Document ID: SEC-2010-1270-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc
Posted Date: 2010-08-18T04:00Z

[Federal Register: August 18, 2010 (Volume 75, Number 159)]
[Notices]               
[Page 51142-51145]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18au10-170]                         

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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

[[Page 51143]]

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

[[Page 51144]]

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 rule-comments@sec.gov. Please include 
File Number SR-Phlx-2010-109 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary,

[[Page 51145]]

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