Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Proposed Rule Change Amending Section 17, Which Are Rules Applicable to Securities Known as Fixed Return Options, To Reflect a Name Change to Binary Return Derivatives, a Change to the Calculation of the Settlement Price, Updating Rule References, Adding New Text for ByRDs Series Available for Trading, Amending the Quoting and Trading Increment Applicable to ByRDs, and Adding a New Paragraph 8 to Rule 975NY(a) and Amending Rule 975NY(b)(1) To Address Obvious Errors in ByRDs, 11845-11849 [2014-04553]
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Federal Register / Vol. 79, No. 41 / Monday, March 3, 2014 / Notices
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 SRISEGemini-2014–10 and should be
submitted on or before March 24, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–04554 Filed 2–28–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71613; File No. SR–
NYSEMKT–2014–06]
Self-Regulatory Organizations; NYSE
MKT LLC; Notice of Filing of Proposed
Rule Change Amending Section 17,
Which Are Rules Applicable to
Securities Known as Fixed Return
Options, To Reflect a Name Change to
Binary Return Derivatives, a Change to
the Calculation of the Settlement Price,
Updating Rule References, Adding
New Text for ByRDs Series Available
for Trading, Amending the Quoting and
Trading Increment Applicable to
ByRDs, and Adding a New Paragraph
8 to Rule 975NY(a) and Amending Rule
975NY(b)(1) To Address Obvious
Errors in ByRDs
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February 25, 2014.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on February
14, 2014, NYSE MKT LLC (the
‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
20 17
CFR 200.30–3(a)(12).
U.S.C.78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
19:40 Feb 28, 2014
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those 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 parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is proposing to amend
Section 17, which are rules applicable
to securities currently known as Fixed
Return Options, to reflect a name
change to ByRDs, a change to the
calculation of the Settlement Price,
updating rule references, adding new
text for ByRDs series available for
trading, amending the quoting and
trading increment applicable to ByRDs,
and adding a new paragraph 8 to Rule
975NY(a) and amending Rule
975NY(b)(1) to address Obvious Errors
in ByRDs.
Overview
In 2007, the Exchange received
approval to trade a type of binary option
referred to as Fixed Return Options.4 In
4 See Securities Exchange Act Release No. 56251
(August 14, 2007), 72 FR 46523 (August 20, 2007)
(Approval Order for SR-Amex-2004–27, as
amended).
1 15
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Section 17, which are rules applicable
to securities known as Fixed Return
Options, to reflect a name change to
Binary Return Derivatives (‘‘ByRDs’’), a
change to the calculation of the
Settlement Price, updating rule
references, adding new text for ByRDs
series available for trading, amending
the quoting and trading increment
applicable to ByRDs, and adding a new
paragraph 8 to Rule 975NY(a) and
amending Rule 975NY(b)(1) to address
Obvious Errors in ByRDs. The text of the
proposed rule change is available on the
Exchange’s Web site at www.nyse.com,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
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11845
March 2009, when the Exchange
migrated to a new trading system as part
of its integration with NYSE Euronext,
because the new trading system was not
optimized to accommodate the trading
of Fixed Return Options, the Exchange
restricted the opening of new series of
Fixed Return Options and limited
transactions to closing only.5
Subsequently, all open interest in Fixed
Return Options was either closed or
expired and the contracts became
dormant.6 Since first migrating over in
2009, the Exchange has regularly
enhanced its systems in efforts to
support new products and meet
business demands. The Exchange’s
systems now have the necessary
functionality and capacity to support
the trading of ByRDs contracts.
The Exchange is now in a position to
re-launch these securities and is
proposing to update its rules to reflect
the re-branding of Fixed Return Options
(‘‘FRO’’) as Binary Return Derivatives,
also referred to as ByRDs. The Exchange
also proposes to update various rule
cites to reflect the adoption of Section
900NY, which are the rules that govern
trading of options contracts at the
Exchange, and which replaced the rules
in place prior to March 2009 that
previously governed the trading of
Fixed Return Options, and delete the
reference to the Constitution, which no
longer exists.7 Additionally, based on its
experience from having trading Fixed
Return Options and based on
participant feedback, the Exchange is
proposing to make changes to the
manner in which the Settlement Price is
calculated to ensure either the Finish
High or Finish Low ByRDs contract pays
off at expiration; adding text to clarify
permissible strike price intervals and
expiration series for ByRDs; adding text
to specify the minimum price variation
(‘‘MPV’’) applicable to quoting and
trading in ByRDs; and adding new text
to Rule 975NY to address Obvious Error
transactions in ByRDs. The Exchange is
also proposing non-substantive
technical changes to certain rules
associated with the trading of ByRDs.
5 See Information Circular #08–0210 https://
www.amex.com/amextrader/dailylist/data/options/
infoCir/2008/ic080210.pdf.
6 See Information Circular #09–0024 https://
www.nyse.com/pdfs/ic090024.pdf.
7 See Securities Exchange Act Release No. 59472
(February 27, 2009) 74 FR 9843 (March 6, 2009),
(Approval Order for SR–NYSEALTR–2008–14 as
amended); See also Securities Exchange Act Release
No. 59454 (March 31, 2009) 74 FR 15802 (April 7,
2009) (Notice of Filing and Immediate Effectiveness
of SR–NYSEALTR–2009–17).
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Renaming and Renumbering of Existing
Rules
The Exchange proposes to re-title
existing Section 17, Fixed Return
Options, (and the rules therein), as
Section 17, Binary Return Derivatives
(ByRDs) so as to be consistent with the
proposed new name of the product and
make it easier for Exchange participants
to identify the rules applicable to the
trading of ByRDs. Similarly, the
Exchange proposes to replace the terms
‘‘Fixed Return Option’’ or ‘‘FRO’’ in the
existing rule text with the terms Binary
Return Derivatives, or ByRDs. Other
proposed changes to the rules within
Section 17 are described in more detail
below.
The Exchange is proposing to add
clarifying text to existing Rule 900FRO,
which is being amended as Rule
900ByRDs, to make clear that unless
otherwise specified in Section 17, the
Section 900NY series of rules is
applicable to the trading of ByRDs.
ByRDs options contracts will be
available for both electronic and floor
based trading.
