
[Federal Register Volume 77, Number 247 (Wednesday, December 26, 2012)]
[Notices]
[Pages 76132-76135]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-31017]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68478; File No. SR-BOX-2012-023]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change To 
Increase the Position and Exercise Limits for Options on the iShares 
MSCI Emerging Markets Index Fund to 500,000 Contracts

December 19, 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 December 12, 2012, BOX Options Exchange LLC (``BOX'' or 
``Exchange'') 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 Interpretive Material to Rule 3120 
(Position Limits) to increase the position and exercise limits for 
options on the iShares MSCI Emerging Markets Index Fund (``EEM'') to 
500,000 contracts. The text of the proposed rule change is available 
from the principal office of the Exchange, at the Commission's Public

[[Page 76133]]

Reference Room and also on the Exchange's Internet Web site at http://boxexchange.com.

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 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
    Position limits for exchange-traded fund (``ETFs'') options, such 
as EEM options, are determined pursuant to Rule 3120 (Position Limits) 
and vary according to the number of outstanding shares and trading 
volume during the most recent six-month trading period of an underlying 
stock or ETF. The largest in capitalization and most frequently traded 
stocks and ETFs have an option position limit of 250,000 contracts 
(with adjustments for splits, re-capitalizations, etc.) on the same 
side of the market; smaller capitalization stocks and ETFs have 
position limits of 200,000, 75,000, 50,000 or 25,000 contracts (with 
adjustments for splits, re-capitalizations, etc.) on the same side of 
the market. The current position limit for EEM options is 250,000 
contracts. The purpose of the proposed rule change is to amend 
Interpretative Material (IM-3120-2) to Rule 3120 to increase the 
position and exercise limits for EEM options to 500,000 contracts.\3\ 
There is precedent for establishing position limits for options on 
actively-traded ETFs and these position limit levels are set forth in 
IM-3120-2.\4\
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    \3\ By virtue of IM-3140-1 to Rule 3140, which is not being 
amended by this filing, the exercise limit for EEM options would be 
similarly increased. See IM-3140-1 to Rule 3140 (Exercise Limits).
    \4\ IM-3120-2 lists exceptions to standard position limits which 
are, for put or call option contracts overlying the following 
securities: 300,000 contracts for the DIAMONDS Trust (DIA); 500,000 
contracts for the iShares Russell 2000 Index Fund (IWM); 900,000 
contracts for the PowerShares QQQ Trust (QQQQ); and no limit for the 
Standard and Poor's Depository Receipts Trust (SPY).
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    In support of this proposed rule change, and as noted by the 
Chicago Board Options Exchange, Incorporated (``CBOE'') in a related 
filing,\5\ the below trading statistics compare EEM to IWM and SPY. As 
shown in the table, the average daily volume in 2011 for EEM was 65 
million shares compared to 64.1 million shares for IWM and 213 million 
shares for SPY. The total shares outstanding for EEM was 922.9 million 
compared to 192.6 million shares for IWM and 716.1 million shares for 
SPY. Further, the fund market cap for EEM was $41.1 billion compared to 
$15.5 billion for IWM and $98.3 billion for SPY.
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    \5\ See Securities Exchange Act Release No. 68086 (October 23, 
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066).

