[Federal Register Volume 77, Number 87 (Friday, May 4, 2012)]
[Rules and Regulations]
[Pages 26441-26444]
[FR Doc No: 2012-10730]

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 52

[EPA-R04-OAR-2012-0355(b); FRL-9666-7]

Approval and Promulgation of Implementation Plans; North
Carolina; Charlotte; Ozone 2002 Base Year Emissions Inventory

AGENCY: Environmental Protection Agency (EPA).

ACTION: Direct final rule.

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SUMMARY: EPA is taking direct final action to approve the ozone 2002
base year emissions inventory portion of the state implementation plan
(SIP) revision submitted by the State of North Carolina November 12,
2009. The emissions inventory is part of the Charlotte-Gastonia-Rock
Hill, North Carolina ozone attainment demonstration that was submitted
for the 1997 8-hour ozone national ambient air quality standards
(NAAQS). The Charlotte-Gastonia-Rock Hill, North Carolina-South
Carolina 1997 8-hour ozone nonattainment area (hereafter referred to as
the ``bi-state Charlotte Area'') is comprised of Cabarrus, Gaston,
Lincoln, Mecklenburg, Rowan, Union and a portion of Iredell (Davidson
and Coddle Creek Townships) Counties in North Carolina; and a portion
of York County in South Carolina. This action is being taken pursuant
to section 110 of the Clean Air Act (CAA or Act). EPA will take action
on the South Carolina submission for the ozone 2002 base year emissions
inventory for its portion of the bi-state Charlotte Area in a separate
action.

DATES: This direct final rule is effective July 3, 2012 without further
notice, unless EPA receives adverse comment by June 4, 2012. If EPA
receives such comments, it will publish a timely withdrawal of the
direct final rule in the Federal Register and inform the public that
the rule will not take effect.

ADDRESSES: Submit your comments, identified by Docket ID No. EPA-R04-
OAR-2012-0355(b), by one of the following methods:
    1. www.regulations.gov: Follow the on-line instructions for
submitting comments.
    2. Email<EMAIL_ADDRESS>    3. Fax:<PHONE_NUMBER>.
    4. Mail: ``EPA-R04-OAR-2012-0355(b),'' Regulatory Development
Section, Air Planning Branch, Air, Pesticides and Toxics Management
Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth
Street SW., Atlanta, Georgia 30303-8960.
    5. Hand Delivery or Courier: Lynorae Benjamin, Regulatory
Development Section, Air Planning Branch, Air, Pesticides and Toxics
Management Division, U.S. Environmental Protection Agency, Region 4, 61
Forsyth Street SW., Atlanta, Georgia 30303-8960. Such deliveries are
only accepted during the Regional Office's normal hours of operation.
The Regional Office's official hours of business are Monday through
Friday, 8:30 to 4:30, excluding federal holidays.
    Instructions: Direct your comments to Docket ID No. EPA-R04-OAR-
2012-0355(b). EPA's policy is that all comments received will be
included in the public docket without change and may be made available
online at www.regulations.gov, including any personal information
provided, unless the comment includes information claimed to be
Confidential Business Information (CBI) or other information whose
disclosure is restricted by statute. Do not submit through
www.regulations.gov or email, information that you consider to be CBI
or otherwise protected. The www.regulations.gov Web site is an
``anonymous access'' system, which means EPA will not know your
identity or contact information unless you provide it in the body of
your comment. If you send an email comment directly to EPA without
going through www.regulations.gov, your email address will be
automatically captured and included as part of the comment that is
placed in the public docket and made available on the Internet. If you
submit an electronic comment, EPA recommends that you include your name
and other contact information in the body of your comment and with any
disk or CD-ROM you submit. If EPA cannot read your comment due to
technical difficulties and cannot contact you for clarification, EPA
may not be able to consider your comment. Electronic files should avoid
the use of special characters, any form of encryption, and be free of
any defects or viruses. For additional information about EPA's public
docket visit the EPA Docket Center homepage at http://www.epa.gov/epahome/dockets.htm.
    Docket: All documents in the electronic docket are listed in the
www.regulations.gov index. Although listed in the index, some
information is not publicly available, i.e., CBI or other information
whose disclosure is restricted by statute. Certain other material, such
as copyrighted material, is not placed on the Internet and will be
publicly available only in hard copy form. Publicly available docket
materials are available either electronically in www.regulations.gov or
in hard copy at the Regulatory Development Section, Air Planning
Branch, Air, Pesticides and Toxics Management Division, U.S.
Environmental Protection Agency, Region 4, 61 Forsyth Street SW.,
Atlanta, Georgia 30303-8960. EPA requests that if at all possible, you
contact the person listed in the FOR FURTHER INFORMATION CONTACT
section to schedule your inspection. The Regional Office's official
hours of business are Monday through Friday, 8:30 to 4:30, excluding
federal holidays.

FOR FURTHER INFORMATION CONTACT: Sara Waterson, Regulatory Development
Section, Air Planning Branch, Air, Pesticides and Toxics Management
Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth
Street SW., Atlanta, Georgia 30303-8960. The telephone number is (404)
562-9061. Ms. Waterson can be reached via electronic mail at
<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

I. Background
II. Analysis of State's Submittal
III. Final Action
IV. Statutory and Executive Order Reviews

I. Background

    On July 18, 1997, EPA promulgated a revised 8-hour ozone NAAQS of
0.08 parts per million (ppm). Under EPA's regulations at 40 CFR part
50, the 1997 8-hour ozone NAAQS is attained when the 3-year average of
the annual fourth highest daily maximum 8-hour average ambient air
quality ozone concentrations is less than or equal to 0.08 ppm (i.e.,
0.084 ppm when rounding is considered) (69 FR 23857, April 30, 2004).
Ambient air quality monitoring data for the 3-year period must meet a
data completeness requirement. The ambient air quality monitoring data
completeness requirement is met when the average percent of days with
valid ambient monitoring data is greater than 90 percent, and no single
year has less than 75 percent data completeness as determined in
Appendix I of part 50.
    Upon promulgation of a new or revised NAAQS, the CAA requires EPA
to designate as nonattainment any area that is violating the NAAQS,
based on the three most recent years of ambient air quality data at the
conclusion of the designation process. The bi-state Charlotte Area was
designated nonattainment for the 1997 8-hour ozone NAAQS on April 30,
2004 (effective June 15, 2004) using 2001-2003 ambient air quality data
(69 FR 23857, April 30, 2004). At the time of designation the bi-state
Charlotte Area was classified as a moderate nonattainment area for the
1997 8-hour ozone NAAQS. In the April 30, 2004, Phase I Ozone
Implementation Rule, EPA established ozone nonattainment area
attainment dates based on Table 1 of section 181(a) of the CAA. This
established an attainment date six years after the June 15, 2004,
effective date for areas classified as moderate areas for the 1997 8-
hour ozone nonattainment designations. Section 181 of the CAA explains
that the attainment date for moderate nonattainment areas shall be as
expeditiously as practicable, but no later than six years after
designation, or June 15, 2010. Therefore, the bi-state Charlotte Area's
original attainment date was June 15, 2010. See 69 FR 23951, April 30,
2004.
    On November 12, 2009,\1\ North Carolina submitted an attainment
demonstration and associated reasonably available control measures
(RACM), a reasonable further progress (RFP) plan, contingency measures,
a 2002 base year emissions inventory and other planning SIP revisions
related to attainment of the 1997 8-hour ozone NAAQS in the bi-state
Charlotte Area (hereafter referred to as the ``North Carolina's
nonattainment submissions for the 1997 8-hour ozone NAAQS for the bi-
state Charlotte Area''). A supplement to the RFP was submitted on
November 30, 2009.
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    \1\ North Carolina withdrew a June 15, 2007, attainment
demonstration SIP for its portion of the Charlotte-Gastonia-Rock
Hill 1997 8-hour ozone area on December 19, 2008, and committed to
submit a revised SIP by November 30, 2009. On November 12, 2009,
North Carolina resubmitted the attainment demonstration SIP for the
North Carolina portion of the Charlotte-Gastonia-Rock Hill 1997 8-
hour ozone area.
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    The bi-state Charlotte Area did not attain the 1997 8-hour ozone
NAAQS by June 15, 2010 (the applicable attainment date for moderate
nonattainment areas); however, the Area qualified for an extension of
the attainment date. Under certain circumstances, the CAA allows for
extensions of the attainment dates prescribed at the time of the
original nonattainment designation. In accordance with CAA section
181(a)(5), EPA may grant up to 2 one-year extensions of the attainment
date under specified conditions. On May 31, 2011, EPA determined that
North Carolina met the CAA requirements to obtain a one-year extension
of the attainment date for the 1997 8-hour ozone NAAQS for the bi-state
Charlotte Area. See 76 FR 31245. As a result, EPA extended the bi-state
Charlotte Area's attainment date from June 15, 2010, to June 15, 2011,
for the 1997 8-hour ozone NAAQS.
    Subsequently, on November 15, 2011 (76 FR 70656), EPA determined
that the bi-state Charlotte Area attained the 1997 8-hour ozone NAAQS.
The determination of attaining data was based upon complete, quality-
assured and certified ambient air monitoring data for the 2008-2010
period, showing that the Area had monitored attainment of the 1997 8-
hour ozone NAAQS. The requirements for the Area to submit an attainment
demonstration and associated RACM, RFP plan, contingency measures, and
other planning SIP revisions related to attainment of the standard were
suspended as a result of the determination of attainment, so long as
the Area continues to attain the 1997 8-hour ozone NAAQS. See 40 CFR
52.1779(a).
    On December 21, 2011, North Carolina withdrew the bi-state
Charlotte Area's attainment demonstration, contingency measures, and
associated RACM as allowed by 40 CFR 51.918 for its portion of this
Area; however, the emissions inventory requirement found in CAA section
182(a)(1), which requires submission and approval of a comprehensive,
accurate, and current inventory of actual emissions, is not suspended
by a determination of attainment. Accordingly, North Carolina has not
withdrawn its emission inventory for the 1997 8-hour ozone NAAQS, and
EPA is now taking direct final action to approve this portion of the
SIP revision submitted by the State of North Carolina on November 12,
2009, as required by section 182(a)(1).

