[Federal Register Volume 78, Number 223 (Tuesday, November 19, 2013)]
[Notices]
[Pages 69493-69496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27621]
[[Page 69493]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70855; File No. SR-NYSEArca-2013-120]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Amending Commentary
.08 to Rule 6.4 To Modify the Quarterly Option Series Program To
Eliminate the Cap on the Number of Additional Series That May Be Listed
Per Expiration Month for Each QOS in Exchange-Traded Fund Options
November 13, 2013.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on November 5, 2013, NYSE Arca, Inc. (the ``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 self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 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 .08 to Rule 6.4 to modify
the Quarterly Option Series (``QOS'') Program to eliminate the cap on
the number of additional series that may be listed per expiration month
for each QOS in exchange-traded fund (``ETF'') options. 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, 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
The Exchange is proposing to amend Commentary .08(ii) to Rule 6.4
related to the QOS Program to eliminate the cap on the number of
additional series that may be listed per expiration month for each QOS
in ETF options.\4\ As set out in Commentary .08, the Exchange may list
QOS for up to five currently listed options classes that are either
index options or options on ETFs. The Exchange may also list QOS on any
option classes that are selected by other securities exchanges that
employ a similar program under their respective rules. Currently, for
each QOS in ETF options that has been initially listed on the Exchange,
the Exchange may list up to 60 additional series per expiration month.
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\4\ A Quarterly Option Series is a series of an option class
that is approved for listing and trading on the Exchange in which
the series is opened for trading on any business day, and that
expires at the close of business on the last business day of a
calendar quarter. The Exchange lists series that expire at the end
of the next consecutive four (4) calendar quarters, as well as the
fourth quarter of the next calendar year. See NYSE Area Options
Rules 6.1(b)(42) and 6.4, Commentary .08(i).
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The Exchange is proposing to amend Commentary .08(ii) to make the
treatment of QOS in ETF options consistent with the treatment of QOS in
index options. NYSE Arca Options Rule 5.19(a)(3)(C) governs the QOS
Program in index options. Index options include options on industry/
narrow-based indices and options on market/broad-based indices.\5\
Options on ETFs are similar to index options because ETFs hold
securities based on an index or portfolio of securities.\6\ The
requirements and conditions of the QOS Program in index options,
moreover, parallel those of the QOS Program in ETF options. For
example, like the QOS Program in ETF options, the QOS Program in index
options permits QOS in up to five currently-listed options classes;
requires the listing of series that expire at the end of the next (as
of the listing date) consecutive four quarters, as well as the fourth
quarter of the next calendar year; requires the strike price of each
QOS to be fixed at a price per share; and establishes parameters for
the number of strike prices above and below the underlying index. The
QOS Program in index options, however, does not place a cap on the
number of additional series that the Exchange may list per expiration
month for each QOS in index options. Elimination of the cap set out in
Commentary .08(ii), therefore, would result in similar regulatory
treatment of similar options products.\7\
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\5\ An ``industry index'' or ``narrow-based index'' is ``an
index designed to be representative of a particular industry or
group of related industries.'' See NYSE Arca Options Rule
5.10(b)(22). A ``market index'' or ``broad-based index'' is ``an
index designed to be representative of a stock market as a whole or
of a range of companies in unrelated industries.'' See NYSE Arca
Options Rule 5.10(b)(23).
\6\ NYSE Arca Options Rule 6.1(b)(32) defines ``Exchange-Traded
Fund Share'' as ``Exchange-listed securities representing interests
in open-end unit investment trusts or open-end management investment
companies that hold securities (including fixed income securities)
based on an index or a portfolio of securities.''
