Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment No. 1 Thereto by the American Stock Exchange, Inc. Relating to an Elimination of Position and Exercise Limits for Certain Broad-Based Index Options

[Federal Register Volume 64, Number 26 (Tuesday, February 9, 1999)]
[Notices]
[Pages 6405-6409]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3032]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41011; File No. SR-Amex-98-38]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the American Stock Exchange, Inc. Relating to an 
Elimination of Position and Exercise Limits for Certain Broad-Based 
Index Options

February 1, 1999.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on October 13, 1998, the American Stock Exchange, 
Inc. (``Amex'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the self-regulatory organization. Amex filed an amendment to the 
proposed rule change on January 28, 1999.\3\ The Commission is

[[Page 6406]]

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\ See Letter to Richard Strasser, Assistant Director, Division 
of Market Regulation, Commission, from Scott G. VanHatten, Legal 
Counsel, Amex, dated January 27, 1999 (``Amendment No. 1''). 
Amendment No. 1 deleted MidCap (MID) index options from the proposal 
and requested that the proposed rule change be approved on a two-
year pilot basis. Amendment No. 1 also provided that the Exchange 
may impose additional margin on accounts holding an underhedged 
position in Institutional Index Options or Major Market Index 
options or FLEX options on those indexes, as warranted by the 
Exchange. In addition, Amendment No. 1 clarified that the 100,000 
reporting threshold that XMI and XII will be subject to will also 
apply to FLEX options on those indexes. Finally, Amendment No. 1 
added that the Exchange will provide a report to the Commission 
detailing the Exchange's experience with the program no later than 
three months prior to the expiration of the two-year pilot program, 
containing certain data from the first eighteen month period of the 
pilot.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to establish a two-year pilot program eliminating 
position and exercise limits for Major Market (``XMI'') and 
Institutional (``XII'') broad-based index options, as well as FLEX 
broad-based index options on these two indexes.\4\ The current 
reporting procedures for XII,\5\ as modified by this proposal, and new 
reporting requirements for XMI will serve to identify large option 
holdings and information concerning the hedging of those positions.\6\ 
The proposal also requires the Exchange to submit a report detailing 
the Exchange's experience with the program no later than three months 
prior to the end of the program.\7\ Finally, the Exchange is proposing 
to add text to Exchange Rule 904C to include the existing position 
limits for Eurotop 100 Index options.\8\
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    \4\ The current position limits for XMI and XII are 34,000 and 
200,000, respectively. See Amex Rule 904C(b).
    \5\ Reporting of positions in XII exceeding 45,000 contracts on 
the same side of the market is currently required by Exchange Rule 
904C, Commentary .03. The Exchange proposes to increase this 
reporting requirement to 100,000 contracts and add the same 
reporting requirement for XMI.
    \6\ Exchange Rule 906C currently requires reporting of every 
account holding an index option position in excess of 200 contracts. 
However, the Exchange will require a second reporting requirement 
for XMI and XII index options and FLEX options on those indexes for 
positions in excess of 100,000 contracts which will require member 
organizations to submit information to the Exchange concerning the 
extent to which such positions are hedged.
    \7\ See Amendment No. 1 for a discussion of additional changes 
to the rule filing.
    \8\ See Exchange Act Release No. 30463, 57 FR 9284 (March 17, 
1992) (order approving File Nos. SR-Amex-90-25 and SR-Amex-91-01; 
establishing a 25,000 position and exercise limit for Eurotop index 
options). The present rule filling seeks only to codify this limit 
in Amex's rules language.
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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 III below. The self-regulatory 
organization 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
    The Exchange is proposing a two year pilot program eliminating 
position and exercise limits for XMI, XII and FLEX options on those 
indexes. The Exchange will continue to require that member 
