[Federal Register Volume 85, Number 174 (Tuesday, September 8, 2020)]
[Notices]
[Pages 55544-55550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19716]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89725; File No. SR-Phlx-2020-41]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Proposed Rule Change To List and Trade Options on a Nasdaq-
100[supreg] Volatility Index

September 1, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 24, 2020, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade options on a Nasdaq-
100[supreg] Volatility Index (Ticker Symbol: VOLQ), a new index that 
measures changes in 30-day implied volatility of the Nasdaq-100 Index. 
Options on the new index, also ticker symbol VOLQ, will be cash-settled 
and will have European-style exercise provisions.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

[[Page 55545]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to introduce a new options index product, the 
Nasdaq-100 Volatility Index (the ``Volatility Index''). This product 
would enable retail and institutional investors to manage volatility 
versus price risk. This index will measure ``at-the-money'' volatility, 
a precise measure of volatility used by investors. Unlike other 
indexes, this proposed novel product isolates at-the-money volatility 
for precise trading and hedging strategies. This product will provide 
investors information on volatility index returns by allowing them to 
observe increases and decreases of the Volatility Index.
    Specifically, the Exchange proposes to provide for the listing and 
trading on the Exchange of options on a new index that measures changes 
in 30-day implied volatility of the Nasdaq-100 Index (commonly known as 
and referred to by its ticker symbol, NDX). Options on the Volatility 
Index will be cash-settled and will have European-style exercise 
provisions. The Volatility Index, calculated using published real-time 
bid/ask quotes of NDX options, represents 30-day implied volatility and 
will be disseminated in annualized percentage points. The Exchange 
proposes to amend Options 4A, Section 12, ``Terms of Option 
Contracts,'' at subparagraphs (b)(2), (b)(6) and (e) as well as 
Supplementary Material .01 to Options 4A, Section 12. The Exchange also 
proposes to amend Options 3. Section 3, ``Minimum Increments'' and 
Options 4A, Section 6, ``Position Limits.''
    The Exchange proposes to list up to six weekly expirations and up 
to 12 standard (monthly) expirations in Volatility Index options. The 
six weekly expirations would be for the nearest weekly expirations from 
the actual listing date, and the weekly expirations would not expire in 
the same week in which standard (monthly) Volatility Index options 
expire. Standard (monthly) expirations in the Volatility Index options 
would not be counted as part of the maximum six weekly expirations 
permitted for Volatility Index options.\3\
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    \3\ See Options 4A, Section 12, Terms of Option Contracts, 
proposed new section (b)(viii)(A), which is based upon Cboe 
Exchange, Inc. (``Cboe'') Rule 4.13(a)(2) as applicable to 
Volatility Index (``VIX'') options.
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Volatility Index Design and Composition
    The calculation of the Volatility Index is based on the methodology 
developed by NShares LLC, a firm that develops proprietary derivatives-
based indexes and options enhanced indexes. The Volatility Index 
reflects changes in 30-day implied volatility, which measures magnitude 
of changes of the underlying broad-based securities index, NDX, 
calculated and maintained by Nasdaq, Inc., which is an affiliate of the 
Exchange. The Nasdaq-100 Index includes 100 of the largest \4\ domestic 
and international non-financial companies listed on The Nasdaq Stock 
Market LLC based on market capitalization. The Index reflects companies 
across major industry groups including computer hardware and software, 
telecommunications, retail/wholesale trade and biotechnology. It does 
not contain securities of financial companies including investment 
companies.
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    \4\ As of June 30, 2020, there were 78 components in the bottom 
25% of Nasdaq-100 Index weight. From January 1 through June 30, 
2020, these components had an Average Daily Dollar Trading Volume of 
$29.7 billion. The Average Daily Dollar Trading Volume of the least 
active component was $41.1 million. The aggregate market 
capitalization of the 78 components was $2.60 trillion.
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    The Volatility Index, which is a broad-based securities index 
pursuant to Phlx Options 4A, Section 2(a)(13),\5\ measures the 
expectation for market volatility over the next 30 calendar days as 
expressed by options on NDX. The Volatility Index uses the prices of 
certain listed options on NDX to obtain the prices of synthetic 
precisely at-the-money (``ATM'') options. The ultimate Volatility Index 
component options used directly in the computation include a total of 
eight NDX options from each of four expirations for a total of thirty-
two component options derived from observation of thirty-two NDX option 
bids and thirty-two NDX options offers (a total of sixty-four input 
observations). The synthetic ATM option prices are then used to 
calculate 30-day closed-form implied volatility. The result is a 
closed-form measure of implied volatility for the Nasdaq-100 Index that 
focuses on the options practitioners, hedgers, and traders use most, 
at-the-money options.
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    \5\ Options 4A, Section 2(a)(13) define a ``market index'' and 
``broad-based index'' to mean an index designed to be representative 
of a stock market as a whole or of a range of companies in unrelated 
industries. Like the Cboe Volatility Index (``VIX''), the Nasdaq-100 
Volatility Index is an implied volatility index and not a realized 
volatility index.
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    The generalized formula for Closed-Form Implied Volatility (CFIV) 
is:
[GRAPHIC] [TIFF OMITTED] TN08SE20.000

