[Federal Register Volume 75, Number 159 (Wednesday, August 18, 2010)]
[Notices]
[Pages 51142-51145]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20471]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62710; File No. SR-Phlx-2010-109]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by NASDAQ OMX PHLX, Inc. To Amend
Exchange Rules Related to the Cut-Off Time for Contrary Exercise Advice
Submissions
August 12, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on August 3, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or
``Exchange'') filed with the
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Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I and II, below, which Items
have been prepared by the Exchange. 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\ 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 is filing with the Commission a proposal to amend Rule
1042 (Exercise of Equity Options Contracts) to extend the cut-off time
to submit contrary exercise advices (``Contrary Exercise Advices'' or
``CEAs'') \3\ to the Exchange. The Exchange also proposes to make
certain non-substantive changes to reorganize the text of Rule 1042 to
more clearly present the existing requirements and to eliminate
duplicative language.\4\
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\3\ Contrary Exercise Advices are also referred to as Expiring
Exercise Declarations (``EED'') in the rules of The Options Clearing
Corporation.
\4\ An Exchange Rule may have an Options Floor Procedure Advice
(``OFPA'' or ``Advice'') that corresponds to the rule. OFPA F-35
(Violations of Exercise and Exercise Advice Rules for Noncash-
Settled Equity Option Contracts) is a corresponding Advice to Rule
1042 and is part of the Exchange's minor rule plan. The Exchange's
minor rule plan consists of Advices with preset fines, pursuant to
Rule 19d-1(c) under the Act. 17 CFR 240.19d-1(c). For exercise
procedures in respect of index option contracts, see Rule 1042A
(Exercise of Option Contracts) and corresponding OFPA G-1 (Index
Options Exercise Advice Forms). The Exchange is not proposing any
changes to Rule 1042A or OFPAs F-35 or G-1.
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The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, at the principal office of the Exchange, on the Commission's
Web site at http://www.sec.gov, 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 Exchange 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 these 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 aspects 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 proposal is to make changes to Rule 1042 to
extend the cut-off time to submit Contrary Exercise Advices; to extend
exercise cut-off deadlines to Quarterly Options Series; and to make
certain non-substantive changes to reorganize the text of Rule 1042 to
more clearly present the existing requirements and to eliminate
duplicative language.\5\
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\5\ The Exchange proposes to reorganize the current rule text of
Rule 1042 so that the requirement that exercise decisions must be
made by 5:30 p.m. is specified in paragraph (c), while the
requirements pertaining to submitting CEA instructions are contained
in new paragraph (d). The language in new paragraph (d) is comprised
of language moved from paragraph (b)(ii) and paragraph (c) of the
current rule. The Exchange also proposes to eliminate Supplementary
Material .04 to Rule 1042 because it is duplicative of the language
contained in paragraph (c) of the current rule and paragraph (d) in
the proposal.
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Background
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
Exchange Rule 1042 option holders must file a CEA with the Exchange
notifying it of the contrary intention. Rule 1042 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. Members satisfy this
evidentiary requirement by submitting a CEA form 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 1042.
Currently under Rule 1042, option holders have until 5:30 p.m.\6\
on the day prior to expiration to make a final decision to exercise or
not exercise an expiring option that would otherwise either expire or
be automatically exercised. An Exchange member may not accept CEA
instructions from its customer or non customer accounts after 5:30 p.m.
However, the current rule gives Exchange members an additional one
hour, up to 6:30 p.m., to submit these CEA instructions to the Exchange
where such members use an electronic submission process.\7\
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\6\ Referenced times are Eastern Standard Time (EST).
\7\ Rule 1042 indicates that if members do not employ an
electronic submission procedure, they are required to submit CEAs
for non-customer accounts by the 5:30 p.m. deadline. This deadline
for manual submission is required in order to prevent firms from
improperly extending the 5:30 p.m. 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 members an additional one hour after
the decision making cut off time of 5:30 p.m. to submit a CEA to the
various options exchanges was approved by the Commission in 2003 for
the existing options exchanges; \8\ and for an additional options
exchange in 2008.\9\ When initially approved 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 was $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 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).
\9\ See Securities Exchange Act Release No. 57478 (May 12,
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080).
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The Proposals
The Exchange proposes to extend the current 6:30 p.m. deadline in
Rule 1042 for submitting CEA instructions to the Exchange by one
additional hour, up to 7:30 p.m. The Exchange believes that this
proposed rule change is necessary to address concerns expressed by
members that, given the decrease in the Ex-by-Ex threshold and the
increase in
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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 paragraph (g)
of the current rule (new paragraph (h)), which allows a member 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 a member to submit a
CEA to the Exchange in the event of a modified close of trading of up
to the proposed 7:30 p.m. 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.
It is important to note that this proposed submission deadline does
not change the substantive requirement that option holders make a final
decision by 5:30 p.m. The Exchange will continue to enforce the 5:30
p.m. decision making requirement, while also allowing 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. This proposed
additional processing time and Exchange submission deadline will not
conflict with OCC submission rules or cause any OCC processing issues.
The initiative to address Exchange member concerns is industry-wide,
and the Exchange anticipates that other options exchanges will also
propose a one hour extension for which they will accept a CEA.\10\
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\10\ The Commission approved a rule change proposal of the
International Stock Exchange LLC (``ISE'') related to extension of
the cutoff time for CEA submissions. See Securities Exchange Act
Release No. 61710 (March 15, 2010), 75 FR 13636 (March 22, 2010)
(SR-ISE-2010-02) (order approving). The Exchange's rule change
proposal is based on SR-ISE-2010-02, and the Exchange believes that
other options exchanges will submit similar filings to the
Commission.
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The Exchange also proposes to impose the same cutoff deadlines in
Rule 1042(c) to QOS as to non-QOS (e.g. equity) options. QOS are listed
and traded on the Exchange pursuant to Rule 1012 (Series of Options
Open for Trading). The proposed change reflects the applicability of
CEA cut-off deadlines to QOS options and conforms Rule 1042 with Rule
1012 and with the CEA rules of other options exchanges.\11\
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\11\ See, e.g., ISE Rule 1100(c).
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The Exchange recognizes that the industry-wide scope of the
Exchange's rule change proposal and other similar proposals will
require coordinated effectiveness of the expansion to 7:30 p.m. If the
operative date of this proposed rule change is more than five business
days prior to the date of the next expiration Friday, i.e. the third
Friday of the month (``Expiration Friday''),\12\ the Exchange will
implement its proposed 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. The Exchange will notify
its Participants of the implementation date of the rule change via an
Options Regulatory Alert (``ORA'') or Options Trader Alert (``OTA'').
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\12\ For example, Expiration Friday for August 2010 options will
be August 20, 2010, and Expiration Friday for September 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 Act \13\ in general, and furthers the objectives of Section
6(b)(5) of the Act \14\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, and to remove impediments to and perfect the mechanisms of
a free and open market and a national market system. 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), by
providing Exchange members an additional hour within which to complete
the necessary processing of CEAs and thereby decreasing Exchange
members' burden of processing an increasing number of contrary exercise
advices and enabling them to more easily manage and process these
instructions.
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\13\ 15 U.S.C. 78f(b).
\14\ 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 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 either solicited or received.
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 \15\ and Rule 19b-
4(f)(6) thereunder.\16\
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 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 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-Phlx-2010-109 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary,
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Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090.
All submissions should refer to File Number SR-Phlx-2010-109. 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-Phlx-2010-109 and should be
submitted on or before September 8, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20471 Filed 8-17-10; 8:45 am]
BILLING CODE 8010-01-P