[Federal Register Volume 73, Number 46 (Friday, March 7, 2008)]
[Notices]
[Pages 12487-12489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-4513]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57413; File No. SR-FINRA-2008-007]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of
Proposed Rule Change To Make Permanent a Pilot Program That Increases
Options Position and Exercise Limits
March 3, 2008.
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 February 28, 2008, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc.
(``NASD'')) filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been substantially prepared by FINRA. FINRA
has designated this proposal as non-controversial under Section
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\
which renders the proposed rule change effective upon filing with the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA seeks to amend NASD Rule 2860 (Options) to make permanent a
pilot program that increases options position and exercise limits. In
addition, FINRA proposes to amend NASD IM-2860-1 (Position Limits) to
revise the examples that illustrate the operation of position limits
with the proposed permanent position limits. The text of the proposed
rule change is available on FINRA's Web site (http://www.finra.org), at
FINRA's principal office, and at the Commission's Public Reference
Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA 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. FINRA 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
FINRA is proposing amendments to its options position and exercise
limits in NASD Rule 2860 to make permanent a pilot program that
increases position and exercise limits for both standardized and
conventional options.\5\ In addition, FINRA proposes to amend NASD IM-
2860-1 (Position Limits) to revise the examples that illustrate the
operation of position limits with the proposed permanent position
limits.
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\5\ A ``conventional option'' is an option contract not issued,
or subject to issuance by, the Options Clearing Corporation. See
NASD Rule 2860(b)(2)(O). Currently, position limits for standardized
and conventional options are the same with respect to the same
underlying security. The proposed rule change would maintain this
parity between standardized and conventional options. FINRA has
maintained parity between conventional and standardized options
since 1999. See Securities Exchange Act Release No. 40932 (January
11, 1999), 64 FR 2930, 2931 (January 19, 1999) (SR-NASD-98-92).
Before 1999, position limits on conventional options were three
times greater than the limits for standardized options. See
Securities Exchange Act Release No. 40087 (June 12, 1998), 63 FR
33746 (June 19, 1998) (SR-NASD-98-23).
FINRA's limits on standardized equity options are applicable
only to those members that are not also members of the exchange on
which the option is traded; the limits on conventional options are
applicable to all FINRA members. NASD Rule 2860(b)(1)(A); see also
Securities Exchange Act Release No. 40932 (January 11, 1999), 64 FR
2930, 2931 (January 19, 1999) (SR-NASD-98-92).
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NASD Rule 2860(b)(3) subjects standardized and conventional options
to one of five different position limits. Options exercise limits,
which are set forth in NASD Rule 2860(b)(4), and which incorporate by
reference the position limits in Rule 2860(b)(3), also would increase.
The original pilot program became effective on March 30, 2005, and has
been extended five times. It was scheduled to expire on March 1,
2008.\6\ FINRA is proposing to make the pilot program permanent in
order to preserve the benefits to the marketplace from the higher
levels. The proposed rule change also is substantively identical to a
proposal by the Chicago Board Options Exchange, Inc. recently approved
by the Commission.\7\ FINRA anticipates all other self-regulatory
organizations (``SROs'') with the pilot program also will seek to make
their program permanent. Thus, the proposed rule change will ensure
that FINRA's position limits are consistent with those of other SROs.
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\6\ See Securities Exchange Act Release Nos. 52271 (August 16,
2005), 70 FR 49344 (August 23, 2005) (SR-NASD-2005-097); 53346
(February 22, 2006), 71 FR 10580 (March 1, 2006) (SR-NASD-2006-025);
54334 (August 18, 2006), 71 FR 50961 (August 28, 2006) (SR-NASD-
2006-097); 55225 (February 1, 2007), 72 FR 6634 (February 12, 2007)
(SR-NASD-2007-007); and 56265 (August 15, 2007), 72 FR 47102 (August
22, 2007) (SR-FINRA-2007-002).
\7\ See Securities Exchange Act Release No. 57352 (February 19,
2008), 73 FR 10076 (February 25, 2008) (SR-CBOE-2008-07).
