Federal Register / Vol. 77, No. 56 / Thursday, March 22, 2012 / Notices 16883 

44See Notice, supra note 3, 77 FR at 5077. 

45See Exchange Rules 1012 and 1101A. 

46 15 U.S.C. 78s(b)(2). 

47 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Under ISE Rule 2009(b), ‘‘Long-Term Index 

Options Series,’’ the Exchange may list long-term 

options that expire from 12 to 60 months from the 

date of issuance. 

the liquidity of the markets for these six 

currencies. Specifically, the Exchange 

has represented that the six major 

foreign currencies that underlie PHLX 

FOREX Options are all within the top 

ten most traded foreign currencies in the 

world, and represent a 72.9% share of 

the daily market turnover (excluding 

U.S. dollars).44 Accordingly, the 

Commission believes that the proposed 

position limits are consistent with the 

Act. 

Further, PHLX FOREX Options 

contracts will be aggregated with FCO 

contracts for position and exercise limit 

purposes. The Commission believes that 

aggregation of PHLX FOREX Options 

contracts with FCOs on the same 

underlying currency for purposes of 

position and exercise limits is 

appropriate and designed to address 

concerns with the potential for 

manipulation or disruptions of the 

markets for PHLX FOREX Options 

contracts and FCOs. 

D. Other Rules 

The Commission believes that the 

other rule changes proposed by the Phlx 

to accommodate the trading of PHLX 

FOREX Options are consistent with the 

Act. First, the Commission believes that 

the procedure for opening initial 

months and series and setting expiration 

terms is appropriate and consistent with 

the Exchange’s rules for equity and 

index options on the Exchange.45

Specifically, the Exchange will open a 

minimum of one expiration month and 

series for each class of options open for 

trading on the Exchange, and the 

exercise price will be fixed at a price 

that is reasonably close to the current 

spot market price of the underlying 

foreign currency at or before the time 

such series of options is first opened for 

trading. 

Further, the Commission believes it is 

reasonable for the Phlx to initially list 

exercise strike prices within a 40 

percent band around the current spot 

market price for an underlying currency 

for a PHLX FOREX Option. The 

Commission also believes that it is 

consistent with the Act for the Exchange 

to establish the proposed minimum 

trading increments for PHLX FOREX 

Options. The Commission notes that the 

Phlx has represented that it has the 

systems capacity to support the 

additional quotations and messages that 

will result from listing options on PHLX 

FOREX Options. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,46 that the 

proposed rule change (SR–Phlx–2012– 

11) be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.47

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–6867 Filed 3–21–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66614; File No. SR–ISE– 

2012–22] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Notice of Filing of Proposed Rule 

Change To Add an Index Option 

Product for Trading on the Exchange 

March 16, 2012. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on March 9, 

2012, the International Securities 

Exchange, LLC (the ‘‘Exchange’’ or the 

‘‘ISE’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’) 

the proposed rule change as described 

in Items I and II below, which items 

have been prepared by the selfregulatory organization. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange is proposing to amend 

its rules to trade options on the ISE Max 

SPY TM Index (‘‘ISE Max SPY’’), a 

newly-developed, ISE proprietary index 

(patent pending). The ISE Max SPY is 

designed to represent 10 times the value 

of the published prices in the SPDR®

S&P 500® ETF Trust. The Exchange also 

proposes to list and trade long-term 

options on the ISE Max SPY. Options on 

the Max SPY will be p.m. cash-settled 

and will have European-style exercise 

provisions. 

The text of the proposed rule change 

is available on the Exchange’s Internet 

Web site at http://www.ise.com, at the 

principal office of the Exchange, 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 these statements may be examined at 

the places specified in Item IV below. 

The self-regulatory organization 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 Exchange proposes to amend its 

Rules 2001, 2004 and 2009 to provide 

for the listing and trading of options on 

the ISE Max SPY TM index, a newlydeveloped, ISE proprietary index 

(patent pending). The ISE Max SPY is 

designed to represent 10 times the value 

of the published share prices in the 

SPDR® S&P 500® ETF Trust. In addition 

to options on the ISE Max SPY, the 

Exchange may list long-term options on 

ISE Max SPY.3 Options on the ISE Max 

SPY will be P.M. cash-settled and will 

have European-style exercise 

provisions. 

The ISE Max SPY Index is 

constructed using the share prices of the 

SPDR® S&P 500® ETF Trust (the 

‘‘Trust’’, which is commonly known by 

its exchange symbol ‘‘SPY’’). According 

to the Trust’s prospectus, SPY is based 

on the S&P 500®, which is a 

capitalization-weighted index of 500 

stocks from a broad range of industries. 

The component stocks are weighted 

according to the total market value of 

their outstanding shares. The impact of 

a component’s price change is 

proportional to the issue’s total market 

share value, which is the share price 

times the number of shares outstanding. 

