Responses to these frequently asked questions on Rule 13h-1 under the Securities Exchange Act of 1934 and Form 13H were prepared by and represent the views of the staff of the Division of Trading and Markets (“Staff”). They are not rules, regulations, or statements of the Securities and Exchange Commission (“Commission”). Further, the Commission has neither approved nor disapproved these interpretive answers. Additional information on Rule 13h-1 and Form 13H can be found in the Commission’s adopting release, available at: http://www.sec.gov/rules/final/2011/34-64976.pdf
For Further Information Contact: Richard Holley III, Assistant Director, at (202) 551-5614, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.
Section 1. Large Trader Identification
Question 1.1: What is an NMS Security?
Answer: “NMS Security” is defined in Rule 600(b)(46) (17 CFR 242.600(b)(46)) as “any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options.”
In general, the term “NMS Security” refers to exchange-listed equity securities and standardized options, but does not include exchange-listed debt securities, securities futures, or open-end mutual funds, which are not currently reported pursuant to an effective transaction reporting plan.
As of March 2012, the current effective transaction reporting plans and the effective national market system plan for the reporting of transactions in listed options that are relevant for purposes of Rule 13h-1 include:
The Consolidated Tape Association (“CTA”) Plan applies to the last sale price reporting of an “Eligible Security” as defined in the plan. In general terms, the CTA plan applies to New York Stock Exchange (Network A) and NYSE Arca, NYSE Amex and other regional exchange (Network B) listed common stock, long-term warrants, preferred stock, and American Depository Receipts. The text of the CTA Plan is available at: http://www.nyxdata.com/CTA
The OTC UTP Plan applies to the consolidated reporting of transactions for issues listed on the NASDAQ Stock Exchange. The text of the OTC UTP Plan is available at: http://www.utpplan.com
The Options Price Reporting Authority (“OPRA”) Plan applies to the consolidated reporting of transactions in eligible option contracts listed and traded on national securities exchanges. The text of the OPRA Plan is available at: http://www.opradata.com/overview/opra_over.jsp#
Question 1.2: Does the identifying activity level apply to a person’s activity in a single security or to all of a person’s trading?
Answer: Rule 13h-1(a)(1)(i) defines a “large trader” as a person that “[d]irectly or indirectly… exercises investment discretion over one or more accounts and effects transactions for the purchase or sale of any NMS security… by or through one or more registered broker-dealer, in an aggregate amount equal to or greater than the identifying activity level.”
Rule 13h-1(a)(7) defines the term “identifying activity level” as “aggregate transactions in NMS securities” that are equal to or greater than the specified levels. Further, as provided in Rule 13h-1(c), a trader should take into consideration its aggregate trading in all NMS securities effected through broker-dealers when calculating its threshold activity level.
Rule 13h-1 requires, when calculating the threshold trading level, that transactions not be netted within or among accounts. In other words, the identifying activity level applies to all of a person’s trading activity in the aggregate.
For purposes only of calculating the identifying activity level threshold, if more than one large trader exercises investment discretion over a single account, then each person need only count the particular transactions that they effected. Note, however, that all transactions in the account would still need to be tagged with all applicable LTID numbers, since LTID numbers are tagged to accounts.
Question 1.3: How are options calculated for purposes of the identifying activity level?
Answer: As provided in Rule 13h-1(a)(7), the identifying activity level means aggregate transactions in NMS securities that are equal to or greater than:
The Rule defines “transaction” to mean “all transactions in NMS securities, excluding the purchase or sale of such securities pursuant to exercises or assignments of option contracts,” except for certain specifically enumerated transactions.
For equity options, Rule 13h-1(c)(1)(i) provides that “the volume or fair market value of the equity securities underlying transactions in options on equity securities, purchased and sold, shall be aggregated.” For index options, Rule 13h-1(c)(1)(ii) provides that “the fair market value of transactions in options on a group or index of equity securities (or based on the value thereof), purchased and sold, shall be aggregated.”
As noted in the Adopting Release (34-64976), “for purposes of the identifying activity level with respect to options, only purchases and sales of the options themselves, and not transactions in the underlying securities pursuant to exercises or assignments of such options, need to be counted. However, for purposes of the identifying activity level, the volume and value of options purchased or sold would be determined by reference to the securities underlying the option” (emphasis added).
Accordingly, to calculate the volume of options for purposes of Rule 13h-1, the number of contracts should be multiplied by the applicable multiplier. For example, 500 contracts x 100 shares of the underlying per contract = 50,000 shares.
