[Federal Register Volume 76, Number 128 (Tuesday, July 5, 2011)]
[Notices]
[Pages 39143-39145]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-16679]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64760; File No. SR-ISE-2011-34]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Increase the Position and Exercise Limit for Options on the 
Standard & Poor's[supreg] Depository Receipts (SPDRs[supreg])

June 28, 2011.
    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 June 17, 2011, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') 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 by the Exchange. 
The Exchange filed the proposal 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\ 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

    The Exchange proposes to amend the rules of the Exchange to 
increase the position and exercise limit applicable to options on the 
Standard and Poor's[supreg] Depositary Receipts (``SPDRs[supreg]'').\5\ 
The text of the proposed rule change is available on the Exchange's Web 
site http://www.ise.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.
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    \5\ ``SPDRs[supreg]'', ``Standard & Poor's[supreg]'', 
``S&P[supreg]'', ``S&P 500[supreg]'', ``Standard & Poor's 500'', and 
``500'' are trademarks of The McGraw-Hill Companies, Inc. 
SPDRs[supreg], also sometimes referred to colloquially as 
``spiders'', are exchange traded funds (``ETFs'') based on the S&P 
500[supreg] Index. Each share of the traditional SPDRs[supreg] ETF 
(SPDRs[supreg] Trust Series 1) holds a stake in the 500 stocks 
represented by the S&P 500[supreg]. SPDRs[supreg], and options 
thereon, are generally used by large institutions and traders as 
bets on the overall direction of the market. They are also used by 
individual retail investors who believe in passive management (index 
investing).
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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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The self-regulatory organization has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

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

1. Purpose
    The purpose of the proposal is to amend ISE Rules 412 and 414 to 
increase the position and exercise limit applicable to options on 
SPDRs[supreg], which are trading under the symbol SPY, from 300,000 to 
900,000 contracts on the same side of the market. The Exchange began 
trading options on SPDRs[supreg] on January 10, 2005. That year, the 
position limit for these options was increased to the current limit of 
300,000 contracts on the same side of the market, and has remained 
unchanged.\6\ However, institutional and retail traders have greatly 
increased their demand for options on SPDRs[supreg] for hedging and 
trading purposes, such that these options have experienced an explosive 
gain in popularity and have been the most actively traded options for 
the last two years. For example, options on SPDRs[supreg] (SPY), the 
most actively traded options in the U.S. in terms of volume, traded a 
total of 33,341,698 contracts across all exchanges from March 1, 2011 
through March 16, 2011. In contrast, over the same time period, options 
on the Nasdaq-100 Index[supreg] Tracking Stock 
(``QQQSM''),\7\ the third most actively traded options, 
traded a total of 8,730,718 contracts (less than 26.2% of the volume of 
options on SPDRs[supreg]).
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    \6\ See Securities Exchange Act Release No. 51042 (January 14, 
2005), 70 FR 3412 (January 24, 2005) (SR-ISE-2005-05) (Approval 
order increasing position and exercise limits for options on 
SPDRs[supreg] from 75,000 contracts to 300,000 contracts on the same 
side of the market).
    \7\ QQQSM options were formerly traded under the 
ticker symbol QQQQSM. QQQSM, Nasdaq-
100[supreg], Nasdaq-100 Index[supreg], Nasdaq[supreg], and Nasdaq-
100 Index Tracking StockSM are trademarks or service 
marks of The Nasdaq Stock Market, Inc. (``Nasdaq'').
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    Currently, SPY options have a position limit of only 300,000 
contracts on the same side on the market while the significantly 
lesser-volume QQQSM options, which are comparable to SPY 
options, have a position limit of 900,000 contracts on the same side of 
the market. The Exchange believes that SPY options should, like options 
on QQQSM, have a position limit of 900,000 contacts. Given 
the increase in volume and continuous unprecedented demand for trading 
options on SPDRs[supreg], the Exchange believes that the current 
position limit of 300,000 contracts is too low and inadequate and is a 
deterrent to the optimal use of the product for hedging and trading 
purposes. There are multiple reasons to increase the position and 
exercise limit for SPY options.
    First, traders have informed the Exchange that the current SPY 
option position limit of 300,000 contracts, which has remained flat for 
more than five years despite the tremendous trading volume increase, is 
no longer sufficient for optimal trading and hedging purposes. SPY 
options are, as noted, used by large institutions and traders as a 
means to invest in or hedge the overall direction of the market. 
Second, options on SPDRs[supreg] are 1/10th the size of options on the 
S&P 500[supreg]Index, traded under the symbol SPX. Thus, a position 
limit of 300,000 contracts in options on SPDRs[supreg] is equivalent to 
a 30,000 contract position limit in options on SPX.\8\ Traders who 
trade options on SPDRs[supreg] to hedge positions in SPX options (and 
the SPDRs[supreg] ETF based on SPX, SPDRs[supreg] Trust Series 1) have 
indicated on several occasions that the current position limit for 
options on SPDRs[supreg] is simply too restrictive,\9\ which may 
adversely affect their (and the Exchange's) ability to provide 
liquidity in this product. And third, the products that are perhaps 
most comparable to options on SPDRs[supreg], namely options on QQQ\SM\, 
are subject to a 900,000 contract position limit on the same side of 
the market.\10\ This has, in light of the huge run-up in SPY option 
trading making them the number one nationally-ranked option in terms of 
volume, resulted in a skewed and unacceptable SPY option position 
limit. Specifically, the position limit for options on SPDRs[supreg] at 
300,000 contracts