Where:

F is the forward price for the underlying asset calculated using 
put/call parity;
R is the annualized risk free rate;
T is time to expiration expressed as a fraction of a year;
Precisely ATM Option Price is the calculated price for an option 
with a strike price exactly equal to the forward price.

    The formula for the Volatility Index is:

VOLQ = 100 * CFIV 30-Day

Where:

CFIV30-Day is calculated using the Closed Form Implied 
Volatility for four weekly expirations as described in the 
methodology document attached [sic] as Exhibit 3-1.

    The underlying asset for the Volatility Index is NDX. The thirty-
two NDX component options used directly in the index calculation 
consist of the first and second in-the-money and the first and second 
out-of-the-money call and put options in the first-term, second-term, 
third-term, and fourth-term expirations (as described below). The price 
of any option is computed as the simple

[[Page 55546]]

average of the best bid and ask prices (accordingly, thirty-two bids 
and thirty-two asks are observed for a total of sixty-four initial 
input observations to arrive at thirty-two Volatility Index 
components). The relevant NDX option prices used in the Volatility 
Index construction are the NBBO (National Best Bid and Offer).
    This proposed broad-based product does not have single or 
aggregated component concentration risk. The methodology caps each 
single component as well as the top five weighted components. 
Specifically, no component security of the Volatility Index comprises 
more than 12.50% of the index's weighting. Further, the five highest 
weighted component securities of the Volatility Index in the aggregate 
do not comprise more than 43.75% of the index's weighting.
    The options on NDX used in the Volatility Index calculation are the 
a.m.- and p.m.-settled options expiring on Friday, unless Friday is an 
exchange holiday. The a.m.-settled options are those which expire on 
the third Friday of the month. The p.m.-settled options are those which 
expire on other Fridays during the month. At the beginning of regular 
trading hours (9:30 a.m. ET) each Thursday (or the commencement of 
trading on the next trading day if Thursday is an exchange holiday), 
the constituent options ``roll'' to new contract maturities. The new 
first-term options are those expiring on the Friday (or the expiration 
immediately prior to that Friday, if an exchange holiday), which is 22 
days after the nominal Thursday roll date. The new second-term options 
are those expiring on the Friday (or the expiration immediately prior 
to that Friday, if an exchange holiday), which is 29 days after the 
nominal Thursday roll date. The new third-term options are those 
expiring on the Friday (or the expiration immediately subsequent to the 
Friday, if an exchange holiday), which is 36 days after the nominal 
Thursday roll date. The new fourth-term options are those expiring on 
the Friday (or the expiration immediately subsequent to the Friday, if 
an exchange holiday), which is 43 days after the nominal Thursday roll 
date.
    The Volatility Index is quoted in annualized percentage points. For 
example, an Index level of 17.90 represents an annualized implied 
volatility of 17.90%.
Index Calculation and Maintenance
    The level of the Volatility Index will reflect the current 30-day 
implied volatility of NDX. The Volatility Index will be updated on a 
real-time basis on each trading day beginning at 9:30 a.m. and ending 
at 4:15 p.m. (New York time). If the current published value of a 
component is not available, the last published value will be used in 
the calculation.
    Values of the Volatility Index will be disseminated via the Nasdaq 
GIDS market data system every 15 seconds during the Exchange's regular 
trading hours to market information vendors such as Bloomberg and 
Thomson Reuters. In the event the Volatility Index ceases to be 
maintained or calculated the Exchange will not list any additional 
series for trading and will limit all transactions in such options to 
closing transactions only for the purpose of maintaining a fair and 
