[Federal Register Volume 86, Number 37 (Friday, February 26, 2021)]
[Notices]
[Pages 11807-11813]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-03949]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91178; File No. SR-Phlx-2021-07]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Proposed Rule Change To Permit the Listing and Trading of Options 
Based on 1/100th the Value of the Nasdaq-100 Index[supreg]

February 22, 2021.
    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 February 10, 2021, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``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 amend the Exchange's rules to permit the 
listing

[[Page 11808]]

and trading of index options on Nasdaq 100 Micro Index Options 
(``XND'').
    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.

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 purpose of the proposed rule change is to amend the Exchange's 
rules to permit the listing and trading of index options on Nasdaq 100 
Micro Index Options (``XND''). The XND options contract will be the 
same in all respects as the current Nasdaq-100 Index options (``NDX'') 
\3\ contract listed on the Exchange, except that it will be based on 1/
100th of the value of the Nasdaq-100 Index, and will be P.M.-Settled 
with an exercise settlement value based on the closing index value of 
the Nasdaq-100 Index on the day of expiration.\4\ The Exchange believes 
that the proposed contract will be valuable for retail and other 
investors that wish to trade micro options on the Nasdaq-100 Index.
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    \3\ See Options 4A, Section 12(e)(II).
    \4\ In addition to the current Nasdaq-100 Index value, Nasdaq 
will disseminate an Index value for XND that is 1/00 of the value of 
the Nasdaq-100 Index.
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I. Nasdaq-100 Index
    The Nasdaq-100 Index is a modified market capitalization-weighted 
index that includes 100 of the largest non-financial companies listed 
on The Nasdaq Stock Market LLC (``Nasdaq''),\5\ based on market 
capitalization.\6\ It does not contain securities of financial 
companies, including investment companies. Security types generally 
eligible for the Nasdaq-100 Index include common stocks, ordinary 
shares, American Depository Receipts, and tracking stocks. Security or 
company types not included in the Nasdaq-100 Index are closed-end 
funds, convertible debentures, exchange traded funds, limited liability 
companies, limited partnership interests, preferred stocks, rights, 
shares or units of beneficial interest, warrants, units and other 
derivative securities.\7\
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    \5\ Nasdaq is an affiliate of the Exchange.
    \6\ The Nasdaq-100 Index is a broad-based index, as defined in 
Options 4A, Section 3.
    \7\ A description of the Nasdaq-100 Index is available on 
Nasdaq's website at https://indexes.nasdaqomx.com/docs/methodology_NDX.pdf.
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II. XND Options Contract
    Currently, the Exchange lists and trades NDX options that are based 
on the full value of the Nasdaq-100 Index. In an effort to attract 
additional interest in index options based on the Nasdaq-100 Index, the 
Exchange now proposes to list and trade a new micro option contract 
based on this index. XND options will trade independently of and in 
addition to NDX options, and the XND options will be subject to the 
same rules that presently govern the trading of index options based on 
the Nasdaq-100 Index, including sales practice rules, margin 
requirements, trading rules, and position and exercise limits. Similar 
to NDX, XND options will be European-style and cash-settled, and will 
have a contract multiplier of 100. The contract specifications for XND 
options will mirror in all respects those of the NDX options contract 
already listed on the Exchange, except that the Exchange proposes that 
XND options will be based on 1/100th of the value of the Nasdaq-100 
Index, and will be P.M.-settled pursuant to proposed Options 4A, 
Section 12(a)(5).
    Similar features are available with other index options contracts 
listed and/or approved for trading on the Exchange and other options 
exchanges, including the Exchange's affiliate, Nasdaq ISE, LLC 
(``ISE''), which lists options on NQX (a reduced value index based on 
\1/5\ of the value of the Nasdaq-100 Index).\8\
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    \8\ See ISE Options 4A, Section 12(a)(6). NQX is P.M.-settled 
and a European-style and cash-settled, with a contract multiplier of 
100.
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    The value of the Nasdaq-100 Index has increased significantly in 
recent years such that the value of the index stood at 12,112.11, as of 
the opening of trading on November 25, 2020. As a result of the 
increase in the value of the underlying Nasdaq-100 Index, the premium 
for NDX options has also increased. The Exchange believes that this has 
caused NDX options to trade at a level that may be uncomfortably high 
for certain retail and other investors. The Exchange believes that 
listing options at a micro value will attract a greater source of 
retail customer business. Further, listing options on a micro index 
will provide an opportunity for investors to trade and hedge the market 
risk associated with the Nasdaq-100 Index.
    With an exercise settlement value based on 1/100th of the Nasdaq-
100 Index, the Exchange believes that retail and other investors would 
be able to use this trading vehicle while extending a smaller outlay of 
capital. Furthermore, the proposed micro index will have a notional 
value at a level that is comparable to similar products that have been 
successful in the market, including the S&P 500 Mini SPX Options Index 
(XSP), which had an index value of (363.55) as of the opening of 
trading on November 25th, 2020. The Exchange therefore believes that 
basing the proposed XND options contract on 1/100 of the value of the 
Nasdaq-100 Index should attract additional investors, and, in turn, 
create a more active and liquid trading environment.
    XND options will also be P.M.-settled as the Exchange believes that 
market participants, and in particular, retail investors, who are the 
target audience for this product, prefer P.M.-settled index options. 
P.M.-settlement is preferred by retail investors as it allows market 
participants to hedge their exposure for the full week. A.M.-settled 
options by contrast are based on opening prices on the day of 
expiration and therefore stop trading on the day prior, leaving 
residual risk on the day of expiration. Feedback from Members that 
handle retail order flow has indicated that P.M.-settlement is needed 
to garner retail investor support for this product. In this regard, the 
Exchange notes that there is ample precedent for P.M.-settlement of 
broad-based index options as described in various P.M.-settled pilot 
filings.\9\ In addition, Cboe offers P.M.-settled index options based 
on both the Standard & Poor's 500 index

