[Federal Register Volume 68, Number 100 (Friday, May 23, 2003)]
[Notices]
[Pages 28309-28312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12942]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47885; File No. SR-Amex-2001-92]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment Nos. 1, 2, 3 and 4 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 
Contrary Exercise Advices

May 16, 2003.

I. Introduction

    On October 29, 2001, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Amex Rule 980 to: (i) 
Simplify the manner in which a Contrary Exercise Advice (``CEA'') is 
submitted to the Exchange; and (ii) extend by one hour the cut-off time 
by which members must submit to the Exchange CEA notices for customer 
accounts. On December 17, 2001, Amex filed Amendment No. 1 to the 
proposed rule change.\3\ The proposed rule change and Amendment No. 1 
(``Original Proposal'') were published for comment in the Federal 
Register on January 15, 2002.\4\ The Commission received four comment 
letters regarding the Original Proposal.\5\

[[Page 28310]]

Amex responded to the issues raised in the comment letters in Amendment 
No. 2, which Amex filed with the Commission on June 19, 2002.\6\ On 
March 6, 2003, Amex submitted Amendment No. 3 to the proposal.\7\ 
Amendment No. 3 was published for comment in the Federal Register on 
March 26, 2003.\8\ The Commission received no comments regarding 
Amendment No. 3. On April 29, 2003, Amex submitted Amendment No. 4.\9\ 
This order approves the proposed rule change, as amended.
---------------------------------------------------------------------------

    \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 (``Division''), Commission, dated December 14, 2001 
(``Amendment No. 1'').
    \4\ See Securities Exchange Act Release No. 45253 (January 8, 
2002), 67 FR 2003.
    \5\ See letters to Jonathan G. Katz, Secretary, Commission, from 
Mark R. Mudry, Chairman, the Options Operations Subcommittee of the 
OCC Roundtable, dated February 22, 2002 (``Subcommittee Letter''); 
Margo R. Topman, Vice President, Assistant General Counsel, Goldman, 
Sachs & Co., dated February 15, 2002 (``Goldman Sachs Letter''); 
Thomas N. McManus, Executive Director and Counsel, Morgan Stanley, 
dated February 11, 2002 (``Morgan Stanley Letter''); and Mark 
Straubel, Assistant Vice President, Pershing, dated February 5, 2002 
(``Pershing Letter'').
    \6\ See letter (with exhibit) from Jeffrey P. Burns, Assistant 
General Counsel, Amex, to Nancy Sanow, Assistant Director, Division, 
Commission, dated June 18, 2002 (``Amendment No. 2''). The exhibit 
to Amendment No. 2 set forth proposed rule text, which was 
subsequently replaced by Amendment No. 3.
    \7\ See letter from Jeffrey P. Burns, Assistant General Counsel, 
Amex, to Nancy Sanow, Assistant Director, Division, Commission, 
dated March 5, 2003, replacing Form 19b-4 in its entirety 
(``Amendment No. 3'').
    \8\ See Securities Exchange Act Release No. 47540 (March 19, 
2003), 68 FR 14717.
    \9\ See letter from Jeffrey P. Burns, Assistant General Counsel, 
Amex, to Cyndi Rodriguez, Special Counsel, Division, Commission, 
dated April 28, 2003 (``Amendment No. 4''). In Amendment No. 4, Amex 
added rule text to proposed Amex Rule 980(d) that was included in 
Amendment No. 1 but inadvertently deleted in Amendment No. 3. This 
was initially subject to notice and comment in the Original 
Proposal.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The Options Clearing Corporation (``OCC'') has an established 
procedure that provides for the automatic exercise of certain options 
that are in-the-money by a specified amount known as Exercise-by-
Exception or ``Ex-by-Ex.'' Option holders who wish to have their 
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. Option holders who 
do not want their options automatically exercised or who want their 
options to be exercised under parameters different than the Ex-by-Ex 
parameters must file a CEA \10\ with the Exchange pursuant to Amex Rule 
980 and instruct OCC of their contrary intention.\11\
---------------------------------------------------------------------------

    \10\ A CEA is a communication either to not exercise an option 
that would be automatically exercised under OCC's Ex-by-Ex 
procedure, or to exercise an option that would not be automatically 
exercised under OCC's Ex-by-Ex procedure.
    \11\ Amex Rule 980 also applies to the submission of Advice 
Cancels, which cancel CEAs.
---------------------------------------------------------------------------

