[Federal Register Volume 77, Number 238 (Tuesday, December 11, 2012)]
[Notices]
[Pages 73716-73719]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-29855]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68359; File No. SR-NYSEArca-2012-132]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Amending Commentary
.06 to Exchange Rule 6.8 To Increase the Position and Exercise Limits
for Options on the iShares MSCI Emerging Markets Index Fund to 500,000
Contracts
December 5, 2012.
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 November 26, 2012, 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 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 proposes to amend Commentary .06 to Exchange Rule 6.8
to increase the position and exercise limits for options on the iShares
MSCI Emerging Markets Index Fund (``EEM'') to 500,000 contracts. The
text of the proposed rule change is available on the Exchange's Web
site at www.nyse.com, 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 self-regulatory organization
included statements concerning the purpose of,
[[Page 73717]]
and basis for, the proposed rule change and discussed any comments it
received on the proposed rule change. The text of those statements may
be examined at the places specified in Item IV below. The Exchange has
prepared summaries, set forth in sections A, B, and C below, of the
most significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Position limits for exchange-traded fund (``ETFs'') options, such
as EEM options, are determined pursuant to Rule 6.8 and vary according
to the number of outstanding shares and past six-month trading volume
of the underlying stock or ETF. The largest in capitalization and most
frequently traded stocks and ETFs have an option position limit of
250,000 contracts (with adjustments for splits, re-capitalizations,
etc.) on the same side of the market; smaller capitalization stocks and
ETFs have position limits of 200,000, 75,000, 50,000 or 25,000
contracts (with adjustments for splits, re-capitalizations, etc.) on
the same side of the market. The current position limit for EEM options
is 250,000 contracts. The purpose of the proposed rule change is to
amend Exchange Rule 6.8, Commentary .06 to increase the position and
exercise limits for EEM options to 500,000 contracts.\3\
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\3\ By virtue of Exchange Rule 6.9, Commentary .01, which is not
being amended by this filing, the exercise limit for EEM options
would be similarly increased.
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Position limits serve as a regulatory tool designed to address
potential manipulative schemes and adverse market impact surrounding
the use of options. The Exchange understands that the Commission, when
considering the appropriate level at which to set option position and
exercise limits, has considered the concern that the limits be
sufficient to prevent investors from disrupting the market in the
security underlying the option.\4\ This consideration has been balanced
by the concern that the limits ``not be established at levels that are
so low as to discourage participation in the options market by
institutions and other investors with substantial hedging needs or to
prevent specialists and market-makers from adequately meeting their
obligations to maintain a fair and orderly market.'' \5\
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\4\ See Securities Exchange Act Release No. 40969 (January 22,
1999), 64 FR 4911, 4912-4913 (February 1, 1999) (SR-CBOE-98-23)
(citing H.R. No. IFC-3, 96th Cong., 1st Sess. at 189-91 (Comm. Print
1978)).
\5\ Id., at 4913.
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There is precedent for establishing position limits for options on
actively-traded ETFs and these position limit levels are set forth in
Commentary .06 to Rule 6.8.
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Option Position limits
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PowerShares QQQ Trust\SM\, Series 1 (QQQ). 900,000 contracts.
SPDR[supreg] S&P 500[supreg] ETF (SPY).... None.
iShares[supreg] Russell 2000[supreg] Index 500,000 contracts.
Fund (IWM).
SPDR[supreg] Dow Jones Industrial 300,000 contracts.
Average\SM\ ETF Trust (DIA).
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In support of this proposed rule change, the Exchange has collected
trading statistics comparing EEM to IWM and SPY. As shown in the
following table, the average daily volume year to date in 2012 for EEM
was 49.1 million shares compared to 47 million shares for IWM and 143.1
million shares for SPY. The total shares outstanding for EEM are 926.6
million compared to 204.2 million shares for IWM and 771.4 million
shares for SPY. Further, the fund market cap for EEM is $38.2 billion
compared to $16.7 billion for IWM and $108.9 billion for SPY.
