Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing of Amendment No. 4 to a Proposed Rule Change and Order Granting Accelerated Approval to a Proposed Rule Change, as Modified by Amendment Nos. 2, 3, and 4 Thereto, Relating to the Listing and Trading of Fixed Return Options, 46523-46525 [E7-16330]

Download as PDF Federal Register / Vol. 72, No. 160 / Monday, August 20, 2007 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56251; File No. SR–Amex– 2004–27] Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing of Amendment No. 4 to a Proposed Rule Change and Order Granting Accelerated Approval to a Proposed Rule Change, as Modified by Amendment Nos. 2, 3, and 4 Thereto, Relating to the Listing and Trading of Fixed Return Options August 14, 2007. I. Introduction On April 29, 2004, the American Stock Exchange LLC (‘‘Amex’’ or ‘‘Exchange’’) 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 list and trade Fixed Return Options (‘‘FROs’’). Amex filed Amendment Nos. 1, 2, 3, and 4 to the proposal on September 26, 2006, April 19, 2007, May 23, 2007, and August 14, 2007, respectively.3 The proposed rule change, as modified by Amendment Nos. 2 and 3, was published for comment in the Federal Register on June 7, 2007.4 The Commission received no comment letters regarding the proposed rule change, as modified by Amendment Nos. 2 and 3. This order provides notice and solicits comments from interested persons regarding Amendment No. 4 and approves the proposed rule change, as amended, on an accelerated basis. II. Description of the Proposal A. FROs Generally Amex proposes to list and trade cashsettled, European-style FROs on individual stocks and exchange-traded funds (‘‘ETFs’’) that satisfy specified listing criteria. FROs are binary options and, as such, differ from the options currently traded on U.S. options exchanges by providing a discontinuous or non-linear payout. An in-the-money 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Amendment No. 2 replaced the original filing and Amendment No. 1 in their entirety. Amendment No. 3 revised the rule text relating to margin requirements. Amendment No. 4 corrected minor errors in the text of the proposed rules, provided representations concerning surveillance procedures and systems capacity, clarified the use of composite prices in calculating the volume weighted average price (‘‘VWAP’’), and clarified the proposed position reporting requirements. 4 See Securities Exchange Act Release No. 55843 (June 1, 2007), 72 FR 31636. pwalker on PROD1PC71 with NOTICES 2 17 VerDate Aug<31>2005 16:53 Aug 17, 2007 Jkt 211001 FRO will pay a fixed sum at expiration regardless of the magnitude of the difference between the option’s exercise price and the settlement price. Amex proposes to list Finish HighSM (‘‘Finish High’’) FROs, which will return $100 per contract if the settlement price of the underlying security is above the strike price at expiration, and Finish LowSM (‘‘Finish Low’’) FROs, which will return $100 per contract if the settlement price of the underlying security is below the strike price at expiration.5 Any in-the-money FRO will be exercised automatically at expiration.6 B. Listing Standards The initial listing criteria for FROs require that an individual stock underlying an FRO meet the criteria for underlying securities in Amex Rule 915, ‘‘Criteria for Underlying Securities,’’ and, in addition, have: (1) Minimum market capitalization of at least $40 billion; (2) minimum trading volume, in all markets in which the security trades, of at least one billion shares in the preceding 12 months; (3) minimum average daily trading volume of four million shares; (4) minimum average daily trading value of at least $200 million during the previous six months; and (5) a minimum market price per share of at least $10, as measured by the closing price reported in the primary listed market in which the security is traded, over the previous five consecutive business days preceding the date on which Amex submits a certificate to the Options Clearing Corporation (‘‘OCC’’) for listing and trading.7 An ETF underlying an FRO would have to meet these five additional criteria along with the requirements of Amex Rule 915, except for the minimum market capitalization requirement.8 The continued listing criteria for FROs require that an individual stock underlying an FRO satisfy the requirements of Amex Rule 916, ‘‘Withdrawal of Approval of Underlying Securities,’’ and, in addition, have: (1) Minimum market capitalization of at least $30 billion; (2) minimum trading volume, in all markets trading the security, of at least one billion shares in the preceding 12 months; (3) minimum average daily trading volume of four million shares; (4) minimum average daily trading value of at least $125 million during the last six months; and (5) an underlying market price per share 5 See Amex Rule 900FRO(b)(2) and (3). Amex Rule 980FRO. 7 See Amex Rule 915FRO, Commentary .01. 