[Federal Register Volume 75, Number 121 (Thursday, June 24, 2010)]
[Notices]
[Pages 36130-36132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15248]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62321; File No. SR-NYSEArca-2010-46]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Amending Commentary
.01 to Rule 5.32 To Permit Certain FLEX Options To Trade Under the FLEX
Trading Procedures for a Limited Time on a Closing Only Basis
June 17, 2010.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that on June 2, 2010, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend Commentary .01 to Rule 5.32, Terms
of FLEX Options, to permit certain FLEX Options to trade under the FLEX
Trading Procedures for a limited time. The text of the proposed rule
change is attached at Exhibit 5 to the 19b-4 form. A copy of this
filing is available on the Exchange's Web site at http://www.nyse.com,
on the Commission's Web site at http://www.sec.gov, at the Exchange's
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, 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 those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to allow certain FLEX options, which
are identical in all terms to a Non-FLEX option, to trade using FLEX
Trading Procedures for the balance of the trading day on which the Non-
FLEX Option is added as an intra-day add.
The Exchange recently adopted rule changes to allow FLEX options to
expire within two business days of a third-Friday-of-the-month
expiration, including expiration Friday (``expiration FLEX'').\4\ Such
FLEX Options could have either an American Style exercise or a European
Style exercise. The same rule change also allowed for FLEX Index
Options to expire on or within two business days of a third-Friday-of-
the-month expiration, provided they only have an exercise settlement
value on the expiration date determined by reference to the reported
level of the index as derived from the opening prices of the component
securities (``a.m. settlement'').
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\4\ See Exchange Act Release No. 60549, SR-NYSE-Arca-2009-75
(August 20, 2009), 74 FR 44415 (August 28, 2009).
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The rule change provided that expiration FLEX options will be
permitted before (but not after) Non-FLEX Options with identical terms
are listed. Once and if an option series is listed for trading as a
Non-FLEX Option series, (i) all existing open positions established
under the FLEX Trading procedures shall be fully fungible with
transactions in the respective Non-FLEX Options series, and (ii) any
further trading in the series would be as Non-FLEX Options subject to
the Non-FLEX trading procedures and rules.
The Options Clearing Corporation (``OCC'') became concerned that,
in certain circumstances, in the event a Non-FLEX Option is listed with
identical terms to an existing FLEX option, OCC could not net the
positions in the contracts until the next business day. If the Non-FLEX
Option were listed intra-day, and the holder of a position in the FLEX
option attempted to close the position using the Non-FLEX Option, the
holder would be technically long in one contract and short in the other
contract. This would expose the holder to assignment risk until the
next day despite having offsetting positions.
The limited circumstances are:
The Non-Flex Option is listed intra-day.
The FLEX contract is for American style exercise.
All other terms are identical and the contracts are
otherwise fungible.
The risk does not occur in expiration Friday FLEX option positions
during the five days prior to expiration, as no new Non-FLEX Option
series may be listed within five days of expiration. It also does not
exist for FLEX option positions that will be identical to Non-FLEX
series to be added after expiration, as those new series are added
``overnight'' and OCC will convert the FLEX position to the Non-FLEX
Options series at the time the Non-FLEX series is created. Further, it
does not exist for FLEX Index Options listed on NYSE Arca, as Non-FLEX
Index options currently traded on
[[Page 36131]]
NYSE Arca are all European style exercise, and thus the Non-FLEX Index
Options cannot be exercised on the day the series is listed.
As an example, suppose underlying issue XYZ, trading around $25 per
share, has options listed on the March cycle, and in February an
investor wishes to buy just-out-of-the-money call options that will
expire in May. Since the Non-FLEX May Options will not be listed until
after the March expiration, the investor enters a FLEX Option order in
February to buy 250 Call 30 options expiring on the third Friday of
May. If, as expected, the Non-FLEX May 30 call options are listed on
the Monday after March expiration, the investor's open FLEX position
will be converted by OCC over the weekend following March expiration to
the Non-FLEX series.
However, if XYZ stock should decline between the time of the FLEX
transaction and March expiration, the May 30 calls may not be added
after March expiration. If that were to occur, the May 30 calls may be
added sometime later. Suppose the Exchange receives a request to add
the May 30 calls on the morning of the Wednesday after expiration, and
the Exchange lists them immediately. The investor with the FLEX
position may then decide it is an opportune time to close his position.
Under current rules, the investor would be required to close the
position by entering a sell order in the new Non-FLEX Option series.
