Document ID: SEC-2013-1860-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2013-10-29T04:00Z

[Federal Register Volume 78, Number 209 (Tuesday, October 29, 2013)]
[Notices]
[Pages 64559-64563]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-25444]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70745; File No. SR-Phlx-2013-104]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Implement 
Transition to Friday Expiration for Most Options Contracts

October 23, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the

[[Page 64560]]

``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 11, 2013, NASDAQ OMX PHLX LLC (``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 proposes to amend certain procedural rules to 
implement the change in the expiration date for most option contracts 
to the third Friday of the expiration month instead of the Saturday 
following the third Friday. The text of the proposed rule change is 
available on the Exchange's Web site at http://nasdaqomxphlx.cchwallstreet.com/nasdaqomxphlx/phlx, 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 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
    On August 21, 2013, the Exchange filed to change the expiration 
date for most option contracts to the third Friday of the expiration 
month instead of the Saturday following the third Friday.\3\ This 
proposed rule change is intended to clarify certain rule changes that 
were made in the Expiration Date Filing and to amend additional 
procedural and other rules intended to implement the change in 
expiration date for most option contracts to the third Friday of the 
expiration month instead of the Saturday following the third Friday.
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    \3\ See Securities Exchange Act Release No. 70258 (August 26, 
2013), 78 FR 54340 (August 30, 2013) (SR-Phlx-2013-89) (``Expiration 
Date Filing''). Certain changes proposed in the Expiration Date 
Filing became effective on filing and become operative on September 
20, 2013. The Exchange filed a proposal to adopt a temporary rule to 
implement the amended definition of ``expiration date'' in Rule 
1000(b)(21) as of September 16, 2013. See Securities Exchange Act 
Release No. 70451 (September 19, 2013), 78 FR 59076 (September 25, 
2013) (SR-Phlx-2013-95) (``Temporary Rule Filing'').
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    The Exchange has adopted rules to change the expiration date for 
most option contracts to the third Friday of the expiration month 
instead of the Saturday following the third Friday.\4\ The changes to 
the expiration date apply to all standard expiration contracts 
including those in which the rules are silent on the expiration date. 
Option contracts having non-standard expiration dates (``non-standard 
expiration contracts'') were unaffected by the proposed rule changes, 
except that FLEX options having expiration dates later than February 1, 
2015 cannot expire on a Saturday unless they are specified by The 
Options Clearing Corporation (``OCC'') as grandfathered.\5\
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    \4\ See Rule 1000(b)(21) (definition of ``expiration date'').
    \5\ Examples of options with non-standard expiration contracts 
include: FLEX options (Rule 1079), Quarterly Equity and Exchange-
Traded Fund Shares (``ETFs'') Option Series (Rule 1012, Commentary 
.08), Quarterly Expiring Index Options Series (Rule 1101A(b)(iv)), 
Quarterly Options Index Series Program (Rule 1101A(b)(v)), Short 
Term Option Series (Rule 1012, Commentary .11) and Short Term Option 
Index Series (Rule 1101A(b)(vi)).
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    The Exchange is making the proposed rule changes to further 
harmonize its rules in connection with a recently approved rule filing 
made by OCC which made substantially similar changes.\6\ The Exchange 
believes that the industry must remain consistent in expiration dates, 
and, thus, is proposing to update its rules to remain consistent with 
those of OCC. In addition, the Exchange understands that other 
exchanges have and will be filing similar rules to effect this 
industry-wide initiative.\7\
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    \6\ See Securities Exchange Act Release No. 34-69772 (June 17, 
2013), 78 FR 37645 (June 21, 2013) (order approving SR-OCC-2013-
004).
    \7\ See Securities Exchange Act Release Nos. 70091 (August 1, 
2013), 78 FR 48212 (August 7, 2013) (SR-CBOE-2013-073); 69996 (July 
17, 2013), 78 FR 44183 (July 23, 2013) (SR-MIAX-2013-32); 70373 
(September 11, 2013), 78 FR 57198 (September 17, 2013) (SR-NYSEMKT-
2013-73); 70372 (September 11, 2013), 78 FR 57186 (September 17, 
2013) (SR-NYSEARCA-2013-88); and 70488 (September 24, 2013), 78 FR 
59998 (September 30, 2013) (SR-BOX-2013-45).
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    In order to provide a smooth transition to the Friday expiration, 
OCC has begun to move the expiration exercise procedures to Friday for 
all standard expiration contracts even though the contracts would 
continue to expire on Saturday.\8\ After February 1, 2015, virtually 
all standard expiration contracts will actually expire on Friday. The 
only standard expiration contracts that will expire on a Saturday after 
February 1, 2015 are certain options that were listed prior to the 
effectiveness of the OCC rule change, and a limited number of options 
that may be listed prior to necessary systems changes of the options 
exchanges. Phlx, along with the other option exchanges, has agreed not 
to list any additional options with Saturday expiration dates falling 
after February 1, 2015. The Exchange understands that the other 
exchanges are committed to the same listing schedule.\9\
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    \8\ See note 6 supra.
    \9\ See note 7 supra.
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    Certain option contracts have already been listed with Saturday 
expiration dates as distant as January 2016 (which is the furthest out 
expiration as of the date of this filing). For these contracts, 
transitioning to a Friday expiration for newly listed option contracts 
expiring after February 1, 2015 would create a situation under which 
certain options with open interest would expire on a Saturday while 
other options with open interest would expire on a Friday in the same 
expiration month.
    Clearing members have expressed a clear preference to not have a 
mix of options with open interest that expire on different days in a 
single month.\10\ Accordingly, OCC represented in its recently approved 
filing that it will not issue and clear any new option contracts with a 
Friday expiration if existing option contracts of the same options 
class expire on the Saturday following the third Friday of the same 
month. However, Friday expiration processing will be in effect for 
these Saturday expiration contracts. As with standard expiration 
options during the transition period, exercise requests received after 
Friday expiration processing is complete but before the Saturday 
contract expiration time will continue to be processed without fines or 
penalties.
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    \10\ Id.
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    Since the rule changes implementing the change in expiration date 
apply only to new series of standard expiration contracts opened for 
trading consistent with the OCC rules and having expiration dates later 
than February 1, 2015, the Exchange is proposing to amend certain rules 
relating to the procedures of the Exchange. The proposed changes take 
into account that, during a transition period, there will be options 
with open interest

