Interpretive Letter to Richard Lewandowski, The Options Exchange
July 26, 1995
Mr. Richard Lewandowski
Department of Financial Compliance
The Options Exchange
LaSalle At Van Buren
Chicago, Illinois 60605
Re: Interpretive Request Concerning the NASD’s Prompt Receipt and Delivery Interpretation
Dear Mr. Lewandowski:
This letter is in response to your letter dated July 13, 1995, concerning the scope of the exemption from the NASD’s Prompt Receipt and Delivery of Securities Interpretation ("Interpretation")1 contained in a letter dated December 13, 1994 from NASD staff to the Intermarket Surveillance Group ("ISG Letter").2 Specifically, in the ISG Letter NASD staff provided that short sales effected by options professionals (i.e., options specialists, market makers and registered options traders) to offset corresponding options positions are exempt from the affirmative determination requirement so long as: (1) the short sales are offsets of options positions established during the course of bona fide market making activity; and (2) the short sales constitute a permissible offset under Regulation T promulgated by the Federal Reserve Board ("Regulation T").3
In your letter you request that the exemption from the Interpretation provided in the ISG Letter be expanded to include all short sales by options professionals established during the course of bona fide market making activity, regardless of whether the short sales constitute a permitted offset under Regulation T. In your letter you also state that the treatment requested for options professionals is in accordance with the treatment of option professionals under New York Stock Exchange ("NYSE") Rule 440C.10, an NYSE Rule that imposes requirements similar to the Interpretation.
Based on conversations with responsible NYSE staff, NASD staff believes that the treatment you request for options professionals under the Interpretation is consistent with the manner in which options professionals are treated under NYSE Rule 440C.10. Accordingly, in light of this precedent, NASD staff finds that short sales by options professionals established during the course of bona fide marking activity, regardless of whether the short sales constitute a permitted offset under Regulation T, are entitled to an exemption from the Interpretation. Thus, in these limited circumstances, short sales for the accounts of options professionals may be effected without the executing NASD member having to satisfy the affirmative determination requirements in the Interpretation.
Please note that the foregoing is only an interpretive position expressed by NASD staff. Under NASD procedures, any final determination regarding the application of NASD Rules rests with the District Business Conduct Committees, the NASD Market Surveillance Committee, the National Business Conduct Committee, and, ultimately, the NASD Board of Governors.
Richard G. Ketchum
Chief Operating Officer and Executive Vice President
1 See NASD Rules of Fair Practice, Article III, Section 1, Interpretation 04. Paragraph (b)(2)(a) of the Interpretation prohibits an NASD member (or an associated person) from accepting a short sale order from a customer unless the member makes an affirmative determination: (1) that it will receive delivery by settlement date; or (2) that it can borrow the security on the customer’s behalf for delivery by settlement date. Paragraph (b)(2)(B) of the Interpretation provides a specific exemption from the affirmative determination requirement for short sales by Nasdaq market makers that are "bona fide market making transactions."
2 Letter from Richard G. Ketchum, Chief Operating Officer and Executive Vice President, NASD, to Gerald O’Connell, First Vice President, Regulation and Trading Operations, Philadelphia Stock Exchange, dated December 13, 1994.
3 See Section 220.12 (b)(2) of Regulation T.