Document ID: SEC-2006-1266-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NYSE Arca, Inc.
Posted Date: 2006-10-02T04:00Z

[Federal Register: October 2, 2006 (Volume 71, Number 190)]
[Notices]               
[Page 58036-58039]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02oc06-142]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54493; File No. SR-NYSEArca-2006-46]

 
 Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Order Granting Accelerated Approval of a Proposed Rule Change, and 
Amendment No. 1 Thereto, Relating to Generic Listing and Maintenance 
Standards for Broad-Based Index Options

September 25, 2006.
    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 25, 2006, the NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared principally by the NYSE Arca. On September 8, 2006, 
the Exchange filed Amendment No. 1.\3\ The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons and is approving the proposal, as amended, on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, which replaced the original filing in 
its entirety, the Exchange proposed to modify NYSE Arca Rule 5.15(a) 
to clarify that the position limit for broad-based index options is 
25,000 contracts on the same side of the market, and made non-
substantive changes to its proposed rule text. The Exchange also 
made clarifying changes in its description of the proposed rule 
change.
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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 NYSE Arca Rule 5.12 to adopt new 
``generic'' listing standards for broad-based index options pursuant to 
Rule

[[Page 58037]]

19b-4(e) under the Act.\4\ The text of the proposed rule change is 
available on the NYSE Arca's Web site (http://www.tradearca.com), at 

the NYSE Arca's Office of the Secretary and at the Commission's Public 
Reference Room.
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    \4\ 17 CFR 240.19b-4(e).
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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 NYSE Arca 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 III below. The NYSE Arca 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 NYSE Arca Rule 5.12 to establish 
listing and maintenance standards, pursuant to Rule 19b-4(e) under the 
Act,\5\ for broad-based index options. The proposal will allow the 
Exchange to list and trade, pursuant to Rule 19b-4(e) under the Act,\6\ 
broad-based index options that meet the listing standards in NYSE Arca 
Rule 5.12(a). The listing standards require, among other things, that 
the underlying index be broad-based, as defined in NYSE Arca Rule 
5.10(b)(23); that options on the index be a.m.-settled; that the index 
be capitalization-weighted, price-weighted, equal dollar-weighted, or 
modified capitalization-weighted; and that the index be comprised of at 
least 50 securities, all of which must be ``NMS stocks,'' as defined in 
Rule 600 of Regulation NMS.\7\ In addition, NYSE Arca Rule 5.12(a) 
requires (among other things) that a specified percentage of the 
index's component securities meet certain minimum market capitalization 
and average daily trading volume requirements; that no single component 
account for more than 10% of the weight of the index and that the five 
highest weighted components represent no more than 33% of the weight of 
the index; that the index value be widely disseminated at least every 
15 seconds; that index components comprising at least 80% of the weight 
of the index must be ``options eligible'' pursuant to NYSE Arca Rule 
5.3; and that the Exchange have written surveillance procedures in 
place with respect to the index options. NYSE Arca Rule 5.12(a) also 
provides that non-U.S. index components that are not subject to a 
comprehensive surveillance sharing agreement between the Exchange and 
the primary market(s) trading the index components may comprise no more 
than 20% of the weight of the index. The Exchange represents that its 
surveillance procedures are adequate to properly monitor the trading of 
broad-based index options and that it intends to apply its existing 
surveillance procedures for index options to monitor trading in broad-
based index options listed pursuant to NYSE Arca Rule 5.12(a). 
Additionally, the Exchange must reasonably believe that it has adequate 
system capacity to support the trading of any index options listed 
pursuant to NYSE Arca Rule 5.12(a). The Exchange also proposes to adopt 
NYSE Arca Rule 5.12(b), which establishes maintenance standards for 
broad-based index options listed pursuant to NYSE Arca Rule 5.12(a).
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    \5\ Id.
    \6\ Id.
    \7\ Rule 600 of Regulation NMS defines an ``NMS stock'' to 
mean``any NMS security other than an option.'' An ``NMS security'' 
is ``any security or class of securities for which transaction 
reports are collected, processed, and made available pursuant to an 
effective transaction reporting plan, or an effective national 
market system plan for reporting transactions in listed options.'' 
17 CFR 242.600.
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    NYSE Arca also proposes to apply NYSE Arca Rule 6.8, as modified by 
NYSE Arca Rule 5.15, which establishes a position limit of 25,000 
contracts on the same side of the market,\8\ to broad-based index 
options listed pursuant to NYSE Arca Rule 5.12(a).
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    \8\ In this proposed rule change, NYSE Arca is proposing to 
amend NYSE ArcaRule 5.15(a) to clarify that the position limit of 
25,000 contracts is on the same side of the market in the same 
underlying index.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \9\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \10\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanisms of a free and open market, and, in general, to 
protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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 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

