[Federal Register Volume 80, Number 118 (Friday, June 19, 2015)]
[Rules and Regulations]
[Pages 35249-35253]
[FR Doc No: 2015-14944]

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 180

[EPA-HQ-OPP-2014-0249; FRL-9928-82]

Thiram; Pesticide Tolerance

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

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SUMMARY: This regulation establishes a tolerance for residues of thiram
in or on avocado. Taminco US, Inc. requested this tolerance under the
Federal Food, Drug, and Cosmetic Act (FFDCA).

DATES: This regulation is effective June 19, 2015. Objections and
requests for hearings must be received on or before August 18, 2015,
and must be filed in accordance with the instructions provided in 40
CFR part 178 (see also Unit I.C. of the SUPPLEMENTARY INFORMATION).

ADDRESSES: The docket for this action, identified by docket
identification (ID) number EPA-HQ-OPP-2014-0249, is available at http://www.regulations.gov or at the Office of Pesticide Programs Regulatory
Public Docket (OPP Docket) in the Environmental Protection Agency
Docket Center (EPA/DC), West William Jefferson Clinton Bldg., Rm. 3334,
1301 Constitution Ave. NW., Washington, DC 20460-0001. The Public
Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through
Friday, excluding legal holidays. The telephone number for the Public
Reading Room is<PHONE_NUMBER>, and the telephone number for the OPP
Docket is<PHONE_NUMBER>. Please review the visitor instructions and
additional information about the docket available at http://www.epa.gov/dockets.

FOR FURTHER INFORMATION CONTACT: Susan Lewis, Registration Division
(7505P), Office of Pesticide Programs, Environmental Protection Agency,
1200 Pennsylvania Ave. NW., Washington, DC 20460-0001; main telephone
number:<PHONE_NUMBER>; email address<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

I. General Information

A. Does this action apply to me?

    You may be potentially affected by this action if you are an
agricultural producer, food manufacturer, or pesticide manufacturer.
The following list of North American Industrial Classification System
(NAICS) codes is not intended to be exhaustive, but rather provides a
guide to help readers determine whether this document applies to them.
Potentially affected entities may include:
     Crop production (NAICS code 111).
     Animal production (NAICS code 112).
     Food manufacturing (NAICS code 311).
     Pesticide manufacturing (NAICS code 32532).

B. How can I get electronic access to other related information?

    You may access a frequently updated electronic version of EPA's
tolerance regulations at 40 CFR part 180 through the Government
Printing Office's e-CFR site at http://www.ecfr.gov/cgi-bin/text-idx?&c=ecfr&tpl=/ecfrbrowse/Title40/40tab_02.tpl.

C. How can I file an objection or hearing request?

    Under FFDCA section 408(g), 21 U.S.C. 346a, any person may file an
objection to any aspect of this regulation and may also request a
hearing on those objections. You must file your objection or request a
hearing on this regulation in accordance with the instructions provided
in 40 CFR part 178. To ensure proper receipt by EPA, you must identify
docket ID number EPA-HQ-OPP-2014-0249 in the subject line on the first
page of your submission. All objections and requests for a hearing must
be in writing, and must be received by the Hearing Clerk on or before
August 18, 2015. Addresses for mail and hand delivery of objections and
hearing requests are provided in 40 CFR 178.25(b).
    In addition to filing an objection or hearing request with the
Hearing Clerk as described in 40 CFR part 178, please submit a copy of
the filing (excluding any Confidential Business Information (CBI)) for
inclusion in the public docket. Information not marked confidential
pursuant to 40 CFR part 2 may be disclosed publicly by EPA without
prior notice. Submit the non-CBI copy of your objection or hearing
request, identified by docket ID number EPA-HQ-OPP-2014-0249, by one of
the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the online instructions for submitting comments. Do not submit
electronically any information you consider to be CBI or other
information whose disclosure is restricted by statute.
     Mail: OPP Docket, Environmental Protection Agency Docket
Center (EPA/DC), (28221T), 1200 Pennsylvania Ave. NW., Washington, DC
20460-0001.
     Hand Delivery: To make special arrangements for hand
delivery or delivery of boxed information, please follow the
instructions at http://www.epa.gov/dockets/contacts.html.
    Additional instructions on commenting or visiting the docket, along
with more information about dockets generally, is available at http://www.epa.gov/dockets.

II. Summary of Petitioned-For Tolerance

    In the Federal Register of December 17, 2014 (79 FR 75107) (FRL-
9918-90), EPA issued a document pursuant to FFDCA section 408(d)(3), 21
U.S.C. 346a(d)(3), announcing the filing of a pesticide petition (PP
4E8250) by Taminco US, Inc., Two Windsor Plaza, Suite 411, 7540 Windsor
Drive, Allentown, PA 18195. The petition requested that 40 CFR 180.132
be amended by establishing a tolerance for residues of the fungicide
thiram in or on avocado at 8 parts per million (ppm). That document
referenced a summary of the petition prepared by Taminco US, Inc, the
petitioner, which is available in the docket, http://www.regulations.gov. There were no comments received in response to the
notice of filing.
    For reasons that are discussed in Unit IV.C., EPA is establishing a
tolerance for avocado at 15 ppm.

III. Aggregate Risk Assessment and Determination of Safety

    Section 408(b)(2)(A)(i) of FFDCA allows EPA to establish a
tolerance (the legal limit for a pesticide chemical residue in or on a
food) only if EPA determines that the tolerance is ``safe.'' Section
408(b)(2)(A)(ii) of FFDCA defines ``safe'' to mean that ``there is a
reasonable certainty that no harm will result from aggregate exposure
to the pesticide chemical residue, including all anticipated dietary
exposures and all other exposures for which there is reliable
information.'' This includes exposure through drinking water and in
residential settings, but does not include occupational exposure.
Section 408(b)(2)(C) of FFDCA requires EPA to

give special consideration to exposure of infants and children to the
pesticide chemical residue in establishing a tolerance and to ``ensure
that there is a reasonable certainty that no harm will result to
infants and children from aggregate exposure to the pesticide chemical
residue. . . .''
    Consistent with FFDCA section 408(b)(2)(D), and the factors
specified in FFDCA section 408(b)(2)(D), EPA has reviewed the available
scientific data and other relevant information in support of this
action. EPA has sufficient data to assess the hazards of and to make a
determination on aggregate exposure for thiram including exposure
resulting from the tolerances established by this action. EPA's
assessment of exposures and risks associated with thiram follows.

