[Federal Register Volume 66, Number 135 (Friday, July 13, 2001)]
[Notices]
[Pages 36809-36811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17519]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44521; File No. 4-443]


Joint Industry Plan; Order Approving a Proposed Options Listing 
Procedures Plan by the American Stock Exchange LLC, Chicago Board 
Options Exchange, Incorporated, International Securities Exchange LLC, 
The Options Clearing Corporation, Pacific Exchange, Inc., and 
Philadelphia Stock Exchange, Inc.

July 6, 2001.

I. Introduction

    On January 11, 2001, pursuant to section 11A(a)(3)(B) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 11Aa3-2 
thereunder,\2\ the American Stock Exchange LLC (``Amex''), Chicago 
Board Options Exchange, Inc. (``CBOE''), International Securities 
Exchange LLC (``ISE''), The Options Clearing

[[Page 36810]]

Corporation (``OCC''), Pacific Exchange, Inc. (``PCX''), and 
Philadelphia Stock Exchange, Inc. (``Phlx'') (collectively, the 
``Sponsors'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed options listing procedures plan (``OLPP'' 
or ``Plan'').\3\ The Sponsors filed amendments to the proposed Plan on 
March 3, 2001 \4\ and May 9, 2001.\5\ The proposed OLPP, as amended, 
was published in the Federal Register on May 16, 2001.\6\ No comments 
were received.
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    \1\ 15 U.S.C. 78k-1(a)(3)(B).
    \2\ 17 CFR 240.11Aa3-2.
    \3\ See Plan for the Purpose of Developing and Implementing 
Procedures Designed to Facilitate the Listing and Trading of 
Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of 
the Securities Exchange Act of 1934 (``OLPP''), dated January 11, 
2001. The proposed OLPP is available at the Commission's Public 
Reference Room.
    \4\ Letter dated March 2, 2001, from Claire P. McGrath, Vice 
President and Special Counsel, Amex, to Elizabeth King, Associate 
Director, Division of Market Regulation (``Division''), Commission 
(``Amendment No. 1''). Amendment No. 1 provided information required 
by Rule 11Aa3-2(b)(4) under the Act, 17 CFR 240.11Aa3-2(b)(4), 
regarding implementation of the proposed OLPP, the proposed OLPP's 
impact on competition, and written agreements or understandings 
among the Sponsors of the Plan.
    \5\ Letter dated May 4, 2001, from Claire P. McGrath, Vice 
President and Special Counsel, Amex, to Elizabeth King, Associate 
Director, Division, Commission (``Amendment No. 2''). Amendment No. 
2 would add procedures for new eligible exchanges to become Sponsors 
of the Plan and a provision for Sponsors that are no longer eligible 
to participate in the Plan.
    \6\ See Securities Exchange Act Release No. 44287 (May 10, 
2001), 66 FR 27184.
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II. Background

    On September 17, 1991, the Commission approved the Joint-Exchange 
Options Plan (``JEOP''), which sets forth procedures governing the 
listing of new options.\7\ The Amex, CBOE, PCX, Phlx, and New York 
Stock Exchange \8\ were parties to the JEOP.\9\ On September 11, 2000, 
the Commission instituted public administrative proceedings pursuant to 
Section 19(h)(1) of the Act \10\ against, and simultaneously accepted 
offers of settlement from, the Amex, CBOE, PCX, and Phlx (collectively, 
the ``respondent exchanges'').\11\ Under the Settlement Order, the 
respondent exchanges were ordered to amend the JEOP to eliminate 
provisions that require advance notice to any other exchange of the 
intention to list a new option and to eliminate provisions that prevent 
or delay a market from commencing to list or trade any option.\12\
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    \7\ See Securities Exchange Act Release No. 29698 (September 17, 
1991), 56 FR 48954 (September 25, 1991). The JEOP provides specific 
procedures governing the selecting, listing, challenging, and 
arbitrating the eligibility of new equity options overlying both 
exchange-traded and over-the-counter listed securities.
    \8\ The NYSE later sold its options business to the CBOE. See 
Securities Exchange Act Release No. 38542 (April 23, 1997), 62 FR 
23521 (April 30, 1997).
    \9\ The parties filed, and the Commission approved, the JEOP as 
identical proposed rule changes. In addition, the ISE incorporated 
the JEOP into its rules at the time its application for registration 
as a national securities exchange was approved by the Commission. 
See Securities Exchange Act Release No. 42455 (February 24, 2000), 
65 FR 11388 (March 2, 2000). The proposed OLPP would not replace 
these rules. The Sponsors would have to file proposed rule changes 
to amend their rules.
    \10\ 15 U.S.C. 78s(h)(1).
    \11\ See Order Instituting Public Administrative Proceedings 
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, 
Making Findings and Imposing Remedial Sanctions. Securities Exchange 
Act Release No. 43268 (September 11, 2000) (``Settlement Order''). 
The Settlement Order states that the respondent exchanges have 
significantly impaired the operations of the options markets by, 
among other things, refraining from multiply listing a large number 
of options.
    \12\ See Section IV.B.a. of the Settlement Order. The Settlement 
Order requires an exchange to provide to the OCC (i) not more than 
one business day's notice of the exchange's intent to list an 
existing option, and (ii) reasonable advance notice of the 
exchange's intention to list a new option. Id.
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    On January 11, 2001, the respondent exchanges, along with the ISE 
and the OCC, submitted the proposed OLPP to the Commission to replace 
and supersede the JEOP and to comply with the respondent exchanges' 
obligations under Section IV.B.a. of the Settlement Order. Although not 
parties to the Settlement Order, the ISE and the OCC have elected to 
become Sponsors of the proposed OLPP to facilitate the listing and 
trading of standardized options contracts.