8 See Amex Rule 915FRO, Commentary .02. 6 See PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 46523 of at least $5 at the time additional series are listed for trading.9 An ETF underlying an FRO would have to meet these five additional criteria along with the requirements of Amex Rule 916, except for the minimum market capitalization requirement.10 C. Role of OCC The OCC plans to file a proposal to issue, clear, and settle FROs. According to Amex, the OCC also plans to file a proposal to revise the Options Disclosure Document (‘‘ODD’’) required under Rule 9b–1 of the Act 11 to incorporate FROs. D. Volume Weighted Average Price Settlement To reduce concerns regarding potential price manipulation at expiration due to the ‘‘all-or-nothing’’ return provided by an FRO, Amex proposes to settle FROs using an all-day volume weighted average price (‘‘VWAP’’) based on trading in the underlying security on the last trading day prior to expiration.12 To calculate the VWAP, Amex will use composite prices during regular trading hours as reported by industry price vendors.13 If the security underlying an FRO does not trade or is unavailable during regular trading hours at expiration, the settlement price may be fixed pursuant to the OCC’s rules on a basis that the OCC believes is appropriate under the circumstances, including using the last sale price during regular trading hours on the most recent trading day for which a last sale price is available.14 Amex will publish and disseminate the current value of the VWAP calculation for FROs at least every 15 seconds throughout the last trading day prior to expiration. Amex will disseminate the VWAP settlement price as the official settlement price for FROs and will make it publicly available 9 See Amex Rule 916FRO, Commentary .01. Amex Rule 916FRO, Commentary .03. 11 17 CFR 240.9b–1. 12 See Amex Rule 910FRO(a). The VWAP for an underlying security is the sum of the dollar value of reported trades (price multiplied by the number of shares traded), divided by the total number of shares traded during the entire last day of trading prior to expiration. See Amex Rule 900FRO(b)(4). 13 See Amex Rule 910FRO(a). Composite prices are prices reported to the consolidated tape from any participating exchange or market. Amex notes that the OCC currently uses composite pricing in connection with the settlement of expiring equity options. The composite closing price is the last reported sale price from any eligible trade source (i.e., primary listing market or participating regional market). It is not an average price. See Securities Exchange Act Release No. 49045 (January 8, 2004), 69 FR 2377 (January 15, 2004) (notice of filing and immediate effectiveness of File No. SR–OCC–2003– 01). 14 See Amex Rule 910FRO(a), Commentary .01. 10 See E:\FR\FM\20AUN1.SGM 20AUN1 46524 Federal Register / Vol. 72, No. 160 / Monday, August 20, 2007 / Notices through various market data vendors and on the Amex Web site at http:// www.amex.com. E. Position and Exercise Limits The position limits for FROs will be 25,000 contracts on the same side of the market, and positions in FROs will not be aggregated with positions in other options on the same underlying stock or ETF for purposes of determining compliance with the position limits.15 Amex is not proposing exercise limits for FROs because FROs will be exercised automatically at expiration if the settlement price of the underlying security is greater than the strike price of a Finish High FRO or less than the strike price of a Finish Low FRO.16 FROs will not be subject to any qualified hedge exemptions from position limits. Positions in FROs must be reported to Amex when an account establishes an aggregate position on the same side of the market of 200 or more contracts,17 and the provisions of Amex Rule 906, ‘‘Reporting of Options Positions,’’ will apply to FROs.18 Amex Rule 906(b) requires that a member, other than an Amex market maker, that maintains an FRO position in excess of 10,000 contracts on the same side of the market, for its own account or the account of its customer, report certain information to Amex, including whether the position is hedged, a description of the hedge, and, if applicable, a description of the collateral. Amex believes that the reporting requirements under Amex Rule 906 