[Federal Register Volume 68, Number 205 (Thursday, October 23, 2003)]
[Notices]
[Pages 60757-60762]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26710]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48640; File No. SR-PCX-2003-47]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto by the Pacific Exchange, Inc. Relating to 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

October 16, 2003.
    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 September 11, 2003, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') submitted to 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 PCX. The Exchange 
amended its proposal on September 22, 2003.\3\ The proposal was also 
amended by the Exchange on October 10, 2003.\4\ The Exchange filed the 
proposed rule change, as amended, under paragraph (f)(6) of Rule 19b-4 
under the Act.\5\ 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\ 217 CFR 240.19b-4.
    \3\ See letter from Mai Sharif Shiver, Senior Attorney, PCX, to 
Nancy Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated September 17, 2003 (``Amendment 
No. 1''). In Amendment No. 1, the PCX requested that the Commission 
waive the thirty-day operative date specified in Rule 19b-4(f)(6) of 
the Act and changed rule language in proposed PCX Rule 6.24(f) and 
proposed Commentary .06.
    \4\ See letter from Mai Sharif Shiver, Senior Attorney, PCX, to 
Nancy Sanow, Assistant Director, Division, Commission, dated October 
9, 2003 (``Amendment No. 2''). In Amendment No. 2, the PCX added 
language to the rule text that was inadvertently deleted from its 
original filing.
    \5\ 17 CFR 240.19b-4(f)(6).
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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 PCX Rule 6.24 regarding the manner 
in which a contrary exercise advice (``CEA'') is submitted to the 
Exchange and to extend by one hour the time for Members and Member 
Organizations to submit CEAs to the Exchange. Below is the text of the 
proposed rule change, as amended. Proposed new language is italicized; 
proposed deleted text is [bracketed].
* * * * *
    Rule 6.24. (a) [Subject to the restrictions set forth in Rule 6.9 
and to such restrictions as may be imposed pursuant to Rule 6.11 or 
pursuant to the Rules of the Options Clearing Corporation (``OCC''), an 
outstanding option contract may be exercised during the time period 
specified in the Rules of the OCC by the tender to the OCC of an 
exercise notice in accordance with the Rules of the OCC.] An 
outstanding option contract may be exercised by the tender to the 
Options Clearing Corporation (``OCC'') of an exercise notice made 
during the periods, and using the procedures, specified in OCC rules. 
An exercise notice may be tendered to the OCC only by the clearing 
member in whose account such option contract is carried with the OCC. 
Option exercises are also subject to restrictions that are established 
by or may be imposed by the Exchange in Rules 6.9, 6.11 and in this 
rule. Members and Member Organizations may establish fixed procedures 
as to the latest time they will accept exercise instructions from 
customers.
    (b) [The exercise cut-off time for all non-cash settled options 
shall be such hour on the business day immediately prior to the 
expiration date as may be fixed from time to time by the Exchange. The 
exercise cut-off time, as so fixed by a member organization or as 
established pursuant to the preceding sentence, shall also apply in 
respect of option contracts carried in any proprietary account of such 
member organization as the latest time at which such member 
organization, if it is a clearing member, shall tender exercise notices 
to the OCC, or if it is not a clearing member, shall issue exercise 
instructions to its clearing member. Notwithstanding the foregoing, 
member organizations may receive and members may submit exercise 
instructions and tender exercise notices after the exercise cut-off 
time but prior to expiration (i) in the case of option contracts 
carried in an account maintained for another member organization in 
which only positions of customers of such other member organization are 
carried, (ii) in order to remedy mistakes or errors made in good faith, 
(iii) to take appropriate action as the result of a failure to 
reconcile unmatched Exchange transactions, or (iv) where exceptional 
circumstances relating to a customer's ability to communicate exercise 
instructions to the member organization (or the member organization's 
ability to receive exercise instructions) prior to such cut-off time 
warrant such action. This subparagraph (b) is intended as a means of 
providing for relatively uniform procedures in respect of exercise 
instructions and not to alter or affect in any way the expiration times 
for an option contract which are fixed in accordance with the Rules of 
