
[Federal Register Volume 77, Number 37 (Friday, February 24, 2012)]
[Notices]
[Pages 11177-11179]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-4281]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66420; File No. SR-Phlx-2011-179]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendment 
No. 1 Thereto, Relating to the Listing and Trading of MSCI EM Index 
Options

February 17, 2012.

I. Introduction

    On December 21, 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\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend certain of its rules to provide for the 
listing and trading of options on the MSCI EM Index. The proposed rule 
change was published for comment in the Federal Register on January 6, 
2012.\3\ On January 11, 2012, the Exchange filed Amendment No. 1 to the 
proposed rule change.\4\ The Commission received no comment letters on 
the proposed rule change. This order approves the proposed rule change, 
as modified by Amendment No. 1 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 66077 (January 3, 
2012), 77 FR 829 (``Notice'').
    \4\ Amendment No. 1 made a technical correction to the Exhibit 
3. Amendment No. 1 is not subject to notice and comment because it 
is technical in nature and does not materially alter the substance 
of the proposed rule change or raise any novel regulatory issues.
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II. Description

    The proposed rule change would amend Phlx Rules 1079 (FLEX Index, 
Equity and Currency Options), 1009A (Designation of the Index) and 
1101A (Terms of Option Contracts) to list and trade P.M. cash-settled, 
European-style options, including FLEX \5\ options and LEAPS,\6\ on the 
MSCI EM Index, which is described below. The proposal would also create 
new Phlx Rule 1108A, entitled ``MSCI EM Index,'' which would provide 
additional detailed information pertaining to the index as required by 
the licensor including, but not limited to, liability and other 
representations on the part of MSCI Inc. (``MSCI''), which maintains 
the index.
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    \5\ FLEX options are flexible exchange-traded index, equity, or 
currency option contracts that provide investors the ability to 
customize basic option features including size, expiration date, 
exercise style, and certain exercise prices. FLEX index options may 
have expiration dates within five years. See Exchange Rules 1079 and 
1101A.
    \6\ LEAPS or Long Term Equity Anticipation Securities are long 
term options that generally expire from twelve to thirty-nine months 
from the time they are listed.
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    As described by the Exchange, the MSCI EM Index is a free float-
adjusted market capitalization index consisting of large and midcap 
component securities from countries classified by MSCI as ``emerging 
markets,'' and is designed to measure equity market performance of 
emerging markets. The index consists of component securities from the 
following 21 emerging market countries: Brazil, Chile, China, Colombia, 
Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, 
Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, 
Taiwan, Thailand, and Turkey.
    As further described by the Exchange, the MSCI EM Index is 
calculated in U.S. Dollars on a real time basis from the open of the 
first market on which the components are traded to the close of the 
last market on which the components are traded. The level of the index 
reflects the free float-adjusted market value of the component stocks 
relative to a particular base date, and the methodology used to 
calculate the value of the index is similar to the methodology used to 
calculate the value of other well-known market-

[[Page 11178]]

