Document ID: SEC-2010-1269-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2010-08-18T04:00Z

[Federal Register: August 18, 2010 (Volume 75, Number 159)]
[Notices]               
[Page 51145-51147]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18au10-171]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62713; File No. SR-BATS-2010-021]

 
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
BATS Rule 23.1, Entitled ``Exercise of Options Contracts''

August 12, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 3, 2010, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') 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 Exchange. The Exchange 
has designated this proposal as a ``non-controversial'' proposed rule 
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6)(iii) thereunder,\4\ which renders it effective upon filing with 
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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange is proposing to amend BATS 23.1, entitled ``Exercise 
of Options Contracts,'' in order to extend the cut-off time to submit 
contrary exercise advices.
    The text of the proposed rule change is available at the Exchange's 
Web site at http://www.batstrading.com, at the principal office of the 
Exchange, at the Commission's Public Reference Room, and on the 
Commission's Web site at http://www.sec.gov.

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 parts 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 Rule 23.1 to 
extend the cut-off time to submit contrary exercise advices (each a 
``Contrary Exercise Advice'', or, ``CEA'') \5\ to the Exchange. The 
Exchange also proposes to make certain non-substantive changes to 
reorganize the text of Rule 23.1 to more clearly present the existing 
requirements and to eliminate duplicative language.\6\
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    \5\ Contrary Exercise Advices are also referred to as Expiring 
Exercise Declarations (``EED'') in the OCC rules.
    \6\ 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 Interpretation 
and Policy .03 to Rule 23.1 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 the OCC requirement, option holders must file a CEA 
with the Exchange in accordance with Exchange Rule 23.1. Rule 23.1 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 electronically 
submitting the CEA to the Exchange through OCC's electronic 
communications system or any other means prescribed by the Exchange. 
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 Rule 23.1.
    Currently under Rule 23.1, option holders have until 5:30 p.m.\7\ 
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

[[Page 51146]]

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.\8\
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    \7\ All referenced times are Eastern Time.
    \8\ 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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    The 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.\9\
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    \9\ See Securities Exchange Act Release No. 47885 (May 16, 
2003), 68 FR 28309 (May 23, 2003) (SR-AMEX-2001-92); Securities 
Exchange Act Release No. 48505 (September 17, 2003), 68 FR 55680 
(September 26, 2003) (SR-ISE-2003-20); Securities Exchange Act 
Release No. 48640 (October 16, 2003), 68 FR 60757 (October 23, 2003) 
(SR-PCX-2003-47); and Securities Exchange Act Release No. 48639 
(October 16, 2003), 68 FR 60767 (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 maintain consistency with the rules of other exchanges 
that have recently, or are in the process of, amending their rules. The 
Exchange understands that such amendments are intended to address 
concerns expressed by members of various options exchanges that, given 
the decrease in the Ex-by-Ex threshold and the increase in trading, the 
existing deadline for submitting CEAs under existing rules 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.
    In addition to the changes described above, the Exchange proposes 
to add language to Rule 23.1(c) to require that with respect to 
Quarterly Options Series the 5:30 p.m. Eastern Time deadline applies on 
the expiration date rather than on the business day immediately prior 
to the expiration date. Standard options contracts expire on the third 
Saturday of the applicable expiration month; because the Exchange 
desires to have all submissions occur on business days rather than 
weekend days, the Exchange requires Options Members to follow the 
Contrary Exercise Advice process by no later than 5:30 on the business 
day immediately prior to expiration for standard options contracts. In 
contrast, Quarterly Options Series expire on a fixed day that is never 
a weekend day, specifically the last business day of each calendar 
quarter, and thus, the Exchange believes it appropriate to require 
Contrary Exercise Advice filings on the expiration date for any 
Quarterly Options Series.\10\
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    \10\ See BATS Rule 19.6, Interpretation and Policy .04.
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    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, a rule change 
regarding this matter has already been approved,\11\ and the Exchange 
anticipates that other options exchanges will also propose a one hour 
extension for which they will accept a CEA. This proposed additional 
processing time and Exchange submission deadline will not conflict with 
OCC submission rules or cause any OCC processing issues.
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    \11\ See Securities Exchange Act Release No. 61710 (March 15, 
2010), 75 FR 13636 (March 22, 2010) (SR-ISE-2010-02) (order 
approving proposed rule change submitted by ISE relating to the cut-
off time for submitting contrary exercise advices).
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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''),\12\ 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 
Members of the implementation date of the rule change via a Regulatory 
Circular.
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    \12\ 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
    Approval of the rule change proposed in this submission is 
consistent with the requirements of the Act and the rules and 
regulations thereunder that are applicable to a national securities 
exchange, and, in particular, with the requirements of Section 6(b) of 
the Act.\13\ In particular, the proposed change is consistent with 
Section 6(b)(5) of the Act,\14\ because it would promote just and 
equitable principles of trade, remove impediments to, and perfect the 
mechanism of, a free and open market and a national market system, and, 
in general, protect investors and the public interest. Specifically, 
the Exchange believes that the proposed amendment 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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    \13\ 15 U.S.C. 78f(b).
    \14\ 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 imposes 
any burden on competition.

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 written comments on 
the proposed rule change.

[[Page 51147]]

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 \15\ and Rule 19b-
4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 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-BATS-2010-021 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-BATS-2010-021. 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-BATS-2010-021 and should be 
submitted on or before September 8, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20468 Filed 8-17-10; 8:45 am]
BILLING CODE 8010-01-P