The Exchange is proposing minor
changes to clarify existing Rule 901FRO,
which is being amended as Rule
901ByRDs, to specify that ByRDs
contracts shall be designated by the
expiration date (day, month and year)
strike price, exercise settlement and the
underlying security when ByRDs series
are listed for trading. Existing rule text
only requires specifying expiration
month and year. However, because the
Exchange now lists and trades Short
Term Option Series and Quarterly
Option Series, which may have an
expiration date that is not a month or
year, the Exchange believes that the rule
text for ByRDs should specify expiration
date as well.
The Exchange is proposing to amend
Rule 462(d).10 by updating references to
Fixed Return Options and/or FRO and
rebranding them as Binary Return
Derivative and/or ByRDs. These prosed
[sic] revisions are technical in nature
and do not in any way make substantive
changes to Rule 462.
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Series of ByRDs Open for Trading
The Exchange is proposing to amend
Rule 903FRO-Series of FROs Open for
Trading in its entirety and rename it as
Rule 903ByRDs—Series of ByRDs Open
for Trading. Presently, the rule simply
cites to Rule 903, in order to describe
which series may be opened for trading
for Fixed Return Options. The Exchange
is proposing to delete that reference and
adopt new paragraphs (a) (b) and (c) to
propose Rule 903ByRDs to specify
which series of ByRDs option contract
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may be opened for trading by the
Exchange and the permitted strike price
intervals for ByRDs.
Proposed paragraph (a) specifies that
the Exchange shall open for trading a
minimum of one expiration month for
each class of ByRDs options listed,
except for Consecutive Week Expiration
Series, which are described in proposed
paragraph (b). Consecution [sic] Week
Expiration Series are expiration series
that will expire at the end of the week,
normally a Friday, with consecutive
week expirations covering the next five
(5) calendar weeks. New expiration
week series will be added for trading on
Thursday each week, unless Friday is an
Exchange holiday in which case new
expiration series would be added for
trading on Wednesday. Based on
feedback from participants who have
expressed a desire to see ByRDs listed
with generally shorter expirations, as
opposed to utilizing the cycle month
series, the Exchange believes it is
appropriate to permit the listing of
ByRDs with five consecutive weeks of
expirations so as to maximize hedging
opportunities surrounding near-term
events like corporate actions, news
releases, corporate earnings and the like.
The Exchange is proposing new
paragraph (c) to specify that the strike
interval for ByRDs shall be $1 for strike
prices between $3 and $200 and $5 for
strike prices above $200. The proposed
rule further specifies that at the time of
listing, strike prices may not be listed
more than 30% away from the price of
the underlying security. The Exchange
notes that this is more conservative than
the 50% permitted under the Options
Listing Procedures Plan (‘‘OLPP’’) 8 for
strike prices on securities trading over
$20 in price generally, and considerably
more conservative than what the OLPP
permits for securities trading below $20
where strike prices within 100% of the
underlying security price may be added.
As further proposed, the Exchange may
list additional series if the furthest out
of the money strike is less than 10% out
of the money. At such time, the
Exchange would be able to list
additional series that are not more than
30% away from the price of the
underlying security.
The Exchange believes that the
proposed rule on when the Exchange
may list ByRDs options strikes the right
balance between offering investors the
maximum hedging opportunities with
ByRDs options while being mindful of
8 The OLPP is a national market system plan
sponsored by all US options exchanges and the
OCC which describes procedures to be followed by
the parties in connection with selecting specified
underlying interests for listing purposes and
requesting a review of such selections.
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creating series that are not likely to offer
meaningful trading opportunities. The
Exchange believes that offering ByRDs
options with $1 strike price intervals is
necessary given the economics of a
product that only pays $100 per contract
if it is in the money at expiration. The
$1 strike price interval means that
investors will have strike prices
reasonably close to the current price of
the underlying security such that they
have an opportunity to buy or sell a
ByRDs contract best able to hedge nearterm movements in the underlying
security price.
The Exchange is proposing to amend
rule text in Rule 904FRO, which is
being amended as Rule 904ByRDs, to
use the term underlying ‘‘security’’
instead of underlying ‘‘stock or
Exchange-Traded Fund Share.’’ The
Exchange is making this change to
ensure consistency with changes
proposed for Rule 903ByRDS, and other
rule text found elsewhere in Exchange
rules, which generally refer to
underlying securities when discussing
options.
Settlement Price
The Exchange is proposing to add
new commentary .02 to existing Rule
910FRO, which is being amended as
Rule 910ByRDs, based on feedback from
participants who traded Fixed Return
Options. Proposed commentary .02
specifies that the Settlement Price 9 at
expiration shall be calculated so as to
always round up $0.01 in those
instances where the Settlement Price
exactly equals an expiring ByRDs option
strike price. For example, if the
calculated Settlement Price is $20.00,
and there are expiring ByRDs Finish
High and Finish Low contracts with a
strike price of $20.00, the Settlement
Price will be rounded up to $20.01. The
effect of rounding will be to have long
$20 strike Finish High holders receiving
$100 and long $20 strike Finish Low
holders receiving $0.
Absent this rounding, a participant
may potentially have a position that
appears to guarantee a pay-off of $100
at expiration, but would instead receive
$0. For example, assume an investor
holds both a $20 strike Finish High
contract and $20 strike Finish Low
contract. Previously, it was more than
likely that either the Finish High or
Finish Low contract would expire in the
money and consequently the holder
would receive $100 at expiration.
However, in the unlikely event that the
9 See proposed Rule 900ByRDS(b)(4) & (5), which
collectively define both the Settlement Price and
how it is calculated based upon volume weighted
average price (‘‘VWAP’’) for the entire day of
trading on expiration.
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Settlement Price was calculated to
exactly equal the $20 strike price, such
holder of the two contracts would
receive $0. Although the risk of the
Settlement Price equaling the strike
price was small, the Exchange believes
that this could cause problems both for
hedging and explaining to investors
what would happen in the unusual
circumstance where the Settlement
Price matched the strike price of an
expiring ByRDs contract exactly.
Therefore, the Exchange is proposing
this change to ensure that either the
Finish High or the Finish Low ByRDs
option contracts will always pay off at
expiration. The Exchange believes this
will result in less opportunity for
investor confusion and less uncertainty
for participants as a whole.
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Underlying Securities
The Exchange is proposing to revise
Commentary .02 to Rule 915FRO, which
is being amended as Rule 915ByRDs, to
include Section 107 Securities 10 as
eligible underlying securities upon
which ByRDs contracts may be listed,
provided all other listing criteria for
ByRDs have been met. The Exchange
notes that approval to list options on
Section 107 Securities came subsequent
to the time when Fixed Return Options
were first offered and traded.11 Given
the success and popularity of options on
Section 107 Securities, such as those on
the iPath S&P 500 VIX Short Term
Futures TM ETN (symbol:VXX), the
Exchange believes it is appropriate to
offer investors the opportunity to hedge
those instruments with ByRDs option
contracts as well.
