[Federal Register Volume 66, Number 95 (Wednesday, May 16, 2001)]
[Notices]
[Pages 27184-27187]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12250]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44287; File No. 4-443]


Joint Industry Plan; Notice of Filings of a Proposed Options 
Listing Procedures Plan by the American Stock Exchange LLC, Chicago 
Board Options Exchange, Incorporated, International Securities Exchange 
LLS, The Options Clearing Corporation, Pacific Exchange, Inc., and 
Philadelphia Stock Exchange, Inc.

May 10, 2001.

I. Introduction

    On January 11, 2001, pursuant to Section 11A(a)(3)(B) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 11Aa3-2 
thereunder,\2\ The American Stock Exchange LLC (``Amex''), Chicago 
Board Options Exchange, Incorporated (``CBOE''), International 
Securities Exchange LLC (``ISE''), The Options Clearing Corporation 
(``OCC''), Pacific Exchange, Inc., (``PCX''), and Philadelphia Stock 
Exchange, Inc. (``Phlx'') (collectively, the ``Sponsors'') filed with 
the Securities and Exchange Commission (``Commission'') a proposed 
options listing procedures plan (``OLPP'' or ``Plan'').\3\ The Sponsors 
filed amendments to the proposed Plan on March 3, 2001 \4\ and May 9, 
2001.\5\ Pursuant to Rule 11Aa3-2(c)(1) under the Act,\6\ the 
Commission is publishing notice of, and soliciting comments on the 
proposed Plan, as amended.
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    \1\ 15 U.S.C. 78k-1(a)(3)(B).
    \2\ 17 CFR 240.11Aa3-2.
    \3\ See Plan for the Purpose of Developing and Implementing 
Procedures Designed to Facilitate the Listing and Trading of 
Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of 
the Securities Exchange Act of 1934, dated January 11, 2001. The 
OLPP is available at the Commission's Public Reference Room.
    \4\ Letter dated March 2, 2001, from Claire P. McGrath, Vice 
President and Special Counsel, Amex, to Elizabeth King, Associate 
Director, Division of Market Regulation (``Division''), Commission 
(``Amendment No. 1''). Amendment No. 1 provided information required 
by Rule 11Aa3-2(b)(4) under the Act, 17 CFR 240.11Aa3-2(b)(4), 
regarding implementation of the proposed OLPP, the proposed OLPP's 
impact on competition, and written agreements or understandings 
among the Sponsors of the plan.
    \5\ Letter dated May 4, 2001, from Clair P. McGrath, Vice 
President and Special Counsel, Amex, to Elizabeth King, Associate 
Director, Division, Commission (``Amendment No. 2''). Amendment No. 
2 would add procedures for new eligible exchanges to become Sponsors 
of the Plan and a provision for Sponsors that are no longer eligible 
to participate in the Plan.
    \6\ 17 CFR 240.11Aa3-2(c)(1).
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II. Background

    On September 17, 1991, the Commission approved the Joint-Exchange 
Options Plan (``JEOP''), which sets forth procedures governing the 
listing of new options.\7\ The Amex, CBOE, PCX, Phlx, and New York 
Stock Exchange \8\ were parties to the JEOP.\9\ On September 11, 2000, 
the Commission instituted public administrative proceedings pursuant to 
Section 19(h)(1) of the Act \10\ against, and simultaneously accepted 
offer of settlement from the Amex, CBOE, PCX, and Phlx (collectively, 
the ``respondent exchanges'').\11\ Under the Settlement

[[Page 27185]]

