[Federal Register: October 23, 2003 (Volume 68, Number 205)]
[Notices]
[Page 60757-60762]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23oc03-83]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48640; File No. SR-PCX-2003-47]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2
Thereto by the Pacific Exchange, Inc. Relating to the Manner in Which a
Contrary Exercise Advice Is Submitted and To Extend by One Hour the
Time for Members To Submit Contrary Exercise Advices
October 16, 2003.
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 September 11, 2003, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which items have been prepared by the PCX. The Exchange
amended its proposal on September 22, 2003.\3\ The proposal was also
amended by the Exchange on October 10, 2003.\4\ The Exchange filed the
proposed rule change, as amended, under paragraph (f)(6) of Rule 19b-4
under the Act.\5\ The Commission is publishing this notice to solicit
comments on the proposed rule change, as amended, from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 217 CFR 240.19b-4.
\3\ See letter from Mai Sharif Shiver, Senior Attorney, PCX, to
Nancy Sanow, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated September 17, 2003 (``Amendment
No. 1''). In Amendment No. 1, the PCX requested that the Commission
waive the thirty-day operative date specified in Rule 19b-4(f)(6) of
the Act and changed rule language in proposed PCX Rule 6.24(f) and
proposed Commentary .06.
\4\ See letter from Mai Sharif Shiver, Senior Attorney, PCX, to
Nancy Sanow, Assistant Director, Division, Commission, dated October
9, 2003 (``Amendment No. 2''). In Amendment No. 2, the PCX added
language to the rule text that was inadvertently deleted from its
original filing.
\5\ 17 CFR 240.19b-4(f)(6).
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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 PCX Rule 6.24 regarding the manner
in which a contrary exercise advice (``CEA'') is submitted to the
Exchange and to extend by one hour the time for Members and Member
Organizations to submit CEAs to the Exchange. Below is the text of the
proposed rule change, as amended. Proposed new language is italicized;
proposed deleted text is [bracketed].
* * * * *
Rule 6.24. (a) [Subject to the restrictions set forth in Rule 6.9
and to such restrictions as may be imposed pursuant to Rule 6.11 or
pursuant to the Rules of the Options Clearing Corporation (``OCC''), an
outstanding option contract may be exercised during the time period
specified in the Rules of the OCC by the tender to the OCC of an
exercise notice in accordance with the Rules of the OCC.] An
outstanding option contract may be exercised by the tender to the
Options Clearing Corporation (``OCC'') of an exercise notice made
during the periods, and using the procedures, specified in OCC rules.
An exercise notice may be tendered to the OCC only by the clearing
member in whose account such option contract is carried with the OCC.
Option exercises are also subject to restrictions that are established
by or may be imposed by the Exchange in Rules 6.9, 6.11 and in this
rule. Members and Member Organizations may establish fixed procedures
as to the latest time they will accept exercise instructions from
customers.
(b) [The exercise cut-off time for all non-cash settled options
shall be such hour on the business day immediately prior to the
expiration date as may be fixed from time to time by the Exchange. The
exercise cut-off time, as so fixed by a member organization or as
established pursuant to the preceding sentence, shall also apply in
respect of option contracts carried in any proprietary account of such
member organization as the latest time at which such member
organization, if it is a clearing member, shall tender exercise notices
to the OCC, or if it is not a clearing member, shall issue exercise
instructions to its clearing member. Notwithstanding the foregoing,
member organizations may receive and members may submit exercise
instructions and tender exercise notices after the exercise cut-off
time but prior to expiration (i) in the case of option contracts
carried in an account maintained for another member organization in
which only positions of customers of such other member organization are
carried, (ii) in order to remedy mistakes or errors made in good faith,
(iii) to take appropriate action as the result of a failure to
reconcile unmatched Exchange transactions, or (iv) where exceptional
circumstances relating to a customer's ability to communicate exercise
instructions to the member organization (or the member organization's
ability to receive exercise instructions) prior to such cut-off time
warrant such action. This subparagraph (b) is intended as a means of
providing for relatively uniform procedures in respect of exercise
instructions and not to alter or affect in any way the expiration times
for an option contract which are fixed in accordance with the Rules of
the OCC or any other provision of an option contract, and the exercise
prior to expiration of an option contract in contravention of this
subparagraph (b) shall neither affect the validity of such exercise nor
modify or otherwise affect any right or obligation of any holder or
