[Federal Register Volume 77, Number 198 (Friday, October 12, 2012)]
[Notices]
[Pages 62303-62308]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-25087]



[[Page 62303]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68001; File No. SR-NYSEArca-2012-112]


 Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending Commentary 
.06 to NYSE Arca Rule 6.8 Adopting a Pilot Program Eliminating Position 
Limits for Options on the SPDR[supreg] S&P 500[supreg] Exchange-Traded 
Fund,\1\ Which List and Trade Under the Symbol SPY October 5, 2012.
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    \1\ ``SPDR[supreg],'' ``Standard & Poor's[supreg],'' 
``S&P[supreg],'' ``S&P 500[supreg],'' and ``Standard & Poor's 500'' 
are registered trademarks of Standard & Poor's Financial Services 
LLC. The SPY ETF represents ownership in the SPDR S&P 500 Trust, a 
unit investment trust that generally corresponds to the price and 
yield performance of the SPDR S&P 500 Index.
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    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on October 1, 2012, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
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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 Commentary .06 to NYSE Arca Rule 6.8 
to adopt a pilot program eliminating position limits for options on the 
SPDR[supreg] S&P 500[supreg] exchange-traded fund (``SPY ETF''),\4\ 
which list and trade under the symbol SPY. The text of the proposed 
rule change is available on the Exchange's Web site at www.nyse.com, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.
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    \4\ ``SPDR[supreg],'' ``Standard & Poor's[supreg],'' 
``S&P[supreg],'' ``S&P 500[supreg],'' and ``Standard & Poor's 500'' 
are registered trademarks of Standard & Poor's Financial Services 
LLC. The SPY ETF represents ownership in the SPDR S&P 500 Trust, a 
unit investment trust that generally corresponds to the price and 
yield performance of the SPDR S&P 500 Index.
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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 self-regulatory organization 
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 those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts 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 Commentary .06 to NYSE Arca 
Rule 6.8 to adopt a pilot program eliminating position limits for SPY 
options. The Exchange is basing this proposal on a recently approved 
rule change by NYSE MKT LLC, on behalf of NYSE Amex Options LLC (``NYSE 
Amex Options''), to adopt a pilot program to eliminate position limits 
for SPY options.\5\
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    \5\ See Securities Exchange Act Release No. 67672 (August 15, 
2012), 77 FR 50750 (August 22, 2012) (Order approving NYSEAmex-2012-
29). NYSE Amex Options is the options trading facility of NYSE MKT, 
LLC, f/n/a NYSE Amex LLC.
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Background
    Position limits serve as a regulatory tool designed to address 
potential manipulative schemes and adverse market impact surrounding 
the use of options. The Exchange understands that the Commission, when 
considering the appropriate level at which to set option position and 
exercise limits, has considered the concern that the limits be 
sufficient to prevent investors from disrupting the market in the 
security underlying the option.\6\ This consideration has been balanced 
by the concern that the limits ``not be established at levels that are 
so low as to discourage participation in the options market by 
institutions and other investors with substantial hedging needs or to 
prevent specialists and market-makers from adequately meeting their 
obligations to maintain a fair and orderly market.'' \7\
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    \6\ See Securities Exchange Act Release No. 40969 (January 22, 
1999), 64 FR 4911, 4912-4913 (February 1, 1999) (SR-CBOE-98-23) 
(citing H.R. No. IFC-3, 96th Cong., 1st Sess. at 189-91 (Comm. Print 
1978)).
    \7\ Id. at 4913.
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    SPY options are currently the most actively traded option class in 
terms of average daily volume (``ADV'').\8\ The Exchange believes that, 
despite the popularity of SPY options as evidenced by their significant 
volume, the current position limits on SPY options could be a deterrent 
to the optimal use of this product as a hedging tool. The Exchange 
further believes that position limits on SPY options may inhibit the 
ability of certain large market participants, such as mutual funds and 
other institutional investors with substantial hedging needs, to 
utilize SPY options and gain meaningful exposure to the hedging 
function they provide.
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    \8\ SPY ADV was 2,156,482 contracts in April 2012. ADV for the 
same period for the next four most actively traded options was: 
Apple Inc. (option symbol AAPL)--1,074,351; S&P 500 Index (option 
symbol SPX)--656,250; PowerShares QQQ Trust\SM\, Series 1 (option 
symbol QQQ)--573,790; and iShares[supreg] Russell 2000[supreg] Index 
Fund (option symbol IWM)--550,316.
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    The Exchange believes that current experience with the trading of 
SPY options, as well as the Exchange's surveillance capabilities, has 
made it appropriate to consider other, less prophylactic alternatives 
to regulating SPY options, while still seeking to ensure that large 
positions in SPY options will not unduly disrupt the options or 
underlying cash markets. Accordingly, the Exchange proposes to 
eliminate the position limits on SPY options--currently 900,000 
contracts on the same side of the market.\9\ In proposing the 
elimination of position limits on SPY options, the Exchange has 
considered several factors, including (1) the availability of 
economically equivalent products and their respective position limits, 
(2) the liquidity of the option and the underlying security, (3) the 
market capitalization of the underlying security and the related index, 
(4) the reporting of large positions and requirements surrounding 
margin, and (5) the potential for market on close volatility.
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    \9\ See Commentary .06 to NYSE Arca Rule 6.8. See also 
Securities Exchange Act Release No. 64945 (July 21, 2011), 76 FR 
44969 (July 27, 2011) (SR-NYSEArca-2011-47).
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Economically Equivalent Products
    The Exchange has considered the existence of economically 
equivalent or similar products, and their respective position limits, 
if any, in assessing the appropriateness of proposing an elimination of 
position limits for SPY options.
    For example, AM-settled options on the S&P 500 Index, which list 
and trade exclusively on the Chicago Board Options Exchange (``CBOE'') 
under the symbol SPX, are currently not subject to position limits.\10\ 
Moreover, SPX options are 10 times the size of SPY options, so that a 
position of only