Similarly, the Exchange is proposing
to amend Commentary .03 to existing
Rule 916FRO, which is being amended
as Rule 916ByRDs, to include Section
107 Securities. Rule 916ByRDs
discusses the criteria necessary for the
continued approval to introduce new
series of ByRDs for trading. Failing to
meet the criteria shall mean that no new
series of ByRDs on that underlying
security will be introduced for trading.
The Exchange is proposing to delete
Rule 918FRO, Trading Rotations, Halts
and Suspensions as it referenced
deleted Rule 918 which has since been
replaced by the rules in Section
900NY,12 which as noted above, have
10 See
NYSE MKT Rule 915 Commentary .11.
Securities Exchange Act Release No. 57150
(January 15, 2008) 73 FR 3765 (January 22, 2008)
(Approval Order for SR-Amex-2007–130, as
amended).
12 See Rule 952NY which addresses Trading
Auctions (a/k/a ‘‘rotations’’) and Rule 953NY which
addresses Trading Halts and Suspensions.
specifically been incorporated by
reference in Rule 900ByRDs.
Minimum Price Variation for ByRDs
The Exchange is proposing to delete
an obsolete rule reference in existing
Rule 951FRO, which is being amended
as Rule 951ByRDs, and adding new text
to state that the Minimum Price
Variation (‘‘MPV’’) for quoting and
trading of ByRDs option contracts is
$0.01 for all series. The Exchange
believes that given the maximum pay off
at expiration for a ByRDs contract is
$100, adopting an MPV with a $0.01
value is appropriate. If the Exchange
were to quote and trade ByRDs in $0.05
MPV’s [sic], the resulting $5
incremental price of a ByRDs option
contact would represent 5% of the
potential payout at expiration, which
would unnecessarily erode profits or
add to losses. Therefore, the Exchange
believes that the optimal MPV for these
securities in [sic] $0.01. The Exchange
notes that other securities, such as
foreign currency options, traded on
other exchanges also have $0.01 MPV’s
[sic].13
Bid-Ask Differentials
The Exchange is also proposing to
delete an obsolete rule reference in
existing Rule 958FRO, which is being
amended as Rule 958ByRDs, which
describes bid-ask differentials for
ByRDs. The Exchange is not proposing
any change with respect to Market
Maker quoting obligations for ByRDs—
other than to simply propose a change
to update an obsolete rule cite. Market
Makers will continue to be obligated to
quote ByRDs no more than $0.25 wide,
except during the last trading day before
expiration when they may quote ByRDs
$0.50 wide.
The Exchange is also proposing to
eliminate a provision in Rule 958FRO,
(Rule 958ByRDs), which provides that
the permissible price differential for any
in-the-money series may be identical to
that of the underlying security market.
Because the bid-ask differential of an
underlying security is not necessarily a
determining factor in the theoretical
value of an in-the-money ByRDs options
contract the Exchange does not believe
that wider bid-ask differentials are
needed simply because the underlying
security may be greater than maximum
bid-ask differentials provided for above.
As provided for in existing Commentary
.01, the Exchange may continue to
11 See
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13 See ISE Rule 710, Supplementary Material .02,
which states, ‘‘Notwithstanding any other provision
of this Rule 710, the Exchange will permit foreign
currency options and options on a Foreign Currency
Index to be quoted and traded in one-cent
increments.’’
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11847
establish permissible price differences
other than those noted above for one or
more series or classes of ByRDs, as
warranted by market conditions.
Obvious Errors and Catastrophic Errors
in ByRDs
Finally, the Exchange proposes to
revise Rule 975NY (a)(1), adopt new
subsection (a)(8) to address the handling
of transactions in ByRDs option
contracts that qualify for treatment
under the Obvious Error provisions of
Rule 975NY and add new text to
paragraph (d) to address the handling of
Catastrophic Errors in ByRDs. Unless
otherwise specified, the provisions of
Rule 975NY will continue to apply.
Proposed paragraph (a)(8) states,
‘‘Binary Return Derivatives: Not
withstanding subsection (a)(1) of this
rule, any transaction in a Binary Return
Derivatives contract that is higher or
lower than the Theoretical Price by $.25
or more shall be deemed an Obvious
Error, subject to the adjustment
procedures of paragraph (a)(3), unless
such adjustment would result in a price
higher than $1.02, in which case the
adjustment price shall be $1.02.’’ As
ByRDs will either pay $0 or $100 at
expiration, a single ByRDs contract
should not have a value greater than
$1.00, therefore the Exchange believes
that any adjustment under the
provisions of the Obvious Error rule
should be capped at a price no higher
than $1.02. Further, the Exchange is
making changes to paragraph (d)(1) to
explicitly state that transactions in
ByRDs contracts over $1.02 shall qualify
as Catastrophic Errors if participants
request a review under the existing
provisions of paragraph (d)(3)(A).
Transactions in ByRDs contracts that
qualify as Catastrophic Errors will be
adjusted in accordance with the
procedures of new subsection (i) of
paragraph (d)(3)(C) such that any
Catastrophic Error in ByRDs contracts
will result in an adjustment to $1.02,
unless both parties mutually agree to a
different adjustment price.
The Exchange believes that using
$1.02 as the maximum price by which
an Obvious Error involving a ByRDs
contract shall be adjusted is appropriate
as it is not unreasonable for someone
looking to close a position (for example,
for tax loss purposes) to have to pay a
slight premium to do so—similar to how
an investor might choose to sell an
option under parity or buy back an
option position for more than its
theoretical maximum value. For the
same reason, the Exchange believes that
using $1.02 as the threshold for
determining whether a Catastrophic
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Error has occurred in a ByRDs contract
is also appropriate.
By adjusting all ByRDs Catastrophic
Error transactions over $1.02 to a price
of $1.02, the certainty of having a trade
is retained, while the party that caused
the error experiences some small
penalty for having created the error; this
is similar to the manner in which nonCustomer to non-Customer transactions
involved in Obvious Errors are handled
presently.14
The Exchange is also proposing minor
technical changes to Rule 980FRO,
which is being amended as Rule
980ByRDs, to capitalize the defined
term Settlement Price.
