Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1, Amending Commentary .07 to NYSE Amex Options Rule 904 To Eliminate Position Limits for Options on the SPDR® S&P 500® Exchange-Traded Fund, 50750-50754 [2012-20575]
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50750
Federal Register / Vol. 77, No. 163 / Wednesday, August 22, 2012 / Notices
Electronic Comments
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–CBOE–2012–076 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.
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A)(iii) of the Act 14 and Rule
19b–4(f)(6) thereunder.15 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, 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 and Rule 19b–4(f)(6)(iii)
thereunder.16
At any time within 60 days of the
filing of such 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:
14 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
16 17 CFR 240.19b–4(f)(6)(iii). 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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All submissions should refer to File
Number SR–CBOE–2012–076. 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 (https://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 such
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–CBOE–
2012–076 and should be submitted on
or before September 12, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012–20573 Filed 8–21–12; 8:45 am]
BILLING CODE 8011–01–P
17 17
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67672; File No. SR–
NYSEAmex–2012–29]
Self-Regulatory Organizations; NYSE
Amex LLC; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1, Amending
Commentary .07 to NYSE Amex
Options Rule 904 To Eliminate Position
Limits for Options on the SPDR® S&P
500® Exchange-Traded Fund
August 15, 2012.
I. Introduction
On May 2, 2012, NYSE Amex LLC
(‘‘NYSE Amex’’ or ‘‘Exchange’’) 1 filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 2 and Rule
19b–4 thereunder,3 a proposed rule
change to eliminate position limits for
options on the SPDR® S&P 500®
exchange-traded fund (‘‘SPY ETF’’) on a
pilot basis.4 The proposed rule change
was published for comment in the
Federal Register on May 18, 2012.5 On
June 27, 2012, the Commission
extended to August 16, 2012 the time
period in which to approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved.6 The Commission received
two comment letters on the proposal.7
On August 9, 2012, NYSE Amex filed
Amendment No. 1 to the proposed rule
change.8 The Commission is publishing
1 NYSE Amex now is known as ‘‘NYSEMKT.’’
The proposed rule change to which this order
relates, however, was submitted before the name
change was implemented.
2 15 U.S.C. 78s(b)(1).
3 17 CFR 240.19b–4.
4 ‘‘SPDR®,’’ ‘‘Standard & Poor’s®,’’ ‘‘S&P®,’’ ‘‘S&P
500®,’’ and ‘‘Standard & Poor’s 500’’ are registered
trademarks of Standard & Poor’s Financial Services
LLC. As described by the Exchange, the SPY ETF
represents ownership in the SPDR S&P 500 Trust,
a unit investment trust that generally corresponds
to the price and yield performance of the SPDR S&P
500 Index.
5 See Securities Exchange Act Release No. 66984
(May 14, 2012), 77 FR 29721 (May 18, 2012)
(‘‘Notice’’).
6 See Securities Exchange Act Release No. 67278
(June 27, 2012), 77 FR 39547 (July 3, 2012).
7 See letters to Elizabeth M. Murphy, Secretary,
Commission, from: John E. Andrie, Managing
Member, Andrie Trading LLC, dated July 16, 2012
(‘‘Andrie Letter’’); and Jenny Klebes Golding, Senior
Attorney, Legal Division, Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’), dated July 30,
2012 (‘‘CBOE Letter’’).
8 In Amendment No. 1, the Exchange proposed to
implement its proposal on a pilot basis and also
explicitly stated that NYSE Amex Options Rule
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this notice to solicit comments on
Amendment No. 1 from interested
persons and is approving the proposed
rule change, as modified by Amendment
No. 1, on an accelerated basis.
II. Description of the Amended
Proposal
Options on the SPY ETF (‘‘SPY
options’’) are American-style, p.m.settled options that physically settle
into shares of the underlying SPY ETF.9
Currently, Commentary .07 to NYSE
Amex Options Rule 904 imposes a
position limit for SPY options of
900,000 contracts on the same side of
the market. The Exchange believes that
the current position limit could deter
the optimal use of SPY options as a
hedging tool.10 Further, it contends, the
current position limit may inhibit the
ability of certain large market
participants, such as mutual funds and
other institutional investors with
substantial hedging needs, to utilize
SPY options and gain meaningful
exposure to the hedging function they
provide.11
Thus, the Exchange’s proposal, as
amended, seeks to amend Commentary
.07 to NYSE Amex Options Rule 904 to
eliminate position limits for SPY
options on a fourteen-month pilot basis
set to end October 15, 2013. The
Exchange states that it will perform an
analysis of the initial pilot program after
a twelve month period (the ‘‘Pilot
Report’’), which will be submitted to the
Commission within thirty (30) days of
the end of the Pilot Period. 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 contract,
particularly at expiration. The Pilot
Report also will detail the size and
different types of strategies employed
with respect to positions established in
SPY options; note whether any
problems, in the underlying SPY ETF or
otherwise, arose as a result of the nolimit approach; and include any other
information that may be useful in
evaluating the effectiveness of the pilot
program. In preparing the Pilot Report,
the Exchange will utilize various data
elements such as volume and open
interest. If the pilot is not extended or
permanently approved by the end of the
Pilot Period, the position limits for SPY
options will revert to the limits in effect
at the commencement of the pilot
program.
906(b) applies to SPY options. These aspects of the
proposal are described in more detail below.
9 See Notice, 77 FR at 29724.
10 Id. at 29721.
11 Id. at 29722–23.
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The Exchange believes that SPY
options with no position limit will (1)
offer investors another investment
option through which they could obtain
and hedge significant levels of exposure
to the S&P 500 stocks, (2) be available
to trade on the Exchange (and
presumably all other U.S. options
exchanges) electronically, and (3)
provide investors with added flexibility
through an additional product that, in
the Exchange’s view, may be better
tailored to meet their particular
investment, hedging, and trading needs,
because, among other things, they are
p.m.-settled.12
The Exchange cites the current
treatment of SPX index options 13 and
SPXPM index options,14 both of which,
like SPY options, are based on the S&P
500, and neither of which is subject to
position limits.15 The Exchange
contends that, because SPX, SPXPM,
and SPY options are ultimately
derivative of the same benchmark—the
S&P 500 Index—they should be treated
equally from a position limit
perspective.16 The Exchange also argues
that the Delta-Based Equity Hedge
Exemption for delta-neutral option
12 Id. at 29722. In support of its proposal, the
Exchange contends that the creation and
redemption process for the SPY ETF allows large
investors to transfer positions from a basket of
stocks comprising the S&P 500 Index to an
equivalent number of ETF shares (and the reverse)
with relative ease, and argues that, because of this,
there is no reason to disadvantage options overlying
the one versus the other. Id.
13 SPX index options are a.m.-settled, cash-settled
options on the S&P 500 Index, which list and trade
exclusively on the CBOE.
