[Federal Register Volume 76, Number 163 (Tuesday, August 23, 2011)]
[Notices]
[Pages 52729-52730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-21486]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65149; File No. SR-Phlx-2011-89]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Granting Approval of Proposed Rule Change Relating to Alpha Index
Options
August 17, 2011.
I. Introduction
On June 23, 2011, NASDAQ OMX PHLX LLC (the ``Exchange'' or
``Phlx'') filed with the Securities and Exchange Commission (the
``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ``Act''),\1\ a proposed rule change to list
and trade options on a number of new Alpha Indexes and to amend
Exchange Rule 1001A, Position Limits, with respect to certain Alpha
Index options. The proposed rule change was published for comment in
the Federal Register on July 8, 2011.\2\ The Commission received no
comment letters on the proposed rule change. This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ See Securities Exchange Act Release No. 64788 (July 1,
2011), 76 FR 40415 (``Notice'').
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II. Description
On February 7, 2011, the Commission approved the Exchange's
proposed rule change to list and trade options on a number of Alpha
Indexes.\3\ Alpha Indexes measure relative total returns of one
underlying stock or exchange traded fund (``ETF'') share against
another underlying stock or ETF share underlying options which are also
traded on the Exchange (each such combination of two components is
referred to as an ``Alpha Pair''). The first component identified in an
Alpha Pair (the ``Target Component'') is measured against the second
component identified in the Alpha Pair (the ``Benchmark Component'').
Total return measures performance (rate of return) of price
appreciation plus dividends over a given evaluation period.
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\3\ See Securities Exchange Act Release No. 63860 (February 7,
2011), 76 FR 7888 (February 11, 2011) (SR-Phlx-2010-176).
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The Alpha Index options that the Commission has previously approved
for listing and trading on the Exchange are limited to specific Alpha
Indexes the Target Component of which is a single stock.\4\ The
Exchange proposes to expand the number of Alpha Indexes on which
options can be listed to include certain Alpha Indexes based on the
following Alpha Pairs: DIA/SPY, EEM/SPY, EWJ/SPY, EWZ/SPY, FXI/SPY,
GLD/SPY, IWM/SPY, QQQ/SPY, SLV/SPY, TLT/SPY, XLE/SPY and XLF/SPY. In
these Alpha Indexes, the Target Component as well as the Benchmark
Component is an ETF share. The proposed Alpha Index options will enable
investors to trade the relative performance of the market sectors
represented by the Target Components as compared with the overall
market performance represented by the Benchmark Component SPY.
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\4\ The Commission previously approved the listing and trading
of options on Alpha Indexes based on the following Alpha Pairs:
AAPL/SPY, AMZN/SPY, CSCO/SPY, F/SPY, GE/SPY, GOOG/SPY, HPQ/SPY, IBM/
SPY, INTC/SPY, KO/SPY, MRK/SPY, MSFT/SPY, ORCL/SPY, PFE/SPY, RIMM/
SPY, T/SPY, TGT/SPY, VZ/SPY and WMT/SPY. See supra note 3. In
connection with its proposed rule change to list and trade this
initial set of Alpha Index options, the Exchange represented that it
would not list Alpha Index options on any other Alpha Pairs without
filing a proposed rule change seeking Commission approval. See id.
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As with each initial Alpha Index option, each proposed new Alpha
Index option will meet the criteria set forth in Exchange Rule
1009A(f).\5\ Further, following the listing of these Alpha Index
options, options on each of the component securities of the Alpha Index
must continue to meet the continued listing standards set forth by
Exchange Rule 1010, Withdrawal of Approval of Underlying Securities or
Options.
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\5\ Rule 1009A(f) requires that options on Alpha Indexes meet
the following criteria: (1) Alpha Index options will be A.M.-
settled. The exercise settlement value will be based upon the
opening prices of the individual stock or ETF from the primary
listing market on the last trading day prior to expiration (usually
a Friday); (2) at the time of listing an Alpha Index option, options
on each underlying component of an Alpha Index will also be listed
and traded on the Exchange and will meet the requirements of Rule
1009, Criteria for Underlying Securities. Additionally, each
underlying component's trading volume (in all markets in which the
underlying security is traded) must have averaged at least 2,250,000
shares per day in the preceding twelve months; (3) following the
listing of an Alpha Index option, options on each of the component
securities of the Alpha Index will continue to meet the continued
listing standards set forth by Phlx Rule 1010, Withdrawal of
Approval of Underlying Securities or Options. Additionally, each
underlying component's trading volume (in all markets in which the
underlying security is traded) must have averaged at least 2,000,000
shares per day in the preceding twelve months; and (4) no Alpha
Index option will be listed unless and until options overlying each
of the Alpha Index component securities have been listed and traded
on a national securities exchange with an average daily options
trading volume during the three previous months of at least 10,000
contracts. Following the listing of an Alpha Index option, options
on each of the component securities of the Alpha Index must continue
to meet this options average daily volume standard.
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Position Limits
The Exchange also proposes to amend section (f) of Exchange Rule
1001A to establish a 15,000 contract position limit in options on Alpha
Indexes in which the Target Component is an ETF share. This 15,000
contract position limit would apply not only to the specific Alpha
Index options proposed herein, but also to any options the Exchange may
list in the future on Alpha Indexes in which the Target Component is an
ETF share.\6\ For purposes of determining compliance with position
limits, positions in Alpha Index options will be aggregated with
positions in equity options on the underlying securities. All position
limit hedge exemptions will apply.