Order, the respondent exchanges were ordered to amend the JEOP to: (i) 
Eliminate the requirement that advance notice of the intention to list 
a new option be given to any other exchange, alternative trading 
system, or other trading venue that lists any options issued by the 
OCC; (ii) eliminate advance notice to any other market that already 
lists or has applied to list the option in question; (iii) eliminate 
any provisions of the JEOP that prevent a market from commencing to 
list or trade any option listed on another market or an option that 
another market has expressed an intention to list; (iv) eliminate any 
provisions of the JEOP allowing one market to prevent or delay another 
market from listing an option; and (v) eliminate any provisions of the 
JEOP that allow one market to delay the commencement of trading of an 
option by another market.\12\
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    \7\ See Securities Exchange Act Release No. 29698 (September 17, 
1991), 56 FR 48954 (September 25, 1991). The JEOP provides specific 
procedures governing the selecting, listing, challenging, and 
arbitrating the eligibility of new equity options overlying both 
exchange-traded an over-the-counter listed securities.
    \8\ The NYSE later sold its options business to the CBOE. See 
Securities Exchange Act Release No. 38542 (April 23, 1997), 62 FR 
23521 (April 30, 1997).
    \9\ The parties filed, and the Commission approved the JEOP as 
identical proposed rule changes. The OLPP would not replace these 
rules. The parties would have to file proposed rule changes to amend 
their rules.
    \10\ 15 U.S.C. 78s(h)(1).
    \11\ See Order Instituting Public Administrative Proceeding 
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, 
Making Findings and Imposing Remedial Sanctions. Securities Exchange 
Act Release No. 43268 (September 11, 2000) (``Settlement Order''). 
The Settlement Order states that the respondent exchanges have 
significantly impaired the operations of the options markets by, 
among other things, refraining from multiply listing a large number 
of options.
    \12\ See Section IV.B.a. of the Settlement Order. The Settlement 
Order requires an exchange to provide to the OCC (i) not more than 
one business day's notice of the exchange's intent to list an 
existing option, and (ii) reasonable advance notice of the 
exchange's intention to list a new option. Id.
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    On January 11, 2001, the respondent exchanges, along with the ISE 
and the OCC, submitted the proposed OLPP to the commission to replace 
and supersede the JEOP and to comply with the respondent exchanges' 
obligations under Section IV.B.a. of the Settlement Order. Although not 
parties to the Settlement Order, the ISE and the OCC have elected to 
become Sponsors of the proposed OLPP to facilitate the listing and 
trading of standardized options contracts.

III. Description of the OLPP

    The proposed Plan would provide procedures for: (i) Listing and 
trading new options classes; (ii) selecting new options series; (iii) 
petitioning the OCC to review the eligibility, pursuant to the 
exchanges' listing standards, of a selected option class without 
delaying the trading of that option class; (iv) determining operational 
details for option contracts adjusted pursuant to OCC By-Laws; (v) 
admitting new sponsors; and (vi) losing eligibility to participate in 
the Plan. The proposed OLPP would eliminate the requirement that an 
exchange give advance notice of its intention to list a new or 
currently trading option class to any other options exchange that 
already lists or has applied to list the selected option.\13\ The 
proposed OLPP also contains no provisions that would prevent or delay 
an exchange from commencing to list or trade any option class other 
than the one-day advance notice requirement to the OCC for operational 
purposes.
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    \13\ However, the proposed OLPP would include a provision that 
allows an exchange to provide the OCC with not more than one 
business day's notice of an exchange's intention to list an existing 
options class. Further, under the proposed OLPP, the Sponsors would 
communicate with each other only indirectly, through the OCC.
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A. Selection of an Option Class

    Under the proposed OLPP, a Sponsor that seeks to trade an option on 
an equity security (``Selecting Exchange'') would be required to submit 
a certificate notifying the OCC of its intention to trade the option. 
The Selecting Exchange would be required to submit the certificate 
between 12:01 a.m. and 11 a.m. (Chicago time) on the trading day before 
the exchange intended to start trading the option. If the option was 
not currently trading on another exchange, or had not been certified 
for listing and trading on another exchange, the Selecting Exchange 
would be required to provide certain additional information to the OCC 
when it submitted its certificate. The Selecting Exchange would be 
required to provide the options symbol, initial exercise prices, 
expiration cycle, and the position and exercise limits for the selected 
option class. If more than one Selecting Exchange submits a certificate 
indicating its intention to commence trading an options class, the OCC 
would use the information provided on the certificate that was 
submitted first. The OCC would provide all other Selecting Exchanges 
with this information, as well as the identity of other Selecting 
Exchanges, by 1 p.m. (Chicago time) on the day that it received the 
certificate.
    If the option class had been previously certified and was currently 
trading on at least one registered options exchange, the OCC would 
notify all other exchanges that traded the option class and all 
Selecting Exchanges of the identity of each Selecting Exchange. The OCC 
would provide this notice by 1 p.m. (Chicago time) on the day that it 
received notification from the Selecting Exchange(s).