organizations report all index option positions exceeding 200 
contracts, pursuant to Exchange Rule 906C. In addition, the Exchange is 
proposing to increase the reporting requirement from 45,000 to 100,000 
contracts for XII and adopt a similar reporting requirement for XMI 
index options, and FLEX options on those indexes.\9\ Lastly, the 
Exchange is adding text to Amex Rule 904C to state the current position 
limit for Eurotop 100 Index options.
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    \9\ The new reporting requirement will be for accounts holding 
positions in excess of 100,000 contracts on the same side of the 
market and will include, if applicable, information concerning the 
extent to which such positions are hedged.
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    Manipulation. The Amex believes that position and exercise limits 
in broad-based index options no longer serve their stated purpose. On 
the fifteenth anniversary of listed index options trading, the Exchange 
believes that the size of the market underlying broad-based index 
options is so large as to dispel any concerns regarding market 
manipulation. To date, there has not been a single disciplinary action 
involving manipulation in any broad-based index product listed on the 
Exchange. The Exchange believes that its fifteen years of experience 
conducting surveillance of index options and program trading activity 
is sufficient to identify improper activity. The Exchange also believes 
that routine oversight inspections of Amex's regulatory programs by the 
Commission have not uncovered any inconsistencies or shortcomings in 
the manner in which index option surveillance is conducted. These 
procedures entail a daily monitoring of market movements via automated 
surveillance techniques to identify unusual activity in both the 
options and underlying stock basket components.
    Competition. In today's market, the Exchange believes that position 
and exercise limits severely hamper Amex's ability to compete with the 
OTC and futures markets. Investors who trade listed options on the Amex 
are placed at a serious disadvantage in comparison to the OTC market 
where index options and other types of index based derivatives (e.g., 
forwards and swaps) are not subject to position and exercise limits. 
Member firms continue to express concern to the Exchange that position 
limits on Amex products are an impediment to their business and that 
they have no choice but to move their business to the OTC market where 
position limits are not an issue.
    In addition, the Amex believes that the current base limits for XMI 
and XII \10\ options are not adequate for the hedging needs of 
institutions which engage in trading strategies differing from those 
covered under the index hedge exemption policy (e.g., delta hedges, OTC 
vs. listed hedges). The Amex believes that, with the elimination of 
position limits for these products, staff resources could be better 
utilized elsewhere.
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    \10\ The base limits for XMI and XII are 34,000 and 200,000 
contracts, respectively. See Amex Rule 904C(b).
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    Financial requirements. The Exchange believes that financial 
requirements imposed by the Exchange and by the Commission adequately 
address concerns that a member or its customer may try to maintain an 
inordinately large unhedged position in XMI or XII. Current margin, and 
risk-based haircut methodologies serve to limit the size of positions 
maintained by any one account by increasing the margin and/or capital 
that a member must maintain for a large position held by itself or by 
its customer. It should also be noted that the Exchange has the 
authority under paragraph (d)(2)(K) of Rule 462 to impose a higher 
margin requirement upon the member or member organization when the 
Exchange determines a higher requirement is warranted.
    FLEX Equity options. In 1997, the SEC approved the elimination of 
position and exercise limits in FLEX Equity options under a two-year 
pilot program.\11\ To date, there have been no adverse affects on the 
market as a result of the elimination of position and exercise limits. 
Member firms have commented favorably on this change and believe that 
it is the first step towards eliminating position and exercise limits 
in all option products. In its release approving the elimination of 
FLEX equity option position and exercise limits, the Commission stated 
that the elimination of position limits