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\6\ The Exchange will not, however, list options on any such
Alpha Pairs without filing a proposed rule change seeking Commission
approval.
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Clearing
Like the Alpha Index options that are currently trading, the
proposed new Alpha Index options are ``Strategy Based Options'' that
will be cleared by the Options Clearing Corporation.
Surveillance
Surveillance for opening price manipulation will be in place for
the launch of these new Alpha Index options and other existing
surveillance patterns will be utilized to monitor trading in these
options. The Exchange represents that these surveillance procedures are
adequate to monitor the trading of the new Alpha Index options. For
surveillance purposes, the Exchange will have complete access to
information regarding trading activity in the pertinent underlying
securities and options thereon.
Margin
The Exchange will set customer margin levels for the new Alpha
Index options at the higher of the margin required for options on the
Target Component or the margin required for options on the Benchmark
Component.
Systems Capacity
Additionally, the Exchange affirms that it possesses the necessary
systems capacity to support new series that would result from the
introduction of these new Alpha Index options. The
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Exchange also has been informed that the Options Price Reporting
Authority (``OPRA'') has the capacity to support such new series.
Customer Protection
Exchange rules designed to protect public customers trading in
options would apply to the new Alpha Index options. Phlx Rule 1026 is
designed to ensure that options, including Alpha Index options, are
sold only to customers capable of evaluating and bearing the risks
associated with trading in the instruments. Phlx Rule 1024, applicable
to the conduct of accounts, Phlx Rule 1025 relating to the supervision
of accounts, Phlx Rule 1028 relating to confirmations, and Phlx Rule
1029 relating to the delivery of options disclosure documents also
apply to trading in Alpha Index options.
Exchange Rules Applicable
All other Exchange rules applicable to Alpha Index options will
also apply to the Alpha Index options proposed herein.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\7\
Specifically, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\8\ which requires, among other things, that
the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, 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,
in general, to protect investors and the public interest.
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\7\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation.
\8\ 15 U.S.C. 78f(b)(5).
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As a national securities exchange, Phlx is required, under Section
6(b)(1) of the Act,\9\ to enforce compliance by its members, and
persons associated with its members, with the provisions of the Act,
Commission rules and regulations thereunder, and its own rules. In
addition, brokers that trade the new Alpha Index options will also be
subject to best execution obligations and FINRA rules.\10\ Applicable
Exchange rules also require that customers receive appropriate
disclosure before trading any Alpha Index option.\11\ Furthermore,
brokers opening accounts and recommending options transactions must
comply with relevant customer suitability standards.\12\
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\9\ 15 U.S.C. 78f(b)(1).
\10\ See NASD Rule 2320.
\11\ See Exchange Rule 1029.
\12\ See Exchange Rule 1026. See also Exchange Rules 1024 and
1025.
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Exchange rules applicable to Alpha Index options will also apply to
the Alpha Index options proposed herein. As stated in the previous
approval for the listing and trading of Alpha Index options, the
Commission believes that the listing rules for Alpha Index options are
consistent with the Act. Further, the Commission notes that Alpha Index
options will be listed only on the specific Alpha Indexes approved by
the Commission.\13\ The Exchange has represented that it will not list
options on any new Alpha Indexes without filing a proposed rule change
seeking Commission approval.
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\13\ The Commission has previously approved the listing and
trading of options on the following Alpha Indexes: AAPL/SPY, AMZN/
SPY, CSCO/SPY, F/SPY, GE/SPY, GOOG/SPY, HPQ/SPY, IBM/SPY, INTC/SPY,
KO/SPY, MRK/SPY, MSFT/SPY, ORCL/SPY, PFE/SPY, RIMM/SPY, T/SPY, TGT/
SPY, VZ/SPY and WMT/SPY. See supra note 3. The Commission is now
approving the listing and trading of options on the following Alpha
Indexes only: DIA/SPY, EEM/SPY, EWJ/SPY, EWZ/SPY, FXI/SPY, GLD/SPY,
IWM/SPY, QQQ/SPY, SLV/SPY, TLT/SPY, XLE/SPY and XLF/SPY.
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The Commission notes that the Exchange has represented that it will
have adequate surveillance procedures in place for trading in the new
Alpha Index options. Opening price manipulation surveillance will be in
place for the launch of the new options on Alpha Indexes and other
existing surveillance patterns will be utilized to monitor trading in
options on each new Alpha Index. In addition, for surveillance
purposes, the Exchange will have complete access to information
regarding trading activity in the pertinent underlying securities and
options thereon. Further, the Commission believes that the Exchange's
proposed position and exercise limits for the new Alpha Index options
are appropriate and consistent with the Act.
Lastly, the Commission notes that the Exchange has affirmed that it
possesses the necessary systems capacity to support any new series that
would result from the introduction of the new Alpha Index options.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-Phlx-2011-89) be, and hereby
is, approved.
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\14\ 15 U.S.C. 78s(b)(2).
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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-21486 Filed 8-22-11; 8:45 am]
BILLING CODE 8011-01-P