
[Federal Register Volume 82, Number 151 (Tuesday, August 8, 2017)]
[Notices]
[Pages 37138-37141]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16639]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81293; File No. SR-Phlx-2017-04]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 
2, To Permit the Listing and Trading of P.M.-Settled NASDAQ-100 
Index[supreg] Options on a Pilot Basis

August 2, 2017.

I. Introduction

    On January 18, 2017, NASDAQ PHLX LLC (``Phlx'' or ``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 
permit the listing and trading of P.M.-settled NASDAQ-100 Index[supreg] 
(``NASDAQ-100'') options on a pilot basis. The proposed rule change was 
published for comment in the Federal Register on February 3, 2017.\3\ 
On March 14, 2017, the Commission extended the time period within which 
to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\4\ On May 2, 2017, the Exchange filed Amendment 
No. 1 to the proposed rule change.\5\ On May 3, 2017, the Commission 
instituted proceedings under Section 19(b)(2)(B) of the Act \6\ to 
determine whether to approve or disapprove the proposed rule change, as 
modified by Amendment No. 1.\7\ On July 25, 2017, the Exchange filed 
Amendment No. 2 to the proposed rule change.\8\ The Commission received 
three comment letters on the proposed rule change, including two from 
the Exchange.\9\ The Commission is approving the proposed rule change, 
as modified by Amendment Nos. 1 and 2, subject to a pilot period set to 
end on the earlier of: (1) Twelve months following the date of the 
first listing of the options; or (2) December 29, 2018.
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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. 79894 (January 30, 
2017), 82 FR 9259 (``Notice'').
    \4\ See Securities Exchange Act Release No. 80241, 82 FR 14393 
(March 20, 2017).
    \5\ In Amendment No. 1, the Exchange revised its proposal to add 
that raw percentage price change data as well as percentage price 
change data normalized for prevailing market volatility, as measured 
by an appropriate index as agreed by the Commission and the 
Exchange, would be provided as part of the pilot data. When the 
Exchange filed Amendment No. 1 with the Commission, it also 
submitted Amendment No. 1 to the public comment file for SR-Phlx-
2017-04 (available at: www.sec.gov/comments/sr-phlx-2017-04/phlx201704.htm).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 80581, 82 FR 21587 
(May 9, 2017) (``Order Instituting Proceedings'').
    \8\ In Amendment No. 2, the Exchange revised the proposed 
duration of the pilot program such that the pilot would terminate on 
the earlier of: (i) Twelve months following the date of the first 
listing of the options; or (ii) December 29, 2018. When the Exchange 
filed Amendment No. 2 with the Commission, it also submitted 
Amendment No. 2 to the public comment file for SR-Phlx-2017-04 
(available at: www.sec.gov/comments/sr-phlx-2017-04/phlx201704.htm). 
Because Amendment No. 2 does not materially alter the substance of 
the proposed rule change or raise unique or novel regulatory issues, 
it is not subject to notice and comment.
    \9\ See Letters to Brent J. Fields, Secretary, Commission, from 
Laura G. Dickman, Lead Counsel, Chicago Board Options Exchange, 
Incorporated (``CBOE''), dated May 30, 2017 (``CBOE Letter''); 
Jeffrey S. Davis, Vice President and Deputy General Counsel, NASDAQ 
PHLX LLC, dated June 12, 2017 (``Phlx Letter I''); and Jeffrey S. 
Davis, Vice President and Deputy General Counsel, NASDAQ PHLX LLC, 
dated June 29, 2017 (``Phlx Letter II'').
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II. Description of the Proposal, as Modified by Amendment Nos. 1 and 2

    The Exchange is proposing to amend its rules to permit the listing 
and trading, on a pilot basis, of NASDAQ-100 options with third-Friday-
of-the-month expiration dates, whose exercise settlement value will be 
based on the closing index value, symbol XQC, of the NASDAQ-100 on the 
expiration day (``P.M.-settled'').
    The Exchange represents that the conditions for listing the 
proposed contract (``NDXPM'') on Phlx will be similar to those for Full 
Value Nasdaq 100 Options (``NDX''), which are already listed and 
trading on Phlx, except that NDXPM will be P.M.-settled.\10\ In 
particular, NDXPM will use a $100 multiplier, and the minimum trading