    In its Original Proposal, Amex proposed to amend Amex Rule 980 to 
simplify the manner in which a CEA is submitted to the Exchange and 
extend by one hour the cut-off time for members to submit customer CEAs 
and Advice Cancels to the Exchange. Specifically, Amex proposed to: (1) 
Eliminate the requirement that a CEA be submitted if the option holder 
does not want to exercise an option when OCC has waived its Ex-by-Ex 
procedure for that options class;\12\ (2) extend the cut-off time for 
members to deliver CEAs and Advice Cancels for customer accounts to the 
Exchange by one hour (from 5:30 p.m. to 6:30 p.m. (EST)); (3) extend 
the time for making a final decision whether to exercise an expiring 
option and submit the CEA or Advice Cancel when the Exchange announces 
a modified time for the close of trading in equity options to 1 hour 
and 28 minutes after the announced close of trading for accounts of 
members and member firms, and establish a time period of 1 hour and 28 
minutes following the time announced for the close of trading for 
customers to make a final decision on whether to exercise an expiring 
option, but 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 CEA or Advice 
Cancel to the Exchange; and (4) provide the Exchange with the ability 
to establish different exercise cut-off times on a case-by-case basis 
to address unusual circumstances.
---------------------------------------------------------------------------

    \12\ Currently, when OCC waives its Ex-by-Ex procedure for an 
options class, Amex Rule 980 requires the submission of a CEA 
evidencing the intention to exercise or not exercise.
---------------------------------------------------------------------------

III. Summary of Comments and Amex's Response

    The Commission received four comment letters regarding the Original 
Proposal.\13\ Amex filed Amendment Nos. 2 and 3 to address the issues 
raised by the commenters.\14\
---------------------------------------------------------------------------

    \13\ See supra note 5.
    \14\ See Amendment Nos. 2 and 3, supra notes 6 and 7.
---------------------------------------------------------------------------

    One commenter specifically expressed support for the Exchange's 
proposal to eliminate the requirement that a CEA 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. The commenter stated that ``it 
makes sense to only require members to submit exercise notices for 
option positions they affirmatively want to exercise.''\15\
---------------------------------------------------------------------------

    \15\ See Morgan Stanley Letter.
---------------------------------------------------------------------------

    Two commenters also supported the Exchange's proposal to extend the 
cut-off time for members to deliver CEAs for customer accounts to the 
Exchange by one hour (from 5:30 p.m. to 6:30 p.m. (EST)).\16\ However, 
they expressed concern that extending the cut-off time for customer 
accounts only and not firm accounts would increase processing burden 
\17\ and create operational inefficiencies.\18\ The commenters believed 
that the proposal would burden them with the process of having to 
separate firm and customer exercise notices into two batches in order 
to avail themselves of the extra hour given to deliver notices for 
customer accounts.
---------------------------------------------------------------------------

    \16\ See Goldman Sachs Letter and Morgan Stanley Letter.
    \17\ See Goldman Sachs Letter.
    \18\ See Morgan Stanley Letter.
---------------------------------------------------------------------------

    The Exchange responded to these comments by explaining that the 
Original Proposal was prompted by concerns expressed by clearing firms 
that the current 5:30 p.m. (EST) cut-off time was problematic for 
customer accounts due to the logistical difficulties of receiving 
customer exercise instructions and processing them through their retail 
branch systems and back office areas before submitting them to the 
Exchange.\19\ The proposal had originally retained the 5:30 p.m. (EST) 
deadline for submission of CEAs for firm proprietary accounts because 
proprietary accounts did not present the same logistical difficulties 
as customer accounts. However, because the commenters stated that it 
would be operationally burdensome to develop different CEA processes 
for customer and firm accounts, Amex revised the proposal to adopt a 
single extended deadline of 6:30 p.m. (EST) for submission of CEAs for 
all accounts. The proposal to extend the deadline to 6:30 p.m. (EST) 
for firm accounts only applies to those member firms that have an 
electronic submission procedure that records the time that decisions 
whether to exercise or not exercise an option are received by the firm. 
The Exchange explicitly outlined the different CEA submission deadlines 
for non-customer accounts, in proposed Commentary .04, depending on the 
manner of the decision whether to exercise or not exercise, and 
required, in proposed Commentary .05, that each member organization 
establish fixed procedures to ensure that the time stamps used for the 
recording of the time of receipt of exercise decisions are secure.
---------------------------------------------------------------------------

    \19\ See Amendment No. 2, supra note 6.
---------------------------------------------------------------------------

    Three commenters addressed Amex's Original Proposal to change the 
time period for members and member firms and customers to make a final 
decision and deliver the CEA or Advice Cancel when the Exchange 
announces a modified time for the close of trading in