A. Toxicological Profile

    EPA has evaluated the available toxicity data and considered its
validity, completeness, and reliability as well as the relationship of
the results of the studies to human risk. EPA has also considered
available information concerning the variability of the sensitivities
of major identifiable subgroups of consumers, including infants and
children.
    Thiram is a dimethyl dithiocarbamate fungicide. Thiram has been
shown to cause neurotoxicity following acute and subchronic exposures.
In the acute and subchronic neurotoxicity studies submitted,
neurotoxicity is characterized as lethargy, reduced and/or tail pinch
response, changes in the functional-observation battery (FOB)
parameters, increased hyperactivity, changes in motor activity, and
increased occurrences of rearing events. No treatment-related changes
were observed in brain weights or in the histopathology of the nervous
system. In a non-guideline study published in the open literature,
chronic feeding of thiram to rats caused neurotoxicity, with onset of
ataxia in some animals 5-19 months after beginning of treatment.
However, no evidence of neurotoxicity was seen following chronic
exposures in mice or rats in guideline studies submitted to the Agency.
The chronic toxicity profile for thiram indicates that the liver,
blood, and urinary system are the target organs for this chemical in
mice, rats, and dogs. There is no evidence for increased susceptibility
following in utero exposures to rats or rabbits and following pre- and
post-natal exposures to rats for 2 generations. There is evidence of
quantitative susceptibility in the developmental neurotoxicity (DNT)
study. However, there is low concern for the increased susceptibility
seen in the DNT study since the dose response is well defined with a
clear NOAEL and this endpoint is used for assessing the acute dietary
risk for the most sensitive population. Thiram is classified as ``not
likely to be carcinogenic to humans'' based on lack of evidence for
carcinogenicity in mice or rats. There are no mutagenic/genotoxic
concerns with thiram. The available toxicological database for thiram
suggests that this chemical has a low to moderate acute-toxicity
profile.
    Specific information on the studies received and the nature of the
adverse effects caused by thiram as well as the no-observed-adverse-
effect-level (NOAEL) and the lowest-observed-adverse-effect-level
(LOAEL) from the toxicity studies can be found at http://www.regulations.gov in document ``Thiram. Revised Human Health Risk
Assessment for the Import Use of Thiram on Avocado, PP#4E8250 and
Banana, PP#4E8268''.

B. Toxicological Points of Departure/Levels of Concern

    Once a pesticide's toxicological profile is determined, EPA
identifies toxicological points of departure (POD) and levels of
concern to use in evaluating the risk posed by human exposure to the
pesticide. For hazards that have a threshold below which there is no
appreciable risk, the toxicological POD is used as the basis for
derivation of reference values for risk assessment. PODs are developed
based on a careful analysis of the doses in each toxicological study to
determine the dose at which no adverse effects are observed (the NOAEL)
and the lowest dose at which adverse effects of concern are identified
(the LOAEL). Uncertainty/safety factors are used in conjunction with
the POD to calculate a safe exposure level--generally referred to as a
population-adjusted dose (PAD) or a reference dose (RfD)--and a safe
margin of exposure (MOE). For non-threshold risks, the Agency assumes
that any amount of exposure will lead to some degree of risk. Thus, the
Agency estimates risk in terms of the probability of an occurrence of
the adverse effect expected in a lifetime. For more information on the
general principles EPA uses in risk characterization and a complete
description of the risk assessment process, see http://www.epa.gov/pesticides/factsheets/riskassess.htm.
    A summary of the toxicological endpoints for thiram used for human
risk assessment is discussed in Unit III.B. of the final rule published
in the Federal Register of February 12, 2014 (79 FR 8295) (FRL-9904-
22).

C. Exposure Assessment

    1. Dietary exposure from food and feed uses. In evaluating dietary
exposure to thiram, EPA considered exposure under the petitioned-for
tolerances as well as all existing thiram tolerances in 40 CFR 180.132.
EPA assessed dietary exposures from thiram in food as follows:
    i. Acute exposure. Quantitative acute dietary exposure and risk
assessments are performed for a food-use pesticide, if a toxicological
study has indicated the possibility of an effect of concern occurring
as a result of a 1-day or single exposure.
    A partially refined probabilistic acute dietary-exposure assessment
was performed using 100 percent crop treated (PCT), average field trial
residues or pulp residues for blended commodities, distributions of
field trial residues, highest pulp residue, and empirical processing
factors.
    ii. Chronic exposure. Tolerances-level residues, average field-
trial residues, and highest pulp residues for avocado with 100 PCT were
used for the chronic dietary exposure analysis for all crops. Empirical
processing factors were also used.
    iii. Cancer. Based on the data summarized in Unit III.A., EPA has
concluded that thiram does not pose a cancer risk to humans. Therefore,
a dietary exposure assessment for the purpose of assessing cancer risk
is unnecessary.
    iv. Anticipated residue and percent crop treated (PCT) information.
EPA did not use PCT information in the dietary assessment for thiram.
Section 408(b)(2)(E) of FFDCA authorizes EPA to use available data and
information on the anticipated residue levels of pesticide residues in
food and the actual levels of pesticide residues that have been
measured in food. If EPA relies on such information, EPA must require
pursuant to FFDCA section 408(f)(1) that data be provided 5 years after
the tolerance is established, modified, or left in effect,
demonstrating that the levels in food are not above the levels
anticipated. For the present action, EPA will issue such data call-ins
as are required by FFDCA section 408(b)(2)(E) and authorized under
FFDCA section 408(f)(1). Data will be required to be submitted no later
than 5 years from the date of issuance of these tolerances.
    2. Dietary exposure from drinking water. The Agency used screening-
level water exposure models in the dietary exposure analysis and risk
assessment for thiram in drinking water. These simulation models take
into account data on the physical, chemical, and fate/

transport characteristics of thiram. Further information regarding EPA
drinking water models used in pesticide exposure assessment can be
found at http://www.epa.gov/oppefed1/models/water/index.htm.
    Based on the Pesticide Root Zone Model/Exposure Analysis Modeling
System (PRZM/EXAMS) and Screening Concentration in Ground Water (SCI-
GROW) models, the estimated drinking water concentrations (EDWCs) of
thiram for acute exposures are 0.0478 ppm and 0.0025 ppm for chronic
exposures (for non-cancer assessments) for surface water. Ground water
sources were not included (for acute or chronic exposures), as the
EDWCs for ground water are minimal in comparison to those for surface
water. Surface water EDWCs were incorporated in Dietary Exposure
Evaluation Model Food Commodity Intake Database (DEEM-FCID) into the
food categories ``water, direct, all sources'' and ``water, indirect,
all sources'' for the dietary assessments.
    3. From non-dietary exposure. The term ``residential exposure'' is
used in this document to refer to non-occupational, non-dietary
exposure (e.g., for lawn and garden pest control, indoor pest control,
termiticides, and flea and tick control on pets). Thiram is not
available for sale or use by homeowner applicators; therefore, there
are no residential handler exposure scenarios. However, there is
potential for residential post-application dermal exposure from treated
golf course greens and tees. Residential exposures resulting from
dermal contact with thiram-treated turf were assessed for children 6 to
<11 years old, children 11 to <16 years old, and adults as described in
document ``Thiram. Revised Human Health Risk Assessment For Import Use
of Thiram on Avocado,'' p. 14.
    4. Cumulative effects from substances with a common mechanism of
toxicity. Section 408(b)(2)(D)(v) of FFDCA requires that, when
considering whether to establish, modify, or revoke a tolerance, the
Agency consider ``available information'' concerning the cumulative
effects of a particular pesticide's residues and ``other substances
that have a common mechanism of toxicity.''
    Unlike the N-methyl carbamate pesticides, EPA has not found thiram
(a dithiocarbamate) to share a common mechanism of toxicity with any
other substances, and thiram does not appear to produce a toxic
metabolite produced by other substances. For the purposes of this
tolerance action, therefore, EPA has assumed that thiram does not have
a common mechanism of toxicity with other substances. For information
regarding EPA's efforts to determine which chemicals have a common
mechanism of toxicity and to evaluate the cumulative effects of such
chemicals, see EPA's Web site at http://www.epa.gov/pesticides/cumulative.