II. Analysis of State's Submittal

    As discussed above, section 182(a)(1) of the CAA requires areas to
submit a comprehensive, accurate and current inventory of actual
emissions from all sources of the relevant pollutant or pollutants in
such area. North Carolina selected 2002 as base year for the emissions
inventory pursuant to 40 CFR 51.915. Emissions contained in North
Carolina's portion of the bi-state Charlotte attainment plan cover the
general source categories of stationary point and area sources, non-
road and on-road mobile sources, and biogenic sources. A detailed
discussion of the emissions inventory development can be found in
Appendix E of the North Carolina submittal. The 2002 nitrogen oxides
(NOX) baseline emissions inventory, including partial county
emissions for Iredell, can be found in Appendix P of the submittal. The
2002 volatile organic compounds (VOC) baseline emissions inventory,
including partial county emissions for Iredell, can be found in
Appendix O of the submittal. The table below provides a summary of the
emissions inventories. A detailed account of the point sources can be
found in Appendix E of the November 12, 2009, submittal, which can be
found in the docket for today's action using Docket ID No. EPA-R04-OAR-
2010-0504.

                       Table 1--2002 Point and Area Sources Annual Emissions for the North Carolina Portion of the Charlotte Area
                                                                  [Tons per summer day]
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                                                                          Point                 Area                Non-road               Mobile
                             County                              ---------------------------------------------------------------------------------------
                                                                     NOX        VOC        NOX        VOC        NOX        VOC        NOX        VOC
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cabarrus........................................................        2.6        2.2        0.8        6.0        5.4        2.7       17.2       21.5
Gaston..........................................................       34.8        2.5        1.3        8.9        4.9        2.9       20.0       13.5
Iredell (partial) *.............................................        8.5        0.9        0.3        1.9        1.4        0.9        5.6        5.1
Lincoln.........................................................        0.3        2.1        0.5        3.1        1.9        1.3        6.1        7.1
Mecklenburg.....................................................        2.1        5.7        7.0       29.4       32.1       24.1       78.7       68.0
Rowan...........................................................       11.0        6.3        0.8        5.6        4.1        2.3       19.7       14.8
Union...........................................................        0.2        1.0        1.0        6.4        7.7        4.7       11.3       13.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Only part of Iredell County is in the nonattainment area.

    The 182(a)(1) emissions inventory is developed by the incorporation
of data from multiple sources. States were required to develop and
submit to EPA a triennial emissions inventory according to the
Consolidated Emissions Reporting Rule for all source categories (i.e.,
point, area, non-road mobile and on-road mobile). This inventory often
forms the basis of data that are updated with more recent information
and data that also is used in their attainment demonstration modeling
inventory. Such was the case in the development of the 2002 emissions
inventory that was submitted in the State's attainment demonstration
SIP for this Area. The 2002 emissions inventory was based on data
developed with the Visibility Improvement State and Tribal Association
of the Southeast (VISTAS) contractors and submitted by the States to
the 2002 National Emissions Inventory. Several iterations of the 2002
inventories were developed for the different emissions source
categories resulting from revisions and updates to the data. Data from
many databases, studies and models (e.g., vehicle miles traveled, fuel
programs, the NONROAD 2002 model data for commercial marine vessels,
locomotives and Clean Air Market Division, etc.) resulted in the
inventory submitted in this SIP. The data were developed according to
current EPA emissions inventory guidance ``Emissions Inventory Guidance
for Implementation of Ozone and Particulate Matter National Ambient Air
Quality Standards (NAAQS) and Regional Haze Regulations'' (August 2005)
and a quality assurance project plan that was developed through VISTAS
and approved by EPA. EPA agrees that the process used to develop this
inventory was adequate to meet the requirements of CAA section
182(a)(1) and the implementing regulations.
    EPA has reviewed North Carolina's emissions inventory for its
portion of the bi-state Charlotte Area for the 1997 8-hour ozone NAAQS
and finds that it is adequate for the purposes of meeting section
182(a)(1) emissions inventory requirement. The emissions inventory is
approvable because the emissions were developed consistent with the
CAA, implementing regulations and EPA guidance for emission
inventories.

III. Final Action

    EPA is approving the 2002 base year emissions inventory portion of
the North Carolina's 1997 8-hour ozone attainment demonstration SIP
revision for the bi-state Charlotte Area submitted by the State of
North Carolina on November 12, 2009. This action is being taken
pursuant to section 110 of the CAA. On March 12, 2008, EPA issued a
revised ozone NAAQS. See 73 FR 16436. The current action, however, is
being taken to address requirements under the 1997 8-hour ozone NAAQS.
Requirements for the North Carolina portion of the Charlotte Area under
the 2008 ozone NAAQS will be addressed in the future. EPA is publishing
this rule without prior proposal because the Agency views this as a
noncontroversial submittal and anticipates no adverse comments.
However, in the proposed rules section of this Federal Register
publication, EPA is publishing a separate document that will serve as
the proposal to approve the SIP revision should adverse comments be
filed. This rule will be effective July 3, 2012 without further notice
unless the Agency receives adverse comments by June 4, 2012.
    If EPA receives such comments, then EPA will publish a document
withdrawing the final rule and informing the public that the rule will
not take effect. All public comments received will then be addressed in
a subsequent final rule based on the proposed rule. EPA will not
institute a second comment period. Parties interested in commenting
should do so at this time. If no such comments are received, the public
is advised that this rule will be effective on July 3, 2012 and no
further action will be taken on the proposed rule.

IV. Statutory and Executive Order Reviews

    Under the CAA, the Administrator is required to approve a SIP
submission that complies with the provisions of the Act and applicable
federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in
reviewing SIP submissions, EPA's role is to approve state choices,
provided that they meet the criteria of the CAA. Accordingly, this
action merely approves state law as meeting federal requirements and
does not impose additional requirements beyond those imposed by state
law. For that reason, this action:
     Is not a ``significant regulatory action'' subject to
review by the Office of Management and Budget under Executive Order
12866 (58 FR 51735, October 4, 1993);
     Does not impose an information collection burden under the
provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.);
     Is certified as not having a significant economic impact
on a substantial number of small entities under the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.);
     Does not contain any unfunded mandate or significantly or
uniquely affect small governments, as described in the Unfunded
Mandates Reform Act of 1995 (Pub. L. 104-4);
     Does not have Federalism implications as specified in
Executive Order 13132 (64 FR 43255, August 10, 1999);
     Is not an economically significant regulatory action based
on health or safety risks subject to Executive Order 13045 (62 FR
19885, April 23, 1997);
     Is not a significant regulatory action subject to
Executive Order 13211 (66 FR 28355, May 22, 2001);

     Is not subject to requirements of Section 12(d) of the
National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272
note) because application of those requirements would be inconsistent
with the CAA; and
     Does not provide EPA with the discretionary authority to
address, as appropriate, disproportionate human health or environmental
effects, using practicable and legally permissible methods, under
Executive Order 12898 (59 FR 7629, February 16, 1994).

In addition, this rule does not have tribal implications as specified
by Executive Order 13175 (65 FR 67249, November 9, 2000), because the
SIP is not approved to apply in Indian country located in the State,
and EPA notes that it will not impose substantial direct costs on
tribal governments or preempt tribal law.
    The Congressional Review Act, 5 U.S.C. 801 et seq., as added by the
Small Business Regulatory Enforcement Fairness Act of 1996, generally
provides that before a rule may take effect, the agency promulgating
the rule must submit a rule report, which includes a copy of the rule,
to each House of the Congress and to the Comptroller General of the
United States. EPA will submit a report containing this action 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. A major rule cannot
take effect until 60 days after it is published in the Federal
Register. This action is not a ``major rule'' as defined by 5 U.S.C.
804(2).
    Under section 307(b)(1) of the CAA, petitions for judicial review
of this action must be filed in the United States Court of Appeals for
the appropriate circuit by July 3, 2012. Filing a petition for
reconsideration by the Administrator of this final rule does not affect
the finality of this action for the purposes of judicial review nor
does it extend the time within which a petition for judicial review may
be filed, and shall not postpone the effectiveness of such rule or
action. Parties with objections to this direct final rule are
encouraged to file a comment in response to the parallel notice of
proposed rulemaking for this action published in the proposed rules
section of today's Federal Register, rather than file an immediate
petition for judicial review of this direct final rule, so that EPA can
withdraw this direct final rule and address the comment in the proposed
rulemaking. This action may not be challenged later in proceedings to
enforce its requirements. (See section 307(b)(2)).

List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Incorporation by
reference, Intergovernmental relations, Nitrogen dioxide, Ozone,
Reporting and recordkeeping requirements, Volatile organic compounds.

    Dated: April 18, 2012.
A. Stanley Meiburg,
Acting Regional Administrator, Region 4.

    40 CFR part 52 is amended as follows:

PART 52--[AMENDED]

0
1. The authority citation for part 52 continues to read as follows:

    Authority: 42 U.S.C. 7401 et seq.

