[Federal Register Volume 61, Number 114 (Wednesday, June 12, 1996)] [Notices] [Pages 29774-29776] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 96-14811] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-37280; File No. SR-Amex-96-19] Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the American Stock Exchange, Inc., Relating to the Elimination of Position and Exercise Limits for FLEX Equity Options June 5, 1996. 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 May 21, 1996, the American Stock Exchange, Inc. (``Amex'' or ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. Sec. 78s(b)(1) (1988). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule change The Amex, pursuant to Rule 19b-4 of the Act, proposes to amend Exchange [[Page 29775]] Rule 906G to eliminate position and exercise limits for FLEX Equity Options. 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 Amex 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 IV below. The Amex 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 In December 1995, the Exchange filed with the Commission a proposal to expand its Flexible Exchange Option\3\ program to include FLEX options on equity securities.\4\ That proposal sets forth position limits for FLEX Equity Options at three times the position limits for the corresponding Non-FLEX Equity Options. The Exchange now proposes to eliminate position and exercise limits for FLEX Equity Options. --------------------------------------------------------------------------- \3\ In general, FLEX Equity Options provide investors with the ability to customize basic option features, including size, expiration date, exercise style, and exercise price. \4\ See Securities Exchange Act Release No. 37053 (March 29, 1996), 61 FR 15537 (April 8, 1996) (File No. SR-Amex-95-57) (notice of filing relating to the listing and trading of Flexible Exchange Options on specified equity securities). The Commission notes that the FLEX Equity Option filing is currently being reviewed. --------------------------------------------------------------------------- The Exchange believes that the elimination of such limits is appropriate given the institutional nature of the market for FLEX Equity Options. Currently, according to the Exchange, many large investors find the use of exchange-traded options impractical because of the constraints imposed by position limits. In the alternative, in the absence of position limits, additional investors will be attracted to exchange-traded options, thereby reducing transaction costs as well as improving price efficiency for all exchange-traded option market participants. The Exchange also believes that FLEX Equity Options, unconstrained by position limits, may become an important part of large investors' investment strategies. For instance, in the absence of position limits, investors will be able to use options to implement specific viewpoints regarding the underlying common stock; viewpoints that take into account specific near- and long-term expectations for the underlying stock price and judgments on price volatility. Similarly, the ability to execute large exchange-traded option transactions will permit large investors to implement transactions that reflect the strength of their interest in buying or selling the underlying shares, as well as their concern or lack of concern for the timing of the sale. The Exchange also anticipates that issuers of stocks underlying FLEX Equity Options will use these options, primarily through the sale of puts, as part of their stock repurchase programs.\5\ For example, General Electric and Philip Morris each recently announced corporate repurchase programs of approximately 100 million shares. Selling puts to implement these programs would have required the use of one million standardized option contracts, an amount far in excess of the position limits currently available for options on these companies. Similarly, the Amex attached to its proposal twenty-seven news stories of companies whose stocks underlie Amex traded option contracts announcing other corporate repurchase programs during 1995 and the first quarter of 1996.\6\ In each instance, the announced size of the buyback significantly exceeded the number of shares that could be repurchased under the position limits currently imposed on FLEX Equity Options. While the Exchange does not expect that corporate issuers will use the sale of put options to buy all the securities that are covered by their repurchase programs, FLEX Equity Options without position limits will at least provide issuers with a meaningful alternative. The inability of corporations to use the sale of exchange-traded equity put options on a significant scale relegates this activity to less transparent markets. --------------------------------------------------------------------------- \5\ The Commission notes that issuers would, of course, need to comply with all applicable provisions of the federal securities laws in conducting their share repurchase programs. \6\ The Commission notes that the new stories are available for examination at the Amex or at the Commission, as specified in Item IV below. --------------------------------------------------------------------------- The Exchange believes that making the Exchange-traded options market more accessible to large investors will create more ``complete'' markets and thereby better serve investors and issuers. In addition, the Exchange believes that institutional investors, large individual investors, and corporate issuers repurchasing their own shares will find FLEX Equity Options without position limits extremely attractive. Moreover, this activity will occur in the regulated, transparent domestic FLEX Equity Option markets rather than in offshore markets which do not come under Commission oversight. Pursuant to Section 13(d) of the Act and the rules and regulations thereunder, the inclusion of any option position is required when reporting the beneficial ownership of more than 5% of any equity security.\7\ The integration of options and reporting requirements in the underlying security pursuant to Section 13(d) makes large option positions widely known and easily monitored by regulators and other market participants. In this light, FLEX Equity Options trading will have the transparency of any exchange-traded option transaction or position (open interest) plus the call market focus of liquidity inherent in the Request For Quote (``REQ'') process. Similar to non- FLEX options, positions in FLEX options are required to be reported to the Exchange when an account establishes an aggregate same-side of the market position of 200 or more FLEX option contracts. The Exchange's proposal is based on the belief that manipulation is best controlled through active and transparent markets. --------------------------------------------------------------------------- \7\ Pursuant to Rule 13d-3 under the Act, a person will be deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within sixty days, including the right to acquire through the exercise of any option. --------------------------------------------------------------------------- The Exchange recognizes the theoretical opportunity for a would-be manipulator to initiate a large FLEX Equity Option RFQ with no intention of actually trading. Such tactics, however, would be patently obvious to Exchange compliance officials as well as to the Commission. Moreover, trading against a bogus FLEX Equity Option RFQ seems readily actionable under existing laws and regulations. 2. Statutory Basis The Amex believes that the proposed rule change is consistent with Section 6(b) of the Act in general, and with Section 6(b)(5) in particular,\8\ in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. --------------------------------------------------------------------------- \8\ 15 U.S.C. Sec. 78f(b)(5) (1988). --------------------------------------------------------------------------- B. Self-Regulatory Organization's Statement on Burden on Competition The Amex does not believe that the proposed rule change will impose any inappropriate burden on competition. [[Page 29776]] 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. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding, or (ii) as to which the Amex consents, the Commission will: A. by order approve the proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 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. Sec. 552, will be available for inspection and copying at the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such filing also will be available for inspection and copying at the principal office of the Amex. All submissions should refer to File No. SR-Amex-96-19 and should be submitted by July 3, 1996. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\9\ --------------------------------------------------------------------------- \9\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 96-14811 Filed 6-11-96; 8:45 am] BILLING CODE 8010-01-M