Skip to Content

Notice

Self-Regulatory Organizations; International Securities Exchange, LLC; Order Approving Proposed Rule Change To Amend Exchange Rules Related to Cut-Off Time for Contrary Exercise Advice Submissions

Document Details

Information about this document as published in the Federal Register.

Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble March 15, 2010.

I. Introduction

On January 11, 2010, the International Securities Exchange, LLC (the “Exchange” or the “ISE”) 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 relating to the cut-off time for submitting contrary exercise advices to the Exchange. The proposed rule change was published for comment in the Federal Register on February 8, 2010.[3] This order approves the proposed rule change.

II. Description of the Proposal

The Exchange has proposed to amend Rule 1100 to extend the cut-off time to submit contrary exercise advices (“CEAs”) [4] to the Exchange to 7:30 p.m. The Exchange also has proposed to make certain non-substantive changes to reorganize the text of Rule 1100 to more clearly present the existing requirements and to eliminate duplicative language.

Pursuant to Rule 805 of the Options Clearing Corporation (“OCC”), certain options that are in-the-money by a specified amount will be automatically exercised. This procedure is known as “Exercise-by-Exception” or “Ex-by-Ex.” Under the Ex-by-Ex process, options holders holding option contracts that are in-the-money by a requisite amount and who wish to have their contracts automatically exercised need take no Start Printed Page 13637further action. However, under OCC Rule 805, option holders who do not want their options automatically exercised or who want their options to be exercised under parameters different than the Ex-by-Ex procedures must instruct OCC of their “contrary intention.” Pursuant to ISE Rule 1100 option holders must also file a CEA with the Exchange notifying the Exchange of the option holder's contrary intention. ISE Rule 1100 is designed, in part, to deter individuals from taking improper advantage of late breaking news by requiring evidence of an option holder's timely decision to exercise or not exercise expiring equity options. Members satisfy this evidentiary requirement by submitting a CEA directly to the Exchange, or by electronically submitting the CEA to the Exchange through OCC's electronic communications system. The submission of the CEA allows the Exchange to satisfy its regulatory obligation to verify that the decision to make a contrary exercise was made timely and in accordance with ISE Rule 1100.

ISE Rule 1100 currently provides option holders until 5:30 p.m. on the day prior to expiration to make a final decision to exercise or not exercise an option that would otherwise either expire or be automatically exercised. An Exchange member may not accept CEA instructions from its customer or non-customer accounts after 5:30 p.m. The current rule, however, gives Exchange members up to 6:30 p.m. to actually submit these CEA instructions to the Exchange where such member uses an electronic submission process. Pursuant to the rule, if members do not employ an electronic submission procedure, they are required to submit CEAs for non-customer accounts by the 5:30 p.m. deadline. This 5:30 p.m. deadline for manual submission of CEAs for non-customer accounts is earlier than the electronic submission deadline to prevent firms from improperly extending the 5:30 p.m. deadline to exercise or not exercise an option.[5] In either case, whether or not submitting the CEA electronically or manually, the final decision to issue a CEA instruction must be made at 5:30 p.m.

This current process of submitting CEAs was approved by the Commission in 2003.[6] The Exchange represents that in 2003, the Ex-by-Ex thresholds were $0.75 for customers and $0.25 for broker-dealer accounts. In 2009, the Ex-by-Ex threshold had narrowed significantly to $0.01 for all accounts. The Exchange notes that this decrease in the Ex-by-Ex threshold, coupled with the dramatic increase in option trading volume from 2003 to 2009, has led to a larger number of CEA instructions and has increased the burden on firms to process and submit instructions on a timely basis.

As a result of these concerns, the Exchange has proposed to extend the current 6:30 p.m. deadline for electronic submission of CEA instructions to the Exchange by one additional hour, to 7:30 p.m. In its filing, the Exchange stated that the proposed rule change is necessary to address concerns expressed by members that, given the decrease in the Ex-by-Ex threshold and the increase in trading, the existing deadline for submitting CEAs to the Exchange is problematic for timely back-office processing. According to the Exchange, the proposed additional one hour will address this concern by further enabling firms to more timely manage, process, and submit the instructions to the Exchange.

The Exchange also proposes to allow a member to submit a CEA to the Exchange by 7:30 p.m. on a day when there is a modified close of trading. The current rule allows a member to submit an electronic CEA to the Exchange up to 2 hours and 30 minutes after the close of trading on a day when there is a modified close of trading. The proposed rule change will make the submission deadline for electronic CEAs on both regular and modified close expiration days uniform and, according to the Exchange, this should help to reduce errors.