To calculate the value of options for purposes of Rule 13h-1, the value of the securities underlying the option should be used. For example, consider a call option with a $20 strike price (with a 100 multiplier) that is trading at a price of $4, where the underlying stock is trading at $22 at the time of the transaction. For purposes of Rule 13h-1, 10 contracts would be calculated as follows: 10 contracts x 100 shares per contract x $22 market price of the underlying = $22,000.
While Rule 13h-1 contemplates the calculation will be performed with reference to the price of the underlying at the time of the options transaction, a person may also consider the price of the underlying at the close of trading on the trade date if that would be less expensive or easier for them to use than the price at the time of the transaction.
Unlike for equity options, index options volume does not need to be calculated.
Calculation of the value of an index option is calculated as follows. Footnote 64 of the Adopting Release (34-64976) provided the following example: "if ABC Index has a multiplier of 100, a person who purchased 200 ABC call options for $400 would have effected aggregate transactions of $8 million (i.e., 200 x 400 x 100 = $8,000,000)." By way of another example, consider an investor that wants to purchase 100 contracts of puts on an index, at a strike price of 1375, where the index is trading at 1380, and where the option uses a 100 multiplier. If the quoted price for these puts is $51.00 per unit, the price per contract would be $5,100. The value of these index options for purposes of Rule 13h-1 would be: 100 contracts x $51 price per unit x $100 contract multiplier = $510,000.
Question 1.4: Do riskless principal transactions count toward the executing broker-dealer’s identifying activity level?
Answer: If a broker-dealer holds a customer order as agent and, after receiving the order, effects a riskless principal transaction with its customer, such activity does not need to be considered towards the broker-dealer’s identifying activity level since, for purposes of Rule 13h-1 only, it would lack the requisite degree of investment discretion to characterize it as large trader activity.
Question 1.5: If a large trader parent company decides to use optional suffixes to sub-identify persons under its control, can it assign the same suffix to multiple entities (e.g., separate entities within a common business line)?
Answer: Yes. Large traders may assign a common suffix to sub-identify multiple persons under its control. Use of a common suffix for separate affiliates should reflect a commonality among the affiliates (e.g., similar business line, similar geographic location, similar reporting line, etc.). Use of suffixes is intended to facilitate the ability of a large trader to identify various sub-groups within a large trader, and thereby facilitate the large trader’s ability to accurately and efficiently track with more particularity the trading for which it exercises investment discretion.
Section 2. Form 13H
Question 2.1: How do I access Form 13H?
Answer: Form 13H is an online web-based electronic form available only to persons with EDGAR access. For reference purposes, a paper copy of the form can be found on the Commission’s website: http://www.sec.gov/about/forms/secforms.htm.
In order to gain the necessary permission and access to file documents thorough the EDGAR system, a registrant must first submit Form ID to obtain a Central Index Key (‘‘CIK’’) and access codes (effectively a logon ID and password). FAQs on the Form ID process can be found here: http://www.sec.gov/info/edgar/feifaq052306.htm.
Registrants should have only one CIK number, and can use their existing CIK to file Form 13H. If a registrant was previously a paper-based broker-dealer filer, it can convert to an electronic filer to enable it to electronically file Form 13H. Paper-based filers may apply to convert to electronic filers at https://www.filermanagement.edgarfiling.sec.gov/.
More information on accessing and using EDGAR is available in the EDGAR Filer Manual, available at: http://www.sec.gov/info/edgar/edmanuals.htm. Volume I of the Filer Manual is a reference for those that need to obtain EDGAR access and for those that are new to EDGAR. Volume II focuses on the filing process and illustrates each step of the process to submit an electronic submission. Volume II contains specific instructions for Form 13H.
If you have questions that are not addressed in those documents, Filer Support and Filer Technical Support can be reached at (202) 551-8900.
Question 2.2: What is meant by “accounts of the large trader” in Item 5(b)?
Answer: The term refers to ownership of the large trader partnership entity, not the accounts that may be managed by the large trader.
Question 2.3: Does Item 6 of Form 13H require the identification of only registered broker-dealers that effect transactions in NMS securities?
Answer: Item 6 requires the identification of registered broker-dealers at which the large trader or its Securities Affiliates have an account for the trading of NMS securities. For example, if a large trader has a relationship with 10 registered broker-dealers, it should list each broker-dealer in Item 6 (even if the large trader only effected transactions through 8 of those entities during the reporting period). At their option, large traders also may list non-registered broker-dealers (e.g., non-U.S.), and may also list broker-dealers that handle accounts involving financial instruments other than NMS securities.
