[Federal Register Volume 77, Number 242 (Monday, December 17, 2012)]
[Notices]
[Pages 74700-74703]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30268]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68398; File No. SR-ISE-2012-93]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Increase Position and Exercise Limits in EEM Options
December 11, 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 28, 2012, the International Securities Exchange, LLC
(``ISE'' 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 its rules to increase position and
exercise limits for options on the iShares MSCI Emerging Markets Index
Fund (``EEM''). The text of the proposed rule change is available on
the Exchange's Web site www.ise.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 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 self-regulatory organization 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
ISE proposes to amend Supplementary Material .01 to ISE Rule 412
and Supplementary Material .01 of ISE Rule 414 to increase position and
exercise limits, respectively, for EEM options. This filing is based on
a filing previously submitted by the Chicago Board Options Exchange
(``CBOE''), which the Commission recently approved.\3\
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\3\ See Securities Exchange Act Release No. 68086 (October 23,
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066).
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Position limits for exchange-traded fund (``ETFs'') options, such
as EEM options, are determined pursuant to Rule 412 and vary according
to the number of outstanding shares and trading volume during the most
recent six-month trading period of an 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 Rules 412 and 414 to increase the
position and exercise limits for EEM options to 500,000 contracts.
There is precedent for establishing position limits for options on
actively-traded ETFs and these position limit levels are set forth in
Rule 412, Supplementary Material .01.\4\
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\4\ Rule 412, Supplementary Material .01, lists exceptions to
standard position limits which are: put or call option contracts
overlying the PowerShares QQQ Trust (``QQQQ''), for which the
position limit is currently 900,000 contracts on the same side of
the market; options overlying the Standard and Poor's Depository
Receipts[supreg] Trust (``SPY''), which currently does not have any
position limits; options overlying the iShares[supreg] Russell
2000[supreg] Index Fund (``IWM''), for which the position limit is
currently 500,000 contracts on the same side of the market; and
options overlying the Diamonds Trust (``DIA''), for which the
position limit is currently 300,000 contracts on the same side of
the market.
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[[Page 74701]]
In support of this proposed rule change, and as noted by the CBOE
in its filing, the below trading statistics compare EEM to IWM and SPY.
As shown in the table, the average daily volume in 2011 for EEM was 65
million shares compared to 64.1 million shares for IWM and 213 million
shares for SPY. The total shares outstanding for EEM are 922.9 million
compared to 192.6 million shares for IWM and 716.1 million shares for
SPY. Further, the fund market cap for EEM is $41.1 billion compared to
$15.5 billion for IWM and $98.3 billion for SPY.
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2011 ADV Shares
ETF 2011 ADV (mil. (option outstanding Fund market
shares) contracts) (mil.) cap ($bil)
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EEM............................................ 65 280,000 922.9 41.1
IWM............................................ 64.1 662,500 192.6 15.5
SPY............................................ 213 2,892,000 716.1 98.3
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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
502(h) for ETFs holding non-U.S. component securities.\5\ EEM tracks
the performance of the MSCI Emerging Markets Index, which has
approximately 800 component securities.\6\ ``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.'' \7\ 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'').\8\ 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.\9\ 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.\10\
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\5\ 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 Rule 502(h) and Rule 503(h).
\6\ 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 EEM
and their individual concentrations can be accessed at: http://us.ishares.com/product_info/fund/holdings/EEM.htm.
\7\ See http://www.msci.com/products/indices/tools/index.html#EM.
\8\ See ISE Rule 502(h)(B)(1).
\9\ See ISE Rule 502(h)(B)(2).
\10\ See ISE Rule 502(h)(B)(3).
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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 17, 2012, the year-to-date average daily trading volume
for EEM across all exchanges was 49.3 million shares. As to EEM
options, the year-to-date average daily trading volume for EEM options
across all exchanges was 250,304 contracts. 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 would continue unabated. Thus, the Exchange would still require
that each Member 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. Exchange
Market Makers would continue to be exempt from this reporting
requirement, as Market Maker information can be accessed through the
Exchange's market surveillance systems. 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.\11\
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\11\ See ISE Rule 415(a).
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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 ISE, 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.\12\
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\12\ 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.\13\ Options positions are
part of any reportable positions and, thus, cannot be legally hidden.
Moreover, the Exchange's requirement that Members 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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\13\ 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 a Member 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 a Member must maintain for a large position
held by it or by its customer.\14\
[[Page 74702]]
In addition, the Commission's net capital rule, Rule 15c3-1 \15\ 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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\14\ See ISE Rule 1202.
\15\ 17 CFR 240.15c3-1.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the Act in general, and furthers the objectives of Section 6(b)(5)
of the Act \16\ 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.
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\16\ 15 U.S.C. 78f(b)(5).
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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. The Exchange also believes that the
proposed rule change will benefit a greater number of market
participants who are ISE Members and members of other exchanges. This
is because EEM is a multiply-listed options class and currently there
is not a uniform and consistent position and exercise limits regime
across all of the exchanges that list EEM options. The proposed filing
will benefit market participants because it will ensure consistency and
uniformity among the competing options exchanges as to the position and
exercise limits for a multiply listed options class.
B. Self-Regulatory Organization's Statement on Burden on Competition
This proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Exchange Act. In this regard and as indicated above, the Exchange
notes that the rule change is being proposed as a competitive response
to a CBOE filing. ISE believes this proposed rule change is necessary
to permit fair competition among the options exchanges and to establish
uniform position limits for a multiply-listed options class.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
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 \17\ and Rule 19b-4(f)(6)
thereunder.\18\
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 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 and exercise 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.\19\ 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.\20\ For these reasons, the Commission designates the
proposed rule change as operative upon filing.
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\19\ 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).
\20\ 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-ISE-2012-93 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-ISE-2012-93. 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.,
[[Page 74703]]
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-ISE-2012-93 and should be
submitted on or before January 7, 2013.
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\21\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30268 Filed 12-14-12; 8:45 am]
BILLING CODE 8011-01-P