III. Description of the OLPP

    The proposed Plan would provide procedures for: (i) Listing and 
trading new options classes; (ii) selecting new options series; (iii) 
petitioning the OCC to review the eligibility, pursuant to the 
exchanges' listing standards, of a selected option class without 
delaying the trading of that option class; (iv) determining operational 
details for option contracts adjusted pursuant to OCC By-Laws; (v) 
admitting new sponsors; and (vi) losing eligibility to participate in 
the Plan.

A. Selection of an Option Class

    Under the proposed OLPP a Sponsor that seeks to trade an option on 
an equity security (``Selecting Exchange'') would be required to submit 
a certificate notifying the OCC of its intention to trade the option. 
If the option was not currently trading on another exchange, or had not 
been certified for listing and trading on another exchange, the 
Selecting Exchange would be required to provide the options symbol, 
initial exercise prices, expiration cycle, and the position and 
exercise limits for the selected option class. The OCC would notify all 
Selecting Exchanges and all other exchanges that traded the option 
class of identity of each Selecting Exchange.

B. Selection of a New Option Series

    The proposed OLPP would provide procedures for each of the Sponsors 
to trade additional series of an option class it currently trades. The 
OLPP would require different procedures if the addition of a new series 
would involve the introduction of a new expiration month. With respect 
to adding new option series and melding LEAP series into near--term 
series, the proposed OLPP would permit an exchange they wanted to trade 
a new series and any other exchange that traded the same option class 
to determine jointly, when necessary, the symbol and trading codes for 
the new series.

C. Petition To Review the Eligibility of a New Option Class

    Under the proposed Plan, a Sponsor would be permitted to petition 
the OCC to review whether an option class was eligible for listing on 
the day a Selecting Exchange certified the option for listing and 
trading. The exchange listing and trading the option class would be 
permitted to continue to do so unless and until the OCC determined that 
the class was ineligible. The proposed OLPP would set forth the 
procedures to be followed by the petitioning exchange, the OCC, and the 
Selecting Exchange. If the OCC determined that the option class was 
ineligible, each Selecting Exchange would be required, on the first 
trading day after the OCC's determination, to delist any option series 
written open interest and allow only closing transaction in any series 
with open interest. If the option class subsequently became eligible, 
any Sponsor would be permitted to submit a certificate to the OCC to 
list and trade the option class.

D. Adjustment Pursuant to OCC By-Laws

    The OCC's By-Laws permit a securities committee composed of 
representatives from each registered options exchange trading options 
on a particular security to determine whether to make adjustment to 
reflect particular events affecting the underlying security, as well as 
operational issues attendant to the adjustment.\13\ Events affecting 
the underlying security that may require an

[[Page 36811]]

adjustment would include, among other things, stock dividends or 
distributions, stock splits, rights offerings mergers, and 
reorganizations. The proposed OLPP would permit the Sponsors to make 
these adjustments, as well as determine operational issues in 
connection with such adjustments.
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    \13\ See Article VI, Section 11 of the OCC By-Laws. Operational 
issues attendant to the adjustment could include option symbols and 
trading codes, contract multipliers, and position and exercise 
limits applicable to the adjusted option class.
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E. New Plan Sponsors

    The proposed OLPP contains a self-effecting provision for the 
addition of new sponsors, in which an ``Eligible Exchange'' would be 
able to become a sponsor of the Plan by: (i) Executing a copy of the 
Plan; (ii) providing each then-current Plan Sponsor with a copy of such 
executed Plan; and (iii) effecting an amendment to the Plan reflecting 
the addition of the new sponsor's name.\14\ An Eligible Exchange would 
be defined as a national securities exchange registered with the 
Commission in accordance with section 6(a) of the Act \15\ that: (i) 
has effective rules for the trading of option contracts issued and 
cleared by OCC approved in accordance with the provisions of the Act 
and the rules and regulations thereunder; and (ii) is a party to the 
Plan for Reporting of Consolidated Options Last Sale Reports and 
Quotation Information.\16\
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    \14\ An amendment to the Plan may be effected by a new Eligible 
Exchange executing a copy of the Plan, as then in effect (with the 
only change being the addition of the new Plan Sponsor's name in 
Section 9 of the Plan) and submitting such executing Plan to the 
Commission. Such amendment will be effective when it has been 
approved by the Commission or otherwise becomes effective pursuant 
to Section 11A of the Act and Rule 11Aa3-2 thereunder.
    \15\ 15 U.S.C. 78f(a).
    \16\ See Securities Exchange Act Release No. 17638 (March 18, 
1981), 22 S.E.C. Docket 484 (March 31, 1981.).
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F. Loss of Eligibility

    An exchange would no longer be an Eligible Exchange when it ceased 
trading OCC issued and cleared option contracts, or, if it had become a 
Plan Sponsor and it had not commenced, within one year of becoming a 
Plan Sponsor, to list and trade OCC issued and cleared option 
contracts.