writer of any option contract of such series of options. As used herein
with respect to any member organization, the word ``customer'' shall
mean every person other than the member organization.] Special
procedures apply to the exercise of equity options on the last business
day before their expiration (``expiring options''). Unless waived by
OCC, expiring options are subject to the Exercise by Exception (``Ex-
by-Ex'') procedure under OCC Rule 805. This rule provides that, unless
contrary instructions are given, option contracts that are in-the-money
by specified amounts shall be automatically exercised. In addition to
OCC rules, the following Exchange requirements apply with respect to
expiring options. Option holders desiring to exercise or not exercise
expiring options must either: (i) take no action and allow exercise
[[Page 60758]]
determinations to be made in accordance with OCC's Ex-by-Ex procedures
where applicable; or (ii) submit a ``Contrary Exercise Advice'' to the
Exchange by the deadline specified in paragraph (c) below. A Contrary
Exercise Advice is a communication either (A) to not exercise an option
that would be automatically exercised under OCC's Ex-by-Ex procedure,
or (B) to exercise an option that would not be automatically exercised
under OCC's Ex-by-Ex procedure. A Contrary Exercise Advice may be
submitted by a Member or Member Organization by using the Exchange's
Contrary Exercise Advice Form, OCC's ENCORE System, a Contrary Exercise
Advice form of any other national securities exchange of which the firm
is a Member and where the option is listed, or such other method as the
Exchange may prescribe. A Contrary Exercise Advice may be canceled by
filing an ``Advice Cancel'' with the Exchange or resubmitted at any
time up to the submission cut-off times specified below.
(c) Exercise cut-off time. Option holders have until 2:30 p.m.
(PST) on the business day immediately prior to the expiration date to
make a final decision to exercise or not exercise an expiring option.
For customer accounts, Members and Member Organizations may not accept
exercise instructions after 2:30 p.m. (PST) but have until 3:30 p.m.
(PST) to submit a Contrary Exercise Advice. For non-customer accounts,
Members and Member Organizations may not accept exercise instructions
after 2:30 p.m. (PST) but have until 3:30 p.m. (PST) to submit a
Contrary Exercise Advice if such Member or Member Organization employs
an electronic submission procedure with time stamp for the submission
of exercise instructions by option holders. Consistent with Commentary
.04, Members and Member Organizations are required to submit a Contrary
Exercise Advice by 2:30 p.m. (PST) for non-customer accounts if such
Members and/or Member Organization do not employ an electronic
submission procedure with time stamp for the submission of exercise
instructions by option holders.
(d) If OCC has waived the Ex-by-Ex procedure for an options class,
Members and Member Organizations must either:
(i) submit to the Exchange, a Contrary Exercise Advice, in a manner
specified by the Exchange, within the time limits specified in
paragraph (c) above if the holder intends to exercise the option, or
(ii) take no action and allow the option to expire without being
exercised.
The applicable underlying security price in such instances will be as
described in OCC Rule 805(j). In cases where the Ex-by-Ex procedure has
been waived, OCC rules require that Members and Member Organizations
wishing to exercise such options must submit an affirmative Exercise
Notice to OCC, whether or not a Contrary Exercise Advice has been filed
with the Exchange.
(e) An Exchange Member Organization that has accepted the
responsibility to indicate final exercise decisions on behalf of
another Member or non-Member firm shall take the necessary steps to
ensure that such decisions are properly indicated to the Exchange. Such
Member Organization may establish a processing cut-off time prior to
the Exchange's exercise cut-off time at which it will no longer accept
final exercise decisions in expiring options from option holders for
whom it indicates final exercise decisions. Each Member or Member
Organization that indicates final exercise decisions through another
broker-dealer is responsible for ensuring that final exercise decisions
for all of its proprietary (including market maker) and public customer
account positions are indicated in a timely manner to such broker-
dealer.
(f) Members and Member Organizations may receive and submit final
exercise decisions after the exercise cut-off time but prior to
expiration without having submitted a Contrary Exercise Advice: (i) In
order to remedy mistakes made in good faith; (ii) to take appropriate
action as the result of a failure to reconcile unmatched Exchange
option transactions; or (iii) where exceptional circumstances have
restricted an option holder's ability to inform a Member organization
of a decision regarding exercise, or a Member organization's ability to
receive an option holder's decision by the cut-off time. The burden of
establishing any of the above exceptions rests solely on the Member or
Member Organization seeking to rely on such exceptions.