B. Selection of a New Option Series

    The proposed OLPP would provide procedures for each of the Sponsors 
to trade additional series of an option class it currently trades. If 
an exchange decided to trade a new option series and began trading the 
new series on the same day, it would be required to notify the OCC, and 
any other exchange that also traded the same option class, within 10 
minutes of commencing trading, under normal market circumstances. If 
the exchange decided to trade the new series on the next trading day or 
thereafter, it would be required to notify the OCC, and any other 
exchange that traded the same option class of the new series to be 
traded, by 4:15 p.m. (Chicago time) the day before the new series is to 
be traded.
    If the addition of a new series would involve the introduction of 
new expiration months, different procedures would apply. First, the 
exchange would be required to provide a preliminary notification of the 
new expiration month for the series it intended to trade to the OCC and 
any other exchange that traded the same option class, by 9 a.m. 
(Chicago time) on the second day prior to expiration. Second, the 
exchange would be required to provide to the OCC and any other exchange 
that traded the same option class by 2 p.m. (Chicago time) on or before 
the trading day before the existing series' expiration a final 
notification of the new expiration month series it intended to trade. 
With respect to adding new option series and melding LEAP series into 
near-term series, the proposed OLPP would permit an exchange that 
wanted to trade a new series and any other exchange that traded the 
same option class to jointly determine, when necessary, the symbol and 
trading codes for the new series.

C. Petition To Review the Eligibility of a New Option Class

    Under the proposed Plan, the Sponsors would be permitted to 
petition the OCC to review whether an option class was eligible for 
listing on the day a Selecting Exchange certified the option for 
listing and trading. The exchange listing and trading the option class 
would be permitted to continue to do so unless and until the OCC 
determined that the class was ineligible. An exchange that wished to 
challenge the eligibility of an option class would be required to 
submit a petition to the OCC, setting forth the listing standards or 
guidelines the petitioning exchange was requesting the OCC to review, 
by 3 p.m. (Chicago time) on the date that the option class began 
trading. The OCC would be required to then provide a copy of the 
petition to the Selecting Exchange by 4 p.m. (Chicago time). Both 
exchanges would be required to submit written support for their claims 
of eligibility or ineligibility to the OCC by 3 p.m. (Chicago time) on 
the second day that the option class had been trading.
    The OCC would endeavor to complete its review and notify the 
Sponsors of its determination by 4 p.m. (Chicago time) on the third day 
that the option class

[[Page 27186]]

had been trading.\14\ If the OCC determined that the option class was 
ineligible, the Selecting Exchange would be required, on the first 
trading day after the OCC's determination, to delist any option series 
without open interest and allow only closing transactions in any series 
with open interest. If the option class subsequently became eligible, 
any exchange would be permitted to submit a certificate to the OCC to 
list and trade the option class.
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    \14\ The OCC would be entitled to take five additional days to 
complete its review if it notified both exchanges of the additional 
time needed.
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D. Adjustments Pursuant to OCC By-Laws

    The OCC's By-Laws permit a securities committee composed of 
representatives from each registered options exchange trading options 
on a particular security to determine whether to make adjustments to 
reflect particular events affecting the underlying security, as well as 
operational issues attendant to the adjustment.\15\ Events affecting 
the underlying security that may require an adjustment would include, 
among other things, stock dividends or distributions, stock splits, 
rights offerings, mergers, and reorganizations. The proposed OLPP would 
permit the Sponsors to make these adjustments, as well as determine 
operational issues in connection with such adjustments.
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    \15\ See Article VI, Section 11 of the OCC By-Laws. Operational 
issues attendant to the adjustment could include option symbols and 
trading codes, contract multipliers, and position and exercise 
limits applicable to the adjusted option class.
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E. New Plan Sponsors