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Shares
October 2012 October 2012 outstanding Fund market
ETF YTD ADV (mil. YTD ADV (mil.) as of cap ($bil) as
shares) (option October 31, of October 31,
contracts) 2012 2012
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EEM.............................................. 49.1 249,496 926.6 38.2
IWM.............................................. 47 498,723 204.2 16.7
SPY.............................................. 143.1 2,292,977 771.4 108.9
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In further support of this proposal, the Exchange represents that
EEM still qualifies for the initial listing criteria set forth in Rule
5.3(g) for ETFs holding non-U.S. component securities.\6\ EEM tracks
the performance of the MSCI Emerging Markets Index, which has
approximately 800 component securities.\7\ ``The MSCI Emerging Markets
Index is a free float-adjusted market capitalization index that is
designed to measure equity market performance of emerging markets. The
MSCI Emerging Markets Index consists of the following 21 emerging
market country indices: Brazil, Chile, China, Colombia, Czech Republic,
Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco,
Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and
Turkey.'' \8\ The Exchange represents that more than 50% of the weight
of the securities held by EEM are now subject to a comprehensive
surveillance agreement (``CSA'').\9\ Additionally, the component
securities of the MSCI Emerging Markets Index on which EEM is based for
which the primary market is in any one country that is not subject to a
CSA do not represent 20% or more of the weight of the MSCI Emerging
Markets Index.\10\ Finally, the component securities of the MSCI
Emerging Markets Index on which EEM is based for which the primary
market is in any two countries that are not subject to CSAs do not
represent 33% or more of the weight of the MSCI Emerging Markets
Index.\11\
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\6\ The Exchange notes that the initial listing criteria for
options on ETFs that hold non-U.S. component securities are more
stringent than the maintenance listing criteria for those same ETF
options. See Exchange Rules 5.3(g) and 5.4(k).
\7\ See http://us.ishares.com/product_info/fund/overview/EEM.htm and http://www.msci.com/products/indices/licensing/msci_emerging_markets/. Identification of the specific securities in the
EEM and their individual concentrations in the EEM can be accessed
at: http://us.ishares.com/product_info/fund/holdings/EEM.htm.
\8\ See http://www.msci.com/products/indices/tools/index.html#EM.
\9\ See Exchange Rule 5.3(g)(2)(A).
\10\ See Exchange Rule 5.3(g)(2)(B).
\11\ See Exchange Rule 5.3(g)(2)(C).
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The Exchange believes that the liquidity in the underlying ETF and
the liquidity in EEM options support its request to increase the
position and exercise limits for EEM options. As to the underlying ETF,
through October 31, 2012 the year-to-date average daily trading volume
for EEM across all exchanges was 49.1 million shares. As to EEM
options, the year-to-date average daily trading for EEM options across
all exchanges was 249,496 contracts.
The Exchange believes that the current position limits on EEM
options
[[Page 73718]]
may inhibit the ability of certain large market participants, such as
mutual funds and other institutional investors with substantial hedging
needs, to utilize EEM options and gain meaningful exposure to the
hedging function they provide. The Exchange believes that increasing
position limits for EEM options will lead to a more liquid and
competitive market environment for EEM options that will benefit
customers interested in this product.
Under the Exchange's proposal, the options reporting requirement
for EEM options would continue unabated. Thus, the Exchange would still
require that each OTP Holder that maintains a position in EEM options
on the same side of the market, for its own account or for the account
of a customer, report certain information to the Exchange. This
information would include, but would not be limited to, the option
position, whether such position is hedged and, if so, a description of
the hedge, and the collateral used to carry the position, if
applicable. In addition, the general reporting requirement for customer
accounts that maintain an aggregate position of 200 or more option
contracts would remain at this level for EEM options.\12\
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\12\ For reporting requirements, see Exchange Rule 6.6.