14 SPXPM index options are p.m.-settled, cashsettled options on the S&P 500 Index, which list
and trade on the C2 Options Exchange (‘‘C2’’).
SPXPM, unlike SPX, is based on the closing value
of the S&P 500 Index, and, in this respect, the
Exchange states, it is very much like SPY options,
which are also settled at the close, acknowledging
that the SPXPM is settled into cash as opposed to
shares of the underlying, like SPY options. See
Notice, 77 FR at 29722.
15 Id. The Exchange notes that SPX index options
are 10 times the size of SPY options, so that a
position of only 90,000 SPX index options is the
equivalent of a position of 900,000 SPY options. Id.
The Exchange further notes that the reduced-value
option on the S&P 500 Index (option symbol XSP)
is the equivalent size of SPY options, and, similar
to SPX index options, is not subject to position
limits. Id.
16 Id. As a practical matter, the Exchange adds,
investors utilize SPX, SPXPM, and SPY options and
their respective underlying instruments and futures
to gain exposure to the same benchmark index, the
S&P 500. Id. The Exchange also states that,
anecdotally, market participants perceive value in
avoiding the regulatory risk of exceeding the
position limit on SPY options by instead using SPX
index options for their hedging needs. Although
exemptions are available with respect to the
position limits for SPY options, the Exchange
believes that such exemptions and the regulatory
burden attendant with them, in its view, may
dissuade investors from using SPY options when
they can instead use an SPX index option without
the need for an exemption. Id. at 29723.
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50751
positions,17 which allows SPY option
positions to be delta-hedged by SPX
index option positions, reflects the
economic equivalence of the two
products.18
The Exchange argues that, if no
position limits have been found to be
warranted on both SPX and SPXPM
index options, the same treatment
should be extended to SPY options so
that inconsistent position limits do not
produce competitive advantages and
disadvantages among contracts. The
Exchange cites observations regarding
competition among economically
equivalent products, appearing in a
2005 paper by Hans R. Dutt and
Lawrence E. Harris,19 in making this
argument.
The Exchange cites the Commission
as noting, in its approval of the
elimination of position and exercise
limits with respect to SPX index
options, that the markets for the
securities underlying the S&P 500 Index
are deep and liquid, and maintaining
that this reduces concerns regarding
manipulation or disruption in the
underlying markets.20 The Exchange
represents that this would similarly be
the case if position limits were
eliminated for SPY options.21 According
to the Exchange, SPY options as well as
the SPY ETF exhibit deep, liquid
markets.22 In this regard, the Exchange
states that SPY options are currently the
most actively traded option class in
terms of average daily volume
(‘‘ADV’’),23 with ADV of 5,789,511 for
year 2011 and 4,525,709 for the period
January 1, 2012 to April 19, 2012.24 The
Exchange also provides figures
indicating that the SPY ETF ADV was
218,227,747 for year 2011 and
145,164,527 for the period January 1,
2012 to April 19, 2012.25 The Exchange
represents further that there is
tremendous liquidity in the component
securities upon which the S&P 500 is
based, providing figures indicating that
the component securities’ ADV was
17 See Commentary .10 to NYSE Amex Options
Rule 904.
18 See Notice, 77 FR at 29722. In making this
argument, the Exchange states that, given the fact
that SPX index options are not subject to position
limits, an Exchange member, member organization,
or non-member affiliate could theoretically
establish a position in SPY options far in excess of
the current 900,000 contract limit, provided that the
position is hedged with SPX index options.
19 See The Journal of Futures Markets, Vol. 25,
no. 10, 945–965 (2005) (‘‘Position Limits for CashSettled Derivative Contracts,’’ by Hans R. Dutt and
Lawrence E. Harris) (‘‘Dutt-Harris Paper’’).
20 See Notice, 77 FR at 29723.
21 Id.
22 Id.
23 Id. at 29721.
24 Id. at 29723.
25 Id.
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3,289,595,675 for year 2011 and
2,851,457,600 for the period January 1,
2012 to April 19, 2012.26
The Exchange also believes that the
SPY ETF’s market capitalization is at a
level consistent with that which the
Commission has previously determined
to be sufficiently large, in tandem with
the depth and liquidity of the markets
for the SPY ETF, to reduce concerns
regarding manipulation.27 In this regard,
the Exchange provides figures
indicating that the average SPY ETF
market capitalization was
$89,533,777,897 for year 2011 and
$99,752,986,022 for the period January
1, 2012 to April 19, 2012.28
The Exchange further cites the DuttHarris Paper in addressing possible
concerns that the elimination of the
position limit on SPY options could
raise the risk of market manipulation.
The Exchange believes that the DuttHarris analysis, which focuses on
concerns relating to manipulation of
cash-settled derivatives, suggests that
whatever manipulation risk does exist
in a cash-settled, broad-based product
such as the SPXPM index option, the
corresponding risk in a physicallysettled, but equally broad-based product
such as the SPY option, is likely to be
equally low, if not lower.29
In assessing the appropriateness of
eliminating position limits for SPY
options, the Exchange also notes its
rules setting forth reporting
requirements for large options positions
and, among other things, the Exchange’s
ability to impose higher margin
requirements upon accounts that it
determines to be under-hedged. 30 The
Exchange further states that the
reporting, surveillance, and monitoring
mechanisms that it currently has in
place for certain other option products
that trade on the Exchange without
position limits are effective and could
easily accommodate SPY options.
Finally, with respect to concerns that
the elimination of position limits for
26 Id.
at 29723–24.
at 29724.
28 Id. The Exchange also provides figures
indicating that the average S&P 500 Index market
capitalization was $11,818,270,341,270 for year
2011 and $12,547,946,920,000 for the period
January 1, 2012 to April 19, 2012. Id.
29 See Notice, 77 FR at 29723. In this context, the
Exchange notes the observation of the Dutt-Harris
Paper that the manipulation of such instruments as
U.S. exchange-traded, cash-settled derivative
contracts requires ‘‘very large trades that are costly
to make and easy to detect through conventional
surveillance,’’ and argues that the same observation
applies equally to SPY options. Id.
30 See Notice, 77 FR at 29724; see also NYSE
Amex Options Rule 906. Additionally, the
Exchange notes that Rule 15c3–1 under the Act
imposes a capital charge on members to the extent
of any margin deficiency resulting from the higher
margin requirement. See Notice, 77 FR at 29724.
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27 Id.