Subpart II--North Carolina

0
2. Section 52.1770(e), is amended by adding a new entry for ``North
Carolina portion of bi-state Charlotte; 1997 8-Hour Ozone 2002 Base
Year Emissions Inventory'' to read as follows:

Sec.  52.1770  Identification of plan.

* * * * *
    (e) * * *

                              EPA-Approved North Carolina Non-Regulatory Provisions
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                                            State       EPA approval
              Provision                effective date       date               Federal Register citation
----------------------------------------------------------------------------------------------------------------

                                                  * * * * * * *
North Carolina portion of bi-state         11/12/2009        5/4/2012   [Insert citation of publication].
 Charlotte; 1997 8-Hour Ozone 2002
 Base Year Emissions Inventory.
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[FR Doc. 2012-10730 Filed 5-3-12; 8:45 am]
BILLING CODE 6560-50-P


[Federal Register Volume 85, Number 174 (Tuesday, September 8, 2020)]
[Notices]
[Pages 55561-55562]
[FR Doc No: 2020-19722]

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SECURITIES AND EXCHANGE COMMISSION

[SEC File No. 270-424 OMB Control No. 3235-0473]

Proposed Collection; Comment Request

Upon Written Request, Copies Available From: Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736

Extension: Rule 17A-3(b)

    Notice is hereby given that pursuant to the Paperwork Reduction Act
of 1995 (``PRA'') (44 U.S.C. 3501 et seq.), the Securities and Exchange
Commission (``Commission'') is soliciting comments on the existing
collection of information provided for in Rule 17Ad-3(b) (17 CFR
240.17Ad-3(b)), under the Securities Exchange Act of 1934 (15 U.S.C.
78a et seq.). The Commission plans to submit this existing collection
of information to the Office of Management and Budget (``OMB'') for
extension and approval.
    Rule 17Ad-3(b) requires registered transfer agents to send a copy
of the written notice required under Rule 17Ad-2(c), (d), and (h) to
the chief executive officer of each issuer for which the transfer agent
acts when it has failed to turnaround at least 75% of all routine items
in accordance with the requirements of Rule 17Ad-2(a), or to process at
least 75% of all items in accordance with the requirements of Rule
17Ad-2(b), for two consecutive months. The issuer may use the
information contained in the notices: (1) As an early warning of the
transfer agent's non-compliance with the Commission's minimum
performance standards regarding registered transfer agents; and (2) to
become aware of certain problems and poor performances with respect to
the transfer agents that are servicing the issuer's issues. If the
issuer does not receive notice of a registered transfer agent's failure
to comply with the Commission's minimum performance standards then the
issuer will be unable to take remedial action to correct the problem or
to find another registered transfer agent. Pursuant to Rule 17Ad-3(b),
a transfer agent that has already filed a Notice of Non-Compliance with
the Commission pursuant to Rule 17Ad-2 will only be required to send a
copy of that notice to issuers for which it acts when that transfer
agent fails to turnaround 75% of all routine items or to process 75% of
all items for two consecutive months.
    The Commission estimates that only one transfer agent will be
subject to the third party disclosure requirements of Rule 17Ad-3(b)
each year. If a transfer agent fails to meet the turnaround and
processing requirements under 17Ad-3(b), it would simply send its
issuer-clients a copy of the notice that had already been produced for
the Commission pursuant to Rule 17Ad-2(c) or (d). The Commission
estimates the requirement will take the transfer agent approximately
four hours to complete. The total estimated burden associated with Rule
17Ad-3(b) is thus approximately 4 hours per year. The Commission
estimates that the internal compliance cost for the transfer agent to
comply with this third party disclosure requirement will be
approximately $1,128 per year (4 hours x $283 per hour = $1,128). The
total estimated internal cost of compliance associated with Rule 17Ad-
3(b) is thus approximately $1,128 per year. There are no external costs
associated with sending the notice to issuer-clients.
    Written comments are invited on: (a) Whether the proposed
collection of information is necessary for the proper performance of
the functions of the Commission, including whether the information
shall have practical utility; (b) the accuracy of the Commission's
estimates of the burden of the proposed collection of information; (c)
ways to enhance the quality, utility, and clarity of the information
collected; and (d) ways to minimize the burden of the collection of
information on respondents, including through the use of automated
collection techniques or other forms of information technology.
Consideration will be given to comments and suggestions submitted in
writing within 60 days of this publication.
    An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information under the PRA unless it
displays a currently valid OMB control number.
    Please direct your written comments to: David Bottom, Director/
Chief Information Officer, Securities and

Exchange Commission, c/o Cynthia Roscoe, 100 F Street NE, Washington,
DC 20549, or send an email to<EMAIL_ADDRESS>
    Dated: September 1, 2020.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-19722 Filed 9-4-20; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 76, Number 175 (Friday, September 9, 2011)]
[Notices]
[Pages 55969-55976]
[FR Doc No: 2011-23045]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65256; File No. SR-C2-2011-008]

Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Order Approving Proposed Rule Change to Establish a Pilot Program To
List and Trade a p.m.-Settled Cash-Settled S&P 500 Index Option Product

September 2, 2011.

I. Introduction

    On February 28, 2011, C2 Options Exchange, Incorporated (the
``Exchange'' or ``C2'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to permit the listing and trading
of p.m.-settled, cash-settled options on the Standard & Poor's 500
Index (``S&P 500''). The proposed rule change was published for comment
in the Federal Register on March 8, 2011.\3\ The Commission received
seven comment letters on the proposal, some of which urged the
Commission to disapprove the proposal.\4\ C2 responded to the comment
letters in a response letter dated April 20, 2011.\5\ To ensure that
the Commission had sufficient time to consider and take action on the
Exchange's proposal in light of, among other things, the comments
received on the proposal, the Commission extended the time period in
which to either approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change, to June 6, 2011.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 64011 (March 2,
2011), 76 FR 12775 (``Notice'').
    \4\ See Letters to Elizabeth M. Murphy, Secretary, Commission,
from Randall Mayne, Blue Capital Group, dated March 18, 2011 and
April 28, 2011 (``Mayne Letter 1'' and ``Mayne Letter 2''); Michael
J. Simon, Secretary, International Securities Exchange, LLC
(``ISE''), dated March 29, 2011 and May 11, 2011 (``ISE Letter 1''
and ``ISE Letter 2''); Andrew Stevens, Legal Counsel, IMC Financial
Markets, dated March 24, 2011 (``IMC Letter''); John Trader, dated
April 20, 2011 (``Trader Letter''); and JP, dated April 30, 2011
(``JP Letter'').
    \5\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Joanne Moffic-Silver, Secretary, C2, dated April 20, 2011 (``C2
Response Letter'').
    \6\ See Securities Exchange Act Release No. 64266 (April 8,
2011), 76 FR 20757 (April 13, 2011).
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    In order to solicit additional input from interested parties,
including relevant data and analysis, on the issues presented by C2's
proposed rule change, on June 3, 2011, the Commission instituted
proceedings to determine whether to approve or disapprove C2's
proposal.\7\ In its order instituting the proceedings, the Commission
specifically noted its interest in receiving additional data and
analysis relating to the potential effect that proposed p.m.-settled
index options could have on the underlying cash equities markets. In
response to the proceedings, the Commission received an additional
three comment letters on the proposal as well as a rebuttal letter from
C2.\8\ This order approves the proposed rule change on a 14-month pilot
basis.
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    \7\ See Securities Exchange Act Release No. 64599 (June 3,
2011), 76 FR 33798 (June 9, 2011).
    \8\ See Letters to Elizabeth M. Murphy, Secretary, Commission,
from Michael J. Simon, Secretary, International Securities Exchange,
LLC dated July 11, 2011 (``ISE Letter 3''); William J. Brodsky,
Chairman and Chief Executive Officer, C2, dated July 11, 2011
(``CBOE Letter 3''); Thomas Foertsch, President, Exchange Capital
Resources, dated July 11, 2011; and William J. Brodsky, Chairman and
Chief Executive Officer, C2, dated July 25, 2011.
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange's proposal would permit it to list and trade cash-
settled S&P 500 index options with third-Friday-of-the-month
(``Expiration Friday'') expiration dates for which the exercise
settlement value will be based on the index value derived from the
closing prices of component securities (``p.m.-settled''). The proposed
contract (referred to as ``SPXPM'') would use a $100 multiplier, and
the minimum trading increment would be $0.05 for options trading below
$3.00 and $0.10 for all other series. Strike price intervals would be
set no less than 5 points apart. Consistent with existing rules for
index options, the Exchange would allow up to twelve near-term
expiration months, as well as LEAPS. Expiration processing would occur
on the Saturday following Expiration Friday. The product would have
European-style exercise and would not be subject to position limits,
though there would be enhanced reporting requirements.
    The Exchange proposes that the SPXPM product be approved on a pilot
basis for an initial period of fourteen months. As part of the pilot
program, the Exchange committed to submit a pilot program report to the
Commission at least two months prior to the

expiration date of the program (the ``annual report''). The annual
report would contain an analysis of volume, open interest, and trading
patterns. The analysis would examine trading in the proposed option
product as well as trading in the securities that comprise the S&P 500
index. In addition, for series that exceed certain minimum open
interest parameters, the annual report would provide analysis of index
price volatility and share trading activity. In addition to the annual
report, the Exchange committed to provide the Commission with periodic
interim reports while the pilot is in effect that would contain some,
but not all, of the information contained in the annual report. In its
filing, C2 notes that it would provide the annual and interim reports
to the Commission on a confidential basis.\9\
---------------------------------------------------------------------------