[[Page 6407]]

will allow the listed options markets to better compete with the OTC 
market.

    \11\ Exchange Act Release No. 39032 (September 9, 1997), 62 FR 
48683 (September 16, 1997).
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    [T]he elimination of position and exercise limits for FLEX 
equity options allows the Exchanges to better compete with the 
growing OTC market in customized equity options, thereby encouraging 
fair competition among brokers and exchange markets. The attributes 
of the Exchanges' options markets versus an OTC market include, but 
are not limited to, a centralized market center, an auction market 
with posted transparent market quotations and transaction reporting, 
parameters and procedures for clearance and settlement, and the 
guarantee of the OCC for all contracts traded on the Exchanges.\12\

    \12\ Id. at 48685. The Commission notes that approval of the 
elimination of position and exercise limits for FLEX equity options 
was for a two-year pilot period and was based on several other 
factors including, in large part, additional safeguards adopted by 
the exchanges to allow them to monitor larger options positions.
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    Reporting requirements. The Exchange will require that each member 
or member organization that maintains a position on the same side of 
the market in excess of 100,000 contracts in XMI, XII options or FLEX 
options on those indexes, for its own account or for the account of a 
customer report certain information. This data would include, but would 
not be limited to, the option position, whether such position is hedged 
and if so, a description of the hedge and if applicable, the collateral 
used to carry the position. Exchange market-makers would continue to be 
exempt from this reporting requirement as market-maker information can 
be accessed through the Exchange's market surveillance systems. The 
Exchange proposes to establish the reporting level for XMI and FLEX 
options on the XMI and XII at 100,000 contracts and to increase the 
reporting level to 100,000 contracts \13\ from the current reporting 
level of 45,000 for XII for the following reasons. Imposing a uniform 
reporting requirement for XII, XMI and FLEX options on those indexes 
will eliminate confusion. The Amex believes that an increase in the 
reporting level to 100,000 contracts for XII will result in the 
collection of more meaningful information. In addition, the general 
reporting requirement for customer accounts that maintain a position in 
excess of 200 contracts will remain at this level for broad based index 
options.\14\ Last, it is important to note that the proposed 100,000 
contract reporting requirement is above and beyond what is currently 
required in the OTC market. NASD member firms are only required to 
report index option positions in excess of 200 contracts and are not 
required to report any related hedging information.
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    \13\ Currently, only the XII is subject to reporting 
requirements beyond those required by Exchange Rule 906C. The 
Exchange would expand this revised reporting requirement to XMI and 
FLEX options on the XII and XMI.
    \14\ See Exchange Rule 904C, Commentary .03, XII Reporting 
Requirement.
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    Eurotop 100 Index options position limit. The Exchange proposes to 
add text to Rule 904C to include the current position limit for Eurotop 
100 Index options. Although the current position limit (25,000 
contracts on the same side of the market with no more than 15,000 of 
such contracts in series with the nearest expirations) was approved in 
a previously submitted rule change,\15\ this limit was not included in 
the text of Exchange Rule 904C. Accordingly, the Exchange is now adding 
text to Rule 904C to include the existing position limit for Eurotop 
100 Index options. The Exchange believes the additional text will 
clarify Rule 904C and make it inclusive of and uniform for all Exchange 
traded indices.
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    \15\ See Exchange Act Release No. 30463, 57 FR 9284 (March 17, 
1992).
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2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5)\16\ that an Exchange have rules that 
are designed to promote just and equitable principles of trade, to 
remove impediments to, and perfect the mechanism of a free and open 
market and, in general, to protect investors and the public interest.
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    \16\ 15 U.S.C. 78f(b)(5).
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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. 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. 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. 552, will be available for inspection and copying at the 
Commission's Public Reference Room, located at the above address. 
Copies of such filing will also be available for inspection and copying 
at the principal office of the Exchange. All submissions should refer 
to File No. SR-Amex-98-38 and should be submitted by March 2, 1999.

IV. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    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, and, in 
particular, with the requirements of Section 6 of the Act.\17\ 
Specifically, the Commission believes the proposed rule change is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.
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    \17\ See 15 U.S.C. 78f(b). In approving this rule change, the 
Commission notes that it has considered the proposal's impact on 
efficiency, competition, and capital formation, consistent with 
Section 3 of the Act. Id at 78c(f).
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    Position limits serve as a regulatory tool designed to address 
potential manipulative schemes and adverse market impact surrounding 
the use of options. In the past, the Commission has stated that:

    Since the inception of standardized options trading, the options 
exchanges have had rules imposing limits on the aggregate number of 
options contracts that a member or customer could hold or exercise. 
These rules are intended to prevent the establishment of options 
positions that can be used or might create incentives to manipulate 
or disrupt the underlying market so as to benefit the options 
position. In particular, position and exercise limits are designed 
to minimize the potential for mini-manipulations and for corners or 
squeezes of the underlying market. In addition such limits serve to 
reduce the possibility for disruption of the options market itself, 
especially in illiquid options classes.\18\
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    \18\ Exchange Act Release Nos. 31330 (October 16, 1992), 57 FR 
48408 (October 23, 1992) (SR-Amex-92-13) (order approving an 
increase in XII position and exercise limits); 39489 (December 24, 
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-11) (order approving 
an increase in OEX position and exercise limits).


