
[Federal Register Volume 77, Number 197 (Thursday, October 11, 2012)]
[Notices]
[Pages 61794-61795]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-24955]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67976; File No. SR-Phlx-2012-105]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto, 
Regarding Treasury Securities Options

October 4, 2012.

I. Introduction

    On August 7, 2012, NASDAQ OMX PHLX LLC (``Exchange'' or ``Phlx'') 
filed 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 
adopt new rules in the Exchange's 1000D Series to permit the listing 
and trading of options on Treasury securities. The proposed rule change 
was published for comment in the Federal Register on August 23, 
2012.\3\ On September 25, 2012, the Exchange filed Amendment No. 1 to 
the proposed rule change.\4\ The Commission received no comments on the 
proposal. 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. 67683 (August 17, 
2012), 77 FR 51088 (August 23, 2012) (``Notice'').
    \4\ In Amendment No. 1, the Exchange proposed minor wording 
changes to substitute the phrase ``options listing timeframe'' for 
the certain other phrases throughout the rule text and Exhibit 1. 
Amendment No. 1 is technical in nature, and therefore the Commission 
is not publishing Amendment No. 1 for public comment.
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II. Description of the Proposal

    The Exchange proposes to adopt rules that would, in conjunction 
with current applicable Exchange rules and procedures, permit the 
listing and trading of options on Treasury securities.\5\ The Exchange 
intends to list and trade standardized options on two specific types of 
marketable on-the-run Treasury securities: notes and bonds. Treasury 
securities options will be designated by reference to the issuer of the 
underlying Treasury security, principal amount, expiration month (and 
year for the longest term option series), exercise price, type (put or 
call), stated rate of interest, and stated date of maturity or nominal 
term to maturity.
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    \5\ Subsection (a)(1) of proposed Rule 1001D defines the term 
``Treasury security'' as a bond or note or other evidence of 
indebtedness that is a direct obligation of, or an obligation 
guaranteed as to principal or interest by, the United States or a 
corporation in which the United States has a direct or indirect 
interest (except debt securities guaranteed as to timely payment of 
principal and interest by the Government National Mortgage 
Association). Securities issued or guaranteed by individual 
departments or agencies of the United States are sometimes referred 
to by the title of the department or agency involved (e.g., a 
``Treasury security'' is a debt instrument that is issued by the 
U.S. Treasury).
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    Pricing and Transparency. Treasury securities are initially sold in 
a scheduled auction process and thereafter trade in a secondary market. 
The Exchange asserts that the prices of Treasury securities are widely 
disseminated, active, and visible to traders and investors. In 
addition, the Exchange represents that it intends to obtain real-time 
Treasury prices from a market data provider so that it can use these 
data in support of the Exchange's market, regulatory, and surveillance 
operations, as well as for opening and determining settlement values 
for Treasury options. The Exchange has represented that, 30 days prior 
to the start of trading Treasury security options, it will make an 
announcement, via an Options Trader Alert, to its member organizations 
regarding the details of the proposed real-time Treasury price 
offering. The Exchange has represented that, on the basis of the real-
time Treasury data that the Exchange is able to get, it may offer an 
alternative Treasury data feed to Exchange members that may desire to 
acquire such data from the Exchange.
    The Exchange would list options only on on-the-run Treasury 
securities. The Exchange believes that these securities are extremely 
liquid and afford excellent price discovery because on-the-run (as 
opposed to off-the-run) Treasury securities are the most recently 
issued U.S. Treasury bonds or notes and are the most frequently traded 
securities of a maturity. Further, the Exchange notes that on-the-run 
Treasury securities are readily quoted and offered by numerous public 
sources and broker-dealers, and that prices are also available from 
exchanges that trade derivatives on Treasuries.
    Trading Rules. Treasury securities options will trade on the 
Exchange's electronic options platform, Phlx XL,\6\ and settle like 
equity options on the

[[Page 61795]]