the OCC or any other provision of an option contract, and the exercise 
prior to expiration of an option contract in contravention of this 
subparagraph (b) shall neither affect the validity of such exercise nor 
modify or otherwise affect any right or obligation of any holder or 
writer of any option contract of such series of options. As used herein 
with respect to any member organization, the word ``customer'' shall 
mean every person other than the member organization.] Special 
procedures apply to the exercise of equity options on the last business 
day before their expiration (``expiring options''). Unless waived by 
OCC, expiring options are subject to the Exercise by Exception (``Ex-
by-Ex'') procedure under OCC Rule 805. This rule provides that, unless 
contrary instructions are given, option contracts that are in-the-money 
by specified amounts shall be automatically exercised. In addition to 
OCC rules, the following Exchange requirements apply with respect to 
expiring options. Option holders desiring to exercise or not exercise 
expiring options must either: (i) take no action and allow exercise

[[Page 60758]]

determinations to be made in accordance with OCC's Ex-by-Ex procedures 
where applicable; or (ii) submit a ``Contrary Exercise Advice'' to the 
Exchange by the deadline specified in paragraph (c) below. A Contrary 
Exercise Advice is a communication either (A) to not exercise an option 
that would be automatically exercised under OCC's Ex-by-Ex procedure, 
or (B) to exercise an option that would not be automatically exercised 
under OCC's Ex-by-Ex procedure. A Contrary Exercise Advice may be 
submitted by a Member or Member Organization by using the Exchange's 
Contrary Exercise Advice Form, OCC's ENCORE System, a Contrary Exercise 
Advice form of any other national securities exchange of which the firm 
is a Member and where the option is listed, or such other method as the 
Exchange may prescribe. A Contrary Exercise Advice may be canceled by 
filing an ``Advice Cancel'' with the Exchange or resubmitted at any 
time up to the submission cut-off times specified below.
    (c) Exercise cut-off time. Option holders have until 2:30 p.m. 
(PST) on the business day immediately prior to the expiration date to 
make a final decision to exercise or not exercise an expiring option. 
For customer accounts, Members and Member Organizations may not accept 
exercise instructions after 2:30 p.m. (PST) but have until 3:30 p.m. 
(PST) to submit a Contrary Exercise Advice. For non-customer accounts, 
Members and Member Organizations may not accept exercise instructions 
after 2:30 p.m. (PST) but have until 3:30 p.m. (PST) to submit a 
Contrary Exercise Advice if such Member or Member Organization employs 
an electronic submission procedure with time stamp for the submission 
of exercise instructions by option holders. Consistent with Commentary 
.04, Members and Member Organizations are required to submit a Contrary 
Exercise Advice by 2:30 p.m. (PST) for non-customer accounts if such 
Members and/or Member Organization do not employ an electronic 
submission procedure with time stamp for the submission of exercise 
instructions by option holders.
    (d) If OCC has waived the Ex-by-Ex procedure for an options class, 
Members and Member Organizations must either:
    (i) submit to the Exchange, a Contrary Exercise Advice, in a manner 
specified by the Exchange, within the time limits specified in 
paragraph (c) above if the holder intends to exercise the option, or
    (ii) take no action and allow the option to expire without being 
exercised.

The applicable underlying security price in such instances will be as 
described in OCC Rule 805(j). In cases where the Ex-by-Ex procedure has 
been waived, OCC rules require that Members and Member Organizations 
wishing to exercise such options must submit an affirmative Exercise 
Notice to OCC, whether or not a Contrary Exercise Advice has been filed 
with the Exchange. 
    (e) An Exchange Member Organization that has accepted the 
responsibility to indicate final exercise decisions on behalf of 
another Member or non-Member firm shall take the necessary steps to 
ensure that such decisions are properly indicated to the Exchange. Such 
Member Organization may establish a processing cut-off time prior to 
the Exchange's exercise cut-off time at which it will no longer accept 
final exercise decisions in expiring options from option holders for 
whom it indicates final exercise decisions. Each Member or Member 
Organization that indicates final exercise decisions through another 
broker-dealer is responsible for ensuring that final exercise decisions 
for all of its proprietary (including market maker) and public customer 
account positions are indicated in a timely manner to such broker-
dealer.