[[Page 64561]]

having both Friday and Saturday expiration dates.
    More specifically, the Exchange seeks to amend Rule 1006 with 
respect to certain timing for restrictions on the exercise of American 
style option. Specifically, the Exchange proposes to specify that the 
10 business day period referenced in Rule 1006 includes the expiration 
date for an option contract that expires on a business day. In 
addition, the proposal would amend Rule 1006A to provide that 
restrictions may be in effect for index options until the open of 
business on the business day of expiration, or, in the case of an 
option contract expiring on a day that is not a business day, the 
business day prior to the expiration date.
    The Exchange also proposes to amend Rule 1012, Series of Options 
Open for Trading, to differentiate between Friday and Saturday 
expirations. Specifically, the Exchange proposes to amend Rule 
1012(a)(i)(B) to specify that additional series of individual stock 
options may be added in unusual market conditions until the close of 
trading on the business day prior to expiration in the case of an 
option contract expiring on a business day (i.e., Thursday for a Friday 
expiration), or, in the case of an option contract expiring on a day 
that is not a business day, and as is currently the case for Saturday 
expirations, until the close of trading on the second business day 
prior to expiration (i.e., until the close of trading on Thursday for 
Saturday expirations). The Exchange also seeks to modify Rule 1012(b) 
to specify that, on a business day of expiration, or, in the case of an 
option contract expiring on a non-business day, on the business day 
prior to the expiration date of a series of options, a closing rotation 
shall commence at 4:00 p.m. in the case of options on stocks or 4:15 
p.m. in the case of options on designated Exchange-Traded Fund Shares.
    The Exchange's proposal includes several proposed changes to Rules 
1042 and 1042A in order to differentiate between the exercise 
procedures for Friday and Saturday expirations. First, the Exchange 
proposes to specify in Rule 1042(b) that special procedures apply to 
the exercise of equity options on the business day of their expiration 
(i.e., for Friday expirations), or, in the case of an option contract 
expiring on a day that is not a business day, and as is currently the 
case for Saturday expirations, on the last business day before their 
expiration. Second, the Exchange proposes to specify in Rule 1042(c) 
that, regarding exercise cut-off times, option holders have until 5:30 
p.m. EST on the business day of their expiration (i.e., for Friday 
expirations), or, in the case of an option contract expiring on a day 
that is not a business day, and as is currently the case for Saturday 
expirations, on the business day immediately prior to the expiration 
date. Third, the Exchange proposes to specify in Rule 1042(h) that the 
advance notice described therein is applicable if provided by the 
Exchange on or before 5:30 p.m. EST on the business day (i.e., on 
Thursday) immediately prior to the business day of expiration (i.e., 
for Friday expirations), or, in the case of an option contract expiring 
on a day that is not a business day, and as is currently the case for 
Saturday expirations, the business day immediately prior to the last 
business day before the expiration date (i.e., Thursday for Saturday 
expirations). Fourth, the Exchange proposes to amend Rule 1042, 
Commentary .03 to specify that the reference therein to ``unusual 
circumstances'' includes, but is not limited to, a significant news 
announcement concerning the underlying security of an option contract 
that is scheduled to be released just after the close on the business 
day the option contract expires (i.e., for Friday expirations), or, in 
