
[Federal Register Volume 77, Number 130 (Friday, July 6, 2012)]
[Notices]
[Pages 40112-40118]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16519]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67315; File No. SR-NYSEMKT-2012-14]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Proposed Rule Change Adopting Rules Governing the Listing and Trading 
of New Products Known as DIVS, OWLS, and RISKS

June 29, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that, on June 19, 2012, NYSE MKT LLC (``Exchange'' or 
``NYSE MKT''), on behalf of NYSE Amex Options LLC (``NYSE Amex 
Options''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt rules governing the listing and 
trading of a new product known as DORS. 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt rules governing the listing and 
trading of a new product known as DORS.\3\ The Exchange believes that 
the product will give investors additional opportunities to manage risk 
by offering the ability to invest discretely in three instruments that, 
when taken together, represent the total return of a security over a 
certain period of time.
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    \3\ In addition, under proposed Rule 900DORS(a), DORS would be 
included within the definition of ``security'' or ``securities'' as 
those terms are used in the Constitution and Rules of the Exchange.
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a. Generally
    DORS are comprised of three components: DIVS, OWLS, and RISKS, each 
of which is described more fully below. Each component has a different 
risk/reward profile and will be able to be bought or sold separately to 
achieve a specific investment goal. The three components, when combined 
appropriately (i.e., long a DIVS, OWLS, and RISKS on the same 
underlying security, having the same expiration, where the OWLS and 
RISKS have identical strike prices), are expected to generate total 
returns that will attempt to replicate that of a long stock position 
held for the same duration.
    DIVS--The phrase ``Dividend Value of Stock'' or the term ``DIVS'' 
refers to an option contract that returns to the investor a stream of 
periodic cash flows equivalent to the dividends paid by the underlying 
stock. An investor that holds a long DIVS contract will receive cash 
payments equal to the dividend paid by the underlying security. Such 
payment will occur on the ``ex-dividend'' date for the underlying 
security. The investor will continue to have the right to earn such 
dividend-equivalent cash payments as long as the investor remains long 
the DIVS contract up until such time as the DIVS contract expires. DIVS 
contracts will be European style and cannot be exercised prior to 
expiration.
    OWLS--The phrase ``Options With Limited Stock'' or the term 
``OWLS'' refers to an option contract that returns to the investor at 
expiration shares of the underlying security equal in value to the 
lesser of (1) the current value of the underlying security or (2) the 
strike price of the option contract. At expiration, regardless of how 
high the stock closes above the strike price of an OWLS contract, the 
holders of the contract will never receive more than shares of stock 
equivalent in value to the strike price of the OWLS contract. The risk/
reward of a long OWLS position is similar to a buy/write or covered 
call position, less the dividends, if any. A long OWLS position offers 
an investor some limited downside protection in exchange for limiting 
his or her upside participation to the strike price of the OWLS 
contract. OWLS contracts will be European style and cannot be exercised 
prior to expiration.
    RISKS--The phrase ``Residual Interest in Stock'' or the term 
``RISKS'' refers to an option contract that returns to the investor at 
expiration shares of the underlying security equal in value to the 
difference between the value of the underlying security at expiration 
and the strike price of the contract. At expiration, holders of RISKS 
will receive nothing if the stock closes at or below the strike price 
of the RISKS contract. A position consisting of a long RISKS contract 
has a risk/reward similar to that of a long call position. A long RISKS 
position offers an investor all of the upside price appreciation above 
the strike price of the RISKS contract while limiting the investor's 
capital at risk to the premium paid to acquire the RISKS contract. 
RISKS contracts will be European style and cannot be exercised prior to 
expiration.

[[Page 40113]]

    The Exchange believes that the structure of the product will enable 
investors to hedge or obtain exposure to discrete portions of the total 
return of a security. For example, an investor interested in generating 
more current income while eliminating stock price risk could sell both 
the RISKS and OWLS against a long position in XYZ stock.\4\ This would 
enable the investor to continue to vote as a shareholder and retain the 
dividends paid by XYZ for the next five years with no stock price risk. 
In addition, the investor would receive the premium from selling the 
RISKS and OWLS, and could earn interest on that premium. At expiration, 
the investor would deliver 100 shares of XYZ to satisfy settlement of 
the RISKS and OWLS sold. A slightly less conservative investor could 
sell just a RISKS contract against the investor's long stock position 
so that at expiration they will only be obligated to sell some portion 
of their long stock holdings (stock equal in value to the difference--
if any--in price of the stock and the strike price of the RISKS 
contract). In the interim the investor will continue to vote as a 
shareholder, earn the dividends paid by the stock and earn interest on 
the premium received from selling the RISKS contract.