(g) In the event the Exchange provides advance notice on or before
2:30 p.m. (PST) on the business day immediately prior to the last
business day before the expiration date indicating that a modified time
for the close of trading in equity options on such last business day
before expiration will occur, then the deadline to make a final
decision to exercise or not exercise an expiring option shall be 1 hour
28 minutes following the time announced for the close of trading on
that day instead of the 2:30 p.m. (PST) deadline found in Rule 6.24(c).
However, Members and Member Organizations may deliver a Contrary
Exercise Advice or Advice Cancel to the Exchange within 2 hours 28
minutes following the time announced for the close of trading in equity
options on that day instead of the 3:30 p.m. (PST) deadline found in
Rule 6.24(c) for customer accounts and non-customer accounts where such
Member firm employs an electronic submission procedure with time stamp
for the submission of exercise instructions. For non-customer accounts,
Members and Member Organizations that do not employ an electronic
procedure with time stamp for the submission of exercise instructions
are required to deliver a Contrary Exercise Advice or Advice Cancel
within 1 hour and 28 minutes following the time announced for the close
of trading on that day instead of the 2:30 p.m. (PST) deadline found in
Rule 6.24(c).
(h)(1) The Exchange may establish extended cut-off times for
decision to exercise or not exercise an expiring option and for the
submission of Contrary Exercise Advices on a case by case basis due to
unusual circumstances.
(2) The Exchange with at least one (1) business day prior advance
notice, by 9 a.m. (PST) on such day, may establish a reduced cut-off
time for the decision to exercise or not exercise an expiring option
and for the submission of Contrary Exercise Advices on a case-by-case
basis due to unusual circumstances; provided, however, that under no
circumstances should the exercise cut-off time and the time for
submission of a Contrary Exercise Advice be before the close of
trading.
Commentary
[.01 The exercise cut-off time pursuant to Rule 6.24(b) for option
contracts shall be 2:30 P.M. (PT) on the business day immediately prior
to the expiration date. In the event a member organization does not
carry accounts for customers, it shall nevertheless be subject to such
exercise cut-off time for the purposes of the third and fourth
sentences of Rule 6.24(b).
.02 Each member organization shall prepare a memorandum of every
exercise instruction received from a customer showing the time when
such instruction was so received. Such memoranda shall be subject to
the requirements of SEC Rules 17a-3(a)(6) and 17a-4(b).
.03 In the event a member submits an exercise instruction or
tenders an exercise notice pursuant to an exception set forth in clause
(ii), (iii) or (iv) of Rule 6.24(b), the member shall maintain a
memorandum setting forth the circumstances giving rise to such
[[Page 60759]]
exception. If the member is relying on clause (ii) or clause (iv) as
the basis of an exception, it shall promptly file a copy of the
memorandum with the Exchange.
.04 Clearing Members must follow the procedures of the OCC when
exercising expiring non-cash settled equity option contracts. Members
must also follow the procedures set forth below with respect to the
exercising of non-cash settled equity option contracts that would
otherwise not be exercised, or the non-exercising of option contracts
that otherwise would be exercised by operation of the OCC Rule 805.
(a) For all such contracts exercised or not exercised, a ``contrary
exercise advice'' must be delivered by the member in such form or
manner prescribed by the Exchange to a place designated by the Exchange
no later than 2:30 p.m. (PT) on the business day immediately prior to
the expiration date;
(b) Subsequent to the delivery of a ``contrary exercise advice,''
should the Market Maker, Floor Broker, customer or firm determine to
act other than as reflected on the original advice form, the Member
must also deliver an ``advice cancel'' in such form or manner
prescribed by the Exchange to a place designated by the Exchange no
later than 2:30 p.m. (PT) on the business day immediately prior to the
expiration date;
(c) The preparation, time stamping or submission of a ``contrary
exercise advice'' prior to the purchase of the contracts to be
exercised or not exercised shall be deemed a violation of this Rule.
