01-12250. Joint Industry Plan; Notice of Filings of a Proposed Options Listing Procedures Plan by the American Stock Exchange LLC, Chicago Board Options Exchange, Incorporated, International Securities Exchange LLS, The Options Clearing Corporation, ...

May 10, 2001.

I. Introduction

On January 11, 2001, pursuant to Section 11A(a)(3)(B) of the Securities Exchange Act of 1934 (“Act”) ^[1] and Rule 11Aa3-2 thereunder,^[2] The American Stock Exchange LLC (“Amex”), Chicago Board Options Exchange, Incorporated (“CBOE”), International Securities Exchange LLC (“ISE”), The Options Clearing Corporation (“OCC”), Pacific Exchange, Inc., (“PCX”), and Philadelphia Stock Exchange, Inc. (“Phlx”) (collectively, the “Sponsors”) filed with the Securities and Exchange Commission (“Commission”) a proposed options listing procedures plan (“OLPP” or “Plan”).^[3] The Sponsors filed amendments to the proposed Plan on March 3, 2001 ^[4] and May 9, 2001.^[5] Pursuant to Rule 11Aa3-2(c)(1) under the Act,^[6] the Commission is publishing notice of, and soliciting comments on the proposed Plan, as amended.

II. Background

On September 17, 1991, the Commission approved the Joint-Exchange Options Plan (“JEOP”), which sets forth procedures governing the listing of new options.^[7] The Amex, CBOE, PCX, Phlx, and New York Stock Exchange ^[8] were parties to the JEOP.^[9] On September 11, 2000, the Commission instituted public administrative proceedings pursuant to Section 19(h)(1) of the Act ^[10] against, and simultaneously accepted offer of settlement from the Amex, CBOE, PCX, and Phlx (collectively, the “respondent exchanges”).^[11] Under the Settlement Order, the respondent exchanges were ordered to amend the JEOP to: (i) Eliminate the requirement that advance notice of the intention to list a new option be given to any other exchange, alternative trading system, or other trading venue that lists any options issued by the OCC; (ii) eliminate advance notice to any other market that already lists or has applied to list the option in question; (iii) eliminate any provisions of the JEOP that prevent a market from commencing to list or trade any option listed on another market or an option that another market has expressed an intention to list; (iv) eliminate any provisions of the JEOP allowing one market to prevent or delay another market from listing an option; and (v) eliminate any provisions of the JEOP that allow one market to delay the commencement of trading of an option by another market.^[12]

On January 11, 2001, the respondent exchanges, along with the ISE and the OCC, submitted the proposed OLPP to the commission to replace and supersede the JEOP and to comply with the respondent exchanges' obligations under Section IV.B.a. of the Settlement Order. Although not parties to the Settlement Order, the ISE and the OCC have elected to become Sponsors of the proposed OLPP to facilitate the listing and trading of standardized options contracts.

III. Description of the OLPP

The proposed Plan would provide procedures for: (i) Listing and trading new options classes; (ii) selecting new options series; (iii) petitioning the OCC to review the eligibility, pursuant to the exchanges' listing standards, of a selected option class without delaying the trading of that option class; (iv) determining operational details for option contracts adjusted pursuant to OCC By-Laws; (v) admitting new sponsors; and (vi) losing eligibility to participate in the Plan. The proposed OLPP would eliminate the requirement that an exchange give advance notice of its intention to list a new or currently trading option class to any other options exchange that already lists or has applied to list the selected option.^[13] The proposed OLPP also contains no provisions that would prevent or delay an exchange from commencing to list or trade any option class other than the one-day advance notice requirement to the OCC for operational purposes.

A. Selection of an Option Class

Under the proposed OLPP, a Sponsor that seeks to trade an option on an equity security (“Selecting Exchange”) would be required to submit a certificate notifying the OCC of its intention to trade the option. The Selecting Exchange would be required to submit the certificate between 12:01 a.m. and 11 a.m. (Chicago time) on the trading day before the exchange intended to start trading the option. If the option was not currently trading on another exchange, or had not been certified for listing and trading on another exchange, the Selecting Exchange would be required to provide certain additional information to the OCC when it submitted its certificate. The Selecting Exchange would be required to provide the options symbol, initial exercise prices, expiration cycle, and the position and exercise limits for the selected option class. If more than one Selecting Exchange submits a certificate indicating its intention to commence trading an options class, the OCC would use the information provided on the certificate that was submitted first. The OCC would provide all other Selecting Exchanges with this information, as well as the identity of other Selecting Exchanges, by 1 p.m. (Chicago time) on the day that it received the certificate.

If the option class had been previously certified and was currently trading on at least one registered options exchange, the OCC would notify all other exchanges that traded the option class and all Selecting Exchanges of the identity of each Selecting Exchange. The OCC would provide this notice by 1 p.m. (Chicago time) on the day that it received notification from the Selecting Exchange(s).

