
[Federal Register Volume 76, Number 163 (Tuesday, August 23, 2011)]
[Notices]
[Pages 52729-52730]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21486]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65149; File No. SR-Phlx-2011-89]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Granting Approval of Proposed Rule Change Relating to Alpha Index 
Options

August 17, 2011.

I. Introduction

    On June 23, 2011, NASDAQ OMX PHLX LLC (the ``Exchange'' or 
``Phlx'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act''),\1\ a proposed rule change to list 
and trade options on a number of new Alpha Indexes and to amend 
Exchange Rule 1001A, Position Limits, with respect to certain Alpha 
Index options. The proposed rule change was published for comment in 
the Federal Register on July 8, 2011.\2\ The Commission received no 
comment letters on the proposed rule change. This order approves the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ See Securities Exchange Act Release No. 64788 (July 1, 
2011), 76 FR 40415 (``Notice'').
---------------------------------------------------------------------------

II. Description

    On February 7, 2011, the Commission approved the Exchange's 
proposed rule change to list and trade options on a number of Alpha 
Indexes.\3\ Alpha Indexes measure relative total returns of one 
underlying stock or exchange traded fund (``ETF'') share against 
another underlying stock or ETF share underlying options which are also 
traded on the Exchange (each such combination of two components is 
referred to as an ``Alpha Pair''). The first component identified in an 
Alpha Pair (the ``Target Component'') is measured against the second 
component identified in the Alpha Pair (the ``Benchmark Component''). 
Total return measures performance (rate of return) of price 
appreciation plus dividends over a given evaluation period.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 63860 (February 7, 
2011), 76 FR 7888 (February 11, 2011) (SR-Phlx-2010-176).
---------------------------------------------------------------------------

    The Alpha Index options that the Commission has previously approved 
for listing and trading on the Exchange are limited to specific Alpha 
Indexes the Target Component of which is a single stock.\4\ The 
Exchange proposes to expand the number of Alpha Indexes on which 
options can be listed to include certain Alpha Indexes based on the 
following Alpha Pairs: DIA/SPY, EEM/SPY, EWJ/SPY, EWZ/SPY, FXI/SPY, 
GLD/SPY, IWM/SPY, QQQ/SPY, SLV/SPY, TLT/SPY, XLE/SPY and XLF/SPY. In 
these Alpha Indexes, the Target Component as well as the Benchmark 
Component is an ETF share. The proposed Alpha Index options will enable 
investors to trade the relative performance of the market sectors 
represented by the Target Components as compared with the overall 
market performance represented by the Benchmark Component SPY.
---------------------------------------------------------------------------

    \4\ The Commission previously approved the listing and trading 
of options on Alpha Indexes based on the following Alpha Pairs: 
AAPL/SPY, AMZN/SPY, CSCO/SPY, F/SPY, GE/SPY, GOOG/SPY, HPQ/SPY, IBM/
SPY, INTC/SPY, KO/SPY, MRK/SPY, MSFT/SPY, ORCL/SPY, PFE/SPY, RIMM/
SPY, T/SPY, TGT/SPY, VZ/SPY and WMT/SPY. See supra note 3. In 
connection with its proposed rule change to list and trade this 
initial set of Alpha Index options, the Exchange represented that it 
would not list Alpha Index options on any other Alpha Pairs without 
filing a proposed rule change seeking Commission approval. See id.
---------------------------------------------------------------------------

    As with each initial Alpha Index option, each proposed new Alpha 
Index option will meet the criteria set forth in Exchange Rule 
1009A(f).\5\ Further, following the listing of these Alpha Index 
options, options on each of the component securities of the Alpha Index 
must continue to meet the continued listing standards set forth by 
Exchange Rule 1010, Withdrawal of Approval of Underlying Securities or 
Options.
---------------------------------------------------------------------------

    \5\ Rule 1009A(f) requires that options on Alpha Indexes meet 
the following criteria: (1) Alpha Index options will be A.M.-
settled. The exercise settlement value will be based upon the 
opening prices of the individual stock or ETF from the primary 
listing market on the last trading day prior to expiration (usually 
a Friday); (2) at the time of listing an Alpha Index option, options 
on each underlying component of an Alpha Index will also be listed 
and traded on the Exchange and will meet the requirements of Rule 
1009, Criteria for Underlying Securities. Additionally, each 
underlying component's trading volume (in all markets in which the 
underlying security is traded) must have averaged at least 2,250,000 
shares per day in the preceding twelve months; (3) following the 
listing of an Alpha Index option, options on each of the component 
securities of the Alpha Index will continue to meet the continued 
listing standards set forth by Phlx Rule 1010, Withdrawal of 
Approval of Underlying Securities or Options. Additionally, each 
underlying component's trading volume (in all markets in which the 
underlying security is traded) must have averaged at least 2,000,000 
shares per day in the preceding twelve months; and (4) no Alpha 
Index option will be listed unless and until options overlying each 
of the Alpha Index component securities have been listed and traded 
on a national securities exchange with an average daily options 
trading volume during the three previous months of at least 10,000 
contracts. Following the listing of an Alpha Index option, options 
on each of the component securities of the Alpha Index must continue 
to meet this options average daily volume standard.
---------------------------------------------------------------------------

Position Limits

    The Exchange also proposes to amend section (f) of Exchange Rule 
1001A to establish a 15,000 contract position limit in options on Alpha 
Indexes in which the Target Component is an ETF share. This 15,000 
contract position limit would apply not only to the specific Alpha 
Index options proposed herein, but also to any options the Exchange may 
list in the future on Alpha Indexes in which the Target Component is an 
ETF share.\6\ For purposes of determining compliance with position 
limits, positions in Alpha Index options will be aggregated with 
positions in equity options on the underlying securities. All position 
limit hedge exemptions will apply.
---------------------------------------------------------------------------

    \6\ The Exchange will not, however, list options on any such 
Alpha Pairs without filing a proposed rule change seeking Commission 
approval.
---------------------------------------------------------------------------

Clearing

    Like the Alpha Index options that are currently trading, the 
proposed new Alpha Index options are ``Strategy Based Options'' that 
will be cleared by the Options Clearing Corporation.