With regard to any systems impact,
NYSE Amex Options represents that
Exchange systems have the functionality
to support the trading of Binary Return
Derivatives. The Exchange has analyzed
its capacity and represents that it and
the Options Price Reporting Authority
(‘‘OPRA’’) have the necessary systems
capacity to handle the potential
additional traffic associated with the relisting and trading of ByRDs contracts.
The Exchange has further discussed the
proposed listing and trading of ByRDs
contracts with the OCC, which has
represented that it is able to
accommodate the clearing and
settlement of ByRDs contracts. The
Exchange will monitor any increased
trading volume associated with the
listing of new series of ByRDs and will
analyze the effect, if any, that the
additional volume has on the capacity
of the Exchange’s, OPRA’s, and the
OCC’s automated systems. In addition,
the Exchange does not believe the
listing of Binary Return Derivatives will
cause fragmentation to liquidity in the
options markets.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with Section 6(b)
of the Act,15 in general, and furthers the
objectives of Section 6(b)(5),16 in
particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest.
Specifically, the Exchange believes
that amending the existing rules
governing Fixed Return Options and
replacing them with rules specific for
Binary Return Derivative Options
removes impediments to and perfects
the mechanism of a free and open
market by conforming Exchange rules to
14 See
Rule 975NY(a)(3)(A).
U.S.C. 78f(b).
16 15 U.S.C. 78f(b)(5).
the new branding for this form of
options contract, which the Exchange
plans to reintroduce. Similarly, the
Exchange believes that updating
Exchange rules governing ByRDs to
include cross-references to rules that
have been updated since March 2009,
e.g., the amendments to cross-reference
the Rule 900NY Series, will remove
impediments to and perfect the
mechanism of a free and open market by
reducing any confusion in Exchange
rules regarding which rules govern the
trading of ByRDs options contracts.
More specifically, the Exchange
believes that augmenting the rules
governing ByRDs to adopt new
paragraphs (a) (b) and (c) to proposed
Rule 903ByRDs to specify which series
of ByRDs option contract may be
opened for trading by the Exchange and
the permitted strike price intervals for
ByRDs will also remove impediments to
and perfect the mechanism of a free and
open market because it will consolidate
in a single location the rules governing
the trading of ByRDs and therefore
provide clarity into [sic] the process for
listing ByRDs options. In addition, the
Exchange believes that adding the
listing of ByRDs on Section 107
Securities will offer investors the
opportunity to hedge those instruments
with ByRDs option contracts, thus
further removing impediments to the
mechanism of a free and open market.
The Exchange believes that the
proposed change to calculating the
Settlement Price so that it will always
round up $0.01 when the Settlement
Price matches an existing strike price is
designed to avert a situation where
neither the Finish High nor the Finish
Low Binary Return Derivative option
contract pays off at expiration. The
Exchange believes that providing the
certainty of a payout on at least one side
of a ByRDs option protects investors and
the public interest in general.
The Exchange notes that that adopting
a $0.01 MPV is consistent with pricing
of other products at competing
exchanges 17 and believes that the
proposed rule will help investors
maximize profits and/or minimize loses
and therefore is designed to promote
just and equitable principles of trade.
Finally the Exchange believes that
amending rules governing Obvious Error
and Catastrophic Error in order to adjust
ByRDs transitions that occur at prices
greater than $1.02, is designed to
promote just and equitable principles of
trade and the protection of investors by
averting situations where a market
participant might potentially pay
15 15
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17 Supra
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Footnote No. 13.
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significantly more than the maximum
value for of [sic] ByRDs option.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange believes the proposed
rule change will not impose any burden
on competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. The proposed
revisions to existing Exchange rules and
the adoption of new ones are intended
to make trading ByRDs options more
attractive to investors, which should
help the Exchange to compete with
other market centers. In addition, the
Exchange has found that offering ATP
Holders a wide variety of investment
products attracts new market
participants to the Exchange, which
may lead to greater competition and
increased liquidity which benefits any
investor choosing to trade on NYSE
Amex Options.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received from
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml ); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEMKT–2014–06 on the subject line.
E:\FR\FM\03MRN1.SGM
03MRN1
Federal Register / Vol. 79, No. 41 / Monday, March 3, 2014 / Notices
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–NYSEMKT–2014–06. 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–
NYSEMKT–2014–06, and should be
submitted on or before March 24, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–04553 Filed 2–28–14; 8:45 am]
mstockstill on DSK4VPTVN1PROD with NOTICES
BILLING CODE 8011–01–P
18 17
CFR 200.30–3(a)(12).
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Jkt 232001
SECURITIES AND EXCHANGE
COMMISSION
11849
whether to disapprove the proposed
rule changes.
II. Description of the Proposals
[Release No. 34–71609; File Nos. SR–NYSE–
2013–72; SR–NYSEMKT–2013–91]
Self-Regulatory Organizations; New
York Stock Exchange LLC; NYSE MKT
LLC; Order Instituting Proceedings to
Determine Whether To Disapprove
Proposed Rule Changes To Establish
an Institutional Liquidity Program on a
One-Year Pilot Basis
February 25, 2014.
I. Introduction
On November 7, 2013, New York
Stock Exchange LLC (‘‘NYSE’’) and
NYSE MKT LLC (‘‘NYSE MKT’’ and
together with NYSE, the ‘‘Exchanges’’)
each 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 establish an
Institutional Liquidity Program (‘‘ILP’’
or ‘‘Program’’) on one-year pilot basis.
The proposed rule changes were
published for comment in the Federal
Register on November 27, 2013.3 The
Commission received three comments
on the NYSE Proposal.4 On January 9,
2014, the Commission designated a
longer period for Commission action on
the proposed rule changes, until
February 25, 2014.5 The Exchanges
submitted a consolidated response letter
on January 14, 2014.6 This order
institutes proceedings under Section
19(b)(2)(B) of the Act to determine
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release Nos. 70909
(November 21, 2013), 78 FR 71002 (SR–NYSE–
2013–72) (‘‘NYSE Proposal’’); and 70910 (November
21, 2013), 78 FR 70992 (SR–NYSEMKT–2013–91)
(‘‘NYSE MKT Proposal’’) (collectively, the
‘‘Proposals’’).
