[Federal Register Volume 78, Number 223 (Tuesday, November 19, 2013)]
[Notices]
[Pages 69493-69496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27621]



[[Page 69493]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70855; File No. SR-NYSEArca-2013-120]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending Commentary 
.08 to Rule 6.4 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 Arca, Inc. (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 .08 to Rule 6.4 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 .08(ii) to Rule 6.4 
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 .08, 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 NYSE Area Options 
Rules 6.1(b)(42) and 6.4, Commentary .08(i).
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    The Exchange is proposing to amend Commentary .08(ii) to make the 
treatment of QOS in ETF options consistent with the treatment of QOS in 
index options. NYSE Arca Options Rule 5.19(a)(3)(C) governs the QOS 
Program in index options. Index options include options on industry/
narrow-based indices and options on market/broad-based indices.\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 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 .08(ii), therefore, would result in similar regulatory 
treatment of similar options products.\7\
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    \5\ An ``industry index'' or ``narrow-based index'' is ``an 
index designed to be representative of a particular industry or 
group of related industries.'' See NYSE Arca Options Rule 
5.10(b)(22). A ``market index'' or ``broad-based index'' is ``an 
index designed to be representative of a stock market as a whole or 
of a range of companies in unrelated industries.'' See NYSE Arca 
Options Rule 5.10(b)(23).
    \6\ NYSE Arca Options Rule 6.1(b)(32) 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 5.19(a)(3)(C)(ii), 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 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

[[Page 69494]]

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 .07 to Rule 6.4 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 .07, 
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 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\ NYSE Arca's quote mitigation plan is provided for in 
Commentary .03 to NYSE Arca Rule 6.86, adopted in 2007. See 
Securities Exchange Act Release No. 55156 (Jan. 23, 2007), 72 FR 
4759 (Feb. 21 [sic], 2007) (SR-NYSEArca-2006-73).
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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 .08(iii) to Rule 6.4 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.
    The Exchange's experience with listing additional QOS in ETF 
options at the end of 2008 also indicates that it has sufficient 
capacity to handle increased order and quote traffic that might be 
expected to result from listing additional QOS in ETF options. 
Commentary .08(iv) to Rule 6.4 established a temporary rule that 
permitted the Exchange to list up to 100 additional series per 
expiration month for each QOS in ETF option in the fourth quarter of 
2008, and for the new expiration month being added after the December 
2008 QOS expiration.\12\ The

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Exchange did not experience capacity constraints during this temporary 
increase.
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    \12\ See Exchange Act Release No. 59012 (Nov. 24, 2008), 73 FR 
73371 (Dec. 2, 2008) (SR-NYSEArca-2008-131). The Exchange amended 
Commentary .08 to add paragraph (iv) during the financial crisis in 
2008. The amendment was in response to requests for lower priced 
strikes on certain ETFs. Other options exchanges amended their rules 
quarterly options series rules to permit the listing of additional 
series in ETF options. See, e.g., 73 FR 12483 (amendments to CBOE 
Rule 5.5(e)(3)).
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    Finally, the Exchange is proposing to make a technical amendment to 
Commentary .08(ii) to Rule 6.4. Currently, the Commentary states that 
the Exchange may open for trading additional Quarterly Options Series 
that are more than 30% away from the current index value; however, the 
provision is meant to reference the price of the underlying ETF. The 
Exchange is also deleting Commentary .08(iv) to Rule 6.4. As noted, 
Commentary .08(iv) temporarily increased the number of additional QOS 
in ETF options that could be added by the Exchange from 60 to 100. Now 
that the pilot program has expired, there is no need for the continued 
inclusion of paragraph (iv) in Commentary .08.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act,\13\ in general, and furthers the objectives of Section 
6(b)(5),\14\ 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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    \13\ 15 U.S.C. 78f(b).
    \14\ 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.
    The Exchange believes it is appropriate to eliminate obsolete or 
out-of-date rule text from the rule book. Specifically, the technical 
amendment to Commentary .08(ii) to Rule 6.4 is appropriate as the 
correction will lessen the likelihood for investor confusion. Further, 
elimination of Commentary .08(iv) to Rule 6.4 is appropriate as the 
removal will also lessen the likelihood for investor confusion by 
deleting rules that no longer are applicable.

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 \15\ and Rule 19b-4(f)(6) 
\16\ thereunder.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 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) \17\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \17\ 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:

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-2013-120 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-2013-120. 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

[[Page 69496]]

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-NYSEArca-2013-120 and should be submitted on or before 
December 10, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27621 Filed 11-18-13; 8:45 am]
BILLING CODE 8011-01-P