[[Page 11809]]

(``SPXW''),\10\ and the Quarterly Russell 2000 Index Options [sic] 
(``RUTW'').
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    \9\ See Securities Exchange Act Release Nos. 85030 (February 1, 
2019), 84 FR 2633 (February 7, 2019) (SR-ISE-2019-01); 85672 (April 
17, 2019), 84 FR 16899 (April 23, 2019) (SR-ISE-2019-11); 87380 
(October 22, 2019), 84 FR 57786 (October 28, 2019) (SR-ISE-2019-28); 
and 88681 (April 17, 2020), 85 FR 22775 (April 23, 2020) (SR-ISE-
2020-17). See also Securities Exchange Act Release Nos. 84835 
(December 17, 2018), 83 FR 65773 (December 21, 2018) (SR-Phlx-2018-
80); 85669 (April 17, 2019), 84 FR 16913 (April 23, 2019) (SR-Phlx-
2019-13); 87381 (October 22, 2019), 84 FR 57788 (October 28, 2019) 
(SR-Phlx-2019-43); and 88684 (April 17, 2020), 85 FR 22781 (April 
23, 2020) (SR-Phlx-2020-24).
    \10\ See Securities Exchange Act Release No. 80060 (February 17, 
2017), 82 FR 11673 (February 24, 2017) (SR-CBOE-2016-091) (Approval 
Order).
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    Pursuant to Phlx Options 4A, Section 12(b)(5), XND would become 
part of the Nonstandard Expirations Pilot Program. Pursuant to the 
provisions of this pilot which currently is set to expire on May 4, 
2021, the Exchange may open for trading Weekly Expirations on any 
broad-based index eligible for standard options trading to expire on 
any Monday, Wednesday, or Friday (other than the third Friday-of-the-
month or days that coincide with an EOM expiration). Weekly Expirations 
shall be subject to all provisions of this Rule and treated the same as 
options on the same underlying index that expire on the third Friday of 
the expiration month; provided, however, that Weekly Expirations shall 
be P.M.-settled and new series in Weekly Expirations may be added up to 
and including on the expiration date for an expiring Weekly Expiration. 
Further, the Exchange may open for trading EOMs on any broad-based 
index eligible for standard options trading to expire on last trading 
day of the month. EOMs shall be subject to all provisions of this Rule 
and treated the same as options on the same underlying index that 
expire on the third Friday of the expiration month; provided, however, 
that EOMs shall be P.M.-settled and new series in EOMs may be added up 
to and including on the expiration date for an expiring EOM.\11\
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    \11\ XND is a broad-based index. Options 4A, Section 12(b)(5) 
provides,
    Nonstandard Expirations Pilot Program
    (A) Weekly Expirations. The Exchange may open for trading Weekly 
Expirations on any broad-based index eligible for standard options 
trading to expire on any Monday, Wednesday, or Friday (other than 
the third Friday-of-the-month or days that coincide with an EOM 
expiration). Weekly Expirations shall be subject to all provisions 
of this Rule and treated the same as options on the same underlying 
index that expire on the third Friday of the expiration month; 
provided, however, that Weekly Expirations shall be P.M.-settled and 
new series in Weekly Expirations may be added up to and including on 
the expiration date for an expiring Weekly Expiration.
    The maximum number of expirations that may be listed for each 
Weekly Expiration (i.e., a Monday expiration, Wednesday expiration, 
or Friday expiration, as applicable) in a given class is the maximum 
number of expirations permitted for standard index options in 
Options 4A, Section 12(a)(4). Weekly Expirations need not be for 
consecutive Monday, Wednesday, or Friday expirations as applicable; 
however, the expiration date of a non-consecutive expiration may not 
be beyond what would be considered the last expiration date if the 
maximum number of expirations were listed consecutively. Weekly 
Expirations that are initially listed in a given class may expire up 
to four weeks from the actual listing date. If the last trading day 
of a month is a Monday, Wednesday, or Friday and the Exchange lists 
EOMs and Weekly Expirations as applicable in a given class, the 
Exchange will list an EOM instead of a Weekly Expiration in the 
given class. Other expirations in the same class are not counted as 
part of the maximum number of Weekly Expirations for a broad-based 
index class. If the Exchange is not open for business on a 
respective Monday, the normally Monday expiring Weekly Expirations 
will expire on the following business day. If the Exchange is not 
open for business on a respective Wednesday or Friday, the normally 
Wednesday or Friday expiring Weekly Expirations will expire on the 
previous business day.
    (B) End of Month (``EOM'') Expirations. The Exchange may open 
for trading EOMs on any broad-based index eligible for standard 
options trading to expire on last trading day of the month. EOMs 
shall be subject to all provisions of this Rule and treated the same 
as options on the same underlying index that expire on the third 
Friday of the expiration month; provided, however, that EOMs shall 
be P.M.-settled and new series in EOMs may be added up to and 
including on the expiration date for an expiring EOM.
