[Federal Register Volume 79, Number 127 (Wednesday, July 2, 2014)]
[Notices]
[Pages 37822-37825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-15477]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72484; File No. SR-FINRA-2014-027]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Options Exercise Procedures

June 26, 2014.
    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 June 17, 2014, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of

[[Page 37823]]

this filing by the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 2360(b)(23) regarding 
procedures for expiring standardized equity options to harmonize its 
rules with the rules of The Options Clearing Corporation (``OCC'') and 
the options exchanges regarding the change to the expiration date for 
most standardized option contracts to the third Friday of the 
expiration month instead of the Saturday following the third Friday.
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

2000. DUTIES AND CONFLICTS

* * * * *

2300. SPECIAL PRODUCTS

* * * * *

2360. Options

    (a) No Change.
(b) Requirements
    (1) through (22) No Change.
(23) Tendering Procedures for Exercise of Options
(A) Exercise of Options Contracts
    (i) No Change.
    (ii) Special procedures apply to the exercise of standardized 
equity options on the business day of their expiration, or, in the case 
of standardized equity options expiring on a day that is not a business 
day, on the last business day before their expiration (``expiring 
options''). Unless waived by The Options Clearing Corporation, expiring 
standardized equity options are subject to the Exercise-by-Exception 
(``Ex-by-Ex'') procedure under The Options Clearing Corporation Rule 
805. This Rule provides that, unless contrary instructions are given, 
standardized equity option contracts that are in-the-money by specified 
amounts shall be automatically exercised. In addition to The Options 
Clearing Corporation rules, the following FINRA requirements apply with 
respect to expiring standardized equity options. Option holders 
desiring to exercise or not exercise expiring standardized equity 
options must either:
    a. through b. No Change.
    (iii) Exercise cut-off time. Option holders have until 5:30 p.m. 
Eastern Time (``ET'') on the business day of expiration, or, in the 
case of a standardized equity option expiring on a day that is not a 
business day, on the business day immediately prior to the expiration 
date to make a final exercise decision to exercise or not exercise an 
expiring option. Members may not accept exercise instructions for 
customer or non-customer accounts after 5:30 p.m. ET.
    (iv) through (vii) No Change.
    (viii) In the event a national options exchange or The Options 
Clearing Corporation provides advance notice on or before 5:30 p.m. ET 
on the business day immediately prior to the business day of 
expiration, or, in the case of a standardized equity option expiring on 
a day that is not a business day, the business day immediately prior to 
the last business day before the expiration date, indicating that a 
modified time for the close of trading in standardized equity options 
on such business day of expiration, or, in the case of a standardized 
option expiring on a day that is not a business day, such last business 
day before expiration will occur, then the deadline for an option 
holder to make a final decision to exercise or not exercise an expiring 
option shall be 1 hour 30 minutes following the time announced for the 
close of trading on that day instead of the 5:30 p.m. ET deadline found 
in subparagraph (iii) above. However, members have until 7:30 p.m. ET 
to deliver a Contrary Exercise Advice or Advice Cancel to the places 
specified in subparagraphs (iv)a. through d. above for customer 
accounts and non-customer accounts where such member firm employs an 
electronic submission procedure with time stamp for the submission of 
exercise instructions. For non-customer accounts, members that do not 
employ an electronic procedure with time stamp for the submission of 
exercise instructions are required to manually deliver a Contrary 
Exercise Advice or Advice Cancel within 1 hour and 30 minutes following 
the time announced for the close of trading on that day instead of the 
5:30 p.m. ET deadline found in subparagraph (iv) above.
    (ix) through (xi) No Change.
    (B) through (D) No Change.
    (24) No Change.
    (c) No Change.
       Supplementary Material: ----------
    .01 through .03 No Change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA 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 these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Most option contracts (``Standard Expiration Contracts'') currently 
expire on the Saturday following the third Friday of the specified 
expiration month (``expiration date''). However, the OCC is 
streamlining its options expiration procedures to change the expiration 
date for most option contracts to the third Friday of the expiration 
month instead of the Saturday following the third Friday.\4\ The OCC 
rule change applies only to Standard Expiration Contracts expiring 
after February 1, 2015. After February 1, 2015, virtually all Standard 
Expiration Contracts will expire on Friday.\5\ In order to start the 
transition to Friday night expiration processing, the OCC began on June 
21, 2013, to move the expiration exercise process to Friday for all 
Standard Expiration Contracts even though the contracts will continue 
to expire on Saturday.
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    \4\ See Securities Exchange Act Release No. 69772 (June 17, 
2013), 78 FR 37645 (June 21, 2013) (Order Approving File No. SR-OCC-
2013-04).
    \5\ The only Standard Expiration Contracts that will expire on a 
Saturday after February 1, 2015 will be certain options that were 
listed prior to the effectiveness of the OCC rule change, and a 
limited number of options that may be listed prior to necessary 
systems' changes of the options exchanges. The exchanges agreed that 
once these systems' changes are made they will not open for trading 
any new series of options contracts with Saturday expiration dates 
falling after February 1, 2015.
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    The rules of the options exchanges \6\ and FINRA Rule 2360(b)(23) 
\7\ set forth