    \9\ See Notice, supra note 3, at 12777.
---------------------------------------------------------------------------

III. Comments Received

    In response to the initial notice of C2's proposal, the Commission
received seven comment letters, some of which expressed concern with
the proposal.\10\ One commenter specifically urges the Commission to
disapprove the proposal.\11\ Commenters expressing concern with the
proposal raised several issues, including: The potential for adverse
effects on the underlying cash markets that could accompany the
reintroduction of p.m. settlement; concern with the similarity (but
lack of fungibility) between the existing S&P 500 index option traded
on the Chicago Board Options Exchange, Incorporated (``CBOE'') and the
proposed S&P 500 index option that would be traded on C2; the lack of
proposed position limits for SPXPM; and issues regarding exclusive
product licensing. Three commenters expressed support for the
proposal.\12\
---------------------------------------------------------------------------

    \10\ See Mayne Letter 1, ISE Letter 1, ISE Letter 2, and Trader
Letter, supra note 4.
    \11\ See ISE Letter 1 and ISE Letter 2, supra note 4.
    \12\ See Mayne Letter 2, IMC Letter, and JP Letter, supra note
4.
---------------------------------------------------------------------------

    In the proceedings to determine whether to approve or disapprove
the proposal, the Commission preliminarily summarized the issues raised
by the commenters, and also set forth a series of questions and
requests for data on the issue of p.m. settlement. In response to the
proceedings, the Commission received three letters, including one from
C2, one from ISE that expands on the concerns it previously raised and
reiterates its recommendation for the Commission to disapprove the
proposal, and one from a new commenter that supports the proposal
because it will offer investors greater flexibility.\13\ The Commission
also received an additional letter from C2 responding to the comments
of ISE.\14\ The comments received are addressed below.
---------------------------------------------------------------------------

    \13\ See ECR Letter, supra note 8.
    \14\ See C2 Rebuttal Letter, supra note 8.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful consideration of the proposal and the comments
received, the Commission finds that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange,\15\ and, in particular, the requirements of Section 6 of the
Act.\16\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\17\ which
requires that an exchange have rules designed to remove impediments to
and perfect the mechanism of a free and open market and to protect
investors and the public interest.
---------------------------------------------------------------------------

    \15\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f.
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

A. Relationship to the National Market System

    One commenter believes that separate a.m. and p.m.-settled S&P 500
index options could potentially bifurcate the market for CBOE's
existing a.m.-settled SPX contract.\18\ This commenter notes that the
SPX, which trades only on CBOE, accounts for 60% of all index options
trading, and argues that the sole difference in settlement between SPX
on CBOE and the proposed S&P 500 index options on C2 (i.e., a.m. vs.
p.m. settlement) is a ``sham'' that is intended to ``keep them non-
fungible,'' which would ``make a mockery of Section 11A of the Act.''
\19\ The commenter states that the objectives of Section 11A are
reflected in a national market system plan for options that requires
exchanges to prevent trading through better priced quotations displayed
on other options exchanges, and that making a p.m.-settled S&P 500
index option non-fungible with CBOE's SPX would allow the CBOE group to
establish two ``monopolies'' in S&P 500 options, one floor-based (CBOE)
and one electronic (C2) that would avoid the application of the
limitation on trade throughs.\20\ The commenter also contends the
proposal is designed to protect CBOE's floor-based SPX trading without
having to accommodate the more narrow quotes that would likely occur on
C2 in an electronically-traded p.m.-settled product.\21\
---------------------------------------------------------------------------

    \18\ See ISE Letter 1, supra note 4, at 4.
    \19\ Id. at 2. See also ISE Letter 2, supra note 4, at 3-4.
    \20\ See ISE Letter 1, supra note 4, at 3.
    \21\ See ISE Letter 1, supra note 4, at 2.
---------------------------------------------------------------------------

    Another commenter asserts that CBOE and C2 should trade a fungible
S&P 500 index option in order to address what the commenter describes
as ``huge customer-unfriendly spreads'' in SPX.\22\ The commenter
argues that if the CBOE believes p.m. settlement is superior to a.m.
settlement, then CBOE should file to change SPX to p.m. settlement so
that the product traded on C2 would be fungible with that proposed to
be traded on CBOE.\23\
---------------------------------------------------------------------------

    \22\ See Trader Letter, supra note 4, at 1. See also JP Letter,
supra note 4, at 1.
    \23\ See Trader Letter, supra note 4, at 1.
---------------------------------------------------------------------------

    In response, C2 argues that the difference between a.m.-settled and
p.m.-settled S&P 500 index option would be a material term and that
C2's proposed S&P 500 index option could not be fungible with, nor
could it be linked with, CBOE's SPX option.\24\
---------------------------------------------------------------------------

    \24\ See C2 Response Letter, supra note 5, at 3.
---------------------------------------------------------------------------

    The Commission agrees that the difference between a.m.-settled SPX
and the proposed p.m.-settled SPXPM involves a materially different
term (i.e., settlement time) that makes C2's proposed SPXPM index
option a different security than, and thus not fungible with, CBOE's
SPX option.\25\ The Commission notes that it has permitted very similar
but different products to trade on the same exchange or on different
exchanges without those separate products being fungible. For example,
the Commission previously approved for CBOE the listing and trading of
a.m.-settled S&P 500 index options during a time when CBOE also traded
p.m.-settled S&P 500 index options, and the two separate products were
not fungible.\26\
---------------------------------------------------------------------------

    \25\ Consequently, rules applicable to prevent trading through
better priced quotations in the same security displayed on other
options exchanges would not be applicable for trading between these
two products.
    Similarly, in response to a comment that investors would be
confused by the presence of an a.m.-settled SPX on CBOE and a p.m.-
settled S&P 500 index option on C2 (see ISE Letter 1, supra note 4,
at 3), the Commission does not believe that SPX on CBOE and a p.m.-
settled S&P 500 index option on C2 would cause investor confusion.
The two products would trade under different ticker symbols and any
potential for investor confusion could be mitigated though investor
outreach and education initiatives. Furthermore, as C2 notes in its
response letter, CBOE currently lists two options on the S&P 100
(American-style OEX and European-style XEO) and is not aware of any
investor confusion among the products. See C2 Response Letter, supra
note 5, at 3.
    \26\ See infra note 44 (citing to Securities Exchange Act
Release No. 24367). See also Securities Exchange Act Release No.
51619 (Apr. 27, 2005), 70 FR 22947 (May 3, 2005) (order approving
ISE's listing and trading of options on various Russell Indexes,
including options based upon one-tenth values of the Russell
Indexes).

---------------------------------------------------------------------------

    One commenter also raises concerns about the potential effect on
competition of C2 listing and trading an option product that is subject
to an exclusive license, citing to concerns they express with respect
to the SPX product traded on CBOE.\27\
---------------------------------------------------------------------------

    \27\ See ISE Letter 1, supra note 4, at 6-7 (arguing in part
that ``CBOE's monopoly in the product imposes significant harm to
investors,'' including the fact that ``CBOE charges for trading SPX
options that are much greater than the fees for multiply listed
options'' and ``the quotes in SPX options are much wider than they
would be if there was competition from other exchanges,'' as well as
that ``CBOE is able to use the monopolistic revenue stream from
these options to subsidize other products * * *.'') and ISE Letter
2, supra note 4, at 3-4 (arguing in part that ``[t]he Proposal is
harmful to investors because it * * * perpetuates the unreasonably
high monopolistic pricing and artificially wide spreads that result
from the lack of competition in this product.'').
    The issue of state law intellectual property rights of index
developers in the use of their indexes to trade derivatives is the
subject of litigation between CBOE and ISE (as well as other
parties). See Chicago Board Options Exchange, Incorporated et al. v.
International Securities Exchange, et al., Case No. 06 CH 24798
(Cir. Ct. of Cook Cty., Ch. Div. July 8, 2010), appeal docketed, No.
1-10-2228 (Ill. App. Ct. August 9, 2010). See also Board of Trade of
the City of Chicago v. Dow Jones & Co., Inc., 98 Ill.2d 109 (1983).
In issuing this order, the Commission expresses no view with respect
to the matters underlying this ongoing litigation, including their
validity or the enforceability of the exclusivity agreement.
---------------------------------------------------------------------------

    The Commission recognizes the potential impact on competition
resulting from the inability of other options exchanges to list and
trade SPXPM. In acting on this proposal, however, the Commission has
balanced the potentially negative competitive effects with the
countervailing positive competitive effects of C2's proposal. The
Commission believes that the availability of SPXPM on the C2 exchange
will enhance competition by providing investors with an additional
investment vehicle, in a fully-electronic trading environment, through
which investors can gain and hedge exposure to the S&P 500 stocks.
Further, this product could offer a competitive alternative to other
existing investment products that seek to allow investors to gain broad
market exposure. Also, we note that it is possible for other exchanges
to develop or license the use of a new or different index to compete
with the S&P 500 index and seek Commission approval to list and trade
options on such index.
    Accordingly, with respect to the Commission's consideration of C2's
proposed rule change at this time, the Commission finds that it does
not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\28\
---------------------------------------------------------------------------

    \28\ The Commission may in the future determine it appropriate
to consider or address competitive issues related to exclusive
licensing of index option products on a more comprehensive level.
---------------------------------------------------------------------------

B. Position Limits

    Under C2's proposal, position limits would not apply to SPXPM. One
commenter argues that position limits should apply to SPXPM.\29\ This
commenter notes that, since 2001 when the Commission approved a CBOE
rule filing to remove all position limits for SPX options,\30\ the
Commission has generally expected exchanges to apply a model, such as
the Dutt-Harris model, to determine the appropriate position limits for
all new index options products.\31\ Because C2 claims that the product
is new and non-fungible, the commenter argues that the Commission
should apply the Dutt-Harris model to require C2 to impose position
limits on SPXPM.\32\
---------------------------------------------------------------------------