\7\ The Exchange notes that Rule 5.19(a)(3)(C)(ii), which
governs the addition of new series of Quarterly Options Series on
index options, states: ``The Exchange may open additional strike
prices of a Quarterly Options Series that are above the value of the
underlying index provided that the total number of strike prices
above the value of the underlying index is no greater than five. The
Exchange may open additional strike prices of a Quarterly Options
Series that are below the value of the underlying index provided
that the total number of strike prices is below the value of the
underlying index is no greater than five. The opening of any new
Quarterly Options series shall not affect the series of options of
the same class previously opened.'' In practice, this means that the
Exchange may add Quarterly Options Series at strikes above and below
the current index value, so long as there are not more than five
strikes above, and five strikes below, the current index value after
such additions are made. The total number of Quarterly Options
Series that can be listed at any one time is, therefore,
theoretically unlimited, so long as there are no more than five
strikes above (or below) a given index value when new strikes are
added.
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The Exchange believes that the proposed revision to the QOS Program
would provide market participants with the ability to better tailor
their trading to meet their investment objectives, including hedging
securities positions, by permitting the Exchange to list additional QOS
in ETF options that meet such objectives. The Exchange has observed
that situations arise in which additional strike prices in smaller
intervals would be valuable to investors. However, due to the cap on
additional QOS series the Exchange cannot always provide these
important at-the-money strikes. Elimination of the cap would remedy
this issue.
Currently, the Exchange lists quarterly expiration options on six
ETFs, but the cap restricts the number of strikes on these options,
which often results in a lack of strike continuity. For example, the
Exchange lists quarterly expiration options on SPDR Gold Trust
(``GLD''). On January 2, 2013, the Exchange initially listed December
31, 2013 quarterly expiration options (``December 2013 Quarterlies'')
on GLD, which closed the previous trading day at $162.02, with initial
strikes from $115 to $210, and additional strikes in $1 intervals from
$131 to $189. But during
[[Page 69494]]
2013, GLD has closed at a range of $115.94 to $163.67 and is currently
trading around $125. As a result of the cap, the Exchange cannot offer
December 2013 Quarterlies on GLD in $1 intervals within $10 of the
closing price of GLD because the number of strikes would exceed the cap
of 60 additional strikes. Consequently, the Exchange is not able to
list important at-the-money strikes due to the cap on additional
strikes. While the Exchange has the ability to delist strikes with no
open interest so that it may list strikes that are closer to the money,
delisting is not always possible. If all of the existing strikes have
open interest, the Exchange cannot delist strikes so that it may list
strikes closer to the money.
But the Exchange is not subject to a similar cap on the number of
additional weekly or monthly expiration options it can list on ETFs.\8\
So, for example, the Exchange can list additional weekly expiration
options on GLD in $1 and $0.50 intervals within $5 of the closing price
of GLD, and additional monthly expiration options in $1 intervals from
$85 to $178. Therefore, due to the cap, the Exchange cannot list, and
an investor cannot structure, an investment on a quarterly basis with
the same granularity that can be achieved on a weekly or monthly basis.
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\8\ For Short Term Options Series (``weekly options''),
commentary .07 to Rule 6.4 sets a maximum number of strikes, but the
Exchange can exceed this maximum number of strikes under certain
circumstances. Specifically, ``in the event that the underlying
security has moved such that there are no series that are at least
10% above or below the current price of the underlying security and
all existing series have open interest, the Exchange may list
additional series, in excess of the 30 allowed under Commentary .07,
that are between 10% and 30% above or below the price of the
underlying security.''
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Similarly, the Exchange lists quarterly options on SPDR S&P 500 ETF
(``SPY''), which during 2013 closed at a range of $145.55 to $173.05.
Again, due to the cap, the Exchange cannot offer quarterly expiration
options on SPY in $1 intervals above $170 because the number of
additional strikes would exceed the cap of 60. Instead, the Exchange is
forced to list quarterly expiration options on SPY at $5 intervals
above $170, despite the fact that SPY has recently traded between $165
and $170. As such, if SPY would again increase to $170, then the
Exchange would only be able to offer options with a strike price $5
away from the price of the underlying ETF due to the cap on additional
strikes.
