Rule 704. Position Limits
This rule is no longer applicable effective February 17, 2009.
(a) Generally
Except with the prior written approval of the Exchange in each instance, no member or member organization shall effect, for any account in which such member or member organization has an interest or for the account of any member or employee of such member or member organization or for the account of any customer, an opening transaction (whether on the Exchange or on or through the facilities of, or otherwise subject to the rules of, another Participating Exchange or Association) in an option of any class if the member or member organization has reason to believe that as a result of such transaction the member or member organization or member or employee of such member or member organization or customer would, acting alone or in concert with others, directly or indirectly, control any aggregate position in options (whether long or short) of puts and calls on the same side of the market covering the same underlying stock or underlying stock group that is in excess of;
Except with the prior written approval of the Exchange in each instance, no member or member organization shall effect, for any account in which such member or member organization has an interest or for the account of any member or employee of such member or member organization or for the account of any customer, an opening transaction (whether on the Exchange or on or through the facilities of, or otherwise subject to the rules of, another Participating Exchange or Association) in an option of any class if the member or member organization has reason to believe that as a result of such transaction the member or member organization or member or employee of such member or member organization or customer would, acting alone or in concert with others, directly or indirectly, control any aggregate position in options (whether long or short) of puts and calls on the same side of the market covering the same underlying stock or underlying stock group that is in excess of;
(i) in the case of a transaction in a class of options that is dealt in on the Exchange, the number of contracts specified in or pursuant to paragraphs (b), (c) and (d) of this Rule; and
(ii) in the case of a transaction (A) that is in a class of options that is not dealt in on the Exchange and (B) that the Exchange member or member organization effects on an exchange of which it is not a member or member organization, such applicable position limits as the other exchange may from time to time establish, after taking into consideration any applicable exemption of the other exchange.
For purposes of this Rule, long positions in puts and short positions in calls, and short positions in puts and long positions in calls, shall be considered to be on the same side of the market.
(b) Stock Options
(i) In the case of stock options, the position limits are those prescribed in paragraph (b)(i) of this Rule, subject to the hedging exemption of paragraph (b)(ii) of this Rule:
(A) 25,000 contracts if
(1) the underlying stock had trading volume of at least 100 million shares during the most recent six-month trading period, or
(2) the underlying stock had trading volume of at least 75 million shares during the most recent six-month trading period and has at least 300 million shares currently outstanding; and
(B) 20,000 contracts if
(1) the underlying stock had trading volume of at least 80 million shares during the most recent six-month trading period, or
(2) the underlying stock had trading volume of at least 60 million shares during the most recent six-month trading period and has at least 240 million shares currently outstanding; and
(C) 10,500 contracts if
(1) the underlying stock had trading volume of at least 40 million shares during the most recent six-month trading period, or
(2) the underlying stock had trading volume of at least 30 million shares during the most recent six-month trading period and has at least 120 million shares currently outstanding; and
(D) 7,500 contracts if
(1) the underlying stock had trading volume of at least 20 million shares during the most recent six-month trading period, or
(2) the underlying stock had trading volume of at least 15 million shares during the most recent six-month trading period and has at least 40 million shares currently outstanding; and
(E) 4,500 contracts if none of the conditions specified in paragraphs (b)(i) (A), (B), (C) and (D) are present.
(ii) The following stock option positions, shall be exempted from the position limits prescribed in paragraph (b)(i) where each stock option contract is "hedged" by the number of shares of stock underlying the contract, or securities readily converted into or economically equivalent to that number of shares of such stock, subject to the liquidation requirement of Supplementary Material .60 of this Rule:
(A)
(1) long stock and short call and
(2) long stock and long put; or
(B)
(1) short stock and long call and
(2) short stock and short put.
In no event may the aggregate position, including contracts hedged pursuant to the equity hedge exemption set forth in this paragraph (b)(ii) and other exemptions for which this Rule 704 may provide, in stock options on the same underlying stock exceed three times the limit established by paragraph (b)(i) for such options.
