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Executive Summary
Given the growing market for over-the-counter (OTC) derivatives, such as OTC options on individual equity securities and stock indexes, and the Securities and Exchange Commission's (SEC) recent approval of increases in option position and exercise limits, the NASD reminds members of their obligations to comply with NASD rules governing options position limits, exercise limits, and position-reporting requirements. To clarify the application and operation of these rules, a description of the rules and a question and answer section follow. In addition, a reprint of the applicable rules follows this Notice.
Background
Section 33 of the NASD Rules of Fair Practice governs members' activities in standardized and conventional options. Standardized options are exchange-traded options issued by the Options Clearing Corporation (OCC) that have standard terms for strike prices, expiration dates, and the amount of the underlying security. Presently, there are standardized options overlying individual equity securities, stock indexes, foreign currencies, American Depositary Receipts, exchange-listed closed-end country funds, Treasury instruments, and yields based on Treasury instruments. A conventional option is any other option contract not issued, or subject to issuance, by the OCC. Section 33(a), however, provides that the term "option" shall "not include any tender offer, registered warrant, right, convertible security, or any other option with respect to which the writer is the issuer of the security which may be purchased or sold upon the exercise of the option."
Pursuant to Section 33(b)(1)(A) of the Rules of Fair Practice the position limits, exercise limits, and reporting requirements described below apply to standardized and conventional stock and stock-index options in the following manner:
(1) The position and exercise limits contained in Sections 33(b)(3) and 33(b)(4) of the Rules of Fair Practice apply only to standardized and conventional equity options.
(2) Standardized options on stock indexes are subject to the position and exercise limits established by the exchange on which the index option trades.
(3) Conventional options on stock indexes are not subject to any position or exercise limits.
(4) The position-reporting requirements contained in Section 33(b)(5) of the Rules of Fair Practice apply to all conventional and standardized-options positions established by member firms that are "access" firms.1
Options Position Limits
Equity Options
Section 33(b)(3) of the Rules of Fan-Practice imposes a ceiling or position limit on the number of conventional and standardized equity options contracts in each options class (i.e, puts or calls) on the same side of the market that a member, a customer, a person associated with a member, or a group of investors acting in concert can write or hold. Accordingly, long calls and short puts are aggregated and short calls and long puts are aggregated for position-limit purposes. The position limit for each stock is determined according to a "three-tiered" system that subjects more actively traded securities with larger public floats to higher position limits and less actively traded stocks to lower limits. The NASD rules do not specifically govern how a particular equity option falls within one of the three position-limit tiers. Rather, the NASD position-limit rule provides that the position limit established by an options exchange(s) for a particular equity option is the applicable position limit for purposes of the NASD rule.2 The position limit for a particular equity security can be obtained from OCC, the relevant options exchange(s), or the NASD Market Surveillance Department. In instances where an equity security is not subject to standardized options trading and, thus, there is no position limit established by an options exchange, the applicable position limit for the conventional option is the lowest tier.
On January 5, 1994, the SEC approved an NASD proposal to increase the current position limits from 3,000,5,500, and 8,000 contracts to 4,500,7,500, and 10,500 contracts, respectively.3 These changes were made to track corresponding position limit increases made by the options exchanges. The NASD believes the increased position limits will afford market participants greater flexibility to employ larger options positions when effectuating their investment strategies. In addition, the NASD believes the increased limits likely will facilitate greater activity in exchange-listed options, thereby enhancing liquidity in the markets for exchange-traded options and the securities underlying those options.
The NASD hedge-exemption pilot program, in effect since February 1990, provides for an automatic exemption from equity option position limits for accounts that have established one of the four most commonly used hedged positions on a limited one-for-one basis (i.e., 100 shares of stock for one option contract or, in the case of an adjusted options contract, the number of shares represented by the adjusted contract). The exempted hedge positions are: (1) long stock/short calls; (2) long stock/long puts; (3) short stock/long calls; and (4) short stock/short puts. Under the pilot program, the largest options position that may be established (combining hedged and unhedged positions) may not exceed twice the basic position limit (i.e, 9,000,15,000, and 21,000 contracts, respectively).
