[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