(iii) The Exchange will review the volume and outstanding share information of all underlying stocks every six months to determine which limit shall apply. A higher limit will be effective on the date set by the Exchange while any change to a lower limit will take effect after the last expiration then trading, unless the requirement for the same or a higher limit is met at the time of an intervening six-month review. Should an increase in the underlying security share volume and/or shares outstanding occur during the six month period, thereby making a stock eligible for a higher position limit, the Exchange at its discretion may change the position limit immediately.
(c) Broad Index Options
In the case of broad index stock group options, the position limits are those prescribed in paragraph (c)(i) of this Rule, subject to the hedging exemption of paragraph (c)(ii) of this Rule:
In the case of broad index stock group options, the position limits are those prescribed in paragraph (c)(i) of this Rule, subject to the hedging exemption of paragraph (c)(ii) of this Rule:
(i) 45,000 contracts on the same side of the market covering the same underlying index stock group, no more than 25,000 of which may be of the series having the nearest expiration date (for reduced value index stock group options (as that term is defined in Paragraph (d) of Rule 703 (Series of Options Open for Trading), 450,000 contracts on the same side of the market covering the same underlying index stock group, no more than 250,000 of which may be of the series having the nearest expiration date).
(ii) Broad index stock group option positions established and held in the aggregate by a public customer of a member organization hall be exempted from the position limits prescribed in paragraph (c)(i) if not exceeding the number of contracts that the Exchange approves for hedging purposes pursuant to the procedures and according to the conditions specified in Supplementary Material .70 of this Rule. Such additional number of contracts shall be limited to the number of contracts for same-side positions in broad index stock group options that are specifically approved by the Exchange for a customer, up to a maximum of 125,000 contracts.
(d) Industry Index Options
(i) Subject to the procedures specified in paragraph (d)(iii) of this Rule, the Exchange shall establish a position limit with respect to options on each underlying industry index stock group of a number of contracts not exceeding:
(A) 5,500 if there are one or more dominant underlying stocks in the group;
(B) 7,500 if either
(1) any single stock in the group accounts for 20 percent or more of the index group value, or
(2) any five stocks in the group together account for more than 50 percent of the index group value.
(C) 10,500 contracts if none of the conditions specified in paragraphs (d)(i)(A) and (B) of this Rule are present.
(ii) The Exchange shall make the determinations anticipated by paragraph (d)(i) of this Rule with respect to options on each industry index stock group at the commencement on the Exchange of trading of such options and thereafter on the semi-annual review dates established by the Exchange from time to time for the purpose of making the required determinations simultaneously with respect to all classes on industry index stock groups. The determinations shall be based upon the average relative representation of the stocks within the group during the 30-day period immediately preceding the review.
(iii) If the Exchange determines, as a consequence of a semi-annual review, that the position limit in effect with respect to options on a particular industry index stock group is lower than the maximum position limit permitted by paragraph (d)(i) of this Rule, the Exchange may increase the position limit immediately. If the Exchange so determines that the position limit in effect with respect to options on a particular industry index stock group exceeds the maximum position limit permitted by paragraph (d)(i), the Exchange shall appropriately reduce the position limit. However, such a reduction shall not apply to any series then trading.
(e) End-of-Quarter Options
End-of-quarter options shall be subject to the position limitations set forth in paragraphs (c) and (d) of this Rule 704. In determining whether a position on an end-of-quarter option on a particular index stock group complies with the position limitations, that position will be aggregated with positions in other Exchange-traded options contracts on the same underlying index stock group. To the extent the Exchange establishes a multiplier for any end-of-quarter option other than 100, the number of contracts to be used in the position limit calculation shall be the number of such contracts multiplied by the multiplier and divided by 100.
End-of-quarter options shall be subject to the position limitations set forth in paragraphs (c) and (d) of this Rule 704. In determining whether a position on an end-of-quarter option on a particular index stock group complies with the position limitations, that position will be aggregated with positions in other Exchange-traded options contracts on the same underlying index stock group. To the extent the Exchange establishes a multiplier for any end-of-quarter option other than 100, the number of contracts to be used in the position limit calculation shall be the number of such contracts multiplied by the multiplier and divided by 100.