(d) All of the foregoing provisions of this Commentary .04 are in
full force and effect whether or not the OCC waives the exercise-by-
exception provisions of its Rule 805; in the event of such waiver, the
procedures of this Commentary shall be followed as if such provisions
of OCC Rule 805 were in full force and effect; and OCC rules may
require the submission of an affirmative exercise notice even in
circumstances where a contrary exercise advice is not required; and
(e) The failure of any Member to follow the provisions in this
Commentary .04 may be referred to the Ethics and Business Conduct
Committee and result in the assessment of a fine, which may include but
is not limited to disgorgement of potential economic gain obtained or
loss avoided by the subject exercise, as determined by the Committee.
.05 Members and member organizations shall properly communicate
final exercise decisions to the Exchange in respect of positions for
which they are responsible. Member organizations may establish a
processing cut-off tune prior to the Exchange's exercise cut-off time
at which it will no longer accept final exercise decisions in expiring
options for customers.
.06 Submitting or preparing an exercise instruction after the
exercise cut-off time in any expiring option on the basis of material
information released after the cut-off time is actively inconsistent
with just and equitable principals of trade.]
.01 For purposes of this Rule 6.24, the terms ``customer account''
and ``non-customer account'' have the same meaning as defined in OCC
By-Laws Article I(C)(28) and Article I (N)(2), respectively.
.02 Each Member Organization shall prepare a memorandum of every
exercise instruction received showing the time when such instruction
was received. Such memoranda shall be subject to the requirements of
SEC Rule 17a-4(b).
.03 In the event of an ``unusual circumstance,'' Rule 6.24(h)(1)
provides that the Exchange may extend the cut-off times for exercise
instructions and the submission of a Contrary Exercise Advice beyond
the normal time frames specified in Rule 6.24(c). For purposes of
subparagraph (h)(1), an ``unusual circumstance'' includes, but is not
limited to, increased market volatility; significant order imbalances;
significant volume surges and/or systems capacity constraints;
significant spreads between the bid and offer in underlying securities;
internal system malfunctions affecting the ability to disseminate or
update market quotes and/or deliver orders; or other similar
occurrences. Rule 6.24(h)(2) specifies that the Exchange may also
reduce such cut-off times for ``unusual circumstances.'' For purposes
of subparagraph (h)(2), an ``unusual circumstance'' includes, but is
not limited to, a significant news announcement concerning the
underlying security of an option contract that is scheduled to be
released just after the close on the business day immediately prior to
expiration.
.04 Although the deadline for all option holders to make a final
decision to exercise or not exercise is 2:30 p.m. (PST), the deadline
for the submission of the Contrary Exercise Advice in the case of non-
customer accounts will depend on the manner of the decision to exercise
or not exercise.
(i) For electronic timestamp submissions of the exercise decision
by non-customer option holders, a Contrary Exercise Advice submitted by
Members and Member Organizations must be received by the Exchange by
3:30 p.m. (PST).
(ii) For manual submissions of the exercise decision by non-
customer option holders, Members and Member Organizations must submit a
Contrary Exercise Advice at the Exchange via the Contrary Exercise
Advice Box by 2:30 p.m. (PST).
.05 Each Member Organization shall establish fixed procedures to
insure secure time stamps in connection with their electronic systems
employed for the recording of submissions to exercise or not exercise
expiring options.
.06 In the event a Member or Member Organization receives and
submits a final exercise decision after the exercise cut-off time
pursuant to an exception set forth in clauses (i), (ii) or (iii) of
paragraph (f) of Rule 6.24, the Member or Member Organization shall
maintain a memorandum setting forth the circumstances regarding such
exception and shall file a copy of the memorandum with the Exchange's
Market Surveillance Department no later than 9 a.m. on the first
business day following the respective expiration.
.07 The filing of a Contrary Exercise Advice required by this rule
does not serve to substitute as the effective notice to OCC for the
exercise or non-exercise of expiring options.
.08 The failure of any Member to follow the provisions in this Rule
may be referred to the Ethics and Business Conduct Committee and result
in the assessment of a fine, which may include but is not limited to
disgorgement of potential economic gain obtained or loss avoided by the
subject exercise, as determined by the Committee.
.09 Submitting or preparing an exercise instruction after the
exercise cut-off time in any expiring option on the basis of material
information released after the cut-off time is actively inconsistent
with just and equitable principals of trade.
* * * * *
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 PCX included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change, as
amended. The text of these statements may be examined at the places
specified in Item IV below and is set forth in sections A, B and C
below, of the most significant aspects of such statements.