    The maximum number of expirations that may be listed for EOMs in 
a given class is the same as the maximum number of expirations 
permitted for standard options on the same broad-based index. EOM 
expirations need not be for consecutive end of month expirations; 
however, the expiration date of a non-consecutive expiration may not 
be beyond what would be considered the last expiration date if the 
maximum number of expirations were listed consecutively. EOMs that 
are first listed in a given class may expire up to four weeks from 
the actual listing date. Other expirations in the same class are not 
counted as part of the maximum numbers of EOM expirations for a 
broad-based index class.
    (C) Duration of Nonstandard Expirations Pilot Program. The 
Nonstandard Expirations Pilot Program shall be through May 4, 2021.
    (D) Weekly Expirations and EOM Trading Hours. Transactions in 
Weekly Expirations and EOMs may be effected on the Exchange between 
the hours of 9:30 a.m. (Eastern Time) and 4:15 p.m. (Eastern Time), 
except that on the last trading day, transactions in expiring Weekly 
Expirations and EOMs may be effected on the Exchange between the 
hours of 9:30 a.m. (Eastern time) and 4:00 p.m. (Eastern time).
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    The Exchange does not believe that the introduction of a new P.M.-
settled Nasdaq-100 Index contract will cause any market disruptions. 
The Exchange will monitor for any disruptions caused by P.M.-settlement 
of the proposed XND options contract or the development of any factors 
that could cause such disruptions. P.M.-settled options predominate in 
the over-the-counter (``OTC'') market, and the Exchange is not aware of 
any adverse effects in the OTC market attributable to the P.M.-
settlement feature. The Exchange is merely proposing to offer a P.M.-
settled product in an exchange environment, which offers the additional 
benefits of added transparency, price discovery, and stability.
III. Trading Hours, Minimum Increments, Expirations and Strike Prices
    XND options will be available for trading during the Exchange's 
standard trading hours for index options, i.e., from 9:30 a.m. to 4:15 
p.m. New York time.\12\
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    \12\ See Options 4A, Section 12(b)(5)(D).
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    XND options will trade with a minimum trading increment of $0.01 
for options for all other series.\13\ Today, Cboe lists a reduced-value 
contract on the S&P 500 Index in the form of XSP options with minimum 
increments of $0.01 for all option series, regardless of price.\14\ The 
minimum increments for bids and offers for SPDR options (``SPY''), an 
exchange-traded fund that also tracks the performance of 1/10th the 
value of the S&P 500 Index, is $0.01, regardless of whether the options 
series is quoted above, at, or below $3. Cboe noted in their Approval 
Filing for XSP that since the prices of both XSP options and SPY 
options are based, in a similar manner, on 1/10th the size of the S&P 
500 Index, CBOE proposes to amend Interpretation and Policy .03 to Rule 
6.42 to state that for so long as SPY options participate in the Penny 
Pilot program (now Penny Interval Program), the minimum increments for 
XSP options shall be the same as SPY for all options series (including 
LEAPS). Likewise, XND options are similar in size to the INVESCO QQQ 
Trust\TM\, Series 1 (``QQQ''),\15\ which is the ETF on the Nasdaq-100 
Index (roughly 1/40th of the Nasdaq-100 Index). Phlx proposes to adopt 
a new Supplementary Material .03 to Options 3, Section 3 to state that 
for so long as QQQ options participate in the Penny Interval Program, 
the minimum increments for XND options shall be the same as QQQ for all 
options series (including LEAPS), which shall be $0.01 for options for 
all other series. The Exchange also proposes to renumber current 
Supplementary Material .03 to Options 3, Section 3 as .04.
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    \13\ These increments differ from the minimum increments within 
Phlx Options 3, Section 3(a), which provides, ``Except as provided 
in Supplementary Material to Options 3, Section 3 below, all options 
on stocks, index options, and Exchange Traded Fund Shares trading at 
a price of $3.00 or higher shall have a minimum increment of $.10, 
and all options on stocks and index options trading at a price under 
$3.00 shall have a minimum increment of $.05.'' While XND options 
have a minimum increment of a penny, these options are not within 
the Penny Interval Program.
    \14\ See Securities Exchange Act Release No. 70087 (August 6, 
2013), 78 FR 47809 (July 31, 2013) (SR-Cboe-2013-055) (Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment No. 1, to List and 
Trade a P.M.-settled Mini-SPX Index Option Product) (``Approval 
Filing for XSP'').
    \15\ QQQ is an exchange-traded fund based on the Nasdaq-100 
Index.
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    The Exchange proposes that XND options will have monthly expiration 
dates on the third Friday of each month (i.e., Expiration Friday), and 
the