and the surveillance procedures for hedged positions will enable Amex to closely monitor sizable FRO positions and corresponding hedges.19 F. Margin The minimum margin on any FRO carried short in a customer’s account is the difference between $100 and the proceeds from the sale of the FRO, which must remain in the customer’s account.20 A customer account with a long position in an FRO must initially deposit and maintain margin equal to at least 100% of the purchase price of the FRO.21 15 See Amex Rule 904FRO(a) and (b). Amex Rule 980FRO. 17 See Amex Rule 906FRO. 18 See Amex Rule 906FRO. 19 Amex notes that hedge information for member firm and customer accounts with 200 or more contracts are reported electronically via the Large Options Position Report. In addition, Amex notes that specialist and registered options trader account information is reported to Amex by the member’s clearing firm. 20 See Amex Rule 462(d)(10)(D). 21 See Amex Rule 462(d)(10)(B). pwalker on PROD1PC71 with NOTICES 16 See VerDate Aug<31>2005 16:53 Aug 17, 2007 Jkt 211001 No margin is required for an FRO position carried short against an existing long position in the same FRO, or when the writer’s obligation is secured by a specific deposit or escrow deposit meeting the entire $100 obligation under the FRO.22 G. Bid-Ask Differentials and Minimum Price Variations A specialist or registered trader is expected to quote with no more than $0.25 between the bid and the offer for each FRO contract, except during the last trading day prior to expiration, when the maximum width may be $0.50.23 In addition, when the bid/ask differential in the underlying security is greater than $0.25, or $0.50 on the last trading day prior to expiration, the permissible quote width for an in-themoney FRO series may be identical to the quote width in the underlying security.24 Amex Rule 952, ‘‘Minimum Price Variations,’’ generally provides that the minimum price variation (‘‘MPV’’) for an option is: (i) $0.05 for options quoted under $3 a contract; and (ii) $0.10 for options quoted at $3 a contract or greater. For the options classes included in the Penny Quoting Pilot Program, the MPV is: (i) $0.01 for options quoted under $3 a contract; and (ii) $0.05 for options quoted at $3 a contract or greater.25 The MPV for FROs in classes not included in the Penny Quoting Pilot Program will be $0.05, and $0.01 for classes in the Penny Quoting Pilot Program. Amex will apply to FROs the existing industry convention of multiplying an option’s quoted price by $100 to determine its premium. For example, for an FRO that is quoted at $0.50, an investor would pay $50.00 ($0.50 × 100). H. Other Considerations Amex Rule 903, ‘‘Series of Options Open for Trading,’’ will apply to FROs.26 Pursuant to Amex Rule 903, Amex generally opens up to four expiration months for an options class when it initially lists the class for trading. Amex will use the same expiration cycle for FROs as it uses for traditional options. Similarly, Amex will use the strike price intervals provided in Amex Rule 22 See Amex Rule 462(d)(10)(F). Amex Rule 958FRO. 24 See Amex Rule 958FRO. 25 See Securities Exchange Act Release No. 55162 (January 24, 2007), 72 FR 5738 (February 1, 2007). In addition, options on the Power Shares QQQ Trust trade at an MPV of $0.01 for all options premiums. 26 See Amex Rule 903FRO. 903, ‘‘Series of Options Open for Trading,’’ and the related commentaries for FROs. Securities underlying options classes included in the $1 strike price pilot program 27 and the 21⁄2-point strike price program 28 may underlie FROs, provided that they meet the listing standards for FROs. Amex represents that symbols will be created for FROs that represent the underlying security, the fact that the option is an FRO rather than a traditional put or call, the expiration date, strike price, and the exchange(s) trading the FRO. III. Discussion The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.29 Specifically, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,30 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission believes that FROs will provide investors with a potentially useful investment choice. The proposal will extend to certain binary options the benefits of a listed exchange market, which include: A centralized forum for price discovery; pre- and post-trade transparency; standardized contract specifications; and the guarantee of the OCC. The Commission believes that the proposal is reasonably designed to address potential manipulation concerns associated with FROs’ nonlinear return. The initial and continuing listing standards for FROs should ensure that only highly capitalized, actively traded stocks and ETFs are eligible to underlie FROs, and the settlement price for FROs is based on an all-day VWAP during the last trading day prior to expiration. These elements should reduce the potential for manipulating the stock or ETF underlying an FRO to benefit an FRO position. 