(ii) Exercises of expiring American-styled, cash-settled index
options shall not be prohibited on the last business day prior to their
expiration.
(iii) Exercises of American-style, cash-settled index options shall
not be prohibited during a trading halt that occurs at or after 1:00
p.m. Pacific Time. In the event of such a trading halt, exercises may
occur through 1:20 p.m. Pacific Time. In addition, if trading resumes
following such a trading halt (such as by closing rotation), exercises
may occur during the resumption of trading and for five (5) minutes
after the close of the resumption of trading. The provisions of this
subparagraph (iii) are subject to the authority of the Board of
Governors to impose restrictions on transactions and exercises pursuant
to Rule 6.10.
(iv) An Exchange official designated by the Board of Governors may
determine to permit the exercise of American-style, cash-settled index
options while trading in such options is delayed, halted, or suspended.
(2) (No changes).
* * * * *
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 PCX 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 PCX 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
a. Position and Exercise Limits. The PCX is proposing to amend PCX
Rules 7.5 and 7.6 in order to increase the position and exercise limits
for broad-based index options to the levels currently in place at the
CBOE. Specifically, the Exchange proposes to amend the current broad-
based position and exercise limits to 25,000.\18\ In certain
circumstances, however, there may be no position limits for certain
specified broad-based option contracts.\19\
---------------------------------------------------------------------------
\18\ The 25,000 contract position and exercise limit for broad-
based index options is derived from CBOE Rule 24.4. In CBOE Rule
24.4, 25,000 contracts serves as the base position limit for broad-
based index options.
\19\ For example, CBOE Rule 24.4 states that there are no
position limits on DJX, OEX and SPX classes. See supra note 4.
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b. Other Index Options Related Rules. The Exchange is proposing to
amend the following rules related to index options in order to bring
the PCX rules up to date and consistent with other SROs. These changes
also include several re-numbering and cosmetic changes.
(a) Amendment to PCX Rules 7 and 7.1: This proposed amendment is
intended to clarify that the Exchange will file additional proposed
rule changes with the Commission with respect to particular indices
that are product specific. The proposed amendment also contains several
updates to definitions with respect to index options.
(b) Amendment to PCX Rule 7.7: This proposed amendment outlines the
exemptions for position limits for broad-based index options and the
procedures for requesting such exemptions.
(c) Amendment to PCX Rules 7.9 and 7.12: The proposed amendment to
PCX Rule 7.9 (currently PCX Rule 7.8(a)) outlines the terms of index
options contracts, while proposed PCX Rule 7.12 applies to debit put
spreads.
(d) Amendment to PCX Rule 7.10: The proposed amendments to PCX Rule
7.10 apply to trading sessions, trading rotations, and trading halts or
suspensions for index options.
(e) Amendment to PCX Rule 7.13: This proposed amendment updates the
provisions for liability for index reporting authorities.
(f) Amendment to PCX Rules 6.11, 7.14 and 7.15: These proposed
amendments apply to the exercise of index options, exercise of
American-style index options, and the procedure for underwriter
requests for restrictions on uncovered opening writing transactions
during public distributions.\20\
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\20\ See supra note 4.
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(g) Amendment to PCX Rule 6.37: This proposed amendment provides
the Exchange with greater flexibility on applying market making
obligations when the primary underlying securities market is not open
for trading. The proposed amendment also addresses calculation of bid/
ask differentials on options on indices.
(h) Amendment to PCX Rule 6.8: This proposed amendment adds broad-
based index options to the market maker exemption from position limits.
(i) Amendment to PCX Rule 6.64(e): This proposed amendment includes
index options to the closing rotation provision.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act,\21\ in general, and furthers the
objectives of section 6(b)(5),\22\ in particular, in that it is
designed to facilitate transactions in securities, to promote just and
equitable principles of trade, to enhance competition, and to protect
investors and the public interest.
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\21\ 15 U.S.C. 78f(b).
\22\ 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
Written comments on the proposed rule change were neither solicited
nor received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, 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. Comments may also be submitted electronically at the
following e-mail address: rule-comments@sec.gov. All comment letters
should refer to File No.