D. Safety Factor for Infants and Children

    1. In general. Section 408(b)(2)(C) of FFDCA provides that EPA
shall apply an additional tenfold (10X) margin of safety for infants
and children in the case of threshold effects to account for prenatal
and postnatal toxicity and the completeness of the database on toxicity
and exposure unless EPA determines based on reliable data that a
different margin of safety will be safe for infants and children. This
additional margin of safety is commonly referred to as the Food Quality
Protection Act Safety Factor (FQPA SF). In applying this provision, EPA
either retains the default value of 10X, or uses a different additional
safety factor when reliable data available to EPA support the choice of
a different factor.
    2. Prenatal and postnatal sensitivity. There was no evidence of
increased susceptibility following in utero exposure to rats or rabbits
or following prenatal and post-natal exposures to rats. There is
evidence of quantitative susceptibility in the DNT study. However,
there is low concern for the enhanced susceptibility seen in the DNT
study because:
    i. Clear NOAELs/LOAELs were established for the offspring effects.
    ii. The dose-response is well defined.
    iii. The behavioral effect of concern were observed only in females
on one evaluation time period.
    iv. The dose/endpoint is used for acute dietary risk for the most
sensitive population subgroup (females 13-49 years old). Consequently,
there are no residual uncertainties for pre- and post-natal toxicity.
    3. Conclusion. EPA has determined that reliable data show the
safety of infants and children would be adequately protected if the
FQPA SF were reduced to 1X. That decision is based on the following
findings:
    i. The toxicity database for thiram is complete with acceptable
neurotoxicity, developmental, and reproductive toxicity studies.
    ii. As explained in this unit, there are no residual uncertainties
for prenatal and post-natal toxicity.
    iii. There are no residual uncertainties in the thiram database
with regards to dietary exposure. A refined probabilistic acute
dietary-exposure assessment was performed using maximum PCT, tolerance,
the highest residue found during field-trials, distribution of field
trial residues, Federal Drug Administration (FDA) monitoring data for
apples, and empirical processing factors. A refined chronic dietary-
exposure assessment was performed using tolerances and average
estimated PCT. EPA made conservative (protective) assumptions in the
water modeling used to assess exposure to thiram in drinking water. EPA
used similarly conservative assumptions to assess postapplication
exposure of children. These assessments will not underestimate the
exposure and risks posed by thiram.

E. Aggregate Risks and Determination of Safety

    EPA determines whether acute and chronic dietary pesticide
exposures are safe by comparing aggregate exposure estimates to the
acute PAD (aPAD) and chronic PAD (cPAD). For linear cancer risks, EPA
calculates the lifetime probability of acquiring cancer given the
estimated aggregate exposure. Short-, intermediate-, and chronic-term
risks are evaluated by comparing the estimated aggregate food, water,
and residential exposure to the appropriate PODs to ensure that an
adequate MOE exists.
    1. Acute risk. An acute aggregate risk assessment takes into
account acute exposure estimates from dietary consumption of food and
drinking water. The acute dietary risk estimates are not of concern to
EPA (<100% aPAD) at the 95th exposure percentile for the general U.S.
population and all other population subgroups. The acute dietary
exposure was 62% of the aPAD for females 13-49 years old, the
population subgroup with the highest percent aPAD.
    2. Chronic risk. The chronic aggregate risk assessment takes into
account exposure estimates from dietary consumption of thiram (food and
drinking water). The chronic dietary risk estimates are not of concern
to EPA (<100% cPAD) for the general U.S. population and all other
population subgroups. The chronic dietary exposure was 70% of the cPAD
for children 1-2 years old, the population subgroup with the highest
estimated chronic dietary exposure.
    3. Short-term and intermediate-term risk. In aggregating short- and
intermediate-term risk, the Agency routinely combines background
chronic dietary exposure (food + water) with short/intermediate-term
residential exposure (dermal only). The combined exposure may then be
used to calculate an MOE for aggregate risk. Using the

golfer scenario for adult males, adult females, and children >6 years
old, combined with the applicable subpopulation with the greatest
dietary exposure, the total short/intermediate-term food and
residential aggregate MOEs are 570, 540, and 280, respectively. As
these MOEs are above the target MOE of 100, the short- and
intermediate-term aggregate risks are not of concern. For children <6
years old, there is no residential exposure, therefore, a short/
intermediate term aggregate risk assessment is not required for this
population.
    4. Aggregate cancer risk for U.S. population. Based on the lack of
evidence of carcinogenicity in two adequate rodent carcinogenicity
studies, thiram is not expected to pose a cancer risk to humans.
    5. Determination of safety. Based on these risk assessments, EPA
concludes that there is a reasonable certainty that no harm will result
to the general population, or to infants and children from aggregate
exposure to thiram residues.

IV. Other Considerations

A. Analytical Enforcement Methodology

    Adequate enforcement methodology (colorimetric analytical method)
is available to enforce the tolerance expression. The method may be
requested from: Chief, Analytical Chemistry Branch, Environmental
Science Center, 701 Mapes Rd., Ft. Meade, MD 20755-5350; telephone
number:<PHONE_NUMBER>; email address<EMAIL_ADDRESS>
B. International Residue Limits

    In making its tolerance decisions, EPA seeks to harmonize U.S.
tolerances with international standards whenever possible, consistent
with U.S. food safety standards and agricultural practices. EPA
considers the international maximum residue limits (MRLs) established
by the Codex Alimentarius Commission (Codex), as required by FFDCA
section 408(b)(4). The Codex Alimentarius is a joint United Nations
Food and Agriculture Organization/World Health Organization food
standards program, and it is recognized as an international food safety
standards-setting organization in trade agreements to which the United
States is a party. EPA may establish a tolerance that is different from
a Codex MRL; however, FFDCA section 408(b)(4) requires that EPA explain
the reasons for departing from the Codex level. The Codex has not
established a MRL for thiram in or on avocado.

C. Revisions to Petitioned-For Tolerances

    The petitioner requested a tolerance for residues of thiram on
avocado at 8 ppm. EPA is establishing a tolerance at 15 ppm based on
available data and the Organization for Economic Cooperation and
Development (OECD) Tolerance Calculation Procedures.

V. Conclusion

    Therefore, a tolerance is established for residues of thiram in or
on avocado at 15 ppm.

