Document ID: SEC-2010-0099-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of Filing of Proposed Rule Change by NASDAQ OMX PHLX, Inc. Relating to Index Option Position Limits
Posted Date: 2010-01-19T05:00Z

[Federal Register Volume 75, Number 11 (Tuesday, January 19, 2010)]
[Notices]
[Pages 2902-2905]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-800]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61326; File No. SR-Phlx-2009-113]

Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing of Proposed Rule Change by NASDAQ OMX PHLX, Inc. Relating to 
Index Option Position Limits

January 11, 2010.
    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 December 29, 2009, NASDAQ OMX PHLX, Inc. (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``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.
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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 Substance 
of the Proposed Rule Change

    The Exchange, pursuant to Section 19(b)(1) of the Act \3\ and Rule 
19b-4 thereunder,\4\ proposes to increase the position limits \5\ for 
certain narrow-based (industry) index option contracts.\6\ Phlx also 
proposes to amend Rule 1001A to delete obsolete references to index 
options which no longer trade on the Exchange, and to delete the word 
``Phlx'' from the term ``Phlx/KBW Bank Index''.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ Position limits generally impose a ceiling on the number of 
option contracts in each class on the same side of the market (i.e., 
aggregating long calls and short puts or long puts and short calls) 
that can be held or written by an investor or group of investors 
acting in concert.
    \6\ Also known as Sector Index Options.
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    The text of the proposed rule change is set forth below. Proposed 
new language is in italics and deleted language is bracketed.
Rule 1001A.

Position Limits

    (a) Except as otherwise indicated, the position limit for a broad-
based (market) index option shall be 25,000 contracts on the same side 
of the market. All other broad-based (market) index options contracts 
shall be subject to a contract limitation fixed by the Exchange, which 
shall not be larger than the limits provided in this section (a), 
except certain positions must be aggregated in accordance with 
paragraph (d) or (e) below:
    [(i) Respecting the Value Line Composite Index, VLE, and the U.S. 
Top 100 Index, TPX, 75,000 contracts total, of which no more than 
45,000 contracts can be in the nearest expiration month.
    (ii) Respecting the National Over-the-Counter Index, XOC, 75,000 
contracts total.
    (iii) Respecting the Nasdaq Composite Index, (1) 50,000 contracts 
total for full-size options, with 30,000 contracts in the nearest 
expiration month, and (2) 500,000 contracts total for mini size 
options, with 300,000 contracts total in the nearest expiration month.]
    (i[v]) Respecting the Full Value Russell 2000[supreg] Options and 
the Reduced Value Russell 2000[supreg] Options, there shall be no 
position limits.
    (ii[v]) Respecting the Full Value Nasdaq 100 Options and the 
Reduced Value Nasdaq 100 Options, there shall be no position limits.
    (b)(i) In determining compliance with Rule 1001, option contracts 
on a narrow-based (industry) index shall, subject to the procedures 
specified in subparagraph (iii) of this rule, be subject to the 
following position limits:

--18,000 contracts (or 54,000 contracts for options on the PHLX Oil 
Service Sector, PHLX Semiconductor Sector, PHLX Utility Sector, PHLX 
Gold/Silver Sector, PHLX Housing Sector, SIG Energy MLP Index, SIG 
Oil Exploration & Production Index and the NASDAQ China Index) if 
the Exchange determines, at the time of a review conducted pursuant 
to subparagraph (ii) of this paragraph (b), that any single 
underlying stock accounted, on average, for 30% or more of the index 
value during the 30-day period immediately preceding the review; or
--24,000 contracts (or 72,000 contracts for options on the PHLX Oil 
Service Sector, PHLX Semiconductor Sector, PHLX Utility Sector, PHLX 
Gold/Silver Sector, PHLX Housing Sector, SIG Energy MLP Index, SIG 
Oil Exploration & Production Index and the NASDAQ China Index) if 
the Exchange determines, at the time of a review conducted pursuant 
to subparagraph (ii) of this paragraph (b), that any single 
underlying stock accounted, on average, for 20% or more of the index 
value or that any five underlying stocks together accounted, on 
average, for more than 50% of the index value, but that

[[Page 2903]]

no single stock in the group accounted, on average, for 30% or more 
of the index value, during the 30-day period immediately preceding 
the review; or
--31,500 contracts (or 94,500 contracts for options on the PHLX Oil 
Service Sector, PHLX Semiconductor Sector, PHLX Utility Sector, PHLX 
Gold/Silver Sector, PHLX Housing Sector, SIG Energy MLP Index, SIG 
Oil Exploration & Production Index and the NASDAQ China Index) if 
the Exchange determines that the conditions specified above which 
would require the establishment of a lower limit have not occurred, 
or
--44,000 contracts total with respect to the [Phlx/]KBW Bank Index.