B. Selection of a New Option Series

The proposed OLPP would provide procedures for each of the Sponsors to trade additional series of an option class it currently trades. If an exchange decided to trade a new option series and began trading the new series on the same day, it would be required to notify the OCC, and any other exchange that also traded the same option class, within 10 minutes of commencing trading, under normal market circumstances. If the exchange decided to trade the new series on the next trading day or thereafter, it would be required to notify the OCC, and any other exchange that traded the same option class of the new series to be traded, by 4:15 p.m. (Chicago time) the day before the new series is to be traded.

If the addition of a new series would involve the introduction of new expiration months, different procedures would apply. First, the exchange would be required to provide a preliminary notification of the new expiration month for the series it intended to trade to the OCC and any other exchange that traded the same option class, by 9 a.m. (Chicago time) on the second day prior to expiration. Second, the exchange would be required to provide to the OCC and any other exchange that traded the same option class by 2 p.m. (Chicago time) on or before the trading day before the existing series' expiration a final notification of the new expiration month series it intended to trade. With respect to adding new option series and melding LEAP series into near-term series, the proposed OLPP would permit an exchange that wanted to trade a new series and any other exchange that traded the same option class to jointly determine, when necessary, the symbol and trading codes for the new series.

C. Petition To Review the Eligibility of a New Option Class

Under the proposed Plan, the Sponsors would be permitted to petition the OCC to review whether an option class was eligible for listing on the day a Selecting Exchange certified the option for listing and trading. The exchange listing and trading the option class would be permitted to continue to do so unless and until the OCC determined that the class was ineligible. An exchange that wished to challenge the eligibility of an option class would be required to submit a petition to the OCC, setting forth the listing standards or guidelines the petitioning exchange was requesting the OCC to review, by 3 p.m. (Chicago time) on the date that the option class began trading. The OCC would be required to then provide a copy of the petition to the Selecting Exchange by 4 p.m. (Chicago time). Both exchanges would be required to submit written support for their claims of eligibility or ineligibility to the OCC by 3 p.m. (Chicago time) on the second day that the option class had been trading.

The OCC would endeavor to complete its review and notify the Sponsors of its determination by 4 p.m. (Chicago time) on the third day that the option class had been trading.^[14] If the OCC determined that the option class was ineligible, the Selecting Exchange would be required, on the first trading day after the OCC's determination, to delist any option series without open interest and allow only closing transactions in any series with open interest. If the option class subsequently became eligible, any exchange would be permitted to submit a certificate to the OCC to list and trade the option class.

D. Adjustments Pursuant to OCC By-Laws

The OCC's By-Laws permit a securities committee composed of representatives from each registered options exchange trading options on a particular security to determine whether to make adjustments to reflect particular events affecting the underlying security, as well as operational issues attendant to the adjustment.^[15] Events affecting the underlying security that may require an adjustment would include, among other things, stock dividends or distributions, stock splits, rights offerings, mergers, and reorganizations. The proposed OLPP would permit the Sponsors to make these adjustments, as well as determine operational issues in connection with such adjustments.

E. New Plan Sponsors

The proposed OLPP contains a self-effecting provision for the addition of new sponsors, in which an Eligible Exchange would be able to become a sponsor of the Plan by: (i) Executing a copy of the Plan; (ii) providing each then-current Plan Sponsor with a copy of such executed Plan; and (iii) effecting an amendment to the Plan reflecting the addition of the new sponsor's name.^[16] An Eligible Exchange would be defined as a national securities exchange registered with the Commission in accordance with Section 6(a) of the Act that: (i) Has effective rules for the trading of option contracts issued and cleared by OCC approved in accordance with the provisions of the Act and the rules and regulations thereunder; and (ii) is a party to the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information (the “OPRA Plan”).

F. Loss of Eligibility

An exchange would no longer be an Eligible Exchange when it ceased trading OCC issued and cleared option contracts, or, if it had become a Plan sponsor and had not commenced to list and trade OCC issued an cleared option contracts, within one year of becoming a Plan Sponsor.

G. Implementation of the OLPP

The Sponsors of the proposed Plan intend to implement the Plan immediately upon approval by the Commission. The Sponsors do not believe that development, implementation, or pilot phases are necessary for the operation of the OLPP.

H. Impact on Competition

The Sponsors represent that the proposed OLPP would: (i) Facilitate the orderly introduction of new equity options; (ii) ensure that there is a mechanism in place to ensure that only eligible securities are selected for options trading; (iii) ensure the continued fungibility of multiply-trade option classes; (iv) allow the options exchanges to list new options as soon as possible to reap the benefits of their research efforts; and (v) minimize investor confusion.

The Sponsors note that the Plan does not require advance notice to any options exchange of an intention to list a new options class (except for not more than one business day's notice to any options exchange that already lists or has applied to list the selected option class) or prevent or delay an options exchange from commencing to list or trade any option class. The Sponsors state that the OLPP would facilitate the orderly and fair introduction of new options and prevent unnecessary confusion among member firms in deciding where to direct their order flow by standardizing the process for listing option classes.