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SPY options could result in, or increase,
market-on-close volatility, the Exchange
believes that the ability to hedge SPY
options with shares of the SPY ETF
reduces the likelihood of such
volatility.31 In this regard, the Exchange
argues that, because SPY options are
physically-settled, they can be easily
hedged via long or short positions in
shares of the SPY ETF, which, as
discussed at supra note 12 and
accompanying text, the Exchange
maintains can be easily created or
redeemed as needed.32
III. Comment Summary
The Commission received two
comment letters on the proposal. One
letter supported the proposed
elimination of position limits on SPY
options.33 The commenter also
expressed a belief that elimination of
SPY option position limits would result
in more trading business on regulated
exchanges, as opposed to other venues,
and would improve market
transparency.34 A second comment
letter neither supported nor opposed the
proposal, but suggested that a reporting
requirement would be useful should
position and exercise limits be
eliminated for SPY options.35
IV. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.36 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,37 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 foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
31 See
Notice, 77 FR at 29724–25.
32 Id.
33 See
Andrie Letter.
34 Id.
35 See CBOE Letter. In Amendment No. 1 the
Exchange responded to this comment by stating
explicitly that the hedge reporting requirements of
NYSE Amex Options Rule 906(b) apply to SPY
options.
36 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).
37 15 U.S.C. 78f(b)(5).
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and a national market system, and, in
general, to protect investors and the
public interest; and not be designed to
permit unfair discrimination between
customers, issuers, brokers or dealers.
Position and exercise limits serve as
a regulatory tool designed to address
manipulative schemes and adverse
market impact surrounding the use of
options. Since the inception of
standardized options trading, the
options exchanges have had rules
limiting the aggregate number of options
contracts that a member or customer
may hold or exercise.38 These position
and exercise limits are intended to
prevent the establishment of options
positions that can be used or might
create incentives to manipulate the
underlying market so as to benefit the
options position.39 In particular,
position and exercise limits are
designed to minimize the potential for
mini-manipulations and for corners or
squeezes of the underlying market.40 In
addition, such limits serve to reduce the
possibility for disruption of the options
market itself, especially in illiquid
classes.41
In general, the Commission has taken
a gradual, evolutionary approach toward
expansion of position and exercise
limits for option products overlying
certain ETFs where there is considerable
liquidity in both the underlying cash
markets and the options markets, and,
in the case of certain broad-based index
options, toward elimination of such
limits altogether.42 The Commission has
been careful to balance two competing
concerns when considering proposals
by the self-regulatory organizations to
change position and exercise limits. The
Commission has recognized that the
limits can be useful to prevent investors
from disrupting the market in securities
underlying the options. At the same
time, the Commission has determined
that limits should not be established in
a manner that will unnecessarily
discourage participation in the options
market by institutions and other
investors with substantial hedging
needs or to prevent specialists and
38 See, e.g., Securities Exchange Act Release No.
45236 (January 4, 2002), 67 FR 1378 (January 10,
2002) (SR–Amex–2001–42).
39 See, e.g., Securities Exchange Act Release No.
47346 (February 11, 2003), 68 FR 8316 (February
20, 2003) (SR–CBOE–2002–26).
40 Id.
41 Id.
42 The Commission’s incremental approach to
approving changes in position and exercise limits
for option products overlying certain ETFs is wellestablished. See Securities Exchange Act Release
No. 64695 (June 17, 2011), 76 FR 36942, n. 19 and
accompanying text (June 23, 2011) (SR–Phlx–2011–
58) (approving increase of SPY option position limit
to 900,000 contracts).
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market-makers from adequately meeting
their obligations to maintain a fair and
orderly market.43
The Commission has carefully
considered the Exchange’s proposal.
The Exchange argues that SPY options
are ultimately derivative of the S&P 500
Index, and should therefore be treated,
from a position limit perspective,
similarly to index options based on the
S&P 500 which have no position limits,
such as SPX and SPXPM. However, in
reviewing the Exchange’s arguments,
the Commission considered certain
noteworthy differences that exist, in its
view, between SPY options and those
index option products.
Among other things, SPX and SPXPM
are cash-settled options on the S&P 500
Index. SPY options, on the other hand,
are physically-settled options on a
single security—the SPY ETF.
Moreover, SPY options settle into shares
of the SPY ETF, a single security, the
performance of which, in turn, generally
corresponds to the performance of the
S&P 500 Index. Thus, unlike SPX and
SPXPM, SPY options are indirectly
based on the performance of the
individual components of the S&P 500
Index.
Nevertheless, in spite of such
differences, the Commission believes
that SPY options have certain
characteristics that serve to mitigate the
concerns that position limits are
designed to address. As the Exchange
has represented, SPY options are the
most actively traded options in terms of
ADV. That, in combination with the
depth and liquidity of the markets for
the underlying SPY ETF as well as the
component securities of the S&P 500
Index, and the surveillance capabilities
of the Exchange, support the
elimination of position limits for SPY
options while still helping to ensure
that large positions in such options will
not unduly disrupt trading in the
options or in the underlying SPY ETF.
Given the Exchange’s belief that
eliminating position limits will afford
investors more flexibility in meeting
their particular investment, hedging,
and trading needs, the Commission
believes that it is consistent with the
Act and appropriate, at this time, to
allow SPY options to be traded on the
Exchange without position limits on a
pilot basis. The Commission believes
that eliminating position limits on the
highly liquid SPY options represents the
next step of a measured approach to
position limits on these options.
43 See Securities Exchange Act Release No. 40969
(January 22, 1999), 64 FR 4911 (February 1, 1999)
(SR–CBOE–98–23).
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As an initial matter, the Commission
notes that certain characteristics unique
to SPY options, taken together,
significantly mitigate concerns
regarding manipulation or potential
disruptions of the markets for SPY
options or the underlying SPY ETF.
Importantly, and as supported by the
figures the Exchange has provided, the
markets for SPY options, the underlying
SPY ETF, and the component securities
upon which the S&P 500 Index is based
are extremely deep and liquid.44 Figures
provided by the Exchange also reflect
enormous capitalization of both the SPY
ETF and the S&P 500 Index.45 Given
these characteristics, the Commission
believes that removing position limits
may benefit investors by bringing
additional depth and liquidity, in terms
of both volume and open interest, to
SPY option classes without raising
significant concerns about manipulation
or potential market disruption. As set
forth in more detail below, however, the
Commission is approving the proposal
on a pilot basis, during which the
Exchange will monitor and report to the
Commission on the impact of the
removal of SPY option position limits
on the SPY option market as well as the
markets for the underlying securities.
The Commission also believes that the
Exchange’s reporting requirements and
surveillance systems should enable it to
detect and deter any trading abuses that
might arise from the elimination of
position limits for SPY options.46 These
safeguards also should enable the
Exchange to monitor large positions to
identify instances of potential risk and
provide the Exchange with the
information to determine whether to
impose additional margin and/or
whether to assess capital charges upon
a member organization carrying the
account.
In this regard, the Commission
believes that financial requirements
imposed by the Exchange and the
Commission help allay concerns that an
Exchange member or its customer may
try to maintain an inordinately large,
unhedged SPY option position. Current
margin and risk-based haircut
methodologies serve to limit the size of
positions maintained by any one
account by increasing the margin and/
44 See
Notice, 77 FR at 29723–24.
at 29724. The Commission also notes that,
according to the Exchange, the creation and
redemption mechanism for SPY ETF shares is
robust, as evidenced by its close tracking of its
benchmark index, and limited only by the number
of shares available in the component securities of
the S&P 500 Index. Id.