VI. Statutory and Executive Order Reviews

    This action establishes a tolerance under FFDCA section 408(d) in
response to a petition submitted to the Agency. The Office of
Management and Budget (OMB) has exempted these types of actions from
review under Executive Order 12866, entitled ``Regulatory Planning and
Review'' (58 FR 51735, October 4, 1993). Because this action has been
exempted from review under Executive Order 12866, this action is not
subject to Executive Order 13211, entitled ``Actions Concerning
Regulations That Significantly Affect Energy Supply, Distribution, or
Use'' (66 FR 28355, May 22, 2001) or Executive Order 13045, entitled
``Protection of Children from Environmental Health Risks and Safety
Risks'' (62 FR 19885, April 23, 1997). This action does not contain any
information collections subject to OMB approval under the Paperwork
Reduction Act (PRA) (44 U.S.C. 3501 et seq.), nor does it require any
special considerations under Executive Order 12898, entitled ``Federal
Actions to Address Environmental Justice in Minority Populations and
Low-Income Populations'' (59 FR 7629, February 16, 1994).
    Since tolerances and exemptions that are established on the basis
of a petition under FFDCA section 408(d), such as the tolerance in this
final rule, do not require the issuance of a proposed rule, the
requirements of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et
seq.), do not apply.
    This action directly regulates growers, food processors, food
handlers, and food retailers, not States or tribes, nor does this
action alter the relationships or distribution of power and
responsibilities established by Congress in the preemption provisions
of FFDCA section 408(n)(4). As such, the Agency has determined that
this action will not have a substantial direct effect on States or
tribal governments, on the relationship between the national government
and the States or tribal governments, or on the distribution of power
and responsibilities among the various levels of government or between
the Federal Government and Indian tribes. Thus, the Agency has
determined that Executive Order 13132, entitled ``Federalism'' (64 FR
43255, August 10, 1999) and Executive Order 13175, entitled
``Consultation and Coordination with Indian Tribal Governments'' (65 FR
67249, November 9, 2000) do not apply to this action. In addition, this
action does not impose any enforceable duty or contain any unfunded
mandate as described under Title II of the Unfunded Mandates Reform Act
(UMRA) (2 U.S.C. 1501 et seq.).
    This action does not involve any technical standards that would
require Agency consideration of voluntary consensus standards pursuant
to section 12(d) of the National Technology Transfer and Advancement
Act (NTTAA) (15 U.S.C. 272 note).

VII. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
EPA will submit a report containing this rule and other required
information to the U.S. Senate, the U.S. House of Representatives, and
the Comptroller General of the United States prior to publication of
the rule in the Federal Register. This action is not a ``major rule''
as defined by 5 U.S.C. 804(2).

List of Subjects in 40 CFR Part 180

    Environmental protection, Administrative practice and procedure,
Agricultural commodities, Pesticides and pests, Reporting and
recordkeeping requirements.

    Dated: June 9, 2015.
Susan Lewis,
Director, Registration Division, Office of Pesticide Programs.

    Therefore, 40 CFR chapter I is amended as follows:

PART 180--[AMENDED]

0
1. The authority citation for part 180 continues to read as follows:

    Authority:  21 U.S.C. 321(q), 346a and 371.

0
2. In Sec.  180.132, alphabetically add the commodity ``avocado'' to
the table in paragraph (a) to read as follows:

Sec.  180.132  Thiram; tolerance for residues.

    (a) * * *

------------------------------------------------------------------------
                                                             Parts per
                        Commodity                             million
------------------------------------------------------------------------

                                * * * * *
Avocado \1\.............................................              15

                               * * * * *
------------------------------------------------------------------------
\1\ No U.S. registrations as of September 23, 2009.

* * * * *
[FR Doc. 2015-14944 Filed 6-18-15; 8:45 am]
BILLING CODE 6560-50-P


[Federal Register Volume 85, Number 190 (Wednesday, September 30, 2020)]
[Notices]
[Page 61793]
[FR Doc No: 2020-21598]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 90001/September 25, 2020/SR-NYSE-2019-67]

Securities Exchange Act of 1934; Order Granting Petition for
Review, Scheduling Filing of Statements, and Denying New York Stock
Exchange LLC's Motion To Lift the Stay; In the Matter of the New York
Stock Exchange LLC Regarding an Order Approving a Proposed Rule Change,
as Modified by Amendment No. 2, To Modify Chapter One of the Listed
Company Manual To Modify the Provisions Relating to Direct Listings

    This matter comes before the Securities and Exchange Commission
(``Commission'') on petition to review the approval, pursuant to
delegated authority, of the New York Stock Exchange LLC (``NYSE'')
proposed rule change to amend Chapter One of the Listed Company Manual
to modify the provisions relating to direct listings.\1\
---------------------------------------------------------------------------

    \1\ The proposed rule change relates to direct listings that
also involve a primary capital raising. This matter does not affect
NYSE's current rules related to direct listings that do not involve
a primary capital raising.
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    On December 20, 2019, the Commission issued a notice of filing of
the proposed rule change, as modified by Amendment No. 1, filed with
the Commission pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Exchange Act'') \2\ and Rule 19b-4 \3\ thereunder.\4\ On
February 13, 2020, a longer time period was designated within which to
act on the proposed rule change.\5\ On March 26, 2020, proceedings were
instituted under Section 19(b)(2)(B) of the Exchange Act \6\ to
determine whether to approve or disapprove the proposed rule change.\7\
On June 22, 2020, NYSE filed Amendment No. 2 to the proposed rule
change, replacing the proposed rule change, as modified by Amendment
No. 1, in its entirety. On June 24, 2020, the Commission issued a
notice of filing of Amendment No. 2 to the proposed rule change.\8\ On
June 24, 2020, a longer time period was designated for Commission
action on proceedings to determine whether to approve or disapprove the
proposed rule change.\9\ On August 26, 2020, after consideration of the
record for the proposed rule change, the Division of Trading and
Markets (``Division''), pursuant to delegated authority,\10\ approved
the proposed rule change, as modified by Amendment No. 2 (``Approval
Order'').\11\
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    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ See Exchange Act Release No. 87821, 84 FR 72065 (Dec. 30,
2019). NYSE filed the proposed rule change on December 11, 2019. On
December 13, 2019, NYSE filed Amendment No. 1 to the proposed rule
change, which amended and replaced the proposed rule change in its
entirety.
    \5\ See Exchange Act Release No. 88190, 85 FR 8981 (Feb. 20,
2020).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Exchange Act Release No. 88485, 85 FR 18292 (Apr. 1,
2020).
    \8\ See Exchange Act Release No. 89148, 85 FR 39246 (June 30,
2020).
    \9\ See Exchange Act Release No. 89147, 85 FR 39226 (June 30,
2020).
    \10\ 17 CFR 200.30-3(a)(12).
    \11\ See Exchange Act Release No. 89684, 85 FR 54454 (Sept. 1,
2020).
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    On August 31, 2020, pursuant to Commission Rule of Practice
430,\12\ the Council of Institutional Investors (``CII'') filed with
the Commission a notice of intention for review of the Approval Order.
Pursuant to Commission Rule of Practice 431(e), the Approval Order was
stayed by the CII filing with the Commission the notice of intention to
petition for review.\13\ On September 4, 2020, NYSE filed a motion for
the Commission to lift the automatic stay of the Approval Order and a
brief in support of its motion to lift the stay. On September 8, 2020,
CII filed a brief in opposition to NYSE's motion to lift the automatic
stay. On September 8, 2020, pursuant to Commission Rule of Practice
430,\14\ the CII filed a petition for review of the Approval Order. On
September 11, 2020, NYSE filed a reply brief in support of its motion
to lift the stay.
---------------------------------------------------------------------------