[[Page 28311]]

equity options.\20\ These commenters stated that while it might be 
appropriate for Amex to have the ability to extend the delivery time 
when Amex extends its closing time there might be an adverse effect on 
customers if the Exchange had the ability to reduce the decision making 
time frame when Amex announces a closing time prior to the regular 
close of trade. Specifically, the commenters expressed concerns over 
the manner in which Amex would notify members of the shortened period 
and how firms, in turn, would notify customers.
---------------------------------------------------------------------------

    \20\ See Goldman Sachs Letter, Morgan Stanley Letter, and 
Subcommittee Letter.
---------------------------------------------------------------------------

    In response to these comments, Amex revised its proposed rule to 
state that in the event the Exchange provides advanced notice on or 
before 5:30 p.m. (EST) on the business day immediately prior to the 
last business day before the expiration date that a modified time for 
the close of trading in equity options will occur on such last business 
day before expiration, then the deadline to make a final decision to 
exercise or not exercise an expiring option shall be 1 hour 28 minutes 
following the time announced for the close of trading instead of 5:30 
p.m. (EST). In addition, members and member organizations will have 2 
hours 28 minutes following the close of trading to deliver a CEA or 
Advice Cancel to the Exchange for customer accounts, and non-customer 
accounts of member firms that employ electronic submission procedures 
with time stamps that record the time of submission of the exercise 
instructions. The Exchange represented that this proposed amendment 
would ensure that at least one day's prior notice is provided by 5:30 
p.m. (EST) before the Exchange establishes an earlier cut-off time.\21\
---------------------------------------------------------------------------

    \21\ See Amendment No. 2, supra note 6.
---------------------------------------------------------------------------

    Two commenters supported the proposal to provide the Exchange with 
the authority to extend the cut off times due to unusual circumstances, 
but believed that it would be inappropriate for the Exchange to use 
this authority to reduce the time frames.\22\ Indeed, all four 
commenters urged the Exchange to define the term ``unusual 
circumstances'' and explain the conditions to which this provision 
would apply.\23\ Three of these commenters requested that the Exchange 
outline how this provision would operate in terms of the time frame 
involved in informing members of the change in cut-off times and how it 
would be implemented,\24\ and two of the commenters believed that this 
provision should be limited to force majeur-type of events.\25\
---------------------------------------------------------------------------

    \22\ See Morgan Stanley Letter and Pershing Letter.
    \23\ See Goldman Sachs Letter, Morgan Stanley Letter, 
Subcommittee Letter, and Pershing Letter.
    \24\ See Morgan Stanley Letter, Subcommittee Letter, and 
Pershing Letter.
    \25\ See Goldman Sachs Letter and Morgan Stanley Letter.
---------------------------------------------------------------------------

    The Exchange responded by revising paragraph (h) of Amex Rule 980. 
Proposed Amex Rule 980(h)(1) would provide the Exchange with the 
ability to extend cut-off times by which an options holder must decide 
whether to exercise an expiring option and by which a member must 
submit a CEA or Advice Cancel to the Exchange. The Exchange may make 
decisions to extend cut-off times on a case-by-case basis due to 
unusual circumstances. In proposed Commentary .03, Amex defined 
``unusual circumstances'' for purposes of paragraph (h)(1) as 
including, but not limited to, increased market volatility, significant 
order imbalances, significant volume surges and/or systems capacity 
constraints, significant spreads between the bid and offer in 
underlying securities, internal system malfunctions affecting the 
ability to disseminate or update market quotes and/or deliver orders, 
or other similar occurrences.
    Proposed Amex Rule 980(h)(2) would permit the Exchange to reduce 
the cut-off times by which an options holder must decide whether to 
exercise an expiring option and by which members must submit CEAs and 
Advice Cancels to the Exchange, but only if the Exchange provides 
notice to members by 12 p.m. (EST) on the day prior to the day with the 
reduced cut-off time. The Exchange may decide to reduce the cut-off 
times on a case-by-case basis due to unusual circumstances, provided, 
however, that under no circumstances may the cut-off times be before 
the close of trading. For purposes of paragraph (h)(2), Amex proposed 
to define ``unusual circumstances'' as including, but not limited to, 
significant news announcements concerning the underlying security of an 
option contract that is scheduled to be released after the close of 
trading on the business day immediately prior to expiration.
    Finally, one commenter stated that the meaning of ``customer'' 
should be clarified.\26\ Amex proposed in Commentary .01 that, for 
purposes of Amex Rule 980, the terms ``customer account'' and ``non-
customer account'' have the same meaning as defined in OCC By-Laws 
Article I(C)(25) and Article I(N)(2), respectively.
---------------------------------------------------------------------------

    \26\ See Subcommittee Letter.
---------------------------------------------------------------------------

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\27\ In particular, the Commission finds that the 
proposal, as amended, is consistent with section 6(b)(5) of the 
Act,\28\ 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, and to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system.
---------------------------------------------------------------------------