On March 18, 1994, the SEC approved an NASD proposal to extend and expand its equity option position-limit, hedge-exemption pilot program.4 Specifically, the pilot program was extended until December 31, 1995, and expanded to provide that the underlying hedged security position may be comprised of securities readily convertible into, or economically equivalent to, the security underlying the corresponding hedging options position. The NASD believes that expanding the hedge-exemption pilot program in this manner will allow investors to hedge instruments that are economically equivalent to stocks more efficiently and effectively. Because the value of a convertible security likely will fluctuate in tandem with the value of the security that it is convertible into, the NASD believes investors with positions in convertible securities should be able to hedge their positions with equity options to the same extent that investors with long or short positions in the underlying security can.5
Stock-Index Options
Conventional stock-index options are not subject to position limits, although members trading standardized stock-index options are required to adhere to the position limits established for the option by the exchange on which it trades.
Options Exercise Limits
Options exercise limits restrict the number of options contracts that a member, customer, person associated with a member, or group of investors acting in concert can exercise within five consecutive business days. Under Section 33(b)(4) of the Rules of Fair Practice, the exercise limits correspond to position limits, such that investors in options classes on the same side of the market are allowed to exercise, during any five consecutive business days, only the number of options contracts set forth as the applicable position limit for those options classes. Accordingly, the SEC's approval of the NASD proposal for higher position limits also increased the NASD exercise limits to 4,500,7,500, and 10,500 contracts, respectively.
Under the hedge-exemption pilot program for equity options, the exercise limit is equivalent to the size of the options position established pursuant to the hedge-exemption program. Therefore, if the position limit for an option is 7,500 contracts and an investor has established a position of 10,000 contracts (7,500 unhedged and 2,500 hedged), the investor could exercise all 10,000 contracts during five consecutive business days.
As with position limits, standardized and conventional equity options and standardized stock-index options are subject to exercise limits, while conventional stock-index options are not.
Options Position Reporting
Section 33(b)(4) of the Rules of Fair Practice is applicable to all standardized options positions established by "access" firms6 or their customers and all conventional options positions established by members or their customers. Specifically, the rule requires members to file a report with the NASD if the member's account, a customer's account, or an associated person's account establishes an aggregate options position of 200 or more options contracts of the put class and the call class on the same side of the market covering the same underlying security or index.
In aggregating options on the "same side of the market," long calls in any class of options should be combined with short puts of the same class and short calls should be combined with long puts to determine whether a reportable position exists. Long and short positions for the same class should not be netted or combined (e.g., 200 contracts long and 200 contracts short in the same options class in the same account should both be reported, while 100 contracts long and 100 contracts short in the same options class in the same account should not be reported).
A position report form should be filed in each of the following situations:
- A long and/or short position of 200 or more options contracts of the put class and the call class on the same side of the market is established in the account.
- There is an increase in a previously reported position (e.g., from 250 contracts to 275 contracts).
- There is a decrease in a previously reported position to a position of less than 200 contracts (e.g., from 250 contracts to 199 contracts). Once a position has been reduced to less than 200 contracts, no subsequent position reports would have to be filed until the account once again established a long and/or short position of 200 or more contracts of the put class and the call class on the same side of the market.
Position report forms and instructions can be obtained by contacting Joseph Alotto, Special Investigator, NASD Market Surveillance Department, at (301) 590-6845.
Exemptions
Section 33(b)(3)(A) of the Rules of Fair Practice provides that the NASD may grant position-limit exemptions in "highly unusual circumstances." Position-limit exemption requests are considered by the Options and Derivatives Subcommittee (Options Subcommittee) of the NASD Trading Committee on a confidential basis. A position-limit exemption request should contain, at a minimum: (1) the size of the position-limit exemption request; (2) the name of the security underlying the option or sufficient information about the underlying security to enable the Options Subcommittee to adequately assess the market for that security (i.e., float, market capitalization, price, primary market, trading volume, etc.); (3) a description of the parties to the transaction; (4) the basis for the exemption; and (5) a statement as to why the market disruption and manipulation concerns underlying position limits would not be compromised if the NASD were to grant the exemption. Depending on the circumstances, the Options Subcommittee also may ask for additional information. Members submitting position-limit exemption requests should direct them to either Glen Shipway, Senior Vice President, Market Operations, The Nasdaq Stock Market, 80 Merritt Boulevard, Trumbull, CT 06611, or Thomas Gira, Assistant General Counsel, The Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.