[[Page 62304]]

90,000 SPX options is the equivalent of a position of 900,000 SPY 
options, which is the current position limit for SPY options.\11\
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    \10\ See Securities Exchange Act Release No. 44994 (October 26, 
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22). Position 
limits were also eliminated for options on the S&P 100 Index (option 
symbol OEX) and the Dow Jones Industrial Average (option symbol 
DJX).
    \11\ The Exchange notes that the reduced-value option on the S&P 
500 Index (option symbol XSP) is the equivalent size of SPY options 
and, similar to SPX options, is not subject to position limits. See 
Securities Exchange Act Release No. 56350 (September 4, 2007), 72 FR 
51878 (September 11, 2007) (SR-CBOE-2007-79).
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    Similarly, the C2 Options Exchange (``C2'') has recently introduced 
a PM-settled S&P 500 cash settled contract (``SPXPM''), which also is 
not subject to position limits.\12\ This contract, unlike the existing 
SPX contract, is cash-settled based on the closing value of the S&P 500 
Index. In this respect, SPXPM is very much like SPY options in that it 
is settled at the close, albeit into cash as opposed to shares of the 
underlying like SPY options.
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    \12\ See Securities Exchange Act Release No. 65256 (September 2, 
2011), 76 FR 55969 (September 9, 2011) (SR-C2-2011-008) (``SPXPM 
Approval'').
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    The Exchange believes that, because SPX, SPXPM, and SPY options are 
ultimately derivative of the same benchmark--the S&P 500 Index--they 
should be treated equally from a position limit perspective. As a 
practical matter, investors utilize SPX, SPXPM, and SPY options and 
their respective underlying instruments and futures to gain exposure to 
the same benchmark index: The S&P 500. Further, because the creation 
and redemption process for the underlying SPY ETF allows large 
investors to transfer positions from a basket of stocks comprising the 
S&P 500 index to an equivalent number of ETF shares (and the reverse) 
with relative ease, there is no reason to disadvantage options 
overlying the one versus the other. The Exchange believes that this 
view is supported by the recent expansion of various exemptions from 
position limits, such as the Delta-Based Equity Hedge Exemption \13\ 
for positions of a member, member organization or non-member affiliate 
that are delta neutral, which allows SPY option positions to be delta-
hedged by positions in SPX options. Given that SPX options are not 
subject to position limits, a member or member organization (or non-
member affiliate thereof) could theoretically establish a position in 
SPY options far in excess of the current 900,000 contract limit, 
provided that the position is hedged with SPX options. The Exchange 
believes that this situation accurately reflects the economic 
equivalence of SPX and SPY options, supporting the Exchange's proposal 
to further acknowledge this equivalence by eliminating position limits 
in SPY options.
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    \13\ See Commentary .07(iii) to NYSE Arca Rule 6.8.
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    The Exchange also believes that Commission findings in approving 
the SPXPM options further support treating SPY options in the same 
manner as SPX and SPXPM options for purposes of position limits. In 
particular, the Commission noted in approving SPXPM options that ``C2's 
proposal will offer investors another investment option through which 
they could obtain and hedge exposure to the S&P 500 stocks,'' and that 
``C2's proposal will provide investors with the ability to trade an 
option on the S&P 500 index in an all-electronic market, which may 
better meet the needs of investors who may prefer to trade 
electronically.'' \14\ The Commission also noted that ``C2's proposal 
will provide investors with added flexibility through an additional 
product that may be better tailored to meet their particular 
investment, hedging, and trading needs.'' \15\ The Exchange believes 
that these Commission findings apply equally to SPY options. In this 
respect, SPY options with no position limit will (1) offer investors 
another investment option through which they could obtain and hedge 
