Document ID: SEC-2010-1278-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2010-08-19T04:00Z

[Federal Register: August 19, 2010 (Volume 75, Number 160)]
[Notices]               
[Page 51324-51326]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19au10-93]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62708; File No. SR-BX-2010-055]

 
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing of Proposed Rule Change Relating To Extend the Cut-Off Time To 
Submit Contrary Exercise Advices and Make Some Clerical and Conforming 
Changes

August 12, 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 August 4, 2010, NASDAQ OMX BX, Inc. (the ``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 by the self-regulatory organization. The Commission is 
publishing this notice to solicit comments on the proposed rule 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 proposes to amend Chapter VII (Exercises and 
Deliveries) of the Rules of the Boston Options Exchange Group, LLC 
(``BOX'') to extend the cut-off time to submit contrary exercise 
advices and make some clerical changes and Chapter X (Minor Rule 
Violations) to make some conforming changes.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXBX/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 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, 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 Chapter VII, 
Section 1 of the BOX Trading Rules 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 the Rule to more clearly 
present the existing requirements and to eliminate duplicative 
language.\4\ The Exchange also proposes to make some clerical changes. 
In addition, the Exchange proposes to make some conforming changes to 
Chapter X.
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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)(ii) and paragraph (c) of the 
current rule. The Exchange also proposes to eliminate Supplementary 
Material .03 to Chapter VII 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

[[Page 51325]]

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 
Chapter VII option holders must file a CEA with the Exchange notifying 
it of the contrary intention. Chapter VII 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. Options Participants 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 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 Chapter VII.
    Currently under Chapter VII, option holders have until 5:30 \5\ 
p.m. on the day prior to expiration, or in the case of quarterly 
options, on the expiration date, to make a final decision to exercise 
or not exercise an expiring option that would otherwise either expire 
or be automatically exercised. An Options Participants may not accept 
CEA instructions from its customer or non customer accounts after 5:30 
p.m. However, the current rule gives Options Participants an additional 
one hour, up to 6:30 p.m., to submit these CEA instructions to the 
Exchange where such Options Participant uses an electronic submission 
process.\6\
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    \5\ All referenced times are Eastern Time.
    \6\ If Participants do not employ an electronic submission 
procedure, they are required to submit CEAs for non-customer 
accounts by the 5:30 deadline. This deadline for manual submission 
is required in order to prevent firms from improperly extending the 
5:30 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 Options Participants 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 e.g. 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). This process has been in place at the Exchange since 2004. See 
Securities Exchange Act Release No. 34-49191 (February 4, 2004) 69 
FR 7055 (February 12, 2004) (SR-BSE-2004-04).
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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 Options Participants 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 an Options 
Participants 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 Options Participants 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 Options Participants 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.\8\
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    \8\ The proposed changes are based on a recently approved rule 
of the International Securities Exchange, LLC (``ISE''). See 
Securities Exchange Act Release No. 34-61458 (February 1, 2010), 75 
FR 6237 (February 8, 2010) (SR-ISE-2010-02).
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    The Exchange proposes to make some clerical changes. First, there 
are certain references in Chapter VII, Section 1 which currently read 
``BOX'' or ``BOXR'', the Exchange proposes to change those certain 
references ``the Exchange''. In addition, the Exchange proposes to 
revise certain cross references, as the respective lettering has been 
modified by this proposal.
    Finally, the Exchange proposes to amend Chapter X (Minor Rule 
Violations), Section 2(f). Specifically, the Exchange proposes to 
delete the word ``Member'' to insert the word ``Participant'' to 
adequately reflect the term used for firms or organizations registered 
with the Exchange for purposes of trading options on BOX. The Exchange 
also proposes to reletter the subsections referenced in Section 2(f) to 
correspond to applicable amendments to Chapter VII, Section 1 detailed 
above.\9\
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    \9\ Under this proposed rule change, the Minor Rule Violations 
will now cover Chapter VII, Sections 1(c), (d), (e), (g), and (h). 
These sections correspond to the former sections referenced by 
Chapter X, Section 2(f) of the Minor Rule Violations.
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    If the operative date of this proposed rule change is more than 5 
business days prior to the date of the next expiration Friday i.e. the 
third Friday of the month (``Expiration Friday''),\10\ the Exchange 
will implement the rule change so as to be effective for that 
Expiration Friday. If the operative date of this proposed rule change 
is 5 business days or less prior to the date of the next Expiration 
Friday, the Exchange will implement the rule change so as to be 
effective for the following Expiration Friday. The Exchange will notify 
Participants of the

[[Page 51326]]

implementation date of the rule change via a Regulatory Circular.
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    \10\ For Example, Expiration Friday for August 2010 options will 
be August 20, 2010, Expiration Friday for September options will be 
September 17, 2010.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) \11\ of the Act, in general, and furthers 
the objectives of Section 6(b)(5) of the Act,\12\ 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 Participants an additional hour within 
which to complete the necessary processing of CEAs, will thereby 
decrease Participants' burden of processing an increasing number of the 
contrary exercise advises and enable them to more easily manage and 
process these instructions.
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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 Regarding the 
Proposed Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing 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 for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give 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 Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the 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-BX-2010-055 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-BX-2010-055. 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 publicly available. All 
submissions should refer to File Number SR-BX-2010-055 and should be 
submitted on or before September 9, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20552 Filed 8-18-10; 8:45 am]
BILLING CODE 8010-01-P