4 See Letters to the Commission from James Allen,
Head, and Rhodri Pierce, Director, Capital Markets
Policy, CFA Institute (Dec. 18, 2013) (‘‘CFA
Letter’’); Clive Williams, Vice President and Global
Head of Trading, Andrew M. Brooks, Vice President
and Head of U.S. Equity Trading, and Christopher
P. Hayes, Vice President and Legal Counsel, T.
Rowe Price Associates, Inc. (Dec. 18, 2013) (‘‘T.
Rowe Price Letter’’); and Theodore R. Lazo,
Managing Director and Associate General Counsel,
Securities Industry and Financial Markets
Association (Dec. 20, 2013) (‘‘SIFMA Letter’’). The
Commission notes that these comment letters
address the NYSE Proposal only. However, since
the Proposals are nearly identical, the Commission
will consider the letters to address the NYSE MKT
Proposal as well.
5 See Securities Exchange Act Release No. 71267,
79 FR 2738 (January 15, 2014).
6 See Letter to the Commission from Janet
McGinnis, EVP & Corporate Secretary, NYSE
Euronext (Jan. 14, 2014) (‘‘Response Letter’’).
2 17
PO 00000
Frm 00100
Fmt 4703
Sfmt 4703
A. Overview
Each Exchange is proposing to
establish, for a pilot term of one year, an
Institutional Liquidity Program
intended to attract buying and selling
interest in greater size to the NYSE for
NYSE-listed securities and to NYSE
MKT for NYSE MKT-listed securities
and securities listed on the Nasdaq
Stock Market and traded pursuant to
unlisted trading privileges. To do so, the
Program would introduce two new
order types to facilitate interactions
between market participants with blocksize trading interest and liquidity
providers that submit orders that meet
certain size thresholds. The Exchanges
have characterized the Program as a
‘‘targeted size discovery mechanism’’
that would enable market participants to
execute trades that are larger than the
average size of trades executed on the
Exchanges or in most dark pools.7
B. Proposed New Order Types—ILOs
and OLOs
The two proposed order types are the
‘‘Institutional Liquidity Order’’ (‘‘ILO’’)
and the ‘‘Oversize Liquidity Order’’
(‘‘OLO’’). Generally, ILOs would
represent non-displayed block-size
interest: a limit order of at least 5,000
shares with a market value of at least
$50,000 or a ‘‘child’’ order of an original
‘‘parent order’’ meeting these size
requirements.8 OLOs would represent
non-displayed orders of at least 500
shares (or at least 300 shares for less
liquid securities) submitted to provide
liquidity to ILOs. ILOs could be
submitted with a Minimum Triggering
Volume (‘‘MTV’’) instruction and would
interact first with displayed interest at
the Exchanges before interacting with
other interest in the Program (i.e., OLOs
and other resting ILOs) or routing to
other markets. OLOs would interact
only with ILOs. Orders within the
Program would be executed according
to price-size-time priority, rather than
the Exchanges’ parity allocation.
To qualify as an ILO, an order would
need to be submitted to establish,
increase, liquidate, or decrease a
position in the subject security and
could not be part of an expression of
two-sided (i.e., market making) interest
7 See,
e.g., NYSE Proposal, 78 FR at 71002.
an ILO represented the child order of
recorded parent instructions, the parent instruction
would not need to be submitted in whole to the
Program; instead, parts of the recorded parent order
instruction could be executed in the Program, on
the Exchanges outside of the Program, or at other
venues.
8 Where
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]]>Agencies
[Federal Register Volume 79, Number 41 (Monday, March 3, 2014)]
[Notices]
[Pages 11845-11849]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-04553]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71613; File No. SR-NYSEMKT-2014-06]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of
Proposed Rule Change Amending Section 17, Which Are Rules Applicable to
Securities Known as Fixed Return Options, To Reflect a Name Change to
Binary Return Derivatives, a Change to the Calculation of the
Settlement Price, Updating Rule References, Adding New Text for ByRDs
Series Available for Trading, Amending the Quoting and Trading
Increment Applicable to ByRDs, and Adding a New Paragraph 8 to Rule
975NY(a) and Amending Rule 975NY(b)(1) To Address Obvious Errors in
ByRDs
February 25, 2014.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on February 14, 2014, NYSE MKT LLC (the ``Exchange'' or
``NYSE MKT'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Section 17, which are rules
applicable to securities known as Fixed Return Options, to reflect a
name change to Binary Return Derivatives (``ByRDs''), a change to the
calculation of the Settlement Price, updating rule references, adding
new text for ByRDs series available for trading, amending the quoting
and trading increment applicable to ByRDs, and adding a new paragraph 8
to Rule 975NY(a) and amending Rule 975NY(b)(1) to address Obvious
Errors in ByRDs. The text of the proposed rule change is available on
the Exchange's Web site at www.nyse.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing to amend Section 17, which are rules
applicable to securities currently known as Fixed Return Options, to
reflect a name change to ByRDs, a change to the calculation of the
Settlement Price, updating rule references, adding new text for ByRDs
series available for trading, amending the quoting and trading
increment applicable to ByRDs, and adding a new paragraph 8 to Rule
975NY(a) and amending Rule 975NY(b)(1) to address Obvious Errors in
ByRDs.
Overview
In 2007, the Exchange received approval to trade a type of binary
option referred to as Fixed Return Options.\4\ In March 2009, when the
Exchange migrated to a new trading system as part of its integration
with NYSE Euronext, because the new trading system was not optimized to
accommodate the trading of Fixed Return Options, the Exchange
restricted the opening of new series of Fixed Return Options and
limited transactions to closing only.\5\ Subsequently, all open
interest in Fixed Return Options was either closed or expired and the
contracts became dormant.\6\ Since first migrating over in 2009, the
Exchange has regularly enhanced its systems in efforts to support new
products and meet business demands. The Exchange's systems now have the
necessary functionality and capacity to support the trading of ByRDs
contracts.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 56251 (August 14,
2007), 72 FR 46523 (August 20, 2007) (Approval Order for SR-Amex-
2004-27, as amended).
\5\ See Information Circular 08-0210 https://www.amex.com/amextrader/dailylist/data/options/infoCir/2008/ic080210.pdf.
\6\ See Information Circular 09-0024 https://www.nyse.com/pdfs/ic090024.pdf.
