
[Federal Register Volume 77, Number 198 (Friday, October 12, 2012)]
[Notices]
[Pages 62300-62302]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25086]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68000; File No. SR-ISE-2012-81]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Adopt a Pilot Program To Eliminate Position and Exercise 
Limits in SPY Options

October 5, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 27, 2012, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II 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 amend its rules to eliminate position and 
exercise limits for physically-settled options on the SPDR S&P ETF 
Trust (``SPY'') pursuant to a pilot program. The text of the proposed 
rule change is available on the Exchange's Web site www.ise.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 Exchange 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 these statements may be examined at the places specified in 
Item IV below. The self-regulatory organization has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    ISE proposes to amend Supplementary Material .01 to ISE Rule 412 
and Supplementary Material .01 of ISE Rule 414 to eliminate position 
and exercise limits, respectively, for physically-settled SPY options 
pursuant to a pilot program. This filing is based on a filing 
previously submitted by NYSE MKT LLC (f/k/a NYSE Amex, LLC (``NYSE 
Amex'')), which the Commission recently approved.\3\
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    \3\ See Securities Exchange Act Release No. 67672 (August 15, 
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29).
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    The Exchange began trading SPY options on January 10, 2005. That 
year, the position limit for these options was increased from 75,000 
contracts to 300,000 contracts on the same side of the market.\4\ In 
July 2011, the position limit for these options was again increased 
from 300,000 contracts to the

[[Page 62301]]

current limit of 900,000 contracts on the same side of the market.\5\
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    \4\ See Securities Exchange Act Release No. 51042 (January 14, 
2005), 70 FR 3412 (January 24, 2005) (SR-ISE-2005-05).
    \5\ See Securities Exchange Act Release No. 64760 (June 28, 
2011), 76 FR 39143 (July 5, 2011) (SR-ISE-2011-34).
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    The underlying SPY generally tracks the performance of the S&P 500 
Index and the Exchange states that the SPY and SPY options have deep, 
liquid markets that reduce concerns regarding manipulation and 
disruption in the underlying markets. In support of this proposed rule 
change, the Exchange has collected the following trading statistics for 
SPY and SPY options: (1) The average daily volume (``ADV'') to date (as 
of August 24, 2012) for SPY is 148 million shares; (2) the ADV to date 
in 2012 for SPY options is 2.6 million; (3) the total shares 
outstanding for SPY are 750.3 million; and (4) the fund market cap for 
SPY is $106 billion. The Exchange represents further that there is 
tremendous liquidity in the securities that make up the S&P 500 Index. 
For example, the ADV of the component securities in the S&P 500 Index 
for the 6-month period of February 28, 2012 through August 28, 2012 was 
635,583,189.
    Under the Exchange's proposal, the options reporting requirement 
for SPY options would continue unabated. Thus, the Exchange would still 
require that each Member that maintains a position in SPY options on 
the same side of the market, for its own account or for the account of 
a customer, report certain information to the Exchange. This 
information would include, but would not be limited to, the option 
position, whether such position is hedged and, if so, a description of 
the hedge, and the collateral used to carry the position, if 
applicable. Exchange market makers would continue to be exempt from 
this reporting requirement, as market maker information can be accessed 
through the Exchange's market surveillance systems. In addition, the 
general reporting requirement for customer accounts that maintain an 
aggregate position of 200 or more option contracts would remain at this 
level for SPY options.\6\
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    \6\ See ISE Rule 415(a).
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    In addition, ISE Rule 4.15(b) [sic] provides:

    Electronic Access Members that maintain an end of day position 
in excess of 10,000 non-FLEX equity options contracts on the same 
side of the market on behalf of its own account or for the account 
of a customer, shall report whether such position is hedged and 
provide documentation as to how such position is hedged. This report 
is required at the time the subject account exceeds the 10,000 
contract threshold and thereafter, for customer accounts, when the 
position increases by 2,500 contracts and for proprietary accounts 
when the position increases by 5,000 contracts.