[[Page 37824]]

special procedures that apply to the exercise of expiring options.\8\ 
The options exchanges have amended their rules to remain consistent 
with the OCC amendments.\9\ Accordingly, FINRA proposes to similarly 
amend Rule 2360(b)(23) to address the OCC amendments.
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    \6\ See ISE Rule 1100; BOX Rule 9000; PHLX Rule 1042; NYSE Arca 
Options Rule 6.24; NYSE MKT Rule 980; CBOE Rule 11.1; BX Chapter 
VIII Section 1; NASDAQ Chapter VIII Section 1; BATS Rule 23.1; and 
MIAX Rule 700 (each an ``options exchange'').
    \7\ The provisions of FINRA Rule 2360(b)(23) apply only to 
members that are not also members of the exchange on which the 
standardized option is traded (so called ``access'' members) in 
order to subject such firms and customers of such firms to the same 
requirements for options exercise procedures as customers that are 
members of an options exchange.
    \8\ The procedures provide that an option holder with an 
expiring standardized equity option may: (1) take no action and 
allow automatic exercise determinations to be made in accordance 
with the OCC exercise by exception (``Ex-by-Ex'') procedures 
(whereby an option will be automatically exercised if the option 
contract is in the money by a requisite amount) or (2) submit a 
Contrary Exercise Advice (``CEA'') (or Expiring Exercise Declaration 
(``EED'') as referenced in the OCC rules) to communicate an option 
holder's intent not to exercise an option that would be 
automatically exercised under the OCC's Ex-by-Ex procedures or to 
exercise an option that would not be automatically exercised under 
the OCC's Ex-by-Ex procedures.
    \9\ See the options exchanges' filings to conform to the OCC 
amendments in Securities Exchange Act Release No. 70372 (September 
11, 2013), 78 FR 57186 (September 17, 2013) (Notice of Filing and 
Immediate Effectiveness of File No. SR-NYSEARCA-2013-88); Securities 
Exchange Act Release No. 70373 (September 11, 2013), 78 FR 57198 
(September 17, 2013) (Notice of Filing and Immediate Effectiveness 
of File No. SR-NYSEMKT-2013-73); Securities Exchange Act Release No. 
70745 (October 23, 2013), 78 FR 64559 (October 29, 2013) (Notice of 
Filing and Immediate Effectiveness of File No. SR-PHLX-2013-104); 
Securities Exchange Act Release No. 70747 (October 23, 2013), 78 FR 
64556 (October 29, 2013) (Notice of Filing and Immediate 
Effectiveness of File No. SR-NASDAQ-2013-133); Securities Exchange 
Act Release No. 70746 (October 23, 2013), 78 FR 64563 (October 29, 
2013) (Notice of Filing and Immediate Effectiveness of File No. SR-
BX-2013-055); Securities Exchange Act Release No. 69996 (July 17, 
2013), 78 FR 44183 (July 23, 2013) (Notice of Filing and Immediate 
Effectiveness of File No. SR-MIAX-2013-32); Securities Exchange Act 
Release No. 70488 (September 24, 2013), 78 FR 59998 (September 30, 
2013) (Notice of Filing and Immediate Effectiveness of File No. SR-
BOX-2013-45) and Securities Exchange Act Release No. 70900 (November 
19, 2013), 78 FR 70382 (November 25, 2013) (Notice of Filing and 
Immediate Effectiveness of File No. SR-ISE-2013-58).
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    Specifically, FINRA proposes to amend Rule 2360(b)(23)(A)(ii) to 
provide that special procedures apply to the exercise of standardized 
equity options on the business day of their expiration (i.e. for Friday 
expirations), or, in the case of standardized equity options expiring 
on a day that is not a business day, on the last business day before 
their expiration (as is currently the case for Saturday expirations).
    FINRA also proposes to amend Rule 2360(b)(23)(A)(iii) regarding the 
exercise cut-off time. Option holders have until 5:30 p.m. Eastern Time 
(``ET'') \10\ on the business day of expiration (i.e., for Friday 
