Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1, To Make Permanent Its Pilot Program Regarding Minimum Value Sizes for Opening Transactions in New Series of Flexible Exchange Options and Establish New Minimum Value Sizes Applicable to Other FLEX Transactions and FLEX Quotes, 39425-39429 [2014-16095]
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Federal Register / Vol. 79, No. 132 / Thursday, July 10, 2014 / Notices
using its facilities because the Exchange
does not levy additional fees or offer
additional rebates for orders that it
routes to PSX through DE Route. Prior
to PSX’s July 2014 fee change, PSX
charged its members, which includes
DE Route, a fee of $0.0030 per share to
remove liquidity using non-routable
order types, which DE Route passed
through to the Exchange and the
Exchange charged to its Members. In
July 2014, PSX decreased this fee from
$0.0030 per share to $0.0026 per share.8
Therefore, the Exchange believes that its
proposal to pass through a fee of
$0.0026 per share for orders that yield
Flag K is equitable and reasonable
because it accounts for the pricing
changes on PSX. In addition, the
proposal allows the Exchange to charge
its Members a pass-through rate for
orders that are routed to PSX.
Furthermore, the Exchange notes that
routing through DE Route is voluntary.
Lastly, the Exchange also believes that
the proposed amendment is nondiscriminatory because it applies
uniformly to all Members.
mstockstill on DSK4VPTVN1PROD with NOTICES
B. Self-Regulatory Organization’s
Statement on Burden on Competition
These proposed rule changes do not
impose any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act.
The Exchange does not believe that any
of these changes represent a significant
departure from previous pricing offered
by the Exchange or pricing offered by
the Exchange’s competitors.
Additionally, Members may opt to
disfavor EDGX’s pricing if they believe
that alternatives offer them better value.
Accordingly, the Exchange does not
believe that the proposed changes will
impair the ability of Members or
competing venues to maintain their
competitive standing in the financial
markets. The Exchange believes that its
proposal to pass through a fee of
$0.0026 per share for Members’ orders
that yield Flag K would increase
intermarket competition because it
offers customers an alternative means to
route to PSX for the same price as
entering orders on PSX directly. The
Exchange believes that its proposal
would not burden intramarket
competition because the proposed rate
would apply uniformly to all Members.
8 See PSX, Equity Trader Alert 2014–45,
Modifications to PSX Pricing Effective July 1, 2014,
dated June 26, 2014, available at https://www.
nasdaqtrader.com/TraderNews.aspx?id=ETA201445.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
unsolicited written comments from
Members or other interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 9 and Rule 19b–4(f)(2) 10
thereunder. At any time within 60 days
of the filing of such proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
EDGX–2014–17 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–EDGX–2014–17. 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 Web site (https://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
PO 00000
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 Web site 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;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–EDGX–
2014–17, and should be submitted on or
before July 31, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014–16093 Filed 7–9–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72536; File No. SR–
NYSEMKT–2014–21]
Self-Regulatory Organizations; NYSE
MKT LLC; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1, To Make Permanent
Its Pilot Program Regarding Minimum
Value Sizes for Opening Transactions
in New Series of Flexible Exchange
Options and Establish New Minimum
Value Sizes Applicable to Other FLEX
Transactions and FLEX Quotes
July 3, 2014.
I. Introduction
On March 18, 2014, NYSE MKT LLC
(the ‘‘Exchange’’ or ‘‘NYSE MKT’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to make permanent its pilot
program regarding minimum value sizes
for opening transactions in new series of
flexible exchange options (‘‘FLEX
Options’’ or ‘‘FLEX’’) and establish new
minimum value sizes applicable to
11 17
9 15
U.S.C. 78s(b)(3)(A).
10 17 CFR 240.19b–4(f)(2).
