[Federal Register Volume 69, Number 29 (Thursday, February 12, 2004)]
[Notices]
[Pages 7055-7058]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3027]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49191; File No. SR-BSE-2004-04]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Boston Stock Exchange, Inc. To Add a New Section to the Rules of 
the Boston Options Exchange Relating to the Exercise and Delivery of 
Options Contracts

February 4, 2004.
    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 January 29, 2004, the Boston Stock Exchange, Inc. (``BSE'' 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 BSE. On February 
4, 2004, the BSE amended the proposed rule change.\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 John A. Boese, Vice President, Legal and 
Compliance, BSE, to Nancy Sanow, Assistant Director, Division of 
Market Regulation, Commission, dated February 4, 2004 (``Amendment 
No. 1''). In Amendment No. 1, the BSE made technical corrections to 
its rule text, changing two references of the term ``Exchange'' to 
``BOX.''
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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 the Rules of the Boston Options 
Exchange (the ``BOX Rules'') regarding the exercise and delivery of 
options contracts. Below is the text of the proposed rule change, as 
amended. Proposed new language is italicized; proposed deleted text is 
[bracketed].
* * * * *

RULES OF THE BOSTON STOCK EXCHANGE

RULES OF THE BOSTON OPTIONS EXCHANGE FACILITY

Trading of options contracts on BOX

Chapter VII. Exercises and Deliveries

Sec. 1 Exercise of Options Contracts

    (a) Subject to the restrictions set forth in Chapter III, Section 9 
of these Rules (Exercise Limits) and to such restrictions as may be 
imposed pursuant to Chapter III, Section 12 of these Rules (Other 
Restrictions on Options Transactions and Exercises) or pursuant to the 
Rules of the Clearing Corporation, an outstanding options contract may 
be exercised during the time period specified in the Rules of the 
Clearing Corporation by the tender to the Clearing Corporation of an 
exercise notice in accordance with the Rules of the Clearing 
Corporation. An exercise notice may be tendered to the Clearing 
Corporation only by the Clearing Participant in the account of which 
such options contract is carried with the Clearing Corporation. 
Participants may establish fixed procedures as to the latest time they 
will accept exercise instructions from customers.
    [(b) The exercise cutoff time for all non cash-settled options 
shall be 5:30 p.m. EST on the business day immediately prior to the 
expiration date. This is the latest time at which an exercise 
instruction for expiring non cash-settled options positions may be:
    i. Prepared by a Clearing Participant for positions in its 
proprietary trading account;
    ii. Submitted to a Clearing Participant by an Options Participant 
for positions in the Options Participant's account or error account;
    iii. Accepted by an Options Participant from any customer for its 
positions in the customer's account.
    (c) Notwithstanding the foregoing, Options Participants may receive 
and Options Participants may submit exercise instructions after the 
exercise cutoff time but prior to expiration in the circumstances 
listed below. A memorandum setting forth the circumstance giving rise 
to instructions after the exercise cutoff time shall be maintained by 
the Participant and a copy thereof shall be promptly filed with BOXR. 
An exercise instruction after the exercise cutoff may be received or 
submitted:
    i. in order to remedy mistakes or errors made in good faith;
    ii. where exceptional circumstances relating to a customer's or 
person's ability to communicate exercise instructions to the 
Participant (or the Participant's ability to receive exercise 
instructions) prior to such cutoff time warrant such action.
    (d) Submitting or preparing an exercise instruction after the 
exercise cutoff time in any expiring options on the basis of material 
information released after the cutoff time is activity inconsistent 
with just and equitable principles of trade.
    (e) For purposes of this Chapter VII with respect to any Options 
Participant, the word ``customer'' shall mean every person or 
organization other than a Market Maker, broker or the Participant 
itself. The term ``exercise instruction,'' with respect to a Market 
Maker, broker and Clearing Participant, shall also mean a notice either 
not to exercise an options position which would otherwise be exercised, 
or to exercise an options position which would otherwise not be 
exercised, by operation of the Rules of the Clearing Corporation, or to 
modify or withdraw a previously submitted instruction. All exercise 
instructions must be time stamped at the time they are prepared.
    (f) No Options Participant may prepare, time stamp or submit an 
exercise instruction prior to the purchase of the exercised contracts 
if the Options Participant knew or had reason to know that the 
contracts had not yet been purchased.
    (g) Clearing Participants must follow the procedures of the 
Clearing Corporation when exercising expiring non cash-settled equity 
options contracts. Options Participants also must follow the procedures 
set forth below with respect to the exercise of non cash-settled equity 
options contracts which would otherwise not be exercised, or the non 
exercise of contracts which otherwise would be exercised, by operation 
of Clearing Corporation Rule 804:
    i. For all contracts so exercised or not exercised, a ``contrary 
exercise advice,'' must be delivered by the Market Maker, broker or 
clearing firm, as applicable, in such form or manner prescribed by BOXR 
no later than 5:30 p.m. est.
    ii. Subsequent to the delivery of a ``contrary exercise advice,'' 
should the Market Maker, broker, customer or firm determine to act 
other than as reflected on the original advice form, the Market Maker, 
broker, or clearing firm, as applicable, must also deliver an ``advice 
cancel,'' in such form or manner prescribed by BOXR no later than 5:30 
p.m. est.
    iii. Options Participants shall properly communicate to BOX final 
exercise decisions in respect of