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    \4\ For every 100 shares of stock held long, the investor could 
sell one RISKS, one OWLS, and one DIVS contract and be fully hedged.
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b. Listing Standards
    Any security eligible for listed options pursuant to Rule 915 will 
also be suitable for the listing of DORS. The Exchange will generally 
seek to list DORS contracts on securities that also trade regular 
listed options; however, there may be instances where securities 
eligible for listing and trading options do not have DORS contracts 
listed and vice versa.
    Rule 915 specifies the criteria for underlying securities to be 
eligible for listed options. Generally, underlying securities in 
respect of which put or call option contracts are approved for listing 
and trading on the Exchange must meet the following criteria:
     The security must be duly registered and be an ``NMS 
stock'' as defined in Rule 600 of Regulation NMS under the Securities 
Exchange Act of 1934; and
     The security shall be characterized by a substantial 
number of outstanding shares which are widely held and actively traded.
    Rule 915 also provides that the Board of Directors of the Exchange 
shall from time to time establish guidelines to be considered by the 
Exchange in evaluating potential underlying securities for Exchange 
option transactions. In addition, Rule 915 states that there are many 
relevant factors which must be considered in arriving at such a 
determination. Under Rule 915, the fact that a particular security may 
meet the guidelines established by the Board does not necessarily mean 
that it will be approved as an underlying security. Further, in 
exceptional circumstances an underlying security may be approved by the 
Exchange even though it does not meet all of the guidelines. The 
Exchange may also give consideration to maintaining diversity among 
various industries and issuers in selecting underlying securities. With 
respect to DORS, as a practical matter the Exchange shall generally 
avoid listing DORS on securities that meet the criteria in Rule 915 but 
in fact do not have regular put and call options listed for trading. 
The Exchange believes that DORS are complementary products to regular 
listed put and call options and that price discovery, and hedging 
should be enhanced when both product types are available for trading.
    The Exchange also notes that Rule 916 will apply to DORS. Rule 916 
considers the circumstances in which the Exchange will contemplate the 
withdrawal of approval for underlying securities. Specifically, 
whenever the Exchange determines that an underlying security previously 
approved for Exchange option transactions does not meet the then 
current requirements for continuance of such approval or for any other 
reason should no longer be approved, the Exchange shall not open for 
trading any additional series of options of the class covering that 
underlying security and may thereafter prohibit any opening purchase 
transactions in series of options of that class previously opened, to 
the extent it shall deem such action necessary or appropriate; 
provided, however, that where exceptional circumstances have caused an 
underlying security not to comply with the Exchange's current approval 
maintenance requirements, regarding number of publicly held shares or 
publicly held principal amount, number of shareholders, trading volume 
or market price the Exchange may, in the interest of maintaining a fair 
and orderly market or for the protection of investors, determine to 
continue to open additional series of option contracts of the class 
covering that underlying security. When all option contracts in respect 
of an underlying security that is no longer approved have expired, the 
Exchange may make application to the Securities and Exchange Commission 
to strike from trading and listing all such option contracts. With 
respect to DORS, should regular put and call options on the same 
underlying security cease trading for any reason other than a failure 
to satisfy Rule 916, DORS shall continue to be listed for trading but 
new series shall not be added unless the Exchange determines that in 
the interest of maintaining a fair and orderly market the addition of 
such series is warranted.
c. Rights and Obligations of Holders and Sellers of DORS
    Proposed Rule 902DORS(a) would provide that, subject to the 
provisions of Rules 907 and 909, the rights and obligations of holders 
and sellers of DORS dealt in on the Exchange shall be as set forth in 
the By-Laws and Rules of the OCC. Rule 907 applies to the liquidation 
of positions and provides that, whenever the Exchange shall determine 
that a person or group of persons acting in concert holds or controls, 
or is obligated in respect of, an aggregate position (whether long or 
short) in all option contracts of one or more classes or series dealt 
in on the Exchange in excess of the applicable position limit 
established pursuant to Rule 904, it may direct all members and member 
organizations carrying a position in option contracts of such classes 
or series for such person or persons to liquidate such position as 
expeditiously as possible consistent with the maintenance of an orderly 
market. Whenever such a direction is issued by the Exchange, no member 
organization receiving notice thereof shall accept any order to 
purchase, sell or exercise any option contract for the account of the 
person or persons named in such directive, unless in each instance 
express approval therefore is given by the Exchange, or until such 
directive is rescinded.