    \29\ See ISE Letter 1, supra note 4, at 6.
    \30\ See Securities Exchange Act Release No. 44994 (October 26,
2002), 66 FR 55722 (November 2, 2001). In this filing, the
Commission relied in part on CBOE's ability to provide enhanced
surveillance and reporting safeguards to detect and deter trading
abuses arising from the elimination of position and exercise limits
in options on the S&P 500.
    \31\ See ISE Letter 1, supra note 4, at 6. In a 2005 paper from
Hans Dutt and Lawrence Harris, titled ``Position Limits for Cash-
Settled Derivative Contracts'' (``Dutt-Harris Paper'') the authors
developed a model to determine appropriate position limits for cash-
settled index derivatives. The authors concluded that the then-
prevailing position limits were lower than the model suggested would
be appropriate for many derivative contracts. The authors also
concluded, however, that position limits are not as important for
broad-based index derivative contracts that are cash settled because
they are composed of highly liquid and well-followed securities. As
such, the authors note that it would require very high trading
volumes to manipulate the underlying securities and, consequently,
any attempted manipulation would be more easily detectable and
prosecutable.
    \32\ See ISE Letter 1, supra note 4, at 6.
---------------------------------------------------------------------------

    In its response to comments, C2 notes that the Dutt-Harris Paper
acknowledges that S&P 500 options have, and should have,
extraordinarily large position limits and Dutt-Harris observes that
position limits are most useful when market surveillance is
inadequate.\33\ C2 argues that position limits suggested by the Dutt-
Harris model for an S&P 500 index option would be so large as to be
irrelevant and that positions of such magnitude would attract scrutiny
from surveillance systems that would, as a consequence, serve as an
effective substitute for position limits.\34\ Further, in its response
letter, C2 summarizes the circumstances and considerations relied upon
by the Commission when it approved the elimination of position limits
on CBOE's S&P 500 index option, including the enormous capitalization
of the index and enhanced reporting and surveillance for the
product.\35\ Thus, because of the enhanced reporting and surveillance
for this product, described below, C2 argues that the absence of
position limits on its proposed S&P 500 index option would not be
inconsistent with Dutt-Harris.\36\
---------------------------------------------------------------------------

    \33\ See C2 Response Letter, supra note 5, at 5.
    \34\ See id. Generally, position limits are intended to prevent
the establishment of options positions that could be used or that
might create incentives to manipulate or disrupt the underlying
market to benefit the holder of the options. See, e.g., Securities
Exchange Act Release Nos. 39489 (December 24, 1997), 63 FR 276
(January 5, 1998) (SR-CBOE-97-11) (approving increases to the
position and exercise limits for options on the Standard & Poor's
100 Stock Index (``OEX''), the OEX firm facilitation exemption, and
the OEX index hedge exemption); Dutt-Harris Paper, supra note 31
(``Position limits directly limit manipulation by limiting the size
of derivative positions that would benefit from manipulative
practices.'').
    \35\ See C2 Response Letter, supra note 5, at 5-6. C2 represents
in its response letter that it would monitor trading in p.m.-settled
S&P 500 index options in the same manner as CBOE does for other
broad-based index options with no position limits. See id. at 6.
    \36\ See id.
---------------------------------------------------------------------------

    The Exchange represents, however, that it will implement enhanced
reporting requirements pursuant to its Rule 4.13 (Reports Related to
Position Limits) and Interpretation and Policy .03 to its Rule 24.4
(Position Limits for Broad-Based Index Options), which sets forth the
reporting requirements for certain broad-based indexes that do not have
position limits.\37\
---------------------------------------------------------------------------

    \37\ See Notice, supra note 3, at note 4 and accompanying text.
---------------------------------------------------------------------------

    In 2001, when the Commission permanently approved a CBOE rule
(which had been in place for a two-year pilot period) to eliminate
position limits on SPX (as well as options on the Dow Jones Industrial
Average and the S&P 100 index),\38\ the Commission stated that because
the S&P 500 index is a broad-based index with a considerable
capitalization, manipulation of the 500 component stocks underlying the
index would require extraordinarily large positions that would be
readily detectable by enhanced surveillance procedures. In its approval
order, the Commission relied in part on CBOE's enhanced surveillance
and reporting procedures that are intended to allow CBOE to detect and
deter trading abuses in the absence of position limits. In particular,
CBOE requires its members to submit a report to CBOE when the member
builds a position of 100,000+ contracts. Among other things, the report
includes a description of the

option position, whether the position is hedged (and, if so, a
description of the hedge), and whether collateral was used (and, if so,
a description of the collateral). This enhanced surveillance and
reporting arrangement allows CBOE to continually monitor, assess, and
respond to any concerns at an early stage. To complement its enhanced
surveillance and reporting requirements, CBOE has the ability to
intervene to impose additional margin or assess capital charges when
warranted. Thus, together with the ``enormous capitalization'' \39\ of
the S&P 500 index and the deep and liquid markets for the S&P 500
stocks, the Commission found that CBOE's enhanced surveillance
procedures ``reduce[] concerns regarding market manipulation or
disruption in the underlying market.'' \40\
---------------------------------------------------------------------------

    \38\ See Securities Exchange Act Release No. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22).
    \39\ Id. at 55723.
    \40\ Id.
---------------------------------------------------------------------------

    C2 has represented in this filing that its enhanced surveillance
requirements and procedures for SPXPM would be identical to the
surveillance and reporting requirements and procedures used by CBOE
with respect to SPX. Accordingly, the Commission believes that position
limits would not be necessary for SPXPM options as long as C2 has in
place and enforces effective enhanced surveillance and reporting
requirements. These enhanced procedures will allow the Exchange to see,
with considerable advance notice, the accumulation of large positions,
which it can then monitor more closely as necessary and take additional
action if appropriate.\41\
---------------------------------------------------------------------------

    \41\ In addition, the Commission notes that C2 would have access
to information through its membership in the Intermarket
Surveillance Group with respect to the trading of the securities
underlying the S&P 500 index, as well as tools such as large options
positions reports to assist its surveillance of SPXPM options.
    In approving the proposed rule change, the Commission also has
relied upon the Exchange's representation that it has the necessary
systems capacity to support new options series that will result from
this proposal. See Notice, supra note 3, at 12777.
---------------------------------------------------------------------------

C. Reintroduction of P.M. Settlement

    When cash-settled \42\ index options were first introduced in the
1980s, they generally utilized closing-price settlement procedures
(i.e., p.m. settlement).\43\ The Commission became concerned about the
impact of p.m. settlement on cash-settled index options on the markets
for the underlying stocks at the close on expiration Fridays.\44\ These
concerns were heightened during the quarterly expirations of the third
Friday of March, June, September and December when options, index
futures, and options on index futures all expire simultaneously. P.m.-
settlement was believed to have contributed to above-average volume and
added market volatility on those days, which sometimes led to sharp
price movements during the last hour of trading.\45\ As a consequence,
the close of trading on the quarterly expiration Friday became known as
the ``triple witching hour.'' Besides contributing to investor anxiety,
heightened volatility during the expiration periods created the
opportunity for manipulation and other abusive trading practices in
anticipation of the liquidity constraints.\46\
---------------------------------------------------------------------------