---------------------------------------------------------------------------
The Exchange is now in a position to re-launch these securities and
is proposing to update its rules to reflect the re-branding of Fixed
Return Options (``FRO'') as Binary Return Derivatives, also referred to
as ByRDs. The Exchange also proposes to update various rule cites to
reflect the adoption of Section 900NY, which are the rules that govern
trading of options contracts at the Exchange, and which replaced the
rules in place prior to March 2009 that previously governed the trading
of Fixed Return Options, and delete the reference to the Constitution,
which no longer exists.\7\ Additionally, based on its experience from
having trading Fixed Return Options and based on participant feedback,
the Exchange is proposing to make changes to the manner in which the
Settlement Price is calculated to ensure either the Finish High or
Finish Low ByRDs contract pays off at expiration; adding text to
clarify permissible strike price intervals and expiration series for
ByRDs; adding text to specify the minimum price variation (``MPV'')
applicable to quoting and trading in ByRDs; and adding new text to Rule
975NY to address Obvious Error transactions in ByRDs. The Exchange is
also proposing non-substantive technical changes to certain rules
associated with the trading of ByRDs.
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 59472 (February 27,
2009) 74 FR 9843 (March 6, 2009), (Approval Order for SR-NYSEALTR-
2008-14 as amended); See also Securities Exchange Act Release No.
59454 (March 31, 2009) 74 FR 15802 (April 7, 2009) (Notice of Filing
and Immediate Effectiveness of SR-NYSEALTR-2009-17).
---------------------------------------------------------------------------
[[Page 11846]]
Renaming and Renumbering of Existing Rules
The Exchange proposes to re-title existing Section 17, Fixed Return
Options, (and the rules therein), as Section 17, Binary Return
Derivatives (ByRDs) so as to be consistent with the proposed new name
of the product and make it easier for Exchange participants to identify
the rules applicable to the trading of ByRDs. Similarly, the Exchange
proposes to replace the terms ``Fixed Return Option'' or ``FRO'' in the
existing rule text with the terms Binary Return Derivatives, or ByRDs.
Other proposed changes to the rules within Section 17 are described in
more detail below.
The Exchange is proposing to add clarifying text to existing Rule
900FRO, which is being amended as Rule 900ByRDs, to make clear that
unless otherwise specified in Section 17, the Section 900NY series of
rules is applicable to the trading of ByRDs. ByRDs options contracts
will be available for both electronic and floor based trading.
The Exchange is proposing minor changes to clarify existing Rule
901FRO, which is being amended as Rule 901ByRDs, to specify that ByRDs
contracts shall be designated by the expiration date (day, month and
year) strike price, exercise settlement and the underlying security
when ByRDs series are listed for trading. Existing rule text only
requires specifying expiration month and year. However, because the
Exchange now lists and trades Short Term Option Series and Quarterly
Option Series, which may have an expiration date that is not a month or
year, the Exchange believes that the rule text for ByRDs should specify
expiration date as well.
The Exchange is proposing to amend Rule 462(d).10 by updating
references to Fixed Return Options and/or FRO and rebranding them as
Binary Return Derivative and/or ByRDs. These prosed [sic] revisions are
technical in nature and do not in any way make substantive changes to
Rule 462.
Series of ByRDs Open for Trading
The Exchange is proposing to amend Rule 903FRO-Series of FROs Open
for Trading in its entirety and rename it as Rule 903ByRDs--Series of
ByRDs Open for Trading. Presently, the rule simply cites to Rule 903,
in order to describe which series may be opened for trading for Fixed
Return Options. The Exchange is proposing to delete that reference and
adopt new paragraphs (a) (b) and (c) to propose Rule 903ByRDs to
specify which series of ByRDs option contract may be opened for trading
by the Exchange and the permitted strike price intervals for ByRDs.
Proposed paragraph (a) specifies that the Exchange shall open for
trading a minimum of one expiration month for each class of ByRDs
options listed, except for Consecutive Week Expiration Series, which
are described in proposed paragraph (b). Consecution [sic] Week
Expiration Series are expiration series that will expire at the end of
the week, normally a Friday, with consecutive week expirations covering
the next five (5) calendar weeks. New expiration week series will be
added for trading on Thursday each week, unless Friday is an Exchange
holiday in which case new expiration series would be added for trading
on Wednesday. Based on feedback from participants who have expressed a
desire to see ByRDs listed with generally shorter expirations, as
opposed to utilizing the cycle month series, the Exchange believes it
is appropriate to permit the listing of ByRDs with five consecutive
weeks of expirations so as to maximize hedging opportunities
surrounding near-term events like corporate actions, news releases,
corporate earnings and the like.
The Exchange is proposing new paragraph (c) to specify that the
strike interval for ByRDs shall be $1 for strike prices between $3 and
$200 and $5 for strike prices above $200. The proposed rule further
specifies that at the time of listing, strike prices may not be listed
more than 30% away from the price of the underlying security. The
Exchange notes that this is more conservative than the 50% permitted
under the Options Listing Procedures Plan (``OLPP'') \8\ for strike
prices on securities trading over $20 in price generally, and
considerably more conservative than what the OLPP permits for
securities trading below $20 where strike prices within 100% of the
underlying security price may be added. As further proposed, the
Exchange may list additional series if the furthest out of the money
strike is less than 10% out of the money. At such time, the Exchange
would be able to list additional series that are not more than 30% away
from the price of the underlying security.
---------------------------------------------------------------------------
\8\ The OLPP is a national market system plan sponsored by all
US options exchanges and the OCC which describes procedures to be
followed by the parties in connection with selecting specified
underlying interests for listing purposes and requesting a review of
such selections.
---------------------------------------------------------------------------
The Exchange believes that the proposed rule on when the Exchange
may list ByRDs options strikes the right balance between offering
investors the maximum hedging opportunities with ByRDs options while
being mindful of creating series that are not likely to offer
meaningful trading opportunities. The Exchange believes that offering
ByRDs options with $1 strike price intervals is necessary given the
economics of a product that only pays $100 per contract if it is in the
money at expiration. The $1 strike price interval means that investors
will have strike prices reasonably close to the current price of the
underlying security such that they have an opportunity to buy or sell a
ByRDs contract best able to hedge near-term movements in the underlying
security price.
The Exchange is proposing to amend rule text in Rule 904FRO, which
is being amended as Rule 904ByRDs, to use the term underlying
``security'' instead of underlying ``stock or Exchange-Traded Fund
Share.'' The Exchange is making this change to ensure consistency with
changes proposed for Rule 903ByRDS, and other rule text found elsewhere
in Exchange rules, which generally refer to underlying securities when
discussing options.