[[Page 11810]]

Exchange proposes to list XND options in expiration months consistent 
with those of other index option products available on the 
Exchange.\16\ In addition, the Exchange may list long term index 
options series (``LEAPS'') that expire from twelve (12) to sixty (60) 
months from the date of issuance.\17\ XND options would also be 
eligible to be added to the Short Term Option Series Program 
(``Weeklies'') and/or Quarterly Options Series Program 
(``Quarterlies'') if designated by the Exchange pursuant to Options 4A, 
Section 12(b)(4) and (b)(3), respectively.\18\
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    \16\ Options 4A, Section 12(a)(4) currently provides that the 
Exchange may list: (i) Up to six (6) standard monthly expirations at 
any one time in a class, but will not list index options that expire 
more than twelve (12) months out; (ii) up to 12 standard monthly 
expirations at any one time for any class that the Exchange (as the 
Reporting Authority) uses to calculate a volatility index; and (iii) 
up to 12 standard (monthly) expirations in NDX options.
    \17\ See Options 4A, Section 12(b)(2).
    \18\ The Exchange expects that it will add XND options to the 
Weeklies program.
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    Further, the Exchange proposes to permit XND options to be listed 
and traded in accordance with the Nonstandard Expirations Pilot 
Program. This would permit the Exchange to open for trading Weekly 
Expirations on any broad-based index eligible for standard options 
trading to expire on any Monday, Wednesday, or Friday (other than the 
third Friday-of-the-month or days that coincide with an End of Month 
(``EOM'') expiration). Weekly Expirations would be subject to all 
provisions of Options 4A, Section 12 and would be treated the same as 
options on the same underlying index that expire on the third Friday of 
the expiration month. New series in Weekly Expirations could be added 
up to and including on the expiration date for an expiring Weekly 
Expiration. The maximum number of expirations that could be listed for 
each Weekly Expiration (i.e., a Monday expiration, Wednesday 
expiration, or Friday expiration, as applicable) in a given class would 
be the same as the maximum number of expirations permitted for standard 
options on the same broad-based index.\19\ Further, the Exchange could 
open for trading EOMs on any broad-based index eligible for standard 
options trading to expire on last trading day of the month. EOMs would 
be subject to all provisions of Options 4A, Section 12 and treated the 
same as options on the same underlying index that expire on the third 
Friday of the expiration month. However, the EOMs would be P.M.-settled 
and new series in EOMs could be added up to and including on the 
expiration date for an expiring EOM.\20\
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    \19\ Weekly Expirations would not need to be for consecutive 
Monday, Wednesday, or Friday expirations as applicable. However, the 
expiration date of a non-consecutive expiration would not be 
permitted beyond what would be considered the last expiration date 
if the maximum number of expirations were listed consecutively. 
Weekly Expirations that are first listed in a given class could 
expire up to four weeks from the actual listing date. If the last 
trading day of a month were a Monday, Wednesday, or Friday and the 
Exchange were to list EOMs and Weekly Expirations as applicable in a 
given class, the Exchange would list an EOM instead of a Weekly 
Expiration in the given class. Other expirations in the same class 
would not be counted as part of the maximum number of Weekly 
Expirations for a broad-based index class. If the Exchange were not 
open for business on a respective Monday, the normally Monday 
expiring Weekly Expirations would expire on the following business 
day. If the Exchange were not open for business on a respective 
Wednesday or Friday, the normally Wednesday or Friday expiring 
Weekly Expirations would expire on the previous business day. See 
Options 4A, Section 12(b)(5)(A).
    \20\ The maximum number of expirations that could be listed for 
EOMs in a given class would be the same as the maximum number of 
expirations permitted for standard options on the same broad-based 
index. EOM expirations would not need to be for consecutive end of 
month expirations. However, the expiration date of a non-consecutive 
expiration may not be beyond what would be considered the last 
expiration date if the maximum number of expirations were listed 