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As the anniversary of listed options trading approaches its
fortieth year, the Exchange believes that the existing surveillance
procedures and reporting requirements at the Exchange, other options
exchanges, and at the several clearing firms are capable of properly
identifying unusual and/or illegal trading activity. In addition,
routine oversight inspections of the Exchange's regulatory programs by
the Commission have not uncovered any material inconsistencies or
shortcomings in the manner in which the Exchange's market surveillance
is conducted. These procedures utilize daily monitoring of market
movements via automated surveillance techniques to identify unusual
activity in both options and underlying stocks.\13\
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\13\ These procedures have been effective for the surveillance
of EEM options trading and will continue to be employed.
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Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\14\ Options positions are
part of any reportable positions and, thus, cannot be legally hidden.
Moreover, the Exchange's requirement that members or member
organizations file reports with the Exchange for any customer who held
aggregate large long or short positions of any single class for the
previous day will continue to serve as an important part of the
Exchange's surveillance efforts.
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\14\ 17 CFR 240.13d-1.
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The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns that an OTP Holder, or its customer may try to maintain an
inordinately large un-hedged position in an option, particularly on
EEM. Current margin and risk-based haircut methodologies serve to limit
the size of positions maintained by any one account by increasing the
margin and/or capital that an OTP Holder must maintain for a large
position held by itself or by its customer.\15\ In addition, the
Commission's net capital rule, Rule 15c3-1 \16\ under the Securities
Exchange Act of 1934 (the ``Act''), imposes a capital charge on members
to the extent of any margin deficiency resulting from the higher margin
requirement.
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\15\ See Exchange Rule 4.15 for a description of margin
requirements.
\16\ 17 CFR 240.15c3-1.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) \17\ of the Act, in general, and furthers the
objectives of Section 6(b)(5),\18\ in particular, in that 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, 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. Specifically, the proposed
rule change will benefit large Market-Makers (which generally have the
greatest potential and actual ability to provide liquidity and depth in
the product), as well as retail traders, investors, and public
customers, by providing them with a more effective trading and hedging
vehicle. In addition, the Exchange believes that the structure of EEM
options and the considerable liquidity of the market for EEM options
diminish the opportunity to manipulate this product and disrupt the
underlying market that a lower position limit may protect against.
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\17\ 15 U.S.C. 78f(b).
\18\ 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 solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
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) by its terms does not become operative for 30 days after the
date of this filing, or such shorter time as the Commission may
designate if consistent with the protection of investors and the public
interest, the proposed rule change has become effective pursuant to
Section 19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(6)
thereunder.\20\
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\19\ 15 U.S.C. 78s(b)(3)(A).
\20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to provide the Commission
with written notice of its intent to file the proposed rule change,
along with a brief description and text of the proposed rule change,
at least five business days prior to the date of filing of the
proposed rule change, or such shorter time as designated by the
Commission. The Exchange has fulfilled this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of filing. However,
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter
time if such action is consistent with the protection of investors and
the public interest. The Exchange requests that the Commission waive
the 30-day operative delay so that it can increase the position and
exercise limits for EEM options immediately, which will result in
consistency and uniformity among the competing options exchanges as to
the position limits for EEM options. The Commission believes that
waiving the 30-day operative delay is consistent with the protection of
investors and the public interest.\21\ The Commission notes the
proposal is substantively identical to a proposal that was recently
approved by the Commission, and does not raise any new regulatory
issues.\22\ For these
[[Page 73719]]
reasons, the Commission designates the proposed rule change as
operative upon filing.
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\21\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\22\ See Securities Exchange Act Release No. 68086 (October 23,
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2012-132 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-NYSEArca-2012-132. 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
10:00 a.m. and 3:00 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-NYSEArca-2012-132 and should
be submitted on or before January 2, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-29855 Filed 12-10-12; 8:45 am]
BILLING CODE 8011-01-P