[Federal Register Volume 61, Number 155 (Friday, August 9, 1996)]
[Notices]
[Pages 41669-41671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20311]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37522; File No. SR-Amex-96-29]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by American Stock Exchange, Inc. Relating to Restrictions on the
Available Exercise Prices for FLEX Equity Call Options and Elimination
of the Requirement that Members Sign the Trade Sheet to Create a
Binding FLEX Contract
August 2, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on July 29,
1996, the American Stock Exchange, Inc. (``Amex'' or ``Exchange'')
filed with the Securities and Exchange 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.
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The American Stock Exchange, Inc. proposes to amend Exchange Rule
906G to restrict the available exercise prices for FLEX equity call
options and Rule 904G to eliminate the requirement that members sign
the Trade Sheet when creating a binding FLEX contract.
The text of the proposed rule changes is available at the Office of
the Secretary, the Amex and at the Commission.
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 self-regulatory organization
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 self-regulatory organization
has prepared summaries, set forth in
[[Page 41670]]
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 the
Statutory Basis for, the Proposed Rule Change
(1) Purpose
Rule 903G Amendment
On June 19, 1996, the Exchange received approval to list and trade
flexible options on individual stocks known as FLEX equity options.\1\
Similar to the FLEX index options currently trading at the Exchange,
investors will be able to set the specific terms of each FLEX equity
option contract. Among the terms that can be specified are: (1) the
expiration date of the option; (2) the exercise price of the option;
and (3) the exercise style of the option (American or European). The
Exchange, however, imposes some limitations on these flexible terms.
For example, the Exchange does not permit the expiration date of a FLEX
option to be any business day that falls on or within two business days
of the expiration date for standardized non-FLEX equity options.
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\1\ See Securities Exchange Act Release No. 37336 (June 19,
1996) (order approving SR-Amex-95-57).
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Although the Exchange has received approval to trade these
products, it has not done so due to a concern that the flexible
exercise price feature could result in an available call option that
would impact the qualified covered call rules of Section 1092(c)(4) of
the Internal Revenue Code, thus jeopardizing a modest tax benefit
currently enjoyed by writers of standardized non-FLEX equity call
options. Under the straddle rules of Section 1092, a loss on one
position in a straddle is taken into account for tax purposes only to
the extent that the amount of the loss exceeds unrecognized gain on the
other position(s) in the straddle. In addition, if a taxpayer has held
stock for less than the long-term holding period at the time the
taxpayer acquires an offsetting position with respect to the stock, the
taxpayer's holding period in the stock will be forfeited until
disposing of the position offsetting the stock.
Although stock and an offsetting option (e.g., a short call)
constitute a straddle for purposes of Section 1092, a straddle
consisting solely of stock and a qualified covered call (``QCC'') has
been exempted from these rules provided, among other things, that the
call option is not ``deep-in-the-money.'' Under certain conditions a
``deep-in-the-money'' call option is defined to mean an option having
an exercise price lower than the highest available exercise price which
is less than the previous day's closing price of the stock. For
example, using standardized options, if stock XYZ closed yesterday at
$54 and opened at that price today, the standardized exercise price of
$50 for a call option would not be ``deep-in-the-money'' since $50
would be the highest available exercise price that is less than the
applicable stock price. A standardized exercise price of $45, however,
would be ``deep-in-the-money'' and would not be a QCC. Thus, if a FLEX
equity call option were written with an exercise price of $53, the
standardized exercise price of $50 might be considered ``deep-in-the-
money'' since the FLEX equity call option with an exercise price of $53
could be considered the highest available exercise price and the only
qualified covered call for that option. Another interpretation might
consider any call option struck at or below $53\3/4\ ``deep-in-the-
money'' since FLEX Equity Call Option strikes of $53\7/8\ and $53\3/4\
could be created.
While the Exchange hopes to petition the Treasury Department for
relief from these latter interpretations of the straddle rules, in the
interim, the Exchange proposes to go forward with the FLEX equity
option program by prohibiting the writing of FLEX equity call options
with exercise prices other than those exercise prices currently
available for standardized or non-FLEX equity options.
Although this proposal will place limitations on a product designed
to be flexible and free of such standardized terms, the Exchange
believes that the proposed limitations appropriately balance the needs
of investors with concerns that flexible exercise prices for FLEX
equity call options could disrupt the existing framework for
determining whether a standardized option is a qualified covered call.
FLEX equity put options would have no restrictions placed on exercise
prices since the exemption from the straddle rules is available only
for call options. In addition, the Exchange anticipates that it will
seek to eliminate the proposed restriction on the exercise prices of
FLEX equity call options when it receives guidance and relief from the
Treasury Department.
Rule 904 G
The Exchange proposes to eliminate the requirement that acceptance
of the best bid or offer will take place only when each party to the
FLEX transaction signs a trade sheet, thus creating a binding contract.
Since the Exchange began trading Flex index options in 1993, the fully
manual process for executing transactions has been automated.
Currently, trade information is input into the Exchange's Intra-Day
Comparison (IDC) System for FLEX index options after completion of a
trade in a manner similar to that for non-FLEX options. IDC input
results in the immediate comparison of FLEX option trades; thus, the
requirement that trade sheets be signed is unnecessary and time
consuming.
(2) Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act in general and furthers the objectives of
Section 6(b)(5) in particular 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.
B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change will impose no burden on competition.
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 date of 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 self-regulatory organization consents, the Commission will:
(A) By order approve such 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
[[Page 41671]]
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 Section, 450 Fifth Street, N.W.,
Washington, D.C. Copies of such filing will also be available for
inspection and copying at the principal office of the Amex.
All submissions should refer to File No. SR-Amex-96-29 and should
be submitted by August 30, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\2\
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\2\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-20311 Filed 8-8-96; 8:45 am]
BILLING CODE 8010-01-M