    Rule 909 addresses other restrictions on exchange traded options 
transactions and exercises and specifies that the Exchange shall have 
the power to impose, from time to time in its discretion, such 
restrictions on Exchange option transactions or the exercise of option 
contracts in one or more series of options of any class dealt in on the 
Exchange as it deems advisable in the interests of maintaining a fair 
and orderly market in option contracts or in the underlying securities 
covered by such option contracts, or otherwise deems advisable in the 
public interest or for the protection of investors. During the 
effectiveness of any such restriction, no member or member organization 
shall effect any Exchange option transaction or exercise

[[Page 40114]]

any option contract in contravention of such restriction. 
Notwithstanding the foregoing, during the ten (10) business days prior 
to the expiration date of a given series of options, no restriction on 
the exercise of option contracts shall remain in effect with respect to 
that series of options.\5\
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    \5\ In addition, Rule 909 would be explicitly applied to DORS 
through proposed Rule 909DORS.
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    In addition, proposed Rule 902DORS(b) would provide that the 
provisions of Rule 905NY are applicable to DORS. 905NY provides 
generally that neither the Exchange nor its Directors, officers, 
committee members, employees or agents shall be liable to the ATP 
Holders of the Exchange or to persons associated therewith for any 
loss, expense, damages or claims that arise out of the use or enjoyment 
of the facilities or services afforded by the Exchange, any 
interruption in or failure or unavailability of any such facilities or 
services, or any action taken or omitted to be taken in respect to the 
business of the Exchange except to the extent such loss, expense, 
damages or claims are attributable to the willful misconduct, gross 
negligence, bad faith or fraudulent or criminal acts of the Exchange or 
its officers, employees or agents acting within the scope of their 
authority.
d. Role of the Options Clearing Corporation (``OCC'')
    The OCC has indicated a willingness to work with the Exchange to 
issue, clear and settle DORS. The Exchange notes that prior to trading 
of DORS, the OCC will need to amend its rules with respect to DORS and 
amend the existing Options Disclosure Document required pursuant to 
Rule 9b-1 under the Exchange Act \6\ to incorporate disclosure about 
DORS.
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    \6\ 17 CFR 240.9b-1.
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e. Series of DORS Open for Trading
    DORS will be listed with expirations of up to six years from the 
listing date. The Exchange intends to list five consecutive-year 
expiration series at any one time, with the expiration date set to 
coincide with regular options expiration on the third Friday of January 
in each expiration year. For example, as of April 1, 2012, the Exchange 
would expect to list and trade DORS contracts expiring on January 18, 
2013, January 17, 2014, and January 16, 2015, January 15, 2016, and 
January 20, 2017. On the Monday following the expiration of the January 
18, 2013 series, the Exchange would list the series expiring on January 
19, 2018.
    At the initial time of listing, the Exchange will seek to list both 
OWLS and RISKS with strike prices that are slightly in or out of the 
money. Periodically the Exchange will introduce new strikes as 
necessary to ensure that both OWLS and RISKS that are slightly in or 
out of the money will be available for trading. The listing of a new 
OWLS series will result in the listing of a RISKS contract with the 
same terms and vice versa. Standard strike price intervals will apply 
to series of both OWLS and RISKS.
    DIVS, however, will always have one strike available for trading 
for a given expiration series. DIVS will always be listed with a strike 
price of $.01 (with no value attached) since they are intended to give 
investors exposure to a stream of cash flows representing the dividends 
paid by the underlying security during the time the investor owns the 
DIVS contract. For example, DIVS on XYZ stock are listed having a 
strike price of $.01 and an expiration date of January 16, 2017. Assume 
that, as April 1, 2012, XYZ is expected to continue to pay a $.20 
dividend in each of the calendar quarters remaining until the DIVS 
contract expires on January 20, 2017. Given this information, it is 
reasonable to expect that the DIVS contract will be quoted in the 
market place at a price reflective of the net present value of the 
expected future dividends. In this example, assuming a discount rate of 
.78%,\7\ those future dividends that total $3.80 would have a net 
present value of $3.73. Consequently, it is reasonable to expect that 
the market price for this DIVS contract would be centered around this 
value such that the bid may be $3.70 with an ask price of $3.75. An 
investor, having purchased the DIVS contract for $3.75, would receive 
periodic cash payments that will equal dividends paid by the underlying 
security. Therefore, each dividend declared and paid by the underlying 
security will result in a cash payment to the DIVS holder and, 
concurrent with that payment, the market value of the DIVS contract 
will be reduced by the amount of the dividend paid. At expiration, it 
is expected that the DIVS contract, having paid out cash payments over 
its life equal to dividends declared by the underlying security, will 
expire with no value. DIVS are essentially a call option on the future 
dividend stream of the underlying security. As such, there is no need 
for multiple strike prices; rather, the market will price each DIVS 
based on the net present value of the expected future stream of 
dividends.
