[Federal Register Volume 83, Number 75 (Wednesday, April 18, 2018)]
[Notices]
[Pages 17206-17209]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08053]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83039; File No. SR-PEARL-2018-02]


Self-Regulatory Organizations; MIAX PEARL, LLC; Order Granting 
Approval of a Proposed Rule Change To Adopt Rules Relating to Index 
Options

April 12, 2018.

I. Introduction

    On February 8, 2018, MIAX PEARL, LLC (``MIAX PEARL'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to the provisions of Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt rules relating to index 
options. The proposed rule change was published for comment in the 
Federal Register on February 27, 2018.\3\ The Commission received no 
comments regarding the proposal. This order approves the proposed rule 
change.
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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. 82756 (February 21, 
2018), 83 FR 8538 (``Notice'').
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II. Description of the Proposal

A. Overview

    The Exchange proposes to amend MIAX PEARL Rule 504 and adopt new 
Chapter XVIII to accommodate the trading of index options on the 
Exchange by MIAX PEARL Members; and establish generic listing standards 
and maintenance standards to permit the Exchange to list ``broad-
based'' and ``narrow-based'' index options on the Exchange pursuant to 
Rule 19b-4(e) under the Act.\4\ Proposed MIAX PEARL Chapter XVIII would 
incorporate by reference Chapter XVIII of the rules of the Exchange's 
affiliate, Miami International Securities Exchange, LLC (``MIAX 
Options'').\5\ The proposed generic listing and maintenance standards 
for broad-based indices listed and traded on the Exchange require, 
among other things, that options on the index be a.m.-settled; that the 
index be capitalization-weighted, modified capitalization-weighted, 
price-weighted, or equal dollar-weighted; and that the index be 
comprised of at least fifty securities, all of which must be ``NMS 
stocks,'' as defined in Rule 600 of Regulation NMS.\6\ The proposed 
generic listing and maintenance standards for narrow-based indices 
require, among other characteristics, that the proposed indices must 
consist of ten or more component securities.\7\
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    \4\ 17 CFR 240.19b-4(e). The term ``broad-based index'' is 
defined as an index designed to be representative of a stock market 
as a whole or of a range of companies in unrelated industries. See 
Proposed Rule 1801(k). The term ``narrow-based index'' is defined as 
an index designed to be representative of a particular industry or a 
group of related industries or an index whose constituents are all 
headquartered within a single country. See Proposed Rule 1801(j).
    \5\ The Commission has separately issued an order granting the 
Exchange an exemption pursuant to Section 36(a) of the Act from the 
rule filing requirements of Section 19(b) of the Act with respect to 
the rules in MIAX Options Chapter XVIII that the Exchange seeks to 
incorporate by reference. See Securities Exchange Act Release No. 
83040 (April 12, 2018). See also Securities Exchange Act Release No. 
81739 (September 27, 2017), 82 FR 46111 (October 3, 2017) (order 
approving SR-MIAX-2017-39) (``MIAX Options Order''). The Commission 
notes that the MIAX Options Order also approved changes to MIAX 
Options Rules 308, 313, and 700, which rules are already 
incorporated by reference in MIAX PEARL's rules. See id. at 46112 & 
nn. 13 & 15. See also Notice, supra note 3, at 8539. In the 
description of the proposed rule change below, the term ``Proposed 
Rule'' shall refer to the rules in MIAX Options Chapter XVIII, which 
the Exchange has proposed to be incorporated by reference into the 
MIAX PEARL Rules and thereby become applicable to MIAX PEARL 
Members.
    \6\ See Proposed Rule 1802(d)(4).
    \7\ See Proposed Rule 1802(b)(2).
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    Because the rules related to options in indices are product 
specific in many areas,\8\ certain rules will indicate that they apply 
to ``Specified'' indices. Proposed Rules 1800, 1801(n), 1804(a), 
1807(a), 1809, and 1811 all contain provisions that are dependent upon 
the Exchange identifying specific index products in the rule. 
Accordingly, Proposed Rule 1800 states that where the rules in Chapter 
XVIII indicate that particular indices or requirements with respect to 
particular indices will be ``Specified,'' the Exchange will file a 
proposed rule change with the Commission pursuant to Section 19 of the 
Act \9\ and Rule 19b-4 \10\ thereunder to specify such indices or 
requirements. Because MIAX PEARL has incorporated the rules in MIAX 
Options Chapter XVIII by reference, MIAX PEARL's rules will be amended 
when MIAX Options files a proposed rule change with the Commission 
pursuant to Section 19 of the Act \11\ and Rule 19b-4 \12\ thereunder 
to specify such indices or requirements.\13\ As more fully set forth in 
the Notice and further described below, the proposed new Exchange Rules 
are based on the existing rules of other options exchanges.\14\
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    \8\ See Notice, supra note 3, at 8539.
    \9\ 15 U.S.C. 78s.
    \10\ 17 CFR 240.19b-4.
    \11\ 15 U.S.C. 78s.
    \12\ 17 CFR 240.19b-4.
    \13\ See Notice, supra note 3, at 8539. See also supra note 5.
    \14\ See, e.g., MIAX Options Rules Chapter XVIII; Nasdaq ISE, 
LLC (``ISE'') Rules, Chapter 20, Index Rules; Nasdaq GEMX, LLC 
Rules, Chapter 20, Index Rules; Nasdaq MRX, LLC Rules, Chapter 20, 
Index Rules; NASDAQ PHLX LLC (``Phlx'') Rules 1000A-1108A; and 
Chicago Board Options Exchange, Inc. (``CBOE'') Rules, Chapter XXIV, 
Index Options; Cboe C2 Exchange, Inc. Rules, Chapter 24, Index 
Options. See also Notice, supra note 3, at 8539.

