
[Federal Register Volume 81, Number 206 (Tuesday, October 25, 2016)]
[Notices]
[Pages 73452-73458]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25713]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79125; File No. SR-NYSEMKT-2016-48]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of 
Amendment Nos. 2 and 3 and Order Granting Accelerated Approval of 
Proposed Rule Change, as Modified by Amendment Nos. 2 and 3, To Amend 
Certain Rules Related to Flexible Exchange Options

October 19, 2016.

I. Introduction

    On July 1, 2016, NYSE MKT LLC (``NYSE MKT'' or the ``Exchange'') 
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 
amend certain rules related to Flexible Exchange (``FLEX'') Options. 
The proposed rule change was published for comment in the Federal 
Register on July 21, 2016.\3\ On August 30, 2016, the Exchange filed 
Amendment No. 1 to the proposed rule change. On August 31, 2016, 
pursuant to Section 19(b)(2) of the Act,\4\ the Commission designated a 
longer period within 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.\5\ On 
September 27, 2016, the Exchange filed Amendment No. 2 to the proposed 
rule change, which superseded and replaced Amendment No. 1.\6\ On

[[Page 73453]]

October 19, 2016, the Exchange filed Amendment No. 3 to the proposed 
rule change.\7\ The Commission received no comments on the proposed 
rule change. The Commission is publishing this notice to solicit 
comment on Amendment Nos. 2 and 3 to the proposed rule change from 
interested persons, and is approving the proposed rule change, as 
modified by Amendment Nos. 2 and 3, on an accelerated basis.
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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. 78348 (July 15, 
2016), 81 FR 47469 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 78744 (August 31, 
2016), 81 FR 61725 (September 7, 2016). The Commission designated 
October 19, 2016 as the date by which it shall approve, disapprove, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.
    \6\ In Amendment No. 2, the Exchange: (1) Provided greater 
clarity regarding the operation of FLEX Binary Return Derivatives 
contracts (``ByRDs''), including specifying position limits 
applicable to FLEX ByRDs and indicating that FLEX ByRDs will be 
settled using VWAP settlement and European exercise style; (2) 
specified that Asian and Cliquet style settlement will be available 
for FLEX Index Options on broad stock index groups; (3) clarified 
that VWAP settlement will be available for FLEX Equity Options; and 
(4) removed its proposal to allow cash settlement of FLEX Options. 
Amendment No. 2 is available at the Exchange's Web site and at 
https://www.sec.gov/comments/sr-nysemkt-2016-48/nysemkt201648-2.pdf.
    \7\ In Amendment No. 3, the Exchange removed its proposal to 
allow VWAP settlement of FLEX Equity Options generally, although 
VWAP settlement would still be used for FLEX ByRDs. Amendment No. 3 
is available at the Exchange's Web site.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
Nos. 2 and 3

    FLEX Options are customized equity or index contracts that allow 
investors to tailor contract terms for exchange-listed equity and index 
options.\8\ The Exchange has proposed to modify the rules relating to 
FLEX Options to allow FLEX Options in ByRDs, make available additional 
settlement styles, modify how exercise prices and premiums are 
expressed, change certain provisions relating to floor-based trading, 
and modify other related provisions pertaining to FLEX Options.
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    \8\ See Rule 900G(b)(1) (defining ``FLEX Option''). See 
generally Section 15, Flexible Exchange Options, Rules 900G-909G.
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A. FLEX ByRDs