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Position and Exercise Limits
The standard position limits were last increased nine years ago, on
December 31, 1998.\8\ Since that time, there has been a steady increase
in the number of accounts that approach the position limit or have been
granted an exemption to the applicable position limit. To the best of
FINRA's knowledge, during the operation of the pilot program, there
have been very few violations of the position limits or exercise limits
and none of these violations were deemed to be a result of manipulative
activities.
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\8\ See Securities Exchange Act Release No. 40875 (December 31,
1998), 64 FR 1842 (January 12, 1999).
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Growth in Options Market
Since the last position limit increase, there has been an
exponential increase in the overall volume in options trading. Part of
this volume is attributable to a corresponding increase in the number
of overall market participants. This growth in market participants has
in turn brought about additional depth and increased liquidity in
options trading. FINRA has no reason to believe that the current
trading volume in equity options will not continue. Rather, FINRA
expects continued options volume growth as opportunities for investors
to participate in the options markets increase and evolve. FINRA
believes that the non-pilot position and exercise limits might
constrain liquidity in the options markets.
Manipulation
Since the last position limit increase, and throughout the duration
of the pilot program, FINRA has not encountered any significant
regulatory issues regarding the applicable position limits. Moreover,
FINRA believes that there is a lack of evidence of market
[[Page 12488]]
manipulation schemes, which justifies the proposed permanent approval
of the pilot program. FINRA believes that its existing surveillance
procedures and reporting requirements are reasonably designed to detect
unusual and/or illegal trading activity. FINRA represents that its
surveillance and reporting mechanisms (which have been significantly
enhanced since the last position limit increase in 1999) will serve to
adequately address any concerns the Commission may have with respect to
account(s) engaging in any manipulative schemes resulting from position
limit violations.
No Adverse Consequences from Past Increases
Equity option position limits have been gradually expanded from
1,000 contracts in 1973 to the current level of 75,000 contracts for
the largest and most actively traded equity options. To date, FINRA is
unaware of any adverse affects on the markets as a result of these past
increases in the limits for equity option contracts.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\9\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. The proposed rule change would make permanent a pilot
program increasing options position and exercise limits. FINRA's
experience administering the higher limits of the pilot program over
the past three years has not revealed any adverse concerns or any other
reasons to suggest that such limits should not be made permanent.
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\9\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
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 were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
FINRA has designated the proposed rule change as one that: (1) Does
not significantly affect the protection of investors or the public
interest; (2) does not impose any significant burden on competition;
and (3) does not become operative for 30 days from the date of filing,
or such shorter time as the Commission may designate if consistent with
the protection of investors and the public interest. Therefore, the
foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \10\ and subparagraph (f)(6) of Rule 19b-4
thereunder.\11\ FINRA notes that the proposed rule change is based on a
similar proposal recently approved by the Commission.\12\ FINRA has
asked the Commission to waive the operative delay to permit the
proposed rule change to become operative prior to the 30th day after
filing.
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to provide the Commission
with written notice of its intent to file the proposed rule change,
along with a brief description and text of the proposed rule change,
at least five business days prior to the date of filing of the
proposed rule change, or such shorter time as designated by the
Commission. FINRA has fulfilled this requirement.
\12\ See Securities Exchange Act Release No. 57352 (February 19,
2008), 73 FR 10076 (February 25, 2008) (order granting accelerated
approval to SR-CBOE-2008-07).
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The pilot program expanding position and exercise limits on
standardized and conventional options was scheduled to expire on March
1, 2008. The Commission believes that waiving the 30-day operative
delay of FINRA's proposal is consistent with the protection of
investors and the public interest because it will allow the position
and exercise limits to remain at consistent levels during the
transition from the pilot program to permanent status.\13\ Therefore,
the Commission designates the proposal to be operative upon filing.
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\13\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate the rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File No. SR-FINRA-2008-007 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2008-007. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commissions Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of FINRA. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2008-007 and should be
submitted on or before March 28, 2008.
[[Page 12489]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-4513 Filed 3-6-08; 8:45 am]
BILLING CODE 8011-01-P