These are all summed for all 500 stocks 

and divided by a predetermined base 

value. The base value for the S&P 500®

is adjusted to reflect changes in 

capitalization resulting from, among 

other things, mergers, acquisitions, 

stock rights and substitutions. The ISE 

Max SPY is calculated by multiplying 

the share prices of SPY by a factor of 10 

and rounding to the tenths place. For 

example, if the share price for SPY is 


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4The Exchange will also disseminate these values 

to its members. 

5The settlement value that the Exchange 

calculates may be different from the NAV published 

by the trustee of the Trust. According to the 

prospectus of the Trust, the trustee may deem 

prices of the Trust’s portfolio securities to be 

inappropriate, and may use the prices of another 

market other than the NYSE, or may appraise the 

value of the securities itself. Additionally, the Trust 

uses the NYSE’s closing prices of all the portfolio 

securities even though several of those securities 

are not listed on the NYSE (as of the close on 

February 24, 2012, one hundred components of the 

SPY portfolio, which represented 20% of the total 

portfolio count and 21.74% of the weighting, were 

listed on Nasdaq). In calculating ISE Max SPY, the 

Exchange uses the published closing prices from 

the primary market of those securities. 

112.35 then the ISE Max SPY value 

would yield a value of 1123.50 for the 

ISE Max SPY. 

The Exchange believes that the 

proposed product would benefit 

investors in several ways. First, the 

European exercise style will allow 

investors to engage in certain trading 

strategies involving in-the-money 

options without the risk of being 

assigned prior to expiration. The 

Exchange also notes that options with a 

European exercise style may exhibit 

lower premiums than those with an 

American exercise style, all other terms 

being equal, because the risks of early 

assignment may contribute to higher 

prices for options with an American 

style exercise. Further, the cashsettlement feature would allow 

investors to retain their existing 

underlying equity or exchange-traded 

fund (‘‘ETF’’) positions if they engage in 

short options strategies, as opposed to 

physically-settled options that also have 

American style exercise where an 

assignment could require an investor to 

adjust its portfolio in the underlying 

shares. 

The Exchange also believes that a 

large underlying index would appeal to 

market participants that have different 

investment goals. For example, a 

smaller index size would appeal to 

investors seeking lower-priced options, 

while a larger index size would appeal 

to investors seeking to reduce their 

transaction costs by having to purchase 

fewer contracts. 

As proposed, the proposal would 

become effective on a pilot program 

basis for a period of fourteen months. If 

the Exchange were to propose an 

extension of the program or should the 

Exchange propose to make the program 

permanent, then the Exchange would 

submit a filing proposing such 

amendments to the program. The 

Exchange notes that any positions 

established under the pilot would not be 

impacted by the expiration of the pilot. 

For example, a position in a p.m.-settled 

series that expires beyond the 

conclusion of the pilot period could be 

established during the 14-month pilot. If 

the pilot program were not extended, 

then the position could continue to 

exist. However, the Exchange notes that 

any further trading in the series would 

be restricted to transactions where at 

least one side of the trade is a closing 

transaction. 

As part of the pilot program, the 

Exchange would also submit a pilot 

program report to the Commission at 

least two months prior to the expiration 

date of the program (the ‘‘annual 

report’’). As described below, the annual 

report would contain an analysis of 

volume, open interest and trading 

patterns. The analysis would examine 

trading in the proposed option product 

as well as trading in the securities that 

comprise the S&P 500® index. In 

addition, for series that exceed certain 

minimum open interest parameters, the 

annual report would provide analysis of 

index price volatility and share trading 

activity. The annual report would be 

provided to the Commission on a 

confidential basis. 

The annual report would contain the 

following volume and open interest 

data: 

(1) Monthly volume aggregated for all 

trades; 

(2) monthly volume aggregated by 

expiration date; 

(3) monthly volume for each 

individual series; 

(4) month-end open interest 

aggregated for all series; 

(5) month-end open interest for all 

series aggregated by expiration data 

[sic]; and 

(6) month-end open interest for each 

individual series. 

In addition to the annual report, the 

Exchange would provide the 

Commission with interim reports of the 

information listed in Items (1) through 

(6) above periodically as required by the 

Commission while the pilot is in effect. 

These interim reports would also be 

provided on a confidential basis. 

Additionally, the annual report would 

contain the following analysis of trading 

patterns in Expiration Friday, p.m.- 

settled ISE Max SPY options series in 

the pilot: 

(1) A time series analysis of open 

interest; and 

(2) An analysis of the distribution of 

trade sizes. 

Also, for series that exceed certain 

minimum parameters, the annual report 

would contain the following analysis 

related to index price changes and 

underlying share trading volume at the 

close on Expiration Fridays: 

(1) A comparison of index price 

changes at the close of trading on a 

given Expiration Friday with 

comparable price changes from a control 

sample. The data would include a 

calculation of percentage price changes 

for various time intervals and compare 

that information to the respective 

control sample. Raw percentage price 

change data as well as percentage price 

change data normalized for prevailing 

market volatility, as measured by the 

CBOE Volatility Index (VIX), would be 

provided; and 

(2) A calculation of share volume of 

a sample set of the component securities 

representing an upper limit on share 

trading that could be attributable to 

expiring in-the-money series. The data 

would include a comparison of the 

calculated share volume for securities in 

the sample set to the average daily 

trading volumes of those securities over 

a sample period. 