    (f) Members and Member Organizations may receive and submit final 
exercise decisions after the exercise cut-off time but prior to 
expiration without having submitted a Contrary Exercise Advice: (i) In 
order to remedy mistakes made in good faith; (ii) to take appropriate 
action as the result of a failure to reconcile unmatched Exchange 
option transactions; or (iii) where exceptional circumstances have 
restricted an option holder's ability to inform a Member organization 
of a decision regarding exercise, or a Member organization's ability to 
receive an option holder's decision by the cut-off time. The burden of 
establishing any of the above exceptions rests solely on the Member or 
Member Organization seeking to rely on such exceptions.
    (g) In the event the Exchange provides advance notice on or before 
2:30 p.m. (PST) on the business day immediately prior to the last 
business day before the expiration date indicating that a modified time 
for the close of trading in equity options on such last business day 
before expiration will occur, 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 on 
that day instead of the 2:30 p.m. (PST) deadline found in Rule 6.24(c). 
However, Members and Member Organizations may deliver a Contrary 
Exercise Advice or Advice Cancel to the Exchange within 2 hours 28 
minutes following the time announced for the close of trading in equity 
options on that day instead of the 3:30 p.m. (PST) deadline found in 
Rule 6.24(c) for customer accounts and non-customer accounts where such 
Member firm employs an electronic submission procedure with time stamp 
for the submission of exercise instructions. For non-customer accounts, 
Members and Member Organizations that do not employ an electronic 
procedure with time stamp for the submission of exercise instructions 
are required to deliver a Contrary Exercise Advice or Advice Cancel 
within 1 hour and 28 minutes following the time announced for the close 
of trading on that day instead of the 2:30 p.m. (PST) deadline found in 
Rule 6.24(c).
    (h)(1) The Exchange may establish extended cut-off times for 
decision to exercise or not exercise an expiring option and for the 
submission of Contrary Exercise Advices on a case by case basis due to 
unusual circumstances.
    (2) The Exchange with at least one (1) business day prior advance 
notice, by 9 a.m. (PST) on such day, may establish a reduced cut-off 
time for the decision to exercise or not exercise an expiring option 
and for the submission of Contrary Exercise Advices on a case-by-case 
basis due to unusual circumstances; provided, however, that under no 
circumstances should the exercise cut-off time and the time for 
submission of a Contrary Exercise Advice be before the close of 
trading.
Commentary
    [.01 The exercise cut-off time pursuant to Rule 6.24(b) for option 
contracts shall be 2:30 P.M. (PT) on the business day immediately prior 
to the expiration date. In the event a member organization does not 
carry accounts for customers, it shall nevertheless be subject to such 
exercise cut-off time for the purposes of the third and fourth 
sentences of Rule 6.24(b).
    .02 Each member organization shall prepare a memorandum of every 
exercise instruction received from a customer showing the time when 
such instruction was so received. Such memoranda shall be subject to 
the requirements of SEC Rules 17a-3(a)(6) and 17a-4(b).
    .03 In the event a member submits an exercise instruction or 
tenders an exercise notice pursuant to an exception set forth in clause 
(ii), (iii) or (iv) of Rule 6.24(b), the member shall maintain a 
memorandum setting forth the circumstances giving rise to such

[[Page 60759]]

exception. If the member is relying on clause (ii) or clause (iv) as 
the basis of an exception, it shall promptly file a copy of the 
memorandum with the Exchange.
    .04 Clearing Members must follow the procedures of the OCC when 
exercising expiring non-cash settled equity option contracts. Members 
must also follow the procedures set forth below with respect to the 
exercising of non-cash settled equity option contracts that would 
otherwise not be exercised, or the non-exercising of option contracts 
that otherwise would be exercised by operation of the OCC Rule 805.
    (a) For all such contracts exercised or not exercised, a ``contrary 
exercise advice'' must be delivered by the member in such form or 
manner prescribed by the Exchange to a place designated by the Exchange 
no later than 2:30 p.m. (PT) on the business day immediately prior to 
the expiration date;
    (b) Subsequent to the delivery of a ``contrary exercise advice,'' 
should the Market Maker, Floor Broker, customer or firm determine to 
act other than as reflected on the original advice form, the Member 
must also deliver an ``advice cancel'' in such form or manner 
prescribed by the Exchange to a place designated by the Exchange no 
later than 2:30 p.m. (PT) on the business day immediately prior to the 
expiration date;
    (c) The preparation, time stamping or submission of a ``contrary 
exercise advice'' prior to the purchase of the contracts to be 
exercised or not exercised shall be deemed a violation of this Rule.
