[Federal Register Volume 83, Number 58 (Monday, March 26, 2018)]
[Notices]
[Pages 12966-12968]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06017]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82911; File No. SR-ISE-2017-106]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To 
Permit the Listing and Trading of NQX Index Options on a Pilot Basis

March 20, 2018.

I. Introduction

    On December 6, 2017, Nasdaq ISE, LLC (``ISE'' 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 options based on \1/5\ the value of 
the Nasdaq-100 Index (``Nasdaq-100'') on a pilot basis. The proposed 
rule change was published for comment in the Federal Register on 
December 26, 2017.\3\ On January 31, 2018, the Exchange filed Amendment 
No. 1 to the proposed rule change.\4\ On February 8, 2018, pursuant to 
Section 19(b)(2) of the Act,\5\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change.\6\ The Commission 
received no comment letters on the proposed rule change. The Commission 
is approving the proposed rule change, as modified by Amendment No. 1, 
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) 
June 30, 2019.
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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. 82362 (December 19, 
2017), 82 FR 61090 (``Notice'').
    \4\ In Amendment No. 1, the Exchange revised its proposal to: 
(1) 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; and (2) 
revise 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) June 30, 2019. 
When the Exchange filed Amendment No. 1 with the Commission, it also 
submitted Amendment No. 1 to the public comment file for SR-ISE-
2017-106 (available at: https://www.sec.gov/comments/sr-ise-2017-106/ise2017106.htm). Because Amendment No. 1 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.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 82666, 83 FR 6626 
(February 14, 2018). The Commission designated March 26, 2018 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to approve or disapprove, 
the proposed rule change.
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II. Description of the Proposal, as Modified by Amendment No. 1

    The Exchange is proposing to amend its rules to permit the listing 
and trading, on a pilot basis, of index options on the Nasdaq 100 
Reduced Value Index (``NQX'') with third Friday of the month expiration 
dates. The Exchange represents that the NQX options contract will be 
the same in all respects as the current Nasdaq-100 (``NDX'') options 
contract listed on the Exchange,\7\ except that it will be based on \1/
5\ of the value of the Nasdaq-100, and will be P.M.-settled with an 
exercise settlement value based on the closing index value of the 
Nasdaq-100 on the day of expiration.\8\ In particular, NQX options will 
be subject to the same rules that presently govern the trading of index 
options based on the Nasdaq-100, including sales practice rules, margin 
requirements, trading rules, and position and exercise limits. Similar 
to NDX options, NQX options will be European-style and cash-settled, 
and will have a contract multiplier of 100. NQX options will have a 
minimum trading increment of $0.05 for options below $3.00 and $0.10 
for all other series. Strike price intervals will be set at $1 or 
greater, subject to conditions described in ISE Rule 2009(c)(5).\9\ 
Consistent with the Exchange's existing rules for index options, the 
Exchange will allow up to six expiration months at any one time that 
may expire at three-month intervals or in consecutive months, as well 
as LEAPS.\10\ The product will have European-style exercise and will 
not be subject to position limits, although the Exchange proposes to 
amend ISE Rule 2004(c) to more accurately describe how positions in 
reduced-value options would be aggregated with full-value options.\11\
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    \7\ See Securities Exchange Act Release No. 51121 (February 1, 
2005), 70 FR 6476 (February 7, 2005) (SR-ISE-2005-01).
    \8\ The Exchange notes that similar features are available with 
other index options contracts listed on the Exchange and other 
options exchanges, including options contracts based on 1/10 the 
value of the Nasdaq-100 (``MNX'') and P.M.-settled options on the 
full value of the Nasdaq-100 (``NDXPM''). See Notice, supra note 3, 
at 61091.
    \9\ Generally, pursuant to ISE Rule 2009(c)(1), index options 
listed on the Exchange are subject to strike price intervals of no 
less than $5, provided that certain classes of index options 
(including NDX and MNX) have strike price intervals of no less than 
$2.50 if the strike price is less than $200. The Exchange proposes 
to amend ISE Rule 2009(c)(1) to add NQX options to the list of 
classes where strike price intervals of no less than $2.50 are 
generally permitted if the strike price is less than $200. In 
addition, ISE Rule 2009(c)(5) provides finer strike price intervals 
for MNX options as these contracts are based on a reduced value of 
the Nasdaq-100. Specifically, ISE Rule 2009(c)(5) provides that 
notwithstanding ISE Rule 2009(c)(1), the interval between strike 
prices of series of MNX options will be $1 or greater, subject to 
certain conditions. The Exchange proposes to adopt the same strike 
price intervals for NQX options as currently approved for MNX 
options. The Exchange will not list LEAPS on NQX options at 
intervals less than $5. If the Exchange determines to add NQX 
options to the Weeklies or Quarterlies programs, such options will 
be listed with the expirations and strike prices described in 
Supplementary Material .01 or .02 to ISE Rule 2009. The Exchange 
notes that it expects to add NQX options to the Weeklies program. 
See id. at 61092 n.15.
    \10\ See id. at 61092 & n.13. The Exchange states that it 
intends to file a separate proposed rule change to modify the 
expiration months permitted for index option contracts consistent 
with Nasdaq PHLX LLC (``Phlx'') Rule 1101A(b). See id. at 61092 
n.13.
    \11\ For a more detailed description of the proposed NQX 
contract, see Notice, supra note 3.
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    As proposed, NQX 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 the options; or (ii) June 30, 2019 (``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 an NQX options 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