significant levels of exposure to the S&P 500 stocks, (2) be available 
to trade on the Exchange (and presumably all other U.S. options 
exchanges) electronically, and (3) provide investors with added 
flexibility through an additional product that may be better tailored 
to meet their particular investment, hedging, and trading needs, 
because, among other things, they are PM-settled.
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    \14\ See SPXPM Approval at 55975.
    \15\ Id.
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    The Exchange notes that, with respect to competition amongst 
economically equivalent products, a 2005 paper by Hans Dutt and 
Lawrence Harris that set forth a model to determine appropriate 
position limits for cash-settled index derivatives observed that 
``markets and their regulators should take a closer look at the 
underlying economic rationale for the levels at which they currently 
set their position limits to ensure that the limits adequately protect 
markets from manipulation and that inconsistent position limits do not 
produce competitive advantages and disadvantages among contracts.'' 
\16\ On this point, the Exchange believes that if no position limits 
have been found to be warranted on both SPX and SPXPM options, then 
such treatment should be extended to SPY options so that inconsistent 
position limits do not produce competitive advantages and disadvantages 
among contracts.
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    \16\ The Journal of Futures Markets, Vol. 25, no. 10, 945-965, 
949 (2005) (``Position Limits for Cash-Settled Derivative 
Contracts,'' by Hans R. Dutt and Lawrence E. Harris) (``Dutt-Harris 
Paper''). In the paper, the authors examined existing position 
limits to determine whether they were consistent with the model the 
authors developed, and found that the results indicated that 
existing limits were not correlated with the limits suggested by 
their model.
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    In addition, the Exchange notes that the Dutt-Harris Paper focuses 
its attention on the concerns relating to manipulation of cash-settled 
derivatives, stating that ``[a]lthough several scholars have argued 
that cash settlement may increase the risk of market manipulation, 
until recently, the theoretical problems arising from potential cash 
settlement manipulation has been considered minor, as evidenced by the 
lack of academic interest in this area.'' \17\ The paper further noted 
that ``[t]he reason for this may arise from the fact that most 
exchange-traded derivative index contracts that are cash settled are 
broad-based, and each of the underlying components typically possesses 
ample liquidity,'' and that ``manipulation of the underlying components 
would likely be extremely costly to the would-be manipulator.'' \18\ 
This suggests that whatever manipulation risk does exist in a cash-
settled, broad-based product such as SPXPM, the corresponding 
manipulation risk in a physically-settled, but equally broad-based 
product such as SPY, is likely to be equally low, if not lower.
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    \17\ Id. at 946.
    \18\ Id.
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    Similarly, the Exchange notes that in the Dutt-Harris Paper the 
authors observed that the lack of scholarly interest in the cash-
settlement manipulation problem may have been ``due to the fact that, 
until recently, most U.S. exchange-traded cash-settled derivative 
contracts were based on broad indices of very liquid stocks,'' and that 
``[m]anipulation of such instruments require very large trades that are 
costly to make and easy to detect through conventional surveillance.'' 
\19\ This observation applies equally to SPY options, which are based 
on a broad index of very liquid stocks and can easily be created by 
submitting a position in the underlying securities. Moreover, it 
provides additional support for the Exchange's view that the enhanced 
reporting and surveillance for SPY options discussed below adequately 
address concerns about manipulation.\20\
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    \19\ Id. at 948.
    \20\ The authors of the Dutt-Harris Paper further posited that 
``position limits need only apply during the period when cash 
settlement takes place.'' Id. at 964. The Exchange notes that no 
such period exists with respect to SPY options, which are physically 
settled.