    (d) All of the foregoing provisions of this Commentary .04 are in 
full force and effect whether or not the OCC waives the exercise-by-
exception provisions of its Rule 805; in the event of such waiver, the 
procedures of this Commentary shall be followed as if such provisions 
of OCC Rule 805 were in full force and effect; and OCC rules may 
require the submission of an affirmative exercise notice even in 
circumstances where a contrary exercise advice is not required; and
    (e) The failure of any Member to follow the provisions in this 
Commentary .04 may be referred to the Ethics and Business Conduct 
Committee and result in the assessment of a fine, which may include but 
is not limited to disgorgement of potential economic gain obtained or 
loss avoided by the subject exercise, as determined by the Committee.
    .05 Members and member organizations shall properly communicate 
final exercise decisions to the Exchange in respect of positions for 
which they are responsible. Member organizations may establish a 
processing cut-off tune prior to the Exchange's exercise cut-off time 
at which it will no longer accept final exercise decisions in expiring 
options for customers.
    .06 Submitting or preparing an exercise instruction after the 
exercise cut-off time in any expiring option on the basis of material 
information released after the cut-off time is actively inconsistent 
with just and equitable principals of trade.]
    .01 For purposes of this Rule 6.24, the terms ``customer account'' 
and ``non-customer account'' have the same meaning as defined in OCC 
By-Laws Article I(C)(28) and Article I (N)(2), respectively.
    .02 Each Member Organization shall prepare a memorandum of every 
exercise instruction received showing the time when such instruction 
was received. Such memoranda shall be subject to the requirements of 
SEC Rule 17a-4(b).
    .03 In the event of an ``unusual circumstance,'' Rule 6.24(h)(1) 
provides that the Exchange may extend the cut-off times for exercise 
instructions and the submission of a Contrary Exercise Advice beyond 
the normal time frames specified in Rule 6.24(c). For purposes of 
subparagraph (h)(1), an ``unusual circumstance'' includes, but is 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. Rule 6.24(h)(2) specifies that the Exchange may also 
reduce such cut-off times for ``unusual circumstances.'' For purposes 
of subparagraph (h)(2), an ``unusual circumstance'' includes, but is 
not limited to, a significant news announcement concerning the 
underlying security of an option contract that is scheduled to be 
released just after the close on the business day immediately prior to 
expiration.
    .04 Although the deadline for all option holders to make a final 
decision to exercise or not exercise is 2:30 p.m. (PST), the deadline 
for the submission of the Contrary Exercise Advice in the case of non-
customer accounts will depend on the manner of the decision to exercise 
or not exercise.
    (i) For electronic timestamp submissions of the exercise decision 
by non-customer option holders, a Contrary Exercise Advice submitted by 
Members and Member Organizations must be received by the Exchange by 
3:30 p.m. (PST).
    (ii) For manual submissions of the exercise decision by non-
customer option holders, Members and Member Organizations must submit a 
Contrary Exercise Advice at the Exchange via the Contrary Exercise 
Advice Box by 2:30 p.m. (PST).
    .05 Each Member Organization shall establish fixed procedures to 
insure secure time stamps in connection with their electronic systems 
employed for the recording of submissions to exercise or not exercise 
expiring options.
    .06 In the event a Member or Member Organization receives and 
submits a final exercise decision after the exercise cut-off time 
pursuant to an exception set forth in clauses (i), (ii) or (iii) of 
paragraph (f) of Rule 6.24, the Member or Member Organization shall 
maintain a memorandum setting forth the circumstances regarding such 
exception and shall file a copy of the memorandum with the Exchange's 
Market Surveillance Department no later than 9 a.m. on the first 
business day following the respective expiration.
    .07 The filing of a Contrary Exercise Advice required by this rule 
does not serve to substitute as the effective notice to OCC for the 
exercise or non-exercise of expiring options.
    .08 The failure of any Member to follow the provisions in this Rule 
may be referred to the Ethics and Business Conduct Committee and result 
in the assessment of a fine, which may include but is not limited to 
disgorgement of potential economic gain obtained or loss avoided by the 
subject exercise, as determined by the Committee.