The minimum open interest 

parameters, control sample, time 

intervals, method for randomly selecting 

the component securities, and sample 

periods would be determined by the 

Exchange and the Commission. 

Index Design and Composition 

The ISE Max SPY Index is designed 

to provide larger scale exposure to, and 

is calculated using, the share prices of 

SPY. Each Trust unit, (i.e., each share of 

SPY) represents an undivided 

ownership interest in the Trust. Shares 

of SPY trade like any other equity 

security, and are listed and traded on 

NYSE Arca. 

As discussed above, the ISE Max SPY 

is calculated by multiplying the share 

prices of SPY by a factor of 10 and 

rounding to the tenths place. For 

example, if the share price for SPY is 

112.35 then the ISE Max SPY value 

would yield a value of 1123.50 for the 

ISE Max SPY. 

Index Calculation and Index 

Maintenance 

Real-time index levels for the ISE Max 

SPY shall be calculated by ISE or its 

agent, and shall be disseminated by ISE 

every 15 seconds during the Exchange’s 

regular trading hours to market 

information vendors via the Options 

Price Reporting Authority (‘‘OPRA’’).4

The settlement value for the ISE Max 

SPY Index is calculated using the Net 

Asset Value (‘‘NAV’’) of the fund, as 

calculated by the Exchange, on a per 

share basis, times ten.5 The NAV of an 

ETF is the per-share dollar amount of 

the fund which is calculated by dividing 

the total value of all the securities in its 

portfolio, less any liabilities, by the 

number of fund shares outstanding. In 

general, equity ETFs use the closing 


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6See Securities Exchange Act Release No. 65256 

(September 2, 2011), 76 FR 55969 (September 9, 

2011) (SR–C2–2011–008) (‘‘SPXPM Filing’’). 

7The seller of a ‘‘cash settled’’ index option pays 

out the cash value of the applicable index on 

expiration or exercise. A ‘‘physically settled’’ 

option, like equity and ETF options, involves the 

transfer of the underlying asset rather than cash. 

See Characteristics and Risks of Standardized 

Options, available at: http://www.theocc.com/ 

components/docs/riskstoc.pdf, for a discussion of 

settlement. 

8The exercise settlement value for a p.m.-settled 

index option is generally determined by reference 

to the reported level of the index as derived from 

the closing prices of the component securities 

(generally based on the closing prices as reported 

by the primary exchange on which the stock is 

listed) on the last business day before expiration 

(e.g., the Friday before Saturday expiration). See 

Characteristics and Risks of Standardized Options, 

available at: http://www.theocc.com/components/ 

docs/riskstoc.pdf, for a discussion of settlement 

value. 

9See, e.g., Securities Exchange Act Release Nos. 

45956 (May 17, 2002), 67 FR 36740 (May 24, 2002) 

(adopting release concerning cash settlement and 

regulatory halt requirements for security futures 

products) (‘‘Regulators and self-regulators were 

concerned that the liquidity constraints faced by the 

securities markets to accommodate expiration 

related buy or sell programs at the market close on 

expiration Fridays could exacerbate ongoing market 

swings during an expiration and could provide 

opportunities for entities to anticipate these 

pressures and enter orders as part of manipulative 

or abusive trading practices designed to artificially 

drive up or down share prices.’’); 24367 (April 17, 

1987), 52 FR 13890 (April 27, 1987) (SR–CBOE–87– 

11) (order approving a proposal for S&P 500 index 

options with an exercise settlement value based on 

an index value derived from opening, rather than 

closing, prices); and 32868 (September 10, 1993), 58 

FR 48687 (September 10, 1993) (notice of filing and 

order granting accelerated approval of proposed 

rule change by the New York Stock Exchange, Inc. 

(‘‘NYSE’’) relating to changes in auxiliary closing 

procedures for expiration days) (stating, ‘‘[a]s long 

as some index derivative products continue to 

expire based on closing stock prices on expiration 

Fridays, the Commission agrees with the NYSE that 

such procedures are necessary to provide a 

mechanism to handle the potential large imbalances 

that can be engendered by firms unwinding index 

derivative related positions’’). The cash settlement 

provisions of stock index futures and options 

contracts facilitated the growth of sizeable index 

arbitrage activities by firms and professional traders 

and made it relatively easy for arbitrageurs to buy 

or sell the underlying stocks at or near the market 

close on expiration Fridays (i.e., the third Friday of 

the expiration month) in order to ‘‘unwind’’ 

arbitrage-related positions. These types of 

unwinding programs at the close on expiration 

Fridays often severely strained the liquidity of the 

securities markets as the markets, and in particular 

the specialists on the NYSE, faced pressure to 

attract contra-side interest in the limited time that 

was permitted to establish closing prices. See 

Securities Exchange Act Release No. 44743 (August 

24, 2001), 66 FR 45904 (August 30, 2001) (File No. 

S7–15–01) (proposing release concerning cash 

settlement and regulatory halt requirements for 

security futures products). 