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                                                                                   2011 ADV (option        Shares outstanding
                         ETF                           2011 ADV (mil. shares)         contracts)                 (Mil.)           Fund market cap ($bil)
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EEM.................................................                       65                  280,000                    922.9                     41.1
IWM.................................................                     64.1                  662,500                    192.6                     15.5
SPY.................................................                      213                2,892,000                    716.1                     98.3
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    In further support of this proposal, the Exchange represents that 
EEM still qualifies for the initial listing criteria set forth in Rule 
5020(h) for ETFs holding non-U.S. component securities.\6\ EEM tracks 
the performance of the MSCI Emerging Markets Index, which has 
approximately 800 component securities.\7\ ``The MSCI Emerging Markets 
Index is a free float-adjusted market capitalization index that is 
designed to measure equity market performance of emerging markets. The 
MSCI Emerging Markets Index consists of the following 21 emerging 
market country indices: Brazil, Chile, China, Colombia, Czech Republic, 
Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, 
Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and 
Turkey.'' \8\ The Exchange represents that more than 50% of the weight 
of the securities held by EEM are now subject to a comprehensive 
surveillance agreement (``CSA'').\9\ Additionally, the component 
securities of the MSCI Emerging Markets Index on which EEM is based for 
which the primary market is in any one country that is not subject to a 
CSA do not represent 20% or more of the weight of the MSCI Emerging 
Markets Index.\10\ Finally, the component securities of the MSCI 
Emerging Markets Index on which EEM is based for which the primary 
market is in any two countries that are not subject to CSAs do not 
represent 33% or more of the weight of the MSCI Emerging Markets 
Index.\11\
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    \6\ The Exchange notes that the initial listing criteria for 
options on ETFs that hold non-U.S. component securities are more 
stringent than the maintenance listing criteria for those same ETF 
options. See Rule 5020(h) and Rule 5030(h).
    \7\ See http://us.ishares.com/product_info/fund/overview/EEM.htm and http://www.msci.com/products/indices/licensing/msci_emerging_markets/. Identification of the specific securities in the 
EEM and their individual concentrations in the EEM can be accessed 
at: http://us.ishares.com/product_info/fund/holdings/EEM.htm.
    \8\ See http://www.msci.com/products/indices/tools/index.html#EM.
    \9\ See Rule 5020(h)(2)(A).
    \10\ See Rule 5020(h)(2)(B).
    \11\ See Rule 5020(h)(2)(C).
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    The Exchange believes that the liquidity in the underlying ETF and 
the liquidity in EEM options support its request to increase the 
position and exercise limits for EEM options. As to the underlying ETF, 
through October 17, 2012 the year-to-date average daily trading volume 
for EEM across all exchanges was 49.3 million shares. As to EEM 
options, the year-to-date average daily trading volume for EEM options 
across all exchanges was approximately 250,000 contracts. The Exchange 
believes that increasing position limits for EEM options will lead to a 
more liquid and competitive market environment for EEM options that 
will benefit customers interested in this product. Under the Exchange's 
proposal, the options reporting requirement for EEM would continue 
unabated. Thus, the Exchange would still require that each Options 
Participant and associated person of an Options Participant that 
maintain a position in EEM 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.

[[Page 76134]]

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. 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 EEM options.\12\
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    \12\ Reporting requirements are stated in Rule 3150 (Reports 
Related to Position Limits).
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    As the anniversary of listed options trading approaches its 
fortieth year, the Exchange believes that the existing surveillance 
procedures and reporting requirements at BOX Options Exchange LLC, 
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.\13\
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    \13\ These procedures have been effective for the surveillance 
of EEM 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.\14\ Options positions are 
part of any reportable positions and, thus, cannot be legally hidden. 
Moreover, the Exchange's requirement that Options Participants are to 
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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    \14\ 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 an Options Participant or associated person of an Options 
Participants or its customer may try to maintain an inordinately large 
un-hedged position in an option, particularly on EEM. 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 Participant must maintain for a large position held by 
itself or by its customer.\15\ In addition, the Commission's net 
capital rule, Rule 15c3-1\16\ under the Act imposes a capital charge on 
Participants to the extent of any margin deficiency resulting from the 
higher margin requirement, which should serve as an additional form of 
protection.
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    \15\ See Rule 10120 (Margin Requirements) for a description of 
margin requirements.
    \16\ 17 CFR 240.15c3-1.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder, including the 
requirements of Section 6(b) of the Act.\17\ In particular, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5)\18\ requirements that the rules of an exchange be 
designed to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, 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.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 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 ability 
to provide liquidity and depth in 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 EEM options and the considerable 
liquidity of the market for EEM options diminish the opportunity to 
manipulate this product and disrupt the underlying market that a lower 
position limit may protect against.

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 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

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

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

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act\19\ and Rule 19b-4(f)(6) thereunder.\20\
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of 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 fulfilled this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. The Exchange requests that the Commission waive 
the 30-day operative delay so that it can increase the position and 
exercise limits for EEM options immediately, which will result in 
consistency and uniformity among the competing options exchanges as to 
the position and exercise limits for EEM options. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest.\21\ The Commission 
notes the proposal is substantively identical to a proposal that was 
recently approved by the Commission, and does not raise any new 
regulatory issues.\22\ For these reasons, the Commission designates the 
proposed rule change as operative upon filing.
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    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \22\ See Securities Exchange Act Release No. 68086 (October 23, 
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066).
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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

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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-BOX-2012-023 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-BOX-2012-023. 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-BOX-2012-023 and should be 
submitted on or before January 16, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-31017 Filed 12-21-12; 4:15 pm]
BILLING CODE 8011-01-P