As a general matter, the NASD has not granted many position-limit exemptions in the past. Recently, however, the Options Subcommittee has been considering an increasing number of exemption requests. Accordingly, in the interests of keeping market participants equally informed of actions taken by the Options Subcommittee in this area, the NASD will publish generic descriptions of the position-limit exemptions and interpretive positions issued by the Options Subcommittee, as well as those requests denied by the Subcommittee, from time to time, in the "For Your Information" section of NASD Notices to Members. Members and customers of members are reminded that these exemptions and interpretations are fact specific in nature and, therefore, it would be a violation of the NASD position-limit rule if a member or customer were to rely solely on a generic description of a position-limit exemption or interpretive position without also obtaining a specific position-limit exemption or interpretive position from the Options Subcommittee. Following are brief summaries of recent actions taken by the Options Subcommittee in this area.
"Collar Transaction" Involving Conventional Options
The Options Subcommittee considered and granted several exemption requests concerning the aggregation of long put and short call positions in the context of "collar" transactions involving cash-settled, European-style conventional options. In these transactions, the customer purchased long puts and wrote short calls on the same amount of the underlying security to hedge a long stock position. Specifically, the Options Subcommittee determined that, subject to the following conditions and consultation with the NASD on a case-by-case basis, short call and long put positions in a conventional option collar transaction need not be aggregated. Provided that all the conditions are satisfied, the Options Subcommittee also determined that corresponding long call and short put positions in conventional options established to facilitate the collar likewise need not be aggregated. The conditions are as follows:
1. The collar must be established with conventional option contracts, which contracts must provide that:
a. the options can only be exercised if they are in-the-money; and
b. neither option can be sold, assigned, or transferred by the holder without the prior written consent of the writer.
2. The options must be European-style (i.e., only exercisable upon expiration), with the short call and long put expiring on the same date.
3. The strike price of the short call can never be less than the strike price of the long put.
4. No more than one side of the transaction can be in-the-money when the collar is established.
5. The member complies with all NASD requests for information concerning the conventional options.
Non-Applicability Of Section 33 Of The Rules Of Fair Practice To Certain Equity Warrants
The Options Subcommittee issued an interpretive position that Section 33 of the Rules of Fair Practice does not apply to warrants issued by a large, publicly held U.S. company on the common stock of a non-U.S. company in which the U.S. company has a 20 percent ownership interest. The Options Subcommittee found that the 20 percent ownership of the non-U.S. company by the U.S. company brought the warrants within the "issuer written" exemption contained in Section 33(a) of the NASD Rules of Fair Practice.
Application Of The Position-Limit, Hedge-Exemption Program To Call Options Purchased By Issuers On Their Own Stock
The Options Subcommittee issued an interpretive position that an issuer may be deemed to be short its own stock when purchasing call options on its stock to hedge market exposure from employee stock options, stock repurchase programs, and outstanding convertible securities, and for other corporate purposes. Thus, for purposes of the hedge-exemption program, an issuer could purchase calls on its own stock up to twice the applicable limit because it would be deemed to be short the requisite number of shares of stock. This interpretive position should not, however, be construed to be an opinion by the Options Subcommittee with respect to the applicability of SEC Rule 10b-18 to issuers purchasing call options on their own stock, or to purchases by writers of such calls to hedge their position or to acquire stock to deliver upon exercise of the call option. Accordingly, the Option Subcommittee's interpretive position in no way affects or changes the operation of any provision of SEC Rule 10b-18 or the availability of the safe harbor afforded by the rule. It is up to NASD members and issuers to determine when they are within the parameters of the safe harbor afforded by SEC Rule 10b-18.
Answers To Common Questions Concerning Position-Limits, Exercise Limits, And Reporting Requirements
Scope Of The NASD Options Rules
Question #1: Do equity option position limits apply to conventional options with transfer restrictions?
Answer: Yes. A transfer restriction does not make an option any less an option; it is an attribute of an option that is negotiated between the writer and holder of the option. Moreover, the regulatory purposes served by position limits (i.e., prevention of market manipulation and market disruption) are no less compelling for options with transfer restrictions.
Question #2: Do equity option position limits apply to foreign securities?
Answer: Yes. The position-limit rule makes no distinction between U.S. securities and foreign securities. Accordingly, if the foreign security is not subject to options trading in the United States, the position limit will be 4,500 contracts. However, because differences in securities trading practices between U.S. and domestic markets (i.e., units of trading, price levels, etc.) may be pronounced, application of the 4,500 contract position limit to foreign securities not subject to standardized options trading in the U.S. may unnecessarily constrain members' conventional options activities. Accordingly, under appropriate circumstances, the Options Subcommittee may determine that a higher position limit for a foreign security is warranted because the differences between the U.S. equities market and a foreign equities market constitute unusual circumstances.