    No written comments were either solicited or received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-NYSEArca-2006-46 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2006-46. 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 such 
filing also will be available for inspection and copying at the 
principal office of the NYSE Arca. All comments received will be posted 
without change; the Commission does not edit personal identifying

[[Page 58038]]

information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSEArca-2006-46 and should be submitted on or before 
October 23, 2006.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\11\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\12\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, 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.
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    \11\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    Currently, to list options on a particular broad-based index, the 
NYSE Arca must file a proposed rule change with the Commission pursuant 
to Section 19(b)(1) of the Act and Rule 19b-4 thereunder. However, Rule 
19b-4(e) provides that the listing and trading of a new derivative 
securities product by a self-regulatory organization (``SRO'') will not 
be deemed a proposed rule change pursuant to Rule 19b-4(c)(1) if the 
Commission has approved, pursuant to Section 19(b) of the Act, the 
SRO's trading rules, procedures, and listing standards for the product 
class that would include the new derivative securities product, and the 
SRO has a surveillance program for the product class.
    As described more fully above, the NYSE Arca proposes to establish 
listing standards pursuant to Rule 19b-4(e) for broad-based index 
options. The Commission's approval of the NYSE Arca's listing standards 
for broad-based index options will allow options that satisfy the 
listing standards to begin trading pursuant to Rule 19b-4(e), without 
constituting a proposed rule change within the meaning of Section 19(b) 
of the Act and Rule 19b-4, for which notice and comment and Commission 
approval is necessary.\13\ The NYSE Arca's ability to rely on Rule 19b-
4(e) to list broad-based index options that meet the requirements of 
NYSE Arca Rule 5.12(a) potentially reduces the time frame for bringing 
these securities to the market, thereby promoting competition and 
making new broad-based index options available to investors more 
quickly.
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    \13\ When relying on Rule 19b-4(e), the SRO must submit Form 
19b-4(e) to the Commission within five business days after the SRO 
begins trading the new derivative securities product. See Securities 
Exchange Act Release No. 40761 (December 8, 1998), 63 FR 70952 
(December 22, 1998) (File No. S7-13-98).
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    The Commission notes that the NYSE Arca has represented that it has 
adequate trading rules, procedures, listing standards, and surveillance 
program for broad-based index options. NYSE Arca's existing index 
option trading rules and procedures will apply to broad-based index 
options listed pursuant to proposed NYSE Arca Rule 5.12(a). 
Additionally, existing NYSE Arca rules, including provisions addressing 
sales practices and margin requirements, also will apply to these 
options. In addition, as mentioned above, the NYSE Arca has established 
a position limit of 25,000 contracts on the same side of the market for 
broad-based index options listed pursuant to NYSE Arca Rule 5.12(a), by 
applying NYSE Arca Rule 6.8, as modified by NYSE Arca Rule 5.15, to 
such options.\14\ NYSE Arca Rule 5.18(a) provides that the exercise 
limits for broad-based index options are equivalent to the position 
limits contained in NYSE Arca Rule 5.15. The Commission believes that 
the position and exercise limits should serve to minimize potential 
manipulation concerns.
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    \14\ See supra at note 3.
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    The NYSE Arca represents that its surveillance procedures are 
adequate to properly monitor the trading of broad-based index options 
and that it intends to apply its existing surveillance procedures for 
index options to monitor trading in broad-based index options listed 
pursuant to NYSE Arca Rule 5.12(a). In addition, because proposed NYSE 
Arca Rule 5.12(a)(9) requires that each component of an index be an 
``NMS stock,'' as defined in Rule 600 of Regulation NMS under the Act, 
each index component must trade on a registered national securities 
exchange or through The Nasdaq Stock Market, Inc. (``Nasdaq'').\15\ 
Accordingly, the NYSE Arca will have access to information concerning 
trading activity in the component securities of an underlying index 
through the Intermarket Surveillance Group (``ISG'').\16\ In addition, 
proposed NYSE Arca Rule 5.12(a)(10) provides that non-U.S. index 
components that are not subject to a comprehensive surveillance sharing 
agreement between the NYSE Arca and the primary market(s) trading the 
index components may comprise no more than 20% of the weight of the 
index.\17\ The Commission believes that these requirements will help to 
ensure that the NYSE Arca has the ability to monitor trading in broad-
based index options listed pursuant to NYSE Arca Rule 5.12(a) and in 
the component securities of the underlying indexes.
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    \15\ Recently, the Commission approved the application of The 
NASDAQ Stock Market LLC, a subsidiary of Nasdaq, to become a 
registered national securities exchange. See Securities Exchange Act 
Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006). 
At the time of the Commission's consideration of this matter, Nasdaq 
is still operating as a subsidiary of the National Association of 
Securities Dealers (``NASD''), a registered national securities 
association for certain securities.
    \16\ The ISG was formed on July 14, 1983 to, among other things, 
coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets. 
All of the registered national securities exchanges and NASD are 
members of the ISG. In addition, futures exchanges and non-U.S. 
exchanges and associations are affiliate members of the ISG.
    \17\ However, such non-U.S. index components, as ``NMS stocks,'' 
would be registered under Section 12 of the Act and listed on a 
national securities exchange where there is last sale reporting.
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    The Commission believes that the requirements in the proposed NYSE 
Arca Rules regarding, among other things, the minimum market 
capitalization, trading volume, and relative weightings of an 
underlying index's component stocks are designed to ensure that the 
markets for the index's component stocks are adequately capitalized and 
sufficiently liquid, and that no one stock dominates the index. In 
addition, as mentioned above, proposed NYSE Arca Rule 5.12(a)(1) 
requires that the underlying index be ``broad-based,'' as defined in 
NYSE Arca Rule 5.10(b)(23).\18\ The Commission believes that these 
requirements minimize the potential for manipulating the underlying 
index.
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    \18\ NYSE Arca Rule 5.10(b)(23) defines ``broad-based index'' to 
mean ``an index designed to be representative of a stock market as a 
whole or of a range of companies in unrelated industries.''
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    The Commission believes that the requirement in proposed NYSE Arca 
Rule 5.12(a)(11) that the current index value be widely disseminated at 
least once every 15 seconds by the Options Price Reporting Authority, 
the Consolidated Tape Association, the Nasdaq Index Dissemination 
Service or one or more major market data vendors \19\ during the time 
an index