[[Page 60760]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Options Clearing Corporation (``OCC''), the issuer of all PCX-
traded options contracts, has an established procedure for options
holders wishing to automatically exercise in-the-money options \6\
before they expire. Known as Exercise by Exception or ``Ex-by-Ex'', the
procedure provides for the automatic exercise at expiration of any
equity option contract that is \3/4\ of a point or more in-the-money
for customer accounts or \1/4\ point or more in-the-money for any other
accounts.\7\ Option holders who wish to have their contracts exercised
in accordance with the Ex-by-Ex procedure do not need to take any
further action; the contracts that are in-the-money by the appropriate
amount will be automatically exercised. Option holders who do not wish
to have their options automatically exercised, or who wish their
options to be exercised under different parameters than the Ex-by-Ex
procedure, must file a CEA with the Exchange pursuant to PCX Rule 6.24,
and instruct OCC of their ``contrary intention''.\8\ The Exchange
believes that PCX Rule 6.24 is designed to deter individuals from
taking improper advantage of late-breaking news by requiring evidence
of an option holder's intention regarding whether to exercise an
expiring equity option via the submission of a CEA. Members and Member
Organizations satisfy the filing requirement by manually submitting a
CEA or by electronically submitting the CEA through OCC's ENCORE
system.
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\6\ ``In-the-money'' for a call option occurs if the current
market value of the underlying security is above the exercise price
of the option. For put options, ``in-the-money'' means the current
value of the underlying security is below the exercise price of the
option.
\7\ See OCC Rule 805(d).
\8\ A CEA may be canceled by filing an ``Advice Cancel'' with
the Exchange at any time up to the submission cut-off deadline
specified in proposed amended PCX Rule 6.24.
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The Exchange states that the principal goal of PCX Rule 6.24 is to
maintain a level playing field between persons holding long and short
positions in expiring equity options. The PCX believes that after
trading has ended on the final trading day before expiration, persons
who are short in the option have no way to close out their short
position. To put option holders on equal footing, PCX Rule 6.24
attempts to minimize the time period in which a holder can exercise the
equity option after the close of trading on the last business day prior
to expiration, generally known as ``Expiration Friday.'' \9\
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\9\ ``Expiration Friday'' is generally the last business day
prior to the expiration of an option contract.
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The current exercise cut-off time for an option holder to decide
whether to exercise an equity option is 2:30 p.m. (PST) on the business
day immediately prior to the expiration date.\10\ Under the proposal,
the exercise cut-off time set forth in amended PCX Rule 6.24(c) will
not change except in cases of a modified trading session or due to
``unusual circumstances.'' Current PCX Rule 6.24 imposes a uniform 2:30
p.m. cut-off time for the submission of CEAs for all accounts without
differentiating between customer and non-customer accounts.
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\10\ The ``expiration date'' of an options contract generally is
the Saturday immediately following the third Friday of the
expiration month of such option. See OCC By-Laws Article I (E)(16).
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The Exchange states that the proposed rule change was prompted by
concerns expressed by clearing firms that the deadline for submitting
CEAs is problematic for customer accounts,\11\ due to the logistical
difficulties of receiving customer exercise instructions and processing
them through their retail branch systems and back office areas before
submitting them to the Exchange. Therefore, the Exchange proposes to
adopt a cut-off time of 3:30 p.m. (PST) for Members and Member
Organizations to submit CEAs for customer accounts. The Exchange also
proposes to allow Members and Member Organizations to submit CEAs for
non-customer accounts \12\ by 3:30 p.m. (PST) provided such Member or
Member Organization employs an electronic procedure with time stamp
recording for the submission of exercise instructions by options
holders. In those cases where Members or Member Organizations do not
employ an electronic submission procedure for the submission of
exercise instructions, CEAs for non-customer accounts must be submitted
to the Exchange by 2:30 p.m. (PST). The different CEA submission
deadlines are set forth in amended PCX Rule 6.24(c) and new Commentary
.04.
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\11\ A ``customer account'' is defined in OCC By-Laws Article I
(C)(28) as an account of a Clearing Member which is confined to
Exchange transactions cleared and positions carried by the Clearing
Member on behalf of its securities customers, other than those
transactions of market-makers which are cleared through a market-
makers account. OCC By-Laws define a ``securities customer'' as a
person having a securities account at a broker or dealer other than
a non-customer of such broker or dealer. See OCC By-Laws Article I
(S)(1).