10See, e.g., Securities Exchange Act Release Nos. 

24276 (March 27, 1987); 52 FR 10836 (April 3, 

1987) (notice of filing and order granting 

accelerated approval to a proposed rule change by 

the NYSE relating to opening price settlement of 

expiring NYSE Composite and Beta Index options); 

37894 (October 30, 1996), 61 FR 6987 [sic] 

(November 5, 1996) (notice of filing and order 

granting accelerated approval of proposed rule 

change by the NYSE permanently approving the 

expiration day auxiliary closing procedures pilot 

program); and 45956 (May 17, 2002), 67 FR 36740 

(May 24, 2002) (adopting release concerning cash 

settlement and regulatory halt requirements for 

security futures products) (reaffirming the 

Commission’s view of the advantages of a.m. 

settlement). See also Hans Stoll and Robert Whaley, 

Expiration Day Effects of Index Options & Futures 

(March 15, 1986) (noting that share volume on the 

NYSE was much higher in the last hour of a 

quarterly expiration Friday when both options and 

futures expire than on non-expiration Fridays). 

11See, e.g., Securities Exchange Act Release No. 

45956 (May 17, 2002), 67 FR 36740 (May 24, 2002) 

(adopting release concerning cash settlement and 

regulatory halt requirements for security futures 

products) (explaining that entities could take 

advantage of illiquidity resulting from the 

unwinding of arbitrage-related positions on 

expiration Fridays to manipulate share prices). 

12See Proposed Amendments Relating to the 

Standard and Poor’s 500, the Standard and Poor’s 

100 and the Standard Poor’s OTC Stock Price Index 

Futures Contract, 51 FR 47053 (December 30, 1986) 

(notice of proposed rule change from the Chicago 

Mercantile Exchange). See also Securities Exchange 

Act Release No. 24367 (April 17, 1987), 52 FR 

13890 (April 27, 1987) (SR–CBOE–87–11) (noting 

that the Chicago Mercantile Exchange moved the 

S&P 500® futures contract’s settlement value to 

opening prices on the delivery date). The exercise 

settlement value for an a.m.-settled index option is 

determined by reference to the reported level of the 

index as derived from the opening prices of the 

component securities on the business day before 

expiration. 

13See Securities Exchange Act Release No. 24367 

(April 17, 1987), 52 FR 13890 (April 27, 1987) (SR– 

CBOE–87–11) (order approving a proposal for S&P 

500 index options with an exercise settlement value 

based on an index value derived from opening, 

rather than closing, prices). At the time it approved 

Continued 

prices of each of the fund’s holdings to 

determine the total value of all the 

securities in its portfolio. In the case of 

SPY, the closing prices of the portfolio 

securities are determined by the closing 

auction processes of the NYSE for each 

of those securities. 

The Exchange will also notify the staff 

of the Division of Trading and Markets 

of the Commission immediately in the 

event values of the ISE Max SPY Index 

are not disseminated every 15 seconds 

by a widely available source. In the 

event the ISE Max SPY Index ceases to 

be maintained or calculated, or its 

values are not disseminated every 15 

seconds by a widely available source, 

the Exchange will not list any additional 

series for trading and will limit all 

transactions in such options to closing 

transactions only for the purpose of 

maintaining a fair and orderly market 

and protecting investors. 

Exercise and Settlement Value 

Options on the ISE Max SPY will 

expire on the Saturday following the 

third Friday of the expiration month. 

Trading in options on the ISE Max SPY 

will normally cease at 4:15 p.m. (EST), 

except for expiring contracts, which will 

cease trading at 4 p.m. (EST) on the 

Friday preceding an expiration 

Saturday. Non-expiring contracts will 

continue to trade until 4:15 p.m. (EST). 

The index value for exercise of the ISE 

Max SPY options will be calculated by 

ISE based on the NAV of the fund, on 

a per share basis, times ten. 

The Commission recently determined 

that it was appropriate to reintroduce 

p.m.-settlement to cash-settled index 

options when it approved C2 Options 

Exchange, Incorporated’s (‘‘C2’’) 

SPXPM.6 As discussed above, 

settlement value of the ISE Max SPY 

utilizes the prices of the stocks held in 

the SPDR® S&P 500® ETF Trust. These 

stocks are also used in the calculation 

of the S&P 500® index underlying C2’s 

SPXPM. Therefore, all the arguments 

supporting p.m.-settlement in the order 

approving SPXPM apply here. 