[[Page 37139]]

increment will be $0.05 for options trading below $3.00 and $0.10 for 
all other series. Strike price intervals will be set at no less than 
$5.00. Consistent with existing rules for index options, the Exchange 
will allow up to nine near-term expiration months, as well as LEAPS. 
The product will have European-style exercise and will not be subject 
to position limits, though there would be enhanced reporting 
requirements.\11\
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    \10\ See Notice, supra note 3, at 9260.
    \11\ For a more detailed description of the proposed NDXPM 
contract, see Notice, supra note 3.
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    As proposed, NDXPM would become subject to a pilot for a period 
that would end on the earlier of: (i) Twelve months following the date 
of the first listing of NDXPM; or (ii) December 29, 2018 (``Pilot 
Program''). If the Exchange were to propose an extension of the Pilot 
Program or should the Exchange propose to make the Pilot Program 
permanent, then the Exchange would submit a filing proposing such 
amendments to the Pilot Program. The Exchange notes that any positions 
established under the pilot would not be impacted by the expiration of 
the pilot. For example, a position in a P.M.-settled series that 
expires beyond the conclusion of the pilot period could be established 
during the pilot. If the Pilot Program were not extended, then the 
position could continue to exist. However, the Exchange notes that any 
further trading in the series would be restricted to transactions where 
at least one side of the trade is a closing transaction.
    The Exchange proposes to submit a Pilot Program report to 
Commission at least two months prior to the expiration date of the 
Pilot 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 NASDAQ-100. 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 
would provide the Commission with periodic interim reports while the 
Pilot Program is in effect that would contain some, but not all, of the 
information contained in the annual report. The annual report would be 
provided to the Commission on a confidential basis. The annual report 
would contain the following volume and open interest data:
    (1) Monthly volume aggregated for all trades;
    (2) monthly volume aggregated by expiration date;
    (3) monthly volume for each individual series;
    (4) month-end open interest aggregated for all series;
    (5) month-end open interest for all series aggregated by expiration 
date; and
    (6) month-end open interest for each individual series.
    In addition to the annual report, the Exchange would provide the 
Commission with interim reports of the information listed in Items (1) 
through (6) above periodically as required by the Commission while the 
Pilot Program is in effect. These interim reports would also be 
provided on a confidential basis. The annual report would also contain 
the information noted in Items (1) through (6) above for Expiration 
Friday, A.M.-settled NASDAQ-100 options traded on Phlx.
    In addition, the annual report would contain the following analysis 
of trading patterns in Expiration Friday, P.M.-settled NASDAQ-100 
option series in the Pilot Program: (1) A time series analysis of open 
interest; and (2) an analysis of the distribution of trade sizes. Also, 
for series that exceed certain minimum parameters, the annual report 
would contain the following analysis related to index price changes and 
underlying share trading volume at the close on Expiration Fridays: A 
comparison of index price changes at the close of trading on a given 
Expiration Friday with comparable price changes from a control sample. 
The data would include a calculation of percentage price changes for 
various time intervals and compare that information to the respective 
control sample. Raw percentage price change data as well as percentage 
price change data normalized for prevailing market volatility, as 
measured by an appropriate index as agreed by the Commission and the 
Exchange, would be provided. The Exchange would provide a calculation 
of share volume for a sample set of the component securities 
representing an upper limit on share trading that could be attributable 
to expiring in-the-money series. The data would include a comparison of 
the calculated share volume for securities in the sample set to the 
average daily trading volumes of those securities over a sample period. 
The minimum open interest parameters, control sample, time intervals, 
method for randomly selecting the component securities, and sample 
periods would be determined by the Exchange and the Commission.\12\
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    \12\ See Notice, supra note 3, at 9261 and Amendment No. 1. The 
proposed Pilot Program for NDXPM options is similar to the pilot 
program approved for the listing and trading of P.M.-settled S&P 500 
Index options (``SPXPM options''). See Securities Exchange Act 
Release No. 64011 (March 2, 2011), 76 FR 12775, 12776-77 (March 8, 
2011).
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III. Summary of Comments