• • • Supplementary Material: --------------
.10 It shall be the responsibility of each member and member organization accepting orders for opening transactions (purchase or writing) in options to inform its customers of the applicable position limits and not to accept any such orders from any customer in any instance in which such member or member organization has reason to believe that such customer, acting alone or in concert with others, has exceeded or is attempting to exceed such position limits.
.20
(a) The Exchange will not approve any opening purchase or writing transaction or the carrying of any positions which would exceed the limits established by this Rule except in highly unusual circumstances. Requests for such approval should be directed in writing to the Exchange and must include a detailed statement of the facts justifying an exception to such position limits.
(b) The Exchange may establish higher position limits for specialists' transactions than those applicable with respect to other accounts. Whenever a specialist reasonably anticipates that he may exceed the position limits prescribed in this Rule in the performance of his function of assisting in the maintenance of a fair and orderly market, he must consult with and obtain the prior approval of the Exchange, with the concurrence of a Floor Official.
.30 For the purpose of determining whether positions in a class of options that is dealt in on the Exchange should be aggregated under this Rule, the term "control" means the power or ability to (1) make investment decisions for an account or (2) materially influence directly or indirectly the investment decision of any person who makes investment decisions for an account. A person or entity who has such power or ability shall be presumed to control such account unless the presumption is rebutted by evidence and a determination to the contrary has been made by the Exchange. Among the other circumstances where control will be presumed are as follows:
(a) among all parties to a joint account who have authority to act on behalf of the account;
(b) among all general partners to a partnership account;
(c) when an individual or entity (i) holds an ownership interest of 10 percent or more in an entity (ownership interest of less than 10 percent will not preclude aggregation), or (ii) shares in 10 percent or more of the profits and/or losses of an account;
(d) when accounts have common directors or management; and
(e) where a person or entity has the authority to execute transactions in an account.
.40 To determine if control exists in respect of a position in a class of options that is dealt in on the Exchange, the Exchange will consider the following, as well as other, relevant factors:
(a) similar patterns of trading activity among separate entities;
(b) the sharing of kindred business purposes and interests;
(c) whether there is common supervision of the entities which extends beyond assuring adherence to each entity's investment objectives and/or restrictions; and
(d) the degree of contact and communication between directors and/or managers of separate accounts.
.50 The presumption of control described in Supplementary Material .30 above can be rebutted by proving, by affidavit and/or such other documentary evidence as may be appropriate under the circumstances, that the factor does not exist or by showing other factors which negate the presumption of control. Upon submission to the Exchange such evidence will be reviewed, in light of the criteria described in Supplementary Material .40 and other relevant criteria, and a written determination will be provided to the person or entity making the request. Until such notification is received, positions in the accounts in question will be aggregated for purposes of determining compliance with the applicable limit.
.60 In order to comply with the stock options hedging exemption of paragraph (b)(ii) of this Rule 704, any excess options positions must be liquidated prior to or contemporaneously with any decrease in the hedged stock position.
.70 The following procedures and conditions shall govern the position limit exemption for broad index stock group option hedge positions for a public customer of a member organization under paragraph (c)(ii) of this Rule (a "hedge exemption customer").
(a) Exchange Approval
A hedge exemption customer must provide information as required on Exchange-approved forms and receive Exchange approval specifying a maximum number of contracts for an exemption under paragraph (c)(ii) of this Rule (an "approved exempted position limit") before establishing a position in reliance upon the paragraph. A hedge exemption customer may apply from time to time for an increase in his approved exempted position limit.
A hedge exemption customer must provide information as required on Exchange-approved forms and receive Exchange approval specifying a maximum number of contracts for an exemption under paragraph (c)(ii) of this Rule (an "approved exempted position limit") before establishing a position in reliance upon the paragraph. A hedge exemption customer may apply from time to time for an increase in his approved exempted position limit.
(b) Information Currency
A hedge exemption customer who establishes a position in reliance upon paragraph (c)(ii) of this Rule is under a continuing obligation to provide and keep current all information requested by the Exchange in connection with the position, and promptly to notify the Exchange of any material change related to the position, including the dollar value and composition of the customer's "qualified hedge portfolio", (as defined below in paragraph (c)), current hedged and aggregate broad index stock group option positions, and positions in stock index futures and options on those futures.
