[Federal Register Volume 77, Number 4 (Friday, January 6, 2012)]
[Notices]
[Pages 829-832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-52]
[[Page 829]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66077; File No. SR-Phlx-2011-179]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change Relating to the MSCI EM Index
January 3, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on December 21, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange, pursuant to Section 19(b)(1) of the Act \3\ and Rule
19b-4 thereunder,\4\ proposes to amend Exchange Rules 1079, 1009A and
1101A, to list and trade new options on the MSCI EM Index based upon
the Full Value MSCI Emerging Markets (``EM'') Index (``Full Value MSCI
EM Index'').\5\
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\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
\5\ The Exchange has entered into a license agreement with MSCI
Inc. to list this product.
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The Exchange also proposes to create a new Rule 1108A entitled
``MSCI EM Index'' which provides additional detailed information
pertaining to the index as required by the licensor.
The text of the proposed rule change is available on the Exchange's
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings,
at the principal office of the Exchange, 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 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 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 Exchange Rules
1079 (FLEX Index, Equity and Currency Options), 1009A (Designation of
the Index) and 1101A (Terms of Option Contracts) to list and trade P.M.
cash-settled, European-style options, including FLEX \6\ options and
LEAPS,\7\ on the MSCI EM Index. Specifically, the Exchange proposes to
list and trade long-term options on the Full Value MSCI EM Index
(``MSCI EM LEAPS'').\8\ The Exchange also proposes to create a new Rule
1108A entitled ``MSCI EM Index'' which provides additional detailed
information pertaining to the index as required by the licensor
including, but not limited to, liability and other representations on
the part of MSCI Inc.
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\6\ FLEX options are flexible exchange-traded index, equity, or
currency option contracts that provide investors the ability to
customize basic option features including size, expiration date,
exercise style, and certain exercise prices. FLEX index options may
have expiration dates within five years. See Exchange Rules 1079 and
1101A.
\7\ LEAPS or Long Term Equity Anticipation Securities are long
term options that generally expire from twelve to thirty-nine months
from the time they are listed.
\8\ The Commission has previously approved the listing and
trading of an exchange-traded fund based on the MSCI EM Index. See
Securities Exchange Act Release Nos. 44900 (October 25, 2001) 66 FR
55712 (November 2, 2001) (SR-Amex-2001-45) and 44990 (October 25,
2001), 66 FR 56869 (November 13, 2001) (SR-Amex-2001-45) (approving
the listing and trading of shares of a fund based on the MSCI EM
Index, among other indexes). The Commission also approved options on
Volatility Indexes comprised of options on the iShares MSCI Emerging
Markets Index Fund (``EEM''). See Securities Exchange Act Release
No. 64551 (May 26, 2011), 76 FR 32000 (June 2, 2011) (SR-CBOE-2011-
026). The MSCI EM ETF is one of the twenty most actively traded
ETFs.
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The MSCI EM Index is a free float-adjusted market capitalization
index\9\ that is designed to measure equity market performance of
emerging markets. The MSCI EM Index consists of component securities
from the following twenty-one (21) emerging market countries: Brazil,
Chile, China, Colombia, Czech Republic, Egypt, Hungary, India,
Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland,
Russia, South Africa, Taiwan, Thailand, and Turkey.
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\9\ The free float adjusted market capitalization is used to
calculate the weights of the securities in the indices. MSCI defines
the free float of a security as the proportion of shares outstanding
that is deemed to be available for purchase in the public equity
markets by international investors.
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Index Design and Composition
The MSCI EM Index is designed to measure equity market performance
in the global emerging markets. The Index is maintained by MSCI, Inc.
(``MSCI'').\10\ The Index was launched on December 31, 1987.
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\10\ MSCI is a provider of investment decision support tools.
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The MSCI EM Index is reviewed on a semi-annual basis. The index
review is based on MSCI's Global Investable Markets Indices
Methodology. A description of the methodology is available at http://www.msci.com/eqb/methodology/meth_docs/MSCI_May11_GIMIMethod.pdf.