expiration), or, in the case of a standardized equity option expiring 
on a day that is not a business day, on the business day immediately 
prior to the expiration date (as is currently the case for Saturday 
expirations) to make a final exercise decision to exercise or not 
exercise an expiring option.
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    \10\ The time of day for the exercise cut-off (i.e., 5:30 p.m. 
ET) is unchanged from the current requirements.
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    Finally, FINRA proposes to amend Rule 2360(b)(23)(A)(viii) to 
specify in the event a national options exchange or the OCC provides 
advance notice on or before 5:30 p.m. ET on the business day 
immediately prior to the business day of expiration (i.e., Thursday for 
Friday expirations), or in the case of a standardized equity option 
expiring on a day that is not a business day, the business day 
immediately prior to the last business day before the expiration date 
(i.e., Thursday for Saturday expirations as is the case today), 
indicating that a modified time for the close of trading in 
standardized equity options on such business day of expiration (i.e., 
Friday for Friday expirations), or in the case of an standardized 
option expiring on a day that is not a business day, such last business 
day before expiration will occur (i.e., Friday for Saturday 
expirations), then the deadline for an option holder to make a final 
decision to exercise or not exercise an expiring option shall be 1 hour 
30 minutes following the time announced for the close of trading on 
that day. FINRA believes that keeping its rules consistent with those 
of the industry will protect all market participants in the market by 
eliminating confusion.
    FINRA has filed the proposed rule change for immediate 
effectiveness. The implementation date will be 30 days after the date 
of filing, June 17, 2014.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change will 
promote consistent regulation by harmonizing FINRA's rules with those 
of the options exchanges as such rules have been amended to comply with 
recent amendments by OCC. FINRA believes that keeping its rules 
consistent with those of the industry will protect all participants in 
the market by eliminating confusion.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA believes that the 
proposed rule change will promote consistent regulation by harmonizing 
FINRA's rules with those of the options exchanges and OCC and will 
apply equally to all members with expiring standardized equity options. 
FINRA does not believe that the proposed rule change will impose a 
burden on competition because it will be applied to all members 
equally. In addition, FINRA does not believe the proposed rule change 
will impose a burden on competition because it will be applied 
industry-wide, apply to all market participants and is designed to 
allow the OCC to streamline the expiration process.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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 from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 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, 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. 
FINRA 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 to 
determine whether the proposed rule should be approved or disapproved.

[[Page 37825]]

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-FINRA-2014-027 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2014-027. 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 FINRA. 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-FINRA-2014-027 and should be 
submitted on or before July 23, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-15477 Filed 7-1-14; 8:45 am]
BILLING CODE 8011-01-P