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[[Page 17207]]

B. Index Options Procedural Rules

    MIAX PEARL proposes to add new Chapter XVIII to the Exchange rules 
(``Proposed Rules''), which would incorporate by reference the rules in 
Chapter XVIII of MIAX Options.\15\ The proposal would, among other 
things, set forth general procedural rules that address the trading 
sessions for index options, including the days and hours of business, 
opening rotation, and halts and suspensions.\16\ Existing MIAX PEARL 
Rules further provide for the procedures Members must follow with 
respect to the exercise of American-style, cash settled index 
options.\17\
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    \15\ The Exchange also proposes to amend MIAX PEARL Rule 504 
(Trading Halts) to address index options.
    \16\ See Proposed Rule 1808.
    \17\ See MIAX PEARL Rules 313(a)(3) and 700(h). See also supra 
note 5.
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    The Proposed Rules also establish position limit and exercise 
limits for index options.\18\ In addition, existing MIAX PEARL Rules 
and the Proposed Rules provide for exemption standards from position 
limits and procedures for requesting exemptions from those rules.\19\ 
The proposed position limits and exercise limits, as well as the 
proposed exemptions, are different for broad-based index options and 
narrow-based index options.\20\
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    \18\ See Proposed Rules 1804, 1805, and 1807.
    \19\ See MIAX PEARL Rule 308(b) and Proposed Rule 1806. See also 
supra note 5.
    \20\ See Proposed Rules 1804 to 1807.
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C. Generic Listing Standards and Maintenance Standards for Broad-Based 
Index Options

