[Federal Register Volume 77, Number 238 (Tuesday, December 11, 2012)]
[Notices]
[Pages 73708-73711]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-29854]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68358; File No. SR-NYSEMKT-2012-71]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Amending Commentary .07 
to Exchange Rule 904 To Increase the Position and Exercise Limits for 
Options on the iShares MSCI Emerging Markets Index Fund to 500,000 
Contracts

December 5, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 26, 2012, NYSE MKT LLC (``NYSE MKT'' 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 by the Exchange. 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.
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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 .07 to Exchange Rule 904 
to increase the position and exercise limits for options on the iShares 
MSCI Emerging Markets Index Fund (``EEM'') to 500,000 contracts. 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.

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 Commission approved the Exchange to list and trade the options 
on the iShares MSCI Emerging Markets Index Fund (``EEM'') on May 17, 
2006.\3\ Position limits for exchange-traded fund (``ETFs'') options, 
such as EEM options, are determined pursuant to Rule 904 and vary 
according to the number of outstanding shares and past six-month 
trading volume of the underlying stock or ETF. The largest in 
capitalization and most frequently traded stocks and ETFs have an 
option position limit of 250,000 contracts (with adjustments for 
splits, re-capitalizations, etc.) on the same side of the market; 
smaller capitalization stocks and ETFs have position limits of 200,000, 
75,000, 50,000 or 25,000 contracts (with adjustments for splits, re-
capitalizations, etc.) on the same side of the market. The current 
position limit for EEM options is 250,000 contracts. The purpose of the 
proposed rule change is to amend Exchange Rule 904, Commentary .07 to 
increase the position and exercise limits for EEM options to 500,000 
contracts.\4\
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    \3\ See Securities Exchange Act Release No. 53824 (May 17, 
2006), 71 FR 30003 (May 24, 2006) (SR-Amex-2006-43).
    \4\ By virtue of Exchange Rule 905(a)(i), which is not being 
amended by this filing, the exercise limit for EEM options would be 
similarly increased.
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    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.\5\ 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

[[Page 73709]]

investors with substantial hedging needs or to prevent specialists and 
market-makers from adequately meeting their obligations to maintain a 
fair and orderly market.'' \6\
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    \5\ 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)).
    \6\ Id., at 4913.
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    There is precedent for establishing position limits for options on 
actively-traded ETFs and these position limit levels are set forth in 
Commentary .07 to Rule 904.

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                  Option                           Position limits
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PowerShares QQQ Trust \SM\, Series 1 (QQQ)  900,000 contracts.
SPDR[supreg] S&P 500[supreg] ETF (SPY)....  None.
iShares[supreg] Russell 2000[supreg] Index  500,000 contracts.
 Fund (IWM).
SPDR[supreg] Dow Jones Industrial           300,000 contracts.
 Average\SM\ ETF Trust (DIA).
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    In support of this proposed rule change, the Exchange has collected 
trading statistics comparing EEM to IWM and SPY. As shown in the 
following table, the average daily volume year to date in 2012 for EEM 
was 49.1 million shares compared to 47 million shares for IWM and 143.1 
million shares for SPY. The total shares outstanding for EEM are 926.6 
million compared to 204.2 million shares for IWM and 771.4 million 
shares for SPY. Further, the fund market cap for EEM is $38.2 billion 
compared to $16.7 billion for IWM and $108.9 billion for SPY.