23 See PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 27 See Amex Rule 903, Commentary .06. Amex Rule 903, Commentary .07. 29 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). 30 15 U.S.C. 78f(b)(5). 28 See E:\FR\FM\20AUN1.SGM 20AUN1 Federal Register / Vol. 72, No. 160 / Monday, August 20, 2007 / Notices The Commission believes that the proposed position limits and margin rules for FROs are reasonable and consistent with the Act. The proposed position limit of 25,000 contracts in any FRO class appears to reasonably balance the promotion of a free and open market for these securities with minimization of incentives for market manipulation. The proposed margin rules appear reasonably designed to deter a member or its customer from assuming an imprudent position in FROs. In support of this proposal, Amex made the following representations: • Amex has in place an adequate surveillance program to monitor trading in FROs and intends to largely apply its existing surveillance program for options to the trading of FROs; and • Amex has the necessary systems capacity to support the new options series that would result from the introduction of FROs. This approval order is based on Amex’s representations. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 4, including whether Amendment No. 4 is consistent with the Act. Comments may be submitted by any of the following methods: pwalker on PROD1PC71 with NOTICES Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–Amex–2004–27 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–Amex–2004–27. This file number should be included on the subject line if e-mail 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 VerDate Aug<31>2005 16:53 Aug 17, 2007 Jkt 211001 those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of Amex. 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–Amex–2004–27 and should be submitted on or before September 10, 2007. V. Accelerated Approval The Commission finds good cause for approving the proposed rule change, as amended, prior to the thirtieth day after the date of publication of notice of filing of Amendment No. 4 in the Federal Register. In Amendment No. 4, Amex provided representations regarding surveillance and systems capacity and corrected minor errors in the text of the proposed rules. In addition, Amendment No. 4 clarified the use of composite prices in calculating the allday VWAP that will be used to establish the settlement price for FROs, and clarified that positions of 10,000 contracts, rather than 25,000 contracts, will be subject to certain reporting requirements. The Commission believes that Amendment No. 4 clarifies and strengthens the proposal and raises no new regulatory issues. Accordingly, the Commission finds good cause for approving the proposal, as amended, on an accelerated basis, pursuant to Section 19(b)(2) of the Act. VI. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,31 that the proposed rule change (SR–Amex–2004– 27), as amended, is approved, on an accelerated basis. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.32 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–16330 Filed 8–17–07; 8:45 am] BILLING CODE 8010–01–P 31 15 32 17 PO 00000 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). Frm 00089 Fmt 4703 Sfmt 4703 46525 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56245; File No. SR–CBOE– 2006–104] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto To Codify the Hybrid Price Check Parameter August 14, 2007. 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 7, 2006, the Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or ‘‘Exchange’’) 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 substantially prepared by the Exchange. On August 1, 2007, the Exchange filed Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rule 6.13, CBOE Hybrid System’s Automatic Execution Feature, in order to codify an automated system feature that prevents executions at potentially erroneous prices. The text of the proposed rule change is available on the Exchange’s Web site (http://www.cboe.com), at the Exchange’s principal office, 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 Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. 1 15 2 17 E:\FR\FM\20AUN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 20AUN1

