[Federal Register Volume 67, Number 10 (Tuesday, January 15, 2002)]
[Notices]
[Pages 2003-2004]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-946]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45253; File No. SR-Amex-2001-92]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the American Stock Exchange LLC 
To Simplify the Manner in Which a Contrary Exercise Advice Is Submitted 
and To Extend by One Hour the Time for Members To Submit Customer's 
Contrary Exercise Advices

January 8, 2002.
    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 October 29, 2001, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The Amex 
amended its proposal on December 17, 2001.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Jeffrey P. Burns, Assistant General Counsel, 
Amex, to Jennifer L. Colihan, Special Counsel, Division of Market 
Regulation, Commission, dated December 14, 2001 (``Amendment No. 
1''). In Amendment No. 1, the Amex clarified its purpose to modify 
the Exchange's Contrary Exercise Advice procedure set forth in 
proposed paragraph (g) of Amex Rule 980. In addition, the Amex 
revised proposed paragraph (d) of Amex Rule 980 to clarify that in 
cases where the Exercise-by-Exception or ``Ex-by-Ex'' procedure has 
been waived and members and member organizations submit an 
affirmative Exercise Notice to the Options Clearing Corporation 
(``OCC'') to exercise the options, the applicable underlying 
security price in such instances will be as described in OCC Rule 
805(l), which is normally the last sale price in the primary market 
for the underlying security.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to amend Amex Rule 980 to: (i) Simplify the 
manner in which a Contrary Exercise Advice is submitted to the 
Exchange; and (ii) to extend by one hour the cut-off time by which 
members must submit to the Exchange Contrary Exercise Advice notices 
for customer accounts.
    The text of the proposed rule change is available at the Amex and 
the Commission.

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 Amex 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 Amex 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 OCC, the issuer of all Amex traded options contracts, has an 
established procedure for options holders wishing to exercise in-the-
money options before they expire. Known as Ex-by-Ex, the procedure 
provides for the automatic exercise at expiration of any equity options 
contract that is \3/4\ of a point or more in-the-money for customer 
accounts or \1/4\ point or more in-the-money for any other accounts. 
All options holders who wish to have their options contracts exercised 
in accordance with the Ex-by-Ex procedure need to take no further 
action; those contracts that are in-the-money by the appropriate amount 
will be automatically exercised. Options holders who do not wish to 
have their options automatically exercised, or do wish options to be 
exercised that do not fit within the parameters of the Ex-by-Ex 
procedure, must file with the Exchange a Contrary Exercise Advice 
pursuant to Exchange Rule 980, and instruct OCC of their contrary 
intention. Members and member organizations satisfy the filing 
requirement by manually submitting a Contrary Exercise Advice Form or 
by electronically submitting the Advice Form through OCC's Clearing 
Management and Control System (C/MACS). Exchange Rule 980 is designed 
to deter individuals from taking improper advantage of late-breaking 
news by requiring evidence of an option holder's intention to exercise 
or not exercise expiring equity options via the submission of a 
Contrary Exercise Advice.
    On occasion, OCC has had to suspend use of its Ex-by-Ex procedure, 
such as when trading in the underlying stock has been halted, or if 
there is no accurate price available to be used in the determination of 
the closing price. When this occurs and there is no automatic exercise, 
all options contract holders must send exercise instructions to OCC if 
they wish to exercise, regardless of whether the option is in or out-
of-the-money. When OCC suspends its Ex-by-Ex procedure for an option 
class, Exchange Rule 980 currently requires the submission of a 
Contrary Exercise Advice. Thus, when OCC has waived the Ex-by-Ex 
procedure, option holders must determine what price would have been 
used, even though the only available price might be a stale last sale 
price (a price OCC did not feel comfortable using). They then must 
determine whether a Contrary Exercise Advice needs to be submitted to 
the Exchange, evidencing the option holder's intention to exercise or 
not exercise.
    The Amex has long viewed this process as cumbersome and confusing 
to options holders. Therefore, the Amex now proposes to amend Exchange 
Rule 980 to eliminate the requirement that a Contrary Exercise Advice 
be submitted if the holder does not want to exercise the option when 
OCC has waived its Ex-by-Ex procedure for that options class. As a 
result, when Ex-by-Ex has been waived, submission of instructions to 
exercise is only required when the options holder wants to exercise the 
option contract. The Amex clarifies that the applicable underlying 
security price in such instances will be as described in OCC Rule 
805(1), which is normally the

