[Federal Register Volume 77, Number 197 (Thursday, October 11, 2012)]
[Notices]
[Pages 61794-61795]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-24955]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67976; File No. SR-Phlx-2012-105]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto,
Regarding Treasury Securities Options
October 4, 2012.
I. Introduction
On August 7, 2012, NASDAQ OMX PHLX LLC (``Exchange'' or ``Phlx'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
adopt new rules in the Exchange's 1000D Series to permit the listing
and trading of options on Treasury securities. The proposed rule change
was published for comment in the Federal Register on August 23,
2012.\3\ On September 25, 2012, the Exchange filed Amendment No. 1 to
the proposed rule change.\4\ The Commission received no comments on the
proposal. This order approves the proposed rule change, as modified by
Amendment No. 1 thereto.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 67683 (August 17,
2012), 77 FR 51088 (August 23, 2012) (``Notice'').
\4\ In Amendment No. 1, the Exchange proposed minor wording
changes to substitute the phrase ``options listing timeframe'' for
the certain other phrases throughout the rule text and Exhibit 1.
Amendment No. 1 is technical in nature, and therefore the Commission
is not publishing Amendment No. 1 for public comment.
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposes to adopt rules that would, in conjunction
with current applicable Exchange rules and procedures, permit the
listing and trading of options on Treasury securities.\5\ The Exchange
intends to list and trade standardized options on two specific types of
marketable on-the-run Treasury securities: notes and bonds. Treasury
securities options will be designated by reference to the issuer of the
underlying Treasury security, principal amount, expiration month (and
year for the longest term option series), exercise price, type (put or
call), stated rate of interest, and stated date of maturity or nominal
term to maturity.
---------------------------------------------------------------------------
\5\ Subsection (a)(1) of proposed Rule 1001D defines the term
``Treasury security'' as a bond or note or other evidence of
indebtedness that is a direct obligation of, or an obligation
guaranteed as to principal or interest by, the United States or a
corporation in which the United States has a direct or indirect
interest (except debt securities guaranteed as to timely payment of
principal and interest by the Government National Mortgage
Association). Securities issued or guaranteed by individual
departments or agencies of the United States are sometimes referred
to by the title of the department or agency involved (e.g., a
``Treasury security'' is a debt instrument that is issued by the
U.S. Treasury).
---------------------------------------------------------------------------
Pricing and Transparency. Treasury securities are initially sold in
a scheduled auction process and thereafter trade in a secondary market.
The Exchange asserts that the prices of Treasury securities are widely
disseminated, active, and visible to traders and investors. In
addition, the Exchange represents that it intends to obtain real-time
Treasury prices from a market data provider so that it can use these
data in support of the Exchange's market, regulatory, and surveillance
operations, as well as for opening and determining settlement values
for Treasury options. The Exchange has represented that, 30 days prior
to the start of trading Treasury security options, it will make an
announcement, via an Options Trader Alert, to its member organizations
regarding the details of the proposed real-time Treasury price
offering. The Exchange has represented that, on the basis of the real-
time Treasury data that the Exchange is able to get, it may offer an
alternative Treasury data feed to Exchange members that may desire to
acquire such data from the Exchange.
The Exchange would list options only on on-the-run Treasury
securities. The Exchange believes that these securities are extremely
liquid and afford excellent price discovery because on-the-run (as
opposed to off-the-run) Treasury securities are the most recently
issued U.S. Treasury bonds or notes and are the most frequently traded
securities of a maturity. Further, the Exchange notes that on-the-run
Treasury securities are readily quoted and offered by numerous public
sources and broker-dealers, and that prices are also available from
exchanges that trade derivatives on Treasuries.
Trading Rules. Treasury securities options will trade on the
Exchange's electronic options platform, Phlx XL,\6\ and settle like
equity options on the
[[Page 61795]]
Exchange. Exchange rules applicable to equity options trading generally
will be applicable to Treasury securities options unless a specific
rule in the 1000D Series is to the contrary or supplements an existing
rule. Trading hours will correspond to the hours during which equity
options are normally traded on the Exchange, which currently are 9:30
a.m. to 4 p.m. ET.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 59995 (May 28,
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32) (order approving
Phlx XL II).