    .09 Submitting or preparing an exercise instruction after the 
exercise cut-off time in any expiring option on the basis of material 
information released after the cut-off time is actively inconsistent 
with just and equitable principals of trade.
* * * * *

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 PCX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change, as 
amended. The text of these statements may be examined at the places 
specified in Item IV below and is set forth in sections A, B and C 
below, of the most significant aspects of such statements.

[[Page 60760]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Options Clearing Corporation (``OCC''), the issuer of all PCX-
traded options contracts, has an established procedure for options 
holders wishing to automatically exercise in-the-money options \6\ 
before they expire. Known as Exercise by Exception or ``Ex-by-Ex'', the 
procedure provides for the automatic exercise at expiration of any 
equity option 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.\7\ Option holders who wish to have their contracts exercised 
in accordance with the Ex-by-Ex procedure do not need to take any 
further action; the contracts that are in-the-money by the appropriate 
amount will be automatically exercised. Option holders who do not wish 
to have their options automatically exercised, or who wish their 
options to be exercised under different parameters than the Ex-by-Ex 
procedure, must file a CEA with the Exchange pursuant to PCX Rule 6.24, 
and instruct OCC of their ``contrary intention''.\8\ The Exchange 
believes that PCX Rule 6.24 is designed to deter individuals from 
taking improper advantage of late-breaking news by requiring evidence 
of an option holder's intention regarding whether to exercise an 
expiring equity option via the submission of a CEA. Members and Member 
Organizations satisfy the filing requirement by manually submitting a 
CEA or by electronically submitting the CEA through OCC's ENCORE 
system.
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    \6\ ``In-the-money'' for a call option occurs if the current 
market value of the underlying security is above the exercise price 
of the option. For put options, ``in-the-money'' means the current 
value of the underlying security is below the exercise price of the 
option.
    \7\ See OCC Rule 805(d).
    \8\ A CEA may be canceled by filing an ``Advice Cancel'' with 
the Exchange at any time up to the submission cut-off deadline 
specified in proposed amended PCX Rule 6.24.
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    The Exchange states that the principal goal of PCX Rule 6.24 is to 
maintain a level playing field between persons holding long and short 
positions in expiring equity options. The PCX believes that after 
trading has ended on the final trading day before expiration, persons 
who are short in the option have no way to close out their short 
position. To put option holders on equal footing, PCX Rule 6.24 
attempts to minimize the time period in which a holder can exercise the 
equity option after the close of trading on the last business day prior 
to expiration, generally known as ``Expiration Friday.'' \9\
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    \9\ ``Expiration Friday'' is generally the last business day 
prior to the expiration of an option contract.
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    The current exercise cut-off time for an option holder to decide 
whether to exercise an equity option is 2:30 p.m. (PST) on the business 
day immediately prior to the expiration date.\10\ Under the proposal, 
the exercise cut-off time set forth in amended PCX Rule 6.24(c) will 
not change except in cases of a modified trading session or due to 
``unusual circumstances.'' Current PCX Rule 6.24 imposes a uniform 2:30 
p.m. cut-off time for the submission of CEAs for all accounts without 
differentiating between customer and non-customer accounts.
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    \10\ The ``expiration date'' of an options contract generally is 
the Saturday immediately following the third Friday of the 
expiration month of such option. See OCC By-Laws Article I (E)(16).
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    The Exchange states that the proposed rule change was prompted by 
concerns expressed by clearing firms that the deadline for submitting 
CEAs is problematic for customer accounts,\11\ 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. Therefore, the Exchange proposes to 
adopt a cut-off time of 3:30 p.m. (PST) for Members and Member 
Organizations to submit CEAs for customer accounts. The Exchange also 
proposes to allow Members and Member Organizations to submit CEAs for 
non-customer accounts \12\ by 3:30 p.m. (PST) provided such Member or 
Member Organization employs an electronic procedure with time stamp 
recording for the submission of exercise instructions by options 
holders. In those cases where Members or Member Organizations do not 
employ an electronic submission procedure for the submission of 
exercise instructions, CEAs for non-customer accounts must be submitted 
to the Exchange by 2:30 p.m. (PST). The different CEA submission 
deadlines are set forth in amended PCX Rule 6.24(c) and new Commentary 
.04.