[[Page 6408]]


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    In general, the Commission has taken a gradual, evolutionary 
approach toward expansion of position and exercise limits.\19\ The 
Commission has been careful to balance two competing concerns when 
considering the appropriate level at which to set option position and 
exercise limits. The Commission has recognized that the limits must be 
sufficient to prevent investors from disrupting the market in the 
component securities comprising the indexes. At the same time, the 
Commission has determined that limits must not be established at levels 
that are so low as to discourage participation in the options market by 
institutions and other investors with substantial hedging needs or to 
prevent specialists and market-makers from adequately meeting their 
obligations to maintain a fair and orderly market.\20\
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    \19\ This gradual approach to increasing position limits is 
evident with both the XMI and XII. See Exchange Act Release Nos. 
29534 (August 8, 1991), 56 FR 40449 (August 15, 1991) (order 
approving SR-Amex-91-18; increasing position limits for the XMI from 
17,000 to 34,000 contracts); 38313 (November 7, 1997), 62 FR 61418 
(November 17, 1997) (order approving SR-Amex-97-44; increasing 
position limits for the XII from 45,000 to 100,000 contracts).
    \20\ See H.R. Rep. No. IFC-3, 96th Cong., 1st Sess. At 189-91 
(Comm. Print 1978).
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    The Commission has carefully considered the Amex's proposal. At the 
outset, the Commission notes that it still believes that the 
fundamental purposes of position and exercise limits are being served 
by their existence. Nevertheless, the Commission believes that the 
current experience with the trading of index options as well as the 
surveillance capabilities of the Amex have made it permissible to 
consider other, less prophylactic alternatives to regulating the index 
options market while still ensuring that large positions in such index 
options will not unduly disrupt the options or underlying cash markets. 
At this time, the Commission believes that it is appropriate to allow 
for an elimination of position and exercise limits for certain broad-
based index options on a two-year pilot basis.
    The Commission believes that an elimination of position and 
exercise limits for certain broad-based index options on a pilot basis 
is appropriate for several reasons. Overall, the Commission believes 
that the pilot will allow Amex to allocate certain of its surveillance 
resources differently, focusing on enhanced reporting and surveillance 
of trading to detect potential manipulation and risky positions that 
may unduly affect the cash market, rather than focusing on the strict 
enforcement of position limits. Although this regulatory approach 
deviates from the current structure that has been in place since the 
beginning of index options trading, the Commission believes that the 
enhanced reporting and surveillance Amex is providing, as well as the 
fact that the pilot is limited to two of Amex's most highly capitalized 
and actively traded index options, provides a sound basis for approving 
a two year pilot program eliminating position and exercise limits.
    The Commission notes first that the proposal is limited to options 
on two broad-based indexes, the XMI and XII, and FLEX options on those 
indexes. The Commission believes that the enormous capitalization of 
and deep, liquid markets for the underlying securities contained in 
these indexes significantly reduces concerns regarding market 
manipulation or disruption in the underlying market.\21\ Removing 
position and exercise limits for these index options may also bring 
additional depth and liquidity, in terms of both volume and open 
interest, to the affected index options classes without significantly 
increasing concerns regarding intermarket manipulations or disruptions 
of the options or the underlying securities.
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    \21\ XMI includes 20 of the largest, most widely-held stocks 
across all major sectors of the U.S. market. As of January 26, 1999, 
the total market capitalization for XMI was $1.9 trillion. XII is 