orderly market and protecting investors.
Exercise and Settlement Value
    The exercise settlement value calculation used for Volatility Index 
option settlement would be calculated on the same day as the Volatility 
Index Options expiration date. The exercise settlement value of a 
Volatility Index option would be calculated on the specific date 
(usually a Wednesday) identified in the option symbol for the series. 
If that Wednesday or the Friday that is 30 days following that 
Wednesday is an Exchange holiday, the exercise settlement value would 
be calculated on the business day immediately preceding that Wednesday. 
The last trading day for a Volatility Index option would be the 
business day immediately preceding the expiration date of the 
Volatility Index option. When the last trading day is moved because of 
an Exchange holiday, the last trading day for an expiring Volatility 
Index option contract would be the day immediately preceding the last 
regularly scheduled business day.\6\
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    \6\ See Options 4A, Section 12, ``Terms of Option Contracts,'' 
proposed new section (b)(6)(B) and (C), which is based upon Cboe 
Rule 4.13(a)(5)(A)(2) and (C) as applicable to VIX options.
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    Monthly options on the Volatility Index would expire on the 
Wednesday that is thirty days prior to the third Friday of the calendar 
month immediately following the expiring month. Trading in expiring 
options on the Volatility Index would normally cease at 4:15 p.m. (New 
York time) on the Tuesday preceding an expiration Wednesday.
Final Settlement
    The final settlement price (Ticker Symbol: VOLS) would be 
calculated as described below on Wednesday commencing at 9:32:000 a.m. 
on the expiration day, and continuing each second for the next 300 
seconds (New York time). The exercise settlement amount would be equal 
to the difference between the final settlement price and the exercise 
price of the option, multiplied by $100. Exercise would result in the 
delivery of cash on the business day following expiration.
    The Volatility Index's component NDX options are listed on Phlx as 
well as on the Exchange's affiliates, Nasdaq ISE, LLC (``ISE'') and 
Nasdaq GEMX, LLC (``GEMX''). The settlement value for the Volatility 
Index options (ticker symbol ``VOLS'') will be the Closing Volume 
Weighted Average Price (``Closing VWAP''), to be determined by 
reference to the prices and sizes of executed transactions or quotes in 
the thirty-two underlying NDX component options \7\ on the Exchange 
calculated at the opening of trading on the expiration date (usually a 
Wednesday).
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    \7\ Dependent upon movement in the Nasdaq-100 Index, all of the 
Closing Settlement Period index (VOLS) thirty-two underlying NDX 
component options can change every second making live market final 
settlement replication unfeasible over 300 seconds. The Exchange 
notes the Commission approved CBOE's change to the VIX settlement 
methodology to provide additional protection against manipulation by 
exact replication whereby CBOE will be solely responsible for 
determining the strike range of the settlement strip, making it 
impossible for anyone to attempt to manipulate the VIX settlement 
process by attempting to artificially affect which SPX series will 
have zero bids at the opening and thus potentially be included in 
the settlement strip. See Securities Exchange Act Release No. 86879 
(September 5, 2019), 84 FR 47984 (September 11, 2019) (SR-CBOE-2019-
034).
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    The following process is used to calculate the Closing VWAP of the 
Volatility Index options.\8\ At the end of individual one-second time 
observations during a 300 second period of time (the ``Closing 
Settlement Period'') \9\ commencing at 9:32:000 on the expiration day 
(or 2.00.001 minutes after the open of trading in the event trading 
does not commence at 9:30:00 a.m. ET),\10\ and continuing each second 
for the next 300 seconds, the number of