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    \11\ A ``customer account'' is defined in OCC By-Laws Article I 
(C)(28) as an account of a Clearing Member which is confined to 
Exchange transactions cleared and positions carried by the Clearing 
Member on behalf of its securities customers, other than those 
transactions of market-makers which are cleared through a market-
makers account. OCC By-Laws define a ``securities customer'' as a 
person having a securities account at a broker or dealer other than 
a non-customer of such broker or dealer. See OCC By-Laws Article I 
(S)(1).
    \12\ A ``non-customer account'' generally means a person that is 
not a customer of a broker or dealer defined in Rule 8c-1 and 15c2-1 
under the Act. See OCC By-Laws Article I (N)(2).
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    Although many Members and Member Organizations have electronic 
submission procedures, the Exchange is concerned that those firms that 
manually submit CEAs could have an opportunity to improperly extend the 
2:30 p.m. (PST) deadline for option holders to submit their exercise 
instructions. This concern on the part of the Exchange is based on the 
difficulty in monitoring a manual procedure that has different times 
for deciding whether to exercise an option and to submit a CEA.
    Accordingly, in the case of non-customer accounts, the Exchange has 
proposed to limit the 3:30 p.m. (PST) deadline for submitting CEAs to 
those Members and Member Organizations that have an electronic 
submission procedure for option holders communicating their decisions 
whether to exercise an option. In connection with the use of an 
electronic submission procedure by Members and Member Organizations, 
the Exchange proposes the addition of new Commentary .05 to PCX Rule 
6.24 to require Members and Member Organizations employing electronic 
submissions to establish procedures to secure time stamps in connection 
with their electronic systems.
    OCC on occasion will suspend the use of its Ex-by-Ex procedure, 
such as when trading in the underlying stock has been halted or if 
accurate price data is unavailable for the determination of closing 
prices. When this occurs and there is no automatic exercise, all 
options contract holders must send an exercise notice to OCC if they 
wish to exercise an option, regardless of whether the option is in or 
out-of-the-money. Currently, when OCC suspends its Ex-by-Ex procedure 
for an option class, PCX Rule 6.24 requires the submission of a CEA. 
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). Option holders then must determine whether a 
CEA needs to be submitted to the Exchange evidencing the intention to 
exercise or not exercise.
    In the PCX's view, the options exchanges have long viewed this 
process as cumbersome and confusing to option holders. Therefore, the 
PCX proposes to amend PCX Rule 6.24(d) to eliminate the requirement 
that a CEA be submitted if the holder does not want to exercise the 
option when OCC has suspended its Ex-by-Ex procedure for that options 
class. As a result, when the Ex-by-Ex procedure has been

[[Page 60761]]

suspended, submission of CEAs to the Exchange will be required only 
when the options holder wants to exercise the option contract.
    The proposed rule change would also permit the Exchange to 
establish different cut-off times as an exception to amended PCX Rule 
6.24(c) to address situations where the Exchange has advance prior 
knowledge or warning of a modified trading session at expiration, or in 
the case of ``unusual circumstances.''
    Specifically, proposed PCX Rule 6.24(g) would apply when a 
different or modified close of trading is announced due to a market-
wide event. In such cases, the Exchange would have forewarning of the 
event and would be required to provide notice of a change in cut-off 
times by 2:30 p.m. (PST) on the business day prior to the last trading 
day before expiration. For example, if the day after Thanksgiving is 
the last trading day prior to expiration with a close of trading of 10 
a.m. (PST), then the Exchange would, with prior notice by 2:30 p.m. 
(PST) on the Wednesday before Thanksgiving, be able to establish the 
cut-off time for option holders to decide whether to exercise expiring 
options to 1 hour 28 minutes after the close of trading. With respect 
to the submission of CEAs by Members and Member Organizations, the cut-
off time would be 2 hours and 28 minutes after the close of trading for 
customer accounts and non-customer accounts where the Members and 
Member Organizations employ an electronic procedure with time stamp for 
the submission of exercise instructions. Members and Member 
Organizations that do not employ an electronic submission procedure for 
exercise instructions would be required to submit a CEA within 1 hour 
and 28 minutes after the close of trading for its non-customer 
accounts. Accordingly, the normal exercise cut-off times would not 
apply and, similar to amended PCX Rule 6.24(c), the deadline for 
submitting CEAs to the Exchange for non-customer accounts would depend 
on the use of an electronic submission procedure for the submission of 
exercise instructions.