----------------------------------------------------------------------------------------------------------------
                                                                                      Shares
                                                    October 2012   October 2012     outstanding     Fund market
                       ETF                         YTD ADV (mil.      YTD ADV      (mil.) as of    cap ($bil) as
                                                      shares)         (option       October 31,   of October 31,
                                                                    contracts)         2012            2012
----------------------------------------------------------------------------------------------------------------
EEM..............................................           49.1         249,496           926.6            38.2
IWM..............................................           47           498,723           204.2            16.7
SPY..............................................          143.1       2,292,977           771.4           108.9
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    In further support of this proposal, the Exchange represents that 
EEM still qualifies for the initial listing criteria set forth in 
Commentary .06 to Exchange Rules [sic] 915 for ETFs holding non-U.S. 
component securities.\7\ EEM tracks the performance of the MSCI 
Emerging Markets Index, which has approximately 800 component 
securities.\8\ ``The MSCI Emerging Markets Index is a free float-
adjusted market capitalization index that is designed to measure equity 
market performance of emerging markets. The MSCI Emerging Markets Index 
consists of the following 21 emerging market country indices: Brazil, 
Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, 
Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, 
Russia, South Africa, Taiwan, Thailand, and Turkey.'' \9\ The Exchange 
represents that more than 50% of the weight of the securities held by 
EEM are now subject to a comprehensive surveillance agreement 
(``CSA'').\10\ Additionally, the component securities of the MSCI 
Emerging Markets Index on which EEM is based for which the primary 
market is in any one country that is not subject to a CSA do not 
represent 20% or more of the weight of the MSCI Emerging Markets 
Index.\11\ Finally, the component securities of the MSCI Emerging 
Markets Index on which EEM is based for which the primary market is in 
any two countries that are not subject to CSAs do not represent 33% or 
more of the weight of the MSCI Emerging Markets Index.\12\
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    \7\ The Exchange notes that the initial listing criteria for 
options on ETFs that hold non-U.S. component securities are more 
stringent than the maintenance listing criteria for those same ETF 
options. See Exchange Rules 915, Commentary .06, and 916, Commentary 
.07.
    \8\ See http://us.ishares.com/product_info/fund/overview/EEM.htm and http://www.msci.com/products/indices/licensing/msci_emerging_markets/. Identification of the specific securities in the 
EEM and their individual concentrations in the EEM can be accessed 
at: http://us.ishares.com/product_info/fund/holdings/EEM.htm.
    \9\ See http://www.msci.com/products/indices/tools/index.html#EM.
    \10\ See Exchange Rules [sic] 915, Commentary .06 subsection 
(b)(i).
    \11\ See Exchange Rules [sic] 915, Commentary .06 subsection 
(b)(ii).
    \12\ See Exchange Rules [sic] 915, Commentary .06 subsection 
(b)(iii).
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    The Exchange believes that the liquidity in the underlying ETF and 
the liquidity in EEM options support its request to increase the 
position and exercise limits for EEM options. As to the underlying ETF, 
through October 31, 2012 the year-to-date average daily trading volume 
for EEM across all exchanges was 49.1 million shares. As to EEM 
options, the year-to-date average daily trading for EEM options across 
all exchanges was 249,496 contracts.
    The Exchange believes that the current position limits on EEM 
options may inhibit the ability of certain large market participants, 
such as mutual funds and other institutional investors with substantial 
hedging needs, to utilize EEM options and gain meaningful exposure to 
the hedging function they provide. The Exchange believes that 
increasing position limits for EEM options will lead to a more liquid 
and competitive market environment for EEM options that will benefit 
customers interested in this product.
    Under the Exchange's proposal, the options reporting requirement 
for EEM options would continue unabated. Thus, the Exchange would still 
require that each ATP Holder that maintains a position in EEM options 
on the same side of the market, for its own account or for the account 
of a customer, report certain information to the Exchange. 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 the collateral used to carry the position, if 
applicable. In addition, the general reporting requirement for customer 
accounts that maintain an aggregate position of 200 or more option 
contracts would remain at this level for EEM options.\13\
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    \13\ For reporting requirements, see Exchange Rule 906.
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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 the Exchange, 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.\14\
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    \14\ These procedures have been effective for the surveillance 
of EEM options trading and will continue to be employed.

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[[Page 73710]]

    Furthermore, large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G.\15\ Options positions are 
part of any reportable positions and, thus, cannot be legally hidden. 
Moreover, the Exchange's requirement that members or member 
organizations 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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    \15\ 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 an ATP Holder, or its customer may try to maintain an 
inordinately large un-hedged position in an option, particularly on 
EEM. 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 an ATP Holder must maintain for a large 
position held by itself or by its customer.\16\ In addition, the 
Commission's net capital rule, Rule 15c3-1 \17\ under the Securities 
Exchange Act of 1934 (the ``Act''), imposes a capital charge on members 
to the extent of any margin deficiency resulting from the higher margin 
requirement.
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    \16\ See Exchange Rule 462 for a description of margin 
requirements.
    \17\ 17 CFR 240.15c3-1.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \18\ of the Act, in general, and furthers the 
objectives of Section 6(b)(5),\19\ 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. Specifically, the proposed 
rule change will benefit large Market-Makers (which generally have the 
greatest potential and actual ability to provide liquidity and depth in 
the product), as well as retail traders, investors, and public 
customers, by providing them with a more effective trading and hedging 
vehicle. In addition, the Exchange believes that the structure of EEM 
options and the considerable liquidity of the market for EEM options 
diminish the opportunity to manipulate this product and disrupt the 
underlying market that a lower position limit may protect against.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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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

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, 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 \20\ and Rule 19b-4(f)(6) 
thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with 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. The Exchange has fulfilled this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. The Exchange requests that the Commission waive 
the 30-day operative delay so that it can increase the position and 
exercise limits for EEM options immediately, which will result in 
consistency and uniformity among the competing options exchanges as to 
the position limits for EEM options. The Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest.\22\ The Commission notes the 
proposal is substantively identical to a proposal that was recently 
approved by the Commission, and does not raise any new regulatory 
issues.\23\ For these reasons, the Commission designates the proposed 
rule change as operative upon filing.
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    \22\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \23\ See Securities Exchange Act Release No. 68086 (October 23, 
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066).
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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-NYSEMKT-2012-71 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-NYSEMKT-2012-71. 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

[[Page 73711]]

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 10:00 a.m. and 3:00 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-NYSEMKT-2012-71 and should be submitted on or before 
January 2, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-29854 Filed 12-10-12; 8:45 am]
BILLING CODE 8011-01-P