    \12\ 17 CFR 201.430.
    \13\ 17 CFR 201.431(e).
    \14\ 17 CFR 201.430.
---------------------------------------------------------------------------

    Pursuant to Rule 431 of the Rules of Practice,\15\ the petition for
review of the Approval Order of CII is granted. Further, the Commission
hereby establishes that any party to the action or other person may
file a written statement in support of or in opposition to the Approval
Order on or before October 16, 2020.
---------------------------------------------------------------------------

    \15\ 17 CFR 201.431.
---------------------------------------------------------------------------

    Finally, the Commission finds that it is inappropriate to lift the
automatic stay during the pendency of the Commission's review.\16\ CII
argues that the proposed rule change makes changes to the initial
public offering (``IPO'') market that are ``so significant that the
Commission should maintain the stay'' while it considers ``the adequacy
of investor protections'' and other policy issues under the proposed
rule change. We do not believe that NYSE has identified a compelling
reason that lifting the automatic stay furthers the public interest,
particularly in light of the policy considerations CII has identified.
We do not believe it to be in the public interest to alter the status
quo while the Commission considers the issues raised by the proposed
rule change before it becomes effective. We accordingly deny NYSE's
motion to lift the stay.
---------------------------------------------------------------------------

    \16\ See Exchange Act Release No. 60988 (Nov. 12, 2009)
(refusing to lift automatic stay because the petitioner ``raised
important policy issues that warrant Commission consideration prior
to allowing'' rule change to go into effect).
---------------------------------------------------------------------------

    For the reasons stated above, it is hereby:
    ORDERED that the petition of CII for review of the Division's
action to approve the proposed rule change by delegated authority be
GRANTED; and
    It is further ORDERED that any party or other person may file a
statement in support of or in opposition to the action made pursuant to
delegated authority on or before October 16, 2020.
    It is further ORDERED that NYSE's Motion to Lift the Automatic Stay
is hereby denied; and
    It is further ORDERED that the August 26, 2020, order approving the
proposed rule change, as modified by Amendment No. 2 (File No. SR-NYSE-
2019-67), shall remain stayed.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-21598 Filed 9-29-20; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 86, Number 3 (Wednesday, January 6, 2021)]
[Notices]
[Pages 659-662]
[FR Doc No: 2020-29217]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90827; File No. SR-OCC-2020-015]

Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Accelerated Approval of Proposed Rule Change Concerning
the Implementation of New Sufficiency Scenarios in the Options Clearing
Corporation's Stress Testing Inventory

December 30, 2020.

I. Introduction

    On December 2, 2020, the Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-OCC-2020-015 (``Proposed Rule Change'')
pursuant to Section 19(b) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to implement
additional stress test scenarios to OCC's Comprehensive Stress Testing
& Clearing Fund Methodology, and to its Liquidity Risk Management
Description.\3\ The Proposed Rule Change was published for public
comment in the Federal Register on December 14, 2020.\4\ The Commission
has received no comments regarding the Proposed Rule Change. This order
approves the Proposed Rule Change on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing infra note 4, 85 FR at 80829.
    \4\ Securities Exchange Act Release No. 90603 (Dec. 8, 2020), 85
FR 80829 (Dec. 14, 2020) (File No. SR-OCC-2020-015) (``Notice of
Filing'').
---------------------------------------------------------------------------

II. Background

    The Proposed Rule Change by OCC would take existing informational
stress test scenarios and add them to the list of stress test scenarios
designed to test the sufficiency of OCC's prefunded financial
resources. The proposed changes are to OCC's Comprehensive Stress
Testing & Clearing Fund Methodology, and to its Liquidity Risk
Management Description (``Methodology Description'').
    In 2018, OCC established its current clearing fund methodology,
using a stress testing framework to measure its credit exposure at a
level sufficient to cover potential losses under extreme but plausible
market conditions.\5\ OCC performs daily stress testing using a wide
range of scenarios, both hypothetical and historical. Its stress
testing scenario inventory includes four

different categories: (1) Scenarios that determine whether the
financial resources collected from all Clearing Members collectively
are adequate to cover OCC's risk tolerance (``Adequacy Scenarios'');
(2) scenarios that establish the monthly size of the Clearing Fund at
an amount necessary to cover losses arising from the default of the two
Clearing Member Groups that would potentially cause the largest
aggregate credit exposure as a result of a 1-in-80 year hypothetical
market event (``Sizing Scenarios''); (3) scenarios that measure the
exposure of the Clearing Fund to the portfolios of individual Clearing
Member Groups and determine whether any such exposure is sufficiently
large as to necessitate OCC calling for additional resources to guard
against potential losses under a wide range of stress scenarios,
including extreme but plausible market conditions (``Sufficiency
Scenarios''); \6\ and (4) scenarios that monitor and assess the size of
OCC's prefunded financial resources against a wide range of stress
scenarios that may include newly developed stress scenarios for
evaluation as well as extreme but implausible scenarios
(``Informational Scenarios''). Adequacy and Informational Scenarios are
not used directly to size the Clearing Fund or drive calls for
additional financial resources from OCC's Clearing Members.
---------------------------------------------------------------------------

    \5\ Securities Exchange Act Release No. 83735 (Jul. 27. 2018),
83 FR 37855 (Aug. 2, 2018) (File No. SR-OCC-2018-008).
    \6\ Pursuant to OCC Rule 609 and OCC's Clearing Fund Methodology
Policy, if any of OCC's Sufficiency Scenarios identifies exposures
that exceed 75% of the current Clearing Fund requirement less
deficits, OCC may require additional margin deposits from the
Clearing Member Group(s) driving the breach. Additionally, pursuant
to Rule 1001(c) and the Clearing Fund Methodology Policy, if a
Sufficiency Scenario identifies a Clearing Fund draw for any one or
two Clearing Member Groups that exceeds 90% of the current Clearing
Fund size (after subtracting any monies deposited as a result of a
margin call in accordance with a breach of the 75% threshold), OCC
has the authority to reset the size of the Clearing Fund on an
intra-month basis to ensure that it continues to maintain sufficient
prefunded financial resources. See Notice of Filing supra note 4, 85
FR at 80829-30.
---------------------------------------------------------------------------

    As described in the Notice of Filing, OCC proposes to elevate four
of its current Informational Scenarios to Sufficiency Scenarios. These
Informational Scenarios are historical scenarios designed to represent
recent market events from March 2020. The proposed Sufficiency
Scenarios would include price shocks representing the most extreme
market decline and rally moves in March 2020, and would include
variations of these scenarios designed to account for specific wrong-
way risk exposures arising from cleared positions on issued exchange
traded notes (``ETNs'').\7\
---------------------------------------------------------------------------

