[Federal Register Volume 75, Number 159 (Wednesday, August 18, 2010)]
[Notices]
[Pages 51126-51128]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20470]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62706; File No. SR-NYSEArca-2010-76]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by NYSE Arca, Inc. Amending Rule
6.24 Exercise of Options Contracts
August 12, 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 August 3, 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 Rule 6.24--Exercise of Options
Contracts. The text of the proposed rule change is attached as 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, at the Exchange's principal
office, at the Commission's Public Reference Room, and on the
Commission's Web site at http://www.sec.gov.
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 the proposed rule change is to amend Rule 6.24 in
order to, (i) extend the cut-off time to submit Contrary Exercise
Advices (``CEA'') \4\ to the Exchange, and (ii) make a technical change
to the rule by revising all Pacific Time (``PT'') references to reflect
Eastern Time (``ET'').\5\
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\4\ Contrary Exercise Advices are also referred to as Expiring
Exercise Declarations (``EED'').
\5\ Presently, all referenced times in Rule 6.24 are noted in
Pacific Time.
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Change in Cut-Off Time
The Options Clearing Corporation (``OCC'') has an established
procedure, under OCC Rule 805, that provides for the automatic exercise
of certain options that are in-the-money by a specified amount known as
``Exercise-by-Exception'' or ``Ex-by-Ex.'' Under the Ex-by-Ex process,
options holders holding option contracts that are in-the-money by a
requisite amount and who wish to have their contracts automatically
exercised need take no further action. However, under OCC Rule 805,
option holders who do not want their options automatically exercised or
who want their options to be exercised under different parameters than
that of the Ex-by-Ex procedures must instruct OCC of their ``contrary
intention.''
In addition to and separately from the OCC requirement, under NYSE
Arca Rule 6.24 option holders must file a CEA with the Exchange
notifying it of the contrary intention. Rule 6.24 is designed, in part,
to deter individuals from taking improper advantage of late breaking
news by requiring evidence of an option holder's timely decision to
exercise or not exercise expiring equity options. OTP Holders and OTP
Firms \6\ satisfy this evidentiary requirement by submitting a CEA form
directly to the Exchange, or by electronically submitting the CEA to
the Exchange through OCC's electronic communications system. The
submission of the CEA allows the Exchange to satisfy its regulatory
obligation to verify that the decision to make a contrary exercise was
made timely and in accordance with Rule 6.24.
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\6\ The term OTP refers to an Options Trading Permit issued by
the Exchange for effecting securities transactions on the Exchange.
OTP Holders and OTP Firms have the status of ``member'' of the
Exchange as that term is defined in Section 3 of the Securities
Exchange Act of 1934, as amended.
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Under Rule 6.24, option holders have until 2:30 p.m. PT (5:30 p.m.
ET) on the last business day before their expiration to make a final
decision to exercise or not exercise an expiring option that would
otherwise either expire or be automatically exercised. OTP Holders may
not accept CEA instructions from their customer or non-customer
accounts after 2:30 p.m. PT (5:30 p.m. ET). However, the current rule
gives OTP Holders and OTP Firms additional time to submit the CEA
instructions if they use an electronic submission process.\7\
Specifically, an OTP Holder or OTP Firm may currently submit CEA
instructions until 3:30 p.m. PT (6:30 p.m. ET) when using an electronic
submission.
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\7\ If an OTP Holder does not employ an electronic submission
procedure, they are required to submit CEAs for non-customer
accounts by the 2:30 p.m. (5:30 p.m. ET) deadline. This deadline for
manual submission is required in order to prevent firms from
improperly extending the 2:30 p.m. (5:30 p.m. ET) deadline to
exercise or not exercise an option. This requirement is based on the
difficulty in monitoring a manual procedure that has different times
for deciding whether or not to exercise the option and for the
submission of the CEA.
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This current process allowing OTP Holders and OTP Firms an
additional one hour after the decision making cut off time of 2:30 p.m.
PT (5:30 p.m. ET) to submit a CEA to the various options exchanges was
approved by the Commission in 2003.\8\ In 2003, the Ex-by-Ex thresholds
were $0.75 for customers and $0.25 for broker-dealer accounts. In 2009,
the Ex-by-Ex threshold is $0.01 for all accounts. This decrease in the
Ex-by-Ex threshold, coupled with the dramatic increase in option
trading volume from 2003 to 2009, has led to a larger number of CEA
instructions and has increased the
[[Page 51127]]
burden on firms to process and submit instructions timely.
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\8\ See Securities Exchange Act Release Nos. 47885 (May 16,
2003), 68 FR 28309 (May 23, 2003) (SR-Amex-2001-92); 48505
(September 17, 2003), 68 FR 55680 (September 26, 2003) (SR-ISE-2003-
20); 48640 (October 16, 2003), 68 FR 60757 (October 23, 2003) (SR-
PCX-2003-47); and 48639 (October 16, 2003), 68 FR 60764 (October 23,
2003) (SR-Phlx-2003-65).
