Document ID: SEC-2010-1636-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2010-10-26T04:00Z

[Federal Register: October 26, 2010 (Volume 75, Number 206)]
[Notices]               
[Page 65685-65687]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26oc10-132]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63140; File No. SR-Phlx-2010-141]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Permit 
Certain FLEX Options To Trade Under the FLEX Trading Procedures for a 
Limited Time on a Closing Only Basis

October 20, 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 October 7, 2010, NASDAQ OMX PHLX LLC (``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 the 
Substance of the Proposed Rule Change

    The Exchange is filing with the Commission a proposal to amend Phlx 
Rule 1079 (FLEX Index, Equity and Currency Options) to permit certain 
exchange-traded flexible options (``FLEX Options'') \3\ to continue to 
trade under the FLEX trading procedures for a limited time on a closing 
only basis.
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    \3\ FLEX Options are flexible exchange-traded index, equity, or 
currency option contracts that provide investors the ability to 
customize basic option features including size, expiration date, 
exercise style, and certain exercise prices. FLEX Options may have 
expiration dates within five years. See Phlx Rule 1079. FLEX 
currency option contracts traded on the Exchange are also known as 
FLEX World Currency Options (``WCO'') or FLEX Foreign Currency 
Options (``FCO'') contracts.
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    The Exchange requests that the Commission waive the 30-day 
operative delay period contained in Exchange Act Rule 19b-
4(f)(6)(iii).\4\
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    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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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, on the Commission's 
Web site at http://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, 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 Exchange proposes to amend Phlx Rule 1079 to allow certain FLEX 
Options, which are identical in all terms to an underlying security or 
index option (``Non-FLEX Option''), to continue to trade on a closing 
only basis using the FLEX trading procedures for the balance of the 
trading day on which the Non-FLEX Option is added as an intra-day add.
    The Exchange recently adopted rule changes to allow FLEX Options to 
expire on or within two business days of a third-Friday-of-the-month 
expiration (``Expiration FLEX Options'').\5\ Such FLEX Options could 
have either an American or European-style exercise. Among other things, 
the rule change also provided that Expiration FLEX Options will be 
permitted before (but not after) Non-FLEX Options with identical terms 
are listed. Once and if an option series is listed for trading as a 
Non-FLEX Option series, (i) all existing open positions established 
under the FLEX trading procedures shall be fully fungible with 
transactions in the respective Non-FLEX Option series, and (ii) any 
further trading in the series would be as Non-FLEX Options subject to 
the Non-FLEX trading procedures and rules.
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    \5\ See Securities Exchange Act Release No. 60679 (September 16, 
2009), 74 FR 48619 (September 23, 2009)(SR-Phlx-2009-81)(notice of 
filing and immediate effectiveness).
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    The Options Clearing Corporation (``OCC'') became concerned that, 
in certain circumstances, in the event a Non-FLEX Option is listed with 
identical terms to an existing FLEX Option, OCC could not net the 
positions in the contracts until the next business day. If the Non-FLEX 
Option were listed intra-day, and an investor with a position in the 
FLEX Option attempted

[[Page 65686]]

to close the position using the Non-FLEX Option, the investor would be 
technically long in one contract and short in the other contract. This 
would expose the investor to assignment risk until the next day despite 
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having offsetting positions. The limited circumstances are:

--The Non-FLEX Option is listed intra-day.
--The FLEX contract is for American-style exercise.
--All other terms are identical and the contracts are otherwise 
fungible.