Question #3: Are standardized equity options listed and traded on markets located outside the U.S. subject to the NASD position-limit rule?
Answer: No. The rules of the foreign exchange on which the option is listed and traded determine the applicable position limit.
Question #4: Do equity option position limits apply to cash-settled options?
Answer: Yes. The fact that an equity option is cash-settled does not exempt it from any provisions of Section 33 of the Rules of Fan-Practice, the instrument underlying the option (i.e., an equity security) is the determinative factor. A cash-settled equity option presents the same market manipulation and market disruption concerns as a physically settled equity option.
Question #5: Do the NASD options rules apply to conventional option transactions effected abroad by an NASD member or a foreign branch of an NASD member?
Answer: Yes. If the option is booked and carried with an NASD member, it is subject to the NASD position-limit rule.
Question #6: Do equity option position limits apply to options on preferred stock, American Depositary Receipts, or closed-end country funds?
Answer: For standardized options on these securities, members are obligated to adhere to the position-limits established by the options exchanges. For conventional options on these securities, the NASD interprets common stock to include these instruments. Thus, conventional options on these securities also are subject to the position limits.
Question #7: Do the position limits apply to options on debt instruments?
Answer: No.
Question #8: Are conventional stock index options subject to position limits?
Answer: No, but they are subject to the position-reporting requirements in Section 33(b)(5) of the Rules of Fair Practice.
Question #9: Do options position limits apply to options on foreign currencies?
Answer: No.
Question #10: Do equity option position limits apply to options written by the issuer of the security underlying the option?
Answer: No. Section 33(a) of the Rules of Fair Practice specifically provides that issuer-written options are not considered options for purposes of Section 33.
Question #11: Equity warrants sold by an issuer on its own stock have economic attributes similar to equity options. Are such warrants, therefore, subject to position and exercise limits?
Answer: No. Equity warrants issued by a company on its own stock, which typically are used to facilitate capital formation, are excluded from the definition of an option for purposes of Section 33.
Aggregation Of Positions
Question #12: Are positions in conventional equity options aggregated with standardized equity option positions for position-limit purposes?
Answer: Yes. All equity options overlying the same security are aggregated for position limit purposes.
Question #13: Are positions in conventional stock-index options aggregated with standardized stock-index option positions?
Answer: No. Only standardized stock-index options are subject to position limits.
Question #14: Assuming the position limit for an equity option is 4,500 contracts, can an investor enter into one contract covering 600,000 shares and not commit a position-limit violation?
Answer: No. Section 33(b)(2)(E) of the Rules of Fair Practice provides that if a stock option is granted covering some number of shares other than 100, then it is deemed to constitute as many options contracts as that other number of shares divided by 100. Therefore, in this case the options position would be deemed to be 6,000 contracts, not one contract
Question #15: How are equity options positions aggregated for position-limit purposes?
Answer: All standardized and conventional options in each options class (i.e., puts or calls) on the same side of the market are aggregated for position-limit purposes. Accordingly, long calls and short puts are aggregated and short calls and long puts are aggregated. For example, assuming ABC stock is subject to a 7,500 position limit, a member who is long 7,500 ABC calls may at the same time be long 7,500 ABC puts because long calls and long puts (or short calls and short puts) are on opposite sides of the market. However, a member who is long 5,000 ABC calls may not at the same time be short more than 2,500 ABC puts because these positions are on the same side of the market.
Question #16: With an equity option that is subject to a position limit of 4,500 contracts, can an investor hold 5,000 contracts on one side of the market and 4,500 on the other and be in compliance with the position limits because there is net only 500 contracts on one side of the market?
Answer: No. The position-limit rules do not permit netting of options positions on opposite sides of the market. Positions on each side of the market (i.e., long calls and short puts or short calls and long puts) are aggregated and evaluated independent from positions on the opposite side of the market.
Question #17: If a member has 300 contracts on one side of the market and 200 contracts on the other side of the market, must the member report these positions on a gross basis, even though the "net" position is only 100 contracts on one side of the market?
Answer: Yes. As with position limits, the reporting requirements do not permit the netting of positions on the opposite side of the market.