A hedge exemption customer who establishes a position in reliance upon paragraph (c)(ii) of this Rule is under a continuing obligation to provide and keep current all information requested by the Exchange in connection with the position, and promptly to notify the Exchange of any material change related to the position, including the dollar value and composition of the customer's "qualified hedge portfolio", (as defined below in paragraph (c)), current hedged and aggregate broad index stock group option positions, and positions in stock index futures and options on those futures.
(c) Stock Hedge Portfolio
In order to qualify for and maintain a position in reliance upon paragraph (c)(ii) of this Rule, a hedge exemption customer must have a previously-established portfolio of common stocks or equivalent securities readily convertible into or economically equivalent to a portfolio of common stocks ("qualified hedge portfolio") that at all times
In order to qualify for and maintain a position in reliance upon paragraph (c)(ii) of this Rule, a hedge exemption customer must have a previously-established portfolio of common stocks or equivalent securities readily convertible into or economically equivalent to a portfolio of common stocks ("qualified hedge portfolio") that at all times
(i) is net long or short in each component stock or security readily convertible or economically equivalent to common stock;
(ii) includes at least four industry groups;
(iii) comprises at least 20 stocks or their equivalents, none of which constitutes more than 15 percent of the portfolio in value; and
(iv) is carried in an account with a member organization.
(d) Available Hedge Value
The value of all contracts held in reliance upon paragraph (c)(ii) of this Rule may not exceed the "available hedge value" of the qualified hedge portfolio. The available hedge value of the qualified hedge portfolio is determined by:
The value of all contracts held in reliance upon paragraph (c)(ii) of this Rule may not exceed the "available hedge value" of the qualified hedge portfolio. The available hedge value of the qualified hedge portfolio is determined by:
(i) totaling the values of the net long or short positions for each of the stocks or their equivalents in the qualified hedge portfolio, and
(ii) subtracting the value of any economically offsetting positions held in (A) broad index stock group futures and (B) options on broad index stock group futures and (C) broad index stock group options.
(e) Approved Trades
A hedge exemption customer who holds a position in reliance upon paragraph (c)(ii) of this Rule thereby agrees to, and any member carrying an account for the customer shall:
A hedge exemption customer who holds a position in reliance upon paragraph (c)(ii) of this Rule thereby agrees to, and any member carrying an account for the customer shall:
(i) comply with all Exchange rules and regulations;
(ii) establish and liquidate options and stock positions or their equivalents in an orderly fashion;
(iii) not establish or liquidate positions in a manner calculated to cause unreasonable price fluctuations or unwarranted price changes;
(iv) not establish or liquidate a stock position or its equivalent contemporaneously with the establishment or liquidation of an equivalent broad index stock group option position with a view toward taking advantage of any differential between the prices of the stocks or their equivalents and the options;
(v) liquidate an offsetting portion of the options position prior to or contemporaneously with any decrease in the available hedge value of his qualified hedge portfolio; and
(vi) designate all options orders affecting the position as "hedge".
(f) Sanctions
Violation by a hedge exemption customer of any of these procedures or conditions, absent reasonable justification or excuse, shall result in withdrawal of his approved exempted position limit and may form the basis for a denial of his subsequent application for an approved exempted position limit.
Violation by a hedge exemption customer of any of these procedures or conditions, absent reasonable justification or excuse, shall result in withdrawal of his approved exempted position limit and may form the basis for a denial of his subsequent application for an approved exempted position limit.
.80 For the purpose of determining compliance with paragraph (c) above, reduced value options on broad index stock groups must be aggregated with full value options on the same broad index stock group. For aggregations purposes, 10 reduced value index stock group option contracts equals one full value index stock group option contract.
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Amendments. September 22, 1983. February 17, 1984. August 17, 1984. February 13, 1985. May 31, 1985. March 20, 1986. March 8, 1990. January 7, 1992. January 5, 1995. May 18, 1995. October 23, 1995. August 2, 1996. Amended by SR-FINRA-2008-036 eff. Nov. 11, 2008. Selected Notice: 08-64. |