On the other hand, in contrast to the limitations imposed on the
Exchange for quarterly expiration options on ETFs, the absence of a
similar cap on quarterly expiration options on indexes means that the
Exchange can list, and investors can achieve, more granularity in
index-based options. For example, S&P 500 Mini-SPX options (``SPX'')
are options on the S&P 500 index, as opposed to options on SPY, the ETF
based on that same S&P 500 index. SPX options are used to hedge SPY
positions and are traded at the equivalent of one point and one-half
point intervals. The SPX trades at 10 times the value of SPY, so that
if SPY trades at $168.70, SPX trades at $1687. Therefore, the strike
price for a quarterly expiration option on SPX, that is a hedge for a
quarterly expiration option on SPY at $170, would be $1700. The
Exchange can offer quarterly expiration options on SPX with strike
prices of $1670, $1680, $1690, and $1700 because there is no cap on
quarterly expiration index-based options. However, the Exchange cannot
similarly offer quarterly expiration options on SPY with similar strike
price continuity because of the cap on quarterly expiration ETF-based
options.
Elimination of the cap would also help market participants meet
their investment objectives by providing expanded opportunities to roll
ETF options into later quarters. For example, a market participant that
holds one or more contracts in a QOS in an ETF put option that has a
strike price of $120 and an expiration date of the last day of the
third quarter may wish to roll that position into the fourth quarter.
That is, the market participant may wish to close out the contracts set
to expire at the end of the third quarter and instead establish a
position in the same number of contracts in a QOS in a put option on
the same ETF with the same strike price of $120, but with an expiration
date of the last day of the fourth quarter. Because of the cap on
additional QOS in ETF options, however, the Exchange may not be able to
list additional QOS in the ETF. Elimination of the cap, though, would
allow the Exchange to meet the investment needs of market participants
in such situations.
The Exchange has sufficient capacity to handle increased quote and
trade reporting traffic that might be expected to result from listing
additional QOS in ETF options. The Exchange notes that it has purchased
capacity from the Options Price Reporting Authority (``OPRA'') to
handle its options quote and trade reporting traffic.\9\ The Exchange
believes that it has acquired sufficient capacity to handle increased
quote and trade reporting traffic that might be expected to result from
listing additional QOS in ETF options.\10\ In the Exchange's view, it
would be inconsistent to prohibit the listing of additional QOS beyond
a specified cap when each exchange independently purchases capacity to
meet its quote and trade reporting traffic needs.
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\9\ See Exchange Act Release No. 48822 (Nov. 21, 2003), 68 FR
66892 (Nov. 28, 2003) (SR-OPRA-2003-01) (requiring exchanges to
acquire options market data transmission capacity independently,
rather than jointly).
\10\ The SEC has relied upon an exchange's representation that
it has sufficient capacity to support new options series in
approving a rule amendment permitting the listing of additional
option series. See Exchange Act Release No. 57410 (Jan. 17 [sic],
2008), 73 FR 12483, 12484 (Mar. 7, 2008) (SR-CBOE-2007-96)
(amendments to CBOE Rule 5.5(e)(3)) (``In approving the proposed
rule change, the Commission has relied upon the Exchange's
representation that it has the necessary systems capacity to support
new options series that will result from this proposal'').
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Moreover, the Exchange has in place a quote mitigation plan that
helps it maintain sufficient capacity to handle quote traffic. The
plan, which has been approved by the Commission, reduces the number of
quotations that the Exchange disseminates by limiting disseminated
quotes to active options series only.\11\
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\11\ NYSE Arca's quote mitigation plan is provided for in
Commentary .03 to NYSE Arca Rule 6.86, adopted in 2007. See
Securities Exchange Act Release No. 55156 (Jan. 23, 2007), 72 FR
4759 (Feb. 21 [sic], 2007) (SR-NYSEArca-2006-73).
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To help ensure that only active options series are listed, the
Exchange also has in place procedures to delist inactive series.
Commentary .08(iii) to Rule 6.4 requires the Exchange to review QOS
that are outside of a range of five strikes above and five strikes
below the current price of the underlying ETF. Based on that review,
the Exchange must delist series with no open interest in both the call
and the put series having (i) a strike price higher than the highest
price with open interest in the put and/or call series for a given
expiration month, and (ii) a strike price lower than the lowest strike
price with open interest in the put and/or call series for a given
expiration month.