46 See Notice, 77 FR at 29724. The Commission
also expects that the Exchange’s surveillance
procedures should enable the Exchange to assess
and respond to market concerns at an early stage.
45 Id.
PO 00000
Frm 00080
Fmt 4703
Sfmt 4703
50753
or capital that a member must maintain
for a large position held by it or by its
customer.47 The Exchange also has the
authority under its rules to impose a
higher margin requirement upon the
member or member organization when
it determines a higher requirement is
warranted.48 In addition, Rule 15c3–1
imposes a capital charge on members to
the extent of any margin deficiency
resulting from the higher margin
requirement. Further, the OCC will
serve as the counter-party guarantor in
every exchange-traded transaction.
As the Exchange notes, NYSE Amex
Options Rule 906(a) requires Exchange
members to report to the Exchange any
account with an aggregate position
(whether long or short) of 200 or more
options contracts where the underlying
security is a stock or ETF share.49 In
addition, as the Exchange sets forth in
Amendment No. 1, NYSE Amex Options
Rule 906(b) requires each member (other
than an Exchange market-maker) that
maintains a position in excess of 10,000
non-FLEX equity option contracts on
the same side of the market, on behalf
of its own account or for the account of
a customer, to report to the Exchange
whether and how such position is
hedged.50 If the position is underhedged, pursuant to Rule 906(b), the
Exchange may consider imposing
additional margin upon the account
maintaining such under-hedged
position.51 CBOE suggests that the
Exchange’s proposal lacks a hedge
reporting requirement,52 but the
Exchange affirms in Amendment No. 1
that the requirements of Rule 906(b)
apply to SPY options.53 Moreover, the
Exchange asserts in Amendment No. 1
that the hedge reporting requirements of
Rule 906(b) are actually more stringent
than those cited in the CBOE Letter
applicable to certain index options.54
The Commission believes that, if
problems were to occur during the Pilot
Period, the market surveillance of large
positions should help the Exchange to
take the appropriate action to avoid any
manipulation or market risk concerns.55
47 The Commission’s net capital rule, Rule 15c3–
1 under the Act, requires a capital charge equal to
the maximum potential loss on a broker-dealer’s
aggregate index position over a + (-) 10% market
move.
48 See NYSE Amex Options Rule 462(e).
49 See NYSE Amex Options Rule 906(a).
50 See NYSE Amex Options Rule 906(b).
51 Id.
52 See CBOE Letter.
53 See Amendment No. 1 to the proposed rule
change.
54 Id.
55 In addition to the aforementioned reporting
requirements, the Commission notes that the
Exchange would have, through its membership in
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The Commission believes further that,
to the extent that the elimination of SPY
option position limits results in
movement of trading interest from the
OTC market onto the Exchange,56
transparency in the SPY option market
would be enhanced, which is a benefit
for investors.
Notwithstanding the protections
discussed above, the Commission
believes that a prudent approach is
warranted with respect to the
Exchange’s proposal to eliminate
position limits for SPY options. In this
regard, the Commission believes that the
risks of manipulation and potential
market disruption are significantly
mitigated as discussed above. To the
extent the potential for adverse effects
on the markets for the SPY ETF or the
S&P 500 component securities
underlying the SPY ETF continues to
exist, the Exchange’s proposal to
implement this change on a pilot basis
should help to address this concern.
Accordingly, the Commission is
approving the proposal, as amended, on
a fourteen-month pilot basis.57 Within
thirty (30) days of the end of the Pilot
Period the Exchange will be required to
submit to the Commission the Pilot
Report. 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 contract, particularly at expiration.
The Pilot Report will also detail the size
and different types of strategies
employed with respect to positions
established in SPY options; note
whether any problems, in the
underlying SPY ETF or otherwise, arose
as a result of the no-limit approach; and
include any other information that may
be useful in evaluating the effectiveness
of the pilot program. Furthermore, if the
pilot is not extended or permanently
approved by the end of the Pilot Period,
the pre-pilot position limit for SPY
options of 900,000 contracts on the
same side of the market will go back
into effect.
The Commission expects that,
throughout the Pilot Period, the
Exchange will monitor for any problems
and collect and analyze on an ongoing
basis the data and information that the
the Intermarket Surveillance Group, access to
information concerning the trading of the securities
underlying the S&P 500 Index, i.e., the securities
that are used to create or redeem SPY ETY shares.
56 See Andrie Letter.
57 The Commission took a similarly measured
approach to the first proposals to eliminate position
limits for certain broad-based index options by
approving those proposals on a pilot basis. See, e.g.,
Securities Exchange Act Release Nos. 40969
(January 22, 1999), 64 FR 4911 (February 1, 1999)
(SR–CBOE–98–23); 41011 (February 1, 1999), 64 FR
6405 (February 9, 1999) (SR–Amex–98–38).
VerDate Mar<15>2010
16:53 Aug 21, 2012
Jkt 226001
Exchange ultimately intends to include
in the Pilot Report. The Commission
also expects that the Exchange will take
prompt action, including timely
communication with the Commission
and with other marketplace selfregulatory organizations responsible for
oversight of trading in component
stocks, should any unanticipated
adverse market effects develop.
The Commission finds good cause to
approve the filing, as amended by
Amendment No. 1 to the proposed rule
change, prior to the thirtieth day after
the date of publication of notice of filing
thereof in the Federal Register.
Specifically, by limiting the proposed
rule change to a pilot program, the
amendment narrows the scope of the
proposal. Moreover, the proposal, which
in its original version would have
eliminated position limits permanently,
was open for comment, as is usual, for
twenty-one days after publication and
generated only two responses—one of
which supported the proposal and one
that did not raise objection to it.58
Further, the Pilot Report and the data
that the Exchange commits in
Amendment No. 1 to provide to the
Commission enhance the proposal by
adding a component that should help
the Exchange and the Commission
assess the impact of eliminating SPY
option position limits. In addition,
Amendment No. 1 enhances the
proposal by making explicit that the
hedge reporting requirement of NYSE
Amex Options Rule 906(b) applies to
SPY options. Accordingly, the
Commission believes that good cause
exists, consistent with Sections 6(b)(5)
and 19(b) of the Act to approve the
filing, as amended by Amendment No.
1 to the proposed rule change, on an
accelerated basis.