Hedge-Exemption Program
Question #18: How does one obtain a hedge exemption?
Answer: As long as the "hedged" position in excess of the basic limit of 4,500,7,500, or 10,500 contracts is hedged on a one-for-one basis with a corresponding long (or short) stock position (or securities readily convertible into, or economically equivalent to, such stock), the exemption is automatic. A member would be obligated to file a position report with the NASD Market Surveillance Department pursuant to Section 33(b)(5) of the Rules of Fair Practice, however. Under the pilot program, the largest options position that may be established (combining hedged and unhedged positions) may not exceed twice the basic position limit (i.e, 9,000,15,000, and 21,000 contacts, respectively).
Question #19: When relying on the hedge exemption, does the entire options position need to hedge a corresponding stock position?
Answer: No. For example, assuming XYZ is subject to a 7,500 contract position limit, a member who is long 750,000 shares of XYZ may be short up to 15,000 XYZ calls, since the "hedge" exemption contained in Section 33(a)(5) of the Rules of Fan-Practice permits the member to establish an options position up to 15,000 contracts in size. In this instance, 7,500 of the 15,000 contracts are permissible under the basic position limit contained in Section 33(b)(3)(A)(2) of the Rules of Fair Practice and the remaining 7,500 contracts are permissible because they are hedged by the 750,000 shares.
Question #20: How do the exercise limits apply to an options position that exceeds the basic position limit pursuant to the hedge exemption?
Answer: Under the hedge-exemption pilot program for equity options, the exercise limit is equivalent to the size of the options position established pursuant to the hedge-exemption program. Therefore, if the position limit for an option is 10,500 contracts and an investor has established a position of 21,000 contracts (10,500 unhedged and 10,500 hedged), the investor could exercise all 21,000 contracts during five consecutive business days.
Miscellaneous
Question #21: Who determines which position-limit tier is applicable to a particular equity option and how can members find out what the position limit is for a specific equity option?
Answer: If an equity option is subject to standardized options trading, the NASD position limit for that option is the same limit imposed by the options exchange trading the option. If the security underlying the option is not subject to standardized options trading, the applicable position limit is the lowest tier (i.e., 4,500 contracts). To find out the position limit for an option, members can contact the exchange on which the option trades or the NASD Market Surveillance Department. However, if a security not subject to standardized options trading would qualify for a position limit higher than 4,500 contracts if it had standardized options traded on it, the Options Subcommittee would consider granting a position limit exemption request for up to such higher position limit.
Question #22: How do you report options positions to the NASD?
Answer: Position report forms and instructions can be obtained by contacting the NASD Market Surveillance Department at (301) 590-6845.
Question #23: If a member reports a position in a standardized option to an options exchange, must the member also report the position to the NASD?
Answer: No. Only "access" firms must report their standardized options positions to the NASD. "Access" firms are NASD members that conduct a business in exchange-listed options but which are not members of any of the options exchanges upon which the options are listed and traded.
Question #24: If the issuer of a security underlying a conventional option declares a two-for-one stock split, would the position limit remain the same?
Answer: Section 33(b)(2)(E) of the Rules of Fair Practice provides that "[a] stock option contract which, when written, grants the right to purchase or sell 100 shares of common stock shall continue to be considered as one contract throughout its life, notwithstanding that, pursuant to its terms, the number of shares which it covers may be adjusted to reflect stock dividends, stock splits, reverse splits, or other similar actions by the issuer of such stock." Therefore, while the limit on the absolute number of contracts would remain the same, the parties to the options contract may mutually agree to adjust the number of shares covered by the options contract to reflect the stock split. Accordingly, in this example, the option contract could be modified to cover 200 shares instead of 100 shares and the applicable position limit would remain the same.
Question #25: What happens to outstanding conventional option positions if the position limit for an option is decreased from 10,500 contracts to 7,500 contracts?
Answer: For conventional option positions outstanding at the time of the decrease, the position limit would remain the same. For conventional options positions established after the decrease, the position limit would be the limit determined according to the three-tiered position limit structure (i.e., 4,500,7,500, or 10,500 contracts).
Questions concerning this Notice may be directed to Thomas Gira, Assistant General Counsel, Office of General Counsel, at (202) 728-8957 or Joseph Alotto, Special Investigator, Market Surveillance, at (301) 590-6845.