Frm 00062
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39425
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 79, No. 132 / Thursday, July 10, 2014 / Notices
other FLEX transactions and FLEX
Quotes. The proposed rule change was
published for comment in the Federal
Register on April 7, 2014.3 The
Commission received no comments on
the proposal. The Exchange consented
to an extension of the time period for
the Commission to approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved, to July 6, 2014. The
Exchange filed Amendment No. 1 to the
proposed rule change on May 22, 2014,
in order to transmit a revised pilot
report that replaces the original Exhibit
3 to the filing.4 The Commission is
publishing this notice to solicit
comments on Amendment No. 1 from
interested persons and is approving the
proposed rule change, as modified by
Amendment No. 1, on an accelerated
basis.
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II. Description of the Amended
Proposal
FLEX Options, unlike traditional
standardized options, allow investors to
customize basic option terms, including
size, expiration date, exercise style, and
certain exercise prices.5 Pursuant to
Commentary .01 to Rule 903G, the
Exchange currently has in place a pilot
program under which the minimum size
requirements set forth in Rule
903G(a)(4)(ii), which apply to opening
transactions in new series of FLEX
Options, are replaced with a onecontract minimum size (‘‘Pilot
Program’’).6 Prior to the Pilot Program,
3 See Securities Exchange Act Release No. 71840
(April 1, 2014), 79 FR 19162 (‘‘Notice’’).
4 The Exchange attached an Exhibit 3 to its
proposed rule change that contained an annual
report summarizing pilot data collected for the year
2013, the most recent complete year of the pilot
program (‘‘Pilot Report’’). Specifically, the Pilot
Report summarizes the trading volume and
underlying value of opening transactions in new
series of FLEX Options during the year 2013 with
a size below the minimum value thresholds in force
before the pilot, as well as the types of customers
initiating such transactions. In Amendment No. 1,
the Exchange submitted a revised Pilot Report as a
new Exhibit 3 that replaces the original Exhibit 3
in its entirety. The revised Pilot Report corrects
errors in the total FLEX Equity Option contract
trading volume under the pilot, total FLEX Index
Option contract trading volume under the pilot, and
total number of FLEX Index Option trades under
the pilot reported in the original Pilot Report. The
revised Pilot Report also makes corresponding
adjustments to other figures reported in the Pilot
Report, as well as non-substantive changes to
certain descriptive language in the Pilot Report.
5 See Notice, 79 FR at 19162 n.4; see also NYSE
MKT Options Rule (‘‘Rule’’) 903G. FLEX Options
can be FLEX Index Options or FLEX Equity
Options. See Rules 900G(b)(10) and (b)(11)
(defining, respectively, the terms ‘‘FLEX Equity
Option’’ and ‘‘FLEX Index Option’’).
6 See Commentary .01 to Rule 903G; see also
Securities Exchange Act Release No. 62084 (May
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18:38 Jul 09, 2014
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pursuant to Rule 903G(a)(4)(ii), the
minimum value size for an opening
transaction in any FLEX series in which
there was no open interest at the time
the request for quotes was submitted
was: (i) For FLEX Equity Options, the
lesser of 250 contracts or the number of
contracts overlying $1 million in the
underlying securities; and (ii) for FLEX
Index Options, $10 million Underlying
Equivalent Value in the case of Broad
Stock Index Group FLEX Index Options
and $5 million Underlying Equivalent
Value in the case of Stock Index
Industry Group FLEX Index Options.7
The Exchange’s proposal will make the
Pilot Program permanent by eliminating
the minimum value size requirements
set forth in Rule 903G(a)(4)(ii) for
opening transactions in new FLEX
Option series and by eliminating the
Pilot Program rule text set forth in
Commentary .01 to Rule 903G. In
connection with its proposal to make
the Pilot Program permanent, and as
required by its filing establishing the
Pilot Program,8 the Exchange submitted
to the Commission an annual Pilot
Report summarizing Pilot Program data
collected for year 2013, the most recent
complete year of the Pilot Program.9
In its filing, the Exchange also has
proposed to make some other changes to
its FLEX Option minimum value size
rules, in addition to requesting that the
Pilot Program be made permanent.