    The risk does not occur in expiration Friday FLEX Option positions 
during the five days prior to expiration, as no new Non-FLEX Option 
series may be listed within five days of expiration. It also does not 
exist for FLEX Option positions that will be identical to Non-FLEX 
series to be added after expiration, as those new series are added 
``overnight'' and OCC will convert the FLEX position to the Non-FLEX 
Option series at the time the Non-FLEX series is created. Further, it 
does not exist for most FLEX Index Options listed on the Exchange, as 
most Non-FLEX Index options currently traded on the Exchange are 
European-style exercise,\6\ and thus the Non-FLEX Index Options cannot 
be exercised on the day the series is listed.
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    \6\ Of the indexes that are currently listed and traded on the 
Exchange, two have American-style exercise and eleven have European-
style exercise.
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    As an example, suppose underlying issue XYZ, trading around $25 per 
share, has options listed on the March cycle, and in February an 
investor wishes to buy just-out-of-the-money call options that expire 
in May. Since the Non-FLEX May Options will not be listed until after 
the March expiration, the investor enters a FLEX Option order in 
February to buy 250 Call 30 options expiring on the third Friday of 
May. If, as expected, the Non-FLEX May 30 call options are listed on 
the Monday after March expiration, the investor's open FLEX position 
will be converted by OCC over the weekend following March expiration to 
the Non-FLEX series.
    However, if XYZ stock should decline between the time of the FLEX 
transaction and March expiration, the May 30 calls may not be added 
after March expiration. If that were to occur, the May 30 calls may be 
added sometime later. Suppose the Exchange receives a request to add 
the May 30 calls on the morning of the Wednesday after expiration, and 
the Exchange lists them immediately. The investor with the FLEX 
position may then decide it is an opportune time to close his position.
    Under the current rules, the investor would be required to close 
the position by entering a sell order in the new Non-FLEX Option 
series. However, when the Non-FLEX transaction is reported to OCC, the 
investor is considered short in the Non-FLEX Option series, and is 
still long in the FLEX Option. OCC cannot aggregate the FLEX positions 
into the Non-FLEX series until after exercise and assignment 
processing. If a buyer in the new Non-FLEX series were to exercise the 
options, the original investor who had attempted to close the FLEX 
position with an offsetting Non-FLEX trade would be at risk of being 
assigned on the technically short Non-FLEX position.
    Because of this risk, OCC will not clear an American-style 
expiration Friday FLEX option. The Exchange has spoken with OCC and OCC 
has agreed that allowing an option position in a FLEX contract to be 
closed using a FLEX Option in such circumstances will mitigate the 
risk.
    The assignment risk does not exist if the Non-FLEX Option is to be 
added the next trading day. In situations where OCC is aware that a 
series will be added overnight, they can convert the FLEX position to a 
Non-FLEX position before the next trading day. However, OCC cannot 
guarantee that an identical Non-FLEX series will not be added intra-
day, and thus will not clear such American-style FLEX Options.
    The Exchange is proposing a limited exception to the requirement 
that the trading in such options be under the Non-FLEX trading 
procedures. The Exchange proposes that, in the event a Non-FLEX Option 
is listed intra-day, a FLEX Option position with identical terms could 
be closed under the FLEX trading procedures, but only for the balance 
of the trading day on which the series is added. Under the proposed 
rule change, both sides of the FLEX transaction would have to be 
closing only positions.
    This change will allow a FLEX Option to be traded in such a manner 
to mitigate assignment risk.
    The Exchange has the regulatory responsibility for reviewing the 
conformity of FLEX trades to the terms and specifications contained in 
Rule 1079, as applicable. In the event a Non-FLEX series, having the 
same terms as an existing expiration Friday FLEX Option, is listed 
intra-day, the Exchange will review any subsequent FLEX transactions in 
that series and verify that the transaction is being executed for the 
purpose of closing out an existing FLEX position. With respect to FLEX 
trades occurring pursuant to the proposed rule change, the Exchange 
will make an announcement that the FLEX series is now restricted to 
closing transactions; a FLEX Request for Quotes may not be disseminated 
for any order representing a FLEX series having the same terms as a 
Non-FLEX series, unless such FLEX Order is a closing order (and it is 
the day the Non-FLEX series has been added); and only responses that 
were closing out an existing FLEX position would be permitted. Any 
transactions that occur that do not conform to these requirements would 
be nullified by the Exchange.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \7\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \8\ 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 by giving Exchange members and 
investors additional tools to trade customized options in a regulated 
exchange environment while allowing a FLEX position to be traded in 
such a manner as to mitigate inadvertent assignment risk.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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

    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 designate if consistent with the protection of investors 
and the public interest, provided that the self-

[[Page 65687]]

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, the proposed rule change has 
become effective pursuant to Section 19(b)(3)(A) of the Act \9\ and 
Rule 19b-4(f)(6) thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires that a self-regulatory organization submit to the 
Commission written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, at least five business days prior to the filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Commission notes that the Exchange has satisfied 
this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\11\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing.
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    \11\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission notes that the proposed rule change is substantially 
similar to a proposed rule change previously submitted by NYSE Arca 
which was published for notice and comment in the Federal Register.\12\ 
The Commission notes that it did not receive any comments on the NYSE 
Arca proposal, and does not believe the Exchange's proposal raises any 
new or novel issues. Further, as noted above, because of the 
inadvertent assignment risk, market participants could not trade 
previously approved American style FLEX Options expiring on Expiration 
Friday. The proposal seeks to mitigate such assignment risks by 
limiting certain FLEX transactions to closing only, thereby allowing 
the trading of previously approved FLEX Options. For these reasons, the 
Commission believes that waiver of the 30-day operative delay is 
consistent with the protection of investors and the public interest and 
therefore, designates the proposed rule change operative upon 
filing.\13\
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    \12\ See Securities Exchange Act Release No. 62321 (June 17, 
2010), 75 FR 36130 (June 24, 2010) (SR-NYSEArca-2010-46).
    \13\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such 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-Phlx-2010-141 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-2010-141. 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 available publicly. All 
submissions should refer to File No. SR-Phlx-2010-141 and should be 
submitted on or before November 16, 2010.

    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. 2010-27066 Filed 10-25-10; 8:45 am]
BILLING CODE 8011-01-P