IV. Discussion

    In section 11A of the Act,\17\ Congress directed the Commission to 
facilitate the development of a national market system consistent with 
the objectives of the Act. Section 11A(a)(3)(B) of the Act \18\ 
authorizes the Commission ``by rule or order, to authorize or require 
self-regulatory organizations to act jointly with respect to matters as 
to which they share authority under this title in planning, developing, 
operating, or regulating a national market system (or a subsystem 
thereof) or one or more facilities thereof.'' Rule 11Aa3-2 under the 
Act \19\ establishes the procedures for filing, amending, and approving 
national market system plans. Pursuant to paragraph (c)(2) of Rule 
11Aa3-2, the Commission must approve a national market system plan if 
it finds that the proposed plan ``is necessary or appropriate in the 
public interest, for the protection of investors and the maintenance of 
fair and orderly markets, to remove impediments to, and perfect the 
mechanisms of, a national market system, or otherwise in furtherance of 
the purposes of the Act.'' \20\
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    \17\ 15 U.S.C. 78k-1.
    \18\ 15 U.S.C. 78k-1(a)(3)(B).
    \19\ 17 CFR 240.11Aa3-2.
    \20\ 17 CFR 240.11Aa3-2(c)(2).
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    After careful review, the Commission has determined to approve, 
pursuant to section 11A(a)(3)(B) of the Act and Rule 11Aa3-2 
thereunder, the proposed OLPP. The Commission finds that approval of 
the Plan is consistent with the Act, the rules thereunder, and 
specifically, with the objectives set forth in section 11A of the Act 
and in Rule 11Aa3-2 thereunder. The Commission believes that, by 
ensuring uniform procedures for the listing of standardized options, 
the proposed OLPP will help to maintain fair and orderly markets and 
remove impediments to, and perfect the mechanisms of, a national market 
system. Specifically, the Commission believes that by providing uniform 
procedures for selecting option classes and series, as well as 
adjusting options to reflect particular events affecting the underlying 
security, the proposed OLPP will ensure the continued fungibility of 
option contracts and permit effective multiple trading of options. The 
Commission also believes that the proposed OLPP will minimize potential 
confusion among member firms and investors by ensuring uniformity with 
respect to symbology, trading codes, and contract terms.
    In addition, the Commission believes that the proposed procedures 
for petitioning the OCC to review the eligibility of a new option class 
will minimize the potential for trading options on ineligible 
securities, without preventing or delaying an exchange from commencing 
to list or trade any option, as required by the Settlement Order. The 
Commission notes that these proposed procedures would not prohibit a 
Sponsor from submitting a certificate to list an option class, while at 
the same time petitioning for review of another Sponsor's listing of 
the same class. The Commission, however, notes that, as self-regulatory 
organizations, each exchange has an obligation to enforce its own 
rules, including its listing standards.
    The Commission believes that the proposed provisions governing the 
admission of new sponsors to the OLPP and the circumstances under which 
a Sponsor would no longer be eligible to participate in the OLPP are 
consistent with the Act. The proposed procedures would permit new 
eligible exchanges to become sponsors of the Plan without the approval 
of current Sponsors, which should promote the multiple trading of 
options without permitting anticompetitive actions on the part of 
existing Sponsors to prevent or delay the plans of the new entrant into 
the market. In addition, the proposed procedures reasonably address the 
need to limit the eligibility to participate in the Plan of Sponsors 
that no longer trade, or never commenced trading, OCC issued and 
cleared options.
    Finally, the Commission finds that the proposed OLPP would comply 
with the respondent exchanges' obligations under the Settlement Order. 
The proposed OLPP contains no requirement of advance notice of the 
intention to list a new option or provisions that would allow one 
exchange to prevent or delay another exchange from commencing to list 
or trade any option class other than the one-day advance notice 
requirement to the OCC needed for operational purposes.

V. Conclusion

    It is therefore ordered, pursuant to section 11A of the Act,\21\ 
and Rule 11Aa3-2 thereunder,\22\ that the proposed OLPP, as amended, is 
approved.
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    \21\ 15 U.S.C. 78k-1(a)(3)(B).
    \22\ 17 CFR 240.11Aa3-2.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-17519 Filed 7-12-01; 8:45 am]
BILLING CODE 8010-01-M