The MSCI EM Index consists of large and midcap components from
countries classified by MSCI as ``emerging markets.''
Index Calculation and Index Maintenance
The base index value of the MSCI EM Index was 100, as of December
31, 1987. On June 1, 2011 the index value of the MSCI EM Index was
1166.72. The MSCI EM Index is calculated in U.S. Dollars on a real time
basis from the open of the first market on which the components are
traded to the closing of the last market on which the components are
traded. The methodology used to calculate the value of the MSCI EM
Index is similar to the methodology used to calculate the value of
other well-known market-capitalization weighted indexes.\11\ The level
of the MSCI EM Index reflects the free float-adjusted market value of
the component stocks relative to a particular base date and is computed
by dividing the total market value of the companies in each index by
its respective index divisor.\12\
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\11\ Additional information about the methodology for
calculating the MSCI EM Index can be found at: http://www.msci.com/eqb/methodology/meth_docs/MSCI_May11_GIMIMethod.pdf.
\12\ A divisor is an arbitrary number chosen at the starting
date of an index to fix the index starting value. The divisor is
adjusted periodically when capitalization amendments are made to the
constituents of the index in order to allow the index value to
remain comparable over time. Without a divisor the index value would
change when corporate actions took place and would not reflect the
true value of an underlying portfolio based upon the index.
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Static data is distributed daily to clients through MSCI as well as
through major quotation vendors, including Bloomberg L.P.
(``Bloomberg''), FactSet Research Systems, Inc. (``FactSet') and
Thomson Reuters (``Reuters''). Real time data is distributed at least
every 15 seconds using MSCI's real-time
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calculation engine to Reuters, Bloomberg, SIX Telekurs and FactSet.
The MSCI EM Index is monitored and maintained by MSCI. Adjustments
to the MSCI EM Index are made on a daily basis with respect to
corporate events and dividends. The MSCI EM Index is generally updated
on a quarterly basis in February, May, August and November of each year
to reflect amendments to shares outstanding and free float and full
index reviews are conducted on a semi-annual basis in May and November
of each year for purposes of rebalancing the index.
Exercise and Settlement Value
The settlement value for expiring options on the MSCI EM Index
would be based on the closing prices of the component stocks on the
last trading day prior to expiration, usually a Friday. The last
trading day for expiring contracts is the last business day prior to
expiration, usually the third Friday of the expiration month. The index
multiplier is $100. The Options Clearing Corporation would be the
issuer and guarantor.
Contract Specifications
The MSCI EM Index is a broad-based index, as defined in Exchange
Rule 1000A. Options on the MSCI EM Index would be European-style and
P.M. cash-settled.\13\ The Exchange's standard trading hours for index
options (9:30 a.m. to 4:15 p.m. E.T. (Philadelphia Time)), as set forth
in Exchange Rules 101 and 1101A at Commentary .01, would apply to
options on the MSCI EM Index. The expiration date for this index is the
Saturday following the third Friday of the expiration month.
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\13\ See proposed Exchange Rule 1009A(g)(i)(2).
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The Exchange also notes that the MSCI EM Index is a broad-based
index as defined in Exchange Rule 1000A(b)(11).\14\ In addition, the
Exchange proposes to create specific listing and maintenance standards
for options on the MSCI EM Index in Exchange Rule 1009A(g).