    As noted above, the Commission received three comment letters on 
the proposed rule change, including two letters from the Exchange.\13\ 
In its letter, CBOE expresses support for Phlx's proposal, stating that 
NDXPM would not present any novel issues not considered in connection 
with SPXPM options.\14\ CBOE further states that many of the concerns 
regarding P.M. settlement have been mitigated over time, and believes 
the availability of additional P.M.-settled options would enhance 
transparency, price discovery, and liquidity by moving these products 
from the over-the-counter market to an exchange environment.\15\ In 
support of its position, CBOE states that it has not observed any 
adverse effects or impact on market volatility and the operation of 
fair and orderly markets on the underlying cash market at or near the 
close of trading in its SPXPM options.\16\
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    \13\ See supra note 9.
    \14\ See CBOE Letter at 2.
    \15\ See id.
    \16\ See id. In its letter, CBOE further proposes that the 
Commission approve pilot programs for a set period of time, such as 
three years, after which the respective pilot may become permanent 
or, if the Commission finds that the pilot resulted in adverse 
effects to the market, conclude. See id. at 3. The Commission notes 
that this comment is beyond the scope of the specific proposed rule 
change under consideration.
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    In its first comment letter, the Exchange notes that its proposal 
is largely based on CBOE's pilot program for SPXPM options.\17\ In 
response to a request from Commission staff that any pilot data be made 
public, the Exchange states that, although it is willing to participate 
in further discussion with the Commission, CBOE, and other exchanges 
about the possibility of making public the data under its Pilot Program 
and other similar pilots, the Exchange does not believe it should be 
required to make its Pilot Program reports public absent the 
development of a uniform and transparent approach regarding pilot 
reports and other associated materials to similar proposed rule 
changes, such as the SPXPM options pilot.\18\ Therefore, the Exchange 
maintains that any reports in connection with its Pilot Program will be 
submitted

[[Page 37140]]

to the Commission on a confidential basis.\19\
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    \17\ See Phlx Letter I at 1.
    \18\ See id. at 2.
    \19\ See id.
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    In its second comment letter, the Exchange responds to the Order 
Instituting Proceedings and states that it does not expect any 
significant impact on trading in the underlying securities of NDXPM 
given the similarity to SPXPM options that are currently trading.\20\ 
The Exchange believes that the changes in the operation and structure 
of the options markets over time, in conjunction with the proposed 
NDXPM Pilot Program's similarity to the SPXPM options pilot and its 
lack of novel issues, further support permitting trading in NDXPM on a 
pilot basis.\21\ The Exchange further states that it expects the data 
to be provided under the NDXPM Pilot Program should be similar to data 
submitted in connection with the SPXPM options pilot, with the 
exception of the index to be used to normalize the pilot data for 
prevailing market volatility, for which the Exchange proposes to work 
with the Commission to identify an index it believes would be more 
suitable to the NDXPM Pilot Program.\22\ The Exchange also reiterated 
its belief that the proposal could benefit investors to the extent it 
attracts trading from opaque over-the-counter markets to an exchange-
listed market and could offer investors additional flexibility.\23\
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    \20\ See Phlx Letter II at 2-4.
    \21\ See id. at 4-5.
    \22\ See id. at 5-6.
    \23\ See id. at 7.
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IV. Discussion and Commission Findings