adjusted quarterly to comprise the 75 stocks held in greatest dollar 
amount among all publicly traded issues in institutional portfolios 
larger than $100 million. As of January 26, 1999, the total market 
capitalization for XII was $6.4 trillion.
    In addition, the average daily trading volume for the underlying 
components of these indexes for the six months preceding January 26, 
1999, demonstrates the substantial liquidity of the index components 
as a group. The average daily trading share volume underlying the 
XMI is 3.2 million shares. The average daily trading share volume 
underlying the XII is 4.4 million shares.
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    Second, eliminating position and exercise limits for these 
specified indexes should better serve the hedging needs of institutions 
that engage in trading strategies different from those covered under 
the index hedge exemption policy (e.g., delta hedges, OTC vs. listed 
hedges). Furthermore, eliminating position and exercise limits for the 
XMI and XII index options will alleviate the regulatory burdens related 
to the current index hedge exemption, which involves a daily monitoring 
of positions and reports to the Exchange at the current levels.
    Third, the Commission believes that financial requirements imposed 
by Amex and by the Commission adequately address concerns that an Amex 
member or its customer may try to maintain an inordinately large 
unhedged position in a broad-based index option. Current margin and 
risk-based haircut methodologies serve to limit the size of positions 
maintained by any one account by increasing the margin and/or capital 
that a member must maintain for a large position held by itself or by 
its customer.\22\ Amex also has the authority under its rules to impose 
a higher margin requirement upon the member or member organization when 
it determines a higher requirement is warranted.\23\ The Commission 
believes that deleting the proposed margin review threshold of 100,000 
contracts for XMI, XII and FLEX option on those indexes is appropriate 
to avoid a possible misinterpretation that the Exchange may only impose 
additional margin under Amex Rule 462 when this threshold is 
reached.\24\ Monitoring accounts maintaining large positions should 
provide the Exchange with the information necessary to determine 
whether to impose additional margin and/or whether to assess capital 
charges upon a member organization carrying the account. In addition, 
the Commission's net capital rule, Rule 15c3-1 under the Exchange Act, 
imposes a capital charge on members to the extent of any margin 
deficiency resulting from the higher margin requirement. The 
significant increases in unhedged options capital charges resulting 
from the September 1997 adoption of risk-based haircuts and Amex's 
margin requirements applicable to these products under Exchange rules 
serves as an additional form of protection.\25\ The Commission also 
notes that the OCC will serve as the counter-party guarantor in every 
exchange-traded transaction.
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    \22\ Exchange Act Rule 15c3-1 requires a capital charge equal to 
the maximum potential loss on a broker-dealer's aggregate index 
position over a +(-) 10% market move. Exchange margin rules require 
margin on naked index options which are in or at-the-money equal to 
a 15% move in the underlying index; and a minimum 10% charge for 
naked out-of-the money contracts. At an index value of 9,000 this 
approximates to a $135,000 to $90,000 requirement per each unhedged 
contract.
    \23\ See Amendment No. 1, and Amex Rules 462 and 904C, 
Commentary .03.
    \24\ Amendment No. 1 clarifies that the Exchange may impose 
additional margin as it deems necessary.
    \25\ See Exchange Act Release No. 38248 (February 6, 1997), 62 
FR 6474 (February 12, 1997) (adopting Risk Based Haircuts); and Amex 
Rule 462(d)(2)(K).
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    Fourth, the Commission notes that the index options and other types 
of index-based derivatives (e.g., forwards and swaps) are not subject 
to position and exercise limits in the OTC market. The Commission 
believes that eliminating position and exercise limits for the XMI and 
XII options on a two-year pilot basis will better allow Amex to compete 
with the OTC market.