    The Exchange also proposes to establish generic listing and 
maintenance standards in Proposed Rule 1802 to enable the Exchange to 
list and trade new broad-based index options pursuant to Rule 19b-4(e) 
under the Act.\21\ Proposed Rule 1802(d) sets forth the initial listing 
standards for broad-based index options. The listing standards require, 
among other things, that the underlying index be broad-based, as 
defined in Rule 1801(k); that options on the index be a.m. settled; 
that the index be capitalization-weighted, modified capitalization-
weighted, price-weighted, or equal dollar-weighted; and that the index 
consist of 50 or more component securities, each of which must be an 
``NMS stock'' as defined in Rule 600 of Regulation NMS under the 
Act.\22\ In addition, Proposed Rule 1802(d) requires that the index's 
component securities meet certain minimum market capitalization and 
average daily trading volume requirements; that no single component 
account for more than10% of the weight of the index and that the five 
highest weighted component securities represent no more than 33% of the 
weight of the index; that the index value be widely disseminated at 
least once every 15 seconds; and that the Exchange have written 
surveillance procedures in place with respect to the index options. 
Proposed Rule 1802(e) establishes maintenance standards for broad-based 
index options listed pursuant to Proposed Rule 1802(d). The Exchange 
states that the proposed listing and maintenance standards are modeled 
after standards approved by the Commission for other options 
exchanges.\23\
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    \21\ 17 CFR 240.19b-4(e). Rule 19b-4(e) provides that the 
listing and trading of a new derivative securities product by a 
self-regulatory organization (``SRO'') shall not be deemed a 
proposed rule change, pursuant to paragraph (c)(1) of Rule 19b-4, if 
the Commission has approved, pursuant to Section 19(b) of the Act, 
the SRO's trading rules, procedures, and listing standards for the 
product class that includes the new derivative securities product 
and the SRO has a surveillance program for the product class. When 
relying on Rule 19b-4(e), the SRO must submit Form 19b-4(e) to the 
Commission within five business days after the exchange begins 
trading the new derivative securities products. See Securities 
Exchange Act Release No. 40761 (December 8, 1998), 63 FR 70952 
(December 22, 1998) (File No. S7-13-98).
    \22\ See 17 CFR 242.600.
    \23\ See, e.g., MIAX Options Rule 1802(d); NYSE American LLC 
(``NYSE American'') Rule 901C.02(a) and (b); CBOE Rule 24.2(f) and 
(g); NYSE Arca, Inc. (``NYSE Arca'') Rule 5.12-O; Phlx Rule 1009A(d) 
and (e); and ISE Rule 2002(d) and (e).
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D. Generic Listing Standards and Maintenance Standards for Narrow-Based 
Index Options

    The Exchange further proposes to establish generic listing and 
maintenance standards in Proposed Rule 1802 to enable the Exchange to 
list and trade new narrow-based index options pursuant to Rule 19b-4(e) 
under the Act.\24\ Proposed Rule 1802(b) sets forth the initial listing 
standards for narrow-based index options. The listing standards 
require, among other things, that options on the index be a.m. settled; 
that the index be capitalization-weighted, price-weighted, equal 
dollar-weighted, or modified capitalization-weighted; and that the 
index consist of 10 or more component securities, each of which must be 
an ``NMS stock'' as defined in Rule 600 of Regulation NMS under the 
Act.\25\ In addition, Proposed Rule 1802(b) requires that the index's 
component securities meet certain minimum market capitalization and 
average daily trading volume requirements; that no single component 
account for more than 30% of the weight of the index and that the five 
highest weighted component securities represent no more than 50% (65% 
for an index consisting of fewer than 25 component securities) of the 
weight of the index; that the index value be widely disseminated at 
least once every 15 seconds; and that non-U.S. component securities 
(stocks or ADRs) that are not subject to comprehensive surveillance 
agreements do not in the aggregate represent more than 20% of the 
weight of the index. Proposed Rule 1802(c) establishes maintenance 
standards for narrow-based index options listed pursuant to Proposed 
Rule 1802(b). The Exchange states that the proposed listing and 
maintenance standards are modeled after standards approved by the 
Commission for other options exchanges.\26\
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    \24\ 17 CFR 240.19b 09 094(e). See also supra note 21.
    \25\ See 17 CFR 242.600.
    \26\ See, e.g., MIAX Options Rule 1802(b) and (c); NYSE American 
Rule 901C.03; CBOE Rule 24.2(b) and (c); NYSE Arca Rule 5.13-O; Phlx 
Rule 1009A(b) and (c); and ISE Rule 2002(b) and (c).
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E. Surveillance and Capacity