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[[Page 62305]]

Liquidity in the Option and the Underlying Security
    The Exchange has also considered the liquidity of SPY options and 
the underlying SPY ETF in assessing the appropriateness of proposing an 
elimination of position limits for SPY options.
    In approving the elimination of position and exercise limits on SPX 
options, the Commission noted that the deep, liquid markets for the 
securities underlying the S&P 500 Index reduced concerns regarding 
market manipulation or disruption in the underlying markets.\21\ The 
Commission further noted that removing position limits for SPX options 
could also bring additional depth and liquidity, in terms of both 
volume and open interest, without increasing concerns regarding 
intermarket manipulations or disruptions of the options or the 
underlying securities.\22\ The Exchange similarly believes that this 
would be the case if position limits for SPY options were eliminated.
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    \21\ See supra note 6 at 4913.
    \22\ Id.
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    In this regard, both the SPY ETF and SPY options similarly exhibit 
deep, liquid markets. However, SPY options are not as active as SPX 
options when adjusted for the difference in their notional size.\23\ As 
described below, the Exchange believes that this is partly due to the 
existence of position limits for SPY options. The table below compares 
the ADV in both SPX and SPY options, and includes an ``implied SPY 
volume'' figure that reflects theoretical SPY ADV without the 
constraint of position limits:
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    \23\ SPX options have a notional value 10 times greater than SPY 
options (i.e., one SPX contract equals 10 SPY contracts).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Implied SPY
                        Date range                             Trade days       SPX option ADV     SPY option ADV      Implied SPY         option ADV
                                                                                                                        option ADV         shortfall
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Jan 1, 2011 to Dec 31, 2011..............................                252          1,567,535          5,789,511         15,675,353          9,885,842
Jan 1, 2012 to Apr 19, 2012..............................                 75          1,343,735          4,525,709         13,437,353          8,911,644
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    The Exchange believes that certain factors may result in SPX 
options--adjusted for their larger notional size--currently trading 
with greater volume than SPY options.\24\ In this regard, the Exchange 
believes that, based on input from various market participants, the 
existence of position limits in SPY options is reason in itself to 
instead utilize SPX options. Anecdotally, market participants perceive 
value in avoiding the regulatory risk of exceeding the SPY option 
position limit by instead using SPX options for their hedging needs. 
The Exchange also believes that, while exemptions are available with 
respect to position limits for SPY options, such exemptions, and the 
regulatory burden attendant therewith, may dissuade investors from 
using SPY options when they can instead use an SPX option without the 
need for such an exemption. Because SPY and SPX options are 
economically equivalent products, an investor deciding between the two 
would generally trade the product with the least barriers or 
requirements to engage in such activity. In this respect, SPX options 
are currently the easier product to trade.
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    \24\ The Exchange notes that the ``Implied SPY Option ADV 
Shortfall'' has narrowed over time and at an accelerated rate, which 
the Exchange believes is a direct result of the implementation of 
the Delta-Based Equity Hedge Exemption that allows SPY options to be 
hedged via SPX options.
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    As a further comparison, the following table sets forth certain 
data for both the SPY ETF and the combined volume for the component 
securities upon which the S&P 500 Index is based:
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    \25\ The data considers the aggregate volume for all component 
stocks of the S&P 500 Index.