V. Solicitation of Comments on
Amendment No. 1
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment No. 1 is
consistent with the Act. Comments may
be submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NYSEAmex–2012–29 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–NYSEAmex-2012–29. 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 (https://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–
NYSEAmex–2012–29 and should be
submitted on or before September 12,
2012.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,59 that the
proposed rule change (SR–NYSEAmex2012–29) be, and it hereby is, approved,
as amended, on a fourteen-month pilot
basis set to expire on October 15, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.60
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012–20575 Filed 8–21–12; 8:45 am]
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58 See
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]]>Agencies
[Federal Register Volume 77, Number 163 (Wednesday, August 22, 2012)]
[Notices]
[Pages 50750-50754]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20575]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67672; File No. SR-NYSEAmex-2012-29]
Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing of
Amendment No. 1 and Order Granting Accelerated Approval of Proposed
Rule Change, as Modified by Amendment No. 1, Amending Commentary .07 to
NYSE Amex Options Rule 904 To Eliminate Position Limits for Options on
the SPDR[supreg] S&P 500[supreg] Exchange-Traded Fund
August 15, 2012.
I. Introduction
On May 2, 2012, NYSE Amex LLC (``NYSE Amex'' or ``Exchange'') \1\
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \2\ and Rule 19b-4 thereunder,\3\ a proposed rule change to
eliminate position limits for options on the SPDR[supreg] S&P
500[supreg] exchange-traded fund (``SPY ETF'') on a pilot basis.\4\ The
proposed rule change was published for comment in the Federal Register
on May 18, 2012.\5\ On June 27, 2012, the Commission extended to August
16, 2012 the time period in which to approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether the proposed rule change should be disapproved.\6\
The Commission received two comment letters on the proposal.\7\ On
August 9, 2012, NYSE Amex filed Amendment No. 1 to the proposed rule
change.\8\ The Commission is publishing
[[Page 50751]]
this notice to solicit comments on Amendment No. 1 from interested
persons and is approving the proposed rule change, as modified by
Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------
\1\ NYSE Amex now is known as ``NYSEMKT.'' The proposed rule
change to which this order relates, however, was submitted before
the name change was implemented.
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ ``SPDR[supreg],'' ``Standard & Poor's[supreg],''
``S&P[supreg],'' ``S&P 500[supreg],'' and ``Standard & Poor's 500''
are registered trademarks of Standard & Poor's Financial Services
LLC. As described by the Exchange, the SPY ETF represents ownership
in the SPDR S&P 500 Trust, a unit investment trust that generally
corresponds to the price and yield performance of the SPDR S&P 500
Index.
\5\ See Securities Exchange Act Release No. 66984 (May 14,
2012), 77 FR 29721 (May 18, 2012) (``Notice'').
\6\ See Securities Exchange Act Release No. 67278 (June 27,
2012), 77 FR 39547 (July 3, 2012).
\7\ See letters to Elizabeth M. Murphy, Secretary, Commission,
from: John E. Andrie, Managing Member, Andrie Trading LLC, dated
July 16, 2012 (``Andrie Letter''); and Jenny Klebes Golding, Senior
Attorney, Legal Division, Chicago Board Options Exchange,
Incorporated (``CBOE''), dated July 30, 2012 (``CBOE Letter'').
\8\ In Amendment No. 1, the Exchange proposed to implement its
proposal on a pilot basis and also explicitly stated that NYSE Amex
Options Rule 906(b) applies to SPY options. These aspects of the
proposal are described in more detail below.
---------------------------------------------------------------------------
II. Description of the Amended Proposal
Options on the SPY ETF (``SPY options'') are American-style, p.m.-
settled options that physically settle into shares of the underlying
SPY ETF.\9\ Currently, Commentary .07 to NYSE Amex Options Rule 904
imposes a position limit for SPY options of 900,000 contracts on the
same side of the market. The Exchange believes that the current
position limit could deter the optimal use of SPY options as a hedging
tool.\10\ Further, it contends, the current position limit may inhibit
the ability of certain large market participants, such as mutual funds
and other institutional investors with substantial hedging needs, to
utilize SPY options and gain meaningful exposure to the hedging
function they provide.\11\
---------------------------------------------------------------------------
\9\ See Notice, 77 FR at 29724.
\10\ Id. at 29721.
\11\ Id. at 29722-23.
---------------------------------------------------------------------------
Thus, the Exchange's proposal, as amended, seeks to amend
Commentary .07 to NYSE Amex Options Rule 904 to eliminate position
limits for SPY options on a fourteen-month pilot basis set to end
October 15, 2013. The Exchange states that it will perform an analysis
of the initial pilot program after a twelve month period (the ``Pilot
Report''), which will be submitted to the Commission within thirty (30)
days of the end of the Pilot Period. 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 contract,
particularly at expiration. The Pilot Report also will detail the size
and different types of strategies employed with respect to positions
established in SPY options; note whether any problems, in the
underlying SPY ETF or otherwise, arose as a result of the no-limit
approach; and include any other information that may be useful in
evaluating the effectiveness of the pilot program. In preparing the
Pilot Report, the Exchange will utilize various data elements such as
volume and open interest. If the pilot is not extended or permanently
approved by the end of the Pilot Period, the position limits for SPY
options will revert to the limits in effect at the commencement of the
pilot program.
The Exchange believes that SPY options with no position limit will
(1) offer investors another investment option through which they could
obtain and hedge significant levels of exposure to the S&P 500 stocks,
(2) be available to trade on the Exchange (and presumably all other
U.S. options exchanges) electronically, and (3) provide investors with
added flexibility through an additional product that, in the Exchange's
view, may be better tailored to meet their particular investment,
hedging, and trading needs, because, among other things, they are p.m.-
settled.\12\
---------------------------------------------------------------------------
\12\ Id. at 29722. In support of its proposal, the Exchange
contends that the creation and redemption process for the SPY ETF
allows large investors to transfer positions from a basket of stocks
comprising the S&P 500 Index to an equivalent number of ETF shares
(and the reverse) with relative ease, and argues that, because of
this, there is no reason to disadvantage options overlying the one
versus the other. Id.
---------------------------------------------------------------------------
The Exchange cites the current treatment of SPX index options \13\
and SPXPM index options,\14\ both of which, like SPY options, are based
on the S&P 500, and neither of which is subject to position limits.\15\
The Exchange contends that, because SPX, SPXPM, and SPY options are
ultimately derivative of the same benchmark--the S&P 500 Index--they
should be treated equally from a position limit perspective.\16\ The
Exchange also argues that the Delta-Based Equity Hedge Exemption for
delta-neutral option positions,\17\ which allows SPY option positions
to be delta-hedged by SPX index option positions, reflects the economic
equivalence of the two products.\18\
---------------------------------------------------------------------------
\13\ SPX index options are a.m.-settled, cash-settled options on
the S&P 500 Index, which list and trade exclusively on the CBOE.
\14\ SPXPM index options are p.m.-settled, cash-settled options
on the S&P 500 Index, which list and trade on the C2 Options
Exchange (``C2''). SPXPM, unlike SPX, is based on the closing value
of the S&P 500 Index, and, in this respect, the Exchange states, it
is very much like SPY options, which are also settled at the close,
acknowledging that the SPXPM is settled into cash as opposed to
shares of the underlying, like SPY options. See Notice, 77 FR at
29722.
