Document ID: SEC-2009-1353-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to FLEX Option Expirations
Posted Date: 2009-09-23T04:00Z

[Federal Register: September 23, 2009 (Volume 74, Number 183)]
[Notices]               
[Page 48619-48621]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23se09-127]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60679; File No. SR-Phlx-2009-81]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
FLEX Option Expirations

September 16, 2009.
    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 September 15, 2009, NASDAQ OMX PHLX, Inc. (``Phlx'' or 
``Exchange'') 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 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 Phlx Rule 1079 (FLEX Index, Equity 
and Currency Options) regarding permissible expiration dates for FLEX 
options.\3\
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    \3\ FLEX options are flexible exchange-traded options contracts 
that overly index, equity, and currency securities. FLEX options 
provide investors with the ability to customize basic option 
features including size, expiration date, exercise style, and 
certain exercise prices. FLEX options may have long expiration dates 
within five years for FLEX index options and three years for FLEX 
equity options and FLEX currency options. See Rule 1079.
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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, 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 the proposed rule change is to modify the 
permissible expiration dates for FLEX options in Phlx Rule 1079.
    Under current Rule 1079, FLEX options may not expire on any 
business day that falls on, or within two business days of an 
expiration day for any non-FLEX option on the same underlying security 
(an ``Expiration Friday'').\4\ However, subject to aggregation 
requirements for cash settled options, the current FLEX rules do permit 
the expiration of FLEX options on the same day that non-FLEX quarterly 
index options (``QIX'' or ``Quarterly Options'') expire.\5\
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    \4\ For example, under current Rule 1079, a FLEX option could 
expire on the Tuesday before Expiration Friday, but could not expire 
on the Wednesday or Thursday before Expiration Friday. Similarly, a 
FLEX option could expire on the Wednesday after Expiration Friday, 
but could not expire on the Monday or Tuesday after Expiration 
Friday. This restriction is hereinafter referred to as the ``three 
business day'' expiration restriction.
    \5\ See Rule 1079(a)(6)(A).
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    The Exchange is now proposing to eliminate the expiration date 
restriction so that FLEX options may expire on any given business 
day.\6\ Although the

[[Page 48620]]