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                                  S&P 500 Index         S&P 500 Index
                                    underlying       underlying component                       SPY ETF average
          Date range              component ADV      average daily value       SPY ETF ADV        daily value
                                       \25\                 traded                                   traded
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Jan. 1, 2011 to Dec. 31, 2011.      3,289,595,675       $4,149,726,217,456        218,227,747    $27,297,097,993
Jan. 1, 2012 to Apr. 19, 2012.      2,851,457,600        3,860,704,307,080        145,164,527     19,684,577,239
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    This data shows that there is tremendous liquidity in both SPY ETF 
shares and the component securities upon which the S&P 500 Index is 
based. While the ADV for the components underlying the S&P 500 Index is 
greater than the ADV for the SPY ETF, the Exchange believes that SPY 
ETF volume has been, is currently and will likely continue to be within 
a range that the Commission has previously determined to be a deep, 
liquid market.\26\
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    \26\ See supra note 6 at n. 13. The ADV for the components of 
the indexes underlying the options for which position limits were 
eliminated were 94.77 million shares (DJX), 244.3 million shares 
(OEX), and 757.5 million shares (SPX).
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Market Capitalization of the Underlying Security and the Related Index
    The Exchange has also considered the market capitalization of the 
SPY ETF and the S&P 500 Index in assessing the appropriateness of 
proposing an elimination of position limits for SPY options.
    The Exchange understands that the Commission similarly considered 
the market capitalization of the underlying index when it approved the 
elimination of position limits in SPX options. Accordingly, the 
Exchange believes that the capitalization of and the deep, liquid 
markets for the underlying SPY ETF reduces concerns regarding market 
manipulation or disruption in the underlying market. The table below 
shows the market capitalization of the SPY ETF and the S&P 500 Index:

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                                                                 Average S&P 500 Index   Average SPY ETF  market
                          Date range                                   market cap                  cap
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Jan. 1, 2011 to Dec. 31, 2011.................................      $11,818,270,341,270          $89,533,777,897
Jan. 1, 2012 to Apr. 19, 2012.................................       12,547,946,920,000           99,752,986,022
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[[Page 62306]]