Agencies

[Federal Register Volume 72, Number 160 (Monday, August 20, 2007)]
[Notices]
[Pages 46523-46525]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-16330]



[[Page 46523]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56251; File No. SR-Amex-2004-27]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Amendment No. 4 to a Proposed Rule Change and Order 
Granting Accelerated Approval to a Proposed Rule Change, as Modified by 
Amendment Nos. 2, 3, and 4 Thereto, Relating to the Listing and Trading 
of Fixed Return Options

August 14, 2007.

I. Introduction

    On April 29, 2004, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') 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 list and trade Fixed Return Options (``FROs''). 
Amex filed Amendment Nos. 1, 2, 3, and 4 to the proposal on September 
26, 2006, April 19, 2007, May 23, 2007, and August 14, 2007, 
respectively.\3\ The proposed rule change, as modified by Amendment 
Nos. 2 and 3, was published for comment in the Federal Register on June 
7, 2007.\4\ The Commission received no comment letters regarding the 
proposed rule change, as modified by Amendment Nos. 2 and 3. This order 
provides notice and solicits comments from interested persons regarding 
Amendment No. 4 and approves the proposed rule change, as amended, on 
an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 2 replaced the original filing and Amendment 
No. 1 in their entirety. Amendment No. 3 revised the rule text 
relating to margin requirements. Amendment No. 4 corrected minor 
errors in the text of the proposed rules, provided representations 
concerning surveillance procedures and systems capacity, clarified 
the use of composite prices in calculating the volume weighted 
average price (``VWAP''), and clarified the proposed position 
reporting requirements.
    \4\ See Securities Exchange Act Release No. 55843 (June 1, 
2007), 72 FR 31636.
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II. Description of the Proposal

A. FROs Generally

    Amex proposes to list and trade cash-settled, European-style FROs 
on individual stocks and exchange-traded funds (``ETFs'') that satisfy 
specified listing criteria. FROs are binary options and, as such, 
differ from the options currently traded on U.S. options exchanges by 
providing a discontinuous or non-linear payout. An in-the-money FRO 
will pay a fixed sum at expiration regardless of the magnitude of the 
difference between the option's exercise price and the settlement 
price. Amex proposes to list Finish High\SM\ (``Finish High'') FROs, 
which will return $100 per contract if the settlement price of the 
underlying security is above the strike price at expiration, and Finish 
Low\SM\ (``Finish Low'') FROs, which will return $100 per contract if 
the settlement price of the underlying security is below the strike 
price at expiration.\5\ Any in-the-money FRO will be exercised 
automatically at expiration.\6\
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    \5\ See Amex Rule 900FRO(b)(2) and (3).
    \6\ See Amex Rule 980FRO.
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B. Listing Standards

    The initial listing criteria for FROs require that an individual 
stock underlying an FRO meet the criteria for underlying securities in 
Amex Rule 915, ``Criteria for Underlying Securities,'' and, in 
addition, have: (1) Minimum market capitalization of at least $40 
billion; (2) minimum trading volume, in all markets in which the 
security trades, of at least one billion shares in the preceding 12 
months; (3) minimum average daily trading volume of four million 
shares; (4) minimum average daily trading value of at least $200 
million during the previous six months; and (5) a minimum market price 
per share of at least $10, as measured by the closing price reported in 
the primary listed market in which the security is traded, over the 
previous five consecutive business days preceding the date on which 
Amex submits a certificate to the Options Clearing Corporation 
(``OCC'') for listing and trading.\7\ An ETF underlying an FRO would 
have to meet these five additional criteria along with the requirements 
of Amex Rule 915, except for the minimum market capitalization 
requirement.\8\
---------------------------------------------------------------------------

    \7\ See Amex Rule 915FRO, Commentary .01.
    \8\ See Amex Rule 915FRO, Commentary .02.
---------------------------------------------------------------------------