    \7\ See Notice of Filing supra note 4, 85 FR at 80830.
---------------------------------------------------------------------------

    These four scenarios, as Informational Scenarios, currently do not
drive the size of the Clearing Fund or calls for additional resources.
Once elevated to Sufficiency Scenarios, they would be used to measure
OCC's Clearing Fund exposure to the portfolios of individual Clearing
Member Groups and determine whether any such exposure is sufficiently
large where it would necessitate OCC calling for additional resources
in the form of margin or an intra-month resizing of the Clearing Fund.
OCC asserts that by adding these four Sufficiency Scenarios, it would
be able to test the sufficiency of its financial resources under a
wider range of relevant stress scenarios and respond quickly when OCC
believes additional financial resources are necessary.\8\
---------------------------------------------------------------------------

    \8\ Id.
---------------------------------------------------------------------------

III. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change

    Section 19(b)(2)(C) of the Exchange Act directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to such organization.\9\ After carefully
considering the Proposed Rule Change, the Commission finds that the
proposal is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to OCC. More
specifically, the Commission finds that the proposal is consistent with
Section 17A(b)(3)(F) of the Exchange Act,\10\ and Rule 17Ad-22(e)(4)
\11\ thereunder, as described in detail below.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(2)(C).
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires that the rules of
a clearing agency be designed to, among other things, promote the
prompt and accurate clearance and settlement of securities
transactions, and assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible.\12\ In 2018, the Commission approved a Proposed Rule
Change to formalize OCC's current Clearing Fund Methodology Policy,
including OCC's current stress testing methodology, and the
Commission's approval was based in part on the same Section
17A(b)(3)(F) requirements above.\13\ Based on its review of the record,
and for the reasons described below, the Commission believes that the
proposed addition of more stress test scenarios designed to test the
sufficiency of OCC's prefunded financial resources as described above
is consistent with the promotion of prompt and accurate clearance and
settlement of securities transactions, and the assurance of the
safeguarding of securities and funds which are in OCC's custody or
control or for which OCC is responsible.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ See supra note 5, 83 FR at 37861-62.
---------------------------------------------------------------------------

    First, the proposal to elevate four Informational Scenarios to
Sufficiency Scenarios would expand upon the scope of stress scenarios
against which OCC monitors its financial resources. The Commission
continues to believe that the historical scenarios replicating the 1987
market crash and financial crisis provide additional depth to the
monitoring of OCC's financial resources.\14\ Similarly, for the present
proposal, the Commission believes that the introduction of new
historical scenarios replicating the market events of March 2020 would
provide stress exposure estimates that would be meaningful for the
monitoring of OCC's total financial resources. Elevating these
Informational Scenarios to become Sufficiency Scenarios would increase
the likelihood that OCC will have sufficient financial resources in
excess of margin to address credit losses that could arise from the
default of a Clearing Member, and this would in turn enhance OCC's
ability to continue to promptly and accurately clear and settle
securities transactions for participants in the options markets during
periods of market stress. Therefore, the Commission believes that the
proposal is consistent with promoting the prompt and accurate clearance
and settlement of securities transactions.
---------------------------------------------------------------------------

    \14\ See supra note 5, 83 FR at 37861.
---------------------------------------------------------------------------

    Second, adding the proposed Sufficiency Scenarios would be
consistent with assuring the safeguarding of securities and funds
currently in OCC's custody and control by creating a wider range of
stress scenarios that would improve the likelihood of the Clearing Fund
having sufficient resources to cover potential credit losses under
adverse market conditions. As noted above, Sufficiency Scenarios are
used to determine whether any exposure of the Clearing Fund to the
portfolios of individual

Clearing Member Groups is sufficiently large as to necessitate OCC
calling for additional resources in the form of margin to guard against
potential losses. Collecting this additional margin reduces the
likelihood that OCC must mutualize the risk associated with these
potential losses through the use of surviving Clearing Members'
contributions to the Clearing Fund. The Commission continues to believe
that reducing the potentiality of loss mutualization during periods of
market stress, while unavoidable in certain circumstances, could reduce
the potential knock-on effects to non-defaulting Clearing Members,
their customers and the broader options market.\15\ The addition of the
four scenarios representing recent market events, previously uncaptured
in OCC's Sufficiency stress testing, would widen the set of Sufficiency
Scenarios to include such events, and further reduce the likelihood of
drawing upon surviving Clearing Members' Clearing Fund collateral in
the event that similar market scenarios occur. Therefore, the
Commission believes that the proposal is consistent with assuring the
safeguarding of securities and funds which are in OCC's custody or
control.
---------------------------------------------------------------------------

    \15\ See e.g., Securities Exchange Act Release No. 86119 (Jun.
17. 2019), 84 FR 29267, 29269 (Jun. 21, 2019) (File No. SR-OCC-2019-
004) (noting a new liquidation cost model's impact on reducing
potential loss mutualization).
---------------------------------------------------------------------------

    The Commission believes, therefore, that the proposal to elevate
the four Informational Scenarios to Sufficiency Scenarios is consistent
with the requirements of Section 17A(b)(3)(F) of the Exchange Act.\16\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(4) Under the Exchange Act

    Rule 17Ad-22(e)(4)(vi) under the Exchange Act requires OCC to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes by testing
the sufficiency of its total financial resources available to meet the
minimum financial resource requirements under paragraphs Rules 17Ad-
22(e)(4)(i) through (iii).\17\ Such testing must include, among other
things, conducting stress testing of OCC's total financial resources
once each day using standard predetermined parameters and
assumptions.\18\
---------------------------------------------------------------------------

    \17\ 17 CFR 240.17Ad-22(e)(4)(vi) (citing 17 CFR 240.17Ad-
22(e)(4)(i)-(iii)).
    \18\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
---------------------------------------------------------------------------

    After reviewing and assessing the proposal, the Commission believes
that the proposed changes described above are consistent with Rule
17Ad-22(e)(4)(vi) under the Exchange Act. As it stated in 2018, the
Commission believes that expanding the scope of stress scenarios
against which OCC monitors its financial resources would increase the
likelihood that OCC maintains sufficient financial resources at all
times.\19\ Similarly, the Commission believes that the elevation of the
four Informational Scenarios to Sufficiency Scenarios is consistent
with Rule 17Ad-22(e)(4)(vi) because the addition of the four
Sufficiency Scenarios would enhance OCC's financial resources testing,
and the broader scope of stress scenarios would increase the chances
that OCC maintains sufficient financial resources. The Commission also
believes that the daily testing of OCC's financial resources against
the Sufficiency Scenarios, including the four proposed Sufficiency
Scenarios based on the March 2020 market events, would be consistent
with the daily stress testing requirements of Rule 17Ad-
22(e)(4)(vi)(A), as described above.
---------------------------------------------------------------------------

    \19\ See supra note 5, 83 FR at 37863.
---------------------------------------------------------------------------