    The proposed OLPP contains a self-effecting provision for the 
addition of new sponsors, in which an Eligible Exchange would be able 
to become a sponsor of the Plan by: (i) Executing a copy of the Plan; 
(ii) providing each then-current Plan Sponsor with a copy of such 
executed Plan; and (iii) effecting an amendment to the Plan reflecting 
the addition of the new sponsor's name.\16\ An Eligible Exchange would 
be defined as a national securities exchange registered with the 
Commission in accordance with Section 6(a) of the Act that: (i) Has 
effective rules for the trading of option contracts issued and cleared 
by OCC approved in accordance with the provisions of the Act and the 
rules and regulations thereunder; and (ii) is a party to the Plan for 
Reporting of Consolidated Options Last Sale Reports and Quotation 
Information (the ``OPRA Plan'').
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    \16\ An amendment to the Plan may be effected by a new Eligible 
Exchange executing a copy of the Plan, as then in effect (with the 
only change being the addition of the new Plan Sponsor's name in 
Section 9 of the Plan) and submitting such executed Plan to the SEC. 
Such amendment will be effective when it has been approved by the 
SEC or otherwise becomes effective pursuant to Section 11A of the 
Act and Rule 11Aa3-2 thereunder.
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F. Loss of Eligibility

    An exchange would no longer be an Eligible Exchange when it ceased 
trading OCC issued and cleared option contracts, or, if it had become a 
Plan sponsor and had not commenced to list and trade OCC issued an 
cleared option contracts, within one year of becoming a Plan Sponsor.

G. Implementation of the OLPP

    The Sponsors of the proposed Plan intend to implement the Plan 
immediately upon approval by the Commission. The Sponsors do not 
believe that development, implementation, or pilot phases are necessary 
for the operation of the OLPP.

H. Impact on Competition

    The Sponsors represent that the proposed OLPP would: (i) Facilitate 
the orderly introduction of new equity options; (ii) ensure that there 
is a mechanism in place to ensure that only eligible securities are 
selected for options trading; (iii) ensure the continued fungibility of 
multiply-trade option classes; (iv) allow the options exchanges to list 
new options as soon as possible to reap the benefits of their research 
efforts; and (v) minimize investor confusion.
    The Sponsors note that the Plan does not require advance notice to 
any options exchange of an intention to list a new options class 
(except for not more than one business day's notice to any options 
exchange that already lists or has applied to list the selected option 
class) or prevent or delay an options exchange from commencing to list 
or trade any option class. The Sponsors state that the OLPP would 
facilitate the orderly and fair introduction of new options and prevent 
unnecessary confusion among member firms in deciding where to direct 
their order flow by standardizing the process for listing option 
classes.
    Additionally, the proposed Plan would provide procedures for the 
selection of new option series and for the determination of operational 
details for option contracts adjusted pursuant to OCC By-Laws. The 
Sponsors represent that these procedures are necessary for the fair and 
orderly trading of multiply-listed option classes. The Sponsors state 
that the listing and trading of the same option series on two or more 
exchanges trading that option class requires uniformity and 
standardization of operational procedures, including uniform trading 
symbols, trading codes, and contract terms. The Sponsors further state 
that consistency is necessary for fully effective multiple trading, 
maintaining the fungibility of option contracts, efficient order 
routing decisions by member firms, and investor expectations that 
orders be routed and executed quickly at the exchanges that offer the 
potential for best execution. While the Plan would not require 
exchanges multiply-trading a particular option class to trade all 
series listed by the other exchanges trading the same class, it would 
provide a means of notification through the OCC of the series to be 
traded by each exchange. Such notification would give the other 
exchanges trading that class the ability to add the quotations for such 
new series into their calculation of the national best bid and offer on 
the date the new series began trading.

I. Description of Written Understandings or Agreements

    The Sponsors represent that they have not entered into any 
understandings or agreements, written or otherwise, relating to 
interpretations of the proposed Plan or conditions for becoming a 
sponsor or participant in the Plan.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed 
plan, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington 
DC 20549-0609. Copies of the submissions, 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 inspection 
and copying at the Commission's Public Reference Room. Copies of such 
filings will also be available for inspection and copying at the 
principal offices of the Sponsors of the proposed OLPP. All submissions 
should refer to the File No. 4-443 and should be submitted by June 16, 
2001.


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    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-12250 Filed 5-15-01; 8:45 am]
BILLING CODE 8010-01-M