Rules 903G(a)(4)(iii)–(iv), which are not
part of the Pilot Program, set forth
minimum value sizes for other FLEX
Option transactions and for FLEX
Quotes. Specifically, pursuant to Rule
903G(a)(4)(iii), for a transaction in any
currently-opened FLEX series, the
minimum value size is: (i) For FLEX
Equity Options, the lesser of 100
contracts or the number of contracts
overlying $1 million in the underlying
securities in the case of opening
transactions, and 25 contracts in the
case of closing transactions; and (ii) for
FLEX Index Options, $1 million
Underlying Equivalent Value in the case
of both opening and closing
transactions; or (iii) for either case, the
remaining underlying size or
Underlying Equivalent Value on a
closing transaction, whichever is less.
Pursuant to Rule 903G(a)(4)(iv), the
minimum value size for FLEX Quotes
responsive to a Request for Quotes is 25
contracts in the case of FLEX Equity
Options and $1 million Underlying
Equivalent Value in the case of FLEX
Index Options or for either case the
remaining underlying size or
Underlying Equivalent Value on a
closing transaction, whichever is less.
Even though these minimum value size
requirements set forth in Rules
903G(a)(4)(iii)–(iv) are not part of the
Pilot Program, the Exchange has
proposed to eliminate them as well, in
conjunction with making the Pilot
Program permanent. In its proposal the
Exchange noted that adopting the same
minimum value sizes for existing and
new series, in addition to quotes, will
allow market participants to tailor their
FLEX Option transactions to meet their
investment objectives.
By proposing to make permanent the
Pilot Program one-contract minimum for
opening transactions in new series of
FLEX Options and by also proposing to
eliminate the minimum value size
requirements for FLEX Option
transactions in currently-opened series
and FLEX Quotes responsive to a
Request for Quotes, the Exchange is
seeking to establish a one-contract
minimum size for all FLEX Option
transactions and FLEX Quotes. This
one-contract minimum size would be
codified in new Rule 903G(a)(2)(vii).
The Exchange states that its proposal for
a one-contract minimum value size for
all FLEX Option transactions and FLEX
Quotes is based on similar rules
governing minimum value size for FLEX
Options approved for the CBOE.10
In addition, as a technical, nonsubstantive change, the Exchange has
proposed to relocate from current Rule
903G(a)(4)(i) to new Rule 903G(a)(2)(vi)
rule text stating that the maximum term
for both Equity and Index FLEX Options
shall be fifteen years, and make other
non-substantive changes to the rule.
12, 2010), 75 FR 28091 (May 19, 2010) (SR–
NYSEAmex–2010–40) (establishing Pilot Program);
and 71844 (April 1, 2014), 79 FR 19160 (April 7,
2014) (SR–NYSEMKT–2014–26) (extending Pilot
Program until the earlier of July 31, 2014 or
approval of the Pilot Program on a permanent
basis).
7 See Rule 903G(a)(4)(ii); see also Rule 900G(b)(9)
(defining the term ‘‘Underlying Equivalent Value’’).
8 See supra note 6.
9 Specifically, the Pilot Report contains data and
analysis of underlying equivalent values, open
interest and trading volume, and analysis of the
types of investors that initiated opening FLEX
Equity and Index Options transactions (i.e.,
institutional, high net worth, or retail) in new FLEX
Option series. See Amendment No. 1, supra note 4.
III. Discussion and Commission
Findings
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After careful review, the Commission
finds that the proposed rule change, as
amended, is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
10 See Notice, 79 FR at 19164 and n.15 (citing
Securities Exchange Act Release No. 67624 (August
8, 2012), 77 FR 48580 (August 14, 2012) (order
approving CBOE’s proposal to make permanent its
pilot program eliminating minimum value sizes for
FLEX Options)).
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a national securities exchange.11 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,12 which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, 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; and not be designed to
permit unfair discrimination between
customers, issuers, brokers or dealers.
FLEX Options were originally
designed for use by institutional and
high net worth customers, rather than
retail investors.13 In approving CBOE’s
pilot eliminating minimum value sizes
for FLEX Options, which was the first
such pilot to go into effect, the
Commission noted that it had received
several comment letters stating that the
proposal would assist institutional
customers, but it also noted that the
elimination of the minimum value size
requirements raised the possibility that
retail customers would access the FLEX
Options market.14 One of the risks to
retail investors outlined in the ODD 15 is
that, because of the customized nature
of FLEX Options and lack of continuous
quotes, trading in FLEX Options is often
less deep and liquid than trading in
standardized options on the same
underlying interest.16 Additionally, the
11 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
12 15 U.S.C. 78f(b)(5).