[[Page 7056]]

positions for which they are responsible.
    iv. The preparation, time stamping or submission of a ``contrary 
exercise advise'' prior to the purchase of the contracts to be 
exercised or not exercised shall be deemed a violation of this Section.
    v. All of the above procedures of this paragraph (g) are in full 
force and effect whether or not the Clearing Corporation waives the 
exercise by exception provisions of its Rule 804; in the event of such 
waiver the procedures of this paragraph shall be followed as if such 
provisions of Clearing Corporation Rule 804 were in full force and 
effect. The Clearing Corporation rules may require the submission of an 
affirmative exercise notice even in circumstances where a contrary 
exercise advise is not submitted.
    vi. The failure of any Options Participant to follow the procedures 
in this paragraph (g) may 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 
BOXR.]
    (b) Special procedures apply to the exercise of equity options on 
the last business day before their expiration (``expiring options''). 
Unless waived by the Clearing Corporation, expiring options are subject 
to the Exercise-by-Exception (``Ex-by-Ex'') procedure under Clearing 
Corporation 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 the 
Rules of the Clearing Corporation, the following BOX 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 determinations to be made in 
accordance with the Clearing Corporation's Ex-by-Ex procedure where 
applicable; or
    (ii) submit a ``Contrary Exercise Advice'' to BOX 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 the Clearing Corporation's Ex-by-Ex 
procedure, or (b) to exercise an option that would not be automatically 
exercised under the Clearing Corporation's Ex-by-Ex procedure. A 
Contrary Exercise Advice may be submitted by a Participant by using 
BOX's Contrary Exercise Advice Form, the Clearing Corporation's ENCORE 
system, a Contrary Exercise Advice form of any other national 
securities exchange of which the firm is a Participant and where the 
option is listed, or such other method as BOX may prescribe. A Contrary 
Exercise Advice may be canceled by filing an ``Advice Cancel'' with BOX 
or resubmitted at any time up to the submission cut-off times specified 
below.
    (c) Exercise cut-off time. Option holders have until 5:30 p.m. 
Eastern Time 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, Participants may not accept exercise 
instructions after 5:30 p.m. Eastern Time but have until 6:30 p.m. 
Eastern Time to submit a Contrary Exercise Advice. For non-customer 
accounts, Participants may not accept exercise instructions after 5:30 
p.m. Eastern Time but have until 6:30 p.m. Eastern Time to submit a 
Contrary Exercise Advice if such Participant employs an electronic 
submission procedure with time stamp for the submission of exercise 
instructions by option holders. Consistent with Supplemental Material 
.03, Participants are required to submit a Contrary Exercise Advice by 
5:30 p.m. for non-customer accounts if such Participants do not employ 
an electronic submission procedure with time stamp for the submission 
of exercise instructions by option holders.
    (d) If the Clearing Corporation has waived the Ex-by-Ex procedure 
for an options class, Participants must either:
    (i) submit to BOX, a Contrary Exercise Advice, in a manner 
specified by BOX, 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. In cases where the Ex-by-Ex procedure has been waived, the 
Rules of the Clearing Corporation require that Participants wishing to 
exercise such options must submit an affirmative Exercise Notice to the 
Clearing Corporation, whether or not a Contrary Exercise Advice has 
been filed with BOX.
    (e) A Participant that has accepted the responsibility to indicate 
final exercise decisions on behalf of another Participant or non-
Participant broker-dealer shall take the necessary steps to ensure that 
such decisions are properly indicated to BOX. Such Participant may 
establish a processing cut-off time prior to BOX'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 Participant 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) Notwithstanding the foregoing, Participants may make final 
exercise decisions after the exercise cut-off time but prior to 
expiration without having submitted a Contrary Exercise Advice in the 
circumstances listed below. A memorandum setting forth the circumstance 
giving rise to instructions after the exercise cutoff time shall be 
maintained by the Participant and a copy thereof shall be filed with 
BOX no later than 12:00 noon Eastern Time on the first business day 
following the respective expiration. An exercise decision after the 
exercise cut-off time may be made:
    (i) in order to remedy mistakes or errors made in good faith; or
    (ii) where exceptional circumstances have restricted an option 
holder's ability to inform a Participant of a decision regarding 
exercise, or a Participant'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 Participant seeking to rely on 
such exceptions.
    (g) In the event BOX provides advance notice on or before 5:30 p.m. 
Eastern Time 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 5:30 p.m. Eastern Time deadline found in Paragraph (c) 
of this Section 1. However, Participants may deliver a Contrary 
Exercise Advice or Advice Cancel to BOX within 2 hours 28 minutes 
following the time announced for the close of trading in equity options 
on that day instead of the 6:30 p.m. Eastern Time deadline found in 
Paragraph(c) of this Section 1 for customer accounts and non-customer 
accounts where such Participant employs an electronic submission 
procedure with time stamp for the submission of exercise instructions. 
For non-customer accounts, Participants that do not employ an 
electronic procedure with time stamp for the