Settlement Price
The Exchange is proposing to add new commentary .02 to existing
Rule 910FRO, which is being amended as Rule 910ByRDs, based on feedback
from participants who traded Fixed Return Options. Proposed commentary
.02 specifies that the Settlement Price \9\ at expiration shall be
calculated so as to always round up $0.01 in those instances where the
Settlement Price exactly equals an expiring ByRDs option strike price.
For example, if the calculated Settlement Price is $20.00, and there
are expiring ByRDs Finish High and Finish Low contracts with a strike
price of $20.00, the Settlement Price will be rounded up to $20.01. The
effect of rounding will be to have long $20 strike Finish High holders
receiving $100 and long $20 strike Finish Low holders receiving $0.
---------------------------------------------------------------------------
\9\ See proposed Rule 900ByRDS(b)(4) & (5), which collectively
define both the Settlement Price and how it is calculated based upon
volume weighted average price (``VWAP'') for the entire day of
trading on expiration.
---------------------------------------------------------------------------
Absent this rounding, a participant may potentially have a position
that appears to guarantee a pay-off of $100 at expiration, but would
instead receive $0. For example, assume an investor holds both a $20
strike Finish High contract and $20 strike Finish Low contract.
Previously, it was more than likely that either the Finish High or
Finish Low contract would expire in the money and consequently the
holder would receive $100 at expiration. However, in the unlikely event
that the
[[Page 11847]]
Settlement Price was calculated to exactly equal the $20 strike price,
such holder of the two contracts would receive $0. Although the risk of
the Settlement Price equaling the strike price was small, the Exchange
believes that this could cause problems both for hedging and explaining
to investors what would happen in the unusual circumstance where the
Settlement Price matched the strike price of an expiring ByRDs contract
exactly. Therefore, the Exchange is proposing this change to ensure
that either the Finish High or the Finish Low ByRDs option contracts
will always pay off at expiration. The Exchange believes this will
result in less opportunity for investor confusion and less uncertainty
for participants as a whole.
Underlying Securities
The Exchange is proposing to revise Commentary .02 to Rule 915FRO,
which is being amended as Rule 915ByRDs, to include Section 107
Securities \10\ as eligible underlying securities upon which ByRDs
contracts may be listed, provided all other listing criteria for ByRDs
have been met. The Exchange notes that approval to list options on
Section 107 Securities came subsequent to the time when Fixed Return
Options were first offered and traded.\11\ Given the success and
popularity of options on Section 107 Securities, such as those on the
iPath S&P 500 VIX Short Term Futures TM ETN (symbol:VXX),
the Exchange believes it is appropriate to offer investors the
opportunity to hedge those instruments with ByRDs option contracts as
well.
---------------------------------------------------------------------------
\10\ See NYSE MKT Rule 915 Commentary .11.
\11\ See Securities Exchange Act Release No. 57150 (January 15,
2008) 73 FR 3765 (January 22, 2008) (Approval Order for SR-Amex-
2007-130, as amended).
---------------------------------------------------------------------------
Similarly, the Exchange is proposing to amend Commentary .03 to
existing Rule 916FRO, which is being amended as Rule 916ByRDs, to
include Section 107 Securities. Rule 916ByRDs discusses the criteria
necessary for the continued approval to introduce new series of ByRDs
for trading. Failing to meet the criteria shall mean that no new series
of ByRDs on that underlying security will be introduced for trading.
The Exchange is proposing to delete Rule 918FRO, Trading Rotations,
Halts and Suspensions as it referenced deleted Rule 918 which has since
been replaced by the rules in Section 900NY,\12\ which as noted above,
have specifically been incorporated by reference in Rule 900ByRDs.
---------------------------------------------------------------------------
\12\ See Rule 952NY which addresses Trading Auctions (a/k/a
``rotations'') and Rule 953NY which addresses Trading Halts and
Suspensions.
---------------------------------------------------------------------------
Minimum Price Variation for ByRDs
The Exchange is proposing to delete an obsolete rule reference in
existing Rule 951FRO, which is being amended as Rule 951ByRDs, and
adding new text to state that the Minimum Price Variation (``MPV'') for
quoting and trading of ByRDs option contracts is $0.01 for all series.
The Exchange believes that given the maximum pay off at expiration for
a ByRDs contract is $100, adopting an MPV with a $0.01 value is
appropriate. If the Exchange were to quote and trade ByRDs in $0.05
MPV's [sic], the resulting $5 incremental price of a ByRDs option
contact would represent 5% of the potential payout at expiration, which
would unnecessarily erode profits or add to losses. Therefore, the
Exchange believes that the optimal MPV for these securities in [sic]
$0.01. The Exchange notes that other securities, such as foreign
currency options, traded on other exchanges also have $0.01 MPV's
[sic].\13\
---------------------------------------------------------------------------
\13\ See ISE Rule 710, Supplementary Material .02, which states,
``Notwithstanding any other provision of this Rule 710, the Exchange
will permit foreign currency options and options on a Foreign
Currency Index to be quoted and traded in one-cent increments.''
---------------------------------------------------------------------------
Bid-Ask Differentials
The Exchange is also proposing to delete an obsolete rule reference
in existing Rule 958FRO, which is being amended as Rule 958ByRDs, which
describes bid-ask differentials for ByRDs. The Exchange is not
proposing any change with respect to Market Maker quoting obligations
for ByRDs--other than to simply propose a change to update an obsolete
rule cite. Market Makers will continue to be obligated to quote ByRDs
no more than $0.25 wide, except during the last trading day before
expiration when they may quote ByRDs $0.50 wide.
The Exchange is also proposing to eliminate a provision in Rule
958FRO, (Rule 958ByRDs), which provides that the permissible price
differential for any in-the-money series may be identical to that of
the underlying security market. Because the bid-ask differential of an
underlying security is not necessarily a determining factor in the
theoretical value of an in-the-money ByRDs options contract the
Exchange does not believe that wider bid-ask differentials are needed
simply because the underlying security may be greater than maximum bid-
ask differentials provided for above. As provided for in existing
Commentary .01, the Exchange may continue to establish permissible
price differences other than those noted above for one or more series
or classes of ByRDs, as warranted by market conditions.
Obvious Errors and Catastrophic Errors in ByRDs
Finally, the Exchange proposes to revise Rule 975NY (a)(1), adopt
new subsection (a)(8) to address the handling of transactions in ByRDs
option contracts that qualify for treatment under the Obvious Error
provisions of Rule 975NY and add new text to paragraph (d) to address
the handling of Catastrophic Errors in ByRDs. Unless otherwise
specified, the provisions of Rule 975NY will continue to apply.