    The continued listing criteria for FROs require that an individual 
stock underlying an FRO satisfy the requirements of Amex Rule 916, 
``Withdrawal of Approval of Underlying Securities,'' and, in addition, 
have: (1) Minimum market capitalization of at least $30 billion; (2) 
minimum trading volume, in all markets trading the security, of at 
least one billion shares in the preceding 12 months; (3) minimum 
average daily trading volume of four million shares; (4) minimum 
average daily trading value of at least $125 million during the last 
six months; and (5) an underlying market price per share of at least $5 
at the time additional series are listed for trading.\9\ An ETF 
underlying an FRO would have to meet these five additional criteria 
along with the requirements of Amex Rule 916, except for the minimum 
market capitalization requirement.\10\
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    \9\ See Amex Rule 916FRO, Commentary .01.
    \10\ See Amex Rule 916FRO, Commentary .03.
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C. Role of OCC

    The OCC plans to file a proposal to issue, clear, and settle FROs. 
According to Amex, the OCC also plans to file a proposal to revise the 
Options Disclosure Document (``ODD'') required under Rule 9b-1 of the 
Act \11\ to incorporate FROs.
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    \11\ 17 CFR 240.9b-1.
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D. Volume Weighted Average Price Settlement

    To reduce concerns regarding potential price manipulation at 
expiration due to the ``all-or-nothing'' return provided by an FRO, 
Amex proposes to settle FROs using an all-day volume weighted average 
price (``VWAP'') based on trading in the underlying security on the 
last trading day prior to expiration.\12\ To calculate the VWAP, Amex 
will use composite prices during regular trading hours as reported by 
industry price vendors.\13\ If the security underlying an FRO does not 
trade or is unavailable during regular trading hours at expiration, the 
settlement price may be fixed pursuant to the OCC's rules on a basis 
that the OCC believes is appropriate under the circumstances, including 
using the last sale price during regular trading hours on the most 
recent trading day for which a last sale price is available.\14\
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    \12\ See Amex Rule 910FRO(a). The VWAP for an underlying 
security is the sum of the dollar value of reported trades (price 
multiplied by the number of shares traded), divided by the total 
number of shares traded during the entire last day of trading prior 
to expiration. See Amex Rule 900FRO(b)(4).
    \13\ See Amex Rule 910FRO(a). Composite prices are prices 
reported to the consolidated tape from any participating exchange or 
market. Amex notes that the OCC currently uses composite pricing in 
connection with the settlement of expiring equity options. The 
composite closing price is the last reported sale price from any 
eligible trade source (i.e., primary listing market or participating 
regional market). It is not an average price. See Securities 
Exchange Act Release No. 49045 (January 8, 2004), 69 FR 2377 
(January 15, 2004) (notice of filing and immediate effectiveness of 
File No. SR-OCC-2003-01).
    \14\ See Amex Rule 910FRO(a), Commentary .01.
---------------------------------------------------------------------------

    Amex will publish and disseminate the current value of the VWAP 
calculation for FROs at least every 15 seconds throughout the last 
trading day prior to expiration. Amex will disseminate the VWAP 
settlement price as the official settlement price for FROs and will 
make it publicly available

[[Page 46524]]

through various market data vendors and on the Amex Web site at http://
www.amex.com.