Specifically, in proposed Rule 1009A(g)(i)(1) through (10) the Exchange
proposes to require that the following conditions are satisfied: (1)
The index is broad-based, as defined in Rule 1000A(b)(11); (2) Options
on the index are designated as P.M.-settled index options; (3) The
index is capitalization-weighted, price-weighted, modified
capitalization-weighted or equal dollar-weighted; (4) The index
consists of 500 or more component securities; (5) All of the component
securities of the index will have a market capitalization of greater
than $100 million; (6) No single component security accounts for more
than fifteen percent (15%) of the weight of the index, and the five
highest weighted component securities in the index do not, in the
aggregate, account for more than fifty percent (50%) of the weight of
the MSCI EM Index; (7) Non-U.S. component securities (stocks or ADRs)
that are not subject to comprehensive surveillance agreements do not,
in the aggregate, represent more than twenty-two and a half percent
(22.5%) of the weight of the index; (8) The current index value is
widely disseminated at least once every fifteen (15) seconds by one or
more major market data vendors during the time options on the index are
traded on the Exchange; (9) The Exchange reasonably believes it has
adequate system capacity to support the trading of options on the
index, based on a calculation of the Exchange's current Independent
System Capacity Advisor (ISCA) allocation and the number of new
messages per second expected to be generated by options on such index;
and (10) The Exchange has written surveillance procedures in place with
respect to surveillance of trading of options on the index.
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\14\ See Exchange Rule 1000A(b)(11), which defines a broad-based
index as 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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Additionally, the Exchange proposes to require the following
maintenance requirements, as set forth in proposed Rule 1009A, for the
MSCI EM Index options: (1) The conditions set forth in subparagraphs
(g)(i)(1), (2), (3), (4), (7), (8), (9) and (10) must continue to be
satisfied. The conditions set forth in subparagraphs (g)(i)(5) and (6),
must be satisfied only as of the first day of January and July in each
year; and (2) the total number of component securities in the index may
not increase or decrease by more than thirty-five percent (35%) from
the number of component securities in the index at the time of its
initial listing.
The Exchange believes that the modified initial listing
requirements are appropriate for trading options on the MSCI EM Index
for various reasons. The Exchange believes that a P.M. settlement \15\
is appropriate given the nature of this index, which encompasses
multiple markets around the world.\16\ Specifically, the MSCI EM Index
components open with the start of trading in Asia at 7 p.m. E.T. (prior
day) and closes with the end of trading in Mexico and Peru at 4 p.m.
E.T. (the next day) as closing prices from Brazil, Chile, Peru and
Mexico, including late prices,\17\ are accounted for in the closing
calculation. The closing index level value is distributed by MSCI
around 6 p.m. EST each trading day.\18\ The index has a higher market
capitalization requirement than other broad based indexes. The MSCI EM
Index currently contains more than 800 components and no single
component comprises more than 3% to 5% of the index, making it not
easily subject to market manipulation. Therefore, because the MSCI EM
Index has a large number of component securities, representative of
many countries, and trades a large volume with respect to ETFs today,
the Exchange believes that the initial listing requirements are
appropriate to trade options on this index. In addition, similar to
other broad based indexes, the Exchange proposes various maintenance
requirements, which require continual compliance and periodic
compliance.
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\15\ The settlement value of a P.M. settled index option is
based on closing prices of the component securities.
\16\ The Exchange's Gold/Silver Sector\SM\ Index (``XAU'') is a
P.M. settled capitalization-weighted index.
\17\ Late prices indicates [sic] that while the last real-time
stock tick comes in at 4 p.m. E.S.T., the index will stay open for
another few minutes to allow any late price information to be
obtained. At 4:30 p.m. E.S.T. the final foreign currency rates are
applied and the last real-time index value is disseminated.
\18\ NYSE Liffe futures based on the MSCI EM Index utilize these
P.M. closing prices.
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Exchange Rules that apply to the trading of options on broad-based
indexes also would apply to options on the Full Value MSCI EM
Index.\19\ The trading of these options also would be subject to, among
others, Exchange Rules governing margin requirements and trading halt
procedures for index options.\20\ The Exchange would apply the same
position limits as exist today for broad-based index options, namely
25,000 contracts on the same side of the market for the MSCI EM Index
option.\21\ All position limit hedge exemptions will apply. The
Exchange proposes to apply existing index option margin requirements
for the purchase and sale of options on the MSCI EM Index.\22\ In
addition, the Exchange proposes to amend Rule 1079(d)(1) to also note
that with respect to FLEX options on the MSCI EM index, the same number
of contracts, 25,000, would apply with respect to the position limit.