    (ii)-(iii)--No Change. `
    (c) Reporting Requirements for Options on Market Indexes.--Each 
member or member organization that maintains a position on the same 
side of the market [in excess of 60,000 contracts for its own 
account or for the account of a customer in the Value Line Composite 
Index, VLE, and the U.S. Top 100 Index, TPX or the National Over-
the-Counter Index, XOC, or] in excess of 100,000 contracts for its 
own account or for the account of a customer in the Full Value 
Russell 2000[reg] Options, RUT; or in excess of 100,000 contracts 
for its own account or for the account of a customer in the Full 
Value Nasdaq 100 Options, NDX must file a report with the Exchange 
that includes, but is not limited to, data related to the option 
position, whether such position is hedged and if applicable, a 
description of the hedge and information concerning collateral used 
to carry the position. Registered Options Traders are exempt from 
this reporting requirement. For positions exceeding the position 
limit in paragraph (a), Commentary .01 contains the requirements for 
qualifying for the Index Hedge Exemption under this Rule.
    (d)-(e)--No Change.
    Commentary--No Change.
* * * * *

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 the proposed rule change is to increase index option 
position limits in Phlx Rule 1001A applicable to options on the PHLX 
Oil Service Sector, PHLX Semiconductor Sector, PHLX Utility Sector, 
PHLX Gold/Silver Sector, PHLX Housing Sector, SIG Energy MLP Index, SIG 
Oil Exploration & Production Index and the NASDAQ China Index) 
(collectively, the ``Specified Index Options'') in order to attract 
additional trading interest and promote depth and liquidity in those 
options.\7\
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    \7\ The SIG Indexes noted herein are trademarks of SIG Indices, 
LLLP.
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    Exchange exercise limits in Phlx Rule 1002A, Exercise Limits, which 
rule is not proposed to be amended, are established by reference to 
position limits. The proposed increase in position limits would 
therefore effectively also increase exercise limits.\8\
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    \8\ Phlx Rule 1002A, states, in relevant part: ``* * * exercise 
limits for index options contracts shall be equivalent to the 
position limits described in Rule 1001A.''
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    The Exchange believes that the current position limits constrain 
certain investors from trading the Specified Index Options, the markets 
for which have become well established and liquid. Pursuant to Rule 
1001A, the three tiered levels of position limits are 18,000, 24,000, 
and 31,500 contracts. These position limits, which are similar among 
all the options exchanges respecting narrow-based index options, are 
based generally on the degree of concentration of a component stock of 
the index.\9\ In some cases the existing position limits for the 
Specified Index Options force these same investors out of transparent 
listed markets and into opaque over-the-counter (``OTC'') transactions. 
The Exchange proposes to increase these limits to 54,000, 72,000, and 
94,500 contracts, respectively, for the Specified Index Options.
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    \9\ Specifically, Phlx Rule 1001A(b)(i) currently provides the 
following position limits for narrow-based index options: (1) 18,000 
contracts if the Exchange determines that any single underlying 
stock accounted, on average, for 30% or more of the index value 
during the 30-day period immediately preceding the semi-annual 
review of narrow-based index option position limits; (2) 24,000 
contracts if the Exchange determines, at the time of a semi-annual 
review, that any single underlying stock accounted, on average, for 
20% or more of the index value or that any five underlying stocks 
together accounted, on average, for more than 50% of the index 
value, but that no single stock in the group accounted, on average, 
for 30% or more of the index value, during the 30-day period 
immediately preceding the review; or (3) 31,500 contracts if the 
Exchange determines that the conditions specified above which would 
require the establishment of a lower limit have not occurred. 
Additionally, the rule provides that position limits with respect to 
options on the KBW Bank Index are 44,000 contracts.
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    The Exchange recognizes that the purpose of position limits is to 
prevent manipulation and protect against disruption of the markets for 
both the option as well as the underlying security. The Exchange has 
considered the effects of increased position limits for the Specified 
Index Options on the marketplace, and believes that manipulation and 
disruption concerns are addressed by a combination of existing 
surveillances and the implementation of tiered position limits.
    Increasing position limits for the Specified Index Options should 
increase market transparency to the benefit of the investing public by 
attracting more existing over the counter transactions in these 
securities to listed, centrally cleared markets. The Exchange dedicates 
substantial resources to monitoring the markets for evidence of 
manipulation or disruption caused by investors with positions at or 
near current position or exercise limits. The proposed increased 
position limits would not diminish the surveillance function in this 
regard. The Exchange believes an increase in position limits for the 
Specified Index Options at this time would reduce risk for manipulation 
and also benefit the investing public.
    The proposed higher position limits for the Specified Index Options 
would serve to better accommodate the hedging needs of Exchange market 
makers and specialists, who are restricted by current position limit 
levels. Exchange members and customers have indicated that the current 
position limits hamper their ability to execute investment strategies 
in respect of narrow-based indexes and have requested increased 
position limits. The market's need for these higher position limits is 
particularly critical for institutional hedging and other high volume 
trading objectives, and in view of the large portfolios common to 
institutional trading and the tendency to use larger-sized transactions 
to execute complex cross-market strategies. Floor members have also 
expressed the negative effect of the current low position limits on 
index options trading in an exchange environment. The Exchange 
believes, based on such member and customer requests, that the current 
position limit levels for the Specified Index Options continue to 
discourage market participation by large investors as well as 
institutions that compete to facilitate the trading interests of some 
of the largest investors. Accordingly, this proposal aims to also 
accommodate the liquidity and hedging needs of large investors and 
their facilitators.
    Investors that are not able to take large positions in the 
Specified Index Options