    The Exchange represents that it has an adequate surveillance 
program in place for index options. The Exchange is a member of the 
Intermarket Surveillance Group (``ISG''), which is comprised of an 
international group of exchanges, market centers, and market 
regulators.\27\ The Exchange further represents that it has analyzed 
its capacity and believes the Exchange and the Options Price Reporting 
Authority (``OPRA'') have the necessary systems capacity to handle the 
additional traffic associated with the listing and trading of index 
options.\28\
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    \27\ See Notice, supra note 3, at 8552. The ISG was formed on 
July 14, 1983, to, among other things, coordinate more effectively 
surveillance and investigative information sharing arrangements in 
the stock and options markets. The purpose of the ISG is to provide 
a framework for the sharing of information and the coordination of 
regulatory efforts among exchanges trading securities and related 
products to address potential intermarket manipulations and trading 
abuses. Id. The ISG plays a crucial role in information sharing 
among markets that trade securities, options on securities, security 
futures products, and futures and options on broad-based security 
indexes. Id.
    \28\ See id.
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F. Implementation

    The Exchange will announce the implementation date of the proposed 
rule change by Regulatory Circular to be published no later than 90 
days following the approval of the proposed rule change. The 
implementation date will be no later than 90 days following the 
issuance of the Regulatory Circular.

[[Page 17208]]

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 
and, in particular, with Section 6(b) of the Act.\29\ In particular, 
the Commission believes that the Exchange's proposal to establish rules 
and procedures applicable to index options and establish generic 
listing and maintenance standards for broad-based and narrow-based 
index options is consistent with Section 6(b)(5) of the Act,\30\ 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 mechanisms 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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    \29\ 15 U.S.C. 78f(b). 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).
    \30\ 15 U.S.C. 78f(b)(5). See also supra note 5.
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    The Commission believes that permitting the trading of options on 
an index of securities (including a narrow-based index) enables 
investors to participate in the price movements of the index's 
underlying securities and allows investors holding positions in some or 
all of such securities to hedge the risks associated with their 
portfolios. The Commission further believes that options on an index 
provide investors with an important trading and hedging mechanism that 
is designed to reflect accurately the overall movement of the component 
stocks. In particular, the Commission believes that the proposed 
position and exercise limits should serve to minimize potential 
manipulation concerns.