expiration date restrictions would be eliminated, the Exchange notes 
that all other requirements for FLEX options in Rule 1079 would 
continue to apply. FLEX options remain subject to position limits under 
Rule 1079(d) and exercise limits under Rule 1079(e). Moreover the 
margin requirements in Rule 721 continue to apply and the Exchange has 
the authority, pursuant to Rule 1079(d)(2), to impose additional margin 
requirements as deemed advisable.
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    \6\ Proposed Rule 1079(a)(6) states that the expiration date for 
FLEX options is: Any month, business day and year within five years 
for FLEX index options and within three years for FLEX currency 
options, except that (i) a FLEX index option that expires on or 
within two business days prior or subsequent to a third Friday-of-
the-month expiration day for a non-FLEX option (except quarterly 
expiring index options) or underlying currency may only have an 
exercise settlement value on the expiration date determined by 
reference to the reported level of the index as derived from the 
opening prices of the component securities (``a.m. settlement'') and 
(ii) all FLEX currency options will expire at 11:59 p.m. eastern 
time on their designated expiration date.
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    The Exchange is also proposing an aggregation requirement under 
Rule 1079(d) for position limit purposes. Specifically, for as long as 
the options positions remain open, positions in FLEX options that 
expire on Expiration Friday shall be aggregated with positions in non-
FLEX options on the same underlying (e.g., the underlying security in 
the case of a FLEX equity option, and the underlying index in the case 
of a FLEX index option) (referred to as ``comparable non-FLEX 
options''). Such FLEX options and comparable non-FLEX options would be 
subject to the position and exercise limits that are applicable to the 
non-FLEX options.\7\
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    \7\ Position and equity limits for non-FLEX equity, currency, 
and index options are governed by Rules 1001, 1002, 1001A, and 
1002A.
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    In addition, in the case of FLEX index options only, the proposed 
rule change provides that FLEX index options expiring on or within two 
business days of an Expiration Friday may not have an exercise 
settlement value on the expiration date determined by reference to the 
closing price of the index or specified averages. Therefore, the 
exercise settlement value on such expiration dates may only be 
determined by a.m. settlement values. These limitations on exercise 
settlement value calculations are intended to serve as a safeguard 
against potential adverse effects that might be associated with triple 
witching.\8\
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    \8\ Contracts for stock index futures, stock index options, and 
stock options all expire on the same days occurring on the third 
Friday of March, June, September, and December (which is referred to 
as ``triple witching''). Currency options expire on the same days. 
The Exchange's proposed limitations on p.m. exercise settlement 
values and exercise settlement values based on a specified average 
would apply during triple witching expirations, as well as on all 
other Expiration Fridays.
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    In conjunction with the elimination of the expiration date 
restriction, the proposed rule change also states that, provided the 
options on an underlying security or index are otherwise eligible for 
FLEX trading, FLEX options will be permitted in puts and calls that do 
not have the same exercise style, same expiration date and same 
exercise price as non-FLEX options that are already available for 
trading on the same underlying security or index. The proposed rule 
change also provides that FLEX options will be permitted before (but 
not after) the options are listed for trading as non-FLEX options. Once 
and if an option series is listed for trading as a non-FLEX option 
series, then: (i) All existing open positions established under the 
FLEX trading procedures shall be fully fungible with transactions in 
the respective non-FLEX options series, and (ii) any further trading in 
the series would be as non-FLEX options subject to the Exchange's non-
FLEX trading procedures and rules.
    For example, a FLEX trader could establish a FLEX options position 
in a European-style, a.m. settled MNX 210 call option series with an 
expiration of August 19, 2011 (which will be an Expiration Friday). In 
such instance, once and if the non-FLEX, European-style, a.m. settled 
MNX 210 call option series that expires on August 19, 2011 is listed 
for trading, the established FLEX option position would be fully 
fungible with transactions in the non-FLEX option series. Any further 
trading in the series would be as non-FLEX options subject to non-FLEX 
option trading procedures.
    The Exchange will report any undue effects or unanticipated 
consequences that may occur due to the elimination of the three 
business day expiration restriction (blackout period).
    The Exchange believes that expanding the eligible dates for FLEX 
expirations is important and necessary to the Exchange's efforts to 
create a product and market that provides market participants on the 
Exchange including investors interested in FLEX-type options with an 
improved but comparable alternative to the over-the-counter (``OTC'') 
market in customized options, which can take on contract 
characteristics similar to FLEX options but are not subject to the same 
restrictions (such as the three business day expiration restriction or 
the p.m. settlement restriction).\9\ By expanding the eligible 
expiration dates for FLEX options, market participants will now have 
greater flexibility in determining whether to execute their customized 
options in an exchange environment or in the OTC market. The Exchange 
believes that market participants benefit from being able to trade 
these customized options in an exchange environment in several ways, 
including, but not limited to, the following: (1) Enhanced efficiency 
in initiating and closing out positions; (2) increased market 
transparency; and (3) heightened contra-party creditworthiness because 
of the role of The Options Clearing Corporation (``OCC'') as issuer and 
guarantor of FLEX options.\10\
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    \9\ The Exchange represents that it has appropriate 
surveillances in place to monitor transactions in FLEX options.
    \10\ The Exchange also proposes technical changes in Rule 1079 
such as, for example, a definitional cross-reference in subsection 
(a)(2); updating language to reflect the proper trading system name 
and deletion of an obsolete reference to AUTOM in (b); deletion of a 
reference to settlement currency in respect of index options because 
they settle in U.S. dollars in (b)(1); deletion of position limits 
for products that no longer trade on the Exchange in (d)(1); and 
deletion of an obsolete rule references (sic) in (d)(2).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ 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 providing additional opportunities to trade customized 
FLEX options in an exchange environment.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \13\ and Rule 19b-4(f)(6) thereunder.\14\ 
Because the foregoing rule 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

[[Page 48621]]

designate if consistent with the protection of investors and the public 
interest, provided that the self-regulatory organization has given 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,\15\ the proposed rule change has become effective pursuant 
to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-4(f)(6) 
thereunder.\17\
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ The Exchange has fulfilled this five day requirement.
    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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    Under Rule 19b-4(f)(6) of the Act,\18\ a proposal does not become 
operative for 30 days after the date of its filing, or such shorter 
time as the Commission may designate if consistent with the protection 
of investors and the public interest.
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    \18\ Id.
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    The Exchange has requested that the Commission waive the 30-day 
operative date. The Exchange notes that the proposed rule change is 
based on the rules of another self-regulatory organization and raises 
no new policy issues.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, 
and thus designates the proposal as operative upon filing.\19\ The 
Commission notes that the Exchange's proposal is based on a similar 
proposed rule change adopted by the Chicago Board Options Exchange.\20\ 
That proposal was subject to full notice and comment and no comments 
were received. Based on this, the Commission believes that it is 
appropriate to designate the proposal operative upon filing.
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    \19\ For purposes only of waiving the operative delay of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f). See also 17 CFR 200.30-3(a)(59).
    \20\ Securities Exchange Act Release No. 59417 (February 18, 
2009), 74 FR 8591 (February 25, 2009) (SR-CBOE-2008-115).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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-2009-81 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-2009-81. 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. 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-2009-81 and should be submitted on or before October 14, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-22877 Filed 9-22-09; 8:45 am]

BILLING CODE 8010-01-P