Question 2.4: When is the first annual filing due?
Answer: Rule 13h-1(b)(1)(ii) specifies that an annual filing must be made “within 45 days after the end of each full calendar year”. Because Rule 13h-1 was effective on October 3, 2011, no full calendar year has elapsed for 2011. Accordingly, no annual filing is required for 2011. For large traders who registered by the December 1, 2011 compliance date, the first annual filing will be required for the period ending December 31, 2012.
For large traders who register starting in 2012, an annual filing is required at the end of each calendar year. For example, if a trader met the identifying activity level on October 16, 2012 and filed an initial Form 13H on October 22, 2012, its first annual filing would be due for the period ending December 31, 2012.
Question 2.5: If a large trader files an amended Form 13H to reflect changes made during the fourth calendar quarter, will the large trader still be required to file the mandatory annual updated Form 13H?
Answer: Yes. Regardless of whether any amended Forms 13H are filed, large traders also are required to file Form 13H annually, within 45 days after the calendar year-end. In future system enhancements, the Staff will consider the possibility of allowing large traders to check both the “annual filing” and “amended filing” file types, in order to allow a large trader to satisfy both the amended 4th quarter filing (Form 13H-Q) as well as the annual update (Form 13H-A), as long as the submission is made within the period permitted for the 4th quarter amendment (i.e., promptly after the quarter’s end).
Section 3. LTID Numbers
Question 3.1: How will I receive my LTID number?
Initially, the Commission is mailing the assigned LTID number to the Authorized Person identified on the Form 13H filing. The LTID number that the Commission assigns is the 8-digit “root” number and is prominently highlighted in the letter. Note that EDGAR generates some tracking numbers upon submission of a Form 13H filing (e.g., the accession number), which are not related to the LTID number. In the future, the Commission may explore how it could electronically assign LTID numbers.
Question 3.2: What is the format of the LTID and the optional suffix?
Answer: The LTID is a total of 13-characters. The first 8 characters constitute the root LTID number, which is assigned to the large trader by the Commission in response to the submission of an initial Form 13H filing. The root number is followed by a dash and a maximum 4-digit suffix (suffixes are optional and are assigned by a large trader at its discretion; suffixes may be assigned to multiple entities under common control of the large trader, for example among affiliates that reflect a commonality (e.g., a similar business line)). Suffixes should be numbers, not letters, and should be right-justified with zeros used as placeholders (e.g., a suffix of “1” would be reflected as “-0001”). For example, an LTID number could look like: “12345678-0001.” If the large trader did not assign itself any suffixes, a broker-dealer should append four zeros to the root number (i.e., “-0000”), so that the LTID number contains the full 13 characters (e.g., “12345678-0000”).
Question 3.3: How should Unidentified Large Traders be designated by broker-dealers?
Answer: For Unidentified Large Traders, broker-dealers should assign their own unique identifying number to each person it identifies as an Unidentified Large Trader. The unique identifier should conform to the format of the LTID (i.e., it should contain 13 characters, including an 8 character root number, followed by a dash, and 4 characters in the suffix field) and should begin with the letters “ULT” (e.g., “ULT00001-0000”). In addition, under Rule 13h-1(d)(3), for transactions effected directly or indirectly by or through the account of an Unidentified Large Trader, broker-dealers are also required to maintain information for such Unidentified Large Trader including the person or entity’s name, address, date the account was opened, and tax identification number(s).
Section 4. Broker-Dealer Recordkeeping and Reporting
Question 4.1: Do the recordkeeping and reporting requirements of Rule 13h-1 apply only to NMS securities?
Question 4.2: For purposes of Rule 13h-1, do the purchase or sale of securities pursuant to options exercises and assignments need to be reported?
Answer: No. The recordkeeping and reporting provisions of Rule 13h-1 are applicable to “transactions,” which, pursuant to Rule 13h-1(a)(6), excludes the purchase or sale of securities pursuant to exercises or assignments of options contracts. Accordingly, if a broker-dealer reports the purchase or sale of the underlying security in connection with the exercise or assignment of an options contract and such transaction involves the account of a large trader, then the broker-dealer does not need to supply an LTID number or report any information in the execution time field for the transaction in the underlying security.