E. Position and Exercise Limits

    The position limits for FROs will be 25,000 contracts on the same 
side of the market, and positions in FROs will not be aggregated with 
positions in other options on the same underlying stock or ETF for 
purposes of determining compliance with the position limits.\15\ Amex 
is not proposing exercise limits for FROs because FROs will be 
exercised automatically at expiration if the settlement price of the 
underlying security is greater than the strike price of a Finish High 
FRO or less than the strike price of a Finish Low FRO.\16\ FROs will 
not be subject to any qualified hedge exemptions from position limits.
---------------------------------------------------------------------------

    \15\ See Amex Rule 904FRO(a) and (b).
    \16\ See Amex Rule 980FRO.
---------------------------------------------------------------------------

    Positions in FROs must be reported to Amex when an account 
establishes an aggregate position on the same side of the market of 200 
or more contracts,\17\ and the provisions of Amex Rule 906, ``Reporting 
of Options Positions,'' will apply to FROs.\18\ Amex Rule 906(b) 
requires that a member, other than an Amex market maker, that maintains 
an FRO position in excess of 10,000 contracts on the same side of the 
market, for its own account or the account of its customer, report 
certain information to Amex, including whether the position is hedged, 
a description of the hedge, and, if applicable, a description of the 
collateral. Amex believes that the reporting requirements under Amex 
Rule 906 and the surveillance procedures for hedged positions will 
enable Amex to closely monitor sizable FRO positions and corresponding 
hedges.\19\
---------------------------------------------------------------------------

    \17\ See Amex Rule 906FRO.
    \18\ See Amex Rule 906FRO.
    \19\ Amex notes that hedge information for member firm and 
customer accounts with 200 or more contracts are reported 
electronically via the Large Options Position Report. In addition, 
Amex notes that specialist and registered options trader account 
information is reported to Amex by the member's clearing firm.
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F. Margin

    The minimum margin on any FRO carried short in a customer's account 
is the difference between $100 and the proceeds from the sale of the 
FRO, which must remain in the customer's account.\20\ A customer 
account with a long position in an FRO must initially deposit and 
maintain margin equal to at least 100% of the purchase price of the 
FRO.\21\
---------------------------------------------------------------------------

    \20\ See Amex Rule 462(d)(10)(D).
    \21\ See Amex Rule 462(d)(10)(B).
---------------------------------------------------------------------------

    No margin is required for an FRO position carried short against an 
existing long position in the same FRO, or when the writer's obligation 
is secured by a specific deposit or escrow deposit meeting the entire 
$100 obligation under the FRO.\22\
---------------------------------------------------------------------------

    \22\ See Amex Rule 462(d)(10)(F).
---------------------------------------------------------------------------

G. Bid-Ask Differentials and Minimum Price Variations

    A specialist or registered trader is expected to quote with no more 
than $0.25 between the bid and the offer for each FRO contract, except 
during the last trading day prior to expiration, when the maximum width 
may be $0.50.\23\ In addition, when the bid/ask differential in the 
underlying security is greater than $0.25, or $0.50 on the last trading 
day prior to expiration, the permissible quote width for an in-the-
money FRO series may be identical to the quote width in the underlying 
security.\24\
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    \23\ See Amex Rule 958FRO.
    \24\ See Amex Rule 958FRO.
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    Amex Rule 952, ``Minimum Price Variations,'' generally provides 
that the minimum price variation (``MPV'') for an option is: (i) $0.05 
for options quoted under $3 a contract; and (ii) $0.10 for options 
quoted at $3 a contract or greater. For the options classes included in 
the Penny Quoting Pilot Program, the MPV is: (i) $0.01 for options 
quoted under $3 a contract; and (ii) $0.05 for options quoted at $3 a 
contract or greater.\25\ The MPV for FROs in classes not included in 
the Penny Quoting Pilot Program will be $0.05, and $0.01 for classes in 
the Penny Quoting Pilot Program.
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    \25\ See Securities Exchange Act Release No. 55162 (January 24, 
2007), 72 FR 5738 (February 1, 2007). In addition, options on the 
Power Shares QQQ Trust trade at an MPV of $0.01 for all options 
premiums.
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    Amex will apply to FROs the existing industry convention of 
multiplying an option's quoted price by $100 to determine its premium. 
For example, for an FRO that is quoted at $0.50, an investor would pay 
$50.00 ($0.50 x 100).