---------------------------------------------------------------------------
Terms and Criteria for Listing and Trading. Treasury securities may
be initially approved by the Exchange as underlying securities for
Exchange transactions in specific CUSIP options, subject to
requirements as to size of original issuance (the original public sale
of an underlying Treasury security must be at least $1 billion in
principle), aggregate principal amount outstanding, and years to
maturity. Additionally, approval will extend only to the settled, on-
the-run Treasury securities.\7\ The Exchange will not approve a
subsequent on-the-run Treasury security until after the expiration of
all the options that are listed pursuant to this described options
listing timeframe.
---------------------------------------------------------------------------
\7\ See Phlx Rule 1006D. The proposal is designed to ensure that
a Treasury security is eligible for underlying options only during
its most liquid on-the run period. Options on a newly settled
(subsequent) on-the-run Treasury security can be listed only after
all the options that are listed pursuant to the preceding options
listing timeframe expire. This minimizes or negates overlap and
proliferation of Treasury options. An on-the run Treasury security
in the options listing timeframe becomes off-the-run when there is a
subsequent auction for the Treasury security and as a result the
newly settled security becomes on-the-run. The Exchange will not
list options on the subsequent on-the-run Treasury security until
all options listed within the options listing timeframe on the
immediately preceding on-the-run Treasury security (which has become
off-the-run) expire.
---------------------------------------------------------------------------
The expiration month and exercise price of each series will be
determined by the Exchange at the time that the series is first opened
for trading. The Exchange will open a minimum of one expiration month
and series for each class of options. The Exchange may open and add
Treasury options in one or all of the months in the options listing
timeframe. Treasury security options opened for trading on the Exchange
will expire on a monthly basis.
Minimum Price Variation. Treasury securities options will have a
minimum increment of $0.01.\8\ The Exchange asserts that the proposed
$0.01 increment is appropriate for Treasury securities options to allow
traders to make the most effective use of the product for hedging
purposes. The Exchange also represents that the proposed $0.01
increments will not cause any capacity problems.
---------------------------------------------------------------------------
\8\ See Phlx Rule 1013D.
---------------------------------------------------------------------------
Series Open for Trading. The Exchange proposes that the exercise
price of each series of Treasury security options will be fixed at a
price denominated in $0.50 increments. The exercise price will be
reasonably close to, and no more than 20% away from, the price at which
the underlying security is traded in the primary market at the time the
series of options is first opened for trading.
Settlement. Treasury securities options will be physically settled,
European-style options that may be exercised only on the day that they
expire. Trading in Treasury securities options ordinarily will cease on
the business day (usually a Friday) preceding the expiration date. The
expiration date will be the Saturday immediately following the third
Friday of the expiration month. The settlement process for Treasury
securities options will be the same as the settlement process for
equity options under current Exchange rules (e.g., Phlx Rule 1044).
Payment of the aggregate exercise price must be accompanied by payment
of accrued interest on the underlying Treasury security.
Additional information relating to options on Treasury securities--
including definitions, listing standards, expiration, exercise,
settlement, margin rules, positions limits, doing business with the
public, and surveillance--can be found in the Notice.
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\9\ In particular, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\10\ which requires that the rules of an
exchange be designed, among other things, to promote just and equitable
principles of trade, to prevent fraudulent and manipulative acts, to
remove impediments to and to perfect the mechanism for a free and open
market and a national market system, and, in general, to protect
investors and the public interest. The Commission believes that the
proposal appropriately balances, on the one hand, the Exchange's desire
to offer a new product to investors with, on the other hand, the
necessity of having appropriate rules for listing, trading and margin,
among other considerations relevant under the Act. The Commission notes
that it has previously approved similar rules permitting other options
exchanges to list and trade options on Treasury securities.\11\
---------------------------------------------------------------------------
\9\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\10\ 15 U.S.C. 78f(b)(5).
\11\ See Chicago Board Options Exchange (``CBOE'') rules 21.1-
21.31. See also Securities Exchange Act Release No. 18371 (December
23, 1981), 46 FR 63423 (December 31, 1981) (approving SR-Amex-81-1
and SR-CBOE-81-27).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-Phlx-2012-105), as modified
by Amendment No. 1 thereto, be, and it hereby is, approved.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------
\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-24955 Filed 10-10-12; 8:45 am]
BILLING CODE 8011-01-P