Document ID: SEC-2011-1212-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-08-16T04:00Z

[Federal Register Volume 76, Number 158 (Tuesday, August 16, 2011)]
[Notices]
[Pages 50796-50798]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20707]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65086; File No. SR-FINRA-2011-036]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Increase the Position Limit for Options on the 
Standard and Poor's Depositary Receipts Trust

August 10, 2011.
    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 July 29, 2011, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') 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 FINRA. FINRA 
has designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 2360 (Options), 
Supplementary Material .03 to increase the position limit for options 
on the Standard and Poor's Depositary Receipts Trust (``SPY'').
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA 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, FINRA 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. FINRA 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 amend FINRA Rule 
2360, Supplementary Material .03 to increase the position limit 
applicable to options on the Standard and Poor's Depositary Receipts 
Trust, which trade under the symbol SPY, from 300,000 to 900,000 
contracts \4\ to conform to a recent rule change by other self-
regulatory organizations \5\ as well as [sic] the reasons discussed 
below.
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    \4\ The exercise limits on SPY options set forth in FINRA Rule 
2360(b)(4), which is not amended by this filing, but which 
incorporate by reference options position limits, would 
correspondingly increase to 900,000 contracts.
    \5\ See Securities Exchange Act Release No. 64695 (June 17, 
2011) 76 FR 36942 (June 23, 2011) (SEC order approving File No. SR-
Phlx-2011-58); Securities Exchange Act Release No. 64760 (June 28, 
2011) 76 FR 39143 (July 5, 2011) (Notice of Filing and Immediate 
Effectiveness of File No. SR-ISE-2011-34); Securities Exchange Act 
Release No. 64928 (July 20, 2011) (File No. SR-CBOE-2011-065); 
Securities Exchange Act Release No. 64966 (July 26, 2011) (File No. 
SR-NYSEAmex-2011-50); and Securities Exchange Act Release No. 64945 
(July 21, 2011) (File No. SR-NYSEArca-2011-47).
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    Currently, SPY options have a position limit of only 300,000 
contracts on the same side of the market while Power Shares QQQ Trust, 
based on the Nasdaq 100 Index[supreg] (``QQQ'') options, which are 
comparable to SPY options but have lesser volume,\6\ have a position 
limit of 900,000 contracts on the same side of the market. Given the 
high volume and continuous demand for trading SPY options, FINRA 
believes that the current position limit of 300,000 contracts is 
inadequate, and that such options should, like options on QQQ, have a 
position limit of 900,000 contracts.
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    \6\ For example, options on SPYs, the most actively traded 
options in the U.S. in terms of volume, traded a total of 33,341,698 
contracts across all exchanges from March 1, 2011 through March 16, 
2011. In contrast, over the same time period options on the QQQ 
traded a total of 8,730,718 contracts (less than 26.2% of the volume 
of options on SPYs). In addition, for 2010, options on SPY had an 
average daily trading volume of 3.63 million contracts, while 
options on QQQs had an average daily trading volume of 963,502. See 
supra note 5 PHLX rule filing, at 36942.
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    The position limit on SPY options has remained flat for more than 
five years,

[[Page 50797]]