[[Page 58039]]

option trades on the NYSE Arca should provide transparency with respect 
to current index values and contribute to the transparency of the 
market for broad-based index options. In addition, the Commission 
believes, as it has noted in other contexts, that the requirement in 
proposed NYSE Arca Rule 5.12(a)(2) that an index option be settled 
based on the opening prices of the index's component securities, rather 
than on closing prices, could help to reduce the potential impact of 
expiring index options on the market for the index's component 
securities.\20\
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    \19\ The NYSE Arca stated that `` `[m]ajor market data vendors' 
for the purposes of NYSE Arca Rule 5.12(a)(11) includes, but is not 
limited to, securities information vendors such as Bloomberg and 
Reuters.''
    \20\ See, e.g., Securities Exchange Act Release No. 30944 (July 
21, 1992), 57 FR 33376 (July 28, 1992) (order approving a Chicago 
Board Options Exchange, Incorporated (``CBOE'') proposal to 
establish opening price settlement for S&P 500 Index options).
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    The Commission finds good cause for approving the proposed rule 
change prior to the 30th day after the date of publication of the 
notice of filing in the Federal Register. The Exchange has requested 
accelerated approval of the proposed rule change. The proposal 
implements listing and maintenance standards and position and exercise 
limits for broad-based index options substantially identical to those 
recently approved for the Philadelphia Stock Exchange, Inc., the 
International Securities Exchange, Inc., the American Stock Exchange 
LLC, and the CBOE.\21\ The Commission does not believe that the 
Exchange's proposal raises any novel regulatory issues. Therefore, the 
Commission finds good cause, consistent with Section 19(b)(2) of the 
Act,\22\ to approve the proposed rule change, as amended, on an 
accelerated basis.
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    \21\ See Securities Exchange Act Release No. 54158 (July 17, 
2006), 71 FR 41853 (July 24, 2006) (SR-Phlx-2006-17); Securities 
Exchange Act Release No. 52578 (October 7, 2005), 70 FR 60590 
(October 18, 2005) (SR-ISE-2005-27); Securities Exchange Act Release 
No. 52781 (November 16, 2005), 70 FR 70898 (November 23, 2005) (SR-
Amex-2005-069); Securities Exchange Act Release No. 53266 (February 
9, 2006), 71 FR 8321 (February 16, 2006) (SR-CBOE-2005-59).
    \22\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-NYSEArca-2006-46), as 
amended, is hereby approved on an accelerated basis.
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    \23\ Id.
    \24\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-16162 Filed 9-29-06; 8:45 am]

BILLING CODE 8010-01-P