Reintroduction of P.M. Settlement 

When cash-settled 7 index options 

were first introduced in the 1980s, they 

generally utilized closing-price 

settlement procedures (i.e., p.m.- 

settlement).8 The Commission became 

concerned about the impact of p.m.- 

settlement on cash-settled index options 

on the markets for the underlying stocks 

at the close on expiration Fridays.9

These concerns were heightened during 

the quarterly expirations of the third 

Friday of March, June, September and 

December when options, index futures, 

and options on index futures all expire 

simultaneously. P.m.-settlement was 

believed to have contributed to above 

average volume and added market 

volatility on those days, which 

sometimes led to sharp price 

movements during the last hour of 

trading.10 As a consequence, the close of 

trading on the quarterly expiration 

Friday became known as the ‘‘triple 

witching hour.’’ Besides contributing to 

investor anxiety, heightened volatility 

during the expiration periods created 

the opportunity for manipulation and 

other abusive trading practices in 

anticipation of the liquidity 

constraints.11

In light of the concerns with p.m.- 

settlement and to help ameliorate the 

price effects associated with expirations 

of p.m.-settled, cash-settled index 

products, in 1987, the Commodity 

Futures Trading Commission (‘‘CFTC’’) 

approved a rule change by the Chicago 

Mercantile Exchange to provide for 

a.m.-settlement for index futures, 

including futures on the S&P 500®

index.12 The Commission subsequently 

approved a rule change by the Chicago 

Board Options Exchange (‘‘CBOE’’) to 

list and trade a.m.-settled S&P 500®

index options.13 In 1992, the 


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CBOE’s introduction of a.m.-settlement for cash 

settled index options, the Commission identified 

two benefits to a.m.-settlement for cash-settled 

index options. See Securities Exchange Act Release 

No. 30944 (July 21, 1992), 57 FR 33376 (July 28, 

1992) (SR–CBOE–92–09). First, it provides 

additional time to test price discovery, as market 

participants have the remainder of the regular 

trading day to adjust to opening session price 

movements and determine whether those 

movements reflect changes in fundamental values 

or short-term supply and demand conditions. 

Second, it provides more opportunity to trade out 

of positions acquired during the opening auction. 

In this respect, attracting contra-side interest to a 

single-priced auction to offset an order imbalance 

(such as those attributable to index arbitrage) may 

more readily be achieved in an opening auction on 

Friday morning than a closing auction on Friday 

afternoon because the morning session allows 

market participants that have provided that 

liquidity to have the remainder of the regular 

trading day to liquidate their positions. In contrast, 

positions acquired in a Friday afternoon closing 

auction generally cannot be liquidated as readily 

and efficiently until the following Monday. Holding 

positions overnight, or over a weekend, may entail 

greater risk than holding intraday positions. To 

accept such risk (real or perceived), market 

participants generally will require a greater 

premium, which may translate into greater price 

concessions, and thus lead to greater volatility in 

the closing auction. In other words, a consequence 

of p.m.-settlement may be enhanced volatility at the 

close. See, e.g., Securities Exchange Act Release No. 

44743 (August 24, 2001), 66 FR 45904 at 45908 

(August 30, 2001) (‘‘Steep discounts (premiums) 

were necessary in part because traders who bought 

(sold) stocks to offset unwinding programs had to 

maintain their newly acquired long (short) positions 

over the weekend—during which time they were 

subject to considerable market risk.’’). 

14See Securities Exchange Act Release No. 30944 

(July 21, 1992), 57 FR 33376 (July 28, 1992) (SR– 

CBOE–92–09) (order approving CBOE’s proposal 

relating to position limits for SPX index options 

based on the opening price of component 

securities). 

15CBOE’s index options on the S&P 100® (OEX), 

however, kept their p.m.-settlement. See Securities 

Exchange Act Release No. 30944 (July 21, 1992), 57 

FR 33376 (July 28, 1992) (SR–CBOE–92–09). No 

futures or options on futures trade on the S&P 100 

index. Other types of options utilize p.m.- 

settlement, including physically-settled single-stock 

options and options on ETFs. 

16See Securities Exchange Act Release No. 44743 

(August 24, 2001), 66 FR 45904 at 45908 (August 

30, 2001) (proposing release for a joint rule between 

the Commission and the CFTC generally 

stipulating, among other provisions, that the final 

settlement price for each cash-settled security 

futures product fairly reflect the opening price of 

the underlying security or securities). See also 

Securities Exchange Act Release No. 45956 (May 

17, 2002), 67 FR 36740 at 36741–42 (May 24, 2002) 

(adopting release concerning cash settlement and 

regulatory halt requirements for security futures 

products in which the Commission reaffirmed the 

advantages of a.m.-settlement) (‘‘[O]pening price 

settlement procedures offered several features that 

enabled the securities markets to better handle 

expiration-related unwinding programs.’’). 

17 In particular, in 1993, the Commission 

approved CBOE’s proposal to list and trade p.m.- 

settled, cash-settled options on certain broad-based 

indexes expiring on the first business day of the 

month following the end of each calendar quarter 

(‘‘Quarterly Index Expirations’’). See Securities 

Exchange Act Release No. 31800 (February 1, 1993), 

58 FR 7274 (February 5, 1993) (SR–CBOE–92–13). 

In 2006, the Commission approved, on a pilot basis, 

CBOE’s listing of p.m.-settled index options 

expiring on the last business day of a calendar 

quarter (‘‘Quarterly Options Series’’). See Securities 

Exchange Act Release No. 54123 (July 11, 2006), 71 

FR 40558 (July 17, 2006) (SR–CBOE–2006–65). In 

January 2010, the Commission approved CBOE’s 

listing of p.m.-settled FLEX options on a pilot basis. 