[[Page 6409]]

    Fifth, the Commission believes that Amex has adopted important 
enhanced surveillance 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 those 
indexes. These safeguards will also allow Amex to monitor large 
positions in order to identify instances of potential risk and to 
assess additional margin and/or capital charges, if deemed necessary. 
Specifically, Amex will subject XMI and XII, and FLEX options on those 
indexes to a 100,000 contract hedge reporting requirement.\26\ 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. Exchange market makers would 
continue to be exempt from this reporting requirement. Although the new 
reporting threshold is higher for XII, the new level will enable Amex 
to allocate its surveillance resources on those accounts maintaining 
larger, potentially riskier, positions. Amex has submitted to the 
Commission a detailed description of enhanced surveillance procedures 
the Exchange will implement in order to monitor accounts maintaining 
large positions. The Commission also believes that Amex's new 
surveillance procedures should enable the Exchange to assess and 
respond to market concerns at an early stage. Although it is 
inappropriate to discuss the details of Amex's enhanced surveillance 
program, the Commission notes that these enhanced procedures were 
critical in its determination to approve the proposed rule change.\27\
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    \26\ The current hedge reporting threshold for XII is 45,000 
contracts. There is currently no reporting requirement for XMI.
    \27\ Disclosure of specific surveillance procedures could 
provide market participants with information that could aid 
potential attempts at avoiding regulatory detection of inappropriate 
trading activity.
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    Finally, the Commission notes the lack of any discernible problems 
at existing levels. Although it is difficult to compare a market with 
position limits and one without, the Commission notes that the lack of 
any significant problems at existing levels, which are relatively high 
for these two index options compared to other similar products, does 
provide some basis for going forward with Amex's proposal. The 
Commission further believes that, if problems were to occur during the 
pilot period, the enhanced market surveillance of large positions 
should help Amex to take the appropriate action in order to avoid any 
manipulation or market risk concerns.
    With regard to the eliminating of position and exercise limits for 
FLEX options on the XMI and XII, the Commission believes that, given 
the size and sophisticated nature of the FLEX options market for these 
indexes, along with the reporting requirements, eliminating position 
and exercise limits for FLEX options on the XMI and XII for a two-year 
pilot period should not substantially increase manipulative concerns.
    Notwithstanding the protections that have been built into Amex's 
proposal, the Commission believes a prudent approach is warranted with 
respect to the elimination of position limits for these indexes. In 
this regard, the Commission cannot rule out the potential for adverse 
effects on the securities markets for the component securities 
underlying the effected broad-based indexes. To address this concern, 
the Commission is approving the proposal for a two-year pilot period 
and limiting the proposal to XMI and XII options, and FLEX options on 
those indexes.\28\ Furthermore, three months prior to the end of the 
pilot program, Amex will provide the Commission with a report detailing 
the size and different types of strategies employed with respect to 
positions established in those classes not subject to position limits. 
In addition, the report will note whether any problems resulted due to 
the no limit approach and any other information that may be useful in 
evaluating the effectiveness of the pilot program.\29\ The Commission 
expects that Amex will 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.
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    \28\ Cf. Exchange Act Release No. 30932 (September 9, 1997), 62 
FR 48683 (September 16, 1997) (order approving the elimination of 
position and exercise limits for FLEX equity options on a two year 
pilot basis).
    \29\ See Amendment No. 1.
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    The Commission also believes that approval of the text being added 
to Amex Rule 904C to state the current position limit for Eurotop 100 
Index options is appropriate given that this change is technical in 
nature.\30\
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    \30\ See Exchange Release No. 30463, 57 FR 9284 (March 17, 1992) 
(order approving Eurotop 100 index).
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    The Commission finds good cause to approve the proposed rule filing 
prior to the thirtieth day after the date of publication of notice of 
filing thereof in the Federal Register. Approval of the proposed rule 
change may bring additional depth and liquidity, in terms of both 
volume and open interest, to the affected index options classes without 
significantly increasing concerns regarding intermarket manipulations 
or disruptions of the options or the underlying securities. Further, 
the proposal is limited to a two year pilot and Amex has addressed the 
regulatory concerns by adopting enhanced reporting and surveillance 
requirements, as discussed above. The Commission also notes that it 
recently approved a similar proposed rule change from the Chicago Board 
Options Exchange (``CBOE''), CBOE's proposed rule change eliminated 
position and exercise limits for SPX, OEX, DJX options and FLEX options 
on those indexes on a two year pilot basis.\31\ CBOE's original 
proposal, which was broader in that it proposed to eliminate position 
and exercise limits for all broad-based index options, was published 
for the entire twenty-one day comment period and generated only one 
response favorable to the proposal. Although CBOE's SPX, OEX and DJX 
options are not identical to Amex's XMI and XII options, these indexes 
are all highly capitalized board-based indexes that have been regulated 
in the same manner. Accordingly, the Commission believes that good 
cause exists, consistent with Sections 6(b)(5) and 19(b) of the Act to 
approve Amex's proposed rule change, as amended, on an accelerated 
basis.
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    \31\ See Exchange Release No. 40969, (January 22, 1999), 64 FR 
4911 (February 1, 1999).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\32\ that the proposed rule change (SR-Amex-98-38) is approved, as 
amended, on a two year pilot basis until February 1, 2001.

    \32\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-3032 Filed 2-8-99; 8:45 am]
BILLING CODE 8010-01-M