\15\ Id. The Exchange notes that SPX index options are 10 times
the size of SPY options, so that a position of only 90,000 SPX index
options is the equivalent of a position of 900,000 SPY options. Id.
The Exchange further notes that the reduced-value option on the S&P
500 Index (option symbol XSP) is the equivalent size of SPY options,
and, similar to SPX index options, is not subject to position
limits. Id.
\16\ Id. As a practical matter, the Exchange adds, investors
utilize SPX, SPXPM, and SPY options and their respective underlying
instruments and futures to gain exposure to the same benchmark
index, the S&P 500. Id. The Exchange also states that, anecdotally,
market participants perceive value in avoiding the regulatory risk
of exceeding the position limit on SPY options by instead using SPX
index options for their hedging needs. Although exemptions are
available with respect to the position limits for SPY options, the
Exchange believes that such exemptions and the regulatory burden
attendant with them, in its view, may dissuade investors from using
SPY options when they can instead use an SPX index option without
the need for an exemption. Id. at 29723.
\17\ See Commentary .10 to NYSE Amex Options Rule 904.
\18\ See Notice, 77 FR at 29722. In making this argument, the
Exchange states that, given the fact that SPX index options are not
subject to position limits, an Exchange member, member organization,
or non-member affiliate could theoretically establish a position in
SPY options far in excess of the current 900,000 contract limit,
provided that the position is hedged with SPX index options.
---------------------------------------------------------------------------
The Exchange argues that, if no position limits have been found to
be warranted on both SPX and SPXPM index options, the same treatment
should be extended to SPY options so that inconsistent position limits
do not produce competitive advantages and disadvantages among
contracts. The Exchange cites observations regarding competition among
economically equivalent products, appearing in a 2005 paper by Hans R.
Dutt and Lawrence E. Harris,\19\ in making this argument.
---------------------------------------------------------------------------
\19\ See The Journal of Futures Markets, Vol. 25, no. 10, 945-
965 (2005) (``Position Limits for Cash-Settled Derivative
Contracts,'' by Hans R. Dutt and Lawrence E. Harris) (``Dutt-Harris
Paper'').
---------------------------------------------------------------------------
The Exchange cites the Commission as noting, in its approval of the
elimination of position and exercise limits with respect to SPX index
options, that the markets for the securities underlying the S&P 500
Index are deep and liquid, and maintaining that this reduces concerns
regarding manipulation or disruption in the underlying markets.\20\ The
Exchange represents that this would similarly be the case if position
limits were eliminated for SPY options.\21\ According to the Exchange,
SPY options as well as the SPY ETF exhibit deep, liquid markets.\22\ In
this regard, the Exchange states that SPY options are currently the
most actively traded option class in terms of average daily volume
(``ADV''),\23\ with ADV of 5,789,511 for year 2011 and 4,525,709 for
the period January 1, 2012 to April 19, 2012.\24\ The Exchange also
provides figures indicating that the SPY ETF ADV was 218,227,747 for
year 2011 and 145,164,527 for the period January 1, 2012 to April 19,
2012.\25\ The Exchange represents further that there is tremendous
liquidity in the component securities upon which the S&P 500 is based,
providing figures indicating that the component securities' ADV was
[[Page 50752]]
3,289,595,675 for year 2011 and 2,851,457,600 for the period January 1,
2012 to April 19, 2012.\26\
---------------------------------------------------------------------------
\20\ See Notice, 77 FR at 29723.
\21\ Id.
\22\ Id.
\23\ Id. at 29721.
\24\ Id. at 29723.
\25\ Id.
\26\ Id. at 29723-24.
---------------------------------------------------------------------------
The Exchange also believes that the SPY ETF's market capitalization
is at a level consistent with that which the Commission has previously
determined to be sufficiently large, in tandem with the depth and
liquidity of the markets for the SPY ETF, to reduce concerns regarding
manipulation.\27\ In this regard, the Exchange provides figures
indicating that the average SPY ETF market capitalization was
$89,533,777,897 for year 2011 and $99,752,986,022 for the period
January 1, 2012 to April 19, 2012.\28\
---------------------------------------------------------------------------
\27\ Id. at 29724.
\28\ Id. The Exchange also provides figures indicating that the
average S&P 500 Index market capitalization was $11,818,270,341,270
for year 2011 and $12,547,946,920,000 for the period January 1, 2012
to April 19, 2012. Id.
---------------------------------------------------------------------------
The Exchange further cites the Dutt-Harris Paper in addressing
possible concerns that the elimination of the position limit on SPY
options could raise the risk of market manipulation. The Exchange
believes that the Dutt-Harris analysis, which focuses on concerns
relating to manipulation of cash-settled derivatives, suggests that
whatever manipulation risk does exist in a cash-settled, broad-based
product such as the SPXPM index option, the corresponding risk in a
physically-settled, but equally broad-based product such as the SPY
option, is likely to be equally low, if not lower.\29\
---------------------------------------------------------------------------
\29\ See Notice, 77 FR at 29723. In this context, the Exchange
notes the observation of the Dutt-Harris Paper that the manipulation
of such instruments as U.S. exchange-traded, cash-settled derivative
contracts requires ``very large trades that are costly to make and
easy to detect through conventional surveillance,'' and argues that
the same observation applies equally to SPY options. Id.
---------------------------------------------------------------------------
In assessing the appropriateness of eliminating position limits for
SPY options, the Exchange also notes its rules setting forth reporting
requirements for large options positions and, among other things, the
Exchange's ability to impose higher margin requirements upon accounts
that it determines to be under-hedged. \30\ The Exchange further states
that the reporting, surveillance, and monitoring mechanisms that it
currently has in place for certain other option products that trade on
the Exchange without position limits are effective and could easily
accommodate SPY options.
---------------------------------------------------------------------------
\30\ See Notice, 77 FR at 29724; see also NYSE Amex Options Rule
906. Additionally, the Exchange notes that Rule 15c3-1 under the Act
imposes a capital charge on members to the extent of any margin
deficiency resulting from the higher margin requirement. See Notice,
77 FR at 29724.
---------------------------------------------------------------------------
Finally, with respect to concerns that the elimination of position
limits for SPY options could result in, or increase, market-on-close
volatility, the Exchange believes that the ability to hedge SPY options
with shares of the SPY ETF reduces the likelihood of such
volatility.\31\ In this regard, the Exchange argues that, because SPY
options are physically-settled, they can be easily hedged via long or
short positions in shares of the SPY ETF, which, as discussed at supra
note 12 and accompanying text, the Exchange maintains can be easily
created or redeemed as needed.\32\
---------------------------------------------------------------------------
\31\ See Notice, 77 FR at 29724-25.