consecutively. EOMs that are first listed in a given class could 
expire up to four weeks from the actual listing date. Other 
expirations would not be counted as part of the maximum numbers of 
EOM expirations for a broad-based index class. See Options 4A, 
Section 12(b)(5)(B).
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    Generally, pursuant to Options 4A, Section 12(a)(2), except as 
provided in Supplementary Material .04 to Options 4A, Section 12,\21\ 
the exercise (strike) price intervals will be no less than $5, provided 
that the Exchange may determine to list strike prices at no less than 
$2.50 intervals for options on the following indexes (which may also be 
known as sector indexes). The Exchange proposes to amend Options 4A, 
Section 12(a)(2) to add XND options to the list of classes where strike 
price intervals of no less than $2.50 are generally permitted and note, 
``if the strike price is less than $200.'' The Exchange proposes to 
adopt the same strike price intervals for XND options as currently 
approved for Reduced Value Nasdaq 100 Options within Supplementary 
Material .02 to Options 4A, Section 12. Thus, notwithstanding Options 
4A, Section 12(a)(2), the interval between strike prices of series of 
XND options will be $1 or greater, subject to the conditions described 
in Supplementary Material .02 to Options 4A, Section 12. The Exchange 
will not list LEAPS on XND options at intervals less than $5. If the 
Exchange determines to add XND options to the Weeklies or Quarterlies 
programs such options will be listed with expirations and strike prices 
described in Supplementary Material .02 to Options 4A, Section 12.
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    \21\ Supplementary Material .04 to Options 4A, Section 12 
provides, ``Supplementary Notwithstanding subsection (a) to this 
Options 4A, Section 12, the interval between strike prices of series 
of Alpha Index options will be $1 or greater. The Exchange will list 
at least two strike prices above and two strike prices below the 
current value of each Alpha Index option at about the time a series 
is opened for trading on the Exchange. The Exchange may also list 
additional strike prices at any price point, with a minimum of a 
$1.00 interval between strike prices, as required to meet the needs 
of customers.''
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IV. Position and Exercise Limits; Margin
    As with NDX, in determining compliance with Options 4A, Section 6, 
Position Limits, there will be no position limits for broad-based index 
option contracts in the XND class.\22\ Although there will be no 
position limits for XND options, the Exchange proposes to amend Options 
4A, Section 6 to include XND. Options 4A, Section 6(e) provides,
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    \22\ The Exchange is amending Options 4A, Section 6(a)(ii) to 
reflect this proposed change.
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    Full value, reduced value, long term and quarterly expiring options 
based on the same index shall be aggregated. Reduced value or mini-size 
contracts shall be aggregated with full value or full-size contracts 
and counted by the amount by which they equal a full value contract 
(e.g., ten (10) one tenth (1/10th) value contracts equal one (1) full 
value contract). Positions in Short Term Options Series and Quarterly 
Options Series shall be aggregated with positions in options contracts 
of the same index. Nonstandard Expirations (as provided for in Options 
4A, Section 5(b)(vii)) on a broad-based index shall be aggregated with 
option contracts on the same broad-based index and shall be subject to 
the overall position limit.
    Since the Exchange is proposing to list a micro index contract that 
is based on 1/100 of the value of the Nasdaq-100 Index, Options 4A, 
Section 6(e) would apply. In addition, as with NDX, there would be no 
exercise limits for XND.\23\ Finally, the Exchange proposes to apply 
broad-based index margin requirements for the purchase and sale of XND 
options that are the same as margin requirements currently in place for 
NDX options.
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    \23\ See Options 4A, Section 10 which provides that exercise 
limits for index options contracts shall be equivalent to the 
position limits described in Options 4A, Section 6.
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V. Other Amendments
    The Exchange proposes to add a new Options 4A, Section 12(a)(5) 
titled ``European-Style Exercise'' similar to ISE Rules at Options 4A, 
Section 12(a)(4). The rule would provide,