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    \7\ Assume .78% is the current yield on five-year Treasury 
notes, which is a good approximation for the discount rate that 
would be commonly used in calculating the net present value of a 
future stream of cash flows.
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    After DORS options have been approved for listing and trading on 
the Exchange, the Exchange shall from time to time open for trading 
series of options therein. Within each approved class of DORS options, 
the Exchange may open for trading series of options expiring in 
consecutive calendar years (``consecutive year series''), as provided 
in proposed Rule 903DORS(a)(1). Prior to the opening of trading in any 
series of DORS options, the Exchange shall fix the expiration day, 
expiration month, expiration year and strike price of DORS option 
contracts included in each such series. Consecutive year series will 
result in the various DORS components, DIVS, OWLS, and RISKS, all being 
listed such that no more than 5 consecutive year series exists at any 
one time with the most distant expiration not to exceed 6 years. 
Generally, DIVS, OWLS and RISKS consecutive year series shall expire on 
the third Friday of January. Expiration series with greater than 9 
months until expiration are not subject to rules regarding strike price 
intervals, bid/ask differentials and continuity.
    In addition, proposed Rule 903DORS(b) would provide that the 
provisions of Rule 903A shall apply to DORS, except as provided for in 
Commentary .01 to the rule. Rule 903A provides generally that the 
exercise price of each options series listed by the Exchange shall be 
fixed at a price per share which is reasonably close to the price of 
the underlying at or about the time the Exchange determines to list the 
series. Commentary .01 to proposed Rule 903DORS(b) would provide that 
OWLS and RISKS shall initially be listed with strike prices that are 
slightly out of or in the money. For example, if the underlying 
security is trading at $72.50, the expectation is that OWLS and RISKS 
would be listed with strike prices of $75. New series of OWLS and RISKS 
shall be listed when the underlying security price has moved such that 
existing series are no longer slightly out of the money. OWLS and RISKS 
shall always be listed in pairs--for example, the listing of an OWLS 
contract expiring on January 18, 2013 with a strike price of $75 shall 
also require that a RISKS contract with the same terms be listed. The 
Exchange is also proposing to adopt Commentary .02 which states that 
DIVS, unlike OWLS and RISKS, shall always be listed with a strike price 
of $.01 with no value attached. As additional strike prices for the 
same consecutive year series are added for OWLS and RISKS, there shall 
be no additional strike prices added for

[[Page 40115]]

DIVS. DIVS shall be listed for each expiration series that exists for 
OWLS and RISKS.
f. Symbology
    DORS will be listed using a unique symbol. For example, if DORS 
were listed on Apple Inc., where the stock and the option symbol is 
AAPL, the symbol AAQ might be adopted as the symbol under which DORS on 
Apple Inc. are listed. OWLS, as noted earlier, have a risk/reward 
profile like that of a buy/write. A buy/write is also known as a 
synthetic short put and has the same risk/reward as a cash secured 
short put position. Given this risk/reward profile, the Exchange 
intends to represent OWLS in the systems for quoting, trading and 
clearance as put options. RISKS options, as noted earlier, have a risk/
reward profile like that of a long call position. As such, the Exchange 
intends to represent RISKS options as call options in the systems used 
for quoting, trading and clearance.
    Consistent with established industry practice, DIVS will utilize 
the same symbol used by the OWLS and RISKS with a ``9'' appended to the 
end. For example, if AAQ denotes the OWLS and RISKS contracts on Apple 
Inc. (symbol AAPL), AAQ9 will denote the DIVS on Apple Inc. stock 
because the DIVS contract represents a non-standard deliverable. 
Further DIVS, will be represented within the systems used for quoting, 
trading, and clearance as a call options with a strike price of $.01. 
The Exchange believes that adopting a unique symbol, coupled with 
investor education, will easily allow investors to ascertain that the 
DORS contracts, which settle into something other than 100 shares of 
stock, are different from regular, listed, equity options. The Exchange 
notes that there are a number of products that traded in the past and 
today based on the performance of a security, or securities, that 
settle into something other than 100 shares of stock. For example, 
NASDAQ PHLX, lists and trades options on the relative performance of 2 
securities that settle into cash.\8\ CBOE currently trades credit event 
binary options, which utilize a slightly different symbol. These 
options only pay off cash in the event of a credit event, such as a 
default on existing debt.\9\ The Exchange has traded another type of 
binary option, called Fixed Return Options, based on the performance of 
equities and ETF. These options pay either $0 or $100 at expiration 
depending upon whether they finish in the money.\10\ The Exchange 
believes that given the past and current practice of trading non-
standard options utilizing different symbols, coupled with appropriate 
educational efforts, the proposed DORS symbol methodology will be 
sufficient to make investors aware that the DORS product delivers 
something other than 100 shares of stock at expiration.