[[Page 39144]]

is but 33% of the position limit for the less active options on QQQ\SM\ 
at 900,000 contracts.\11\ The Exchange proposes that options on 
SPDRs[supreg] similarly be subject to a position and exercise limit of 
900,000 contracts.
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    \8\ Chicago Board Options Exchange, which lists and trades SPX 
options, has established that there is no position limit on SPX 
options. See CBOE Rule 24.4 and Securities Exchange Act Release No. 
44994 (October 26, 2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-
2001-22) (order approving permanent elimination of SPX options 
position limit).
    \9\ See supra note 3.
    \10\ See Securities Exchange Act Release No. 51295 (March 2, 
2005), 70 FR 11292 (March 8, 2005) (SR-ISE-2005-14).
    \11\ Similarly to options on SPDRs[supreg] (SPY) being 1/10th 
the size of options on the related index S&P 500[supreg]Index (SPX), 
so options on the Nasdaq-100 Index[supreg] Tracking Stock (QQQ\SM\) 
are 1/10th the size of options on the related index NASDAQ-100 Index 
(NDX). The position limit for QQQ\SM\ options and its related index 
NDX have a comparable relationship to that of SPY options and SPX. 
That is, the position limit for options on QQQ\SM\ is 900,000 
contracts and there is no positions limit for NDX options. See supra 
note 7 and Securities Exchange Act Release No. 52650 (October 21, 
2005), 70 FR 62147 (October 28, 2005) (SR-CBOE-2001-41) (order 
approving elimination of NDX options position limit).
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    Under this proposal, the Exchange's options reporting requirement 
would continue abated. Thus, the Exchange would require that, just like 
for options on QQQSM, each member or member organization 
that maintains a position in SPDRs[supreg] options on the same side of 
the market, for its own account or for the account of a customer, must 
report certain information. This information would include, but would 
not be limited to, the option position, whether such position is hedged 
and if so, a description of the hedge and if applicable, the collateral 
used to carry the position. Exchange market makers would continue to be 
exempt from this reporting requirement as information regarding 
positions held by market makers can be accessed through the Exchange's 
market surveillance systems. In addition, the general reporting 
requirement for customer accounts that maintain an aggregate position 
of 200 or more option contracts (``large positions'') would remain at 
this level for options on SPDRs[supreg].
    The Exchange believes that position and exercise limits, at their 
current levels, no longer serve their stated purpose. There has been a 
steadfast and significant increase over the last decade in the overall 
volume of exchange-traded options; position limits, however, have not 
kept up with the volume. Part of this volume is attributable to a 
corresponding increase in the number of overall market participants, 
which has, in turn, brought about additional depth and increased 
liquidity in exchange-traded options.\12\
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    \12\ The Commission has previously observed that: Since the 
inception of standardized options trading, the options exchanges 
have had rules imposing limits on the aggregate number of options 
contracts that a member or customer could hold or exercise. These 
rules are intended to prevent the establishment of options positions 
that can be used or might create incentives to manipulate or disrupt 
the underlying market so as to benefit the options position. In 
particular, position and exercise limits are designed to minimize 
the potential for mini-manipulations and for corners or squeezes of 
the underlying market. In addition such limits serve to reduce the 
possibility for disruption of the options market itself, especially 
in illiquid options classes. See Securities Exchange Act Release No. 
39489 (December 24, 1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-
11) (order approving).
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    As the anniversary of listed options trading approaches its 
fortieth year, the Exchange believes that the existing surveillance 
procedures and reporting requirements at ISE, other options exchanges, 
and at the several clearing firms are capable of properly identifying 
unusual and/or illegal trading activity. In addition, routine oversight 
inspections of the Exchange's regulatory programs by the Commission 
have not uncovered any material inconsistencies or shortcomings in the 
manner in which the Exchange's market surveillance is conducted. These 
procedures utilize daily monitoring of market movements via automated 
surveillance techniques to identify unusual activity in both options 
and underlying stocks.\13\
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    \13\ These procedures have been effective for the surveillance 
of SPY options trading and will continue to be employed.
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    Furthermore, large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G.\14\ Options positions are 
part of any reportable positions and, thus, cannot be legally hidden. 
Moreover, the Exchange's requirement that members file reports with the 
Exchange for any customer who held aggregate large long or short 
positions of any single class for the previous day will continue to 
serve as an important part of the Exchange's surveillance efforts.