\32\ Id.
---------------------------------------------------------------------------
III. Comment Summary
The Commission received two comment letters on the proposal. One
letter supported the proposed elimination of position limits on SPY
options.\33\ The commenter also expressed a belief that elimination of
SPY option position limits would result in more trading business on
regulated exchanges, as opposed to other venues, and would improve
market transparency.\34\ A second comment letter neither supported nor
opposed the proposal, but suggested that a reporting requirement would
be useful should position and exercise limits be eliminated for SPY
options.\35\
---------------------------------------------------------------------------
\33\ See Andrie Letter.
\34\ Id.
\35\ See CBOE Letter. In Amendment No. 1 the Exchange responded
to this comment by stating explicitly that the hedge reporting
requirements of NYSE Amex Options Rule 906(b) apply to SPY options.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\36\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\37\ 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 foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
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 general, to protect investors and the public interest;
and not be designed to permit unfair discrimination between customers,
issuers, brokers or dealers.
---------------------------------------------------------------------------
\36\ 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).
\37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Position and exercise limits serve as a regulatory tool designed to
address manipulative schemes and adverse market impact surrounding the
use of options. Since the inception of standardized options trading,
the options exchanges have had rules limiting the aggregate number of
options contracts that a member or customer may hold or exercise.\38\
These position and exercise limits are intended to prevent the
establishment of options positions that can be used or might create
incentives to manipulate the underlying market so as to benefit the
options position.\39\ In particular, position and exercise limits are
designed to minimize the potential for mini-manipulations and for
corners or squeezes of the underlying market.\40\ In addition, such
limits serve to reduce the possibility for disruption of the options
market itself, especially in illiquid classes.\41\
---------------------------------------------------------------------------
\38\ See, e.g., Securities Exchange Act Release No. 45236
(January 4, 2002), 67 FR 1378 (January 10, 2002) (SR-Amex-2001-42).
\39\ See, e.g., Securities Exchange Act Release No. 47346
(February 11, 2003), 68 FR 8316 (February 20, 2003) (SR-CBOE-2002-
26).
\40\ Id.
\41\ Id.
---------------------------------------------------------------------------
In general, the Commission has taken a gradual, evolutionary
approach toward expansion of position and exercise limits for option
products overlying certain ETFs where there is considerable liquidity
in both the underlying cash markets and the options markets, and, in
the case of certain broad-based index options, toward elimination of
such limits altogether.\42\ The Commission has been careful to balance
two competing concerns when considering proposals by the self-
regulatory organizations to change position and exercise limits. The
Commission has recognized that the limits can be useful to prevent
investors from disrupting the market in securities underlying the
options. At the same time, the Commission has determined that limits
should not be established in a manner that will unnecessarily
discourage participation in the options market by institutions and
other investors with substantial hedging needs or to prevent
specialists and
[[Page 50753]]
market-makers from adequately meeting their obligations to maintain a
fair and orderly market.\43\
---------------------------------------------------------------------------
\42\ The Commission's incremental approach to approving changes
in position and exercise limits for option products overlying
certain ETFs is well-established. See Securities Exchange Act
Release No. 64695 (June 17, 2011), 76 FR 36942, n. 19 and
accompanying text (June 23, 2011) (SR-Phlx-2011-58) (approving
increase of SPY option position limit to 900,000 contracts).
\43\ See Securities Exchange Act Release No. 40969 (January 22,
1999), 64 FR 4911 (February 1, 1999) (SR-CBOE-98-23).
---------------------------------------------------------------------------
The Commission has carefully considered the Exchange's proposal.
The Exchange argues that SPY options are ultimately derivative of the
S&P 500 Index, and should therefore be treated, from a position limit
perspective, similarly to index options based on the S&P 500 which have
no position limits, such as SPX and SPXPM. However, in reviewing the
Exchange's arguments, the Commission considered certain noteworthy
differences that exist, in its view, between SPY options and those
index option products.
Among other things, SPX and SPXPM are cash-settled options on the
S&P 500 Index. SPY options, on the other hand, are physically-settled
options on a single security--the SPY ETF. Moreover, SPY options settle
into shares of the SPY ETF, a single security, the performance of
which, in turn, generally corresponds to the performance of the S&P 500
Index. Thus, unlike SPX and SPXPM, SPY options are indirectly based on
the performance of the individual components of the S&P 500 Index.
Nevertheless, in spite of such differences, the Commission believes
that SPY options have certain characteristics that serve to mitigate
the concerns that position limits are designed to address. As the
Exchange has represented, SPY options are the most actively traded
options in terms of ADV. That, in combination with the depth and
liquidity of the markets for the underlying SPY ETF as well as the
component securities of the S&P 500 Index, and the surveillance
capabilities of the Exchange, support the elimination of position
limits for SPY options while still helping to ensure that large
positions in such options will not unduly disrupt trading in the
options or in the underlying SPY ETF. Given the Exchange's belief that
eliminating position limits will afford investors more flexibility in
meeting their particular investment, hedging, and trading needs, the
Commission believes that it is consistent with the Act and appropriate,
at this time, to allow SPY options to be traded on the Exchange without
position limits on a pilot basis. The Commission believes that
eliminating position limits on the highly liquid SPY options represents
the next step of a measured approach to position limits on these
options.
As an initial matter, the Commission notes that certain
characteristics unique to SPY options, taken together, significantly
mitigate concerns regarding manipulation or potential disruptions of
the markets for SPY options or the underlying SPY ETF. Importantly, and
as supported by the figures the Exchange has provided, the markets for
SPY options, the underlying SPY ETF, and the component securities upon
which the S&P 500 Index is based are extremely deep and liquid.\44\
Figures provided by the Exchange also reflect enormous capitalization
of both the SPY ETF and the S&P 500 Index.\45\ Given these
characteristics, the Commission believes that removing position limits
may benefit investors by bringing additional depth and liquidity, in
terms of both volume and open interest, to SPY option classes without
raising significant concerns about manipulation or potential market
disruption. As set forth in more detail below, however, the Commission
is approving the proposal on a pilot basis, during which the Exchange
will monitor and report to the Commission on the impact of the removal
of SPY option position limits on the SPY option market as well as the
markets for the underlying securities.
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\44\ See Notice, 77 FR at 29723-24.
\45\ Id. at 29724. The Commission also notes that, according to
the Exchange, the creation and redemption mechanism for SPY ETF
shares is robust, as evidenced by its close tracking of its
benchmark index, and limited only by the number of shares available
in the component securities of the S&P 500 Index. Id.
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The Commission also believes that the Exchange's reporting
requirements and surveillance systems should enable it to detect and
deter any trading abuses that might arise from the elimination of
position limits for SPY options.\46\ These safeguards also should
enable the Exchange to monitor large positions to identify instances of
potential risk and provide the Exchange with the information to
determine whether to impose additional margin and/or whether to assess
capital charges upon a member organization carrying the account.