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    \8\ See http://www.nasdaqtrader.com/Micro.aspx?id=alpha for a 
description of NASDAQ OMX Alpha Index Options.
    \9\ See http://www.cboe.com/micro/credit/AvailableCebos.aspx.
    \10\ See Rules 900FRO to 980FRO.
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g. Quote and Trade Reporting
    The Exchange intends to list and trade the DORS components as 
standard options contracts. Quotes and trades will be reported over the 
Securities Information Processor (``SIP'') known as the Options Price 
Reporting Authority.
h. Position Limits
    The Exchange proposes to adopt a new Rule 904DORS to establish 
position limits for OWLS and RISKS consistent with the provisions of 
Rule 904, except as provided for below. Since OWLS and RISKS options 
are of the type known as European exercise, the Exchange believes that 
it is appropriate for positions in OWLS and RISKS to be segregated from 
positions in regular listed options on the same underlying security. 
For example, Rule 904, Commentary .07 specifies that if XYZ stock had 
traded more than 100,000,000 shares during the previous six-month 
trading period, it would qualify for the highest tier of position 
limits applicable to standard listed options, which is presently 
250,000 contracts. OWLS and RISKS contracts that have XYZ stock as the 
underlying security in turn would have their own position limit of 
250,000 contracts, separate and distinct from the 250,000-contract 
position limit applicable to the standard listed option. The Exchange 
notes that granting a separate and distinct position limit for OWLS and 
RISKS that is equal to the position limit for standard options on the 
same underlying security is warranted since OWLS and RISKS are European 
style and may not be exercised before expiration. This inability to 
exercise OWLS and RISKS before expiration means that an investor could 
not combine a position in OWLS and RISKS with a position in standard 
options on the same underlying security and attempt to manipulate the 
underlying security via the exercise of those options.
    Long positions in both OWLS and RISKS are considered to be on the 
same side of the market for purposes of position limit reporting and 
compliance. Long RISKS contracts are essentially long calls, and long 
OWLS contracts are essentially synthetic short puts. Conversely, short 
positions in both OWLS and RISKS are also considered to be on the same 
side of the market for purposes of position limit reporting and 
compliance. For example, a position consisting of long 150,000 OWLS on 
XYZ and long 150,000 RISKS on XYZ would be considered to have a 
position of 300,000 contracts on the same side of the market, and 
absent any hedge exemptions as provided for in Rule 904, such position 
would be considered to be in violation of that Rule.
    The Exchange proposes that position limits in DIVS be subject to 
their own separate limit, also determined in accordance with Rule 904. 
DIVS are call options that give investors exposure to the stream of 
cash flows equivalent to any dividends paid by the underlying security. 
As such, there is no potential to try to influence the underlying stock 
price by either purchasing large quantities of DIVS or exercising large 
quantities of DIVS since they are settled in cash and they are also 
European style and only exercisable at expiration. Due to their 
structure, at expiration DIVS will be worthless, having already paid 
out their value periodically over their life as the underlying stock 
itself goes ex-dividend. For these reasons, the Exchange believes that 
this aggregation of position limits for DIVS is not warranted.
    The Exchange proposes to allow hedge exemptions for DORS in the 
case where an investor is long the same quantity of DIVS, OWLS and 
RISKS all expiring at the same time, and where the OWLS and RISKS 
having the same strike price can be fully hedged by a short position in 
the underlying security such that for every 100 shares of stock that 
are sold short against a long position consisting of 1 DIV, 1 OWL and 1 
RISK. Conversely, a short position consisting of 1 DIV, 1 OWL and 1 
RISK is deemed to be fully hedged by a long position consisting of 100 
shares of the underlying security. Such positions, as fully hedged, are 
exempt from the position limits described in this Rule 904DORS.
i. Reports of Positions
    The Exchange proposes to adopt a new Rule 906DORS that mirrors 
existing Rule 906 for Reports of Positions. Consistent with current 
practice, positions in DIVS, OWLS and RISKS will be subject to the 200-
contract reporting requirement under Rule 906. In addition, long RISKS 
and OWLS would be considered to be on the same side of the market and 
would be aggregated for purposes of this reporting

[[Page 40116]]

requirement. DIVS would be subject to their own position limit, and 
accordingly, positions in DIVS would not be aggregated with RISKS or 
OWLS.