    This data shows the enormous capitalization of both the SPY ETF and 
the component securities upon which the S&P 500 Index is based. While 
the capitalization for the components underlying the S&P 500 Index is 
greater than that for the SPY ETF, the Exchange believes that the SPY 
ETF capitalization has nonetheless been, is currently and will likely 
continue to be at a level consistent with that which the Commission has 
previously determined to be enormously capitalized.\27\
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    \27\ See supra note 11 at 51879. Specifically, the market 
capitalization of the component securities of the Russell 2000 Index 
(``RUT'') of $1.73 trillion was determined to be enormously 
capitalized.
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    The Exchange notes that the theoretical limit on one's ability to 
hedge both SPX and SPY options is the full market capitalization of the 
S&P 500 Index itself. This similarly contributes to the Exchange's 
determination that it is appropriate for position limits on SPY options 
to be eliminated.
Large Position Reporting and Margin Requirements
    The Exchange has also considered the reporting of large option 
positions and related margin requirements in assessing the 
appropriateness of proposing an elimination of position limits for SPY 
options.
    The Exchange notes that the Large Option Position Reporting 
(``LOPR'') requirement in NYSE Arca Rule 6.6 would continue to apply. 
Rule 6.6 requires members and member organizations to file a report 
with the Exchange with respect to each account in which the member or 
member organization has an interest; each account of a partner, 
officer, director, trustee or employee of such member organization; and 
each customer account that has established an aggregate position 
(whether long or short) that meets certain determined thresholds (e.g., 
200 or more option contracts if the underlying security is a stock or 
Exchange-Traded Fund Share). Rule 6.6 also permits the Exchange to 
impose a higher margin requirement upon the account of a member or 
member organization when it determines that the account maintains an 
under-hedged position.
    Additionally, Rule 6.6 provides:
    In addition to the requirements under Rule 6.6(a), each OTP Holder 
or OTP Firm (other than an Exchange Market Maker), that maintains a 
position in excess of 10,000 Non-FLEX equity option contracts on the 
same side of the market on behalf of its own account or for the account 
of a customer, must report information, in a manner and form prescribed 
by the Exchange, as to whether such positions are hedged and provide 
documentation as to how such contracts are hedged. In addition, 
whenever the Exchange determines, based on a report to the Exchange or 
otherwise, that a higher margin requirement is necessary in light of 
the risks associated with an under-hedged Non-FLEX equity option 
position in excess of 10,000 contracts on the same side of the market, 
the Exchange may, pursuant to its authority under Exchange Rule 4.16, 
consider imposing additional margin upon the account maintaining such 
under-hedged position. It should be noted that the clearing firm 
carrying the account will be subject to capital charges under SEC Rule 
15c3-1 to the extent of any margin deficiency from the higher margin 
requirements.
    Monitoring accounts maintaining large positions provides the 
Exchange with the information necessary to determine whether to impose 
additional margin and/or whether to assess capital charges upon a 
member organization carrying the account. In addition, the Commission's 
net capital rule, Rule 15c3-1 under the Securities Exchange Act of 1934 
(the ``Act''),\28\ imposes a capital charge on members to the extent of 
any margin deficiency resulting from the higher margin requirement, 
which should serve as an additional form of protection.
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    \28\ 17 CFR 240.15c3-1.
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    In approving SPXPM, the Commission addressed concerns about the 
lack of a position limit by noting that CBOE will rely on its enhanced 
surveillance requirements and procedures for SPX options to monitor 
trading activity in SPXPM options.\29\ Similarly, the Exchange notes 
that certain option products are currently traded on the Exchange 
without position limits (e.g., the NASDAQ[supreg] 100 Index option 
(option symbol NDX) and the Russell 2000[supreg] Index option (option 
symbol RUT)), and believes that the reporting, surveillance and 
monitoring mechanisms in place for these products are effective and 
could easily accommodate SPY options if position limits thereon are 
eliminated.
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    \29\ See SPXPM Approval at 55972.
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Market on Close Volatility
    The Exchange has also considered the potential for resulting or 
increased market on close volatility in assessing the appropriateness 
of proposing an elimination of position limits for SPY options.
    SPY options are American-style, physically settled options that can 
be exercised at any time and settle into shares of the underlying SPY 
ETF. A key characteristic of the SPY ETF is that the number of shares 
outstanding is limited only by the number of shares available in the 
component securities of the S&P 500 Index, which can be used to create 
additional SPY ETF shares as needed. This in-kind creation and 
redemption mechanism has proven to be quite robust, as evidenced by the 
SPY ETF's close tracking of its benchmark index and the relatively 
small premiums or discounts to Net Asset Value (``NAV'') that it has 
historically exhibited.\30\ Additionally, the ability to hedge with SPX 
options against the stocks underlying the S&P 500 is limited to the 
shares outstanding for those stocks--the same limit that applies to 
hedging with SPY options. Accordingly, the Exchange believes that the 
risk of distortions to the market resulting from the elimination of 
position limits in SPY options is no greater than the risk presented by 
SPX options not being subject to position limits.
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    \30\ See SPDR[supreg] S&P 500[supreg] ETF Trust, Annual Report 
(September 30, 2011), available at https://www.spdrs.com/library-content/public/SPY%20Annual%20Report%2009.30.11.pdf.
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    As a physically-settled option, SPY options can be easily hedged 
via long or short positions in SPY ETF shares, which, as noted above, 
can be easily created or redeemed as needed. With a physically-settled 
contract such as SPY options, once a hedge in the form of a long or 
short position is obtained, that hedge can only be lost if the 
underlying security becomes hard to borrow and the short position is 
bought in.\31\ The Exchange believes that this ability to hedge with 
shares of the SPY ETF is very important, and reduces the likelihood of 
market on close volatility in the component securities underlying the 
S&P 500 Index (i.e., a market participant can remain fully hedged 
through expiration via shares of the SPY ETF), which should also be the 
case if position limits for SPY options are eliminated. At the same 
time, the Exchange believes that the elimination of position limits for 
SPY options would not increase market volatility or facilitate the 
ability to manipulate the market. The Exchange believes that any 
potential concern regarding volatility at the closing that could result 
from an elimination in the position limits for

[[Page 62307]]