    The Commission also believes that the proposed introduction of
stress scenario variations accounting for specific wrong-way risk
exposures arising from cleared positions on issued ETNs would be
consistent with the requirements of Rules 17Ad-22(e)(4)(i), (iii), and
(vi).\20\ These Rules require that a covered clearing agency establish,
implement, maintain and enforce written policies and procedures
reasonably designed to effectively identify, measure, monitor, and
manage its credit exposures to participants and those arising from its
payment, clearing, and settlement processes, including by: (1)
Maintaining sufficient financial resources to cover its credit exposure
to each participant fully with a high degree of confidence; (2)
maintaining additional financial resources at the minimum to enable it
to cover a wide range of foreseeable stress scenarios that include, but
are not limited to, the default of the participant family that would
potentially cause the largest aggregate credit exposure for the covered
clearing agency in extreme but plausible market conditions; and (3)
testing the sufficiency of its total financial resources available to
meet these minimum financial resource requirements. In its 2019
approval of enhancements to OCC's Clearing Fund and stress testing
methodology, the Commission noted that OCC's introduction of new stress
test scenarios designed to capture single wrong-way risk exposures for
Clearing Member-issued ETNs would be consistent with the requirements
of Rules 17Ad-22(e)(4)(i), (iii), and (vi), because it would enable OCC
to test its total financial resources and to call for additional
resources as necessary to ensure the resources it holds would be
sufficient to enable OCC to cover exposures arising under the relevant
stress scenarios.\21\ Likewise, for the current proposal, the
Commission believes that OCC's introduction of four Sufficiency
Scenarios reflecting the market events of March 2020, including its
specific wrong-way risk exposure variations, would also enable OCC to
more accurately measure its credit risks and better test the
sufficiency of its overall financial resources. The proposed rule
change would thus enhance OCC's overall framework for measuring and
managing its credit risks and would reduce the risk that OCC's
financial resources would be insufficient in the event of a Clearing
Member default consistent with Rules 17Ad-22(e)(4)(i), (iii), and (vi).
---------------------------------------------------------------------------

    \20\ 17 CFR 240.17Ad-22(e)(4)(i), (iii), and (vi).
    \21\ Securities Exchange Act Release No. 87718 (Dec. 11, 2019),
84 FR 68992, 68995 (Dec. 17, 2019) (File No. SR-OCC-2019-010).
---------------------------------------------------------------------------

    The Commission believes, therefore, that the proposal to elevate
the four Informational Scenarios to Sufficiency Scenarios is consistent
with the requirements of Rule 17Ad-22(e)(4) under the Exchange Act.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------

C. Accelerated Approval of the Proposed Rule Change

    In its filing, OCC requests that the Commission grant accelerated
approval of the Proposed Rule Change pursuant to Secton 19(b)(C)(iii)
of the Exchange Act.\23\ Under Section 19(b)(2)(C)(iii) of the Exchange
Act, the Commission may grant accelerated approval of a proposed rule
change if the Commission finds good cause for doing so.\24\ OCC
believes that there is good cause for the Commission to accelerate
effectiveness because the proposed changes are designed to improve
OCC's ability to measure, monitor and manage its credit exposures to
its participants.\25\ Further, OCC believes that implementation of the
proposed Sufficiency Scenarios would promote the protection of
investors and the public interest by enabling OCC to test the
sufficiency of its prefunded financial resources against a recent and
significant period of market volatility and enhancing OCC's ability to
manage

the risks it faces as a systemically important financial market
utility.\26\
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(2)(C)(iii).
    \24\ Id.
    \25\ See Notice of Filing, 85 FR at 80830.
    \26\ Id.
---------------------------------------------------------------------------

    The Commission finds good cause, pursuant to Section
19(b)(2)(C)(iii) of the Exchange Act,\27\ for approving the Proposed
Rule Change on an accelerated basis, prior to the 30th day after the
date of publication of notice in the Federal Register, because
accelerated approval of this proposed rule change will facilitate the
prompt and accurate clearance and settlement of options contracts by
ensuring that OCC has expanded the range of stress scenarios to
measure, monitor, and manage its credit exposures to its participants
in a timely fashion, thereby immediately putting OCC in a better
position to manage the risks it faces as a systemically important
financial market utility.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(2)(C)(iii).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, the requirements of Section 17A of the
Exchange Act \28\ and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \28\ In approving this Proposed Rule Change, the Commission has
considered the proposed rules' impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\29\ that the Proposed Rule Change (SR-OCC-2020-015) be,
and hereby is, approved.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-29217 Filed 1-5-21; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register: September 25, 2009 (Volume 74, Number 185)]
[Notices]
[Page 49053-49055]
[DOCID:fr25se09-149]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60696; File No. SR-ISE-2009-65]

Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change Relating to Strike Price Intervals of $0.50 for Options on
Stocks Trading At or Below $3.00

September 18, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on September 17, 2009, the International Securities Exchange, LLC
(the ``Exchange'' or the ``ISE'') filed with the Securities and
Exchange 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\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of theTerms of Substance of
the Proposed Rule Change

    The ISE proposes to amend its rules in order to establish strike
price intervals of $0.50, beginning at $1, for certain options classes
whose underlying security closed at or below $3 in its primary market
on the previous trading day. The text of the proposed rule change is
available on the Exchange's Web site http://www.ise.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 these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections A, B and C below, of the
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to expand the ability of
investors to hedge risks associated with stocks trading at or under $3.
Currently, ISE Rule 504(d) provides that the interval of strike prices
of series of options on individual stocks may be $2.50 or greater where
the strike price is $25 or less. Additionally, Supplementary Material
.01 to ISE Rule 504 allows the Exchange to establish $1 strike price
intervals (the ``$1 Strike Program'') on options classes overlying no
more than 55 individual stocks designated by the Exchange. In order to
be eligible for selection into the $1 Strike Program, the underlying
stock must close below $50 in its primary market on the previous
trading day. If selected for the $1 Strike Program, the Exchange may
list strike prices at $1 intervals from $1 to $50, but no $1 strike
price may be listed that is greater than $5 from the underlying stock's
closing price in its primary market on the previous day. The Exchange
may also list $1 strikes on any other option class designated by
another securities exchange that employs a similar $1 Strike Program
its own rules.\3\ The Exchange is restricted from listing any series
that would result in strike prices being within $0.50 of a strike price
set pursuant to Supplementary Material .01 to ISE Rule 504 at intervals
of $2.50.
---------------------------------------------------------------------------

    \3\ The Exchange may not list long-term option series
(``LEAPS'') at $1 strike price intervals for any class selected for
the $1 Strike Program.
---------------------------------------------------------------------------

    The Exchange is now proposing to establish strike prices of $1,
$1.50, $ 2, $2.50, $3 and $3.50 for certain stocks that trade at or
under $3.00.\4\ The listing of these strike prices will be limited to
options classes whose underlying security closed at or below $3 in its
primary market on the previous trading day, and which have national
average daily volume that equals or exceeds 1000 contracts per day as
determined by The Options Clearing Corporation during the preceding
three calendar months. The listing of $0.50 strike prices would be
limited to options classes overlying no more than five (5) individual
stocks (the ``$0.50 Strike Program'') as specifically designated by the
Exchange. The Exchange would also be able to list $0.50 strike prices
on any other option classes if those classes were specifically
designated by other securities exchanges that employed a similar $0.50
Strike Program under their respective rules.
---------------------------------------------------------------------------