13 See Notice, 79 FR at 19163; see also Securities
Exchange Act Release No. 37336 (June 19, 1996), 61
FR 33558 (June 27, 1996) (order approving SR–
Amex–95–57). As noted in the Options Disclosure
Document (‘‘ODD’’), which explains the
characteristics and risks of exchange-traded
options, flexibly structured options may be useful
to sophisticated investors seeking to manage
particular portfolio and trading risks. Rule 9b–1
under the Act requires that broker-dealers furnish
the ODD to a customer before accepting an order
from the customer to purchase or sell an option
contract relating to an options class that is the
subject of the ODD, or approving the customer’s
account for the trading of such option. See 17 CFR
240.9b–1(d).
14 See Securities Exchange Act Release No. 61439
(January 28, 2010), 75 FR 5831 (February 4, 2010)
(order approving SR–CBOE–2009–087) (‘‘CBOE
Pilot Approval Order’’).
15 See supra note 13.
16 In particular, the ODD states that because many
of the terms of FLEX Options are not standardized,
it is less likely that there will be an active secondary
market in which holders and writers of such
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Commission observed that reducing the
minimum value size for opening FLEX
Option transactions increases the
potential for the FLEX Options market
to act as a surrogate for the standardized
options market, and expressed concern
in this regard because the standardized
market contains certain protections for
investors not present in the FLEX
Options market.17 The Commission
stated that, in the event CBOE proposed
making its pilot program permanent,
information regarding the types of
customers initiating opening FLEX
Options transactions during the pilot
would enable the Commission to
evaluate how market participants have
responded to CBOE’s pilot program and
what types of customers are using the
FLEX Options market.18 For these same
reasons, at the Commission’s request,
the Exchange included in its Pilot
Report information regarding the types
of customers that initiated opening
FLEX Option transactions under its
Pilot Program.19
The Commission believes that these
considerations and concerns that
informed its analysis of whether to
permanently approve CBOE’s pilot are
equally germane to its analysis here. As
such, the Commission has carefully
reviewed the Pilot Report that the
Exchange provided to the
Commission.20 The Pilot Report reflects
that, in 2013, 315 opening transactions
in new series of FLEX Equity Options
were initiated on the Exchange with
small minimum value sizes made
possible by the Pilot Program, 286 of
which were initiated by retail
customers, 25 of which were initiated
by institutional customers, and 4 of
which were initiated by high net worth
customers.21 Moreover, the Pilot Report
indicates that these 315 FLEX Equity
Option transactions covered by the Pilot
Program accounted for approximately
options will be able to close out their positions by
offsetting sales and purchases. Also, the ODD states
that certain margin requirements for positions in
flexibly structured options may be significantly
greater than the margin requirements applicable to
similar positions in other options on the same
underlying interest.
17 See CBOE Pilot Approval Order, supra note 14.
In particular, the Commission noted that
continuous quotes may not always be available in
the FLEX Options market and that FLEX Options
do not have trading rotations at either the opening
or closing of trading. Id.
18 Id. The Exchange has submitted a Pilot Report
to the Commission as Exhibit 3 to its filing, as well
as other, confidential reports of data collected
during the Pilot Program. See Amendment No. 1,
supra note 4.
19 See Amendment No. 1, supra note 4.
20 Id.
21 Id. The Pilot Report indicates that there were
no opening transactions in new series of FLEX
Index Options during 2013 that were initiated
below the pre-pilot minimum size requirement.
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39427
3% of the total volume and
approximately 5% of the total value of
all opening FLEX Equity Option
transactions in new series—i.e., opening
transactions covered by the Pilot
Program as well as opening transactions
with value sizes above the pre-pilot
minimum—during 2013.
