[Federal Register Volume 75, Number 54 (Monday, March 22, 2010)]
[Notices]
[Pages 13636-13638]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-6204]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61710; File No. SR-ISE-2010-02]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Approving Proposed Rule Change To Amend Exchange Rules
Related to Cut-Off Time for Contrary Exercise Advice Submissions
March 15, 2010.
I. Introduction
On January 11, 2010, the International Securities Exchange, LLC
(the ``Exchange'' or the ``ISE'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change relating to the cut-off time for
submitting contrary exercise advices to the Exchange. The proposed rule
change was published for comment in the Federal Register on February 8,
2010.\3\ This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 61458 (February 1,
2010), 75 FR 6237.
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II. Description of the Proposal
The Exchange has proposed to amend Rule 1100 to extend the cut-off
time to submit contrary exercise advices (``CEAs'') \4\ to the Exchange
to 7:30 p.m. The Exchange also has proposed to make certain non-
substantive changes to reorganize the text of Rule 1100 to more clearly
present the existing requirements and to eliminate duplicative
language.
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\4\ Contrary exercise advices are also referred to as Expiring
Exercise Declarations in the OCC rules.
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Pursuant to Rule 805 of the Options Clearing Corporation (``OCC''),
certain options that are in-the-money by a specified amount will be
automatically exercised. This procedure is 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
[[Page 13637]]
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 parameters different than the Ex-by-Ex procedures
must instruct OCC of their ``contrary intention.'' Pursuant to ISE Rule
1100 option holders must also file a CEA with the Exchange notifying
the Exchange of the option holder's contrary intention. ISE Rule 1100
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 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 ISE Rule 1100.
ISE Rule 1100 currently provides option holders until 5:30 p.m. on
the day prior to expiration to make a final decision to exercise or not
exercise an 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.
The current rule, however, gives Exchange members up to 6:30 p.m. to
actually submit these CEA instructions to the Exchange where such
member uses an electronic submission process. Pursuant to the rule, 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 5:30 p.m. deadline for manual submission of CEAs for
non-customer accounts is earlier than the electronic submission
deadline to prevent firms from improperly extending the 5:30 p.m.
deadline to exercise or not exercise an option.\5\ In either case,
whether or not submitting the CEA electronically or manually, the final
decision to issue a CEA instruction must be made at 5:30 p.m.
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\5\ According to the Exchange, this requirement is based on the
difficulty of 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 of submitting CEAs was approved by the
Commission in 2003.\6\ The Exchange represents that 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 had narrowed significantly to
$0.01 for all accounts. The Exchange notes that 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 on a timely basis.
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\6\ 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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As a result of these concerns, the Exchange has proposed to extend
the current 6:30 p.m. deadline for electronic submission of CEA
instructions to the Exchange by one additional hour, to 7:30 p.m. In
its filing, the Exchange stated that the 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 trading, the
existing deadline for submitting CEAs to the Exchange is problematic
for timely back-office processing. According to the Exchange, 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 allow a member to submit a CEA to the
Exchange by 7:30 p.m. on a day when there is a modified close of
trading. The current rule allows a member to submit an electronic CEA
to the Exchange up to 2 hours and 30 minutes after the close of trading
on a day when there is a modified close of trading. The proposed rule
change will make the submission deadline for electronic CEAs on both
regular and modified close expiration days uniform and, according to
the Exchange, this should help to reduce errors.
The ISE noted in its filing that the proposed rule change does not
change the substantive requirement that option holders make a final
decision by 5:30 p.m. whether to exercise or not exercise an option
that would otherwise either expire or be automatically exercised. The
Exchange represented that it will continue to enforce the 5:30 p.m.
decision making requirement, while also allowing additional time to
process and submit the CEA instructions. As noted in the filing, the
Exchange believes that the proposed rule change will benefit the
marketplace, particularly back-office processing. The Exchange also
represents that the additional processing time and Exchange submission
deadline will not conflict with OCC submission rules or cause any OCC
processing issues.
III. Discussion and Commission's Findings
After careful review of the proposed rule change, the Commission
finds that the proposed rule change is consistent with the requirements
of the Act and the rules and regulations thereunder applicable to a
national securities exchange.\7\ In particular, the Commission finds
that the proposed rule change is consistent with the provisions of
Section 6(b)(5) of the Act,\8\ which requires, among other things, that
ISE rules must be 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 regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, 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.
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\7\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition and capital
formation. See 15 U.S.C. 78c(f).
\8\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed rule change is
appropriate because, by extending the deadline to submit electronic
CEAs from 6:30 p.m. to 7:30 p.m., the proposal should provide Exchange
members with sufficient additional time to process the CEAs submitted
by options holders which, according to the Exchange, have steadily
increased with the increased options trading volume of recent years and
the narrowing of the Ex-by-Ex threshold. Thus, consistent with Section
6(b)(5) of the Act,\9\ the proposal will foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, by addressing the back-office processing problems noted
by the Exchange that exist under the current 6:30 p.m. deadline for
electronic submission of CEAs.
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\9\ Id.
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In approving the proposal, the Commission emphasizes that the
Exchange is not changing the time by which options holders must notify
Exchange members of the contrary intention, which will remain at 5:30
p.m., and will continue to be enforced by the Exchange as it is
currently.
[[Page 13638]]
Because the deadline for options holders to make a decision to exercise
or not exercise an expiring option that would otherwise either expire
or be automatically exercised is not changing, the Commission also
believes that proposal will not compromise one key goal of the rule,
which is to prevent individuals from taking improper advantage of late-
breaking news.
The Commission also notes that the time for submission of CEAs for
non-customer accounts on a manual basis will remain at 5:30 p.m. The
Commission continues to believe that this time difference for manual
submissions is warranted given the potential difficulties in monitoring
compliance with a manual procedure, as noted by the Exchange.\10\
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\10\ See footnote 5 and accompanying text.
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The Commission also believes that the Exchange's proposal to change
the deadline for submitting CEAs to the Exchange to 7:30 p.m. on days
when there is a modified close of trading is appropriate. A uniform
deadline for submitting CEAs, irrespective of the closing time, will
eliminate any possibility for error when determining what the
submission deadline is on a modified close expiration day. As described
above, current rules set the deadline on modified close expiration day
at 2 hours and 30 minutes after the close. Since the modified close
time does vary on these modified days, the CEA times could vary as
well, which may have proved confusing to Exchange members. Thus, the
change to a 7:30 p.m. cut-off for all electronic submission of CEAs,
irrespective of the market's closing time, should help to avoid
confusion and reduce the potential for errors. Finally, the Commission
also finds that the Exchange's non-substantive changes to the text of
Rule 1100 to more clearly present the existing requirements and to
eliminate duplicative language is appropriate.
Based on the above, the Commission believes that the proposed rule
change is consistent with Section 6(b)(5) of the Act \11\ in that it
will prevent fraudulent and manipulative acts and practices, promote
just and equitable principles of trade, foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
protect investors and the public interest.
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\11\ 15 U.S.C. 78f(b)(5).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-ISE-2010-002) be, and it
hereby is, approved.
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\12\ 15 U.S.C. 78s(b)(2).
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. 2010-6204 Filed 3-19-10; 8:45 am]
BILLING CODE 8011-01-P