    In computing reportable positions under Rule 906DORS, DORS on 
underlying individual stocks, indexes, Exchange-Traded Fund Shares and 
Section 107 Securities shall not be aggregated with non-DORS option 
contracts.
j. Exercise, Settlement and Dividend Equivalent Exchange Date
    The exercise style for all DORS components will be European style, 
where exercise and assignment only take place at expiration. 
Additionally, all DORS components will be automatically exercised, to 
be settled in accordance with the policies and procedures of the OCC as 
further described below.
    DIVS Settlement: Settlement of DIVS will be for cash only if there 
are previously declared but unpaid dividends on the underlying stock. 
Though all DIVS contracts will be limited to strike prices of $0.01, 
settlement will not require delivery (receipt) of $1 per contract 
assigned (exercised) because there is no value attached to the strike 
price; the only amount due will be potentially a cash amount equal to 
any dividend amount that the underlying security is ``ex'' on 
expiration Friday. As noted earlier, a DIVS contract will have paid out 
any of its value during the life of the contract whenever the 
underlying security has declared a dividend payment.
    OWLS and RISKS Settlement: Settlement of OWLS and RISKS will be 
made via a combination of shares of the underlying security plus cash 
in lieu of any fractional shares of the underlying security, except 
that RISKS may expire worthless and convey nothing at expiration upon 
assignment. At expiration, holders of OWLS will receive shares of the 
underlying security plus cash in lieu of fractional shares equal to the 
lesser of the composite closing price of the stock or the strike price 
of the OWLS contract.
    For example, at the close of trading on expiration (typically the 
third Friday in January), XYZ security has a composite closing price of 
$78.35. There are two series of expiring OWLS contracts, one having a 
strike price of $75 and one having a strike price of $80. The holder of 
the OWLS contract with a strike price of $75 would receive a 
combination of shares and cash in lieu of fractional shares equal to 
$75. With the stock closing at $78.35, this would mean the holder of 
the $75 strike OWLS contract would receive 95 shares of XYZ plus cash 
in lieu of .724313 shares or cash of $56.75. This result is arrived at 
by computing how many shares are needed to deliver $75 per share or 
$7,500 per contract in value to the long OWLS holder. By dividing $75 
by the current value of the stock, one can calculate the number of 
shares required to settle the OWLS contract at expiration. In this 
example, $75 divided by $78.35 results in .95724313. This figure, when 
multiplied by the contract multiplier (100), results in 95 whole shares 
of XYZ plus fractional shares of .724313 that will be paid in cash. The 
holder of the OWLS contract with a strike price of $80 would receive 
100 shares of XYZ equal in value to the composite closing price of the 
stock--in this case 100 shares at $78.35.
    RISKS contracts will settle for shares of stock equal to the 
value--if any--between the difference of the composite closing price of 
the stock at expiration and the strike price of the RISKS contract. For 
example, at the close of trading on expiration (typically the third 
Friday in January), XYZ security has a composite closing price of 
$78.35. There are two series of expiring RISKS contracts, one having a 
strike price of $75 and one having a strike price of $80. The holder of 
the RISKS contract with a strike price of $75 would receive shares of 
XYZ plus cash in lieu of any fractional shares, equal in value to $3.35 
(the difference between the composite close in the security and the 
strike price). In this case that would translate into four shares of 
XYZ (having a value of $313.40) plus cash in lieu of .275686 fractional 
shares (having a value of $21.60), resulting in a long position of cash 
and stock worth a total of $335. The RISKS contract with a strike price 
of $80 would expire worthless and the holder would receive nothing at 
expiration.
    As noted previously, DIVS holders are entitled to receive cash 
payments during the time they hold the contract that are equivalent to 
the dividend stream on the underlying security. The transfer of 
payments between those with long and short positions in DIVS contracts 
of the same terms will occur on the Dividend Equivalent Exchange Date 
(``DExD''). The DExD will coincide with the ``ex-dividend'' date for 
the underlying security. The OCC will credit long DIVS with cash equal 
to the dividend on the ``ex-dividend'' date based on publicly available 
information from sources including, but not limited to, Bloomberg, 
Reuters, information circulars from listing exchanges and press 
releases by the underlying security's issuer. This cash will be debited 
from those accounts that are short DIVS contracts of the same terms. 
If, for example, XYZ stock goes ``ex'' $.50 per share, the holder of 
the DIVS contract on XYZ would receive $50 per DIVS contract held long 
in its account on the DExD, which is also the ``ex-dividend'' date of 
the underlying security XYZ. Short positions in DIVS on XYZ would be 
debited $50 per contract on the DExD.