Proposed paragraph (a)(8) states, ``Binary Return Derivatives: Not
withstanding subsection (a)(1) of this rule, any transaction in a
Binary Return Derivatives contract that is higher or lower than the
Theoretical Price by $.25 or more shall be deemed an Obvious Error,
subject to the adjustment procedures of paragraph (a)(3), unless such
adjustment would result in a price higher than $1.02, in which case the
adjustment price shall be $1.02.'' As ByRDs will either pay $0 or $100
at expiration, a single ByRDs contract should not have a value greater
than $1.00, therefore the Exchange believes that any adjustment under
the provisions of the Obvious Error rule should be capped at a price no
higher than $1.02. Further, the Exchange is making changes to paragraph
(d)(1) to explicitly state that transactions in ByRDs contracts over
$1.02 shall qualify as Catastrophic Errors if participants request a
review under the existing provisions of paragraph (d)(3)(A).
Transactions in ByRDs contracts that qualify as Catastrophic Errors
will be adjusted in accordance with the procedures of new subsection
(i) of paragraph (d)(3)(C) such that any Catastrophic Error in ByRDs
contracts will result in an adjustment to $1.02, unless both parties
mutually agree to a different adjustment price.
The Exchange believes that using $1.02 as the maximum price by
which an Obvious Error involving a ByRDs contract shall be adjusted is
appropriate as it is not unreasonable for someone looking to close a
position (for example, for tax loss purposes) to have to pay a slight
premium to do so--similar to how an investor might choose to sell an
option under parity or buy back an option position for more than its
theoretical maximum value. For the same reason, the Exchange believes
that using $1.02 as the threshold for determining whether a
Catastrophic
[[Page 11848]]
Error has occurred in a ByRDs contract is also appropriate.
By adjusting all ByRDs Catastrophic Error transactions over $1.02
to a price of $1.02, the certainty of having a trade is retained, while
the party that caused the error experiences some small penalty for
having created the error; this is similar to the manner in which non-
Customer to non-Customer transactions involved in Obvious Errors are
handled presently.\14\
---------------------------------------------------------------------------
\14\ See Rule 975NY(a)(3)(A).
---------------------------------------------------------------------------
The Exchange is also proposing minor technical changes to Rule
980FRO, which is being amended as Rule 980ByRDs, to capitalize the
defined term Settlement Price.
With regard to any systems impact, NYSE Amex Options represents
that Exchange systems have the functionality to support the trading of
Binary Return Derivatives. The Exchange has analyzed its capacity and
represents that it and the Options Price Reporting Authority (``OPRA'')
have the necessary systems capacity to handle the potential additional
traffic associated with the re-listing and trading of ByRDs contracts.
The Exchange has further discussed the proposed listing and trading of
ByRDs contracts with the OCC, which has represented that it is able to
accommodate the clearing and settlement of ByRDs contracts. The
Exchange will monitor any increased trading volume associated with the
listing of new series of ByRDs and will analyze the effect, if any,
that the additional volume has on the capacity of the Exchange's,
OPRA's, and the OCC's automated systems. In addition, the Exchange does
not believe the listing of Binary Return Derivatives will cause
fragmentation to liquidity in the options markets.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act,\15\ in general, and furthers the objectives of Section
6(b)(5),\16\ in particular, in that it is designed to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and, in general, to protect
investors and the public interest.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes that amending the existing
rules governing Fixed Return Options and replacing them with rules
specific for Binary Return Derivative Options removes impediments to
and perfects the mechanism of a free and open market by conforming
Exchange rules to the new branding for this form of options contract,
which the Exchange plans to reintroduce. Similarly, the Exchange
believes that updating Exchange rules governing ByRDs to include cross-
references to rules that have been updated since March 2009, e.g., the
amendments to cross-reference the Rule 900NY Series, will remove
impediments to and perfect the mechanism of a free and open market by
reducing any confusion in Exchange rules regarding which rules govern
the trading of ByRDs options contracts.
More specifically, the Exchange believes that augmenting the rules
governing ByRDs to adopt new paragraphs (a) (b) and (c) to proposed
Rule 903ByRDs to specify which series of ByRDs option contract may be
opened for trading by the Exchange and the permitted strike price
intervals for ByRDs will also remove impediments to and perfect the
mechanism of a free and open market because it will consolidate in a
single location the rules governing the trading of ByRDs and therefore
provide clarity into [sic] the process for listing ByRDs options. In
addition, the Exchange believes that adding the listing of ByRDs on
Section 107 Securities will offer investors the opportunity to hedge
those instruments with ByRDs option contracts, thus further removing
impediments to the mechanism of a free and open market.
The Exchange believes that the proposed change to calculating the
Settlement Price so that it will always round up $0.01 when the
Settlement Price matches an existing strike price is designed to avert
a situation where neither the Finish High nor the Finish Low Binary
Return Derivative option contract pays off at expiration. The Exchange
believes that providing the certainty of a payout on at least one side
of a ByRDs option protects investors and the public interest in
general.
The Exchange notes that that adopting a $0.01 MPV is consistent
with pricing of other products at competing exchanges \17\ and believes
that the proposed rule will help investors maximize profits and/or
minimize loses and therefore is designed to promote just and equitable
principles of trade.
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\17\ Supra Footnote No. 13.
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Finally the Exchange believes that amending rules governing Obvious
Error and Catastrophic Error in order to adjust ByRDs transitions that
occur at prices greater than $1.02, is designed to promote just and
equitable principles of trade and the protection of investors by
averting situations where a market participant might potentially pay
significantly more than the maximum value for of [sic] ByRDs option.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will not impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed revisions to
existing Exchange rules and the adoption of new ones are intended to
make trading ByRDs options more attractive to investors, which should
help the Exchange to compete with other market centers. In addition,
the Exchange has found that offering ATP Holders a wide variety of
investment products attracts new market participants to the Exchange,
which may lead to greater competition and increased liquidity which
benefits any investor choosing to trade on NYSE Amex Options.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml ); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEMKT-2014-06 on the subject line.
[[Page 11849]]
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-NYSEMKT-2014-06. 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-NYSEMKT-2014-06, and should
be submitted on or before March 24, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04553 Filed 2-28-14; 8:45 am]
BILLING CODE 8011-01-P