[[Page 11811]]

``European-Style Exercise.'' The following European-style index 
options, some of which may be A.M.-settled as provided in subparagraph 
(e), are approved for trading on the Exchange:
    (i) Full-size Nasdaq 100 Index; and
    (ii) Nasdaq 100 Micro Index Options.
    The addition of this rule text will bring greater clarity to the 
Exchange's rules regarding which index options will trade European-
Style Exercise.
    The Exchange also proposes to add rule text within Options 4A, 
Section 12(b)(2) which describes LEAPS. This rule text is similar to 
rule text within ISE Options 4A, Section 12(b). The Exchange proposes 
to provide,
    (i) Index long-term options series may be based on either the full 
or micro index value of the underlying index. There may be up to ten 
(10) expiration months, none further out than sixty (60) months. Strike 
price interval, bid/ask differential and continuity rules shall not 
apply to such options series until the time to expiration is less than 
twelve (12) months.
    (ii) When a new index long-term options series is listed, such 
series will be opened for trading either when there is buying or 
selling interest, or forty (40) minutes prior to the close, whichever 
occurs first. No quotations will be posted for such options series 
until they are opened for trading.
    (iii) Micro Index Long Term Options Series. Micro index Long Term 
Options Series on the following stock indices are approved for trading 
on the Exchange:
    (A) Nasdaq 100 Index
    (1) Expiration Months. Micro index long term options series may 
expire at six-month intervals. When a new expiration month is listed, 
series may be near or bracketing the current index value. Additional 
series may be added when the value of the underlying index increases or 
decreases by ten (10) to fifteen (15) percent.
    Similar to ISE, the Exchange proposes to provide within the rule 
text that Index LEAPS may be based on either the full or micro index 
value of the underlying index.\24\ The Exchange proposes to permit up 
to ten (10) expiration months, however not further out than sixty (60) 
months, similar to ISE. Finally, the Exchange proposes to state that 
strike price interval, bid/ask differential and continuity rules shall 
not apply to such options series until the time to expiration is less 
than twelve (12) months, similar to ISE.
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    \24\ ISE Rules do not reference a micro index product but rather 
a reduced value index.
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    With respect to new index LEAPS, the Exchange proposes to permit 
such series to be opened for trading either when there is buying or 
selling interest, or forty (40) minutes prior to the close, whichever 
occurs first, similar to ISE. Also, similar to ISE, no quotations will 
be posted for such options series until they are opened for trading.
    Finally, the Exchange proposes to note the expiration months for 
Micro index LEAPS. Micro index LEAPS may expire at six-month intervals. 
When a new expiration month is listed, series may be near or bracketing 
the current index value. Additional series may be added when the value 
of the underlying index increases or decreases by ten (10) to fifteen 
(15) percent. These proposed changes are similar to ISE.
VI. Surveillance and Capacity
    The Exchange represents that it has sufficient capacity to handle 
additional quotations and message traffic associated with the proposed 
listing and trading of XND options. Further, the Exchange has analyzed 
its capacity and represents that it believes the Exchange and the 
Options Price Reporting Authority (``OPRA'') have the necessary systems 
capacity to handle any additional traffic associated with the listing 
of the maximum number nonstandard expirations permitted pursuant to 
Options 4A, Section 12(b)(5).
    Index options are integrated into the Exchange's existing 
surveillance system architecture and are thus subject to the relevant 
surveillance processes. The Exchange represents that it has adequate 
surveillance procedures to monitor trading in XND options thereby 
aiding in the maintenance of a fair and orderly market.
    The Exchange notes that it is amending Options 4A, Section 12 to 
include the Nasdaq 100 Micro Index Options within the Rule to conform 
to the amendments proposes herein.
VII. Pilot Program Reports
    The Exchange proposes to list and trade XND options on a pilot 
basis for a pilot period expiring on May 4, 2021 (``Pilot Program''). 
If the Exchange were to propose an extension of the program or should 
the Exchange propose to make the program permanent, then the Exchange 
would submit a filing proposing such amendments to the 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 XND 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 the 
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 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: \25\
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    \25\ Based on the data elements to be provided to the Commission 
for the NDXPM pilot. See supra note 7.
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    (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 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 XND option series 
in the pilot: (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