See Securities Exchange Act Release No. 61439 

(January 28, 2010), 75 FR 5831 (February 4, 2010) 

(SR–CBOE–2009–087) (order approving rule change 

to establish a pilot program to modify FLEX option 

exercise settlement values and minimum value 

sizes). FLEX options provide investors with the 

ability to customize basic option features including 

size, expiration date, exercise style, and certain 

exercise prices. Prior to 2010, only a.m.-settlement 

based on opening prices of the underlying 

components of an index could be used to settle a 

FLEX index option if it expired on, or within two 

business days of, a third-Friday-of-the month 

expiration (‘‘Blackout Period’’). Last year, the 

Commission approved a pilot program to permit 

FLEX index options with p.m.-settlement that 

expire within the Blackout Period. See Securities 

Exchange Act Release No. 61439 (January 28, 2010), 

75 FR 5831 (February 4, 2010) (SR–CBOE–2009– 

087). In September 2010, the Commission approved 

CBOE’s listing of p.m.-settled End of Week 

expirations (expiring on each Friday, other than the 

third Friday) and End of Month expirations 

(expiring on the last trading day of the month) for 

options on broad-based indexes, also on a pilot 

basis. See Securities Exchange Act Release No. 

62911 (September 14, 2010), 75 FR 57539 

(September 21, 2010) (SR–CBOE–2009–075). 

18See SPXPM Filing, supra note 6, at 55974. 

19 Id. At 55975. 

Commission approved CBOE’s proposal 

to transition all of its European-style 

cash-settled options on the S&P 500® 

index to a.m.-settlement.14 Thereafter, 

the Commission approved proposals by 

the options markets to transfer most of 

their cash-settled index products to 

a.m.-settlement.15

The Commission and the CFTC noted 

the benefits of a.m.-settlement in a 2001 

joint release concerning securities 

futures, where they observed that ‘‘the 

widespread adoption of opening-price 

settlement procedures in index futures 

and options has served to mitigate the 

liquidity strains that had previously 

been experienced in the securities 

markets on expirations.’’ 16

Since 1992, the Commission has 

approved proposals that provide for 

cash-settled index options with p.m.- 

settlement on a limited basis for options 

products that generally are 

characterized by lower relative volume 

and that generally do not involve 

settlement on the third Friday of a 

month.17 At the time of each approval, 

the Commission stated that limited 

approvals on a pilot basis would allow 

the exchange and the Commission to 

monitor the potential for adverse market 

effects and modify or terminate the 

pilots, if necessary. Notably, with the 

exception of FLEX Index options, these 

recently-approved p.m.-settled contracts 

do not involve expiration on the third 

Friday of the month. These new 

contracts, including FLEX, have also 

been characterized by limited volume, 

and would not be expected to have a 

pronounced effect on volatility in the 

underlying securities at the close as a 

result. 

The concerns from 18 years ago that 

led to the transition to a.m.-settlement 

for index derivatives have been largely 

mitigated. Expiration pressure in the 

underlying cash markets at the close has 

been greatly reduced with the advent of 

multiple primary listing and unlisted 

trading privilege markets and trading is 

now widely dispersed among many 

market centers. Further, opening 

procedures in the 1990s were deemed 

acceptable to mitigate one-sided order 

flow driven by index option expiration 

and that [sic] today’s more sophisticated 

automated closing procedures should 

afford a similar, if not greater, level of 

comfort. Specifically, many markets, 

notably The NASDAQ Stock Market 

LLC (‘‘Nasdaq’’) and the NYSE, now 

utilize automated closing cross 

procedures and have closing order types 

that facilitate orderly closings, and that 

[sic] these closing procedures are well 

equipped to mitigate imbalance pressure 

at the close. In addition, ISE believes 

that after-hours trading now provides 

market participants with an alternative 

to help offset market-on-close 

imbalances. 

Also, as noted in the SPXPM Filing, 

for roughly five years (1987–1992) 

CBOE listed both a.m.- and p.m.-settled 

SPX and did not observe any related 

market disruptions during that period in 

connection with the dual a.m./p.m.- 

settlement.18 Finally, ISE believes that 

p.m.-settled options predominate in the 

over-the-counter (‘‘OTC’’) market, and 

ISE is not aware of any adverse effects 

in the underlying cash markets 

attributable to the considerable volume 

of OTC trading. ISE is merely trying to 

offer a p.m.-settled product in an 

exchange environment which offers the 

benefit of added transparency, price 

discovery and stability. The ISE asserts 

that given the changes since the 1980s, 

concerns with p.m.-settlement are not 

applicable in today’s market because 

closing procedures on the cash equities 

markets have become more automated 

with real time data feeds that are 

distributed to a wider array of market 

participants. 

Finally, in the SPXPM Filing, C2 

estimates that 95% of OTC options 

based on the S&P 500® index are p.m.- 

settled,19 therefore ISE Max SPY will 

attract some of that trading interest. ISE 

notes that doing so would be consistent 

with the objectives of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act and could help mitigate 


tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 56 / Thursday, March 22, 2012 / Notices 16887 

20See ISE Rules 2000 through 2013. 