    \4\ The Exchange recently amended ISE Rule 503, Withdrawal of
Approval of Underlying Securities, to eliminate the $3 market price
per share requirement for continued approval for an underlying
security. The amendment eliminated the prohibition against listing
additional series or options on an underlying security at any time
when the price per share of such underlying security is less than
$3. The Exchange explained in that proposed rule change that the
market price for a large number of securities has fallen below $3 in
the current volatile market environment. See Securities Exchange Act
Release No. 59347 (February 3, 2009), 74 FR 6678 (February 10,
2009).
---------------------------------------------------------------------------

    Currently, the Exchange may list options on stocks trading at $3 at
strike prices of $1, $2, $3, $4, $5, $6, $7 and $8 if they are
designated to participate in the $1 Strike Program.\5\ If these stocks
have not been selected for the Exchange's $1 Strike Program, the
Exchange may list strike prices of $2.50, $5, $7.50 and so forth as
provided in Supplementary Material .01 to ISE Rule 504, but not strike
prices of $1, $2, $3, $4, $6, $7 and $8.\6\
---------------------------------------------------------------------------

    \5\ Additionally, market participants may be able to trade $2.50
strikes on the same option at another exchange, if that exchange has
elected not to select the stock for participation in its own similar
$1 Strike Program.
    \6\ Again, market participants may also be able to trade the
option at $1 strike price intervals on other exchanges, if those
exchanges have selected the stock for participation in their own
similar $1 Strike Program.
---------------------------------------------------------------------------

    The Exchange is now proposing to amend Supplementary Material .01
to ISE Rule 504 by adding new language that will permit the Exchange to
list strike prices on options on a number of qualifying stocks that
trade at or under $3.00, not simply those stocks also participating in
the $1 Strike Program, in finer intervals of $0.50, beginning at $1 up
to $3.50. Thus, a qualifying stock trading at $3 would have option
strike prices established not just at $2.50, $5.00, $7.50 and so forth
(for stocks not in the Exchange's $1 Strike Program) or just at $1, $2,
$3, $4, $5, $6, $7 and $8 (for stocks designated to participate in the
$1 Strike Program), but rather at strike prices established at $1,
$1.50, $2, $2.50, $3 and $3.50.\7\
---------------------------------------------------------------------------

    \7\ The option on the qualifying stock could also have strike
prices set at $5, $7.50 and so forth at $2.50 intervals (pursuant to
Supplementary Material .01 to ISE Rule 504) or, if it has been
selected for the $1 Strike Program, at $4, $5, $6, $7 and $8.
---------------------------------------------------------------------------

    The Exchange believes that current market conditions demonstrate
the appropriateness of the new strike prices. Recently the number of
securities trading below $3.00 has increased dramatically.\8\ Unless
the underlying stock has been selected for the $1 Strike Program, there
is only one possible in-the-money call (at $2.50) to be traded if an
underlying stock trades at $3.00. Similarly, unless the underlying
stock has been selected for the $1 Strike Program, only one out-of-the-
money strike price choice within 100% of a stock price of $3 is
available if an investor wants to purchase out-of-the-money calls.
Stated otherwise, a purchaser would need over a 100% move in the
underlying stock price in order to have a call option at any strike
price other than the $5 strike price become in-the-money. If the stock
is selected for the $1 Strike Program, the available strike price
choices are somewhat broader, but are still greatly limited by the
proximity of the $3 stock price to zero, and the very large percent
gain or loss in the underlying stock price, relative to a higher priced
stock, that would be required in order for strikes set at $1 or away
from the stock price to become in-the-money and serve their intended
hedging purpose.
---------------------------------------------------------------------------

    \8\ As of July 31, 2009, stocks trading at or below $3 include
E*Trade Financial Corporation, Ambac Financial Group, Inc., Alcatel-
Lucent, Federal Home Loan Mortgage Corporation (Freddie Mac) and
Federal National Mortgage Association (Fannie Mae). A number of
these stocks are widely held and actively traded equities, and the
options overlying these stocks also trade actively on ISE.
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    As a practical matter, a low-priced stock by its very nature
requires narrow strike price intervals in order for investors to have
any real ability to hedge the risks associated with such a security or
execute other related options trading strategies. The current
restriction on strike price intervals, which prohibits intervals of
less than $2.50 (or $1 for stocks in the $1 Strike Program) for options
on stocks trading at or below $3, could have a negative effect on
investors. The Exchange believes that the proposed $0.50 strike price
intervals would provide investors with greater flexibility in the
trading of equity options that overlie lower priced stocks by allowing
investors to establish equity option positions that are better tailored
to meet their investment objectives. The proposed new strike prices
would enable investors to more closely tailor their investment
strategies and decisions to the movement of the underlying security. As
the price of stocks decline below $3 or even $2, the availability of
options with strike prices at intervals of $0.50 could provide
investors with opportunities and strategies to minimize losses
associated with owning a stock declining in price.
    With regard to the impact on system capacity, ISE has analyzed its
capacity and represents that it and the Options Price Reporting
Authority have the necessary systems capacity to handle the additional
traffic associated with the listing and trading of an expanded

number of series as proposed by this filing.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act \9\ in general, and furthers the objectives of Section
6(b)(5) of the Act \10\ 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 a national
market system, and, in general to protect investors and the public
interest, by expanding the ability of investors to hedge risks
associated with stocks trading at or under $3. The proposal should
create greater trading and hedging opportunities and flexibility, and
provide customers with the ability to more closely tailor investment
strategies to the price movement of the underlying stocks, trading in
many of which is highly liquid.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others

    The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate, if consistent with the
protection of investors and the public interest, it has become
effective pursuant to 19(b)(3)(A) of the Act\11 \ and Rule 19b-4(f)(6)
thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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    The Exchange has requested that the Commission waive the 30-day
operative delay to permit the Exchange to respond promptly to demand by
market participants to list qualifying options series at $0.50
intervals at about the same time that NASDAQ OMX PHLX, Inc. does once
that exchange receives Commission approval of its proposed rule change.
The Commission today has approved SR-Phlx-2009-65,\13\ and therefore
finds that waiver of the operative delay is consistent with the
protection of investors and the public interest because such waiver
will encourage fair competition among the exchanges. Therefore, the
Commission designates the proposal operative upon filing.\14\
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    \13\ See Securities Exchange Act Release No. 60694 (September
18, 2009) (SR-Phlx-2009-65) (order approving a $0.50 strike program
substantially the same as the $0.50 Strike Program proposed by
CBOE).
    \14\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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    At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number SR-ISE-2009-65 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2009-65. This file
number should be included on the subject line if e-mail 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 (http://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 inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-ISE-2009-65 and should be
submitted on or before October 16, 2009.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-23113 Filed 9-24-09; 8:45 am]

BILLING CODE 8010-01-P