[Federal Register Volume 73, Number 30 (Wednesday, February 13, 2008)]
[Notices]
[Pages 8387-8389]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-2611]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57284; File No. SR-NYSEArca-2008-16]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rules 
Pertaining to the Terms of Index Option Contracts

February 7, 2008.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on January 30, 2007, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared substantially by NYSE Arca. 
NYSE Arca filed the proposed rule change as a ``non-controversial'' 
proposed rule change pursuant to section 19(b)(3)(A) of the Act \3\ and 
Rule 19b-4(f)(6) thereunder,\4\ which renders it effective

[[Page 8388]]

upon filing with the Commission. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 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

    NYSE Arca proposes to amend Rule 5.19(a) (Terms of Index Option 
Contracts) to allow the listing of up to seven expiration months for 
options on certain broad-based indexes. NYSE Arca proposes to implement 
the proposed rule change immediately.
    The text of the proposed rule change is available at http://www.nyse.com, the principal office of NYSE Arca, and the Commission's 
Public Reference Room.

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

    In its filing with the Commission, NYSE Arca included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NYSE Arca 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
    NYSE Arca proposes to amend Rule 5.19 (Terms of Index Options 
Contracts) to allow the Exchange to list up to seven expiration months 
for broad-based security index options upon which a constant three-
month volatility index is calculated. Currently, Rule 5.19(a)(3) 
permits the Exchange to list only six expiration months in any index 
options at any one time.
    Volatility products offer investors a unique set of tools for 
hedging. For example, the Chicago Board Options Exchange (``CBOE'') 
Volatility Index (``VIX'') options, first introduced in February 2006, 
have proven to be one of CBOE's most successful new products ever 
listed, currently averaging over 90,000 contracts traded per day. In a 
recent proposal, CBOE explained that it plans to introduce new 
volatility products and new volatility indexes in the near future, 
including the CBOE S&P 500 Three-Month Volatility Index (``VXV'').\5\ 
Similar to the VIX, the VXV is a measure of S&P 500 implied volatility, 
the volatility implied by S&P option prices. Instead of reflecting a 
constant one-month implied volatility period, however, VXV is designed 
to reflect the implied volatility of an option with a constant three 
months to expiration. Since there is only one day on which an option 
has exactly three months to expiration, VXV is calculated as a weighted 
average of options expiring immediately before and immediately after 
the three-month standard.
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    \5\ CBOE calculates volatility indexes on other broad-based 
security indexes, such as the Dow Jones Industrial Average index 
(``DJX''), the Nasdaq-100 index (``NDX''), and the Russell 2000 
index (``RUT''). CBOE may calculate a constant three-month 
volatility index on DJX, NDX, or RUT in the future. See Securities 
Exchange Act Release No. 56821 (November 20, 2007), 72 FR 66210 
(November 27, 2007) (SR-CBOE-2007-82) (``CBOE proposal'').
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    Accordingly, an index calculator would need to use four consecutive 
expiration months in order to calculate a constant three-month 
volatility index. Under the current application of NYSE Arca Rule 
5.19(a)(3), the Exchange generally lists three consecutive near term 
months and three months on a quarterly expiration cycle. One of the 
three consecutive near term months is always a quarterly month; 
however, that near term contract month (which is also a quarterly 
month) is not included as part of the three months listed on a 
quarterly expiration cycle. Therefore, in order to permit the addition 
of four consecutive near term months under current Rule 5.19(a)(3), the 
Exchange would only be able to list two months on a quarterly 
expiration cycle. Because of customer demand and other investment 
strategy reasons for having three months on a quarterly expiration 
cycle, the Exchange is seeking to increase, from six to seven, the 
number of expiration months for broad-based security index options upon 
which a constant three-month volatility index is calculated.
    Proposed Rule 5.19(a)(3)(A) will permit the Exchange to list up to 
seven expiration months at any one time for any broad-based security 
index option contracts (e.g., NDX, RUT) upon which any exchange 
calculates a constant three-month volatility index.
    Without this proposed rule, if a three-month volatility index is 
calculated using only three consecutive near term months, this would 
result in the VXV's being calculated with options expiring three months 
apart about one-third of the time. Another one-third of the time, VXV 
would be calculated with options expiring two months apart. And the 
final one-third of the time, VXV would be calculated with options 
expiring one month apart. As a result, the calculation of the three-
month VXV under the current rules would render the VXV subject to 
inconsistencies that may make the index unattractive as an underlying 
for volatility products. The proposed rule change will permit the 
Exchange, eight times a year, to add an additional seventh month in 
order to maintain four consecutive near term contract months.\6\
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    \6\ Examples illustrating the need for a seventh month in order 
to maintain four consecutive near term contract months can be found 
in the CBOE proposal, supra note 5.
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    Therefore, the Exchange believes that the addition of a fourth 
consecutive near term month for broad-based security index options upon 
which a constant three-month volatility index is calculated will result 
in a consistent calculation in which the option series that bracket 
three months to expiration will always expire one month apart. In order 
to accommodate the listing of a fourth consecutive near term month and 
to maintain the listing of three months on a quarterly expiration 
cycle, the Exchange proposes to increase, from six to seven, the number 
of expiration months for broad-based security indexes on which a 
constant three-month volatility index is calculated.
    The Exchange also proposes making minor technical changes to 
certain subparagraphs contained in Rule 5.19(a) in order to accommodate 
the new rule.
    NYSE Arca has analyzed its capacity and represents that it believes 
the Exchange and the Options Price Reporting Authority have the 
necessary systems capacity to handle the additional traffic associated 
with the additional listing of a seventh contract month in order to 
maintain four consecutive near term contract months for those broad-
based security index options upon which a constant three-month 
volatility index is calculated.
2. Statutory Basis
    The proposed rule change is consistent with the provisions of 
section 6 of the Act,\7\ in general, and with sections 6(b)(1) and 
(b)(5) of the Act,\8\ in particular, in that the proposal is designed 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
NYSE Arca believes that the proposed rule