    As the anniversary of listed options trading approaches its 
fortieth year, the Exchange believes that the existing surveillance 
procedures and reporting requirements at ISE, other options exchanges, 
and at the several clearing firms are capable of properly identifying 
unusual and/or illegal trading activity. In addition, routine oversight 
inspections of the Exchange's regulatory programs by the Commission 
have not uncovered any material inconsistencies or shortcomings in the 
manner in which the Exchange's market surveillance is conducted. These 
procedures utilize daily monitoring of market movements via automated 
surveillance techniques to identify unusual activity in both options 
and underlying stocks.\7\
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    \7\ These procedures have been effective for the surveillance of 
SPY options trading and will continue to be employed.
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    Furthermore, large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G.\8\ Options positions are 
part of any reportable positions and, thus, cannot be legally hidden. 
Moreover, the Exchange's requirement that Members file reports with the 
Exchange for any customer who held aggregate large long or short 
positions of any single class for the previous day will continue to 
serve as an important part of the Exchange's surveillance efforts.
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    \8\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns that a Member or its customer may try to maintain an 
inordinately large un-hedged position in an option, particularly on 
SPY. Current margin and risk-based haircut methodologies serve to limit 
the size of positions maintained by any one account by increasing the 
margin and/or capital that a Member must maintain for a large position 
held by itself or by its customer. In addition, the Commission's net 
capital rule, Rule 15c3-1 \9\ under the Securities Exchange Act of 1934 
(the ``Act''),\10\ imposes a capital charge on members to the extent of 
any margin deficiency resulting from the higher margin requirement.
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    \9\ 17 CFR 240.15c3-1.
    \10\ 15 U.S.C. 78s(b)(1).
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Pilot Program
    The Exchange proposes that this rule change be adopted pursuant to 
a pilot program, set to expire December 5, 2013.\11\ The Exchange will 
perform an analysis of the initial pilot program to eliminate position 
limits in SPY after the first twelve (12) months of the pilot program 
(the ``Pilot Report''). The Pilot Report will be submitted within 
thirty (30) days of the end of such twelve (12) month time period. The 
Pilot Report will detail the size and different types of strategies 
employed with respect to positions established as a result of the 
elimination of position limits in SPY. In addition, the report will 
note whether any problems resulted due to the no limit approach and any 
other information that may be useful in evaluating the effectiveness of 
the pilot program. The Pilot Report will compare the impact of the 
pilot program, if any, on the volumes of SPY options and the volatility 
in the price of the underlying SPY shares, particularly at expiration. 
In preparing the report the Exchange will utilize various data elements 
such as volume and open interest. In addition the Exchange will make 
available to Commission staff data elements relating to the 
effectiveness of the pilot program.
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    \11\ The Exchange will notify ISE Members of the establishment 
of the pilot program and the running dates of the pilot program via 
regulatory circular.
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    Conditional on the findings in the Pilot Report, ISE will file with 
the Commission a proposal to either extend the pilot program, adopt the 
pilot program on a permanent basis, or terminate the pilot program. If 
the pilot program is not extended or adopted on a permanent basis by 
December 5, 2013, the position limits for SPY would revert to limits in 
effect at the commencement of the pilot program.
    The Exchange believes that the elimination of position and exercise 
limits on SPY options on a pilot basis is required for competitive 
purposes as well as for purposes of consistency and uniformity among 
the competing options exchanges. This supports the Exchange's current 
proposal to eliminate the position and exercise limits applicable to 
physically-settled SPY options on a pilot basis.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the Securities Exchange Act of 1934 \12\ (the ``Act'') in general, 
and furthers the objectives of Section 6(b)(5) of the Act \13\ in 
particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in

[[Page 62302]]

general to protect investors and the public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    Specifically, the proposed rule change will benefit large market 
makers (which generally have the greatest potential and actual 
liability [sic] to provide liquidity and depth I [sic] the product), as 
well as retail traders, investors, and public customers, by providing 
them with a more effective trading and hedging vehicle. In addition, 
the Exchange believes that the structure of SPY options and the 
considerable liquidity of the market for SPY options diminish the 
opportunity to manipulate this product and disrupt the underlying 
market that a lower position limit may protect against. The Exchange 
also believes that the proposed rule change will benefit a greater 
number of market participants who are ISE Members and members of other 
exchanges. This is because SPY is a multiply listed options class and 
currently there is not a uniform and consistent position and exercise 
limits regime across all of the exchanges that list SPY options. The 
proposed filing will benefit market participants because it will ensure 
consistency and uniformity among the competing options exchanges as to 
the position and exercise limits for a multiply listed options class.

B. Self-Regulatory Organization's Statement on Burden on Competition

    ISE does not believe that this proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. In this regard and as 
indicated above, the Exchange notes that the rule change is being 
proposed as a competitive response to a NYSE Amex filing. ISE believes 
this proposed rule change is necessary to permit fair competition among 
the options exchanges and to establish uniform positions for a multiply 
listed options class.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change does not: (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \16\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \17\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay, noting that doing 
so will ensure fair competition among options exchanges and immediately 
benefit market participants who are ISE members and members of other 
exchanges by ensuring consistency and uniformity across options 
exchanges with respect to the multiply listed SPY options class. The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\18\ Therefore, the Commission hereby waives the 30-day 
operative delay and designates the proposal operative as of October 5, 
2012.
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    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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-ISE-2012-81 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-ISE-2012-81. 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 Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. 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-ISE-2012-81 and 
should be submitted on or before November 2, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25086 Filed 10-11-12; 8:45 am]
BILLING CODE 8011-01-P


