[Federal Register Volume 78, Number 223 (Tuesday, November 19, 2013)]
[Notices]
[Pages 69465-69468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27620]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70854; File No. SR-NYSEMKT-2013-90]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Amending Commentary .09 
to Rule 903 To Modify the Quarterly Option Series Program To Eliminate 
the Cap on the Number of Additional Series That May Be Listed Per 
Expiration Month for Each QOS in Exchange-Traded Fund Options

November 13, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on November 5, 2013, NYSE MKT LLC (the ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``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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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \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 .09 to Rule 903 to modify 
the Quarterly Option Series (``QOS'') Program to eliminate the cap on 
the number of additional series that may be listed per expiration month 
for each QOS in exchange-traded fund (``ETF'') options. 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 Exchange is proposing to amend Commentary .09(d) to Rule 903 
related to the QOS Program to eliminate the cap on the number of 
additional series that may be listed per expiration month for each QOS 
in ETF options.\4\ As set out in Commentary .09, the Exchange may list 
QOS for up to five currently listed options classes that are either 
index options or options on ETFs. The Exchange may also list QOS on any 
option classes that are selected by other securities exchanges that 
employ a similar program under their respective rules. Currently, for 
each QOS in ETF options that has been initially listed on the Exchange, 
the Exchange may list up to 60 additional series per expiration month.
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    \4\ A Quarterly Option Series is a series of an option class 
that is approved for listing and trading on the Exchange in which 
the series is opened for trading on any business day, and that 
expires at the close of business on the last business day of a 
calendar quarter. The Exchange lists series that expire at the end 
of the next consecutive four (4) calendar quarters, as well as the 
fourth quarter of the next calendar year. See Rules 900C(26) and 
903, Commentary .09(a).
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    The Exchange is proposing to amend Commentary .09(d) to make the 
treatment of QOS in ETF options consistent with the treatment of QOS in 
stock index options. Rule 900C(a)(iv) [sic] governs the QOS Program in 
stock index options. A stock index option is ``an option contract on a 
specific stock index group.'' \5\ Options on ETFs are similar to index 
options because ETFs hold securities based on an index or portfolio of 
securities.\6\ The requirements and conditions of the QOS Program in 
index options, moreover, parallel those of the QOS Program in ETF 
options. For example, like the QOS Program in ETF options, the QOS 
Program in index options permits QOS in up to five currently-listed 
options

[[Page 69466]]