    \42\ The seller of a ``cash settled'' index option pays out the
cash value of the applicable index on expiration or exercise. A
``physically settled'' option, like equity and ETF options, involves
the transfer of the underlying asset rather than cash. See
Characteristics and Risks of Standardized Options, available at:
http://www.theocc.com/components/docs/riskstoc.pdf, for a discussion
of settlement.
    \43\ The exercise settlement value for a p.m.-settled index
option is generally determined by reference to the reported level of
the index as derived from the closing prices of the component
securities (generally based on the closing prices as reported by the
primary exchange on which the stock is listed) on the last business
day before expiration (e.g., the Friday before Saturday expiration).
See Characteristics and Risks of Standardized Options, available at:
http://www.theocc.com/components/docs/riskstoc.pdf, for a discussion
of settlement value.
    \44\ See, e.g., Securities Exchange Act Release Nos. 45956 (May
17, 2002), 67 FR 36740 (May 24, 2002) (adopting release concerning
cash settlement and regulatory halt requirements for security
futures products) (``Regulators and self-regulators were concerned
that the liquidity constraints faced by the securities markets to
accommodate expiration-related buy or sell programs at the market
close on expiration Fridays could exacerbate ongoing market swings
during an expiration and could provide opportunities for entities to
anticipate these pressures and enter orders as part of manipulative
or abusive trading practices designed to artificially drive up or
down share prices.''); 24367 (April 17, 1987), 52 FR 13890 (April
27, 1987) (SR-CBOE-87-11) (order approving a proposal for S&P 500
index options with an exercise settlement value based on an index
value derived from opening, rather than closing, prices); and 32868
(September 10, 1993), 58 FR 48687 (September 10, 1993) (notice of
filing and order granting accelerated approval of proposed rule
change by the New York Stock Exchange, Inc. (``NYSE'') relating to
changes in auxiliary closing procedures for expiration days)
(stating, ``[a]s long as some index derivative products continue to
expire based on closing stock prices on expiration Fridays, the
Commission agrees with the NYSE that such procedures are necessary
to provide a mechanism to handle the potential large imbalances that
can be engendered by firms unwinding index derivative related
positions''). The cash settlement provisions of stock index futures
and options contracts facilitated the growth of sizeable index
arbitrage activities by firms and professional traders and made it
relatively easy for arbitrageurs to buy or sell the underlying
stocks at or near the market close on expiration Fridays (i.e., the
third Friday of the expiration month) in order to ``unwind''
arbitrage-related positions. These types of unwinding programs at
the close on expiration Fridays often severely strained the
liquidity of the securities markets as the markets, and in
particular the specialists on the NYSE, faced pressure to attract
contra-side interest in the limited time that was permitted to
establish closing prices. See Securities Exchange Act Release No.
44743 (August 24, 2001), 66 FR 45904 (August 30, 2001) (File No. S7-
15-01) (proposing release concerning cash settlement and regulatory
halt requirements for security futures products).
    \45\ See, e.g., Securities Exchange Act Release Nos. 24276
(March 27, 1987); 52 FR 10836 (April 3, 1987) (notice of filing and
order granting accelerated approval to a proposed rule change by the
NYSE relating to opening price settlement of expiring NYSE Composite
and Beta Index options); 37894 (October 30, 1996), 61 FR 56987
(November 5, 1996) (notice of filing and order granting accelerated
approval of proposed rule change by the NYSE permanently approving
the expiration day auxiliary closing procedures pilot program); and
45956 (May 17, 2002), 67 FR 36740 (May 24, 2002) (adopting release
concerning cash settlement and regulatory halt requirements for
security futures products) (reaffirming the Commission's view of the
advantages of a.m. settlement). See also Hans Stoll and Robert
Whaley, Expiration Day Effects of Index Options & Futures (March 15,
1986) (noting that share volume on the NYSE was much higher in the
last hour of a quarterly expiration Friday when both options and
futures expire than on non-expiration Fridays).
    \46\ See, e.g., Securities Exchange Act Release No. 45956 (May
17, 2002), 67 FR 36740 (May 24, 2002) (adopting release concerning
cash settlement and regulatory halt requirements for security
futures products) (explaining that entities could take advantage of
illiquidity resulting from the unwinding of arbitrage-related
positions on expiration Fridays to manipulate share prices).
---------------------------------------------------------------------------

    In light of the concerns with p.m. settlement and to help
ameliorate the price effects associated with expirations of p.m.-
settled, cash-settled index products, in 1987, the Commodity Futures
Trading Commission (``CFTC'') approved a rule change by the Chicago
Mercantile Exchange to provide for a.m. settlement for index futures,
including futures on the S&P 500 index.\47\ The Commission subsequently
approved a rule change by CBOE to list and trade a.m.-settled S&P 500
index options.\48\ In

1992, the Commission approved CBOE's proposal to transition all of its
European-style cash-settled options on the S&P 500 index to a.m.
settlement.\49\ Thereafter, the Commission approved proposals by the
options markets to transfer most of their cash-settled index products
to a.m. settlement.\50\
---------------------------------------------------------------------------

    \47\ See Proposed Amendments Relating to the Standard and Poor's
500, the Standard and Poor's 100 and the Standard Poor's OTC Stock
Price Index Futures Contract, 51 FR 47053 (December 30, 1986)
(notice of proposed rule change from the Chicago Mercantile
Exchange). See also Securities Exchange Act Release No. 24367 (April
17, 1987), 52 FR 13890 (April 27, 1987) (SR-CBOE-87-11) (noting that
the Chicago Mercantile Exchange moved the S&P 500 futures contract's
settlement value to opening prices on the delivery date).
    The exercise settlement value for an a.m.-settled index option
is determined by reference to the reported level of the index as
derived from the opening prices of the component securities on the
business day before expiration.
    \48\ See Securities Exchange Act Release No. 24367 (April 17,
1987), 52 FR 13890 (April 27, 1987) (SR-CBOE-87-11) (order approving
a proposal for S&P 500 index options with an exercise settlement
value based on an index value derived from opening, rather than
closing, prices). At the time it approved CBOE's introduction of
a.m. settlement for cash-settled index options, the Commission
identified two benefits to a.m. settlement for cash-settled index
options. See Securities Exchange Act Release No. 30944 (July 21,
1992), 57 FR 33376 (July 28, 1992) (SR-CBOE-92-09). First, it
provides additional time to test price discovery, as market
participants have the remainder of the regular trading day to adjust
to opening session price movements and determine whether those
movements reflect changes in fundamental values or short-term supply
and demand conditions. Second, it provides more opportunity to trade
out of positions acquired during the opening auction. In this
respect, attracting contra-side interest to a single-priced auction
to offset an order imbalance (such as those attributable to index
arbitrage) may more readily be achieved in an opening auction on
Friday morning than a closing auction on Friday afternoon because
the morning session allows market participants that have provided
that liquidity to have the remainder of the regular trading day to
liquidate their positions. In contrast, positions acquired in a
Friday afternoon closing auction generally cannot be liquidated as
readily and efficiently until the following Monday. Holding
positions overnight, or over a weekend, may entail greater risk than
holding intraday positions. To accept such risk (real or perceived),
market participants generally will require a greater premium, which
may translate into greater price concessions, and thus lead to
greater volatility in the closing auction. In other words, a
consequence of p.m. settlement may be enhanced volatility at the
close. See, e.g., Securities Exchange Act Release No. 44743 (August
24, 2001), 66 FR 45904 at 45908 (August 30, 2001) (``Steep discounts
(premiums) were necessary in part because traders who bought (sold)
stocks to offset unwinding programs had to maintain their newly
acquired long (short) positions over the weekend--during which time
they were subject to considerable market risk.'').
    \49\ See Securities Exchange Act Release No. 30944 (July 21,
1992), 57 FR 33376 (July 28, 1992) (SR-CBOE-92-09) (order approving
CBOE's proposal relating to position limits for SPX index options
based on the opening price of component securities).
    \50\ CBOE's index options on the S&P 100 (OEX), however, kept
their p.m. settlement. See Securities Exchange Act Release No. 30944
(July 21, 1992), 57 FR 33376 (July 28, 1992) (SR-CBOE-92-09). No
futures or options on futures trade on the S&P 100 index. Other
types of options utilize p.m. settlement, including physically-
settled single-stock options and options on ETFs.
---------------------------------------------------------------------------

    The Commission and the CFTC noted the benefits of a.m. settlement
in a 2001 joint release concerning securities futures, where they
observed that ``the widespread adoption of opening-price settlement
procedures in index futures and options has served to mitigate the
liquidity strains that had previously been experienced in the
securities markets on expirations.'' \51\
---------------------------------------------------------------------------

    \51\ See Securities Exchange Act Release No. 44743 (August 24,
2001), 66 FR 45904 at 45908 (August 30, 2001) (proposing release for
a joint rule between the Commission and the CFTC generally
stipulating, among other provisions, that the final settlement price
for each cash-settled security futures product fairly reflect the
opening price of the underlying security or securities). See also
Securities Exchange Act Release No. 45956 (May 17, 2002), 67 FR
36740 at 36741-42 (May 24, 2002) (adopting release concerning cash
settlement and regulatory halt requirements for security futures
products in which the Commission reaffirmed the advantages of a.m.
settlement) (``[O]pening price settlement procedures offered several
features that enabled the securities markets to better handle
expiration-related unwinding programs.'').
---------------------------------------------------------------------------

    Since 1992, the Commission has approved proposals that provide for
cash-settled index options with p.m. settlement on a limited basis for
options products that generally are characterized by lower relative
volume and that generally do not involve settlement on the third Friday
of a month.\52\ At the time of each approval, the Commission stated
that limited approvals on a pilot basis would allow the exchange and
the Commission to monitor the potential for adverse market effects and
modify or terminate the pilots, if necessary. Notably, with the
exception of FLEX Index options, these recently-approved p.m.-settled
contracts do not involve expiration on the third Friday of the month.
These new contracts, including FLEX, have also been characterized by
limited volume, and would not be expected to have a pronounced effect
on volatility in the underlying securities at the close as a result.
---------------------------------------------------------------------------

    \52\ In particular, in 1993, the Commission approved CBOE's
proposal to list and trade p.m.-settled, cash-settled options on
certain broad-based indexes expiring on the first business day of
the month following the end of each calendar quarter (``Quarterly
Index Expirations''). See Securities Exchange Act Release No. 31800
(February 1, 1993), 58 FR 7274 (February 5, 1993) (SR-CBOE-92-13).
In 2006, the Commission approved, on a pilot basis, CBOE's listing
of p.m.-settled index options expiring on the last business day of a
calendar quarter (``Quarterly Options Series''). See Securities
Exchange Act Release No. 54123 (July 11, 2006), 71 FR 40558 (July
17, 2006) (SR-CBOE-2006-65). In January 2010, the Commission
approved CBOE's listing of p.m.-settled FLEX options on a pilot
basis.\52\ See Securities Exchange Act Release No. 61439 (January
28, 2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) (order
approving rule change to establish a pilot program to modify FLEX
option exercise settlement values and minimum value sizes). FLEX
options provide investors with the ability to customize basic option
features including size, expiration date, exercise style, and
certain exercise prices. Prior to 2010, only a.m. settlement based
on opening prices of the underlying components of an index could be
used to settle a FLEX index option if it expired on, or within two
business days of, a third-Friday-of-the-month expiration (``Blackout
Period''). Last year, the Commission approved a pilot program to
permit FLEX index options with p.m. settlement that expire within
the Blackout Period. See Securities Exchange Act Release No. 61439
(January 28, 2010), 75 FR 5831 (February 4, 2010) (SR-CBOE-2009-
087). In September 2010, the Commission approved CBOE's listing of
p.m.-settled End of Week expirations (expiring on each Friday, other
than the third Friday) and End of Month expirations (expiring on the
last trading day of the month) for options on broad-based indexes,
also on a pilot basis. See Securities Exchange Act Release No. 62911
(September 14, 2010), 75 FR 57539 (September 21, 2010) (SR-CBOE-
2009-075).
---------------------------------------------------------------------------