    The Exchange has proposed to allow market participants to trade 
FLEX options contracts in ByRDs. ByRDs are option contracts that have a 
fixed return in cash based on a set strike price and that may only be 
exercised at expiration pursuant to the Rules of the Options Clearing 
Corporation.\9\ ByRDs may be issued on individual stocks, Exchange-
Traded Fund Shares, and Section 107 Securities, and must satisfy 
heightened listing standards.\10\ ByRDs are settled using a settlement 
price calculated from the all-day Volume-Weighted Average Price of the 
composite prices of the underlying security on the expiration date 
(``VWAP'') and using a European exercise style.\11\
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    \9\ See Rule 900ByRDs(b)(1).
    \10\ See Rule 915ByRDs. For a description of ``Exchange-Traded 
Fund Shares'' and ``Section 107 Securities,'' see also Rule 915, 
Commentaries .06 and .11.
    \11\ See Rules 900ByRDs (b)(1), 910ByRDs.
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    Through the use of FLEX ByRDs,\12\ market participants would be 
able to trade ByRDs with non-standard exercise prices, non-standard 
expiration dates, or both. FLEX ByRDs would be settled in the same 
manner as ByRDs, with all-day VWAP settlement and European exercise 
style.\13\ The Exchange would establish position limits for FLEX ByRDs 
that are the same as Non-FLEX ByRDs, as set forth in Rule 904ByRDs(a), 
although positions in FLEX ByRDs would be aggregated with positions in 
Non-FLEX ByRDs on the same or similar underlying for the purpose of 
calculating position limits.\14\ The Exchange stated that, in its view, 
FLEX ByRDs would enable market participants to negotiate terms that 
differ from standardized ByRDs and thereby provide greater 
opportunities for investors to manage risk through the use of FLEX 
Options.\15\
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    \12\ Proposed Rule 900G(b)(17) would define ``FLEX ByRDs'' to 
mean ``a Binary Return Derivatives contract on any ByRDs-eligible 
underlying security that is subject to the rules in this Section.'' 
Proposed Rule 900G(b)(22) would define ``Non-FLEX ByRDs'' to mean 
``a Non-FLEX Option that is a Binary Return Derivatives contract.'' 
Proposed Rule 900G(b)(16) would revise the definition of ``Series of 
FLEX Options'' to provide that a such a series would consist of, 
``in the case of FLEX ByRDs, all such option contracts of the same 
class having the same expiration date, strike price, and exercise 
settlement amount.''
    \13\ See proposed Rule 903G(c)(3)(ii). Proposed Rule 
903G(c)(3)(i) would specify that settlement by physical delivery of 
the underlying security would apply to FLEX Equity Options other 
than FLEX ByRDs. See also Amendment No. 2, at 6. ``FLEX Equity 
Option'' is defined in Rule 900G(b)(10).
    \14\ See proposed Rule 906G(b)(ii). For purposes of these 
position limits, long positions in ``Finish Low'' and short 
positions in ``Finish High'' ByRDs would be considered to be on the 
same side of the market; and short positions in ``Finish Low'' and 
long positions in ``Finish High'' ByRDs would be considered to be on 
the same side of the market. See id.
    \15\ See Notice, 81 FR at 47470.
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B. Alternative Settlement Styles: Asian and Cliquet

    The Exchange has proposed to allow market participants to designate 
Asian or Cliquet settlement styles for FLEX Index Options on broad 
stock index groups.\16\ In its filing, the Exchange noted that these 
settlement styles are currently offered by another options 
exchange.\17\
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    \16\ See Amendment No. 2, at 4. ``FLEX Index Option'' is defined 
in Rule 900G(b)(11). A ``broad stock index group'' is ``a stock 
index which reflects representative stock market values or prices of 
. . . a broad segment of the stock market.'' Rule 900C(b)(1). See 
also Rule 901C, Commentary .02 (specifying conditions that must be 
satisfied to trade options on a broad stock index group). Asian and 
Cliquet settlement styles would not be available for FLEX ByRDs. See 
Amendment No. 2, at 4-5, n. 9. The Commission notes that the 
Exchange has agreed file a proposed rule change to provide 
additional clarity to several aspects of the rule. None of these 
changes impact the Commission's analysis of this proposed rule 
change.
    \17\ See Amendment No. 2, at 4 (citing Chicago Board Options 
Exchange, Inc. (``CBOE'') Rules 24A.1, 24A.4, 24B.1, 24B.4).
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1. Asian Style Settlement
    FLEX Index Options on broad stock index groups with Asian style 
settlement would be cash-settled call \18\ option contracts for which 
the final payout would be based on an arithmetic average of specified 
closing prices of an underlying broad stock index group taken on twelve 
predetermined monthly observation dates, including the expiration date 
(``Asian option'').\19\ Asian options would use a ``preceding business 
day convention,'' such that if the monthly observation date falls on a 
non-NYSE MKT business day, the monthly observation date would be the 
immediately preceding business day.\20\ Asian options would have a term 
of approximately one year, ranging from 350 to 371 days from the date 
of initial listing.\21\ The contract multiplier would be determined in 
accordance with Rule 900G(b)(12) and, for Asian options that settle in 
U.S. Dollars, would be $100.\22\ The exercise settlement amount would 
be the difference between the designated strike price and the observed 
average closing price.\23\ Given that settlement value would be 
determined by observations taken over a 12-month period, Asian options 
would require the use of European exercise style.\24\
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    \18\ Puts would not be permitted. See proposed Rule 903G(b)(4).
    \19\ See proposed Rule 900G(b)(18) (defining ``Asian style 
settlement''); proposed Rule 903G(b)(4) (specifying terms for Asian 
options).
    \20\ See proposed Rule 900G(b)(18).
    \21\ See proposed Rule 903G(b)(4).
    \22\ See Notice, 81 FR at 47470; Rule 900G(b)(12).
    \23\ See Notice, 81 FR at 47470.
    \24\ See proposed Rule 900G(b)(18).
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    In its filing, the Exchange provided the following example of an 
Asian option that expires in-the-money. On January 21, 2015, an 
investor hedging the value of XYZ Index over a year purchases an Asian 
FLEX call option expiring on January 22, 2016 with a strike price of 
2000 and a contract multiplier of $100. The option has monthly 
observation dates occurring on the 23rd of each month.