    \27\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \28\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, the Commission finds that Amex's proposal, as 
amended, is designed to simplify and clarify the process by which 
members and member firms accept exercise decisions from options holders 
and submit such decisions to the Exchange. For example, during 
instances when OCC has waived its Ex-by-Ex procedure for a particular 
options class, the Commission finds Amex's proposal to require the 
submission of a CEA only if the options holder wants to exercise the 
option contract to be less cumbersome and confusing for options holders 
and members.
    Amex also proposed to extend the time by which CEAs and Advice 
Cancels must be delivered to the Exchange to 6:30 p.m. (EST). Options 
holders, however, must still decide whether to exercise or not exercise 
an expiring option by 5:30 p.m. The Commission believes that this new 
deadline should provide members with additional time to process the 
exercise decisions of options holders while maintaining the goal of the 
rule to prevent individuals from taking improper advantage of late-
breaking news.
    In the Original Proposal, Amex proposed that the 6:30 (EST) 
deadline apply only to public customer accounts. Several commenters 
noted that limiting the extension of the submission deadline to only 
public customers would create operational burdens. The Commission notes 
that Amex addressed these concerns by extending the use of the 6:30 
p.m. (EST) deadline to all accounts. However, members that wish to 
submit CEAs and Advice Cancels of

[[Page 28312]]

non-customers by the 6:30 p.m. (EST) deadline must use an electronic 
time stamp to record the time the member received the exercise decision 
from the non-customer options holder. This requirement is in response 
to Amex's concern that firms that manually submit CEAs or Advice 
Cancels could have an opportunity to improperly extend the 5:30 p.m. 
(EST) deadline to decide whether to exercise an expiring option. The 
Commission believes that the requirement that an electronic time stamp 
be employed in such circumstances adequately addresses these concerns.
    Amex also proposed alternate time frames for exercise decisions and 
CEA and Advice Cancel submissions when trading times are modified. 
Specifically, if the Exchange announces a modified close of trading by 
5:30 p.m. (EST) on the business day immediately prior to the last 
business day before expiration, then options holders will have 1 hour 
and 28 minutes after the close of trading to make a decision whether to 
exercise an expiring option and members will have 2 hours and 28 
minutes to submit CEAs and Advice Cancels of customers and non-
customers to the Exchange.\29\ In addition, Amex proposed to allow it 
to extend cut-off times for exercise decisions and CEA and Advice 
Cancel submissions due to unusual circumstances \30\ and on a case-by-
case basis. Finally, Amex proposed to allow it to reduce cut-off times 
for exercise decisions and CEA and Advice Cancel submissions due to 
unusual circumstances \31\ so long as the Exchange provides at least 
one business day prior notice, by 12 noon on such day. If the Exchange 
reduces cut-off times, however, they cannot set such cut-off times 
before the close of trading.
---------------------------------------------------------------------------

    \29\ As required above, members must use an electronic time 
stamp for non-customer exercise decisions. If a member does not 
employ an electronic time stamp procedure, then it must submit the 
CEAs and Advice Cancels of non-customer options holders within 1 
hour and 28 minutes following the close of trading.
    \30\ For purposes of extending cut-off times, Amex defined 
``unusual circumstances'' as including increased market volatility, 
significant order imbalances; significant volume surges and/or 
systems capacity constraints; significant spreads between the bid 
and offer in underlying securities; internal systems malfunctions 
affecting the ability to disseminate or update market quotes and/or 
deliver orders; or other similar occurrences.
    \31\ For purposes of reducing cut-off times, Amex defined 
``unusual circumstances'' as including a significant news 
announcement concerning the underlying security of an options 
contract that is scheduled to be released just after the close of 
trading on the business day immediately prior to expiration.
---------------------------------------------------------------------------

    As noted above, several commenters raised concerns regarding the 
Exchange's ability to modify the cut-off times. The Commission believes 
that Amex addressed commenters concerns by requiring that advance 
notice be provided in the event that Amex modifies the cut-off times 
due to either modified trading hours or unusual circumstances. The 
Commission believes that the advance notice requirements should enable 
members to notify customers and non-customers of the modified cut-off 
times.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended by Amendment Nos. 1, 2, 3 and 4, is consistent 
with the requirements of the Act and rules and regulations thereunder.
    It is therefore ordered, Pursuant to section 19(b)(2) of the 
Act,\32\ that the proposed rule change, as amended, (SR-Amex-2001-92) 
be, and it hereby is, approved.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\33\
---------------------------------------------------------------------------

    \33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-12942 Filed 5-22-03; 8:45 am]
BILLING CODE 8010-01-P