A. Generic Listing and Maintenance Standards for Broad-Based and 
Narrow-Based Index Options

    In considering the proposed generic listing and maintenance 
standards for broad-based and narrow-based index options, the 
Commission notes that they are consistent with the listing and 
maintenance standards for broad-based and narrow-based index options 
that other exchanges \31\ have developed and that the Commission has 
previously approved.\32\ The Commission finds that the generic 
standards covering minimum capitalization, monthly trading volume, and 
relative weightings of component stocks are designed to ensure that the 
trading markets for component stocks are adequately capitalized and 
sufficiently liquid, and that no one stock or stock group dominates the 
index. Thus, the Commission believes that the satisfaction of these 
requirements significantly minimizes the potential for manipulation of 
the index.
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    \31\ See, e.g., MIAX Options Rules Chapter XVIII; NYSE American 
Rules 901C.02 and 901C.03; CBOE Rule 24.2; NYSE Arca Rules 5.12-O 
and 5.13-O; Phlx Rule 1009A; and ISE Rule 2002.
    \32\ See, e.g., MIAX Options Order, supra note 5 (order 
approving rules for index options, including generic listing and 
maintenance standards for broad-based and narrow-based index 
options); Securities Exchange Act Release Nos. 48405 (August 25, 
2003), 68 FR 52257 (September 2, 2003) (SR-ISE-2003-05) (order 
approving rules for index options and generic listing and 
maintenance standards for narrow-based index options); 52578 
(October 7, 2005), 70 FR 60590 (October 18, 2005) (SR-ISE-2005-27) 
(order approving generic listing and maintenance standards for 
broad-based index options); and 75650 (August 7, 2015), 80 FR 48600 
(August 13, 2015) (SR-EDGX-2015-18) (order approving options trading 
rules, including generic listing and maintenance standards for 
broad-based and narrow-based index options).
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    The Commission also finds the requirements that all securities 
comprising the index be an ``NMS stock'' as defined in Rule 600 of 
Regulation NMS under the Act,\33\ and that the index value be 
disseminated at least once every 15 seconds during trading hours of the 
index, will contribute significantly to the transparency of the market 
for such index options.
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    \33\ See 17 CFR 242.600.
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    The Commission further notes that the Exchange's rules that are 
applicable to broad-based and narrow-based index options, including 
provisions addressing sales practices, floor trading procedures, 
position and exercise limits, margin requirements, and trading halts 
and suspensions, will continue to apply to any broad-based or narrow-
based index options listed pursuant to Rule 19b-4(e) under the Act.
    The Commission's approval of the Exchange's proposed listing 
standards for broad-based and narrow-based index options will allow 
those index option products that satisfy the generic listing standards 
to begin trading pursuant to Rule 19b-4(e) under the Act, without the 
need for notice and comment and Commission approval. The Exchange's 
ability to rely on Rule 19b-4(e) under the Act for these products 
potentially reduces the time frame for listing and trading these 
securities, and thus enhances investors' opportunities.\34\
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    \34\ The Exchange, however, must maintain regulatory oversight 
over any products listed under the generic listing standards through 
adequate surveillance. The Exchange represents that it has an 
adequate surveillance program in place for index options. See 
Notice, supra note 3, at 8552.
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B. Surveillance

    As noted above,\35\ the Commission believes that the Exchange must 
maintain regulatory oversight over any products listed under the 
generic listing standards through adequate surveillance, and the 
Exchange represents that it has an adequate surveillance program in 
place for index options. The Commission also believes that a 
surveillance sharing agreement between an Exchange proposing to list a 
stock index derivative product and the exchange(s) trading the stocks 
underlying the derivative product is an important measure for 
surveillance of the derivative and underlying securities markets. The 
Commission notes that such agreements ensure the availability of 
information necessary to detect and deter potential manipulations and 
other trading abuses, thereby making the stock index product less 
readily susceptible to manipulation. When a new derivative securities 
product based upon domestic securities is listed and traded on an 
exchange pursuant to Rule 19b-4(e) under the Act, the exchange should 
determine that the markets upon which all of the U.S. component 
securities trade are members of the ISG, which provides information 
relevant to the surveillance of the trading of securities on other 
market centers.\36\ In this regard, all of the registered national 
securities exchanges, including the Exchange, as well as the Financial 
Industry Regulatory Authority (FINRA), are members of the ISG.
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    \35\ See supra note 34.
    \36\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (File No. S7-13-98).
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    For new derivative securities products based on securities from a 
foreign market, the SRO should have a comprehensive Intermarket 
Surveillance Agreement with the market for the securities underlying 
the new securities product.\37\ Accordingly, the Commission finds that 
the requirement that no more than 20% of the weight of the index may be 
comprised of non-U.S. component securities (stocks or ADRs) that are 
not subject to a comprehensive surveillance sharing agreement between 
the particular U.S. exchange and the primary market of the underlying 
security will continue to ensure that the Exchange has the ability to 
adequately surveil trading in the broad-based and narrow-based index 
options and the ADR components of the index.\38\
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    \37\ Id.
    \38\ See Proposed Rule 1802(b)(9) and (d)(10).

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[[Page 17209]]

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-PEARL-2018-02), be and 
hereby is approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-08053 Filed 4-17-18; 8:45 am]
 BILLING CODE 8011-01-P