[[Page 73454]]



------------------------------------------------------------------------
       Monthly observation date \25\           XYZ Index closing value
------------------------------------------------------------------------
23-Feb-15..................................                      2025.36
23-Mar-15..................................                      2049.34
23-Apr-15..................................                      2019.77
22-May-15..................................                      1989.65
23-Jun-15..................................                      2005.64
23-Jul-15..................................                      2035.10
21-Aug-15..................................                      2032.15
23-Sep-15..................................                      2076.18
23-Oct-15..................................                      2099.01
23-Nov-15..................................                      2109.32
23-Dec-15..................................                      2085.42
22-Jan-16..................................                      2084.81
Exercise (Averaged) Settlement Value.......       24,611.75/12 = 2050.98
------------------------------------------------------------------------

    In this example, the exercise settlement amount would be $5,098. 
This amount would be determined by adding the 12 observed closing 
values for the XYZ index and dividing that amount by 12 (24,611.75/12), 
which is equal to 2050.98 (when rounded). The payout would be the 
difference between the exercise (averaged) settlement value and the 
strike price (2050.98-2000 = 50.98) multiplied by the contract 
multiplier (50.98 x $100 = $5,098). If alternatively, in the above 
example, the strike price was 2060, the contract would have expired 
out-of-the money. The option would not be exercised and would expire 
worthless because the strike price of 2060 would be more than the 
2050.98 exercise settlement value.\26\
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    \25\ Note that May 23, 2015 and August 23, 2015 fell on a 
weekend or holiday, so the business days immediately preceding those 
dates were used as the monthly observation dates.
    \26\ See Notice, 81 FR at 47470.
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2. Cliquet Style Settlement
    FLEX Index Options on broad stock index groups with Cliquet style 
settlement would be cash-settled call \27\ option contracts for which 
the final payout would be based on the greater of $0 or the sum of 
monthly returns (i.e., percent changes in the closing value of the 
underlying broad stock index group from one month to the next), subject 
to a monthly return ``cap'' (e.g., 3%), applied over twelve monthly 
observation dates (``Cliquet option'').\28\ Cliquet options would use a 
preceding business day convention and have a term of approximately one 
year, ranging from 350 to 371 days from the date of initial 
listing.\29\ The contract multiplier would be determined in accordance 
with Rule 900G(b)(12) and, for Cliquet options that settle in U.S. 
Dollars, would be $100.\30\
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    \27\ Puts would not be permitted. See proposed Rule 903G(b)(5).
    \28\ See proposed Rule 900G(b)(19) (defining ``Cliquet style 
settlement''); proposed Rule 903(G)(b)(5) (specifying terms for 
Cliquet options).
    \29\ See proposed Rule 900G(b)(19); proposed Rule 903G(b)(5).
    \30\ See Notice, 81 FR at 47470; Rule 900G(b)(12).
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    The parties to a Cliquet option would designate a set of monthly 
observation dates for each contract and an expiration date for each 
contract. The monthly observation date would be the date each month on 
which the closing price of the underlying broad stock index group would 
be observed for the purpose of calculating the exercise settlement 
value. In addition, the parties to a Cliquet option would designate a 
capped monthly return (i.e., percent change in the closing values of 
the underlying broad stock index group from one month to the next 
month) for the contract, which would be the maximum monthly return that 
would be included in the calculation of the exercise settlement value 
for the contract. On each monthly observation date, the Exchange would 
determine the actual monthly return by computing the percent change 
between the closing value of the broad stock index group on the current 
monthly observation date versus its closing value on the previous 
monthly observation date. The Exchange would then compare the actual 
monthly return to the capped monthly return. The value used as the 
monthly return for a Cliquet option would be the lesser of the actual 
monthly return or the capped monthly return.
    For example, if the actual monthly return of the underlying broad 
stock index group was 1.75% and the designated capped monthly return 
for a Cliquet option was 2%, the 1.75% value would be utilized (and not 
the 2%) as the value for the observation date to determine the exercise 
settlement value. Using this same example, if the actual monthly return 
of the underlying broad stock index group was 3.30%, the 2% value would 
be utilized (and not the 3.30%) as the value of the observation date to 
determine the exercise settlement value. This latter example 
illustrates that Cliquet options have a capped upside. Cliquet options 
do not, however, have a capped downside for the monthly return that 
would be utilized in determining the exercise settlement value. Drawing 
on this same example, if the actual monthly return of the underlying 
broad stock index group was -4.07%, the -4.07% value would be utilized 
as the value for the observation date to determine the exercise 
settlement value. There would, however, be a floor for all Cliquet 
options in that if the sum of the monthly returns is negative, a 
Cliquet option would expire worthless.
    Unlike other options, Cliquet options would not have a traditional 
exercise (strike) price. Rather, the exercise (strike) price field for 
a Cliquet option would represent the designated capped monthly return 
for the contract and would be expressed in dollars and cents. For 
example, a capped monthly return of 2.25% would be represented by the 
dollar amount of $2.25. The ``strike'' price for a Cliquet option could 
only be expressed in a dollar and cents amount and the ``strike'' price 
for a Cliquet option could only span a range between $0.05 and 
$25.95.\31\ In addition, the ``strike'' price for a Cliquet option 
could only be designated in $0.05 increments, e.g., $1.75, $2.50, 
$4.15.\32\ Increments of $0.01 in the ``strike'' price field 
(representing the capped monthly return) would not be permitted.
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    \31\ See proposed Rule 903G(b)(5).
    \32\ See id.
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    The first ``monthly'' return for a Cliquet option would be based on 
the initial reference value, which would be the closing value of the 
underlying broad stock index group on the date a new Cliquet option is 
listed. The time period measured for the first ``monthly'' return would 
be between the initial listing date and the first monthly observation 
date. For example, if a