The ISE noted in its filing that the proposed rule change does not change the substantive requirement that option holders make a final decision by 5:30 p.m. whether to exercise or not exercise an option that would otherwise either expire or be automatically exercised. The Exchange represented that it will continue to enforce the 5:30 p.m. decision making requirement, while also allowing additional time to process and submit the CEA instructions. As noted in the filing, the Exchange believes that the proposed rule change will benefit the marketplace, particularly back-office processing. The Exchange also represents that the additional processing time and Exchange submission deadline will not conflict with OCC submission rules or cause any OCC processing issues.

III. Discussion and Commission's Findings

After careful review of the proposed rule change, 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.[7] In particular, the Commission finds that the proposed rule change is consistent with the provisions of Section 6(b)(5) of the Act,[8] which requires, among other things, that ISE rules must 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.

The Commission believes that the proposed rule change is appropriate because, by extending the deadline to submit electronic CEAs from 6:30 p.m. to 7:30 p.m., the proposal should provide Exchange members with sufficient additional time to process the CEAs submitted by options holders which, according to the Exchange, have steadily increased with the increased options trading volume of recent years and the narrowing of the Ex-by-Ex threshold. Thus, consistent with Section 6(b)(5) of the Act,[9] the proposal will foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, by addressing the back-office processing problems noted by the Exchange that exist under the current 6:30 p.m. deadline for electronic submission of CEAs.

In approving the proposal, the Commission emphasizes that the Exchange is not changing the time by which options holders must notify Exchange members of the contrary intention, which will remain at 5:30 p.m., and will continue to be enforced by the Exchange as it is currently. Start Printed Page 13638Because the deadline for options holders to make a decision to exercise or not exercise an expiring option that would otherwise either expire or be automatically exercised is not changing, the Commission also believes that proposal will not compromise one key goal of the rule, which is to prevent individuals from taking improper advantage of late-breaking news.

The Commission also notes that the time for submission of CEAs for non-customer accounts on a manual basis will remain at 5:30 p.m. The Commission continues to believe that this time difference for manual submissions is warranted given the potential difficulties in monitoring compliance with a manual procedure, as noted by the Exchange.[10]

The Commission also believes that the Exchange's proposal to change the deadline for submitting CEAs to the Exchange to 7:30 p.m. on days when there is a modified close of trading is appropriate. A uniform deadline for submitting CEAs, irrespective of the closing time, will eliminate any possibility for error when determining what the submission deadline is on a modified close expiration day. As described above, current rules set the deadline on modified close expiration day at 2 hours and 30 minutes after the close. Since the modified close time does vary on these modified days, the CEA times could vary as well, which may have proved confusing to Exchange members. Thus, the change to a 7:30 p.m. cut-off for all electronic submission of CEAs, irrespective of the market's closing time, should help to avoid confusion and reduce the potential for errors. Finally, the Commission also finds that the Exchange's non-substantive changes to the text of Rule 1100 to more clearly present the existing requirements and to eliminate duplicative language is appropriate.

Based on the above, the Commission believes that the proposed rule change is consistent with Section 6(b)(5) of the Act [11] in that it will prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, protect investors and the public interest.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,[12] that the proposed rule change (SR-ISE-2010-002) be, and it hereby is, approved.

Start Signature

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.[13]

Florence E. Harmon,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Securities Exchange Act Release No. 61458 (February 1, 2010), 75 FR 6237.

Back to Citation

4.  Contrary exercise advices are also referred to as Expiring Exercise Declarations in the OCC rules.

Back to Citation

5.  According to the Exchange, this requirement is based on the difficulty of monitoring a manual procedure that has different times for deciding whether or not to exercise the option and for the submission of the CEA.

Back to Citation

6.  See Securities Exchange Act Release Nos. 47885 (May 16, 2003), 68 FR 28309 (May 23, 2003) (SR-Amex-2001-92); 48505 (September 17, 2003), 68 FR 55680 (September 26, 2003) (SR-ISE-2003-20); 48640 (October 16, 2003), 68 FR 60757 (October 23, 2003) (SR-PCX-2003-47); and 48639 (October 16, 2003), 68 FR 60764 (October 23,2003) (SR-Phlx-2003-65).

Back to Citation

7.  In approving this proposal, the Commission has considered the proposed rule's impact on efficiency, competition and capital formation. See 15 U.S.C. 78c(f).

Back to Citation

10.  See footnote 5 and accompanying text.

Back to Citation

[FR Doc. 2010-6204 Filed 3-19-10; 8:45 am]

BILLING CODE 8011-01-P