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The Exchange proposes to extend the current 3:30 p.m. PT (6:30 p.m.
ET) deadline for submitting CEA instructions to the Exchange by one
additional hour, up to 4:30 p.m. PT (7:30 p.m. ET). The Exchange
believes that this proposed rule change is necessary to address
concerns that, given the decrease in the Ex-by-Ex threshold and the
increase in trading, the existing deadline for submitting CEAs to the
Exchange is problematic for timely back-office processing. The proposed
additional one hour will address this concern by further enabling firms
to more timely manage, process, and submit the instructions to the
Exchange. The Exchange also proposes to modify the language in
subsection (g) of the current rule, which allows OTP Holders and OTP
Firms up to 2 hours and 30 minutes to submit a CEA to the Exchange in
the event of a modified close of trading on the day of expiration, by
removing the two hour and thirty minute restriction and allowing for
submission of a CEA to the Exchange in the event of a modified close of
trading of up to the proposed 4:30 p.m. PT (7:30 p.m. ET) deadline.
This will make consistent the submission deadline for both regular and
modified close expiration days. Moreover, this will provide uniformity
with submission deadlines for both regular and modified close
expiration days which will remove any possibility for error when
determining what the submission deadline is on any modified close
expiration day.
In addition, the Exchange proposes to revise Commentary .04(i) to
reflect that OTP Holders and OTP Firms, who electronically submit
Contrary Exercise Advice decisions on behalf of non-customer option
holders, will now have one additional hour, until 4:30 p.m. PT (7:30
p.m. ET), to submit such decisions to the Exchange.
This proposal does not change the substantive requirement that
option holders make a final decision by 2:30 p.m. PT (5:30 p.m. ET).
The options exchanges currently enforce the 2:30 p.m. PT (5:30 p.m. ET)
requirement while giving members additional time to process and submit
the CEA instructions. This proposal seeks to increase that additional
submission time by one hour, and the Exchange believes that this
proposal will be beneficial to the marketplace, particularly as it
concerns back-office processing. The initiative to address OTP Holder
concerns is industry-wide. The International Securities Exchange
recently adopted a rule change which extended, by one hour, the
submission time for CEAs.\9\ NYSE Arca anticipates that all other
options exchanges will also propose similar rule changes. This
additional processing time and Exchange submission deadline will not
conflict with OCC submission rules or cause any OCC processing issues.
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\9\ See Securities and Exchange Act Release No. 61710 (March 15,
2010), 75 FR 13636 (March 22, 2010) Approval order for SR-ISE-2010-
02.
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Technical Changes Related to Time Zones
All time references in current Rule 6.24 are reflected in Pacific
Time. Rule 6.24 dates back to when NYSE Arca (f/k/a The Pacific
Exchange) was headquartered in California and all business on the
Exchange was conducted on the physical trading floor.
While the Exchange still operates a trading floor in California,
OTP Holders and OTP Firms are no longer geographically limited to
California and able to conduct business from remote locations
throughout the country. NYSE Arca now proposes to remove references to
Pacific Time in Rule 6.24 and replace them with the more commonly
recognized Eastern Time. All existing and proposed time references in
Rule 6.24 will now be reflected as Eastern Time. This is simply a
technical change and does not alter the period of time that OTP Holders
and OTP Firms are afforded when making decisions to exercise options
contracts.
Implementation of Proposed Rule Change
If the operative date of this proposed rule change is more than
five business days prior to the date of the next options expiration
Friday, i.e., the third Friday of the month (``Expiration
Friday''),\10\ the Exchange will implement the rule change so as to be
effective for that Expiration Friday. If the operative date of this
proposed rule change is five business days or less prior to the date of
the next Expiration Friday, the Exchange will implement the rule change
so as to be effective for the following Expiration Friday. NYSE Arca
will notify OTP Holders of the implementation date of the rule change
via a Regulatory Bulletin.
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\10\ For example, Expiration Friday for August 2010 options will
be August 20, 2010, Expiration Friday for September 2010 options
will be September 17, 2010.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\11\ in
general, and furthers the objectives of Section 6(b)(5) of the Act,\12\
in particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest. This proposed
rule change will foster coordination with back office personnel engaged
in processing information and is consistent with the facilitating of
transactions in securities as set forth in Section 6(b)(5) in that it,
by providing OTP Holders and OTP Firms an additional hour within which
to complete the necessary processing of CEAs, will thereby decrease the
burden of processing an increasing number of contrary exercise advices
and enable OTP Holders and OTP Firms to more easily manage and process
these instructions.
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\11\ 15 U.S.C. 78f(b).
\12\ 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 Regarding 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
Because the foregoing 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 for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder.\14\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such
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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-2010-76 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-2010-76. 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
publicly available. All submissions should refer to File Number SR-
NYSEArca-2010-76 and should be submitted on or before September 8,
2010.
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\15\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20470 Filed 8-17-10; 8:45 am]
BILLING CODE 8010-01-P