H. Other Considerations

    Amex Rule 903, ``Series of Options Open for Trading,'' will apply 
to FROs.\26\ Pursuant to Amex Rule 903, Amex generally opens up to four 
expiration months for an options class when it initially lists the 
class for trading. Amex will use the same expiration cycle for FROs as 
it uses for traditional options.
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    \26\ See Amex Rule 903FRO.
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    Similarly, Amex will use the strike price intervals provided in 
Amex Rule 903, ``Series of Options Open for Trading,'' and the related 
commentaries for FROs. Securities underlying options classes included 
in the $1 strike price pilot program \27\ and the 2\1/2\-point strike 
price program \28\ may underlie FROs, provided that they meet the 
listing standards for FROs.
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    \27\ See Amex Rule 903, Commentary .06.
    \28\ See Amex Rule 903, Commentary .07.
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    Amex represents that symbols will be created for FROs that 
represent the underlying security, the fact that the option is an FRO 
rather than a traditional put or call, the expiration date, strike 
price, and the exchange(s) trading the FRO.

III. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\29\ Specifically, the Commission finds that the proposal is 
consistent with Section 6(b)(5) of the Act,\30\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest. The Commission believes that FROs will provide investors with 
a potentially useful investment choice. The proposal will extend to 
certain binary options the benefits of a listed exchange market, which 
include: A centralized forum for price discovery; pre- and post-trade 
transparency; standardized contract specifications; and the guarantee 
of the OCC.
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    \29\ 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).
    \30\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal is reasonably designed to 
address potential manipulation concerns associated with FROs' non-
linear return. The initial and continuing listing standards for FROs 
should ensure that only highly capitalized, actively traded stocks and 
ETFs are eligible to underlie FROs, and the settlement price for FROs 
is based on an all-day VWAP during the last trading day prior to 
expiration. These elements should reduce the potential for manipulating 
the stock or ETF underlying an FRO to benefit an FRO position.

[[Page 46525]]

    The Commission believes that the proposed position limits and 
margin rules for FROs are reasonable and consistent with the Act. The 
proposed position limit of 25,000 contracts in any FRO class appears to 
reasonably balance the promotion of a free and open market for these 
securities with minimization of incentives for market manipulation. The 
proposed margin rules appear reasonably designed to deter a member or 
its customer from assuming an imprudent position in FROs.
    In support of this proposal, Amex made the following 
representations:
     Amex has in place an adequate surveillance program to 
monitor trading in FROs and intends to largely apply its existing 
surveillance program for options to the trading of FROs; and
     Amex has the necessary systems capacity to support the new 
options series that would result from the introduction of FROs.
    This approval order is based on Amex's representations.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4, including whether Amendment No. 4 
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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-Amex-2004-27 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Amex-2004-27. This file 
number should be included on the subject line if e-mail 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 inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of Amex. 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-Amex-2004-27 and should be 
submitted on or before September 10, 2007.

V. Accelerated Approval

    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the thirtieth day after the date of 
publication of notice of filing of Amendment No. 4 in the Federal 
Register. In Amendment No. 4, Amex provided representations regarding 
surveillance and systems capacity and corrected minor errors in the 
text of the proposed rules. In addition, Amendment No. 4 clarified the 
use of composite prices in calculating the all-day VWAP that will be 
used to establish the settlement price for FROs, and clarified that 
positions of 10,000 contracts, rather than 25,000 contracts, will be 
subject to certain reporting requirements. The Commission believes that 
Amendment No. 4 clarifies and strengthens the proposal and raises no 
new regulatory issues. Accordingly, the Commission finds good cause for 
approving the proposal, as amended, on an accelerated basis, pursuant 
to Section 19(b)(2) of the Act.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-Amex-2004-27), as amended, 
is approved, on an accelerated basis.
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    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
Florence E. Harmon,
Deputy Secretary.
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    \32\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E7-16330 Filed 8-17-07; 8:45 am]
BILLING CODE 8010-01-P