\12\ A ``non-customer account'' generally means a person that is
not a customer of a broker or dealer defined in Rule 8c-1 and 15c2-1
under the Act. See OCC By-Laws Article I (N)(2).
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Although many Members and Member Organizations have electronic
submission procedures, the Exchange is concerned that those firms that
manually submit CEAs could have an opportunity to improperly extend the
2:30 p.m. (PST) deadline for option holders to submit their exercise
instructions. This concern on the part of the Exchange is based on the
difficulty in monitoring a manual procedure that has different times
for deciding whether to exercise an option and to submit a CEA.
Accordingly, in the case of non-customer accounts, the Exchange has
proposed to limit the 3:30 p.m. (PST) deadline for submitting CEAs to
those Members and Member Organizations that have an electronic
submission procedure for option holders communicating their decisions
whether to exercise an option. In connection with the use of an
electronic submission procedure by Members and Member Organizations,
the Exchange proposes the addition of new Commentary .05 to PCX Rule
6.24 to require Members and Member Organizations employing electronic
submissions to establish procedures to secure time stamps in connection
with their electronic systems.
OCC on occasion will suspend the use of its Ex-by-Ex procedure,
such as when trading in the underlying stock has been halted or if
accurate price data is unavailable for the determination of closing
prices. When this occurs and there is no automatic exercise, all
options contract holders must send an exercise notice to OCC if they
wish to exercise an option, regardless of whether the option is in or
out-of-the-money. Currently, when OCC suspends its Ex-by-Ex procedure
for an option class, PCX Rule 6.24 requires the submission of a CEA.
Thus, when OCC has waived the Ex-by-Ex procedure, option holders must
determine what price would have been used, even though the only
available price might be a stale last sale price (a price OCC did not
feel comfortable using). Option holders then must determine whether a
CEA needs to be submitted to the Exchange evidencing the intention to
exercise or not exercise.
In the PCX's view, the options exchanges have long viewed this
process as cumbersome and confusing to option holders. Therefore, the
PCX proposes to amend PCX Rule 6.24(d) to eliminate the requirement
that a CEA be submitted if the holder does not want to exercise the
option when OCC has suspended its Ex-by-Ex procedure for that options
class. As a result, when the Ex-by-Ex procedure has been
[[Page 60761]]
suspended, submission of CEAs to the Exchange will be required only
when the options holder wants to exercise the option contract.
The proposed rule change would also permit the Exchange to
establish different cut-off times as an exception to amended PCX Rule
6.24(c) to address situations where the Exchange has advance prior
knowledge or warning of a modified trading session at expiration, or in
the case of ``unusual circumstances.''
Specifically, proposed PCX Rule 6.24(g) would apply when a
different or modified close of trading is announced due to a market-
wide event. In such cases, the Exchange would have forewarning of the
event and would be required to provide notice of a change in cut-off
times by 2:30 p.m. (PST) on the business day prior to the last trading
day before expiration. For example, if the day after Thanksgiving is
the last trading day prior to expiration with a close of trading of 10
a.m. (PST), then the Exchange would, with prior notice by 2:30 p.m.
(PST) on the Wednesday before Thanksgiving, be able to establish the
cut-off time for option holders to decide whether to exercise expiring
options to 1 hour 28 minutes after the close of trading. With respect
to the submission of CEAs by Members and Member Organizations, the cut-
off time would be 2 hours and 28 minutes after the close of trading for
customer accounts and non-customer accounts where the Members and
Member Organizations employ an electronic procedure with time stamp for
the submission of exercise instructions. Members and Member
Organizations that do not employ an electronic submission procedure for
exercise instructions would be required to submit a CEA within 1 hour
and 28 minutes after the close of trading for its non-customer
accounts. Accordingly, the normal exercise cut-off times would not
apply and, similar to amended PCX Rule 6.24(c), the deadline for
submitting CEAs to the Exchange for non-customer accounts would depend
on the use of an electronic submission procedure for the submission of
exercise instructions.
Proposed PCX Rule 6.24(h)(1) would permit the Exchange to extend
the cut-off time periods for option holders to decide whether to
exercise expiring options, as well as for Members to submit CEAs due to
unusual circumstances. Situations that are deemed to be an ``unusual
circumstance'' are set forth in revised Commentary .03 to PCX Rule
6.24. An ``unusual circumstance'' for purposes of proposed paragraph
(h)(1) includes, but is not limited to, increased market volatility;
significant order imbalances; significant volume surges and/or systems
capacity constraints; significant spreads between the bid and offer in
underlying securities; internal system malfunctions affecting the
ability to disseminate or update market quotes and/or deliver orders;
or other similar occurrences.