Additionally, the proposed Plan would provide procedures for the selection of new option series and for the determination of operational details for option contracts adjusted pursuant to OCC By-Laws. The Sponsors represent that these procedures are necessary for the fair and orderly trading of multiply-listed option classes. The Sponsors state that the listing and trading of the same option series on two or more exchanges trading that option class requires uniformity and standardization of operational procedures, including uniform trading symbols, trading codes, and contract terms. The Sponsors further state that consistency is necessary for fully effective multiple trading, maintaining the fungibility of option contracts, efficient order routing decisions by member firms, and investor expectations that orders be routed and executed quickly at the exchanges that offer the potential for best execution. While the Plan would not require exchanges multiply-trading a particular option class to trade all series listed by the other exchanges trading the same class, it would provide a means of notification through the OCC of the series to be traded by each exchange. Such notification would give the other exchanges trading that class the ability to add the quotations for such new series into their calculation of the national best bid and offer on the date the new series began trading.

I. Description of Written Understandings or Agreements

The Sponsors represent that they have not entered into any understandings or agreements, written or otherwise, relating to interpretations of the proposed Plan or conditions for becoming a sponsor or participant in the Plan.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed plan, as amended, is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington DC 20549-0609. Copies of the submissions, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying at the Commission's Public Reference Room. Copies of such filings will also be available for inspection and copying at the principal offices of the Sponsors of the proposed OLPP. All submissions should refer to the File No. 4-443 and should be submitted by June 16, 2001.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78k-1(a)(3)(B).

2.  17 CFR 240.11Aa3-2.

3.  See Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the Securities Exchange Act of 1934, dated January 11, 2001. The OLPP is available at the Commission's Public Reference Room.

4.  Letter dated March 2, 2001, from Claire P. McGrath, Vice President and Special Counsel, Amex, to Elizabeth King, Associate Director, Division of Market Regulation (“Division”), Commission (“Amendment No. 1”). Amendment No. 1 provided information required by Rule 11Aa3-2(b)(4) under the Act, 17 CFR 240.11Aa3-2(b)(4), regarding implementation of the proposed OLPP, the proposed OLPP's impact on competition, and written agreements or understandings among the Sponsors of the plan.

5.  Letter dated May 4, 2001, from Clair P. McGrath, Vice President and Special Counsel, Amex, to Elizabeth King, Associate Director, Division, Commission (“Amendment No. 2”). Amendment No. 2 would add procedures for new eligible exchanges to become Sponsors of the Plan and a provision for Sponsors that are no longer eligible to participate in the Plan.

6.  17 CFR 240.11Aa3-2(c)(1).

7.  See Securities Exchange Act Release No. 29698 (September 17, 1991), 56 FR 48954 (September 25, 1991). The JEOP provides specific procedures governing the selecting, listing, challenging, and arbitrating the eligibility of new equity options overlying both exchange-traded an over-the-counter listed securities.

8.  The NYSE later sold its options business to the CBOE. See Securities Exchange Act Release No. 38542 (April 23, 1997), 62 FR 23521 (April 30, 1997).

9.  The parties filed, and the Commission approved the JEOP as identical proposed rule changes. The OLPP would not replace these rules. The parties would have to file proposed rule changes to amend their rules.

10.  15 U.S.C. 78s(h)(1).

11.  See Order Instituting Public Administrative Proceeding Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions. Securities Exchange Act Release No. 43268 (September 11, 2000) (“Settlement Order”). The Settlement Order states that the respondent exchanges have significantly impaired the operations of the options markets by, among other things, refraining from multiply listing a large number of options.

12.  See Section IV.B.a. of the Settlement Order. The Settlement Order requires an exchange to provide to the OCC (i) not more than one business day's notice of the exchange's intent to list an existing option, and (ii) reasonable advance notice of the exchange's intention to list a new option. Id.

13.  However, the proposed OLPP would include a provision that allows an exchange to provide the OCC with not more than one business day's notice of an exchange's intention to list an existing options class. Further, under the proposed OLPP, the Sponsors would communicate with each other only indirectly, through the OCC.

14.  The OCC would be entitled to take five additional days to complete its review if it notified both exchanges of the additional time needed.

15.  See Article VI, Section 11 of the OCC By-Laws. Operational issues attendant to the adjustment could include option symbols and trading codes, contract multipliers, and position and exercise limits applicable to the adjusted option class.

16.  An amendment to the Plan may be effected by a new Eligible Exchange executing a copy of the Plan, as then in effect (with the only change being the addition of the new Plan Sponsor's name in Section 9 of the Plan) and submitting such executed Plan to the SEC. Such amendment will be effective when it has been approved by the SEC or otherwise becomes effective pursuant to Section 11A of the Act and Rule 11Aa3-2 thereunder.