capitalization weighted indexes.\7\ As of December 31, 1987, when the 
MSCI EM Index was launched, its base index value was 100. On June 1, 
2011, the index value was 1166.72.\8\
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    \7\ Details regarding the methodology for calculating the MSCI 
EM Index can be found in the Notice, supra note 3, and at http://www.msci.com/eqb/methodology/meth_docs/MSCI_May11_GIMIMethod.pdf.
    \8\ According to the Exchange, static data regarding the MSCI EM 
Index is distributed daily to clients through MSCI as well as 
through major quotation vendors, including Bloomberg L.P. 
(``Bloomberg''), FactSet Research Systems, Inc. (``FactSet'') and 
Thomson Reuters (``Reuters''). Real time data is distributed at 
least every 15 seconds using MSCI's real-time calculation engine to 
Reuters, Bloomberg, SIX Telekurs and FactSet.
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    The MSCI EM Index is monitored and maintained by MSCI. Adjustments 
to the MSCI EM Index are made on a daily basis with respect to 
corporate events and dividends. The index is generally updated on a 
quarterly basis to reflect amendments to shares outstanding and free 
float. Full index reviews are conducted on a semi-annual basis for 
purposes of rebalancing the index.
    Options on the MSCI EM Index, as introduced by the proposed rule 
change, would be European-style and P.M. cash-settled. The settlement 
value for expiring options would be based on the closing prices of the 
component stocks on the last trading day prior to expiration. The 
expiration date would be the Saturday following the third Friday of the 
expiration month. The Options Clearing Corporation would be the issuer 
and guarantor.
    Phlx Rule 1009A(d) provides that the Exchange may trade options on 
a broad-based index \9\ pursuant to Rule 19b-4(e) under the Act, when 
certain conditions are satisfied.\10\ The MSCI EM Index is a broad-
based index. However, it does not meet all the conditions of Rule 
1009A(d). The proposed rule change would establish listing standards 
that are specific to MSCI EM Index options, to be set forth in new Rule 
1009A(g).
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    \9\ A broad-based index is defined in Exchange Rule 1000A(b)(11) 
as an index designed to be representative of a stock market as a 
whole or of a range of companies in unrelated industries.
    \10\ This provision is an exception to Exchange Rule 1009A(a), 
which provides generally that the listing of a class of index 
options on a new underlying index will be treated by the Exchange as 
a proposed rule change subject to filing with and approved by the 
Commission under Section 19(b) of the Act.
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    Specifically, proposed Rule 1009A(g)(i) would provide that the 
Exchange may trade options on the MSCI EM Index if each of the 
following conditions is satisfied:
    (1) The index is broad-based;
    (2) Options on the index are designated as P.M.-settled index 
options;
    (3) The index is capitalization-weighted, price-weighted, modified 
capitalization-weighted or equal dollar-weighted;
    (4) The index consists of 500 or more component securities;
    (5) All the component securities of the index have a market 
capitalization of greater than $100 million;
    (6) No single component security accounts for more than 15% of the 
weight of the index, and the five highest weighted component securities 
in the index do not, in the aggregate, account for more than 50% of the 
weight of the index;
    (7) Non-U.S. component securities (stocks or ADRs) that are not 
subject to comprehensive surveillance agreements do not, in the 
aggregate, represent more than 22.5% of the weight of the index;
    (8) The current index value is widely disseminated at least once 
every 15 seconds by one or more major market data vendors during the 
time options on the index are traded on the Exchange;
    (9) The Exchange reasonably believes it has adequate system 
capacity to support the trading of options on the index, based on a 
calculation of the Exchange's current Independent System Capacity 
Advisor (ISCA) allocation and the number of new messages per second 
expected to be generated by options on such index; and
    (10) The Exchange has written procedures in place for the 
surveillance of trading of options on the index.
    After the initial listing of options on the MSCI EM Index under the 
above conditions, the following maintenance standards, as set forth in 
proposed Rule 1009A(g)(ii), would apply: The requirements set forth in 
proposed Rule 1009A(g)(i)(1), (2), (3), (4), (7), (8), (9), and (10) 
must continue to be satisfied. The requirements set forth in proposed 
Rule 1009A(g)(i)(5) and (6) must be satisfied only as of the first day 
of January and July in each year. In addition, the total number of 
component securities in the index could not increase or decrease by 
more than 35% from the number of component securities in the index at 
the time of its initial listing.
    The Exchange proposed to apply position limits of 25,000 contracts 
on the same side of the market to options on the MSCI EM Index.\11\ All 
position limit hedge exemptions would apply. In addition, the Exchange 
proposed to amend Rule 1079(d)(1) to note that, with respect to FLEX 
options on the MSCI EM index, the same number of contracts, 25,000, 
would apply with respect to the position limit. The Exchange also 
proposed to apply existing index option margin requirements for the 
purchase and sale of options on the MSCI EM Index.\12\
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    \11\ The exercise limit would also be 25,000 contracts as per 
Exchange Rule 1002A.
    \12\ See Exchange Rule 721. For additional proposed requirements 
for options on the MSCI EM Index, including strike price intervals, 
minimum tick size, and series openings, see Notice, supra note 3.
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    Further, as proposed, Exchange rules that apply to the trading of 
options on broad-based indexes also would apply to options on the MSCI 
EM Index.\13\ This includes, among others,
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    \13\ See generally Exchange Rules 1000A through 1107A (Rules 
Applicable to Trading of Options on Indices) and Exchange Rules 1000 
through 1094 (Rules Applicable to Trading of Options on Stocks, 
Exchange-Traded Fund Shares and Foreign Currencies).
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    Exchange rules governing margin requirements and trading halt 
procedures for index options.\14\
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    \14\ See Exchange Rules 721 (Proper and Adequate Margin) and 
1047A (Trading Rotations, Halts or Reopenings).
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    Finally, the Exchange proposed to add Rule 1108A, entitled ``MSCI 
EM Index,'' to provide additional detailed information pertaining to 
the index as required by the licensor, including, but not limited to, 
liability and other representations on the part of MSCI.