[[Page 8389]]

change is needed to remain competitive with other self-regulatory 
organizations that have listed the additional option series.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(1) and (b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NYSE Arca does not believe that the proposed rule change 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 were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to section 19(b)(3)(A) of the Act \9\ and Rule 19b-
4(f)(6) thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\11\ 
However, Rule 19b-4(f)(6)(iii) \12\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay, to permit the Exchange to 
list options on the Fund immediately. The Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest. The Commission notes that another 
self-regulatory organization recently adopted a substantially similar 
rule change that was effective upon filing,\13\ and that this filing 
raises no new regulatory issues.
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    \11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
NYSE Arca has complied with this requirement.
    \12\ Id.
    \13\ See Securities Exchange Act Release No. 57104 (January 4, 
2008), 73 FR 2070 (January 11, 2008) (SR-ISE-2007-113).
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    The Commission believes that increasing, from six to seven, the 
number of expiration months for broad-based security indexes on which 
an Exchange calculates a constant three-month volatility index (to 
accommodate a fourth consecutive near-term month while maintaining the 
listing of three months on a quarterly expiration cycle) will result in 
a more consistent and predictable calculation in which the option 
series that bracket three months to expiration will always expire one 
month apart, thereby promoting just and equitable principles of trade 
while protecting investors and the public interest. The Commission also 
notes the Exchange's representations that it possesses the necessary 
systems capacity to handle the additional traffic associated with the 
additional listing of a seventh contract month in order to maintain 
four consecutive near-term contract months for those broad-based 
security index options upon which the Exchange calculates a constant 
three-month volatility index. The Commission hereby grants the 
Exchange's request and designates the proposal as operative upon 
filing.\14\
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    \14\ For purposes only of waiving the 30-day operative delay of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File No. SR-NYSEArca-2008-16 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2008-16. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of NYSE Arca. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSEArca-2008-16 and should be submitted on or before 
March 5, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-2611 Filed 2-12-08; 8:45 am]
BILLING CODE 8011-01-P