the case of an option contract expiring on a day that is not a business 
day, and as is currently the case for Saturday expirations, the 
business day immediately prior to expiration. In addition, the Exchange 
proposes to amend Rule 1042A(b) to make clear when certain procedures 
do not apply with respect to the exercise of any stock index option 
series on the business day of expiration, or in the case of an option 
expiring on a day that is not a business day, the business day prior to 
the expiration date.
    The Exchange also seeks to modify Rule 1047(c) to specify that an 
Options Exchange Official has the authority to conduct a closing 
rotation on a business day of expiration, or, in the case of an option 
contract expiring on a non-business day, on the trading day prior to 
expiration where the underlying stock or Exchange-Traded Fund Share did 
not open or was halted, whenever such action is deemed necessary in the 
interests of maintaining a fair and orderly market and to protect 
investors. Rule 1047, Commentary .01(c) also would be modified to 
clarify certain procedures relating to closing rotations that may 
commence on a business day of expiration, or, in the case of an option 
contract expiring on a non-business day, on the last trading day prior 
to expiration with respect to expiring stock option contracts, expiring 
stock option contracts or options on Exchange-Traded Fund Shares.
    Additionally, the Exchange proposes to amend Rule 1092 to add 
greater specificity regarding the timing surrounding notifications to 
the Exchange of a Catastrophic Error. Specifically, the Exchange 
proposes to specify that, for such transactions in an expiring options 
series that take place on an expiration day that is a business day 
(i.e., for Friday expirations), a party must notify the Exchange by 
5:00 p.m. ET that same day. For such transactions in an options series 
that take place on the business day immediately prior to an expiration 
day that is not a business day (i.e., for Saturday expirations), an 
Exchange member must notify the Exchange's Regulatory staff by 5:00 
p.m. ET on such business day (i.e., on Friday).
    Additionally, it is proposed that Rule 1101A(b)(i) would be amended 
to specify that due to unusual market conditions new series of index 
option contracts may be added up to, but not on or after, the fourth 
business day prior to expiration for an option contract expiring on a 
business day (i.e., up to, but not on or after, the opening of trading 
on Monday morning for Friday expirations), or, in the case of an option 
contract expiring on a day that is not a business day, and as is 
currently the case for Saturday expirations, the fifth business day 
prior to expiration. Similarly, Rule 1002C is proposed to be modified 
to specify that due to unusual market conditions new series of PHLX 
FOREX Options may be added consistent with the timing described above 
for new series of index option contracts. The Exchange also proposes to 
modify Rule 1101A(c) and Rule 1101A, Commentary .01 to specify the 
applicable hours for trading for index options series and options on 
the Full Value MSCI EAFE Index on an expiration date that is a business 
day or the business day prior to expiration when the expiration date is 
a non-business day.
    The Exchange also seeks to clarify rules governing the closing 
settlement value of certain option contracts. Rule 1057, as proposed to 
be amended, would provide that the closing settlement value for U.S. 
dollar-settled foreign currency options on the currencies listed 
therein, shall be the Exchange Spot Price at 12:00:00 Eastern Time 
(noon) on the expiration date, if that expiration date is a business 
day, or on the business day prior to expiration, when the expiration 
date is a non-business day, unless the Exchange determines to apply an 
alternative closing settlement value as a result of