The Exchange notes that the Pilot
Report includes data specific to opening
transactions in new series of FLEX
Options pursuant to current Rule
903G(a)(4)(ii), and does not include data
for transactions in currently-opened
FLEX Options series or FLEX Quotes
responsive to a request for quotes
pursuant to Rules 903G(a)(4)(iii)–(iv), as
such transactions and FLEX Quotes
were not part of the Pilot Program.22
The Exchange represents, however, that
based on its internal review, if Rules
903G(a)(4)(iii)–(iv) had been part of the
Pilot Program, transactions in currentlyopened FLEX Options series or FLEX
Quotes with small value sizes made
permissible by the Pilot Program would
have been de minimis, and would not
have materially altered the data in the
Pilot Report.23
On balance, the Commission believes
that it is consistent with the Act to make
the Pilot Program permanent and thus
eliminate, on a permanent basis, the
minimum value size requirements set
forth in Rule 903G(a)(4)(ii) for opening
transactions in new series of FLEX
Options. The protections noted below,
including heightened options suitability
requirements, should help to address
any concerns about retail participation
in the Exchange’s FLEX Options market.
Moreover, the Commission is not aware
of any data or analysis to date
suggesting that the trading of FLEX
Options has acted as a surrogate for the
trading of standardized options on the
Exchange as a result of the Pilot
Program. Indeed, the Commission
understands that FLEX Option trading
accounts for less than 1% of the
combined trading volume of the
standardized and FLEX Option
markets.24 In addition, the Pilot Report
indicates that Pilot Program FLEX
Option trades account for a very small
proportion of the total volume and total
value of all FLEX Option trades. Thus,
it appears that the Pilot Program has not
caused significant trading interest to
migrate from the standardized options
market to the FLEX Options market, nor
caused, to the best of our knowledge, a
22 See
Notice, 79 FR at 19164.
23 Id.
24 See email dated June 19, 2014 from Glenn H.
Gsell, Managing Director, Intercontinental
Exchange, NYSE Regulation, Inc. to Michael
Bradley and David Michehl, Special Counsels,
Division of Trading and Markets, Commission.
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large number of investors to use FLEX
Options to avoid certain requirements in
the standardized market. Based on the
current data and size of the FLEX
Options market, and the lack of any
evidence to the contrary, it would
appear that investors are using the FLEX
Options market for its intended
purpose—to be able to customize certain
terms not available in the standardized
options market.
The Commission also believes that a
logical corollary to making the Pilot
Program permanent is to eliminate the
minimum value size requirements set
forth in Rules 903G(a)(4)(iii)–(iv) for
transactions in currently-opened FLEX
Options series and FLEX Quotes
responsive to a request for quotes. In
this regard, the Commission notes that
the Exchange does not believe that the
difference between effecting a
transaction in an existing FLEX Option
series and effecting a FLEX transaction
in a new series is material to the extent
that there should be different minimum
value sizes for the two types of
transactions.25 In addition, the
Exchange believes it would be
consistent to apply the same minimum
value size to closing transactions so that
investors may elect to close just a
portion of their FLEX position, without
being subject to a minimum value size
that may be greater than the equivalent
value size necessary to meet their
investment objectives.26 Further, the
Exchange believes that it would be
consistent to apply the same minimum
value size to FLEX Quotes so that
market participants may respond to a
request for quotes with the precise
number of contracts or underlying
equivalent value needed to trade with
the OTP Holder that submitted the
request. The Commission finds no basis
under the Act at this time for
maintaining a minimum value size
requirement for transactions in
currently-opened FLEX Option series or
FLEX Quotes responsive to a request for
quotes, and believes that these changes
should be approved for reasons similar
to those supporting permanent approval
of the Pilot Program. The Commission
notes that it is not aware of any
problems resulting from the permanent
approval of CBOE’s pilot eliminating
FLEX Option minimum value sizes,
which included currently-opened series
25 See
Notice, 79 FR at 19164.
Currently, the minimum value size for
closing transactions is 25 contracts in the case of
FLEX Equity Options and $1 million Underlying
Equivalent Value in the case of FLEX Index
Options, or in either case the remaining underlying
size or Underlying Equivalent Value on a closing
transaction, whichever is less. See Rules
903G(a)(4)(iii)–(iv).