21There would be reporting requirements 

pursuant to Rule 415, Reports Related to Position 

Limits. 

22See note 6. 

23 Id. 

24See The Journal of Futures Markets, Vol. 25, no. 

10, 945–965 (2005) (Position Limits for Cash-Settled 

Derivative Contracts by Hans R. Dutt and Lawrence 

E. Harris) (‘‘Dutt-Harris Paper’’). 

25These procedures have been effective for the 

surveillance of SPY options trading and will 

continue to be employed. 

26See Rule 2009(a)(3). 

27See Rule 2009(b)(1). 

counterparty risks faced by OTC market 

participants. 

Contract Specifications 

The contract specifications for options 

on the ISE Max SPY are set forth in 

Exhibit 3–2. Options on the ISE Max 

SPY are European-style and p.m.- 

settled. The Exchange’s standard trading 

hours for broad-based index options 

(9:30 a.m. to 4:15 p.m., New York time), 

as set forth in Rule 2008(a), will apply 

to the trading of options on the ISE Max 

SPY. Exchange rules that are applicable 

to the trading of options on broad-based 

indexes will also apply to the trading of 

ISE Max SPY options.20 Specifically, the 

trading of ISE Max SPY options will be 

subject to, among others, Exchange rules 

governing margin requirements and 

trading halt procedures for index 

options. Further, ISE Max SPY options 

shall be quoted and traded in U.S. 

dollars. 

For options on the ISE Max SPY, the 

Exchange proposes that there would be 

no position limits since the index is 

based on the published prices of the 

stocks held in the SPDR® S&P 500® ETF 

Trust.21 As discussed above, C2 

received approval to list and trade cashsettled S&P 500® index options with no 

position limits.22 The Exchange believes 

that ISE Max SPY should have no 

position limits for the same reasons 

suggested by C2 for SPXPM.23 The 

settlement value calculated by ISE 

would use the portfolio components of 

the SPY Trust, which are the same as 

the components of the S&P 500® index. 

C2 has stated that the settlement value 

it is using for SPXPM is based on the 

closing value of the S&P 500® which is 

calculated using the closing prices of 

the index components. Similarly, ISE 

would be calculating the settlement 

value using the published closing prices 

of the portfolio securities of the SPDR®

S&P 500® ETF Trust, thereby benefitting 

from the same considerable aggregate 

capitalization. 

To determine appropriate position 

limits for this product, the Commission 

requested that the Exchange apply a 

model, such as the Dutt-Harris model,24

whereby the authors developed a model 

to determine appropriate position limits 

for cash settled index derivatives. The 

authors concluded that position limits 

are not as important for broad-based 

index derivative contracts that are cash 

settled because they are composed of 

highly liquid and well-followed 

securities. As such, the authors note that 

it would require very high trading 

volumes to manipulate the underlying 

securities and, consequently, any 

attempted manipulation would be more 

easily detectable and prosecutable. The 

position limits suggested by the DuttHarris model for an S&P 500®-based 

index option would be so large as to be 

irrelevant and position limits of such 

magnitude would attract scrutiny from 

surveillance systems that would, as a 

consequence, serve as an effective 

substitute for position limits. The 

premise of this conclusion is based 

upon the broad range and deep liquidity 

of securities that comprise the S&P 

500®, which are the same portfolio 

securities whose published prices are 

used to calculate the settlement value of 

the ISE Max SPY. 

The Exchange believes that the 

existing surveillance procedures and 

reporting requirements at ISE, other 

options exchanges, and at the clearing 

firms are capable of properly identifying 

unusual and/or illegal trading activity. 

In addition, routine oversight 

inspections of the Exchange’s regulatory 

programs by the Commission have not 

uncovered any material inconsistencies 

or shortcomings in the manner in which 

the Exchange’s market surveillance is 

conducted. These procedures utilize 

daily monitoring of market movements 

via automated surveillance techniques 

to identify unusual activity in both 

options and underlying stocks.25

Accordingly, ISE’s market surveillance 

has been and will continue to be 

rigorous and more than adequate to 

address any manipulation concerns. 

The Exchange proposes to apply 

broad-based index margin requirements 

for the purchase and sale of options on 

the ISE Max SPY. Accordingly, 

purchases of put or call options with 9 

months or less until expiration must be 

paid for in full. Writers of uncovered 

put or call options must deposit/ 

maintain 100% of the option proceeds, 

plus 15% of the aggregate contract value 

(current index level × $100), less any 

out-of-the-money amount, subject to a 

minimum of the option proceeds plus 

10% of the aggregate contract value for 

call options and a minimum of the 

option proceeds plus 10% of the 

aggregate exercise price amount for put 

options. 

The Exchange proposes to set 

minimum strike price intervals for ISE 

Max SPY options at 1 point intervals. 

The minimum tick size for series trading 

below $3 shall be $0.05, and for series 

trading at or above $3 shall be $0.10. 

