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The Securities and Exchange Commission (SEC or Commission) recently approved amendments to Exchange Rule 980 simplifying the manner in which a Contrary Exercise Advice (CEA) is submitted to the Exchange and extending by one (1) hour the cut-off Time by which members must submit to the Exchange CEA notices for certain accounts. These changes are effective immediately. The text of the amended Rule is attached.
NEW CUT-OFF TIMES
The basic exercise cut-off time for an equity option holder to decide whether or not to exercise is 5:30 p.m. (NY time) on the business day immediately prior to the expiration date. This exercise cut-off Time for deciding whether to exercise an option will not change except in cases of a modified trading session or due to "unusual circumstances."
Amended Rule 980(c) adopts an expanded cut-off time of 6:30 p.m. (NY time) for members and member organizations to submit a CEA for customer accounts. In addition, members and member organizations may also submit a CEA for non-customer accounts by 6:30 p.m. (NY time) provided the member or member organization uses an electronic submission procedure with an electronic time stamp to record the receipt of the exercise instruction by 5:30 p.m. (NY time). In connection with the use of electronic submission methods, Commentary .05 requires members and member organizations to establish a fixed procedure to ensure that the electronic time stamp for the exercise instruction decision is secure. In those cases where members or member organizations do not employ an electronic submission procedure for the entry of exercise instructions, non-customer CEAs must be submitted to the Exchange by 5:30 p.m. (NY time). The different CEA submission deadlines are set forth in amended Rule 980(c) and new Commentary .04.
MODIFIED TRADING SESSIONS AND UNUSUAL CIRCUMSTANCES EXCEPTIONS
To address occasions where the Exchange has advance prior knowledge or warning of a modified trading session at expiration or in the case of "unusual circumstances", the rule provides the Exchange with the ability to establish different exercise cut-off times as an exception to Rule 980(c).
First, paragraph (g) to Amex Rule 980 is applicable to situations where a different or modified close of trading is announced due to a market-wide event. The Exchange in such cases will have forewarning of the event and will be required to provide notice by 5:30 p.m. on the business day prior to the last trading day before expiration. For example, if the day after Thanksgiving is the last trading day prior to expiration with a close of stock trading of 1:00 p.m., then the Exchange would, with prior notice up to the Wednesday before Thanksgiving, be able to reduce the cut-off time of the decision to exercise or not exercise expiring options to 1 hour 28 minutes after the close of options trading. With respect to the submission of a CEA by members and member organizations, the cut-off time would accordingly, be reduced to 2 hours and 28 minutes after the close of options trading for customer accounts and non-customer accounts where the member firm employs an electronic procedure with a time stamp for the submission of exercise instructions. Member firms that do not employ an electronic submission procedure for exercise instructions would be required to submit a CEA within 1 hour and 28 minutes after the close of options trading for its non-customer accounts.
Second, paragraph (h)(1) to Amex Rule 980 permits the Exchange to extend the cut-off time period for the decision to exercise or not exercise expiring options as well as the submission of a CEA due to "unusual circumstances". Situations that may arise that are deemed to be "unusual circumstances" include, but are not limited to, increased market volatility; significant order imbalances; significant volume surges and/or systems capacity constraints; significant spreads between the bid and offer in underlying securities; internal system malfunctions affecting the ability to disseminate or update market quotes and/or deliver orders; or other similar occurrences.
Third, paragraph (h)(2) to Amex Rule 980 permits the Exchange with one (1) business day prior advance notice by 12:00 noon to establish a reduced cut-off time for exercise decisions as well as CEA submissions. The reduced cut-off time under this new paragraph for both the decision to exercise or not exercise and the submission of the CEA may not occur before the close of trading. The primary purpose of this provision is to permit the Exchange to reduce cut-off times because of an "unusual circumstance." Revised Commentary .03 to Rule 980 provides that "unusual circumstances" for these purposes includes, but is not limited to, significant news concerning the underlying security of an option contract scheduled to be released after the close on the last trading day prior to expiration. For example, a decision on whether a particular merger will be approved or whether a "blockbuster" new product will receive regulatory approval that occurs after the close of trading would justify a reduced cut-off time so that persons holding short positions are not prejudiced by being unable to close out their positions. The Exchange believes that this will maintain a level playing field between persons holding long and short positions in expiring options.
EX-BY-EX PROCEDURE
The Options Clearing Corporation ("OCC") on occasion suspends the use of its Ex-by-Ex procedure, such as when trading in the underlying stock has been halted or when accurate price data is unavailable for the determination of a closing price.
Amended Rule 980(d) eliminates the requirement that a CEA be submitted if the holder does not want to exercise the option when OCC has waived its Ex-by-Ex procedure for that options class. As a result, when the Ex-by-Ex procedure has been waived, submission of a CEA to the Exchange is only required when the options holder wants to exercise the option contract.
NEW METHODOLOGY_ COMPOSITE PRICES
On June 6, 2003, OCC modified its methodology for selecting underlying security prices for expiration processing. OCC utilizes the "composite" close price as reported by OCC's price vendors (ILX and Hyperfeed) for underlying security prices.
"Composite" closing security price is defined as the last reported sale price from any primary listing market (e.g., NYSE and Amex and Nasdaq) or participating regional exchanges or markets. The composite closing price is the last reported sale price from any of the eligible sources, regardless of volume. The composite price is not an average price. See OCC Memo #18930 for more details.
METHODS FOR FILING A CEA
A member or member organization may submit a CEA by using the Exchange's CEA Form, OCC's ENCORE 1, or a CEA form of any other national securities exchange of which the firm is a member and where the option is listed 2.
Additionally, the Exchange will now accept CEAs via e-mail. The e-mail must have all the information as normally required on the Exchange's CEA Form. The e-mail must be sent by the appropriate cut-off time and received by the Exchange. Contact the Market Surveillance Department at 212-306-1552 or 212-306-1514 for the appropriate e-mail address.
Member Organizations, which maintain standing instructions from customers or market-makers to routinely exercise options contracts at closing values below the OCC Ex-by-Ex parameters, will not be required to submit a CEA in those instances where the closing value meets or exceeds the standing instruction. Member organizations must retain such dated standing instructions on file and submit copies of the instruction to each option SRO of which they are a member (market-maker standing instructions need only be forwarded to the Exchange where the market-maker is a member). Should a customer or member elect to take action on a specific occasion that differs from a standing instruction, a CEA must be submitted in the prescribed form and the member organization must prepare for its files a time-stamped written memorandum prior to the exercise cut-off time detailing the change.
Please be advised that the physical Exchange CEA Form, or that of another exchange, must be submitted by 5:30 p.m. (NY time) on the Amex Floor. The CEA lockbox is promptly removed from the Floor at 5:30 p.m. (NY time).
Questions concerning this Circular may be directed to James Alaimo, Vice President, Market Surveillance at 212-306-1540 or Eric Miller, Director 212-306-1552. Copies of this Information Circular, which includes the revised Rule 980, and others may be accessed at our AmexTrader.com website.
1 ENCORE replaced OCC's Clearing Management and Control System (C/MACS) as its interface for CEAs. See OCC Memo #18343 for details.
2 Amex will consider a CEA filed if it is appropriately submitted to an exchange where a member or member organization is a member and where the option is listed.
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