Exchange. Exchange rules applicable to equity options trading generally 
will be applicable to Treasury securities options unless a specific 
rule in the 1000D Series is to the contrary or supplements an existing 
rule. Trading hours will correspond to the hours during which equity 
options are normally traded on the Exchange, which currently are 9:30 
a.m. to 4 p.m. ET.
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    \6\ See Securities Exchange Act Release No. 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32) (order approving 
Phlx XL II).
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    Terms and Criteria for Listing and Trading. Treasury securities may 
be initially approved by the Exchange as underlying securities for 
Exchange transactions in specific CUSIP options, subject to 
requirements as to size of original issuance (the original public sale 
of an underlying Treasury security must be at least $1 billion in 
principle), aggregate principal amount outstanding, and years to 
maturity. Additionally, approval will extend only to the settled, on-
the-run Treasury securities.\7\ The Exchange will not approve a 
subsequent on-the-run Treasury security until after the expiration of 
all the options that are listed pursuant to this described options 
listing timeframe.
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    \7\ See Phlx Rule 1006D. The proposal is designed to ensure that 
a Treasury security is eligible for underlying options only during 
its most liquid on-the run period. Options on a newly settled 
(subsequent) on-the-run Treasury security can be listed only after 
all the options that are listed pursuant to the preceding options 
listing timeframe expire. This minimizes or negates overlap and 
proliferation of Treasury options. An on-the run Treasury security 
in the options listing timeframe becomes off-the-run when there is a 
subsequent auction for the Treasury security and as a result the 
newly settled security becomes on-the-run. The Exchange will not 
list options on the subsequent on-the-run Treasury security until 
all options listed within the options listing timeframe on the 
immediately preceding on-the-run Treasury security (which has become 
off-the-run) expire.
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    The expiration month and exercise price of each series will be 
determined by the Exchange at the time that the series is first opened 
for trading. The Exchange will open a minimum of one expiration month 
and series for each class of options. The Exchange may open and add 
Treasury options in one or all of the months in the options listing 
timeframe. Treasury security options opened for trading on the Exchange 
will expire on a monthly basis.
    Minimum Price Variation. Treasury securities options will have a 
minimum increment of $0.01.\8\ The Exchange asserts that the proposed 
$0.01 increment is appropriate for Treasury securities options to allow 
traders to make the most effective use of the product for hedging 
purposes. The Exchange also represents that the proposed $0.01 
increments will not cause any capacity problems.
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    \8\ See Phlx Rule 1013D.
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    Series Open for Trading. The Exchange proposes that the exercise 
price of each series of Treasury security options will be fixed at a 
price denominated in $0.50 increments. The exercise price will be 
reasonably close to, and no more than 20% away from, the price at which 
the underlying security is traded in the primary market at the time the 
series of options is first opened for trading.
    Settlement. Treasury securities options will be physically settled, 
European-style options that may be exercised only on the day that they 
expire. Trading in Treasury securities options ordinarily will cease on 
the business day (usually a Friday) preceding the expiration date. The 
expiration date will be the Saturday immediately following the third 
Friday of the expiration month. The settlement process for Treasury 
securities options will be the same as the settlement process for 
equity options under current Exchange rules (e.g., Phlx Rule 1044). 
Payment of the aggregate exercise price must be accompanied by payment 
of accrued interest on the underlying Treasury security.
    Additional information relating to options on Treasury securities--
including definitions, listing standards, expiration, exercise, 
settlement, margin rules, positions limits, doing business with the 
public, and surveillance--can be found in the Notice.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\9\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\10\ which requires that the rules of an 
exchange be designed, among other things, to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts, to 
remove impediments to and to perfect the mechanism for a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. The Commission believes that the 
proposal appropriately balances, on the one hand, the Exchange's desire 
to offer a new product to investors with, on the other hand, the 
necessity of having appropriate rules for listing, trading and margin, 
among other considerations relevant under the Act. The Commission notes 
that it has previously approved similar rules permitting other options 
exchanges to list and trade options on Treasury securities.\11\
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    \9\ 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).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ See Chicago Board Options Exchange (``CBOE'') rules 21.1-
21.31. See also Securities Exchange Act Release No. 18371 (December 
23, 1981), 46 FR 63423 (December 31, 1981) (approving SR-Amex-81-1 
and SR-CBOE-81-27).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-Phlx-2012-105), as modified 
by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-24955 Filed 10-10-12; 8:45 am]
BILLING CODE 8011-01-P