    In response to C2's proposal, two commenters raise concerns over
the reintroduction of p.m. settlement on a potentially popular index
derivative and the possible impact that doing so could have on the
underlying cash equities markets.\53\ One commenter urges the
Commission to consider why markets went to a.m. settlement in the early
1990s and opines that hindsight supports the conclusion that a.m.
settlement has been good for the markets.\54\ While acknowledging that
the answer is not clear, the commenter asks the Commission to consider
whether it is now safe to return to the dominance of p.m.-settled index
options and futures.\55\ However, this commenter submitted a subsequent
letter in which he agreed with the Exchange that ``conditions today are
vastly different'' from those that drove the transition to a.m.
settlement.\56\ The commenter concludes that C2's proposal should be
approved on a pilot basis, which would allow the Commission to collect
data to closely analyze the impact of the proposal.\57\
---------------------------------------------------------------------------

    \53\ See ISE Letter 1, supra note 4, at 4-5; ISE Letter 2, supra
note 4, at 2-3; and Mayne Letter 1, supra note 4, at 1-2.
    \54\ See Mayne Letter 1, supra note 4, at 1 (noting that
concerns with p.m. settlement ``led to the advent of the far more
innocuous, and perhaps more fair `AM-Print' method of determining
the final value for expiring index options. To judge by the
abatement of the negative press, hindsight would seem to support
that the AM-Print made for a more level playing field.'')
    \55\ See id. at 2.
    \56\ See Mayne Letter 2, supra note 4, at 1.
    \57\ See id.
---------------------------------------------------------------------------

    A different commenter describes the history behind the transition
to a.m. settlement and criticizes C2 for trivializing that history.\58\
This commenter argues that a mainstream return to the ``discredited''
p.m. settlement would ``risk undermining the operation of fair and
orderly financial markets.'' \59\ The commenter notes that experience
with the ``flash crash'' of May 6, 2010 demonstrates that the current
market structure struggles to find price equilibriums, and that
dispersed trading is a ``mirage'' as participants often flock to the
same liquidity centers in time of stress.\60\ In its July comment
letter, the commenter took a slightly different approach by arguing
that fragmentation is the biggest change to the markets since 1987 when
markets moved to a.m. settlement.\61\ The commenter notes that even
with almost all volume concentrated on one exchange back in the 1980s,
the markets could not address closing liquidity and volatility concerns
and prevent market disruptions on ``triple witch'' settlement

dates.\62\ The commenter believes that fragmentation makes it almost
impossible for any single market to concentrate liquidity at the close
to produce an effective clearing price at times of market
volatility.\63\ In addition, the commenter argues that exchange-
specific closing procedures are only applicable to trading on one
exchange, which represents a small fraction of the overall market
today, and therefore will have little ability to dampen market
volatility.\64\ The commenter believes that C2's proposal would
exacerbate liquidity strains by reintroducing an extraordinary market
event--the triple witching hour--and argues that allowing S&P 500 index
options to be based on closing settlement prices, even on a pilot
basis, would re-introduce the potential for extreme market volatility
at expiration.\65\
---------------------------------------------------------------------------

    \58\ See ISE Letter 1, supra note 4, at 4.
    \59\ Id.
    \60\ See id.
    \61\ See ISE Letter 3, supra note 8, at 2.
    \62\ See id.
    \63\ See id.
    \64\ See id.
    \65\ See ISE Letter 1, supra note 4, at 5. This commenter also
notes that recently-imposed circuit breakers in the cash equities
markets do not apply in the final 25 minutes of trading. See id.
---------------------------------------------------------------------------

    In addition, the commenter states that Commission approval of C2's
proposal would lead to the reintroduction of multiple p.m.-settled
derivatives and argues that while the SPXPM pilot would be troubling,
having multiple pilots operating simultaneously would undermine the
industry-wide move to a.m. settlement.\66\ The Commission generally
considers relevant information available to it at the time it reviews
each filing in evaluating whether the filing is consistent with the
Act.\67\
---------------------------------------------------------------------------

    \66\ See ISE Letter 3, supra note 8, at 3.
    \67\ See 15 U.S.C. 78s(b) (concerning Commission consideration
of proposed rule changes submitted by self-regulatory
organizations).
---------------------------------------------------------------------------

    Taking the opposite view, two commenters urge the Commission to
approve the proposal on a pilot basis.\68\ One commenter asserts its
belief that C2's proposal will not cause greater volatility in the
underlying securities of the S&P 500 index.\69\ This commenter opines
that whether an options contract is p.m.-settled as opposed to a.m.-
settled is not a contributing factor to volatility, and the commenter
notes that there is more liquidity in the securities underlying the S&P
500 index at the close compared to the opening.\70\ The commenter
states that exchanges are well equipped to handle end-of-day volume and
that existing p.m.-settled products do not contribute to increased
volatility.\71\ The other commenter states that the reintroduction of
p.m. settlement is long overdue and would attract liquidity from dark
pools, crossing mechanisms, and the over-the-counter markets.\72\
---------------------------------------------------------------------------

    \68\ See IMC Letter, supra note 4, at 1-2 and JP Letter, supra
note 4.
    \69\ See IMC Letter, supra note 4, at 1.
    \70\ See id.
    \71\ See id. at 2.
    \72\ See JP Letter, supra note 4.
---------------------------------------------------------------------------

    In its initial response to comments, C2 argues that the concerns
from 18 years ago that led to the transition to a.m. settlement for
index derivatives have been largely mitigated.\73\ C2 argues that
expiration pressure in the underlying cash markets at the close has
been greatly reduced with the advent of multiple primary listing and
unlisted trading privilege markets, and that trading is now widely
dispersed among many market centers.\74\ C2 further argues that opening
procedures in the 1990s were deemed acceptable to mitigate one-sided
order flow driven by index option expiration and that today's more
sophisticated automated closing procedures should afford a similar, if
not greater, level of comfort.\75\ Specifically, C2 notes that many
markets, notably The NASDAQ Stock Market LLC (``Nasdaq'') and the NYSE,
now utilize automated closing cross procedures and have closing order
types that facilitate orderly closings, and that these closing
procedures are well-equipped to mitigate imbalance pressure at the
close.\76\ In addition, C2 believes that after-hours trading now
provides market participants with an alternative to help offset market-
on-close imbalances.\77\
---------------------------------------------------------------------------

    \73\ See C2 Response Letter, supra note 5, at 4.
    \74\ See id.
    \75\ See C2 Response Letter, supra note 5, at 4.
    \76\ See id.
    \77\ See id. at 2.
---------------------------------------------------------------------------

    C2 also notes that for roughly five years (1987-1992) CBOE listed
both a.m.- and p.m.-settled SPX and did not observe any related market
disruptions during that period in connection with the dual a.m./p.m.
settlement.\78\ Finally, C2 believes that p.m.-settled options
predominate in the over-the-counter (``OTC'') market, and C2 is not
aware of any adverse effects in the underlying cash markets
attributable to the considerable volume of OTC trading.\79\ C2 asserts
that given the changes since the 1980s, concerns with p.m. settlement
are ``misplaced'' and have been ``negated'' now that closing procedures
on the cash equities markets have become more automated with real-time
data feeds that are distributed to a wider array of market
participants.\80\
---------------------------------------------------------------------------

    \78\ See Notice, supra note 3, at 12776.
    \79\ See id.
    \80\ See C2 Response Letter, supra note 5, at 2 and 4. In its
comment letter, ISE notes that C2's claim that electronic trading
can smooth out the price-setting process is ``disingenuous'' as
recent history suggests that the opposite may be true in some cases
(such as the market events of May 6, 2010). See ISE Letter 1, supra
note 4, at 5.
---------------------------------------------------------------------------

    The Commission agrees with C2 that the closing cross mechanisms on
the primary listing stock markets have matured considerably since the
late 1980s. Closing procedures used by the primary equity markets now
offer a more transparent and automated process for attracting contra-
side interest and determining closing prices in a manner that is
comparable to the process used to determine opening prices.\81\ The
Commission recognizes, however, that the ability of such procedures to
counter-balance any potential negative effects that could stem from
p.m. settlement is dependent on their ability to attract liquidity in a
fragmented market to the primary listing exchanges during a very
concentrated window of time at the close of trading on expiration
Fridays. Consequently, the potential effect that p.m.-settlement of
cash-settled index options could have on the underlying cash equities
markets at expiration remains unclear and the Commission remains
concerned about

the possible effect on volatility at the close of a return to p.m.
settlement for cash-settled index options.\82\
---------------------------------------------------------------------------