III. Discussion and Commission Findings

    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.\15\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\16\ 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.
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    \15\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation.
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the listing and trading of options on 
the MSCI EM Index will broaden trading and hedging opportunities for 
investors by creating a new options instrument based on an index 
designed to measure the equity market performance of emerging markets. 
Because the MSCI EM Index is a broad-based index comprised of actively-
traded, well-

[[Page 11179]]

capitalized stocks, the trading of options on the MSCI EM Index does 
not raise unique regulatory concerns. The Commission believes that the 
listing standards, which are created specifically and exclusively for 
the MSCI EM Index, are consistent with the Act, for the reasons 
discussed below.
    The Commission notes that proposed Rule 1009A(g) would require that 
the MSCI EM Index consist of 500 or more component securities. The 
component securities of the MSCI EM Index are listed and traded on 
markets spread over 21 different countries. Further, for options on the 
MSCI EM Index to trade, each of the minimum of 500 component securities 
would need to have a market capitalization of greater than $100 
million. Moreover, the Commission notes that, according to the 
Exchange, the MSCI EM Index is comprised of more than 800 components, 
all of which must meet the market capitalization requirement to permit 
an option on the index to begin trading.
    The Commission notes that the proposed listing standards for 
options on the MSCI EM Index would not permit any single security to 
comprise more than 15% of the weight of the index, and would not permit 
a group of five securities to comprise more than 50% of the weight of 
the index. The Commission believes that, in view of the requirement on 
the number of securities in the index, the number of countries 
represented in the index, and the market capitalization, this 
concentration standard is consistent with the Act. Further, the 
Exchange stated that, of the more than 800 components that comprise the 
MSCI EM Index, no single component comprises more than 5% of the index.
    The Exchange has represented that it has an adequate surveillance 
program in place for options on the MSCI EM Index, and intends to apply 
the same procedures for surveillance that it applies to its other index 
options. The Exchange also is a member of the Intermarket Surveillance 
Group and an affiliate member of the International Organization of 
Securities Commissions, and has entered into various Information 
Sharing Agreements and/or Memoranda of Understandings with various 
stock exchanges.
    Under the proposed rule change, non-U.S. component securities of 
the MSCI EM Index that are not subject to comprehensive surveillance 
agreements will not, in the aggregate, represent more than 22.5% of the 
weight of the index. The Commission expects the Exchange to continue to 
work to secure comprehensive surveillance agreements with exchanges on 
which the component securities of the MSCI EM Index trade, but with 
which the Exchange currently does not have comprehensive surveillance 
agreements in place.
    The proposed listing standards require the current value of the 
MSCI EM Index to be widely disseminated at least once every 15 seconds 
by one or more major market data vendors during the time options on the 
index are traded on the Exchange. Further, the standards require that 
the Exchange have adequate system capacity to support the trading of 
options on the MSCI EM Index. The Exchange stated that these 
requirements will be met.
    As a national securities exchange, the Exchange is required, under 
Section 6(b)(1) of the Act,\17\ 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 
this regard, the Commission notes that Exchange rules that apply to the 
trading of options on broad-based indexes would apply to options on the 
MSCI EM Index.\18\ In addition, the Exchange has stated that options on 
the MSCI EM Index would be subject to the same rules that govern all 
Exchange index options, including rules that are designed to protect 
public customer trading.\19\
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    \17\ 15 U.S.C. 78f(b)(1).
    \18\ See generally Exchange Rules 1000A through 1107A (Rules 
Applicable to Trading of Options on Indices) and Exchange Rules 1000 
through 1094 (Rules Applicable to Trading of Options on Stocks, 
Exchange-Traded Fund Shares and Foreign Currencies).
    \19\ See Notice, supra note 3 and Exchange Rules 1024-1029. See 
also supra notes 13 and 14.
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    The Commission further believes that the Exchange's proposed 
position and exercise limits, strike price intervals, minimum tick 
size, series openings, and other aspects of the proposed rule change 
are appropriate and consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-Phlx-2011-179), as modified 
by Amendment No. 1 thereto, be, and hereby is, approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-4281 Filed 2-23-12; 8:45 am]
BILLING CODE 8011-01-P