[[Page 55547]]

contracts traded on Phlx at each price during the observation period is 
multiplied by that price to yield a Reference Number.\11\ All Reference 
Numbers are then summed, and that sum is then divided by the total 
number of contracts traded during the observation period [Sum of 
(contracts traded at a price x price) / total contracts traded)] to 
calculate a Volume Weighted Average Price for that observation period 
(a ``One Second VWAP'') for that component option. If no transactions 
occur on Phlx during any one-second observation period, the NBBO 
midpoint \12\ at the end of the one second observation period will be 
considered the One Second VWAP for that observation period for purposes 
of this settlement methodology. Specifically, VOLS would seek the best 
bid and best offer (which may consist of a quote or an order) from 
among the listing markets, Phlx, ISE and GEMX markets.\13\ Each One 
Second VWAP for each component option is then used to calculate the 
Volatility Index, resulting in the calculation of 300 sequential 
Volatility Index values. Finally, all 300 Volatility Index values will 
be arithmetically averaged (i.e., the sum of 300 Volatility Index 
calculations is divided by 300) and the resulting figure is rounded to 
the nearest .01 to arrive at the settlement value disseminated under 
the ticker symbol VOLS.\14\
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    \8\ The Exchange shall be the reporting authority for VOLQ 
Index. The term ``reporting authority'' in respect of a particular 
index means the institutions or reporting service designated by the 
Exchange as the official source for calculating and determining the 
current value or the closing index value of the index. See Phlx 
Options 4A, Section 2(a)(16).
    \9\ The Exchange notes the extensive five-minute length of the 
VOLS Closing Settlement Period is similar to final settlement 
construction of the EURO STOXX 50 VOLATILITY index (VSTOXX) (average 
of all valid ticks that index produced during an expanding time 
window starting at 11:30:00 CET up to the current calculation time 
and not later than 12:00:00 CET). Both VSTOXX and VOLS inject 
substantive randomization for which components may change and market 
participants cannot know index components on a forward-looking 
basis.
    \10\ If the Exchange is unable to publish a settlement value by 
12:00 p.m. (New York Time) due to a trading halt, the Exchange will 
determine and publish a value on its website. In the event of a 
trading halt, the Exchange will commence the calculation of the 
settlement window beginning 2.00.001 minutes after the re-opening of 
trading.
    \11\ The Volatility Index final settlement treats options 
inclusion prices largely similar to the EURO STOXX 50 VOLATILITY 
(VSTOXX) index whereby the options inclusion price is defined as 
first priority, the most recent trade price and then second, the 
midpoint bid/ask price.
    \12\ The Volatility Index's component NDX options are listed on 
Phlx as well as on the Exchange's affiliates, ISE, GEMX. NDX average 
bid/ask spreads for all component options at each second for each of 
four expiration dates (11/21/2018, 12/19/2018, 1/16/2019, and 2/13/
2019) commencing at 9:30:15 a.m. is 5.52%. Commencing at 9:32.010 
a.m. the NDX average bid/ask spreads for all component options at 
each second for each of four expiration dates is 3.72%, 
demonstrating quote stability at 2 minutes after the opening.
    \13\ By considering the NBBO of all three markets, the Exchange 
believes the risk of manipulation is tempered by the consideration 
of a larger number of quotes from multiple Market Makers.
    \14\ See Options 4A, Section 12, ``Terms of Option Contracts,'' 
proposed new section (b)(6)(D)(II).
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    The Exchange notes the Volatility Index final settlement has 
exceedingly high hurdles for potential manipulation. First, the 
Volatility Index assesses each second of the entire field of NDX 
options prices to select certain listed options to obtain the prices of 
synthetic precisely at-the-money options. Accordingly, since the market 
is subject to constant change during three hundred individual one-
second time periods for which listed options will be included in final 
settlement, market participants cannot predict which components will be 
included, which would entail predicting where the Nasdaq-100 Index 
price level (a function of predicting the price of all one-hundred 
component stocks) will be at the end of each of the three hundred 
individual one-second time periods.
    Second, in the event the number of contracts traded at each price 
during the observation period is limited or zero, traders are subject 