26 Id.
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and FLEX Quotes responsive to a
request for quotes. As a result, the
Commission believes that it is
appropriate under the Act, and would
promote just and equitable principles of
trade, as well as remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, to replace the current minimum
value size requirements for all FLEX
Option transactions and FLEX Quotes
on the Exchange with a one-contract
minimum size.
Existing safeguards—such as position
reporting requirements and margin
requirements—will continue to apply to
FLEX Options.27 Further, as noted
above, under Rule 9b–1 under the Act,28
all customers of a broker-dealer with
options accounts approved to trade
FLEX Options must receive the ODD,
which contains specific disclosures
about the characteristics and special
risks of trading FLEX Options.29 In
addition, similar to other options, FLEX
Options are subject to Trading Permit
Holder supervision and suitability
requirements, such as in Rules 922 and
923, respectively.30 In addition to
ensuring that FLEX Options are suitable
for their customers, broker-dealers also
must take into account the
characteristics of the FLEX market, as
compared to the standardized market,
when satisfying their best execution
obligations. The Commission believes
that the safeguards in place are
reasonably designed to help mitigate
potential risks for retail investors and
other market participants investing in
FLEX Options.
The Exchange believes that
permanently removing the minimum
value size requirements for FLEX
Options will give investors a more
viable, exchange-traded alternative to
customized options in the OTC market,
which are not subject to minimum value
size requirements.31 Furthermore, the
Exchange has represented that brokerdealers have indicated to the Exchange
that the minimum value size
requirements have prevented them from
bringing transactions on the Exchange
that are already taking place in the OTC
market.32 Therefore, it appears possible
that eliminating the minimum value
sizes for all FLEX Options transactions
27 Certain position limit, aggregation and exercise
limit requirements continue to apply to FLEX
Options in accordance with Rule 906G (Position
Limits) and Rule 907G (Exercise Limits). But the
Commission notes that certain FLEX Options do not
have position or exercise limits.
28 17 CFR 240.9b–1.
29 See supra notes 13 and 16.
30 See Notice, 79 FR at 19163.
31 Id.
32 Id.
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and FLEX Quotes could further incent
trading interest in customized options to
move from the OTC market to the
Exchange. To the extent investors
choose to trade FLEX Options on the
Exchange in lieu of the OTC market as
a result of the permanent removal of the
minimum value size requirements, such
action should benefit investors. As the
Commission has previously noted, there
are certain benefits to trading on an
exchange, such as enhanced efficiency
in initiating and closing out positions,
increased market transparency, and
heightened contra-party
creditworthiness due to the role of the
Options Clearing Corporation as issuer
and guarantor of FLEX Options.33
IV. Solicitation of Comments on
Amendment No. 1
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment No. 1 to
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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEMKT–2014–21 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–NYSEMKT–2014–21. 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 Web site (https://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 Web site viewing and
33 See Securities Exchange Act Release No. 57429
(March 4, 2008), 73 FR 13058 (March 11, 2008)
(order approving SR–CBOE–2006–36).
E:\FR\FM\10JYN1.SGM
10JYN1
Federal Register / Vol. 79, No. 132 / Thursday, July 10, 2014 / Notices
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;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEMKT–2014–21 and should be
submitted on or before July 31, 2014.
mstockstill on DSK4VPTVN1PROD with NOTICES
V. Accelerated Approval of Proposal, as
Modified by Amendment No. 1
In Amendment No. 1, the Exchange
submitted a revised Pilot Report that
corrects errors in the total FLEX Equity
Option contract trading volume under
the pilot, total FLEX Index Option
contract trading volume under the pilot,
and total number of FLEX Index Option
trades under the pilot reported in the
original Pilot Report. The revised Pilot
Report also makes corresponding
adjustments to other figures reported in
the Pilot Report, as well non-substantive
changes to certain descriptive language
in the Pilot Report. The Commission
believes that these corrections to the
Pilot Report do not substantively alter
the findings in the Pilot Report or
diminish their support for approval of
the pilot on a permanent basis.