[[Page 16326]]
SR-PCX-2003-60. The 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, comments should be sent in hardcopy or by e-
mail but not by both methods. 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. Copies of such filing will also be available for
inspection and copying at the principal office of the PCX. All
submissions should refer to the File No. SR-PCX-2003-60 and should be
submitted by April 19, 2004.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of section
6(b)(5) of the Act \23\ and the rules and regulations thereunder
applicable to a national securities exchange.\24\ The Commission
believes that the PCX's proposal to update its trading rules and
certain standards related to index options strikes a reasonable balance
between the Commission's mandates under section 6(b)(5) of the Act \25\
to remove impediments to and perfect the mechanisms of a free and open
market and a national market system while protecting investors and the
public interest.
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\23\ 15 U.S.C. 78f(b)(5).
\24\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\25\ See note 21 supra.
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The proposed rule, among other things, updates the rules that
govern the trading sessions of index options, including the days and
hours of business, the rules governing trading rotations at the
opening, and the rules related to the trading halts or suspensions.\26\
The proposed rule change provides updated definitions for terms related
to index options.\27\ The proposed rule further updates the procedures
PCX members must follow with respect to the exercise of American-style,
cash settled index options.\28\ The proposed rule also updates position
limits for broad-based index options \29\ and exercise limits for
broad-based and narrow-based index options.\30\ In addition, the
proposed rule updates the hedge exemption standards from position and
exercise limits and procedures for requesting exemptions from the
proposed rule.\31\ The Commission notes that the PCX has not amended
its Rule 7.3 to provide for generic listing standards for narrow-based
index options that would be eligible for streamlined listing and
trading pursuant to Rule 19b-4(e) under the Act.\32\ Because the PCX
has not established generic listing standards for narrow-based index
options, the Exchange would be required to submit a proposed rule
change pursuant to section 19(b)(2) of the Act,\33\ if it were to seek
the listing and trading of a class of a new narrow-based index
option,\34\ notwithstanding the provision of PCX Rule 7.3(b), which
suggests that the Exchange can list a class of certain narrow-based
index options pursuant to section 19(b)(3)(A) of the Act.\35\
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\26\ See Proposed PCX Rule 7.10.
\27\ See Proposed PCX Rule 7.1.
\28\ See Proposed PCX Rule 6.11 and 7.15.
\29\ See Proposed PCX Rule 7.5.
\30\ See Proposed PCX Rule 7.8.
\31\ See Proposed PCX Rule 7.7.
\32\ 17 CFR 240.19b-4(e). Rule 19b-4(e) provides that the
listing and trading of a new derivative securities product by an SRO
shall not be deemed a proposed rule change, pursuant to paragraph
(c)(1) of Rule 19b-4, if the Commission has approved, pursuant to
section 19(b) of the Act, the SRO's trading rules, procedures, and
listing standards for the product class that include the new
derivative securities product and the SRO has a surveillance program
for the product class. When relying on Rule 19b-4(e), the SRO must
submit Form 19b-4(e) to the Commission within five business days
after the SRO begins trading the new derivative securities products.
See Securities Exchange Act Release No. 40761 (December 8, 1998), 63
FR 70952 (December 22, 1998) (File No. S7-13-98) (``19b-4(e)
Release'').
\33\ 15 U.S.C. 78s(b)(2).
\34\ See 19b-4(e) Release, supra note 32, at fn 135.
\35\ 15 U.S.C. 78s(b)(3)(A).
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The Commission believes that trading options on an index of
securities permits investors to participate in the price movements of
indexes' underlying securities and allows investors holding positions
in some or all of such securities to hedge the risks associated with
their portfolios. The Commission further believes that trading options
on an index provides investors with an important trading and hedging
mechanism that is designed to reflect accurately the overall movement
of the component stocks.
The Commission finds good cause, pursuant to section 19(b)(2) of
the Act,\36\ for approving the proposed rule change prior to the
thirtieth day after the date of publication of the notice of the filing
thereof in the Federal Register. The Commission believes that granting
accelerated approval will provide PCX members with updated trading
rules and standards that should serve to protect the interests of
investors. In making this finding, the Commission notes that all of the
proposed new Exchange Rules and changes to existing Exchange Rules are
comparable to the existing rules of the other options exchanges.\37\
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\36\ 15 U.S.C. 78s(b)(2).
\37\ See, e.g., CBOE Rules 4.11, 4.16, 6.2, 6.7, 8.7, 11.1, and
24.1 through 24.14; ISE Rules 413, 418, 701, 705, 803, 1100, and
2000 through 2012.
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V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\38\ that the proposed rule change (SR-PCX-2003-60) is hereby
approved, as amended, on an accelerated basis.
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\38\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-6892 Filed 3-26-04; 8:45 am]
BILLING CODE 8010-01-P