to highly competitive market forces of deep and established market 
liquidity. Streaming bid/ask quotes on notional total contract value 
[Number of Contracts on Bid (Offer) times $100 multiplier times the 
Nasdaq-100 Index price level] during the final settlement observation 
often exceed one billion dollars, a figure which would require 
substantive capital to influence quotes. Taken together, during each 
second of the final settlement observation period on January 16, 2019 
and February 13, 2019, the average notional value of each bid of the 
thirty-two components was $21.1 million; the average notional value of 
each offer was $13.5 million. The sum of all thirty-two component 
notional value bid quotes was $675.9 million; the sum of all thirty-two 
component notional value ask quotes was $432.89 million (a bid/ask 
notional value of $1.1 billion).
    Third, since the Volatility Index assesses each second of all 
listed NDX options, this is a continuous assessment of competitive 
price action and voluminous trading activity for all Nasdaq-100 Index 
stock components. During the final settlement observation period (five-
minute period) on January 16, 2019 and February 13, 2019, the average 
summation of traded volume for all Nasdaq-100 Index component shares 
was 18.8 million shares. The average total value of all Nasdaq-100 
Index shares traded during the final settlement observation period was 
$1.93 billion. The corresponding market capitalization for all Nasdaq-
100 Index components during the final settlement period was $7.8 
trillion.
Contract Specifications
    The contract specifications for options on the Volatility Index are 
set forth in Exhibit 3-2. As noted above, the Volatility Index is a 
market index or a broad-based index, as defined in Phlx Options 4A, 
Section 2(a)(13). Options on the Volatility Index are European-style 
and cash-settled. The Exchange's standard trading hours for broad-based 
index options (9:30 a.m. to 4:15 p.m., New York time) will apply to the 
Volatility Index options under Phlx Options 4A, Section 12 at 
Supplementary Material .01, as proposed to be amended. The Exchange 
proposes to apply margin requirements for the purchase and sale of 
options on the Volatility Index that are identical to those applied for 
its other broad-based index options.
    The trading of options on the Volatility Index will be subject to 
the trading halt procedures applicable to other index options traded on 
the Exchange.\15\ Options on the Index will be quoted and traded in 
U.S. dollars.\16\ Accordingly, all Exchange and The Options Clearing 
Corporation members will be able to accommodate trading, clearance and 
settlement of the Volatility Index without alteration. All options on 
the index would have a minimum increment for options trading below 3.00 
of 0.05 ($5.00) and for all other series, 0.10 ($10.00).
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    \15\ Phlx Options 4A, Section 18(c), ``Trading Rotations, Halts 
or Reopenings.''
    \16\ Phlx Options 4A, Section 12(a)(1) titled ``Meaning of 
Premium Bids and Offers,'' provides that bids and offers shall be 
expressed in terms of dollars and decimal equivalents of dollars per 
unit of the index (e.g., a bid of 85.50 would represent a bid of 
$85.50 per unit).
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    The Exchange proposes to set the minimum strike price interval for 
options on the Volatility Index at $0.50 or greater where the strike 
price is less than $75, $1 or greater where the strike price is $200 or 
less and $5 or greater where the strike price is more than $200.\17\ 
The Exchange believes that these strike price intervals will provide 
investors with greater flexibility by allowing them to establish 
positions that are better tailored to meet their investment objectives.
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    \17\ Phlx Options 4A, Section 12 ``Terms of Option Contracts,'' 
proposed new section (b)(6)(E).
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    The Exchange proposes that there shall be no position or exercise 
limits for options on the Volatility Index. As noted above, the 
Volatility Index will settle using published volume and/or quotes from 
NDX options. Given that there are currently no position limits for NDX 
options,\18\ the Exchange believes it is appropriate for there to be no 
position or exercise limits \19\ for options on the Volatility Index. 
The underlying Nasdaq-100 Index includes 100 of the largest domestic 
and international non-financial securities listed on The Nasdaq Stock 
Market LLC based on market capitalization. The Index reflects companies 
across major industry groups including computer hardware and software, 
telecommunications, retail/wholesale trade and biotechnology. It