Accordingly, the Commission also finds
good cause, pursuant to Section 19(b)(2)
of the Act,34 for approving the proposed
rule change, as modified by Amendment
No. 1, prior to the thirtieth day after the
date of publication of notice in the
Federal Register.
VI. Conclusion
In summary, the Commission
believes, for the reasons noted above,
that the proposed rule change to
permanently approve the Pilot Program
as well as remove the minimum size
requirements for currently-opened FLEX
Option series and FLEX Quotes, thereby
permanently removing the minimum
size requirements for all FLEX Options
on the Exchange, is consistent with the
Act and Section 6(b)(5) thereunder in
particular, and should be approved, as
amended. The Exchange has committed,
and the Commission expects the
Exchange, to continue to monitor the
usage of FLEX Options, whether
changes need to be made to its rules or
the ODD to address any changes in retail
FLEX Option participation, and for any
34 15
U.S.C. 78s(b)(2).
VerDate Mar<15>2010
18:38 Jul 09, 2014
Jkt 232001
other issues that may occur as a result
of the elimination of the minimum
value sizes on a permanent basis,
including whether FLEX Option trades
are being used as a surrogate for trading
options in the standardized market.35
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,36 that the
proposed rule change (SR–NYSEMKT–
2014–21) be, and it hereby is, approved,
on an accelerated basis, as amended.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.37
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014–16095 Filed 7–9–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72540; File No. SR–ICEEU–
2014–09]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Notice of Filing
of Proposed Rule Change Relating To
EMIR Requirements
July 3, 2014.
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 June 30,
2014, ICE Clear Europe Limited (‘‘ICE
Clear Europe’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
changes described in Items I, II and III
below, which Items have been prepared
by ICE Clear Europe. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The principal purpose of the
proposed changes is to amend the ICE
Clear Europe Clearing Rules in order to
comply with requirements under the
European Market Infrastructure
Regulation (including regulations and
implementing technical standards
thereunder, ‘‘EMIR’’) 3 that will apply to
35 See Notice, 79 FR at 19164 (Exchange
representing that it will continue to monitor the
usage of FLEX Options and whether any changes to
its rules or the ODD are necessary).
36 15 U.S.C. 78s(b)(2).
37 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Regulation (EU) No 648/2012 of the European
Parliament and of the Council of 4 July 2012 on
OTC derivatives, central counterparties and trade
repositories, as well as various implementing
regulations and technical standards.
PO 00000
Frm 00066
Fmt 4703
Sfmt 4703
39429
ICE Clear Europe as an authorized
central counterparty.4 Among other
changes, the proposed rules would
implement a framework under which
Clearing Members may offer to their
clients the ability to have their positions
and margin assets segregated from those
of other clients of the Clearing Member
(‘‘Individual Client Segregation’’).5 The
proposed rule changes include various
other amendments to comply with
EMIR, as discussed herein. In addition,
certain other aspects of the proposed
amendments are not specifically
intended to comply with EMIR, but are
designed to harmonize various rule
provisions across different products and
to make various other improvements to
the rules. ICE Clear Europe will be
required to be in compliance with EMIR
as of the time it receives authorization
as a central counterparty from the
European Securities and Markets
Authority (‘‘ESMA’’).
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, ICE
Clear Europe 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. ICE
Clear Europe has prepared summaries,
set forth in sections A, B, and C below,
of the most significant aspects of these
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
a. Purpose
ICE Clear Europe submitted proposed
amendments to its Rules in order to
comply with requirements under EMIR
that will apply to ICE Clear Europe
upon its authorization as a central
counterparty under EMIR, and to make
certain other improvements to its rules.
The principal change will be to
implement changes to the structure of
customer accounts for cleared
transactions to enhance segregation
4 ICE Clear Europe will separately file certain
related changes to its policies and procedures,
including risk management policies.
5 As discussed herein, the Individual Client
Segregation model is not being offered at this time
to U.S. clearing members or U.S. person clients, and
certain provisions of the proposed rules are
therefore not applicable to such persons. ICE Clear
Europe will make a subsequent rule filing if it
subsequently determines to offer such model to U.S.
clearing members or U.S. persons.