[[Page 73455]]

Cliquet option was opened on January 1 and the parties designated the 
31st of each month as the monthly observation date, the measurement 
period for the first monthly return would span the time period from 
January 1 to January 31. The time period measured for the second 
monthly return, and all subsequent monthly returns, would run from the 
31st of one month to the 31st of the next month (or the last Exchange 
business day of each month depending on the actual number of calendar 
days in each month covered by the contract).
    Cliquet options would have European exercise style and could not be 
exercised prior to the expiration date.\33\ The exercise settlement 
value for Cliquet options would be equal to the initial reference price 
of the underlying broad stock index group multiplied by the sum of the 
monthly returns (with the cap applied) on the 12 consecutive monthly 
observation dates, which include the expiration date of the option, 
provided that the sum is greater than 0. If the sum of the monthly 
returns (with the applied cap) is 0 or less, the option would expire 
worthless.
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    \33\ See proposed Rule 900G(b)(19).
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    In its filing, the Exchange provided the following example of a 
Cliquet option. On January 21, 2015, an investor hedging the value of 
XYZ Index over a year purchases a Cliquet FLEX call option expiring on 
January 22, 2016 with a capped monthly return of 2% and a contract 
multiplier of $100. The initial reference price of XYZ Index (closing 
value) on January 21, 2015 is 2000. The option has monthly observation 
dates occurring on the 23rd of each month.
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    \34\ Note that May 23, 2015 and August 23, 2015 fell on a 
weekend or holiday, so the business days immediately preceding those 
dates were used as the monthly observation dates.
    \35\ Note that on September 23, 2015, the observed actual 
monthly return was 2.17%. Because the actual monthly return exceeded 
the 2% cap, the calculation utilized a capped monthly return of 2% 
for this observation date.

----------------------------------------------------------------------------------------------------------------
                                                                  Actual monthly  Capped monthly  Sum of monthly
          Monthly observation date \34\              XYZ Index        return          return          returns
                                                   closing value     (percent)    (percent) \35\     (percent)
----------------------------------------------------------------------------------------------------------------
23-Feb-15.......................................         2025.36            1.27            1.27            1.27
23-Mar-15.......................................         2049.34            1.18            1.18            2.45
23-Apr-15.......................................         2019.77           -1.44           -1.44            1.01
22-May-15.......................................         1989.65           -1.49           -1.49           -0.48
23-Jun-15.......................................         2005.64            0.80            0.80            0.32
23-Jul-15.......................................         2035.10            1.47            1.47            1.79
21-Aug-15.......................................         2032.15           -0.14           -0.14            1.65
23-Sep-15.......................................         2076.18            2.17            2.00            3.65
23-Oct-15.......................................         2099.01            1.10            1.10            4.75
23-Nov-15.......................................         2109.32            0.49            0.49            5.24
23-Dec-15.......................................         2085.42           -1.13           -1.13            4.11
22-Jan-16.......................................         2084.81           -0.03           -0.03            4.08
                                                 ---------------------------------------------------------------
Exercise Settlement Value.......................                   (4.08% * 2000.00) + 2 = 83.60
----------------------------------------------------------------------------------------------------------------

    In this example, the exercise settlement amount would be $8,160. 
This amount would be determined by adding the capped monthly return for 
the XYZ Index on the 12 monthly observation dates, multiplying that 
amount by the initial reference price (4.08% * 2000 = 81.60) and adding 
that amount to the strike price \36\ (81.60 + 2 = 83.60), to arrive at 
an Exercise Settlement Value (``ESV'') that is the greater of zero (0) 
or the result of this calculation (83.60). Having determined the ESV, 
the payout at expiration would be based upon how much the ESV exceeds 
the strike price, similar to options that utilize standard settlement 
styles. Therefore the payout would be the amount by which the ESV 
exceeds the strike price (83.60 - 2 = 81.60), multiplied by the 
contract multiplier (81.60 x $100 = $8,160). In contrast, if the sum of 
the capped monthly returns had been negative, this option would have 
expired worthless.\37\
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    \36\ The ``strike price'' for a Cliquet option would be 
determined by the agreed upon capped monthly return, which in this 
example is 2%.
    \37\ See Notice, 81 FR at 47470-72.
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3. Surveillance for Asian and Cliquet Options
    The Exchange stated that it would utilize the same procedures for 
FLEX Options utilizing the proposed settlement styles as it currently 
utilizes for other FLEX Options with standard settlement. The Exchange 
also represented that these surveillance procedures will be adequate to 
monitor trading in these options products. The Exchange noted that, for 
surveillance purposes, it would have access to information regarding 
trading activity in the pertinent underlying securities.\38\
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    \38\ See id. at 47472.
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C. Exercise Prices and Premiums