[[Page 55548]]

does not contain securities of financial companies including investment 
companies. As of June 30, 2020, the Nasdaq-100 Index contained 74.7 
billion component shares representing $11.42 trillion market value. By 
extension, the Exchange believes that the same reasoning applies to 
options on the Volatility Index since the value of options on the 
Volatility Index is derived from the volatility of NDX as implied by 
its options. The Exchange notes that options on the Miami International 
Securities Exchange LLC (``MIAX'') SPIKES Index, and options on the 
Cboe Volatility (``VIX'') Index are also not subject to any position or 
exercise limits.\20\ SPX, which underlies the Cboe Volatility Index, is 
one of the most actively trading index option and is, therefore, 
subject to no position limits. Accordingly, NDX, which underlies the 
VOLQ Index, is also one of the most actively trading index option and 
is, therefore, subject to no position limits.
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    \18\ See Phlx Options 4A, Section 6, ``Position Limits,'' 
section (a)(ii).
    \19\ Phlx Options 4A, Section 10, ``Exercise Limits,'' provides 
``In determining compliance with Options 9, Section 15, exercise 
limits for index option contracts shall be equivalent to the 
position limits described in Options 4A, Section 6.''
    \20\ See ISE Options 4A, Section 12, Cboe Rule 4.13 and MIAX 
Rule 1804. Additionally, the Exchange notes there are currently a 
number of other actively-traded broad-based index options, i.e., DJX 
and SPX, that are not subject to any position or exercise limits.
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    The trading of options on the Volatility Index would be subject to 
the same rules that presently govern the trading of Exchange index 
options, including sales practice rules, margin requirements, and 
trading rules. In addition, long term option series having up to sixty 
months to expiration could be traded.\21\ The trading of long term 
options on the Volatility Index would also be subject to the same rules 
that govern the trading of all the Exchange's index options, including 
sales practice rules, margin requirements, and trading rules.
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    \21\ Phlx Options 4A, Section 12(b)(2), as proposed to be 
amended. Phlx Rule Options 4A, Section 12(b)(2) currently applies 
only to stock index options and would be amended to permit listing 
of long term Volatility Index options. The Commission has previously 
approved long term options on the Nations VolDex Index. See 
Securities Exchange Act Release No. 71365, 79 FR 4512 (January 28, 
2014) (approving SR-ISE-2013-42).
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    Options 10, Section 6, ``Opening of Accounts,'' is designed to 
protect public customer trading and shall apply to trading in options 
on the Volatility Index. Specifically, Options 10, Section 6(a) 
prohibits members and member organizations from accepting a customer 
order to purchase or write an option, including options on the 
Volatility Index, unless such customer's account has been approved in 
writing by an Options Principal. Additionally, Phlx Options 10, Section 
8, ``Suitability,'' is designed to ensure that options, including 
options on the Volatility Index, are only sold to customers capable of 
evaluating and bearing the risks associated with trading in this 
instrument. Further, Phlx Options 10, Section 9, ``Discretionary 
Accounts,'' permits members and member organizations to exercise 
discretionary power with respect to trading options, including options 
on the Volatility Index, in a customer's account only if the customer 
has given prior written authorization and the account has been accepted 
in writing by a Registered Options Principal. Phlx Options 10, Section 
9 also requires a record to be made of every option transaction for an 
account in respect to which a member or member organization or a 
partner, officer or employee of a member organization is vested with 
any discretionary authority, such record to include the name of the 
customer, the designation, number of contracts and premium of the 
option contracts, the date and time when such transaction took place 
and clearly reflecting the fact that discretionary authority was 