The Exchange's experience with listing additional QOS in ETF
options at the end of 2008 also indicates that it has sufficient
capacity to handle increased order and quote traffic that might be
expected to result from listing additional QOS in ETF options.
Commentary .08(iv) to Rule 6.4 established a temporary rule that
permitted the Exchange to list up to 100 additional series per
expiration month for each QOS in ETF option in the fourth quarter of
2008, and for the new expiration month being added after the December
2008 QOS expiration.\12\ The
[[Page 69495]]
Exchange did not experience capacity constraints during this temporary
increase.
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\12\ See Exchange Act Release No. 59012 (Nov. 24, 2008), 73 FR
73371 (Dec. 2, 2008) (SR-NYSEArca-2008-131). The Exchange amended
Commentary .08 to add paragraph (iv) during the financial crisis in
2008. The amendment was in response to requests for lower priced
strikes on certain ETFs. Other options exchanges amended their rules
quarterly options series rules to permit the listing of additional
series in ETF options. See, e.g., 73 FR 12483 (amendments to CBOE
Rule 5.5(e)(3)).
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Finally, the Exchange is proposing to make a technical amendment to
Commentary .08(ii) to Rule 6.4. Currently, the Commentary states that
the Exchange may open for trading additional Quarterly Options Series
that are more than 30% away from the current index value; however, the
provision is meant to reference the price of the underlying ETF. The
Exchange is also deleting Commentary .08(iv) to Rule 6.4. As noted,
Commentary .08(iv) temporarily increased the number of additional QOS
in ETF options that could be added by the Exchange from 60 to 100. Now
that the pilot program has expired, there is no need for the continued
inclusion of paragraph (iv) in Commentary .08.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act,\13\ in general, and furthers the objectives of Section
6(b)(5),\14\ in particular, in that it is designed to promote just and
equitable principles of trade, to remove impediments to, and perfect
the mechanism of a free and open market and, in general, to protect
investors and the public interest.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
remove impediments to and perfect the mechanism of a free and open
market because it will expand the investment options available to
investors and will allow for more efficient risk management. The
Exchange believes that removing the cap on the number of QOS in ETF
options permitted to be listed on the Exchange will result in a
continuing benefit to investors by giving them more flexibility to
closely tailor their investment and hedging decisions to their needs,
and therefore, the proposal is designed to protect investors and the
public interest. Additionally, by removing the cap, the proposed rule
change will make the treatment of QOS in ETF options consistent with
the treatment of QOS in index options, thus resulting in similar
regulatory treatment for similar options products.
While the expansion of the number of QOS in ETF options is expected
to generate additional quote traffic, the Exchange believes that this
increased traffic will be manageable and will not present capacity
problems. As previously stated, the Exchange has in place a quote
mitigation plan that helps it maintain sufficient capacity to handle
quote traffic. To help ensure that only active options series are
listed, Exchange procedures are designed to delist inactive series,
ensuring that any additional quote traffic is a result of interest in
active series.
The Exchange believes it is appropriate to eliminate obsolete or
out-of-date rule text from the rule book. Specifically, the technical
amendment to Commentary .08(ii) to Rule 6.4 is appropriate as the
correction will lessen the likelihood for investor confusion. Further,
elimination of Commentary .08(iv) to Rule 6.4 is appropriate as the
removal will also lessen the likelihood for investor confusion by
deleting rules that no longer are applicable.
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. Specifically, the Exchange
believes that investors would benefit from the introduction of
additional QOS in ETF options by providing investors with more
flexibility to closely tailor their investment and hedging decisions to
their needs. Additionally, Exchange procedures for delisting inactive
series will ensure that only active series with sufficient investor
interest will be made available and maintained on the Exchange.
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 does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6)
\16\ thereunder.
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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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 satisfied this requirement.
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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. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \17\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\17\ 15 U.S.C. 78s(b)(2)(B).
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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-2013-120 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-2013-120. 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
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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-2013-120 and should be submitted on or before
December 10, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27621 Filed 11-18-13; 8:45 am]
BILLING CODE 8011-01-P