    The Exchange has proposed to modify how market participants may 
express exercise prices and premiums for FLEX Options. The Exchange 
noted that these modifications reflect changes in the marketplace and a 
move towards decimalization. The Exchange explained that when it 
adopted its rules for FLEX Options, strike prices were designated in 
one-eighth of a dollar and options were priced in fractions of a 
dollar, whereas now certain Exchange rules have been revised to reflect 
the decimal equivalent of the previously approved fractional 
amount.\39\ With respect to FLEX Equity Options, proposed Rule 
903G(c)(2) would provide that exercise prices and premiums may be 
stated in terms of (i) a dollar amount; (ii) a method for fixing such a 
number at the time a FLEX Request for Quote or FLEX Order is traded; or 
(iii) a percentage of the price of the underlying security at the time 
of the trade or as of the close of trading on the Exchange on the trade 
date. The Exchange explained that this change would align the 
Exchange's treatment of FLEX Equity Options with its treatment of FLEX 
Index Options and also be consistent with the rules of another options 
exchange.\40\
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    \39\ See id.
    \40\ See id. (citing CBOE Rule 24A.4(b)(2), (c)(2)).
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    In addition, with respect to both FLEX Index Options and FLEX 
Equity Options, proposed Rule 903G(b)(1) and (c)(2) would provide that 
exercise prices

[[Page 73456]]

may be rounded to the nearest minimum tick or other decimal increment 
determined by the Exchange on a class-by-class basis that may not be 
smaller than $0.01 and exercise premiums will be rounded to the nearest 
minimum tick. Additionally, for exercise prices and premiums stated 
using a percentage based methodology, such values may be stated in a 
percentage increment determined by the Exchange on a class-by-class 
basis that may not be smaller than 0.01% and will be rounded as 
described above.\41\ The Exchange noted that this proposed change is 
consistent with the rules of another options exchange.\42\ Finally, the 
Exchange proposed to remove a reference to fractional pricing from Rule 
903G(a)(3)(i).\43\ The Exchange stated that, in its view, this change 
would provide market participants with greater flexibility to create an 
options contract tailored to an investor's needs.\44\
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    \41\ See proposed Rule 903G(b)(1), (c)(2).
    \42\ See Notice, 81 FR at 47472 (citing CBOE Rule 24A.4(b)(2), 
(c)(2)).
    \43\ See proposed Rule 903G(a)(3)(i).
    \44\ See Notice, 81 FR at 47472.
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D. FLEX Officials and Trading Posts

    Currently under the FLEX rules, the FLEX Specialist is responsible 
for handling various aspects of FLEX Options, including receiving and 
displaying the terms of Requests for Quotes. The Exchange has proposed 
to delete these references to a FLEX Specialist and replace them with a 
floor official, to be known as a ``FLEX Official.''\45\ A ``FLEX 
Official'' would be an Exchange employee that has regulatory 
responsibility for reviewing FLEX trades for adherence to the terms and 
specifications in the FLEX rules.\46\
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    \45\ See proposed Rule 904G(a)(i)-(ii).
    \46\ See Notice, 81 FR at 47472-73. Proposed Rule 900G(b)(21) 
would define ``FLEX Official'' as ``an Exchange employee designated 
to perform the FLEX Official functions set forth in Rule 910G.''
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    Under the proposal, the Exchange would be able, at any time, to 
designate an Exchange employee to act as a FLEX Official in one or more 
classes of FLEX Options and to designate other qualified employees to 
assist the FLEX Official as needed.\47\ This FLEX Official would be 
responsible for: (i) Reviewing the conforming of FLEX Requests for 
Quotes and FLEX Quotes to the terms and specifications contained in 
Rule 903G (Terms of FLEX Options); (ii) posting FLEX Requests for 
Quotes for dissemination; (iii) determining the BBO; (iv) ensuring that 
FLEX contracts are executed in conformance with the priority principles 
set forth in Rule 904G (FLEX Trading Procedures and Principles); and 
(v) calling upon Specialists to make FLEX Quotes in specific classes of 
FLEX Equity Options as provided in Rule 927NY(c), which sets forth the 
obligations of Specialists.\48\ The Exchange noted that these 
provisions relating to a FLEX Official are consistent with the rules of 
another options exchange that trades FLEX Options.\49\
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    \47\ See proposed Rule 910G(a).
    \48\ See proposed Rule 910G(b). The Exchange also proposed to 
make a conforming change to change a reference from ``FLEX Post 
Official'' to ``FLEX Official.'' See proposed Rule 927NY(c)(7).
    \49\ See Notice, 81 FR at 47472-73 (citing NYSE Arca, Inc. 
(``NYSEArca'') Rules 5.30(b)(7), 5.38 (defining role of FLEX Post 
Official)). See also CBOE Rule 24A.5(a)(i), (ii) (specifying role of 
FLEX Post Official in handling Requests for Quotes); CBOE Rule 
24A.12(b) (setting forth duties of FLEX Official).
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    Additionally, the Exchange has proposed to revise its rules to 
reflect that in its current trading environment, FLEX Requests for 
Quotes and FLEX Quotes are ``disseminated,'' rather than ``displayed.'' 
\50\ The Exchange explained that at the time when it introduced FLEX 
Options, the Exchange displayed FLEX Requests for Quotes and FLEX 
Quotes at physical FLEX posts. However, according to the Exchange, as 
FLEX Option trading gained in popularity, it became apparent that 
liquidity for FLEX Options was more readily available at the trading 
posts where the standard options in the underlying security traded, 
rather than the specific FLEX post. The Exchange explained that, over 
time, floor participants asked floor brokers to use various means to 
communicate the existence of trading interest.\51\ Additionally, the 
Exchange has proposed to remove the modifier ``FLEX'' from before 
``post'' in Rule 904G(b)(i) because there are no longer specific 
physical FLEX posts on the trading floor.\52\
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    \50\ See proposed Rule 904G(a)(ii), (c)(i)-(iii).
    \51\ See Notice, 81 FR at 47473. The Commission notes that the 
Exchange has represented that dissemination will permit market 
participants to transmit required information widely, including 
through wireless communications, cellular telephones, instant 
messaging, and other Exchange-approved communication devices. The 
Commission expects that the Exchange will properly surveil the use 
of such communications.
    \52\ See proposed Rule 904G(b)(i). The Exchange also proposed to 
make a non-substantive change to Rule 904G(c)(ii) to replace a colon 
with a semi-colon.
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E. Additional Changes