[[Page 7057]]

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 
5:30 p.m. Eastern Time deadline found in Paragraph(c) of this Section 
1.
    (h) Modification of cut-off time.
    (i) BOX 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. For purposes of this subparagraph (h)(i), 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.
    (ii) BOX with at least one (1) business day prior advance notice, 
by 12:00 noon 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. For purposes 
of this subparagraph (h)(ii), 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.
    (i) Submitting or preparing an exercise instruction, contrary 
exercise advice or advice cancel after the applicable exercise cut-off 
time in any expiring options on the basis of material information 
released after the cut-off time is activity inconsistent with just and 
equitable principles of trade.
    (j) The failure of any Participant to follow the procedures in this 
Section 1 may 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 BOX.

Supplementary Material

    .01 For purposes of this Section 1, the terms ``customer account'' 
and ``non-customer account'' have the same meaning as defined in the 
Clearing Corporation By-Laws Article I(C)(28) and Article I(N)(2), 
respectively.
    .02 Each Participant shall prepare a memorandum of every exercise 
instruction received showing the time when such instruction was so 
received. Such memoranda shall be subject to the requirements of SEC 
Rule 17a-4(b).
    .03 Although the deadline for all option holders to make a final 
decision to exercise or not exercise is 5:30 p.m. Eastern Time, 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 time stamp submissions of the exercise decision 
by non-customer option holders, a Contrary Exercise Advice submitted by 
Participants must be received by BOX by 6:30 p.m. Eastern Time.
    (ii) For manual submissions of the exercise decision by non-
customer option holders, a Contrary Exercise Advice submitted by 
Participants must be received by BOX by 5:30 p.m. Eastern Time.
    .04 Each Participant 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.
    .05 The filing of a Contrary Exercise Advice required by this 
Section 1 does not serve to substitute as the effective notice to the 
Clearing Corporation for the exercise or non-exercise of expiring 
options.
* * * * *

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 BSE 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 and is set forth in sections A, B, and C below.

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

1. Purpose
    The purpose of the proposed rule change is to amend the BOX Rules 
relating to the exercise of options contracts. Chapter VII, Exercises 
and Deliveries, Section 1, Exercise of Options Contracts contains 
various procedures, requirements, and guidelines regarding the exercise 
of options contracts. Due to recent changes in the practices and rules 
of other options exchanges in this area, particularly in regard to 
contrary exercise advices, the BSE proposes to amend Chapter VII, 
Exercises and Deliveries, Section 1, Exercise of Options Contracts in 
order to remain consistent with the similar rules of other options 
exchanges.
2. Statutory Basis
    The Exchange believes that its proposed rule change is consistent 
with Section 6(b) of the Act in general \4\ and furthers the objectives 
of Section 6(b)(5) in particular,\5\ because it is designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and to protect investors and the general public by adopting 
rules for the exercise of options contracts consistent with the rules 
of the Options Clearing Corporation.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change does not 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

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

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

    The proposed rule change, as amended, has been filed by the 
Exchange pursuant to Section 19(b)(3)(A) of the Act \6\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\7\ 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

[[Page 7058]]

19(b)(3)(A) of the Act \8\ and Rule 19b-4(f)(6)\9\ thereunder.\10\
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(f)(6)
    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
    \10\ 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) \11\ 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 BSE has requested 
that the Commission accelerate the thirty-day operative date so that 
the Exchange may remain competitive with other exchanges that currently 
have similar rules in effect.
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    \11\ 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.\12\ Accelerating the operative date will allow the BSE to 
immediately implement rules similar to ones already in place at the 
other options exchanges,\13\ and will simplify and clarify the process 
by which BOX Participants accept exercise decisions from options 
holders and submit such decisions to the Exchange. For these reasons, 
the Commission designates the proposed rule change, as amended, 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.\14\
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    \12\ 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).
    \13\ See Securities Exchange Act Release Nos. 47885 (May 16, 
2003), 68 FR 28309 (May 23, 2003) (SR-Amex-2001-92); 48505 
(September 17, 2003), 68 FR 55680 (September 26, 2003) (SR-ISE-2003-
20); 48640 (October 16, 2003), 68 FR 60757 (October 23, 2003) (SR-
PCX-2003-47); and 48639 (October 16, 2003), 68 FR 60764 (October 23, 
2003) (SR-Phlx-2003-65).
    \14\ For purposes of calculating the sixty-day abrogation 
period, the Commission considers the period to commence on February 
4, 2004, the date at which the Exchange filed Amendment No. 1.
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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. Comments may also be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-BSE-2004-04. This file number should be 
included on the subject line if e-mail is used. To help the Commission 
process and review your comments more efficiently, comments should be 
sent in hardcopy or by e-mail but not by both methods. 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 Exchange. All 
submissions should refer to File No. SR-BSE-2004-04 and should be 
submitted by March 4, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3027 Filed 2-11-04; 8:45 am]
BILLING CODE 8010-01-P