
[Federal Register Volume 77, Number 85 (Wednesday, May 2, 2012)]
[Notices]
[Pages 26056-26059]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-10538]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66861; File No. SR-Phlx-2012-28]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Granting Approval of a Proposed Rule Change Relating to the Listing and 
Trading of MSCI EAFE Index Options

April 26, 2012.

I. Introduction

    On March 1, 2012, NASDAQ OMX PHLX LLC (``Exchange'' or ``Phlx'') 
filed

[[Page 26057]]

with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``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 EAFE Index. The proposed rule change was published for 
comment in the Federal Register on March 15, 2012.\3\ 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\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 66569 (March 9, 
2012), 77 FR 15409 (``Notice'').
---------------------------------------------------------------------------

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 permit the Exchange to list and 
trade P.M. cash-settled, European-style options, including FLEX \4\ 
options and LEAPS,\5\ on the MSCI EAFE (Europe, Australasia, and the 
Far East) Index, which is described below. The proposal would also 
create new Phlx Rule 1109A, entitled ``MSCI EAFE 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.
---------------------------------------------------------------------------

    \4\ 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.
    \5\ 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.
---------------------------------------------------------------------------

    As described by the Exchange, the MSCI EAFE Index is a free float-
adjusted market capitalization index consisting of large and midcap 
components from countries classified by MSCI as developed (excluding 
the U.S. and Canada), and is designed to measure the equity market 
performance of developed markets (excluding the U.S. and Canada). The 
index consists of component securities from markets in the following 22 
areas: Australia, Austria, Belgium, Denmark, Finland, France, Germany, 
Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New 
Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and 
the United Kingdom.
    As further described by the Exchange, the MSCI EAFE 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-capitalization weighted 
indexes.\6\ As of December 31, 1969, when the MSCI EAFE Index was 
launched, its base index value was 100. On June 1, 2011, the index 
value was 1727.187.\7\
---------------------------------------------------------------------------

    \6\ Details regarding the methodology for calculating the MSCI 
EAFE Index can be found in the Notice, supra note 3, and at http://www.msci.com/eqb/methodology/meth_docs/MSCI_May11_GIMIMethod.pdf.
    \7\ According to the Exchange, static data regarding the MSCI 
EAFE 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.
---------------------------------------------------------------------------

    The MSCI EAFE Index is monitored and maintained by MSCI. According 
to the Exchange, adjustments to the MSCI EAFE 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 EAFE 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 \8\ pursuant to Rule 19b-4(e) under the Act, when 
certain conditions are satisfied.\9\ The MSCI EAFE 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 EAFE Index options, to be set forth in new 
Rule 1009A(h).
---------------------------------------------------------------------------

    \8\ 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.
    \9\ 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.
---------------------------------------------------------------------------

    Specifically, proposed Rule 1009A(h)(i) would provide that the 
Exchange may trade options on the MSCI EAFE 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 20% 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 EAFE Index under 
the above conditions, the following maintenance standards, as set forth 
in proposed Rule 1009A(h)(ii), would apply: The requirements set forth 
in proposed Rule 1009A(h)(i)(1), (2), (3), (4), (7), (8), (9), and (10) 
must continue to be satisfied. The requirements set forth in proposed 
Rule 1009A(h)(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.

[[Page 26058]]

    The Exchange proposed to apply position limits of 25,000 contracts 
on the same side of the market to options on the MSCI EAFE Index.\10\ 
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 EAFE 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 EAFE Index.\11\
---------------------------------------------------------------------------

    \10\ The exercise limit would also be 25,000 contracts as per 
Exchange Rule 1002A.
    \11\ See Exchange Rule 721. For additional proposed requirements 
for options on the MSCI EAFE Index, including strike price 
intervals, minimum tick size, and series openings, see Notice, supra 
note 3.
---------------------------------------------------------------------------

    Further, as proposed, Exchange rules that apply to the trading of 
options on broad-based indexes also would apply to options on the MSCI 
EAFE Index.\12\ The trading of these options would also be subject to, 
among other provisions, Exchange rules governing margin requirements 
and trading halt procedures for index options.\13\
---------------------------------------------------------------------------

    \12\ See generally Exchange Rules 1000A through 1108A (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).
    \13\ See Exchange Rules 721 (Proper and Adequate Margin) and 
1047A (Trading Rotations, Halts or Reopenings).
---------------------------------------------------------------------------

    Finally, the Exchange proposed to add Rule 1109A, entitled ``MSCI 
EAFE 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.\14\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\15\ 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.
---------------------------------------------------------------------------

    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that the listing and trading of options on 
the MSCI EAFE 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 developed markets 
(excluding the U.S. and Canada). Because the MSCI EAFE Index is a 
broad-based index comprised of actively-traded, well-capitalized 
stocks, the trading of options on the MSCI EAFE Index does not raise 
unique regulatory concerns. The Commission believes that the listing 
standards, which are created specifically and exclusively for the MSCI 
EAFE Index, are consistent with the Act, for the reasons discussed 
below.
    The Commission notes that proposed Rule 1009A(h) would require that 
the MSCI EAFE Index consist of 500 or more component securities. The 
component securities of the MSCI EAFE Index are listed and traded on 22 
different markets. Further, for options on the MSCI EAFE 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 EAFE 
Index is comprised of more than 900 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 EAFE 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 number of 
countries represented in the index and the requirement on the number of 
securities in the index and the market capitalization, this 
concentration standard is consistent with the Act. Further, the 
Exchange stated that, of the more than 900 components that comprise the 
MSCI EAFE 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 EAFE 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. The Commission notes that, consistent with the 
Exchange's generic listing standards for broad-based index options, 
non-U.S. component securities of the MSCI EAFE Index that are not 
subject to comprehensive surveillance agreements will not, in the 
aggregate, represent more than 20% of the weight of the index.
    In addition, the Commission notes that the proposed listing 
standards require the current value of the MSCI EAFE 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 reasonably 
believe it has adequate system capacity to support the trading of 
options on the MSCI EAFE 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,\16\ 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 EAFE Index.\17\ In addition, the Exchange has stated that options 
on the MSCI EAFE Index would be subject to the same rules that govern 
all Exchange index options, including rules that are designed to 
protect public customer trading.\18\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b)(1).
    \17\ See generally Exchange Rules 1000A through 1108A (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).
    \18\ See Notice, supra note 3 and Exchange Rules 1024-1029. See 
also supra notes 12 and 13.
---------------------------------------------------------------------------

    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,\19\ that the

[[Page 26059]]

proposed rule change (SR-Phlx-2012-28) be, and hereby is, approved.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
---------------------------------------------------------------------------

    \20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-10538 Filed 5-1-12; 8:45 am]
BILLING CODE 8011-01-P