[[Page 2904]]

due to the restrictive index option position limits of Rule 1001A may 
resort in the alternative to executing that strategy in the OTC 
markets, where index option position limit rules do not constrain their 
ability to structure the desired strategy, and where regulators are 
limited in their ability to monitor and surveil market activity 
altogether. In today's evolving regulatory climate, the Exchange 
believes that the Commission should encourage migration of trading from 
opaque and largely unregulated OTC markets onto exchanges which are 
able to provide regulators with greater transparency and control. 
Additionally, by raising position limits, the Exchange should be able 
to increase investor participation in its markets for Specified Index 
Options, thereby reducing even further any potential for manipulation 
of index option settlement prices.
    The Exchange understands based on conversations with Commission 
staff that the Commission's understanding of appropriate position limit 
levels is based upon an economic analysis of that issue conducted under 
the auspices of the Commission over five years ago (the ``SEC 
Study'').\10\ The Exchange understands that the goal of the SEC Study's 
analysis was to determine a methodology for setting optimal position 
limits for index option contracts in order to minimize the potential 
for manipulation of the index options' settlement prices. The Exchange 
also understands that SEC staff have recently reviewed the SEC's 
study's analysis to reflect changes in market and regulatory 
environment and have analyzed the Specified Index Options in light of 
its review.
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    \10\ Exchange staff had previously discussed with Commission 
staff the issue of the position limits counseled by the SEC Study in 
the context of an earlier proposed rule change filed by the Exchange 
to raise the Sector Index option contracts' position limits. That 
filing was ultimately withdrawn by the Exchange at Commission 
staff's request. See SR-Phlx-2008-56.
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    Markets to buy and sell the individual index component stocks are 
now much more efficient, liquid, competitive and automated in nature 
making it highly unlikely that any one person or institution, either 
acting alone or in concert, could successfully influence the price of 
an underlying component stock to the extent that would be necessary to 
measurably affect the settlement price of one of the Specified Index 
Options. Since 2002, average daily volume has nearly tripled.\11\ 
Furthermore, liquidity measures of the price impact of a trade show an 
improvement of tenfold or more relative to 2002 values. Finally, the 
stocks which are the individual index components of the Specified Index 
Options trade actively on a number of national market centers as well 
as OTC, and all major market centers have become highly automated and 
fully linked in response to Regulation NMS.
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    \11\ In 2002 United States equities markets averaged 77 billion 
shares traded per month. So far in 2009 United States equities 
markets are averaging 225 billion shares traded per month--nearly 
three times the trading volume of the 2002 markets.
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    Finally, the Exchange is proposing to amend Rule 1001A to delete 
obsolete references to options on the Value Line Composite Index, the 
U.S. Top 100 Index and the National Over-the-Counter Index, as these 
index options are no longer traded on the Exchange, and is removing the 
word ``Phlx'' from the term Phlx/KBW Bank Index, as the index is now 
known simply as the ``KBW Bank Index''.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \13\ in particular, in that it is designed to 
promote just and equitable principles of trade, 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, by establishing increased position limits for the Specified 
Index Options which should allow more efficient use of those options by 
market participants.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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 on 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

    Within 35 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 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2009-113 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-Phlx-2009-113. 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 inspection and 
copying in the Commission's Public Reference Room, 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-
Phlx-2009-113 and should be submitted on or before February 9, 2010.

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-800 Filed 1-15-10; 8:45 am]
BILLING CODE 8011-01-P