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\19\ See generally Exchange Rules 1000A through 1107A (Rules
Applicable to Trading Options on Indices) and Exchange Rules 1000
through 1094 (Rules Applicable to Trading of Options on Stocks,
Exchange-Traded Fund Shares and Foreign Currencies).
\20\ See Exchange Rules 721 (Proper and Adequate Margin) and
1047A (Trading Rotations, Halts or Reopenings).
\21\ The exercise limits would also be 25,000 contracts as per
Exchange Rule 1002A.
\22\ See Exchange Rule 721.
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The Exchange proposes to set strike price intervals for these
options at $2.50 when the strike price of Full Value MSCI EM Index is
below $200, and at least $5.00 strike price intervals otherwise. The
minimum tick size for series trading below $3 would be $0.05 and for
series trading at or above $3 would be $0.10.\23\
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\23\ See Exchange Rule 1034 and proposed Rule 1101A.
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Pursuant to Exchange Rule 1101A, the Exchange proposes to open at
least one expiration month and one series for each class of index
options open for trading on the Exchange.\24\ The Exchange may open
additional series of index options to maintain an orderly market, to
meet customer demand or when the market price of the underlying index
moves more than five strike prices from the initial exercise price or
prices. New series of options may be added until the beginning of the
month in which the options contract will expire. Additionally, due to
unusual market conditions, the Exchange, in its discretion, may add a
new series of options on the index until five (5) business days prior
to expiration. Also, the opening of a new series of options shall not
affect the series of options of the same class previously opened.
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\24\ See Exchange Rule 1101A.
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Options on the MSCI EM Index would be subject to the same rules
that presently govern all Exchange index options, including sales
practice rules, margin requirements, trading rules, and position and
exercise limits. Exchange Rules are designed to protect public customer
trading. Specifically, Rule 1024 prohibits members and member
organizations from accepting a customer order to purchase or write an
option unless such customer's account has been approved in writing by a
designated Options Principal of the Member.\25\ Additionally, Exchange
Rule 1026, regarding suitability, is designed to ensure that options
are only sold to customers capable of evaluating and bearing the risks
associated with trading in this instrument.\26\ Further, Exchange Rule
1027 permits members and employees of member organizations to exercise
discretionary power with respect to trading options in a customer's
account only if the member or employee of a member organization has
received prior written authorization from the customer and the account
had been accepted in writing by a designated Options Principal.\27\
Finally, Exchange Rule 1025, Supervision of Accounts, Rule 1028,
Confirmations, and Rule 1029, Delivery of Options Disclosure Documents,
will also apply to trading in options on the MSCI EM Index.
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\25\ See Exchange Rule 1024.
\26\ See Exchange Rule 1026.
\27\ See Exchange Rule 1027. Further, this Rule states that
discretionary accounts shall receive frequent review by a Registered
Options Principal qualified person specifically delegated such
responsibilities under Rule 1025, who is not exercising the
discretionary authority.
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Surveillance and Capacity
The Exchange represents that it has an adequate surveillance
program in place for options on the MSCI EM Index and intends to apply
those same procedures that it applies to the Exchange's other index
options. Additionally, the Exchange is a member of the Intermarket
Surveillance Group (``ISG'') under the Intermarket Surveillance Group
Agreement, dated June 20, 1994. The members of the ISG include all of
the national securities exchanges. ISG members work together to
coordinate surveillance and share information regarding the stock and
options markets. In addition, the major futures exchanges are
affiliated members of the ISG, which allows for the sharing of
surveillance information for potential intermarket trading abuses. In
addition, the Exchange is an affiliate member of the International
Organization of Securities Commissions (``IOSCO''). IOSCO has members
from over 100 different countries. Each of the countries from which
there is a component security in the MSCI EM Index is a member of
IOSCO. These members regulate more than 90 percent of the world's
securities markets. Additionally, the Exchange has entered into various
Information Sharing Agreements and/or Memoranda of Understandings with
various stock exchanges. Given the capitalization of this index and the
deep and liquid markets for the securities underlying the MSCI EM
Index, the concerns for market manipulation and/or disruption in the
underlying markets are greatly reduced. There is also an active trading
volume for the ETFS on the MSCI EM Index.
