Document ID: SEC-2010-0203-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: International Securities Exchange, LLC
Posted Date: 2010-02-08T05:00Z

[Federal Register: February 8, 2010 (Volume 75, Number 25)]
[Notices]               
[Page 6237-6239]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08fe10-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61458; File No. SR-ISE-2010-02]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change To Amend Exchange Rules 
Related to Cutoff Time for Contrary Exercise Advice Submissions

February 1, 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 January 11, 2010, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
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 International Securities Exchange, LLC (the ``Exchange'' or the 
``ISE'') proposes to amend Rule 1100 in order to extend the cut-off 
time to submit contrary exercise advices. The text of the proposed rule 
change is available on the Exchange's Web site http://www.ise.com, at 
the Exchange's Office of the Secretary, 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 self-regulatory organization 
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 self-regulatory organization 
has prepared summaries, set forth in sections A, B and C below.

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 amend Rule 1100 to 
extend the cut-off time to submit contrary exercise advices (``Contrary 
Exercise Advice'', or, ``CEA'') \3\ to the Exchange. The Exchange also 
proposes to make certain non-substantive changes to reorganize the text 
of Rule 1100 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 OCC rules.
    \4\ The Exchange proposes to reorganize the current rule text 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)(2) and paragraph (c) of the 
current rule. The Exchange also proposes to eliminate Supplementary 
Material .03 to Rule 1100 because it is duplicative of the language 
contained in paragraph (c) of the current rule and paragraph 
(d)(iii) in the proposal.
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    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 1100 option holders must file a CEA with the Exchange 
notifying it of the contrary intention. Rule 1100 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 directly to the 
Exchange, or by electronically submitting the CEA to the Exchange 
through OCC's electronic communications system. The

[[Page 6238]]

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 1100.
    Currently under Rule 1100, option holders have until 5:30 p.m.\5\ 
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 member uses an electronic submission process.\6\
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    \5\ All referenced times are Eastern Time.
    \6\ 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.\7\ 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 is $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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    \7\ 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).
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    The Exchange proposes to extend the current 6:30 p.m. deadline 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 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. 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. This additional processing 
time and Exchange submission deadline will not conflict with OCC 
submission rules or cause any OCC processing issues.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\8\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act,\9\ in particular, in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and to 
protect investors and the public interest in that it is designed 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 for a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
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) in that it, by providing Exchange members an additional hour 
within which to complete the necessary processing of CEAs, will thereby 
decrease Exchange members' burden of processing an increasing number of 
contrary exercise advices and enable them to more easily manage and 
process these instructions.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose 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 on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

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:

[[Page 6239]]

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-ISE-2010-02 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-ISE-2010-02. 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, 100 F Street, NE., 
Washington, DC 20549, 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 ISE. 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-ISE-2010-02 and should be 
submitted on or before March 1, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\

    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-2587 Filed 2-5-10; 8:45 am]
BILLING CODE 8011-01-P