SPY options is further alleviated by the current trading environment, 
including that there are markets for individual securities on more than 
one exchange, via unlisted trading privileges, that there is wide 
dispersion of trading across multiple exchanges, and that exchange 
procedures and systems are designed to facilitate orderly closings, 
even when there is volatility.\32\
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    \31\ As noted, the in-kind creation and redemption process 
allows for short term imbalances in supply and demand to be resolved 
readily, which in turn reduces the likelihood of getting ``bought 
in'' on a short position in SPY. Since the implementation of 
Regulation SHO, SPY has never been on the threshold security list, 
which further evidences the efficacy of the in-kind creation and 
redemption process in resolving imbalances in supply and demand.
    \32\ See, e.g., Rule 123C--NYSE Amex Equities (The Closing 
Procedures).
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Implementation
    The implementation of this proposed rule change will be contingent 
on other factors, including the completion of any changes that may be 
necessary to the Exchange's regulatory and surveillance program. Once 
this rule filing is effective, the Exchange will announce the 
implementation of the elimination of position limits on SPY options 
through a notice to OTP Holders.
Pilot Program
    NYSE Arca proposes that this rule change be adopted pursuant to a 
pilot program, set to expire December 5, 2013. The Exchange will 
perform an analysis of the initial pilot program to eliminate position 
limits in SPY after the first twelve (12) months of the pilot program 
(the ``Pilot Report''). NYSE Arca represents that the Pilot Report will 
be submitted within thirty (30) days of the end of such twelve (12) 
month time period. The Pilot Report will detail the size and different 
types of strategies employed with respect to positions established as a 
result of the elimination of position limits in SPY. In addition, the 
Pilot Report will note whether any problems resulted due to the no 
limit approach and any other information that may be useful in 
evaluating the effectiveness of the pilot program. The Pilot Report 
will compare the impact of the pilot program, if any, on the volumes of 
SPY options and the volatility in the price of the underlying SPY 
shares, particularly at expiration. In preparing the report the 
Exchange will utilize various data elements such as volume and open 
interest. In addition, the Exchange has represented that it will make 
available to Commission staff data elements relating to the 
effectiveness of the pilot.
    Depending on the findings in the Pilot Report, NYSE Arca will file 
with the Commission a proposal to either extend the pilot program, 
adopt the pilot program on a permanent basis, or terminate the pilot 
program. If the pilot program is not extended or adopted on a permanent 
basis by December 5, 2013, the position limits for SPY would revert to 
limits in effect at the commencement of the pilot program.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)\33\ of the 
Act, in general, and furthers the objectives of Section 6(b)(5),\34\ in 
particular, in that 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, 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. The Exchange believes that the proposed rule change 
would be beneficial to market participants, including market makers, 
institutional investors and retail investors, by permitting them to 
establish greater positions when pursuing their investment goals and 
needs. The Exchange also believes that economically equivalent products 
should be treated in an equivalent manner so as to avoid regulatory 
arbitrage, especially with respect to position limits. Treating SPY and 
SPX options differently by virtue of imposing different position limits 
is inconsistent with the notion of promoting just and equitable 
principles of trade and removing impediments to perfect the mechanisms 
of a free and open market. At the same time, the Exchange believes that 
the elimination of position limits for SPY options would not increase 
market volatility or facilitate the ability to manipulate the market.
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    \33\ 15 U.S.C. 78f(b).
    \34\ 15 U.S.C. 78f(b)(5).
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    The Exchange further notes that the rule proposal will remove 
impediments to and perfect the mechanism of a free and open market 
because it will harmonize how position limits are treated for SPY 
options across options markets. As noted above, the Commission has 
already approved the elimination of position limits for SPY options for 
NYSE Amex Options, and the Exchange believes that harmonizing the 
standard across options markets will enable market participants to 
handle trading in SPY options similarly regardless of which options 
market in which they are trading.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \35\ and Rule 19b-4(f)(6) thereunder.\36\ 
Because the 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 prior to 
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, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \37\ and Rule 19b-
4(f)(6) thereunder.\38\
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    \35\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \36\ 17 CFR 240.19b-4(f)(6).
    \37\ 15 U.S.C. 78s(b)(3)(A).
    \38\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
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. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \39\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \40\ 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 asked 
the Commission to waive the 30-day operative delay, noting that doing 
so will allow participants on the Exchange to benefit from the 
opportunity to establish greater positions when pursuing their 
investment goals and needs without undue delay and will allow dual 
members of NYSE Amex Options and the Exchange to harmonize how they 
establish position limits for SPY options when trading at both markets. 
The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of

[[Page 62308]]

investors and the public interest.\41\ Therefore, the Commission hereby 
waives the 30-day operative delay and designates the proposal operative 
as of October 5, 2012.
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    \39\ 17 CFR 240.19b-4(f)(6).
    \40\ 17 CFR 240.19b-4(f)(6).
    \41\ 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 email to [email protected]. Please include 
File Number SR-NYSEArca-2012-112 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2012-112. This 
file number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. 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-2012-112 
and should be submitted on or before November 2, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25087 Filed 10-11-12; 8:45 am]
BILLING CODE 8011-01-P