However, when the Non-FLEX transaction is reported to OCC, the investor
is considered short in the Non-FLEX Option series, and is still long in
the FLEX Option. OCC cannot aggregate the FLEX positions into the Non-
FLEX series until after exercise and assignment processing. If a buyer
in the new Non-FLEX series were to exercise the options, the original
investor who had attempted to close the FLEX position with an
offsetting Non-FLEX trade would be at risk of being assigned on the
technically short Non-FLEX position.
Because of this risk, OCC will not clear an American style
expiration Friday FLEX option. The Exchange has spoken to OCC, and OCC
has agreed that allowing the holder of an open position in a FLEX
contract to close the position using a FLEX option in such
circumstances will mitigate the risk.
The assignment risk does not exist if the Non-FLEX option is to be
added the next trading day. In situations where OCC is aware that a
series will be added overnight, they can convert the FLEX Position to a
Non-FLEX position before the next trading day. However, OCC cannot
guarantee that an identical Non-FLEX series will not be added intra-
day, and thus will not clear such American style FLEX options.
NYSE Arca is proposing a limited exception to the requirement that
the trading in such options be under the Non-FLEX Trading Procedures.
The Exchange proposes that, in the event a Non-FLEX Option is listed
intra-day, the holder of a FLEX Option with identical terms could close
the FLEX position under the FLEX Trading procedures, but only for the
balance of the trading day on which the series is added. Under the
proposed rule change, both sides of the FLEX transaction would have to
be closing only positions.
This change will allow the holder of a FLEX position to trade in
such a manner to mitigate the assignment risk.
A FLEX Post Official \5\ has the regulatory responsibility for
reviewing the conformity of FLEX trades to the terms and specifications
contained in Rule 5.32. In the event a Non-FLEX series, having the same
terms as an existing expiration Friday FLEX option, is listed intra-
day, the FLEX Post Official will review any subsequent FLEX
transactions in that series and verify that the order is being executed
for the purpose of closing out an existing FLEX position. The FLEX Post
Official will not disseminate a FLEX Request for Quote for any order
representing a FLEX series having the same terms as a Non-FLEX series,
unless such FLEX order is a closing order (and it is the day the Non-
FLEX series has been added). In addition, if the FLEX Post Official
were to disseminate a FLEX Request for Quotes for a closing order
representing a FLEX series having the same terms as a Non-FLEX series,
the FLEX Post Official would only accept response quotes and orders
from Options Trading Permit (``OTP'') Holders that were closing out an
existing FLEX position.
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\5\ FLEX Post Officials are Exchange employees designated
pursuant to Rule 5.38(a).
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The NYSE Regulatory Department reviews FLEX trading activity, and,
in the event a non-FLEX series with the same terms as an expiration
Friday FLEX option is listed intra-day, will review any subsequent FLEX
transactions in the series to verify that they are closing a
position.\6\
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\6\ Through a Regulatory Services Agreement (``RSA'') between
NYSE Regulation, Inc. (``NYSE Regulation'') and NYSE Arca, staff of
NYSE Regulation conducts, among other things, surveillances of the
NYSE Arca options trading platform for purposes of monitoring
compliance with the relevant trading rules by NYSE Arca
participants. NYSE Arca represents that, through this RSA, there are
appropriate surveillance in place to monitor transactions in FLEX
options.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) \7\ of the Securities Exchange Act of 1934 (the ``Act''),
in general, and furthers the objectives of Section 6(b)(5) \8\ in
particular in that it is designed to promote just and equitable
principles of trade, to prevent fraudulent and manipulative acts, to
remove impediments to and to perfect the mechanism for a free and open
market and a national market system and, in general, to protect
investors and the public interest, by giving OTP Holders, OTP Firms,
and investors with additional tools to trade customized options in an
exchange environment while allowing the holder of a FLEX position to
trade in such a manner as to mitigate inadvertent assignment risk.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \9\ and Rule 19b-4(f)(6) thereunder.\10\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-
4(f)(6)(iii) thereunder.\12\
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\9\ 15 U.S.C. 78s(b)(3)(A)(iii).
\10\ 17 CFR 240.19b-4(f)(6).
\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires that a self-regulatory organization submit to the
Commission written notice of its intent to file the proposed rule
change, along with a brief description and text of the proposed rule
change, at least five business days prior to the filing of the
proposed rule change, or such shorter time as designated by the
Commission. The Commission notes that the Exchange has satisfied
this requirement.
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[[Page 36132]]
At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-NYSEArca-2010-46 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2010-46. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of the
Exchange. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File No. SR-
NYSEArca-2010-46 and should be submitted on or before July 15, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15248 Filed 6-23-10; 8:45 am]
BILLING CODE 8010-01-P