    The exercise, settlement, and dividend exchange date practices and 
procedures outlined above will be codified in new Rule 980DORS.
k. Hedging
    A position consisting of a long DIVS contract, a long OWLS contract 
and a RISKS contract of the same strike, all expiring at the same time, 
will have yielded investment returns identical to those of an investor 
long 100 shares of the underlying stock for the same period of time. By 
virtue of this, hedging of DORS is fairly straightforward and the 
introduction of DORS should create additional arbitrage opportunities 
between the underlying stock, listed options on the same underlying 
stock and the DORS, which will be beneficial to investors in any of the 
related instruments due to the increased liquidity and the transparency 
DORS bring to the market.
l. Margin
    For both RISKS and OWLS, customer purchases must be paid for in 
full, consistent with how purchases of option contracts are handled 
under present margin rules. Customers who are selling RISKS and OWLS 
will be subject to standard options margining. For example, the seller 
of an 85 strike RISKS contract on XYZ stock that expires on 1/21/17 
will be expected to post margin equivalent to 100% of the current 
market value of the contract, reduced by any out-of-the-money amount 
not to be less than 20% for initial and/or for maintenance purposes, 
with a 10% minimum margin requirement. If XYZ were trading at $87.00 
per share and the current price of the 85 RISKS contract is $16.20,\11\ 
a Customer selling the 85 strike RISKS contract would be expected to 
post margin equal to $1,740 (20% of $8,700, which is the current market 
value of 100 shares of XYZ) because that amount is greater than the 
current market price of the RISKS contract ($16.20 x 100 = $1,620). A 
covered writer of a RISKS contract is

[[Page 40117]]

someone who is long 100 shares of the underlying security for each 
RISKS contract sold short, and such a person would not be required to 
post margin for that covered position.
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    \11\ Using a standard pricing model such as Black-Scholes, the 
price of the 85 strike RISKS expiring on 1/21/17 would be higher 
than the $2 difference between the current price of XYZ and the 85 
strike price principally due to the length of time until expiration.
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    Similarly, if the 85 strike OWLS contract on XYZ stock that expires 
on 1/21/17 is trading at $60.40, the seller of that OWLS contract would 
be required to post margin equal to 100% of the market value of the 
OWLS contract ($6,040, as this is greater than 20% of the current 
market value of the underlying security after being reduced by the out-
of-the-money amount, if any (20% of $8700 is $1,740)). A covered writer 
of OWLS is anyone who is long 100 shares of the underlying security for 
each OWLS contract sold short, and such a person would not be required 
to post margin for that covered position.
    DIVS also have an existing contract with similar risks. 
Specifically, the Chicago Board Options Exchange (``CBOE'') lists and 
trades options on several indexes designed to track the dividends paid 
by the constituents of the index. Existing margin rules for those 
products require that ``[p]urchases of puts or calls with 9 months or 
less until expiration must be paid for in full. Writers of uncovered 
puts or calls must deposit/maintain 100% of the option proceeds plus 
15% of the aggregate contract value (current index level x $100) minus 
the amount by which the option is out-of-the-money, if any, subject to 
a minimum for calls of option proceeds plus 10% of the aggregate 
contract value and a minimum for puts of option proceeds plus 10% of 
the aggregate exercise price amount.'' \12\ The Exchange notes that 
while there is no ``underlying contract value,'' there is an underlying 
security associated with DIVS. Extending the margin requirements in 
place for the existing dividend-based product to DIVS and utilizing the 
value of the underlying security in lieu of the ``underlying contract 
value'' makes economic sense. Therefore, the Exchange proposes that 
writers of uncovered DIVS contracts be margined as follows:
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    \12\ See CBOE Rule 12.3.
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    Except as provided below, no DIVS contract carried for a customer 
shall be considered of any value for the purpose of computing the 
margin required in the account of such customer. The initial and 
maintenance margin on any DIVS contract carried long in a customer 
account is 100% of the purchase price of such DIVS contract. The margin 
required for any DIVS contract carried short in a customer account is: 
(a) For Initial Margin, 100% of the DIVS contract sale proceeds plus 
20% of the value of 100 shares of the security underlying the DIVS for 
each DIVS contract carried short; and (b) for Maintenance Margin, 100% 
of the DIVS current market price for DIVS contracts plus a minimum of 
10% of the value of 100 shares of the security underlying the DIVS for 
each DIVS contract carried short.
    The Exchange may also require uncovered writers to post additional 
margin if it deems it necessary; any such increase will be disseminated 
via an information circular sent to all ATP Holders. A covered writer 
of DIVS contracts is someone who is long 100 shares of the underlying 
security for each DIVS contract sold short. A buyer of DIVS will be 
required to pay for the contract in full.