[[Page 2004]]

last sale price in the primary market for the underlying security.\4\
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    \4\ Id.
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    In addition, the Exchange proposes to extend the cut-off time for 
members to deliver Contrary Exercise Advices for customer accounts to 
the Exchange by one hour (from 5:30 p.m. to 6:30 p.m. EST). Currently, 
members are required to submit Contrary Exercise Advices to the 
Exchange and OCC no later than 5:30 p.m. (EST). However, because 
determination of final settlement prices is sometimes delayed and 
members need to confirm exercise instructions with customers, it is 
sometimes difficult for firms to deliver customer Contrary Exercise 
Advices in satisfaction of the 5:30 p.m. (EST) cut-off time. 
Accordingly, members must immediately process customer Contrary 
Exercise Advices to submit them to the Exchange simultaneously upon 
receipt of the instructions from customers in order to meet the 
Contrary Exercise Advice cut-off time. Accordingly, to provide members 
with sufficient time to process Contrary Exercise Advices for customers 
accounts, the Exchange proposes to extend the cut-off time for members 
to deliver Contrary Exercise Advices for customer accounts to the 
Exchange by one hour (from 5:30 p.m. to 6:30 p.m. EST). The Exchange 
believes it is appropriate to extend the cut-off time for member 
submission of customer Contrary Exercise Advices, and any cancellation 
thereof, to the Exchange as all decisions to exercise (or not exercise) 
must still be made by 5:30 p.m. (EST) in accordance with Exchange Rule 
980.
    Furthermore, the Amex believes that customers and member firms 
should have added flexibility in connection with the delivery of a 
Contrary Exercise Advice cancel \5\ when the Exchange announces a 
modified time for the close of trading in equity options.\6\ Currently, 
the delivery of a Contrary Exercise Advice or Advice cancel is required 
on the business day preceding the expiration date for the expiring 
option. Instead of a final cut-off time of 5:30 p.m., the Exchange 
proposes to allow a time period of 1 hour and 28 minutes after the 
announced close of trading for accounts of members and member firms to 
make a final decision whether to exercise or not exercise an expiring 
option and to deliver the Contrary Exercise Advice or Advice cancel. In 
addition, the Exchange proposes that customers be able to make a final 
decision on whether to exercise or not exercise an expiring option 
within 1 hour and 28 minutes following the time announced for the close 
of trading rather than an established time of 5:30 p.m., and that 
members and member firms acting as an agent for customer accounts have 
a time period of 2 hours and 28 minutes after the close of trading 
instead of the current 6:30 p.m. to deliver a Contrary Exercise Advice 
or Advice cancel to the Exchange. The Exchange believes that the 
extension of time to deliver a Contrary Exercise Advice for customer 
accounts will benefit customers and make the process easier to 
administer. Moreover, the Amex feels that the proposed time periods for 
the delivery of a Contrary Exercise Advice or Advice cancel to the 
Exchange rather than a designated time when there is a modified time 
for the close of trading for expiring options will permit customers and 
member firms to better deliver their intentions whether to exercise the 
option. To address unusual circumstances, the proposed rule would give 
the Exchange the ability to establish different exercise cut-off times 
on a case-by-case basis.
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    \5\ An Advice cancel refers to a cancellation of the Contrary 
Exercise Advice. Telephone conversation between Jeffrey P. Burns, 
Assistant General Counsel, Amex, and Jennifer L. Colihan, Special 
Counsel and Cyndi N. Nguyen, Attorney, Commission on December 21, 
2001.
    \6\ See Amendment No. 1, supra note 3.
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with section 6(b) of the Act \7\ in general, and furthers 
the objectives of section 6(b)(5) of the Act \8\ in particular, because 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of change, to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, and to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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, as 
amended, will impose any burden on competition.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be 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, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. 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 inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Amex. All submissions should refer to File No. 
SR-Amex-2001-92 and should be submitted by [insert date 21 days from 
date of publication].

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-946 Filed 1-14-02; 8:45 am]
BILLING CODE 8010-01-M