exercised. Finally, Phlx Options 10, Section 7, ``Supervision of 
Accounts,'' Phlx Options 10, Section 10,''Confirmations to Customers,'' 
and Phlx Options 10, Section 13, ``Delivery of Options Disclosure 
Documents,'' will also apply to trading in options on the Volatility 
Index.
Surveillance and Capacity
    The Exchange has an adequate surveillance program in place for 
options traded on the Volatility Index and intends to apply those same 
program procedures that it applies to the Exchange's other options 
products. Further, the Phlx Market Surveillance Department conducts 
routine surveillance in approximately 30 discrete areas. Index products 
and their respective symbols are integrated into the Exchange's 
existing surveillance system architecture and are thus subject to the 
relevant surveillance processes. This is true for both surveillance 
system processing and manual processes that support the Phlx's 
surveillance program. Additionally, the Exchange is also a member of 
the Intermarket Surveillance Group (``ISG'') under the Intermarket 
Surveillance Group Agreement, dated June 20, 1994. ISG members work 
together to coordinate surveillance and investigative information 
sharing in the stock and options markets.
    The consistent liquidity of NDX options as well as the underlying 
NDX component securities ensures a multitude of market participants at 
any given time.\22\ Indeed, at least twelve Market Makers actively 
traded NDX options on Phlx during December 2018 on any given day, and 
there are now three options exchanges that list NDX options. The 
Exchange reiterates that it is unlikely that the Volatility Index 
settlement value could be manipulated. In particular, because the 32 
component Volatility Index option inputs \23\ are reviewed each second 
as the market changes to determine the ATM strikes (meaning that 
Volatility Index components could change 300 times during the 
settlement period), market participants could manipulate the settlement 
value only if they could replicate such value by guessing exact market 
moves over an extended period of 300 million microseconds. Because the 
likelihood of replication is extremely low, the Exchange believes that 
it is unlikely the settlement value could be manipulated.
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    \22\ NDX options one year (July 2019-June 2020) average daily 
volume was 11,678 contracts per day. For a comparative measure of 
liquidity, the Russell 2000 (RUT) index options one year (July 2019-
June 2020) average daily volume surpassed NDX (36,998 contracts 
versus 11,678 contracts). However, NDX options average daily 
portfolio notional value is greater than Russell 2000 (RUT) options 
average daily portfolio notional value ($10.09 billion versus $4.94 
billion). The NDX options average daily portfolio notional value is 
the product of the average daily volume times the one year (July 
2019-June 2020) median index price times the one-hundred dollar 
options index multiplier divided by 253 trading days.
    \23\ The Exchange notes that due to the number of proposed 
components, the mathematical formula would prevent the Volatility 
Index from exceeding 12.5% in any single component and 43.5% for the 
top 5 components.
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    Nonetheless, the Exchange, in its normal course of surveillance, 
will monitor for any potential manipulation of the Volatility Index 
settlement value according to the Exchange's current procedures. 
Additionally, the Exchange would monitor the integrity of the 
Volatility Index by analyzing trades, quotations, and orders that 
affect any of the 300 calculated reference prices for any of the 32 NDX 
option series used for the final settlement calculation for potential 
manipulation on the Exchange.
    In the context of surveillance, the Exchange will monitor all NDX 
NBBO quotes and trades (including but not limited to NDX quotes and 
trades on the Exchange) during the opening (from 09:32:01 a.m. to 
09:37:00 a.m.) for each of the 32 at-the-money series utilized in the 
final settlement calculation for possible manipulation. It would also 
surveil for open interest manipulation by monitoring NDX positions 
prior to settlement to identify the economic interest (long and short), 
account type