    After careful consideration of the proposal, 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,\24\ and, in particular, the requirements 
of Section 6 of the Act.\25\ Specifically, the Commission finds that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\26\ 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, to allow Phlx to conduct 
a limited, and carefully monitored, pilot as proposed.
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    \24\ 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).
    \25\ 15 U.S.C. 78f.
    \26\ 15 U.S.C. 78f(b)(5).
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    As noted in the Order Instituting Proceedings, the Commission has 
had concerns about the potential adverse effects and impact of P.M. 
settlement upon market volatility and the operation of fair and orderly 
markets on the underlying cash market at or near the close of trading, 
including for cash-settled derivatives contracts based on a broad-based 
index.\27\ In particular, the Commission sought input from commenters 
to inform its evaluation of whether P.M.-settled, cash-settled index 
options such as NDXPM could impact volume and volatility on the 
underlying cash equities markets at the close of the trading day, and 
the potential consequences this might have for investors and the 
overall stability of the markets.\28\ The potential impact today 
remains unclear, given the significant changes in the closing 
procedures of the primary markets in recent 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, but 
recognizes that these risks may be mitigated today by the enhanced 
closing procedures that are now in use at the primary equity markets.
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    \27\ See Order Instituting Proceedings, supra note 7, at 21589. 
See also Securities Exchange Act Release Nos. 64599 (June 3, 2011), 
76 FR 33798, 33801-02 (June 9, 2011) (order instituting proceedings 
to determine whether to approve or disapprove a proposed rule change 
to allow the listing and trading of SPXPM options); 65256 (September 
2, 2011), 76 FR 55969, 55970-76 (September 9, 2011) (order approving 
proposed rule change to establish a pilot program to list and trade 
SPXPM options); and 68888 (February 8, 2013), 78 FR 10668, 10669 
(February 14, 2013) (order approving the listing and trading of 
SPXPM on CBOE).
    \28\ See Order Instituting Proceedings, supra note 7, at 21589.
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    For the reasons described below, the Commission believes that 
Phlx's proposed NDXPM Pilot Program is designed to mitigate concerns 
regarding P.M. settlement and will provide additional trading 
opportunities for investors while providing the Commission with data to 
monitor the effects of NDXPM and the impact of P.M. settlement on the 
markets. To assist the Commission in assessing any potential impact of 
a P.M.-settled NASDAQ-100 index option on the options markets as well 
as the underlying cash equities markets, Phlx will be required to 
submit data to the Commission in connection with the Pilot Program. The 
Commission believes that Phlx's proposed Pilot Program, together with 
the data and analysis that Phlx will provide to the Commission, will 
allow Phlx and the Commission to monitor for and assess any potential 
for adverse market effects of allowing P.M. settlement for Nasdaq-100 
index options, including on the underlying component stocks. In 
particular, the data collected from Phlx's NDXPM Pilot Program will 
help inform the Commission's consideration of whether the Pilot Program 
should be modified, discontinued, extended, or permanently approved. 
Furthermore, the Exchange's ongoing analysis of the Pilot Program 
should help it monitor any potential risks from large P.M.-settled 
positions and take appropriate action on a timely basis if warranted.
    The Exchange represents that it has adequate surveillance 
procedures to monitor trading in these options thereby helping to 
ensure the maintenance of a fair and orderly market, and has 
represented that it has sufficient capacity to handle additional 
traffic associated with this new listing.\29\
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    \29\ See Notice, supra note 3, at 9261. In addition, the 
Commission notes that Phlx would have access to information through 
its membership in the Intermarket Surveillance Group with respect to 
the trading of the securities underlying the Nasdaq-100 index, as 
well as tools such as large options positions reports to assist its 
surveillance of NDXPM 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 id.
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    For the reasons discussed above, the Commission finds that Phlx's 
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 at the underlying markets and the potential benefits to 
investors discussed by the Exchange in the Notice,\30\ the Commission 
finds that it is appropriate and consistent with the Act to approve 
Phlx's proposal on a pilot basis. The collection of data during the 
Pilot Program and Phlx's active monitoring of any effects of NDXPM on 
the markets will help Phlx and the Commission assess any impact of P.M. 
settlement in today's market.
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    \30\ See id. at 9262.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-Phlx-2017-04), as modified 
by Amendment Nos. 1 and 2, be, and hereby is, approved, subject to a 
pilot period set to expire on the earlier of: (1) Twelve months 
following the date of the first listing of NDXPM; or (2) December 29, 
2018.
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    \31\ 15 U.S.C. 78s(b)(2).


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-16639 Filed 8-7-17; 8:45 am]
 BILLING CODE 8011-01-P