Surveillance

    Surveillance for opening price manipulation will be in place for 
the launch of these new Alpha Index options and other existing 
surveillance patterns will be utilized to monitor trading in these 
options. The Exchange represents that these surveillance procedures are 
adequate to monitor the trading of the new Alpha Index options. For 
surveillance purposes, the Exchange will have complete access to 
information regarding trading activity in the pertinent underlying 
securities and options thereon.

Margin

    The Exchange will set customer margin levels for the new Alpha 
Index options at the higher of the margin required for options on the 
Target Component or the margin required for options on the Benchmark 
Component.

Systems Capacity

    Additionally, the Exchange affirms that it possesses the necessary 
systems capacity to support new series that would result from the 
introduction of these new Alpha Index options. The

[[Page 52730]]

Exchange also has been informed that the Options Price Reporting 
Authority (``OPRA'') has the capacity to support such new series.

Customer Protection

    Exchange rules designed to protect public customers trading in 
options would apply to the new Alpha Index options. Phlx Rule 1026 is 
designed to ensure that options, including Alpha Index options, are 
sold only to customers capable of evaluating and bearing the risks 
associated with trading in the instruments. Phlx Rule 1024, applicable 
to the conduct of accounts, Phlx Rule 1025 relating to the supervision 
of accounts, Phlx Rule 1028 relating to confirmations, and Phlx Rule 
1029 relating to the delivery of options disclosure documents also 
apply to trading in Alpha Index options.

Exchange Rules Applicable

    All other Exchange rules applicable to Alpha Index options will 
also apply to the Alpha Index options proposed herein.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\7\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\8\ which requires, among other things, that 
the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, 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.
---------------------------------------------------------------------------

    \7\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation.
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As a national securities exchange, Phlx is required, under Section 
6(b)(1) of the Act,\9\ to enforce compliance by its members, and 
persons associated with its members, with the provisions of the Act, 
Commission rules and regulations thereunder, and its own rules. In 
addition, brokers that trade the new Alpha Index options will also be 
subject to best execution obligations and FINRA rules.\10\ Applicable 
Exchange rules also require that customers receive appropriate 
disclosure before trading any Alpha Index option.\11\ Furthermore, 
brokers opening accounts and recommending options transactions must 
comply with relevant customer suitability standards.\12\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(1).
    \10\ See NASD Rule 2320.
    \11\ See Exchange Rule 1029.
    \12\ See Exchange Rule 1026. See also Exchange Rules 1024 and 
1025.
---------------------------------------------------------------------------

    Exchange rules applicable to Alpha Index options will also apply to 
the Alpha Index options proposed herein. As stated in the previous 
approval for the listing and trading of Alpha Index options, the 
Commission believes that the listing rules for Alpha Index options are 
consistent with the Act. Further, the Commission notes that Alpha Index 
options will be listed only on the specific Alpha Indexes approved by 
the Commission.\13\ The Exchange has represented that it will not list 
options on any new Alpha Indexes without filing a proposed rule change 
seeking Commission approval.
---------------------------------------------------------------------------

    \13\ The Commission has previously approved the listing and 
trading of options on the following Alpha Indexes: AAPL/SPY, AMZN/
SPY, CSCO/SPY, F/SPY, GE/SPY, GOOG/SPY, HPQ/SPY, IBM/SPY, INTC/SPY, 
KO/SPY, MRK/SPY, MSFT/SPY, ORCL/SPY, PFE/SPY, RIMM/SPY, T/SPY, TGT/
SPY, VZ/SPY and WMT/SPY. See supra note 3. The Commission is now 
approving the listing and trading of options on the following Alpha 
Indexes only: DIA/SPY, EEM/SPY, EWJ/SPY, EWZ/SPY, FXI/SPY, GLD/SPY, 
IWM/SPY, QQQ/SPY, SLV/SPY, TLT/SPY, XLE/SPY and XLF/SPY.
---------------------------------------------------------------------------

    The Commission notes that the Exchange has represented that it will 
have adequate surveillance procedures in place for trading in the new 
Alpha Index options. Opening price manipulation surveillance will be in 
place for the launch of the new options on Alpha Indexes and other 
existing surveillance patterns will be utilized to monitor trading in 
options on each new Alpha Index. In addition, for surveillance 
purposes, the Exchange will have complete access to information 
regarding trading activity in the pertinent underlying securities and 
options thereon. Further, the Commission believes that the Exchange's 
proposed position and exercise limits for the new Alpha Index options 
are appropriate and consistent with the Act.
    Lastly, the Commission notes that the Exchange has affirmed that it 
possesses the necessary systems capacity to support any new series that 
would result from the introduction of the new Alpha Index options.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-Phlx-2011-89) be, and hereby 
is, approved.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-21486 Filed 8-22-11; 8:45 am]
BILLING CODE 8011-01-P