[[Page 12967]]

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.
    Finally, the annual report would contain the following analysis of 
trading patterns in Expiration Friday, P.M.-settled NQX 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 id. at 61092-93 and Amendment No. 1. The proposed Pilot 
Program for NQX options is similar to the pilot program approved for 
the listing and trading of NDXPM options on Phlx. See Securities 
Exchange Act Release No. 81293 (Aug. 2, 2017), 82 FR 37138 (Aug. 8, 
2017) (``NDXPM Order'').
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III. Discussion and Commission Findings

    After careful consideration of the proposal, the Commission finds 
that the proposed rule change, as modified by Amendment No. 1, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange,\13\ and, in particular, the requirements of Section 6 of the 
Act.\14\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\15\ 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 ISE to conduct a limited, 
and carefully monitored, pilot as proposed.
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    \13\ 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).
    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that it has previously approved the listing 
and trading of options based on a reduced value of the Nasdaq-100.\16\ 
However, this proposed rule change would permit P.M. settlement for 
such options and, as noted in the Commission's order approving the 
listing and trading of NDXPM on Phlx on a pilot program basis, 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.\17\ 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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    \16\ See, e.g., Securities Exchange Act Release Nos. 57654 
(April 11, 2008), 73 FR 21003 (April 17, 2008); 51121 (February 1, 
2005), 70 FR 6476 (February 7, 2005).
    \17\ See NDXPM Order, supra note 12. 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).
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    Additionally, for the reasons described below, the Commission 
believes that ISE's proposed NQX 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 NQX options and the impact of P.M. settlement on 
the markets. To assist the Commission in assessing any potential impact 
of a P.M.-settled NQX option on the options markets as well as the 
underlying cash equities markets, ISE will be required to submit data 
to the Commission in connection with the Pilot Program. The Commission 
believes that ISE's proposed Pilot Program, together with the data and 
analysis that ISE will provide to the Commission, will allow ISE and 
the Commission to monitor for and assess any potential for adverse 
market effects of allowing P.M. settlement for NQX options, including 
on the underlying component stocks. In particular, the data collected 
from ISE's NQX 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.\18\
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    \18\ See Notice, supra note 3, at 61092. In addition, the 
Commission notes that ISE would have access to information through 
its membership in the Intermarket Surveillance Group with respect to 
the trading of the securities underlying the NQX, as well as tools 
such as large options positions reports to assist its surveillance 
of NQX 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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[[Page 12968]]

    For the reasons discussed above, the Commission finds that ISE'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,\19\ the Commission 
finds that it is appropriate and consistent with the Act to approve 
ISE's proposal on a pilot basis. The collection of data during the 
Pilot Program and ISE's active monitoring of any effects of NQX options 
on the markets will help ISE and the Commission assess any impact of 
P.M. settlement in today's market.
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    \19\ See id.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-ISE-2017-106), as modified 
by Amendment No. 1, 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 the options; or (2) June 30, 2019.
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    \20\ 15 U.S.C. 78s(b)(2).
    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06017 Filed 3-23-18; 8:45 am]
 BILLING CODE 8011-01-P