The Exchange proposes to list options 

on the ISE Max SPY in the twelve 

consecutive near-term expiration 

months.26 In addition, long-term option 

series having up to sixty months to 

expiration may be traded.27 The trading 

of long-term ISE Max SPY options shall 

also be subject to the same rules that 

govern the trading of all the Exchange’s 

index options, including sales practice 

rules, margin requirements, and trading 

rules. 

Chapter 6 of the Exchange’s rules is 

designed to protect public customer 

trading and shall apply to the trading of 

options on the ISE Max SPY. 

Specifically, ISE Rules 608(a) and (b) 

prohibit Members from accepting a 

customer order to purchase or write an 

option unless such customer’s account 

has been approved in writing by a 

designated Options Principal of the 

Member. Additionally, ISE’s Rule 610 

regarding suitability is designed to 

ensure that options are only sold to 

customers capable of evaluating and 

bearing the risks associated with trading 

in this instrument. Further, ISE Rule 

611 permits members to exercise 

discretionary power with respect to 

trading options in a customer’s account 

only if the Member has received prior 

written authorization from the customer 

and the account had been accepted in 

writing by a designated Options 

Principal. ISE Rule 611 also requires 

designated Options Principals or 

Representatives of a Member to approve 

and initial each discretionary order on 

the day the discretionary order is 

entered. Finally, ISE Rule 609, 

Supervision of Accounts, Rule 612, 

Confirmation to Customers, and Rule 

616, Delivery of Current Options 

Disclosure Documents and Prospectus, 

will also apply to trading in of [sic] 

options on the ISE Max SPY. 

Surveillance and Capacity 

The Exchange represents that it has an 

adequate surveillance program in place 

for options traded on the ISE Max SPY. 

The ISE Market Surveillance 

Department conducts routine 

surveillance in approximately 30 

discrete areas. Index products and their 

respective symbols are integrated into 

the Exchange’s existing surveillance 

system architecture and are thus subject 

to the relevant surveillance processes. 


tkelley on DSK3SPTVN1PROD with NOTICES
16888 Federal Register / Vol. 77, No. 56 / Thursday, March 22, 2012 / Notices 

28 15 U.S.C. 78f(b). 

29 15 U.S.C. 78f(b)(5). 

30 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

This is true for both surveillance system 

processing and manual processes that 

support the ISE’s surveillance program. 

Finally, the Exchange has the 

necessary systems capacity to support 

new options series that will result from 

the introduction of options on the ISE 

Max SPY, including Leaps. 

2. Statutory Basis 

The Exchange believes that the 

proposed rule change is consistent with 

Section 6(b) of the Act in general, and 

the rules and regulations thereunder, 

and, in particular, the requirements of 

Section 6(b) of the Act.28 In particular, 

the Exchange believes the proposed rule 

change is consistent with Section 

6(b)(5) 29 requirements that the rules of 

an exchange [sic] designed to promote 

just and equitable principles of trade, 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. The Exchange 

believes that p.m.-settlement for the 

subject index option in the manner 

proposed does not raise any meaningful 

regulatory concerns. Further, the 

Exchange believes that the proposal will 

not adversely impact fair and orderly 

markets on expiration Fridays for the 

underlying stocks comprising SPY. As 

discussed in Section (a) of Item 3 of this 

filing (the purpose section), the 

handling of orders at the close on the 

stock markets has matured considerably 

since concerns were initially raised in 

the late 1980s. Additionally, the 

proposed rule change would provide 

Members and investors with additional 

opportunities to trade S&P 500® options 

with a p.m.-settlement feature in an 

exchange environment and subject to 

transparent exchange-based rules, and 

that [sic] investors would also benefit 

from the opportunity to trade in 

association with this product on 

Expiration Fridays thereby removing 

impediments to a free and open market 

consistent with the Act. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The proposed rule change does not 

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 

The Exchange has not solicited, and 

does not intend to solicit, comments on 

this proposed rule change. The 

Exchange has not received any 

unsolicited written comments from 

members or other interested parties. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve or disapprove 

such proposed rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

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 email to rulecomments@sec.gov. Please include File 

Number SR–ISE–2012–22 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–ISE–2012–22. This file 

number should be included on the 

subject line if email 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 the 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 Number SR–ISE– 

2012–22 and should be submitted on or 

before April 12, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.30

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–6863 Filed 3–21–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66610; File No. SR–Phlx– 

2012–29] 

Self-Regulatory Organizations; 

NASDAQ OMX PHLX LLC; Notice of 

Filing and Immediate Effectiveness of 

Proposed Rule Change To Delete 

Certain Select Symbols From the 

Rebates and Fees for Adding and 

Removing Liquidity in Select Symbols 

March 15, 2012. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1, and Rule 19b–4 thereunder,2

notice is hereby given that on March 2, 

2012, NASDAQ OMX PHLX LLC 

(‘‘Phlx’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) the proposed 

rule change as described in Items I, II, 

and III 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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend 

Section I of the Exchange’s Fee 

Schedule titled ‘‘Rebates and Fees for 

Adding and Removing Liquidity in 


tkelley on DSK3SPTVN1PROD with NOTICES