[[Page 64562]]

extraordinary circumstances. The proposal would amend Rule 1009A(f)(1) 
to provide that the exercise settlement value for Alpha Index options 
will be based upon the opening prices of the individual stock or ETF 
from the primary listing market on the business day of expiration, or, 
in the case of an option contract expiring on a day that is not a 
business day, the business day prior to the expiration date. Under 
proposed Rule 1006C, the closing settlement value for PHLX FOREX 
Options and for the FLEX PHLX FOREX Options on the currencies listed in 
the rule shall be the spot market price at 12:00:00 Eastern Time (noon) 
on an expiration date that is a business day or on the business day 
prior to expiration, when the expiration date is a non-business day, 
unless the Exchange determines to apply an alternative closing 
settlement value as a result of extraordinary circumstances.
    As stated above, the Exchange believes the proposed change will 
keep the Exchange consistent with the processing at OCC and will enable 
the Exchange to give effect to the industry-wide initiative. In 
addition, the Exchange understands that other exchanges have filed 
similar rules to differentiate between Friday and Saturday expiration 
dates for standard options on listed classes.\11\
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    \11\ See note 7 supra.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\12\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \13\ requirements that the rules of an exchange be 
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 regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, 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. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \14\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ Id.
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    The Exchange believes that implementing the change to Friday 
expiration processing and eventually transitioning to Friday expiration 
for all monthly expiration contracts would foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities. In particular, the Exchange believes that keeping its rules 
consistent with those of the industry will protect all participants in 
the market by eliminating confusion and would facilitate the long-term 
goal of OCC and its clearing members to move the expiration process for 
all monthly expiration contracts from Saturday to Friday night. The 
proposed changes thus allow for a more orderly market by allowing all 
options markets, including the clearing agencies, to have the same 
expiration date for standard options and to have clarity around the 
procedures that apply during the transition period when both Friday and 
Saturday expirations will exist for standard options.
    In addition, the proposed changes will foster cooperation and 
coordination with persons engaged in regulating clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities by aligning a pivotal part of the options processing to 
be consistent industry wide. If the industry were to differ, investors 
would suffer from confusion and be more vulnerable to inadvertent 
violations of different exchange rules. The proposed changes do not 
permit unfair discrimination between any members because they are 
applied to all members equally. In the alternative, the Exchange 
believes that the proposed changes help all members by keeping the 
Exchange consistent with OCC practices and those of other exchanges.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Phlx 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, as amended. Specifically, the 
Exchange does not believe the proposed rule change will impose a burden 
on intramarket competition because it will be applied to all members 
equally. In addition, the Exchange does not believe the proposed rule 
change will impose any burden to intermarket competition because it 
will be applied industry-wide, apply to all market participants and is 
designed to allow OCC to streamline the expiration process for all 
monthly expiration contracts and increase operational efficiencies for 
OCC and its clearing members.
    The proposed rule change is structured to enhance competition 
because the shift from an expiration date of the Saturday following the 
third Friday to the third Friday is anticipated to be adopted industry-
wide and will apply to multiple listed classes. The proposed changes in 
turn will allow Phlx to continue to compete with other exchanges making 
similar rule changes. For the reasons above, the Exchange does not 
believe that the proposed rule change would impose a burden on 
competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received. The Exchange 
notes, however, that a favorable comment was submitted to the OCC 
filing.

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 after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) \16\ 
thereunder.
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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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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.

[[Page 64563]]

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 rule-comments@sec.gov. Please include 
File Number SR-Phlx-2013-104 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-2013-104. 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 
10:00 a.m. and 3:00 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-2013-104 and should be 
submitted on or before November 19, 2013.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-25444 Filed 10-28-13; 8:45 am]
BILLING CODE 8011-01-P