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    \14\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns that a member or its customer may try to maintain an 
inordinately large un-hedged position in an option, particularly on 
SPDRs[supreg]. Current margin and risk-based haircut methodologies 
serve to limit the size of positions maintained by any one account by 
increasing the margin and/or capital that a member must maintain for a 
large position held by it or by its customer. In addition, the 
Commission's net capital rule, Rule 15c3-1 under the Act,\15\ imposes a 
capital charge on members to the extent of any margin deficiency 
resulting from a higher margin requirement.
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    \15\ 17 CFR 240.15c3-1.
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    The Exchange believes that while position limit on options on 
QQQsSM, which as noted are similar to options on 
SPDRs[supreg], has been gradually expanded from 75,000 contracts to the 
current level of 900,000 contracts in 2005, there have been no adverse 
affects on the market as a result of this position limit increase. 
Likewise, there have been no adverse affects on the market from 
expanding the position limit for options on SPDRs[supreg] from 75,000 
contracts to the current level of 300,000 contracts in 2005.
    The Exchange also believes that restrictive option position limits 
prevent large customers, such as mutual funds and pension funds, from 
using options to gain meaningful exposure to and hedging protection 
through the use of options on SPDRs[supreg]. This can result in lost 
liquidity in both the options market and the equity market. The 
proposed position limit increase will remedy this situation to the 
benefit of large as well as retail traders, investors, and public 
customers. The Exchange believes that increasing position and exercise 
limits for options would lead to a more liquid and competitive market 
environment for options on SPDRs[supreg] that would benefit customers 
interested in this product.
    Finally, the Exchange believes that the proposed increase in 
position and exercise limits on options on SPDRs[supreg] is required 
for competitive purposes as well as for purposes of consistency and 
uniformity among the competing options exchanges. This, taken in 
conjunction with the permanent establishment of other separate 
increased position and exercise limits, all as noted above, supports 
the Exchange's current proposal to increase the position and exercise 
limits applicable to options on SPDRs[supreg].
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of Section 6(b) of the Securities Exchange Act of 
1934,\16\ in general, and Section 6(b)(5) of the Act of 1934,\17\ in 
particular, in that it is designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts, 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. Specifically, the Exchange believes 
that the structure of the SPDRs[supreg] options and the considerable 
liquidity of the market for SPDRs[supreg] options diminish the 
opportunity to manipulate this product and disrupt the underlying 
market that a lower position limit may protect against. Further, the 
Exchange believes that this proposal will be beneficial to

[[Page 39145]]

large market makers (which generally have the greatest potential and 
actual ability to provide liquidity and depth in this product), as well 
as retail traders, investors, and public customers.
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    \16\ 15 U.S.C. 78(f)(b).
    \17\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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 not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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) does not impose any significant burden on competition; 
and (iii) by its terms, does not become operative for 30 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, provided that the self-regulatory organization has given the 
Commission written notice of its intent to file the proposed rule 
change, along with a brief description and text of 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,\18\ the proposed rule change has become effective pursuant 
to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(6) \20\ 
thereunder.
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    \18\ The Exchange has satisfied this requirement.
    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 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 is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest, because it will enable 
the Exchange immediately to compete with another exchange that already 
has adopted the higher position and exercise limit for options on 
SPDRs[supreg]. Therefore, the Commission designates the proposal 
operative upon filing.\21\
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    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 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 summarily may temporarily suspend 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-ISE-2011-34 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2011-34. 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 Commissions 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 Web site viewing and printing in 
the Commission's Public Reference Room. Copies of such filing also will 
be available for inspection and copying at the principal office of the 
ISE. 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-ISE-
2011-34 and should be submitted by July 26, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-16679 Filed 7-1-11; 8:45 am]
BILLING CODE 8011-01-P