The Exchange also represents that it has the necessary systems
capacity to support the new options series that would result from the
introduction of options on the Full Value MSCI EM Index, including
LEAPS on the Full Value MSCI EM Index.
Finally, the Exchange proposes to add a new Rule 1108A entitled
``MSCI EM Index'' to provide additional detailed information pertaining
to the index as required by the licensor, including but not limited to,
liability and other representations on the part of MSCI Inc.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \28\ in general, and furthers the objectives of Section
6(b)(5) of the Act \29\ in particular, in that it will permit trading
in options on Full Value MSCI EM Index pursuant to rules designed to
prevent fraudulent and manipulative acts and practices to protect
investor and the public interest, and to promote just and equitable
principles of trade.
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\28\ 15 U.S.C. 78f(b).
\29\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that because the MSCI EM Index currently
contains more than 800 components and no single component comprises
more than 3% to 5% of the index, it is not easily subject to market
manipulation. Given the capitalization of this index and the deep and
liquid markets for the securities underlying the MSCI EM Index, the
concerns for market manipulation and/or disruption in the underlying
markets are greatly reduced. There is also an active trading volume for
the ETF on the MSCI EM Index. Therefore, because the MSCI EM Index has
a large number of component securities, representative of many
countries, and trades a large volume with respect to ETFs today, the
Exchange believes that the initial listing requirements are appropriate
to trade options on this index. In addition, similar to other broad
based indexes, the Exchange proposes various maintenance requirements,
which require continual compliance and periodic compliance.
Exchange Rules that apply to the trading of options on broad-based
indexes also would apply to options on the Full Value MSCI EM
Index.\30\ The trading of these options also would be subject to, among
others, Exchange Rules governing margin requirements and trading halt
procedures for index options.\31\ The Exchange would apply the same
position limits as exist today for broad-based index options, namely
25,000 contracts on the same side of the market for the MSCI EM Index
option.\32\ All position limit hedge exemptions will apply. The
Exchange proposes to apply existing index option margin requirements
for the purchase and sale
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of options on the MSCI EM Index.\33\ In addition, the Exchange proposes
to amend Rule 1079(d)(1) to also note that with respect to FLEX options
on the MSCI EM index, the same number of contracts, 25,000, would apply
with respect to the position limit.
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\30\ See generally Exchange Rules 1000A through 1107A (Rules
Applicable to Trading Options on Indices) and Exchange Rules 1000
through 1094 (Rules Applicable to Trading of Options on Stocks,
Exchange-Traded Fund Shares and Foreign Currencies).
\31\ See Exchange Rules 721 (Proper and Adequate Margin) and
1047A (Trading Rotations, Halts or Reopenings).
\32\ The exercise limits would also be 25,000 contracts as per
Exchange Rule 1002A.
\33\ See Exchange Rule 721.
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The Exchange represents that it has an adequate surveillance
program in place for options on the MSCI EM Index. The Exchange also
represents that it has the necessary systems capacity to support the
new options series. As stated in the filing, the Exchange has rules in
place designed to protect public customer trading.
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 on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
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 email to [email protected]. Please include
File Number SR-Phlx-2011-179 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-Phlx-2011-179. This file
number should be included on the subject line if email 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 the 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 available publicly. All
submissions should refer to File Number SR-Phlx-2011-179 and should be
submitted on or before January 27, 2012.
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\34\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-52 Filed 1-5-12; 8:45 am]
BILLING CODE 8011-01-P