Skip to Content

Notice

Self-Regulatory Organizations; Order Granting Approval to Proposed Rule Change by the American Stock Exchange LLC Requesting Permanent Approval of Pilot Program Eliminating Position and Exercise Limits for XMI and XII Index Options and Related Flex Options

Document Details

Information about this document as published in the Federal Register.

Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble August 21, 2002.

On April 12, 2002, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),[1] and Rule 19b-4 thereunder,[2] a proposed rule change to request permanent approval of the pilot program that provides for the elimination of position and exercise limits for the Major Market (“XMI”) and Institutional (“XII”) broad-based index options, as well as FLEX Options on these indexes.[3]

The proposed rule change was published for comment in the Federal Register on May 30, 2002.[4] The Commission received no comments on the proposal.

The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange [5] and, in particular, the requirements of section 6 of the Act [6] and the rules and regulations thereunder. The Commission finds specifically that the proposed rule change is consistent with section 6(b)(5) of the Act [7] in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism for a free and open market and a national market system, and, in general, to protect investors and the public interest.

The Commission believes that it is appropriate to eliminate position and exercise limits for XMI and XII options, as well as related FLEX options, on a permanent basis based on the Amex's experience administering the Pilot Program. The Commission's original order approving the elimination of position and exercise limits for the XMI and XII index options (as well as FLEX options on these indexes) on a two-year basis required the Exchange to submit a report to the Commission regarding the status of the Pilot Program so that the Commission could use this information to evaluate any effects of the program.[8]

The Exchange's report indicated that from February 1, 1999 through March 30, 2001, no customer and/or firm accounts reached a level of 100,000 or more options contracts in XMI or XII options. During this review period, the Amex did not discover any instances where an account maintained an unusually large unhedged position. In addition, during the period from April 2, 2001 through February 28, 2002, the Amex did not experience accounts establishing positions in excess of the standard limit applicable to each index at the time the Pilot Program was approved.[9]

In addition to no identifiable problems during the pilot program, the Commission also believes that the factors for approval of the pilot program continue to be met. For example, in approving the pilot, the Commission stated, among other things, that the enormous capitalization of and deep, liquid markets for the underlying securities contained the XMI and XII indexes significantly reduces concerns regarding market manipulation or disruption in the underlying market.

The Commission also continues to believe that the financial requirements imposed by the Amex and the Commission help to address concerns that a member or its customer may try to maintain an inordinately large unhedged position in a broad-based index option. The Amex has the authority to impose additional margin and/or assess capital charges and should be able to monitor accounts to determine when such action is warranted.

In addition, the Commission notes that the Amex has adopted surveillance [10] and reporting safeguards that will allow it to detect and deter trading abuses arising from the elimination of position and exercise limits for XMI and XII, and FLEX options on these indexes.[11] The Commission continues to believe that these enhanced procedures are critical in our determination to permanently approve the pilot. While the pilot report did not note any aberrations or concerns about large unhedged positions, the Commission continues to believe that these procedures will enable the Amex to adequately assess and respond to market concerns at an early stage. In this regard, the Commission continues to expect the Amex to take prompt action, including timely communication with the Commission and other marketplace self-regulatory organizations responsible for oversight of trading in component stocks, should any unanticipated adverse market effects develop.

It is therefore ordered, pursuant to section 19(b)(2) of the Act,[12] that the proposed rule change (File No. SR-Amex-2002-31) be, and it hereby is, approved.

Start Signature
Start Printed Page 55290

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[13]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  On February 1, 1999, the Commission approved the elimination of position and exercise limits for the XMI and XII index options, as well as FLEX options on these indexes on a two-year basis (the “Pilot Program”). See Securities Exchange Act Release No. 41011 (February 1, 1999), 64 FR 6405 (February 9, 1999). The Pilot Program originally ended on February 1, 2001, with extensions for an additional six-month period approved on July 3, 2001 and January 3, 2002, respectively. See Securities Exchange Act Release No. 44507 (July 3, 2001), 66 FR 36348 (July 11, 2001); and Securities Exchange Act Release No. 45234 (January 3, 2002), 67 FR 1377 (January 10, 2002).

Back to Citation

4.  See Securities Exchange Act Release No. 45975 (May 23, 2002), 67 FR 37882 (May 30, 2002).

Back to Citation

5.  In approving this proposed rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

Back to Citation

8.  See Securities Exchange Act Release No. 41011 (February 1, 1999), 64 FR 6405 (February 9, 1999).

Back to Citation

9.  Telephone call between Jeffrey P. Burns, Assistant General Counsel, Amex, and Susie Cho, Special Counsel, Division of Market Regulation, Commission, August 21, 2002. At the time the Commission approved the Pilot Program, the position limits for XMI and XII were 34,000 and 200,000, respectively.

Back to Citation

10.  Disclosure of specific surveillance procedures could provide market participants with information that could aid potential attempts at avoiding regulatory detection of inappropriate trading activity.

Back to Citation

11.  The Amex's reporting requirements subject XMI and XII, and FLEX options on those indexes to a 100,000 contract hedge reporting requirement. Each member or member organization that maintains a position on the same side of the market in excess of these contract thresholds for its own account or for the account of a customer must file a report that includes, but is not limited to, data related to the option position, whether such position is hedged and if so, a description of the hedge. If applicable, the report must contain information concerning collateral used to carry the position.

Back to Citation

[FR Doc. 02-21960 Filed 8-27-02; 8:45 am]

BILLING CODE 8010-01-P