classes; requires the listing of series that expire at the end of the 
next (as of the listing date) consecutive four quarters, as well as the 
fourth quarter of the next calendar year; requires the strike price of 
each QOS to be fixed at a price per share; and establishes parameters 
for the number of strike prices above and below the underlying index. 
The QOS Program in index options, however, does not place a cap on the 
number of additional series that the Exchange may list per expiration 
month for each QOS in index options. Elimination of the cap set out in 
Commentary .09(d), therefore, would result in similar regulatory 
treatment of similar options products.\7\
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    \5\ Rule 900C(b)(2). ``Stock index group'' means: ``[A] group of 
stocks each of whose inclusion and relative representation in the 
group is determined by the inclusion and relative representation of 
their current market values or market prices in a widely 
disseminated stock index. A stock index group may relate to a stock 
index which reflects representative stock market values or prices of 
either a broad segment of the stock market (``broad stock index 
group'') or stocks representing a particular industry or related 
industries (``stock index industry group'').'' Rule 900C(b)(1).
    \6\ Rule 900.2NY(24) defines ``Exchange-Traded Fund Share'' as 
``Exchange-listed securities representing interests in open-end unit 
investment trusts or open-end management investment companies that 
hold securities (including fixed income securities) based on an 
index or a portfolio of securities.''
    \7\ The Exchange notes that Rule 903C(a)(iv)(4), which governs 
the addition of new series of Quarterly Options Series on index 
options, states: ``The Exchange may open additional strike prices of 
a Quarterly Options Series that are above the value of the 
underlying index provided that the total number of strike prices 
above the value of the underlying index is no greater than five. The 
Exchange may open additional strike prices of a Quarterly Options 
Series that are below the value of the underlying index provided 
that the total number of strike prices is below the value of the 
underlying index is no greater than five. The opening of any new 
Quarterly Options series shall not affect the series of options of 
the same class previously opened.'' In practice, this means that the 
Exchange may add Quarterly Options Series at strikes above and below 
the current index value, so long as there are not more than five 
strikes above, and five strikes below, the current index value after 
such additions are made. The total number of Quarterly Options 
Series that can be listed at any one time is, therefore, 
theoretically unlimited, so long as there are no more than five 
strikes above (or below) a given index value when new strikes are 
added.
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    The Exchange believes that the proposed revision to the QOS Program 
would provide market participants with the ability to better tailor 
their trading to meet their investment objectives, including hedging 
securities positions, by permitting the Exchange to list additional QOS 
in ETF options that meet such objectives. The Exchange has observed 
that situations arise in which the market value of the ETF underlying 
QOS moves to the point that additional strike prices in smaller 
intervals would be valuable to investors. However, due to the cap on 
additional QOS series, the Exchange cannot always provide these 
important at-the-money strikes. Elimination of the cap would remedy 
this issue.
    Currently, the Exchange lists quarterly expiration options on six 
ETFs, but the cap restricts the number of strikes on these options, 
which often results in a lack of strike continuity. For example, the 
Exchange lists quarterly expiration options on SPDR Gold Trust 
(``GLD''). On January 2, 2013, the Exchange initially listed December 
31, 2013 quarterly expiration options (``December 2013 Quarterlies'') 
on GLD, which closed the previous trading day at $162.02, with initial 
strikes from $115 to $210, and additional strikes in $1 intervals from 
$131 to $189. But during 2013, GLD has closed at a range of $115.94 to 
$163.67 and is currently trading around $125. As a result of the cap, 
the Exchange cannot offer December 2013 Quarterlies on GLD in $1 
intervals within $10 of the closing price of GLD because the number of 
strikes would exceed the cap of 60 additional strikes. Consequently, 
the Exchange is not able to list important at-the-money strikes due to 
the cap on additional strikes. While the Exchange has the ability to 
delist strikes with no open interest so that it may list strikes that 
are closer to the money, delisting is not always possible. If all of 
the existing strikes have open interest, the Exchange cannot delist 
strikes so that it may list strikes closer to the money.
    But the Exchange is not subject to a similar cap on the number of 
additional weekly or monthly expiration options it can list on ETFs.\8\ 
So, for example, the Exchange can list additional weekly expiration 
options on GLD in $1 and $0.50 intervals within $5 of the closing price 
of GLD, and additional monthly expiration options in $1 intervals from 
$85 to $178. Therefore, due to the cap, the Exchange cannot list, and 
an investor cannot structure, an investment on a quarterly basis with 
the same granularity that can be achieved on a weekly or monthly basis.
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    \8\ For Short Term Options Series (``weekly options''), 
commentary .10 to Rule 903 sets a maximum number of strikes, but the 
Exchange can exceed this maximum number of strikes under certain 
circumstances. Specifically, ``in the event that the underlying 
security has moved such that there are no series that are at least 
10% above or below the current price of the underlying security and 
all existing series have open interest, the Exchange may list 
additional series, in excess of the 30 allowed under Commentary .10, 
that are between 10% and 30% above or below the price of the 
underlying security.''
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    Similarly, the Exchange lists quarterly options on SPDR S&P 500 ETF 
(``SPY''), which during 2013 closed at a range of $145.55 to $173.05. 
Again, due to the cap, the Exchange cannot offer quarterly expiration 
options on SPY in $1 intervals above $170 because the number of 
additional strikes would exceed the cap of 60. Instead, the Exchange is 
forced to list quarterly expiration options on SPY at $5 intervals 
above $170, despite the fact that SPY has recently traded between $165 
and $170. As such, if SPY would again increase to $170, then the 
Exchange would only be able to offer options with a strike price $5 
away from the price of the underlying ETF due to the cap on additional 
strikes.
    On the other hand, in contrast to the limitations imposed on the 
Exchange for quarterly expiration options on ETFs, the absence of a 
similar cap on quarterly expiration options on indexes means that the 
Exchange can list, and investors can achieve, more granularity in 
index-based options. For example, S&P 500 Mini--SPX options (``SPX'') 
are options on the S&P 500 index, as opposed to options on SPY, the ETF 
based on that same S&P 500 index. SPX options are used to hedge SPY 
positions and are traded at the equivalent of one point and one-half 
point intervals. The SPX trades at 10 times the value of SPY, so that 
if SPY trades at $168.70, SPX trades at $1687. Therefore, the strike 
price for a quarterly expiration option on SPX, that is a hedge for a 
quarterly expiration option on SPY at $170, would be $1700. The 
Exchange can offer quarterly expiration options on SPX with strike 
prices of $1670, $1680, $1690, and $1700 because there is no cap on 
quarterly expiration index-based options. However, the Exchange cannot 
similarly offer quarterly expiration options on SPY with similar strike 
price continuity because of the cap on quarterly expiration ETF-based 
options.
    Elimination of the cap would also help market participants meet 
their investment objectives by providing expanded opportunities to roll 
ETF options into later quarters. For example, a market participant that 
holds one or more contracts in a QOS in an ETF put option that has a 
strike price of $120 and an expiration date of the last day of the 
third quarter may wish to roll that position into the fourth quarter. 
That is, the market participant may wish to close out the contracts set 
to expire at the end of the third quarter and instead establish a 
position in the same number of contracts in a QOS in a put option on 
the same ETF with the same strike price of $120, but with an expiration 
date of the last day of the fourth quarter. Because of the cap on 
additional QOS in ETF options, however, the Exchange may not be able to 
list additional QOS in the ETF. Elimination of the cap, though, would 
allow the Exchange to meet the investment needs of market participants 
in such situations.
    The Exchange has sufficient capacity to handle increased quote and 
trade reporting traffic that might be expected to result from listing 
additional QOS in ETF options. The Exchange notes that it has purchased 
capacity from the Options Price Reporting Authority (``OPRA'') to 
handle its options quote and trade reporting traffic.\9\ The