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\46\ See Notice, 77 FR at 29724. The Commission also expects
that the Exchange's surveillance procedures should enable the
Exchange to assess and respond to market concerns at an early stage.
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In this regard, the Commission believes that financial requirements
imposed by the Exchange and the Commission help allay concerns that an
Exchange member or its customer may try to maintain an inordinately
large, unhedged SPY option position. 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 it or by its
customer.\47\ The Exchange also has the authority under its rules to
impose a higher margin requirement upon the member or member
organization when it determines a higher requirement is warranted.\48\
In addition, Rule 15c3-1 imposes a capital charge on members to the
extent of any margin deficiency resulting from the higher margin
requirement. Further, the OCC will serve as the counter-party guarantor
in every exchange-traded transaction.
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\47\ The Commission's net capital rule, Rule 15c3-1 under the
Act, requires a capital charge equal to the maximum potential loss
on a broker-dealer's aggregate index position over a + (-) 10%
market move.
\48\ See NYSE Amex Options Rule 462(e).
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As the Exchange notes, NYSE Amex Options Rule 906(a) requires
Exchange members to report to the Exchange any account with an
aggregate position (whether long or short) of 200 or more options
contracts where the underlying security is a stock or ETF share.\49\ In
addition, as the Exchange sets forth in Amendment No. 1, NYSE Amex
Options Rule 906(b) requires each member (other than an Exchange
market-maker) that maintains a position in excess of 10,000 non-FLEX
equity option contracts on the same side of the market, on behalf of
its own account or for the account of a customer, to report to the
Exchange whether and how such position is hedged.\50\ If the position
is under-hedged, pursuant to Rule 906(b), the Exchange may consider
imposing additional margin upon the account maintaining such under-
hedged position.\51\ CBOE suggests that the Exchange's proposal lacks a
hedge reporting requirement,\52\ but the Exchange affirms in Amendment
No. 1 that the requirements of Rule 906(b) apply to SPY options.\53\
Moreover, the Exchange asserts in Amendment No. 1 that the hedge
reporting requirements of Rule 906(b) are actually more stringent than
those cited in the CBOE Letter applicable to certain index options.\54\
The Commission believes that, if problems were to occur during the
Pilot Period, the market surveillance of large positions should help
the Exchange to take the appropriate action to avoid any manipulation
or market risk concerns.\55\
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\49\ See NYSE Amex Options Rule 906(a).
\50\ See NYSE Amex Options Rule 906(b).
\51\ Id.
\52\ See CBOE Letter.
\53\ See Amendment No. 1 to the proposed rule change.
\54\ Id.
\55\ In addition to the aforementioned reporting requirements,
the Commission notes that the Exchange would have, through its
membership in the Intermarket Surveillance Group, access to
information concerning the trading of the securities underlying the
S&P 500 Index, i.e., the securities that are used to create or
redeem SPY ETY shares.
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[[Page 50754]]
The Commission believes further that, to the extent that the
elimination of SPY option position limits results in movement of
trading interest from the OTC market onto the Exchange,\56\
transparency in the SPY option market would be enhanced, which is a
benefit for investors.
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\56\ See Andrie Letter.
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Notwithstanding the protections discussed above, the Commission
believes that a prudent approach is warranted with respect to the
Exchange's proposal to eliminate position limits for SPY options. In
this regard, the Commission believes that the risks of manipulation and
potential market disruption are significantly mitigated as discussed
above. To the extent the potential for adverse effects on the markets
for the SPY ETF or the S&P 500 component securities underlying the SPY
ETF continues to exist, the Exchange's proposal to implement this
change on a pilot basis should help to address this concern.
Accordingly, the Commission is approving the proposal, as amended, on a
fourteen-month pilot basis.\57\ Within thirty (30) days of the end of
the Pilot Period the Exchange will be required to submit to the
Commission the Pilot Report. 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 contract, particularly at
expiration. The Pilot Report will also detail the size and different
types of strategies employed with respect to positions established in
SPY options; note whether any problems, in the underlying SPY ETF or
otherwise, arose as a result of the no-limit approach; and include any
other information that may be useful in evaluating the effectiveness of
the pilot program. Furthermore, if the pilot is not extended or
permanently approved by the end of the Pilot Period, the pre-pilot
position limit for SPY options of 900,000 contracts on the same side of
the market will go back into effect.
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\57\ The Commission took a similarly measured approach to the
first proposals to eliminate position limits for certain broad-based
index options by approving those proposals on a pilot basis. See,
e.g., Securities Exchange Act Release Nos. 40969 (January 22, 1999),
64 FR 4911 (February 1, 1999) (SR-CBOE-98-23); 41011 (February 1,
1999), 64 FR 6405 (February 9, 1999) (SR-Amex-98-38).
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The Commission expects that, throughout the Pilot Period, the
Exchange will monitor for any problems and collect and analyze on an
ongoing basis the data and information that the Exchange ultimately
intends to include in the Pilot Report. The Commission also expects
that the Exchange will take prompt action, including timely
communication with the Commission and with other marketplace self-
regulatory organizations responsible for oversight of trading in
component stocks, should any unanticipated adverse market effects
develop.
The Commission finds good cause to approve the filing, as amended
by Amendment No. 1 to the proposed rule change, prior to the thirtieth
day after the date of publication of notice of filing thereof in the
Federal Register. Specifically, by limiting the proposed rule change to
a pilot program, the amendment narrows the scope of the proposal.
Moreover, the proposal, which in its original version would have
eliminated position limits permanently, was open for comment, as is
usual, for twenty-one days after publication and generated only two
responses--one of which supported the proposal and one that did not
raise objection to it.\58\ Further, the Pilot Report and the data that
the Exchange commits in Amendment No. 1 to provide to the Commission
enhance the proposal by adding a component that should help the
Exchange and the Commission assess the impact of eliminating SPY option
position limits. In addition, Amendment No. 1 enhances the proposal by
making explicit that the hedge reporting requirement of NYSE Amex
Options Rule 906(b) applies to SPY options. Accordingly, the Commission
believes that good cause exists, consistent with Sections 6(b)(5) and
19(b) of the Act to approve the filing, as amended by Amendment No. 1
to the proposed rule change, on an accelerated basis.
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\58\ See Andrie Letter and CBOE Letter.
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V. Solicitation of Comments on Amendment No. 1
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
is consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEAmex-2012-29 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-NYSEAmex-2012-29. 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 (https://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-NYSEAmex-2012-29 and should
be submitted on or before September 12, 2012.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\59\ that the proposed rule change (SR-NYSEAmex-2012-29) be, and it
hereby is, approved, as amended, on a fourteen-month pilot basis set to
expire on October 15, 2013.
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\59\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\60\
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\60\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-20575 Filed 8-21-12; 8:45 am]
BILLING CODE 8011-01-P