    Proposed PCX Rule 6.24(h)(1) would permit the Exchange to extend 
the cut-off time periods for option holders to decide whether to 
exercise expiring options, as well as for Members to submit CEAs due to 
unusual circumstances. Situations that are deemed to be an ``unusual 
circumstance'' are set forth in revised Commentary .03 to PCX Rule 
6.24. An ``unusual circumstance'' for purposes of proposed paragraph 
(h)(1) includes, but is 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 PCX Rule 6.24(h)(2) would permit the Exchange, with one 
(1) business day prior advance notice by 9 a.m. (PST), to establish a 
reduced cut-off time for option holders to decide whether to exercise 
expiring options as well as for Members to submit CEAs. The reduced 
cut-off time under this new paragraph for both exercise decisions and 
CEA submissions may not occur before the close of trading. The primary 
purpose of proposed paragraph (h)(2) is to permit the Exchange to 
reduce cut-off times because of an ``unusual circumstance,'' such as a 
significant news event occurring after the close. Revised Commentary 
.03 to PCX Rule 6.24 provides that, for purposes of subparagraph 
(h)(2), an ``unusual circumstance'' is a significant news announcement 
concerning the underlying security of an option contract that is 
scheduled to be released after the close on the last trading day prior 
to expiration. For example, a decision on whether a particular merger 
will be approved or whether a new product will receive regulatory 
approval that occurs after the close of trading would justify a reduced 
cut-off time so that persons holding short positions are not prejudiced 
by being unable to close out their positions. The Exchange believes 
that this would maintain a level playing field between persons holding 
long and short positions in expiring options.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act \13\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act \14\ in particular, 
because 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.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 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 that is not necessary or 
appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change, as amended, were 
neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The proposed rule change, as amended, has been filed by the 
Exchange pursuant to Section 19(b)(3)(A) of the Act \15\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\ Because the foregoing 
proposed rule change: (1) Does not significantly affect the protection 
of investors or the public interest; (2) does not impose any 
significant burden on competition; and (3) does not become operative 
for thirty days from the date on which it was filed, or such shorter 
time as the Commission may designate if consistent with the protection 
of investors and the public interest, it has become effective pursuant 
to Section 19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(6) \18\ 
thereunder.\19\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
    \19\ 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 at least five business days prior to the 
filing date or such shorter period as designated by the Commission.
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    A proposed rule change filed under Rule 19b-4(f)(6) \20\ normally 
does not become operative prior to thirty days after the date of 
filing. However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may 
designate a shorter time if such action in consistent with the 
protection of investors and the public interest. The PCX has requested 
that the Commission waive the thirty-day operative date of the proposed 
rule change due to the Exchange's need to maintain competition and 
efficiency.
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    \20\ 17 CFR 240.19b-4(f)(6).
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    The Commission believes that waiving the thirty-day operative date 
is consistent with the protection of investors and the public 
interest.\21\

[[Page 60762]]

Accelerating the operative date will allow the PCX to immediately 
implement rules similar to ones already in place at the American Stock 
Exchange LLC and the International Securities Exchange, Inc., \22\ and 
will simplify and clarify the process by which Members and Member 
Organizations accept exercise decisions from options holders and submit 
such decisions to the Exchange. For these reasons, the Commission 
designates the proposed rule change as effective and operative 
immediately. At any time within 60 days of the filing of the proposed 
rule change, as amended, the Commission may summarily abrogate such 
proposed 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.\23\
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    \21\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation.15 U.S.C. 
78c(f).
    \22\ See Securities Exchange Act Release Nos. 47885 (May 16, 
2003), 68 FR 28309 (May 23, 2003) (SR-Amex-2001-92) and 48505 
(September 17, 2003), 68 FR 55680 (September 26, 2003) (SR-ISE-2003-
20).
    \23\ For purposes of calculating the sixty-day abrogation 
period, the Commission considers the period to commence on October 
9, 2003, the date at which the Exchange filed Amendment No. 2.
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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, 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 PCX. All submissions should refer to File No. 
SR-PCX-2003-47 and should be submitted by November 13, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26710 Filed 10-22-03; 8:45 am]
BILLING CODE 8010-01-P