Document ID: SEC-2010-1257-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2010-08-18T04:00Z

[Federal Register: August 18, 2010 (Volume 75, Number 159)]
[Notices]               
[Page 51140-51142]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18au10-169]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62709; File No. SR-NASDAQ-2010-097]

 
Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by The NASDAQ Stock Market LLC 
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, The NASDAQ Stock Market LLC (``NASDAQ'') filed 
with the 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 NASDAQ. 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

    NASDAQ is filing with the Commission a proposal for the NASDAQ 
Options Market (``NOM'' or ``Exchange'') to amend Chapter VIII, Section 
1 (Exercise of Options Contracts) to make changes to extend the cut-off 
time to submit contrary exercise advices (``Contrary Exercise Advices'' 
or ``CEAs'').\3\ The Exchange also proposes to make certain non-
substantive changes to reorganize the text of Chapter VIII, Section 1 
to more clearly present the existing requirements and to eliminate 
duplicative language.
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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.
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    The text of the proposed rule change is available on NASDAQ's Web 
site at http:[sol][sol]nasdaq.cchwallstreet.com/Filings/, at NASDAQ's 
principal office, on the Commission's Web site at 
http:[sol][sol]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, NASDAQ 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. NASDAQ 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 Chapter VIII, 
Section 1 to extend the cut-off time to submit Contrary Exercise 
Advices to the Exchange; to extend exercise cut-off deadlines to 
Quarterly Options Series; and to make certain non-substantive changes 
to reorganize the text of Section 1 to more clearly present the 
existing requirements and to eliminate duplicative language.\4\
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    \4\ The Exchange proposes to reorganize the current rule text of 
Chapter VIII, Section 1 so that the requirement that exercise 
decisions must be made by 5:30 p.m. Eastern Time 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 .03 to Chapter VIII, Section 1 
because it is duplicative of certain language contained in paragraph 
(c) of the current rule and paragraph (d) in the proposal.

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[[Page 51141]]

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 
Chapter VIII, Section 1 option holders must file a CEA with the 
Exchange notifying it of the contrary intention.\5\ Chapter VIII, 
Section 1 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. Participants satisfy this evidentiary requirement by 
submitting a CEA form to the Exchange, or by electronically submitting 
the CEA 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 Chapter VIII, Section 1.
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    \5\ Referenced submissions of CEAs to OCC are through 
Participants' clearing firms.
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    Currently under Chapter VIII, Section 1, 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 Participant may not 
accept CEA instructions from its customer or non customer accounts 
after 5:30 p.m. However, the current rule gives Participants an 
additional one hour, up to 6:30 p.m., to submit these CEA instructions 
where such Participants use an electronic submission process.\7\
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    \6\ Referenced times are to Eastern Standard Time (EST).
    \7\ Chapter VIII, Section 1 indicates that if Participants 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 
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 exchange 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 was approved in 2008 
for NASDAQ in respect of Participants.\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 
Chapter VIII, Section 1 for submitting CEA instructions to the Exchange 
by one additional hour, up to 7:30 p.m.\10\ The Exchange believes that 
this proposed rule change is necessary to address concerns expressed by 
members (Participants) that, given the decrease in the Ex-by-Ex 
threshold and the increase in trading, the existing deadline for 
submitting CEAs to the Exchange is problematic for timely back-office 
processing. 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.
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    \10\ To clarify Chapter VIII, Section 1 so that it is similar to 
CEA rules of other options exchanges, such as ISE Rule 1100, the 
Exchange proposes to incorporate in Section 1 the concept that 
instructions are submitted to the Exchange.
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    The Exchange also proposes to modify the language in paragraph (g) 
of the current rule (new paragraph (h)), which allows a Participant 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 Participant 
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.\11\
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    \11\ CEA procedures in respect of index options are discussed 
separately in Chapter VIII, Section 1(k) (new paragraph (l)).
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    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 submission deadline will not conflict 
with OCC submission rules or cause any OCC processing issues. The 
initiative to address Exchange member (Participant) 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.\12\
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    \12\ 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 
Chapter VIII, Section 1(c) to QOS as to non-QOS (e.g. equity) options. 
QOS are listed and traded on the Exchange pursuant to Chapter XIV, 
Section 11 (Terms of Index Options Contracts). The proposed change 
reflects the applicability of CEA cut-off deadlines to QOS options and 
conforms Chapter VIII, Section 1 with Chapter XIV, Section 11 of the 
Exchange's rules and with the CEA rules of other options exchanges.\13\
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    \13\ See, e.g., ISE Rule 1100(c).
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    Finally, the Exchange also proposes non-substantive, housekeeping 
changes

[[Page 51142]]

such as clarifying the name of The Options Clearing Corporation in 
Chapter VIII, Section 1(b).
    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''),\14\ 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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    \14\ 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 \15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \16\ 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 Participants an additional hour within which to 
complete the necessary processing of CEAs and thereby decreasing 
Exchange Participants' 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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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ does not believe that the proposed rule change will result 
in 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 Regarding the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor 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 \17\ and Rule 19b-
4(f)(6) thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 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-NASDAQ-2010-097 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-NASDAQ-2010-097. 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-
NASDAQ-2010-097 and should be submitted on or before September 8, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20472 Filed 8-17-10; 8:45 am]
BILLING CODE 8010-01-P