[[Page 11812]]

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. 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. 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 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.
    The Exchange proposes to add rule text at Options 4A, Section 
12(a)(6) which provides, ``In addition to A.M.-settled Nasdaq-100 Index 
options approved for trading on the Exchange pursuant to Options 4A, 
Section 12(a)(5), the Exchange may also list options on the Nasdaq 100 
Micro Index Options (``XND'') whose exercise settlement value is 
derived from closing prices on the expiration day (``P.M.-settled''). 
XND options will be listed for trading for a pilot period expiring on 
May 4, 2021.''
Implementation
    The Exchange intends to begin implementation of the proposed rule 
change in Q1 2021. The Exchange will issue an Options Trader Alert to 
Participants with the date of implementation.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\26\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\27\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general to protect 
investors and the public interest. Specifically, the Exchange believes 
that the listing and trading of a micro index P.M.-settled index option 
contract based on the Nasdaq-100 Index will attract order flow to the 
Exchange, increase the variety of listed options, and provide a 
valuable hedge tool to retail and other investors.
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    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change will further 
the Exchange's goal of introducing new and innovative products to the 
marketplace. Specifically, the Exchange believes that XND options would 
provide additional opportunities for market participants to trade and 
hedge exposure to the Nasdaq-100 Index. The proposed XND options 
product is similar to NDX options that are currently listed and traded 
on the Exchange with two important differences: (1) XND options will be 
based on 1/100 the value of the Nasdaq-100 Index, and (2) XND options 
will be P.M.-settled. These differences are based on the Exchanges 
experience listing NDX options, and are designed to attract additional 
participation from retail and other investors. Based on feedback 
received from members, the Exchange believes that the proposed contract 
specifications will be attractive to market participants, and will 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. The nonstandard expirations would 
expand the ability of investors to hedge risks against market movements 
stemming from economic releases or market events that occur during the 
month and at the end of the month. Accordingly, the Exchange believes 
that weekly expirations and EOMs should create greater trading and 
hedging opportunities and flexibility, and provide customers with the 
ability to more closely tailor their investment objectives.
    Currently, the Exchange believes that there continues to be unmet 
market demand for exchange-listed index options on the Nasdaq-100 
Index. This unmet demand stems in part from the high value of the 
Nasdaq-100 Index and the consequently higher cost of purchasing NDX 
options. As noted above, the value of the Nasdaq-100 was 12,112.11 as 
of the opening of trading on November 25, 2020, and this high value has 
made it more difficult for retail and other investors to comfortably 
purchase options on the index. The Exchange believes that a micro index 
option would allow additional participation from these investors. 
Specifically, the Exchange believes that basing the contract on a micro 
value of the Nasdaq-100 Index will encourage additional participation 
by retail and other investors due to the reduced capital outlay needed 
to trade these options. The ISE NQX product has attracted retail 
trading volume to a certain point given that the NQX product represents 
\1/5\ the value of the Nasdaq-100 Index. The Exchange believes that XND 
options, which represent 1/100 of the Nasdaq-100 Index, may strike a 
more appropriate balance for other retail investors with its reduced 
size. This value is more similar to other competitive index option 
products.
    Furthermore, based on member feedback, the Exchange believes that 
providing P.M.-settlement will make this product more attractive to 
market participants and help garner additional support for this new 
index options product. Specifically, the Exchange believes that P.M.-
settlement will be attractive to retail and other investors that want 
to use these options to hedge an entire week of risk without leaving 
residual risk on the day of expiration, and without having to actively 
manage these positions, for example, by rolling their hedge into the 
next expiration. For this reason, other popular index option products 
have been transitioning to P.M.-settlement. For example, due to market 
demand for P.M.-settlement, Cboe Exchange, Inc. (``Cboe'') transitioned 
its heavily traded SPX index options to P.M.-settlement, and removed 
related A.M.-settled products.\28\ The Exchange believes that market 
participants similarly desire P.M.-settlement for index options on the 
Nasdaq-100 Index, and proposes to offer such a product so that it can 
compete effectively with similar index option products offered by 
options markets such as Cboe which offers SPXW and OEX.
---------------------------------------------------------------------------