    The Exchange has proposed several additional modifications to the 
FLEX Options Rules. First, the Exchange has proposed to amend the title 
of Section 15 to add the abbreviation ``FLEX.'' \53\ In addition, the 
Exchange has proposed to replace references to ``Registered Options 
Traders'' in the FLEX rules with the term ``Floor Market Makers.'' \54\ 
The Exchange explained that this change in terminology is consistent 
with a recent rule change approved by the Commission.\55\ Further, the 
Exchange has proposed to remove obsolete references to Deutsche Marks 
and French Francs because these foreign currencies are no longer in 
circulation.\56\ Additionally, the Exchange has proposed to modify Rule 
909G(c) to update a cross-reference to rules pertaining to specialists' 
financial requirements by adding a reference to Rule 927NY(c)(1) and 
removing obsolete references to Rule 171 and Rule 950(h).\57\
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    \53\ See proposed Section 15. The Exchange has also proposed to 
delete an extraneous ``t'' from the word ``the'' in Rule 900G(a).
    \54\ See proposed Rules 900G(b)(4), 906G(a)(iv) and (b), 908G, 
909G (updating title), and 909G(b).
    \55\ See Securities Exchange Act Release No. 59472 (February 27, 
2009), 74 FR 9843, 9843 n.11 (March 6, 2009) (SR-NYSEALTR-2008-14) 
(noting that Exchange had indicated that Rules 900G through 909G 
would become outdated upon approval of the described rules and the 
Exchange represented it would review these rules and submit a 
separate filing to revise any outdated references).
    \56\ See proposed Rules 900G(b)(12), 903G(b)(3), 904G(g). See 
also Notice, 81 FR at 47473. The Exchange also proposed to make non-
substantive changes to certain references to British Pounds. See 
proposed Rules 900G(b)(12), 904G(g).
    \57\ See proposed Rule 909G(c).
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    The Exchange also has proposed to clarify that each FLEX Request 
for Quotes or FLEX contract must contain, as a contract term, either 
the underlying security in the case of FLEX Equity Options or (rather 
than ``and'') an underlying index in the case of FLEX Index 
Options.\58\ In addition, the Exchange has proposed to make a non-
substantive change to Rule 903G(c)(4) to clarify the reference to Rule 
805 of the Options Clearing Corporation.\59\ Moreover, the Exchange has 
proposed to clarify that the minimum value size of one contract for 
FLEX Options applies to quotations, in addition to the transactions 
specified in the current rule text.\60\ Finally, the Exchange has 
proposed that FLEX Options will be permitted in puts and calls that do 
not have the same settlement style.\61\ The Exchange explained that it 
does not allow trading of a FLEX Option that has the exact same terms 
as a Non-FLEX

[[Page 73457]]