[[Page 69467]]

Exchange believes that it has acquired sufficient capacity to handle 
increased quote and trade reporting traffic that might be expected to 
result from listing additional QOS in ETF options.\10\ In the 
Exchange's view, it would be inconsistent to prohibit the listing of 
additional QOS beyond a specified cap when each exchange independently 
purchases capacity to meet its quote and trade reporting traffic needs.
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    \9\ See Exchange Act Release No. 48822 (Nov. 21, 2003), 68 FR 
66892 (Nov. 28, 2003) (SR-OPRA-2003-01) (requiring exchanges to 
acquire options market data transmission capacity independently, 
rather than jointly).
    \10\ The SEC has relied upon an exchange's representation that 
it has sufficient capacity to support new options series in 
approving a rule amendment permitting the listing of additional 
option series. See Exchange Act Release No. 57410 (Jan. 17 [sic], 
2008), 73 FR 12483, 12484 (Mar. 7, 2008) (SR-CBOE-2007-96) 
(amendments to CBOE Rule 5.5(e)(3)) (``In approving the proposed 
rule change, the Commission has relied upon the Exchange's 
representation that it has the necessary systems capacity to support 
new options series that will result from this proposal'').
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    Moreover, the Exchange has in place a quote mitigation plan that 
helps it maintain sufficient capacity to handle quote traffic. The 
plan, which has been approved by the Commission, reduces the number of 
quotations that the Exchange disseminates by limiting disseminated 
quotes to active options series only.\11\
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    \11\ The Exchange's quote mitigation plan is set out in Rule 
970.1NY, adopted in 2009.
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    To help ensure that only active options series are listed, the 
Exchange also has in place procedures to delist inactive series. 
Commentary .09(f) to Rule 903 requires the Exchange to review QOS that 
are outside of a range of five strikes above and five strikes below the 
current price of the underlying ETF. Based on that review, the Exchange 
must delist series with no open interest in both the call and the put 
series having (i) a strike price higher than the highest price with 
open interest in the put and/or call series for a given expiration 
month, and (ii) a strike price lower than the lowest strike price with 
open interest in the put and/or call series for a given expiration 
month.
    Finally, the Exchange is proposing to update an outdated cross-
reference in Commentary .09(d) to Rule 903. Commentary .09(d) currently 
states that the term ``Exchange-Traded Fund Share'' is defined in Rule 
900(b)(42); however, that term is defined in Rule 900.2NY(24). The 
Exchange proposes to update the language accordingly.
 2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of Section 
6(b)(5),\13\ in particular, in that it is designed to promote just and 
equitable principles of trade, to remove impediments to, and perfect 
the mechanism of a free and open market and, in general, to protect 
investors and the public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is designed to 
remove impediments to and perfect the mechanism of a free and open 
market because it will expand the investment options available to 
investors and will allow for more efficient risk management. The 
Exchange believes that removing the cap on the number of QOS in ETF 
options permitted to be listed on the Exchange will result in a 
continuing benefit to investors by giving them more flexibility to 
closely tailor their investment and hedging decisions to their needs, 
and therefore, the proposal is designed to protect investors and the 
public interest. Additionally, by removing the cap, the proposed rule 
change will make the treatment of QOS in ETF options consistent with 
the treatment of QOS in index options, thus resulting in similar 
regulatory treatment for similar options products.
    While the expansion of the number of QOS in ETF options is expected 
to generate additional quote traffic, the Exchange believes that this 
increased traffic will be manageable and will not present capacity 
problems. As previously stated, the Exchange has in place a quote 
mitigation plan that helps it maintain sufficient capacity to handle 
quote traffic. To help ensure that only active options series are 
listed, Exchange procedures are designed to delist inactive series, 
ensuring that any additional quote traffic is a result of interest in 
active series.
    Finally, amending Commentary .09(d) to Rule 903 to correct an 
outdated cross-reference to the definition of Exchange-Traded Fund 
Shares will remove impediments to, and perfect the mechanism of a free 
and open market system. The Exchange believes that the proposed rule 
change will resolve any investor confusion regarding the incorrect 
cross-reference, and ensures that the Exchange provides a clear and 
well-defined rule set.

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 not necessary or appropriate in 
furtherance of the purposes of the Act. Specifically, the Exchange 
believes that investors would benefit from the introduction of 
additional QOS in ETF options by providing investors with more 
flexibility to closely tailor their investment and hedging decisions to 
their needs. Additionally, Exchange procedures for delisting inactive 
series will ensure that only active series with sufficient investor 
interest will be made available and maintained on the Exchange.

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 does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6) 
\15\ thereunder.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 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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    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. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \16\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \16\ 15 U.S.C. 78s(b)(2)(B).
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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:

[[Page 69468]]

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-2013-90 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-2013-90. 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 
10:00 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-2013-90 and should 
be submitted on or before December 10, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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 Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27620 Filed 11-18-13; 8:45 am]
BILLING CODE 8011-01-P