    Margin on Spreads: Under the proposed rule change, no margin is 
required on a DIVS contract carried short in a customer account that is 
offset by a long DIVS contract for the same underlying security or 
instrument that expires after the date on which the short DIVS contract 
expires.
    Fully Hedged Positions: Under the proposed rule change, a position 
consisting of a DIVS contract carried short in a customer account that 
expires at the same time as an OWLS contract and an RISKS contract with 
the same strike prices, on the same underlying security or instrument, 
that are also carried short in a customer account, shall be treated as 
fully hedged if such position is offset by a long position consisting 
of the appropriate number of shares of the underlying security or 
instrument. Such a short position shall not require any additional 
margin to be posted.
    Cash Account Positions: Under the proposed rule change, a DIVS, 
OWLS, or RISKS contract carried short in a customer account would be 
deemed a covered position, and eligible for the cash account, as 
described below:
    A DIVS contract carried short in a customer account is deemed a 
covered position, and eligible for the cash account, provided any one 
of the following either is held in the account at the time the contract 
is written or is received into it promptly thereafter: a long DIVS 
contract on the same underlying security or instrument that expires 
after the date on which the short DIVS contract expires.
    An OWLS contract carried short in a customer account is deemed a 
covered position, and eligible for the cash account, provided any one 
of the following either is held in the account at the time the contract 
is written or is received into it promptly thereafter: a long OWLS 
contract on the same underlying security or instrument, having a strike 
price equal to or higher than the short OWLS contract, that expires on 
or after the date on which the short OWLS contract expires.
    A RISKS contract carried short in a customer account is deemed a 
covered position, and eligible for the cash account, provided any one 
of the following either is held in the account at the time the contract 
is written or is received into it promptly thereafter: a long RISKS 
contract on the same underlying security or instrument, having a strike 
price equal to or lower than the short RISKS contract, that expires on 
or after the date on which the short RISKS contract expires.
m. Voting Rights
    As with regular listed options, none of the DORS components convey 
any of the voting rights a shareholder of the common stock enjoys until 
the option contract(s) are exercised, and, where appropriate, settled 
into shares of the underlying security. At that time, after exercise 
and assignment have taken place, anyone who ends up with a long 
position in shares of the underlying security would be deemed to be a 
shareholder of record in the security, and he or she would be afforded 
all the rights of a shareholder at that time.
n. Surveillance
    The Exchange represents that the existing surveillance systems that 
are in place for listed options are adequate to perform surveillance 
for the DORS components.
o. Systems Capacity
    The Exchange represents that DORS will not place an undue burden on 
its systems capacity.
p. FLEX Trading
    The Exchange does not initially intend to allow DORS components to 
trade via the FLEX trading procedures in Rules 900G to 909G. If the 
Exchange makes a determination to permit DORS to trade via FLEX trading 
procedures, it will submit a proposed rule change to the Commission to 
clarify the manner in which such trading will be permitted at that 
time.
q. Implementation Date
    In addition to Commission approval, the implementation of this 
proposed rule change will be contingent on other factors, including the 
completion of any changes that may be necessary to the Exchange's 
regulatory and surveillance program. Accordingly, the Exchange does not 
intend to implement the proposed rule change immediately upon

[[Page 40118]]

Commission approval. The Exchange intends to issue a notice announcing 
the implementation date of this rule change within six months after 
Commission approval of the proposed rule change.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Exchange Act,\13\ in general, and furthers the 
objectives of Section 6(b)(5) of the Exchange Act,\14\ in particular, 
in that it is designed to promote just and equitable principles of 
trade, remove impediments to and perfect the mechanisms of a free and 
open market and a national market system and, in general, protect 
investors and the public interest by offering three new products that 
allow investors to hedge their risks in ways that do not currently 
exist. The DORS structure will allow investors for the first time to 
separate the total return of a security into three distinct components 
of varying levels of risk to allow individuals to further refine the 
risk within their portfolio. An especially novel aspect is the DIVS 
component, which will for the first time allow investors to hedge the 
expected stream of dividends to be paid by a security.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 rule-comments@sec.gov. Please include 
File Number SR-NYSEMKT-2012-14 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-NYSEMKT-2012-14. 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 Section, 100 F Street 
NE., Washington, DC 20549 on official business days between 10:00 a.m. 
and 3:00 p.m. Copies of the filing will also be available for 
inspection and copying at the NYSE's principal office and on its 
Internet Web site at www.nyse.com. 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-NYSEMKT-2012-14 and should be submitted on or before 
July 27, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16519 Filed 7-5-12; 8:45 am]
BILLING CODE 8011-01-P


