[Federal Register Volume 78, Number 238 (Wednesday, December 11, 2013)]
[Notices]
[Pages 75420-75423]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-29489]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70991; File No. SR-BOX-2013-57]
Self-Regulatory Organizations; BOX Options Exchange LLC; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Interpretive Material To Rule 5050 To Eliminate the Cap on the
Number of Additional Series That May be Listed Per Expiration Month for
Each Quarterly Options Series in Exchange-Traded Fund Options
December 5, 2013.
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 December 3, 2013, BOX Options Exchange LLC (the ``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 self-regulatory organization. The Commission
is publishing this notice to solicit comments on the proposed rule 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 interpretive material to Rule 5050
(Series of Options Contracts Open for Trading) to eliminate the cap on
the number of additional series that may be listed per expiration month
for each Quarterly Option Series (``QOS'') in exchange-traded fund
(``ETF'') options. The text of the proposed rule change is available
from the principal office of the Exchange, at the Commission's Public
Reference Room and also on the Exchange's Internet Web site at http://boxexchange.com.
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 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
The Exchange is proposing to amend Interpretive Material (``IM'')
5050-4 to Rule 5050 (Series of Options Contracts Open for Trading) to
eliminate the cap on the number of additional series that may be listed
per expiration month for each QOS in ETF options.\3\ This is a
competitive filing that is based on proposals recently submitted by
NYSE Arca, Inc. (``NYSE Acra'') and NYSE MKT LLC (``NYSE MKT'') that
were recently noticed by the Commission.\4\ As set out in IM-5050-4,
the Exchange
[[Page 75421]]
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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\3\ 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 Rule 100(a)(54) and
IM-5050-4(a).
\4\ See Securities Exchange Act Release Nos. 70855 (November 13,
2013) 78 FR 69493 (November 19, 2013) (Notice of Filing and
Immediate Effectiveness of SR-NYSEArca-2013-120) and 070854
(November 13, 2013) 78 FR 69465 (November 19, 2013) (Notice of
Filing and Immediate Effectiveness of SR-NYSEMKT-2013-90).
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The Exchange is proposing to amend IM-5050-4(d) to make the
treatment of QOS in ETF options consistent with the treatment of QOS in
index options. IM-6090-1 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 IM-5050-4(d), 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 Rule 6010(i). 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 Rule 6010(j).
\6\ See Rule 5020(h).
\7\ The Exchange notes that Rule IM-6090-1(d), 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 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 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 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''), IM-5050-
6(b) 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, BOX may list additional series, in excess of the
30 allowed under IM-5050-6(b), 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
[[Page 75422]]
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, 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\ See Rule 7250 (Quote Mitigation).
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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. IM-
5050-4(f) 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. The
Exchange 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
Exchange did not experience capacity constraints during this temporary
increase.
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\12\ See Exchange Act Release No. 58996 (November 21, 2008), 73
FR 72878 (December 1, 2008) (SR-BSE-2008-55). The Exchange amended
the cap on additional series per expiration month for each QOS in
ETF options 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., Exchange Act Release No. 59012 (November 24, 2008), 73 FR
73371 (December 2, 2008) (amendments to Commentary .08 to NYSE Arca
Rule 6.4)
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2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Securities Exchange Act of 1934
(the ``Act''),\13\ in general, and Section 6(b)(5) of the Act,\14\ 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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\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.
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. In this regard and as indicated
above, the Exchange notes that the rule change is being proposed as a
competitive response to filings submitted by NYSE Arca and NYSE MKT
that were recently noticed by the Commission.\15\
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\15\ See supra, note 4.
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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.
[[Page 75423]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the 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 from the date on which it was filed, or such shorter time as the
Commission may designate, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-4(f)(6)
thereunder.\17\
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\16\ 15 U.S.C. 78s(b)(3)(A).
\17\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the 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.
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The Exchange has asked the Commission to waive the 30-day operative
delay so that the proposal may become operative immediately upon
filing. The Exchange stated that waiver of this requirement will
promote fair competition among the exchanges by allowing the Exchange
to treat QOS in ETF options in the same manner as QOS in index options
at the same time as NYSE Arca and NYSE MKT. The Exchange also stated
that the proposal would allow the Exchange to meet investor demand for
an expanded number of QOS in ETF options, allowing investors to meet
investment objectives, including hedging securities positions,
currently unavailable because of the limited number of QOS in ETF
options available. For these reasons, the Commission believes that the
proposed rule change presents no novel issues, and waiver will allow
the Exchange to remain competitive with other exchanges. Therefore, the
Commission designates the proposed rule change to be operative upon
filing.\18\
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\18\ 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).
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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 to
determine whether the proposed rule should be approved or 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-BOX-2013-57 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-BOX-2013-57. 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-BOX-2013-57 and should be
submitted on or before January 2, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-29489 Filed 12-10-13; 8:45 am]
BILLING CODE 8011-01-P