1 "Access" firms are NASD members that conduct a business in exchange-listed options but which are not members of any of the options exchanges upon which the options are listed and traded.
2 For a description of the trading volume and float parameters used to determine applicable equity option position limits, see, e.g., Commentary .07 to American Stock Exchange Rule 904 and Interpretations and Policies .02 to Chicago Board Options Exchange Rule 4.11.
3See Securities Exchange Act Release No. 33432 (January 5, 1994), 59 FR 1979.
4See Securities Exchange Act Release No. 33783 (March 18, 1994), 59 FR 14229.
5 The NASD will determine on a case-by-case basis whether an instrument that is being used as the basis for the underlying hedged position is readily convertible into, or economically equivalent to, the security underlying the corresponding option position. In this connection, the NASD will find that an instrument which is not presently convertible into a security, but which will be at a future date, is not a readily "convertible" security for purposes of the hedge-exemption pilot program. In addition, the NASD notes that if a convertible security used to hedge an option position is called for redemption by the issuer, the security would have to be converted into the underlying security immediately or the corresponding option position reduced accordingly. For further guidance in this area, see also the NASD Board of Governor's Prompt Receipt and Delivery of Securities Interpretation issued under Article HI, Section 1 of the NASD Rules of Fair Practice. Specifically, Section (b)(5)(a) of the Interpretation provides some guidelines as to positions that are bona fide fully hedged for purposes of the NASD "affirmative determination" requirements for short sales. While Section (b)(5)(a) of the Interpretation provides some guidance, the staff must determine on a case-by-case basis whether an instrument is readily convertible into, or economically equivalent to, the security underlying the corresponding hedging options position.
6See, supra, note 1.
Text Of Amendments To Section 33 Of The NASD Rules Of Fair Practice
(Note: New language is underlined; deletions are in brackets.)
Section 33(b)(3) Position Limits
(a) Stock Options—Except in highly unusual circumstances and with the prior written approval of the Corporation in each instance, no member shall effect for any account in which such member has an interest, or for the account of any partner, officer, director or employee thereof, or for the account of any customer, an opening transaction through the
Nasdaq [NASDAQ] System, the over-the-counter market or on any exchange in a stock option contract of any class of stock options if the member has reason to believe that as a result of such transaction the member or partner, officer, director or employee thereof, or customer would, acting alone or in concert with others, directly or indirectly, hold or control or be obligated in respect of an aggregate position in excess of:
(1) 4.500 [3,000] option contracts of the put class and the call class on the same side of the market covering the same underlying security, combining for purposes of this position limit long positions in put options with short positions in call options, and short positions in put options with long positions in call options; or
(2) 7.500 [5,500] options contracts of the put class and the call class on the same side of the market covering the same underlying security, providing that the 7.500 [5,500] contract position limit shall only be available for option contracts on securities which underlie Nasdaq [NASDAQ] or exchange-traded options qualifying under applicable rules for a position limit of 7.500 [5,500] option contracts; or
(3) 10.500 [8,000] option contracts of the put class and the call class on the same side of the market covering the same underlying security, providing that the 10.500 [8,000] contract position limit shall only be available for option contracts on securities which underlie Nasdaq [NASDAQ] or exchange-traded options qualifying under applicable rules for a position-limit of 10.500 [8,000] option contracts; or
(4) such other number of stock options contracts as may be fixed from time to time by the Corporation as the position limit for one or more classes or series of options provided that reasonable notice shall be given of each new position limit fixed by the Corporation.
(5) Equity Option Hedge Exemption
(a) The following positions, where each option contract is "hedged" by 100 shares of stock or securities readily convertible into or economically equivalent to such stock, or, in the case of an adjusted option contract, the same number of shares represented by the adjusted contract, shall be exempted from established limits contained in (1) through (4) above: (i) long call and short stock; (ii) short call and long stock; (iii) long put and long stock; (iv) short put and short stock.
(b) In no event, however, may position limits for any class of stock options exceed twice the limits established by this subparagraph (3).
(c) The Equity Option Hedge Exemption is a pilot program authorized by the Securities and Exchange Commission through December 31, 1995.
The following examples illustrate the operation of position limits established by subparagraph (3)
(all examples assume a position limit of 4,500 contracts):
(a) Customer A, who is long 4.500 [3,000] XYZ calls, may at the same time be short 4.500 [3,000] XYZ calls, since long and short positions in the same class of options (i.e., in calls only, or in puts only) are on opposite sides of the market and are not aggregated for purposes of sub paragraph (3).