despite the options being the most actively traded options for the last 
two years, and is no longer sufficient for optimal trading and hedging 
purposes. SPY options are used by large institutions and traders as a 
means to invest in or hedge the overall direction of the market. The 
restrictive option position limit prevents large customers, such as 
mutual funds and pension funds, from using options to gain meaningful 
exposure to, and hedging protection through the use of, SPY options. 
Restrictive options position limits also can result in lost liquidity 
in both the options market and the equity market. The proposed position 
limit increase will remedy this situation to the benefit of large as 
well as retail traders, investors, and public customers. FINRA also 
believes that increasing position and exercise limits for SPY options 
would lead to a more liquid and competitive market environment that 
would benefit customers interested in this product.
    In addition, FINRA believes that the options on SPY position and 
exercise limits, at their current levels, no longer serve their stated 
purpose. There has been a steadfast and significant increase over the 
last decade in the overall volume of exchange-traded options; position 
limits, however, have not kept up with the volume. Part of this volume 
is attributable to a corresponding increase in the number of overall 
market participants, which has, in turn, brought about additional depth 
and increased liquidity in exchange-traded options.\7\
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    \7\ The Commission has previously observed that: ``Since the 
inception of standardized options trading, the options exchanges 
have had rules imposing limits on the aggregate number of options 
contracts that a member or customer could hold or exercise. These 
rules are intended to prevent the establishment of options positions 
that can be used or might create incentives to manipulate or disrupt 
the underlying market so as to benefit the options position. In 
particular, position and exercise limits are designed to minimize 
the potential for mini-manipulations and for corners or squeezes of 
the underlying market. In addition such limits serve to reduce the 
possibility for disruption of the options market itself, especially 
in illiquid options classes.'' See Securities Exchange Act Release 
No. 39489 (December 24, 1997), 63 FR 276, 278 (January 5, 1998) 
(File No. SR-CBOE-97-11) (order approving increased OEX position and 
exercise limits).
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    FINRA believes that the existing surveillance procedures and 
reporting requirements at FINRA,\8\ the options exchanges, and at the 
several clearing firms are capable of properly identifying unusual and/
or illegal trading activity. These procedures use daily monitoring of 
market movements by automated surveillance techniques to identify 
unusual activity in both options and underlying stocks.\9\
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    \8\ See FINRA Rule 2360(b)(5) for the reporting requirements.
    \9\ These procedures have been effective for the surveillance of 
SPY options trading and will continue to be employed.
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    Furthermore, large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G.\10\ Options positions are 
part of any reportable positions and cannot legally be hidden. 
Moreover, the previously noted Rule 2360(b)(5) requirement that members 
must file reports with FINRA for any customer who held aggregate large 
long or short positions of any single class for the previous day will 
continue to serve as an important part of FINRA's surveillance efforts.
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    \10\ 17 CFR 240.13d-1.
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    FINRA believes that the current financial requirements imposed by 
FINRA and by the Commission adequately address concerns that a member 
or its customer may try to maintain an inordinately large unhedged 
position in an option, particularly on SPY. Current margin and risk-
based haircut methodologies serve to limit the size of positions 
maintained by any one account by increasing the margin and/or capital 
that a member must maintain for a large position held by it or by its 
customer. It also should be noted that FINRA has the authority under 
FINRA Rule 4210(f)(8)(A) to impose a higher margin requirement upon a 
member when FINRA determines a higher requirement is warranted. In 
addition, the Commission's net capital rule, Rule 15c3-1 under the 
Act,\11\ imposes a capital charge on members to the extent of any 
margin deficiency resulting from the higher margin requirement.
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    \11\ 17 CFR 240.15c3-1.
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    Finally, FINRA believes that while the position limit on options on 
QQQs, which as noted are similar to SPY options, has been gradually 
expanded from 75,000 contracts to the current level of 900,000 
contracts, there have been no adverse affects on the market as a result 
of this position limit increase. Likewise, there have been no adverse 
affects on the market from expanding the position limit for SPY options 
from 75,000 contracts to the current level of 300,000 contracts.
    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the SEC waive the requirement that 
the proposed rule change not become operative for 30 days after the 
date of the filing, such that FINRA can implement the proposed rule 
change immediately.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\12\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule filing promotes 
consistent regulation by harmonizing FINRA's position limits for 
options on SPYs with those of the other self-regulatory organizations. 
In addition, FINRA believes this proposal will be beneficial to large 
market makers (which generally have the greatest potential and actual 
ability to provide liquidity and depth in this product), as well as 
retail traders, investors and public customers.
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    \12\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA 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 on 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 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 prior to 
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-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 \13\ and Rule 19b-
4(f)(6)(iii) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).

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[[Page 50798]]

    A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\16\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. FINRA has requested 
that the Commission waive the 30-day operative delay so that the 
proposal may become operative immediately upon filing. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest, because increasing 
position and exercise limits for SPY options would lead to a more 
liquid and competitive market environment that would benefit customers 
interested in this product. Additionally, it would allow FINRA to 
seamlessly continue to offer traders and the investing public the 
ability to use this product as an effective hedging and trading 
vehicle. Lastly, it will enable FINRA's position and exercise limits 
for SPDR[supreg] options to be consistent with those of other exchanges 
that have already adopted the higher position and exercise limits. 
Therefore, the Commission designates the proposal operative upon 
filing.\17\
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    \15\ 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 FINRA has satisfied this 
requirement.
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
    \17\ 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-FINRA-2011-036 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-FINRA-2011-036. 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 FINRA. 
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-FINRA-2011-036 
and should be submitted on or before September 6, 2011.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20707 Filed 8-15-11; 8:45 am]
BILLING CODE 8011-01-P