    \28\ See Cboe Regulatory Circular RG10-112.
---------------------------------------------------------------------------

    When cash-settled index options were first introduced in the 1980s, 
they generally utilized closing-price settlement procedures (i.e., 
P.M.-settlement). Due to concerns raised by the Commission on the 
impact of P.M.-settlement on market volatility and the operation of 
fair and orderly markets on the underlying cash market at or near the 
close of trading on expiration day, however, exchanges moved to A.M.-
settlement for these products. As discussed in the recent approval of 
the NDXP product,\29\ however, the Commission has recognized that these 
risks may be mitigated today by the enhanced closing procedures that 
are now employed by the primary equity markets. The Exchange believes 
that the concerns that led to the transition to a.m.-settlement for 
index derivatives have been largely mitigated today. Opening procedures 
in the 1990s were

[[Page 11813]]

deemed acceptable to mitigate one-sided order flow driven by index 
option expiration. Nasdaq now has an automated closing cross that that 
facilitates orderly closings by aggregating a large pool of liquidity, 
across a variety of order types, in a single venue. The Exchange 
believes that Nasdaq's closing procedures are well-equipped to mitigate 
imbalance pressure at the close. Furthermore, the Exchange believes 
that the proposal is designed to mitigate any potential concerns 
regarding P.M. settlement. Specifically, the Exchange believes that the 
proposal will provide additional trading and hedging opportunities for 
investors.
---------------------------------------------------------------------------

    \29\ See supra note 9.
---------------------------------------------------------------------------

    XND options will be subject to the same rules that presently govern 
the trading of index options based on the Nasdaq-100 Index, including 
sales practice rules, margin requirements, trading rules, and position 
and exercise limits. The Exchange therefore believes that the rules 
applicable to trading in XND options are consistent with the protection 
of investors and the public interest. Furthermore, the Exchange 
represents that it has sufficient systems capacity and adequate 
surveillance procedures to handle trading in XND options.
    With respect to the Exchange's proposal to adopt new Supplementary 
Material .03 to Options 3, Section 3 to provide that minimum increments 
for bids and offers for XND options be the same as those for QQQ, 
regardless of the value at which the option series is quoted, may 
promote competition and benefit investors. This proposal aligns the 
minimum increments for XND options with those for QQQ options in order 
to allow market participants to quote in minimum increments of $0.01 is 
consistent with the Act because allowing participants to quote in 
smaller increments may provide the opportunity for reduced spreads, 
thereby lowering costs to investors. In addition, because both XND and 
QQQ are based on Nasdaq-100 Index it would be reasonable for the 
minimum increments of bids and offers to be the same for both types of 
options.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. XND options would be 
available for trading to all market participants. The proposed rule 
change will facilitate the listing and trading of a new option product 
that will enhance competition among market participants, to the benefit 
of investors and the marketplace. The listing of XND will enhance 
competition by providing investors with an additional investment 
vehicle, in a fully-electronic trading environment, through which 
investors can gain and hedge exposure to the Nasdaq-100 Index. 
Furthermore, this product could offer a competitive alternative to 
other existing investment products that seek to allow investors to gain 
broad market exposure. Finally, it is possible for other exchanges to 
develop or license the use of a new or different index to compete with 
the Nasdaq-100 Index and seek Commission approval to list and trade 
options on such an index.

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:

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-2021-07 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-2021-07. 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-2021-07, and should be submitted on 
or before March 19, 2021.
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    \30\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-03949 Filed 2-25-21; 8:45 am]
BILLING CODE 8011-01-P