    \81\ Nasdaq (see Nasdaq Rule 4754), NYSE (see NYSE Rule 123C),
and NYSE Amex LLC (``NYSE Amex'') (see NYSE Amex Rule 123C) all have
automated closing cross procedures for their equities markets, which
are designed to attract liquidity, to determine a price for a
security that minimizes any imbalance, and to match orders at the
4:00 p.m. close. Participants of these exchanges generally receive
frequently-disseminated market data reports reflecting any
imbalance, which is intended to attract offsetting interest to
minimize or eliminate an imbalance heading into the close. NYSE
Arca, Inc. has closing procedures (NYSE Arca Rule 7.35), but it only
conducts a closing cross for securities in which it is the primary
listing market as well as for all exchange-listed derivatives.
    Additionally, to minimize the potential for price swings at the
close, Nasdaq provides that the closing price must be within an
acceptable range of 10% of the midpoint of the NBBO, while the NYSE
permits the Designated Market Maker in a stock to request that the
exchange extend its trading day to not longer than 4:30 p.m. to
allow for the solicitation and entry of orders that are specifically
solicited to offset an imbalance existing as of 4 p.m. To further
minimize selling pressure at the NYSE, market-on-close and limit-on-
close orders may be entered after 3:45 p.m. only if they offset an
imbalance. The NYSE also provides for closing-only orders that only
execute if they offset an imbalance. The Commission views these
closing cross procedures as a significant change in how orders are
handled at the close of trading that could potentially help reduce
volatility at the close caused by p.m. settlement.
    C2 also notes that SPXPM expiration dates would be predetermined
and known in advance and, as a consequence, this awareness could
facilitate the generation of contra-side trading interest. See C2
Response Letter, supra note 5, at 3. The potential for reoccurring
heightened volatility during these expiration periods may, however,
increase the opportunity for manipulation and other abusive trading
practices in anticipation of the liquidity constraints. To the
extent such volatility was possible, active surveillance and robust
enforcement activity by C2 and other self-regulatory organizations
around expiration dates would help to address the potential for
abusive trading.
    \82\ The Commission's concern with the potential effect that
p.m.-settlement of cash-settled index options could have on the
underlying cash equities markets at expiration takes into
consideration, as C2 notes, that the use of closing prices by retail
and institutions investors is widespread. See C2 Letter 3, supra
note 8, at 6. For example, mutual funds use closing prices to
calculate their net asset values. Therefore, any event or product
that potentially introduces additional volatility into the process
of determining closing prices has the potential to harm investors
and the public interest.
---------------------------------------------------------------------------

    C2 cites to the Commission's recent approval of a series of
proposals that authorized the expansion of a limited subset of options
products to p.m. settlement along with data collected in connection
with those products as revealing no evidence that p.m. settlement is
likely to have a disruptive effect on volatility at the close.\83\ We
do not believe that such an inference necessarily can be drawn. These
prior approvals involved sub-categories of options that are generally
characterized by relatively low volume and thus would not be expected
to have a pronounced effect on volatility in the underlying securities
at the close on expiration.\84\ Further, many of these products are not
authorized for listing with expiration on the third Friday of a month
when other cash-settled index derivatives expire. For example, C2
mentions CBOE's experience with End-of-Week p.m.-settled options (which
it notes is the most heavily traded of CBOE's new special-dated
expiration products), and concludes that they fail to show any evidence
of disruptive volatility on the settlement days for these
contracts.\85\ Despite the fact that End-of-Week p.m.-settled options
constitute over 7% of CBOE's S&P 500 index option volume, their volume
does not compare to that of CBOE's SPX product, which accounts for 60%
of all index options trading. For this reason, it is difficult to draw
any conclusions about the potential impact of p.m.-settled S&P 500
index options on the market for the underlying component stocks based
on the existing p.m.-settled cash-settled options. Further, past
experience suggests that the potential impact would be more significant
if both index options and index futures (and options on index futures)
were offered with p.m. settlement.
---------------------------------------------------------------------------

    \83\ See C2 Letter 3, supra note 8, at 4-5.
    \84\ We note that historical experience with respect to more
heavily traded index options and index futures indicates that p.m.
settlement carries additional risks for enhanced volatility on
settlement days. See, e.g., Hans Stoll and Robert Whaley, Expiration
Day Effects of Index Options & Futures (March 15, 1986) (concluding
that price effects ``are observable on quarterly futures expirations
* * * [and] [t]he volatility of prices is significantly higher on
such expiration days, and the stock market indices tend to fall on
such expiration days.'').
    \85\ See id. at 5.
---------------------------------------------------------------------------

    While the enhanced closing processes on the primary listing markets
may serve to mitigate some of the risk that imbalances on the
underlying cash markets prior to the close could lead to excess
volatility, the extent of that mitigation is unclear. A pilot program
would provide an opportunity to observe and analyze the actual effects
on the underlying cash markets of SPXPM. Further, to the extent that
trading interest is redirected to the primary markets during times of
stress, as one commenter noted, it could be conducive to addressing an
imbalance to concentrate liquidity on the primary markets during the
close. In particular, those markets conduct automated closing cross
procedures, described above,\86\ that are designed to more efficiently
disseminate information broadly and attract and offset imbalances. We
note, however, that despite C2's emphasis on the higher volumes in
today's markets compared with the 1980s and the dispersion of trading
to more venues,\87\ volume statistics are not necessarily indicative or
predictive of the level of available liquidity.\88\
---------------------------------------------------------------------------

    \86\ See supra note 81.
    \87\ See id.
    \88\ See, e.g., Findings Regarding the Market Events of May 6,
2010, Report of the Staffs of the CFTC and SEC to the Joint Advisory
Committee on Emerging Regulatory Issues, available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf, at page 6
(``As the events of May 6 demonstrate, especially in times of
significant volatility, high trading volume is not necessarily a
reliable indicator of market liquidity.'').
---------------------------------------------------------------------------

    Finally, C2 estimates that 95% of OTC options based on the S&P 500
index are p.m.-settled,\89\ and states that SPXPM will attract some of
that trading interest. C2 notes that doing so would be consistent with
the objectives of the Dodd-Frank Wall Street Reform and Consumer
Protection Act and could help mitigate counterparty risks faced by OTC
market participants.\90\ The Commission agrees that the proposal could
benefit investors to the extent it attracts trading in p.m.-settled S&P
500 index options from the opaque OTC market to the more transparent
exchange-listed markets.
---------------------------------------------------------------------------

    \89\ See C2 Letter 3, supra note 8, at 13.
    \90\ See id.
---------------------------------------------------------------------------

    Further, C2's proposal will offer investors another investment
option through which they could obtain and hedge exposure to the S&P
500 stocks. In addition, C2's proposal will provide investors with the
ability to trade an option on the S&P 500 index in an all-electronic
market, which may better meet the needs of investors who may prefer to
trade electronically.\91\ Accordingly, C2's proposal will provide
investors with added flexibility through an additional product that may
be better tailored to meet their particular investment, hedging, and
trading needs.
---------------------------------------------------------------------------

    \91\ See, e.g., Exchange Capital Resources Letter, supra note 8,
at 3 (stating in part that ``* * * the addition of the SPXPM product
will offer the investor greater flexibility and opportunity to
participate in S&P 500 option product line.'')
---------------------------------------------------------------------------

    To assist the Commission in assessing any potential impact of a
p.m.-settled S&P 500 index option on the options markets as well as the
underlying cash equities markets, as discussed above,\92\ C2 has
proposed to submit data to the Commission on a confidential basis in
connection with the pilot. The Commission believes that C2's proposed
fourteen-month pilot, together with the data and analysis that C2 will
provide to the Commission, will allow C2 and the Commission to monitor
for and assess the potential for adverse market effects. Specifically,
the data and analysis will assist the Commission in evaluating the
effect of allowing p.m. settlement for S&P 500 index options on the
underlying component stocks.
---------------------------------------------------------------------------

    \92\ See Section II (Description of the Proposal).
---------------------------------------------------------------------------

    In light of the fact that approval of C2's proposal would be a
change from a.m. settlement for cash-settled index options, the
Commission instituted proceedings to determine whether to approve or
disapprove the proposal. In particular, through specific requests for
comment and data, the Commission solicited input from market
participants on the potential impact on the markets, particularly the
underlying cash equities markets.
    As discussed above, the Commission remains concerned about the
potential impact on the market at expiration for the underlying
component stocks for a p.m.-settled, cash-settled index option such as
SPXPM. The potential impact today remains unclear, given the
significant changes in the closing procedures of the primary markets
over the past two decades. The Commission is mindful of the historical
experience with the impact of p.m. settlement of cash-settled index
derivatives on the underlying cash markets, discussed at length above,
but recognizes, however, that these risks may be mitigated today by the
enhanced closing procedures that are now in use at the primary equity
markets.
    Finally, approval of C2's proposal on a pilot basis will enable the
Commission to collect current data to assess and monitor for any
potential for impact on markets, including the underlying cash

equities markets. In particular, the data collected from C2's pilot
program will help inform the Commission's consideration of whether the
SPXPM pilot should be modified, discontinued, extended, or permanently
approved. It also could benefit investors and the public interest to
the extent it attracts trading in p.m.-settled S&P 500 index options
from the opaque OTC market to the more transparent exchange-listed
markets, where trading in the product will be subject to exchange
trading rules and exchange surveillance.
    Thus, based on the discussion above, the Commission finds that C2's
current proposal is consistent with the Act, including Section 6(b)(5)
thereof in that it is designed to remove impediments to and perfect the
mechanism of a free and open market, and, in general, to protect
investors and the public interest. In light of the enhanced closing
procedures and the potential benefits to investors discussed above, the
Commission finds that it is appropriate and consistent with the Act to
approve C2's proposal on a pilot basis. The collection of data during
the pilot and C2's active monitoring of any effects of SPXPM on the
markets will help the Commission assess the impact of p.m. settlement
in today's market.

V. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\93\ that the proposed rule change (SR-C2-2011-008) be, and hereby
is, approved on a 14-month pilot basis only.
---------------------------------------------------------------------------

    \93\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23045 Filed 9-8-11; 8:45 am]
BILLING CODE 8011-01-P