(b) Customer B, who is long 4.500 [3,000] XYZ calls, may at the same time be long 4.500 [3,000] XYZ puts. Subparagraph (3) does not require the aggregation of long call and long put (or short call and short put) positions, since they are on opposite sides of the market.
(c) Customer C, who is long 1,700 XYZ calls, may not at the same time be short more than 2.800 [1,300] XYZ puts, since the 4.500 [3,000] contract limit applies to the aggregation of long call and short put positions in options covering the same underlying security. Similarly, if Customer C is also short 1,600 XYZ calls, he may not at the same time be long more than 2,900 [1,400] puts, since the 4.500 [3,000] contract limit applies separately to the aggregation of short call and long put positions in options covering the same underlying security.
(d) Customer D. who is short 450.000 shares of XYZ. may be long up to 9.000 XYZ calls, since the "hedge" exemption contained in sub paragraph (3)(A)(5) permits Customer D to establish an options position up to 9.000 contracts in size. In this instance. 4.500 of the 9.000 contracts are permissible under the basic position limit contained in sub paragraph (3) and the remaining 4.500 contracts are permissible because they are hedged by the 450.000 short stock position.
(b) Index Options—Except in highly unusual circumstances and with the prior written approval of the Corporation in each instance, no member shall effect for any account in which such member has an interest, or for the account of any partner, officer, director or employee thereof, or for the account of any customer, an opening transaction in an option contract of any class of index options displayed on the Nasdaq [NASDAQ] System or dealt in on an exchange if the member has reason to believe that as a result of such transaction the member or partner, officer or employee thereof, or customer, would, acting alone or in concert with others, directly or indirectly, hold or control or be obligated in respect of an aggregate position in excess of position limits established by the Corporation, in the case of Nasdaq [NASDAQ] Index Options, or the exchange on which the option trades.
In determining compliance with this subparagraph (3), option contracts on a market index displayed in the Nasdaq [NASDAQ] System shall be subject to a contract limitation fixed by the Corporation, which shall not be larger than the equivalent of a $300 million position. For this purpose, a position shall be determined by the product of the closing index value times the index multiplier times the number of contracts on the same side of the market.
(c) Index option contracts shall not be aggregated with option contracts on any stocks whose prices are the basis for calculation of the index.
(d) The Corporation will notify the Securities and Exchange Commission at any time it approves a request to exceed the limits established pursuant to this subparagraph.
Section 33(b)(4) Exercise Limits Except in highly unusual circumstances and with the prior written approval of the Corporation, in each instance, no member or person associated with a member shall exercise, for any account in which such member or person associated with a member has an interest, or for the account of any partner, officer, director or employee thereof or for the account of any customer, any option contract if as a result thereof such member or partner, officer, director or employee thereof or customer, acting alone or in concert with others, directly or indirectly, has or will have exercised within any five (5) consecutive business days a number of option contracts of a particular class of options in excess of the limits for options positions in subparagraph (b)(3). The Corporation may institute other limitations concerning the exercise of option contracts from time to time by action of the Corporation. Reasonable notice shall be given of each new limitation fixed by the Corporation.
Section 33(b)(5) Reporting of Options Positions
(a) Each member shall file with the Corporation a report with respect to each account in which the member has an interest, each account of a partner, officer, director or employee of such member, and each customer account, which has established an aggregate position of 200 or more option contracts (whether long or short) of the put class and the call class on the same side of the market covering the same underlying security or index, combining for purposes of this Section long positions in put options with short positions in call options and short positions in put options with long positions in call options.
Such report shall identify the person or persons having an interest in such account and shall identify separately the total number of option contracts of each such class comprising the reportable position in such account. The report shall be in such form as may be prescribed by the Corporation and shall be filed no later than the close of business on the next business day following the day on which the transaction or transactions requiring the filing of such report occurred. Whenever a report shall be required to be filed with respect to an account pursuant to this subsection, the member filing such shall file with the Corporation such additional periodic reports with respect to such account as the Corporation may from time to time prescribe.
(b) In addition to the reports required by subparagraph (a) above, each member shall report promptly to the Corporation any instance in which such member has a reason to believe that a person, acting alone or in concert with others, has exceeded or is attempting to exceed the position limits or the exercise limits set forth in subparagraphs (b)(3) and (4).