Option, but that if the option's underlying security, exercise style, 
expiration date, exercise price, or, as proposed, settlement style 
differs then it may be traded as a FLEX Option.\62\
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    \58\ See proposed Rule 903G(a)(2)(i).
    \59\ See proposed Rule 903G(c)(4).
    \60\ See proposed Rule 903G(a)(2)(vii). The Exchange explained 
that this proposed change aligns the rule text with the Commission's 
adoption on a permanent basis of a pilot program regarding minimum 
value sizes for opening transactions in new series of FLEX Options 
and FLEX Quotes. See Notice, 81 FR at 47473 (citing Securities 
Exchange Act Release No. 72536 (July 3, 2014), 79 FR 39425 (July 10, 
2014) (SR-NYSEMKT-2014-21)).
    \61\ See proposed Rule 903G, Commentary .01.
    \62\ See Notice, 81 FR at 47473.
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III. Discussion and Commission Findings

    After careful review, 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.\63\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\64\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
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    \63\ 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).
    \64\ 15 U.S.C. 78f(b)(5).
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    The Exchange has proposed several amendments to its rules related 
to FLEX Options. These amendments modify rules related to FLEX Options 
to offer new alternative terms for FLEX Options and to update rule text 
to more accurately reflect trading in FLEX Options on the Exchange. As 
is discussed in more detail below, the Commission finds these changes 
consistent with the Act.
    The proposal to allow ByRDs to trade as FLEX Equity Options on NYSE 
MKT will allow market participants to flex strike prices and expiration 
dates and thus obtain strike prices and expiration dates that are not 
available in the standardized market on the Exchange in ByRDs. In its 
approval order originally approving ByRDs for Exchange trading, the 
Commission noted that the heightened initial and continued listing 
standards, as well the settlement price based on an all-day VWAP, were 
reasonably designed to address potential manipulation concerns.\65\ 
Similarly, the Commission believes that specifying that FLEX ByRDs can 
only be traded on ByRDs-eligible underlying securities that meet the 
same heightened initial and continued listing standards as ByRDs, 
thereby helping to ensure that only highly capitalized, actively traded 
stocks and ETFs will underlie cash-settled FLEX ByRDs, as well as 
requiring settlement based on all-day VWAP (as required for 
standardized ByRDs), should help to mitigate concerns about 
manipulation in the underlying security to benefit a position in FLEX 
ByRDs.
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    \65\ See Securities Exchange Act Release No. 56251 (August 14, 
2007), 72 FR 46523, 76524 (August 20, 2007) (SR-Amex-2004-27) 
(``ByRDs Order'').
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    The Commission also believes that establishing position limits for 
FLEX ByRDs to be the same as Non-FLEX ByRDs position limits, which are 
currently 25,000 contracts on the same side of the market,\66\ and 
aggregating positions in Flex ByRDs with Non-FLEX ByRDs on the same or 
similar underlying security for purposes of calculating position limits 
is reasonable and consistent with the Act. In approving position limits 
for ByRDs, the Commission noted that these position limits appeared to 
reasonably balance the promotion of a free and open market for these 
securities with minimization of incentives for market manipulation.\67\ 
By establishing the same position limits for FLEX ByRDs as for Non-FLEX 
ByRDs and, importantly, aggregating such positions on the same side of 
the market,\68\ the Commission similarly believes that the position 
limit requirements for FLEX ByRDs should help to ensure that the 
trading of FLEX ByRDs on the Exchange will not increase the potential 
for manipulation and could help to minimize such incentives. Finally, 
as noted above, because FLEX ByRDs must, like standardized ByRDs, be 
cash settled, European-style exercise, with a settlement price based on 
an all-day VWAP (and meet heightened listing and continued listing 
standards), unlike other FLEX Options, the only non-standardized terms 
that can be flexed are strike prices and expiration dates. The 
Commission notes that the Exchange has represented that it will be able 
to adequately surveil trading in FLEX ByRDs utilizing existing 
surveillance procedures pertaining to Non-FLEX ByRDs and FLEX Options.
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    \66\ The exercise limits for FLEX ByRDs will be equivalent to 
the position limits for FLEX ByRDs described in Rule 906G(b)(ii). 
See Rule 907G.
    \67\ See ByRDs Order, 72 FR at 76525.
    \68\ For purposes of these position limits, long positions in 
``Finish Low'' and short positions in ``Finish High'' ByRDs would be 
considered to be on the same side of the market; and short positions 
in ``Finish Low'' and long positions in ``Finish High'' ByRDs would 
be considered to be on the same side of the market. See proposed 
Rule 906G(b)(ii).
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    The Commission believes that the Asian and Cliquet style 
settlements for FLEX Index Options on broad stock index groups may 
provide investors with additional trading and hedging tools. The 
Commission also believes that the Exchange's proposal to allow Asian 
and Cliquet style settlement for FLEX Index Options on broad stock 
index groups may give investors and other market participants the 
ability to individually tailor, within specified limits, certain terms 
of those options. Furthermore, the Commission believes that, since both 
Asian and Cliquet settlement styles depend on multiple measurements in 
determining the settlement value, both settlement styles could help to 
mitigate the potential for manipulation in the underlying 
security(ies).
    The Commission notes that the Exchange would use the same 
surveillance procedures currently utilized for the Exchange's FLEX 
Options with standard settlement to monitor trading in those options 
with Asian or Cliquet style settlement. The Exchange has represented 
that these surveillance procedures will be adequate to monitor trading 
in options on these option products. The Exchange has also stated that 
for surveillance purposes, the Exchange will have complete access to 
information regarding trading activity in the pertinent underlying 
securities.
    The Commission believes that the proposed modification in how 
exercise prices and premiums for FLEX Equity Options are stated may 
provide greater flexibility for market participants to tailor a 
contract to the needs of the investor. In addition, the Commission 
believes that the proposal to specify how exercise prices and premium 
for FLEX Index Options and FLEX Equity Options will be rounded and how 
they will be stated using a percentage-based methodology should provide 
greater clarity and allow market participants to specify contracts that 
meet their particular needs. Moreover, the Commission believes that the 
proposal to remove a reference to fractional pricing is consistent with 
the shift to decimal pricing found elsewhere in the Exchange's rules 
and would promote internal consistency.
    The Commission notes that the Exchange's proposal to replace 
certain duties of a FLEX Specialist with respect to FLEX Options 
transactions with duties assigned to a FLEX Official, who is an 
Exchange employee, is consistent with the FLEX rules of CBOE.\69\ Under 
current rules, the FLEX Specialist is responsible for assuring that a 
Request for Quotes is submitted properly as a FLEX Option and for 
displaying the terms and specifications of the Request for Quotes. The 
Exchange now proposes to change these duties to a FLEX Official