[[Page 55549]]

(customer, firm or market maker) and clearing members to evaluate 
customer, and firm interest in the Volatility Index options. 
Additionally, the Exchange will evaluate all trades in the NDX option 
series on the Phlx, ISE and GEMX options exchanges from one second 
after the Closing Settlement Period through end of the trading day for 
possible wash trading or related artificial activity. Finally, the 
Exchange will monitor for manipulation by comparing quotes for 
settlement against quotes for non-settlement in the 32 NDX option 
series used for settlement between the opening, and a period of time 
thereafter, with a focus on identifying deviations of the midpoint, the 
bid-ask spread and other market elements compared to the Nasdaq-100 
Index value.
    The Exchange believes that its surveillance procedures currently in 
place, coupled with the additional measures proposed above, will allow 
it to adequately surveil for any potential manipulation in the trading 
of Volatility Index options.
    The Exchange represents that it has the necessary system capacity 
to support additional quotations and messages that will result from the 
listing and trading of options on the Volatility Index.
Implementation
    The Exchange proposes to issue an Options Trader Alert announcing 
the day it will launch options on Nasdaq-100 Volatility Index. The 
Exchange will launch these options by Q3 2021. The Exchange will issue 
an Options Trader Alert to announce the launch date.
    The Exchange also proposes minor technical amendments within 
Options 4A, Sections 6 and 12 to update the name of the Nasdaq-100 
Index.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\24\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\25\ in particular, in that it will permit options 
trading in the Volatility Index pursuant to rules designed to prevent 
fraudulent and manipulative acts and practices and promote just and 
equitable principles of trade. In particular, the Exchange believes the 
proposed rule change will further the Exchange's goal of introducing 
new and innovative products to the marketplace. The Exchange believes 
that listing options on the Volatility Index will provide an 
opportunity for investors to hedge, or speculate on, the market risk 
associated with changes in 30-day implied volatility.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Volatility-focused products have become more prominent over the 
past few years, and in a number of different formats and types, 
including ETFs, exchange-traded notes, exchange-traded options, and 
exchange-traded futures. Such products offer investors the opportunity 
to manage their volatility risks associated with an underlying asset 
class. Currently, most of the products focus on underlying equity 
indexes or equity-based portfolios. The Exchange proposes to introduce 
a cash-settled options contract on a new volatility index, which 
focuses on equity exposure using options on the NDX, which are actively 
traded equity option products. The Exchange believes that because the 
Volatility Index is derived from published NDX options prices, and 
given the immense liquidity found in the individual security components 
of NDX as well as the aggregate index market value of $7.24 trillion, 
the concern that the Volatility Index will be subject to market 
manipulation is greatly reduced. Therefore, the Exchange believes that 
the proposed rule change to list options on the Volatility Index is 
appropriate.
    The Exchange further notes that Phlx rules that apply to the 
trading of other index options currently traded on the Exchange would 
also apply to the trading of options on the Volatility Index. The 
Exchange proposes to utilize nickel and dime increments for trading the 
Volatility Index options. The Exchange believes that these trading 
increments will enable traders to make the most effective use of the 
product for trading and hedging purposes. Additionally, the trading of 
options on the Volatility Index would be subject to, among others, 
Exchange rules governing margin requirements and trading halt 
procedures. Finally, the Exchange represents that it has an adequate 
surveillance program in place to detect manipulative trading in options 
on the Volatility Index. The Exchange also represents that it has the 
necessary systems capacity to support the new options series. And as 
stated in the filing, the Exchange has rules in place designed to 
protect public customer trading.
    Phlx's proposal to initiate the Closing Settlement Period at 2 
minutes after the underlying market opens is intended to permit the 
price of the underlying NDX component security to settle down and not 
flicker back and forth among prices after its opening. It is common for 
options to fluctuate in price immediately upon opening; such volatility 
reflects a natural uncertainty about the ultimate opening price of all 
Nasdaq-100 Index component stocks while the buy and sell interest is 
matched. The Exchange notes that this delay ensures more stability in 
the marketplace prior to initiating the settlement. The Exchange's 
decision to initiate the Closing Settlement Period at 2 minutes after 
the underlying market opens ensures that it has the ability for Market 
Makers to gain information and certainty after the underlying market 
has opened before submitting quotes. This 2 minute delay before the 
Closing Settlement Period commences permits Market Makers to submit 
informed quotes which the Exchange believes would be tighter given the 
added certainty. Market Makers provide necessary liquidity to the 
marketplace.

B. Self-Regulatory Organization's Statement on Burden on Competition

    This proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act. The Exchange notes that the proposed rule change will 
facilitate the listing and trading of an index option product with a 
novel structure that will enhance competition among market 
participants, to the benefit of investors and the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 55550]]

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-Phlx-2020-41 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2020-41. 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 website (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 website 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 the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-Phlx-2020-41, and should be submitted on 
or before September 29, 2020.
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    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-19716 Filed 9-4-20; 8:45 am]
BILLING CODE 8011-01-P