Proposed PCX Rule 6.24(h)(2) would permit the Exchange, with one
(1) business day prior advance notice by 9 a.m. (PST), to establish a
reduced cut-off time for option holders to decide whether to exercise
expiring options as well as for Members to submit CEAs. The reduced
cut-off time under this new paragraph for both exercise decisions and
CEA submissions may not occur before the close of trading. The primary
purpose of proposed paragraph (h)(2) is to permit the Exchange to
reduce cut-off times because of an ``unusual circumstance,'' such as a
significant news event occurring after the close. Revised Commentary
.03 to PCX Rule 6.24 provides that, for purposes of subparagraph
(h)(2), an ``unusual circumstance'' is a significant news announcement
concerning the underlying security of an option contract that is
scheduled to be released after the close on the last trading day prior
to expiration. For example, a decision on whether a particular merger
will be approved or whether a new product will receive regulatory
approval that occurs after the close of trading would justify a reduced
cut-off time so that persons holding short positions are not prejudiced
by being unable to close out their positions. The Exchange believes
that this would maintain a level playing field between persons holding
long and short positions in expiring options.
2. Statutory Basis
The Exchange believes that the proposed rule change, as amended, is
consistent with Section 6(b) of the Act \13\ in general, and furthers
the objectives of Section 6(b)(5) of the Act \14\ in particular,
because 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 mechanism of a free and open market and a national market system.
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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, as
amended, 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
Written comments on the proposed rule change, as amended, were
neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The proposed rule change, as amended, has been filed by the
Exchange pursuant to Section 19(b)(3)(A) of the Act \15\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\ Because the foregoing
proposed rule change: (1) Does not significantly affect the protection
of investors or the public interest; (2) does not impose any
significant burden on competition; and (3) does not become operative
for thirty 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, it has become effective pursuant
to Section 19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(6) \18\
thereunder.\19\
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6).
\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6).
\19\ As required under Rule 19b-4(f)(6)(iii), the Exchange
provided the Commission with written notice of its intent to file
the proposed rule change at least five business days prior to the
filing date or such shorter period as designated by the Commission.
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A proposed rule change filed under Rule 19b-4(f)(6) \20\ normally
does not become operative prior to thirty days after the date of
filing. However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may
designate a shorter time if such action in consistent with the
protection of investors and the public interest. The PCX has requested
that the Commission waive the thirty-day operative date of the proposed
rule change due to the Exchange's need to maintain competition and
efficiency.
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\20\ 17 CFR 240.19b-4(f)(6).
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The Commission believes that waiving the thirty-day operative date
is consistent with the protection of investors and the public
interest.\21\
[[Page 60762]]
Accelerating the operative date will allow the PCX to immediately
implement rules similar to ones already in place at the American Stock
Exchange LLC and the International Securities Exchange, Inc., \22\ and
will simplify and clarify the process by which Members and Member
Organizations accept exercise decisions from options holders and submit
such decisions to the Exchange. For these reasons, the Commission
designates the proposed rule change as effective and operative
immediately. At any time within 60 days of the filing of the proposed
rule change, as amended, the Commission may summarily abrogate such
proposed 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.\23\
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\21\ For purposes only of accelerating the operative date of
this proposal, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation.15 U.S.C.
78c(f).
\22\ See Securities Exchange Act Release Nos. 47885 (May 16,
2003), 68 FR 28309 (May 23, 2003) (SR-Amex-2001-92) and 48505
(September 17, 2003), 68 FR 55680 (September 26, 2003) (SR-ISE-2003-
20).
\23\ For purposes of calculating the sixty-day abrogation
period, the Commission considers the period to commence on October
9, 2003, the date at which the Exchange filed Amendment No. 2.
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IV. 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. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW, Washington,
DC 20549-0609. 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 will also be available for inspection and copying at the
principal office of the PCX. All submissions should refer to File No.
SR-PCX-2003-47 and should be submitted by November 13, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26710 Filed 10-22-03; 8:45 am]
BILLING CODE 8010-01-P