[[Page 73458]]

rather than a FLEX Specialist due to market structure changes. The new 
rules will set forth with specificity the particular functions and 
requirements of a FLEX Official to, among other things, ensure 
adherence to FLEX rules and call in a Specialist to make FLEX Quotes. 
The Exchange has represented that the FLEX Official would be an 
Exchange employee that reports to the regulatory officer of the 
Exchange. The Commission would expect the Exchange to ensure that such 
FLEX Official, or any other designated qualified employees called in to 
assist the FLEX Official as permitted under the new rule, are properly 
qualified and meet any necessary requirements. The regulatory oversight 
of FLEX transactions by a properly qualified FLEX Official could help 
to ensure that FLEX transactions comply with the FLEX rules. Therefore 
we find this change is consistent with the Act. The proposed conforming 
changes to other provisions in the Exchange rules would enhance clarity 
and consistency. Moreover, the Commission believes that the proposed 
changes to refer to FLEX Requests for Quotes and FLEX Quotes as being 
disseminated and remove the concept of a post specific to the trading 
of FLEX options will align the rules with current trading practices on 
the Exchange's floor.\70\
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    \69\ See CBOE Rules 24A.5(a)(i) and (ii), 24A.12(b). See also 
NYSEArca Rules 5.30(b)(7), 5.38.
    \70\ See supra note 51 and accompanying text.
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    Finally, the Commission believes that the proposal's minor, 
conforming, and technical revisions to Section 15, Rules 900G through 
909G are consistent with the Act.

IV. Solicitation of Comments on Amendment Nos. 2 and 3

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment Nos. 2 and 3 are consistent with 
the Act. Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEMKT-2016-48 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEMKT-2016-48. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEMKT-2016-48, and should 
be submitted on or before November 15, 2016.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment Nos. 2 and 3

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment Nos. 2 and 3, prior to the thirtieth 
day after the date of publication of the notice of Amendment Nos. 2 and 
3 in the Federal Register. As discussed above, the proposed changes 
regarding the operation of FLEX ByRDs, including the delineation of 
applicable position limits and statement that FLEX ByRDs will be 
settled similar to Non-FLEX ByRDs, using all-day VWAP settlement and 
European exercise style, will provide additional clarity to the 
Exchange's rules concerning FLEX ByRDs. Similarly, the proposed changes 
to specify that Asian and Cliquet style settlement will be available 
only for FLEX Index Options on broad stock index groups remove 
potential for ambiguity about the operation of these settlement styles 
for FLEX Options. Furthermore, the Commission believes it is 
appropriate to have these changes incorporated into the rules of the 
Exchange concurrently with the changes noticed for comment in the 
original filing. Additionally, deleting the proposal to permit cash 
settlement for all FLEX Equity Options other than FLEX ByRDs, and the 
corresponding provision that would permit the use of a VWAP settlement 
for FLEX Equity Options other than FLEX ByRDs, helps to ensure that the 
proposal does not raise investor protection and manipulation concerns 
and allows the Commission to no longer consider these provisions for 
consistency with the Act.
    Accordingly, for the reasons noted above, the Commission finds good 
cause for approving the proposed rule change, as modified by Amendment 
Nos. 2 and 3, on an accelerated basis, pursuant to Section 19(b)(2) of 
the Act.\71\
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    \71\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19b(2) of the Act,\72\ 
that the proposed rule change (SR-NYSEMKT-2016-48), as modified by 
Amendment Nos. 2 and 3 thereto, be, and hereby is, approved on an 
accelerated basis.
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    \72\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\73\
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    \73\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-25713 Filed 10-24-16; 8:45 am]
 BILLING CODE 8011-01-P