E:\FR\FM\10JYN1.SGM
10JYN1
]]>Agencies
[Federal Register Volume 79, Number 132 (Thursday, July 10, 2014)]
[Notices]
[Pages 39425-39429]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-16095]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72536; File No. SR-NYSEMKT-2014-21]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of
Amendment No. 1 and Order Granting Accelerated Approval of Proposed
Rule Change, as Modified by Amendment No. 1, To Make Permanent Its
Pilot Program Regarding Minimum Value Sizes for Opening Transactions in
New Series of Flexible Exchange Options and Establish New Minimum Value
Sizes Applicable to Other FLEX Transactions and FLEX Quotes
July 3, 2014.
I. Introduction
On March 18, 2014, NYSE MKT LLC (the ``Exchange'' or ``NYSE MKT'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
make permanent its pilot program regarding minimum value sizes for
opening transactions in new series of flexible exchange options (``FLEX
Options'' or ``FLEX'') and establish new minimum value sizes applicable
to
[[Page 39426]]
other FLEX transactions and FLEX Quotes. The proposed rule change was
published for comment in the Federal Register on April 7, 2014.\3\ The
Commission received no comments on the proposal. The Exchange consented
to an extension of the time period for the Commission to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether the proposed rule change should be
disapproved, to July 6, 2014. The Exchange filed Amendment No. 1 to the
proposed rule change on May 22, 2014, in order to transmit a revised
pilot report that replaces the original Exhibit 3 to the filing.\4\ The
Commission is publishing this notice to solicit comments on Amendment
No. 1 from interested persons and is approving the proposed rule
change, as modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 71840 (April 1,
2014), 79 FR 19162 (``Notice'').
\4\ The Exchange attached an Exhibit 3 to its proposed rule
change that contained an annual report summarizing pilot data
collected for the year 2013, the most recent complete year of the
pilot program (``Pilot Report''). Specifically, the Pilot Report
summarizes the trading volume and underlying value of opening
transactions in new series of FLEX Options during the year 2013 with
a size below the minimum value thresholds in force before the pilot,
as well as the types of customers initiating such transactions. In
Amendment No. 1, the Exchange submitted a revised Pilot Report as a
new Exhibit 3 that replaces the original Exhibit 3 in its entirety.
The revised Pilot Report corrects errors in the total FLEX Equity
Option contract trading volume under the pilot, total FLEX Index
Option contract trading volume under the pilot, and total number of
FLEX Index Option trades under the pilot reported in the original
Pilot Report. The revised Pilot Report also makes corresponding
adjustments to other figures reported in the Pilot Report, as well
as non-substantive changes to certain descriptive language in the
Pilot Report.
---------------------------------------------------------------------------
II. Description of the Amended Proposal
FLEX Options, unlike traditional standardized options, allow
investors to customize basic option terms, including size, expiration
date, exercise style, and certain exercise prices.\5\ Pursuant to
Commentary .01 to Rule 903G, the Exchange currently has in place a
pilot program under which the minimum size requirements set forth in
Rule 903G(a)(4)(ii), which apply to opening transactions in new series
of FLEX Options, are replaced with a one-contract minimum size (``Pilot
Program'').\6\ Prior to the Pilot Program, pursuant to Rule
903G(a)(4)(ii), the minimum value size for an opening transaction in
any FLEX series in which there was no open interest at the time the
request for quotes was submitted was: (i) For FLEX Equity Options, the
lesser of 250 contracts or the number of contracts overlying $1 million
in the underlying securities; and (ii) for FLEX Index Options, $10
million Underlying Equivalent Value in the case of Broad Stock Index
Group FLEX Index Options and $5 million Underlying Equivalent Value in
the case of Stock Index Industry Group FLEX Index Options.\7\ The
Exchange's proposal will make the Pilot Program permanent by
eliminating the minimum value size requirements set forth in Rule
903G(a)(4)(ii) for opening transactions in new FLEX Option series and
by eliminating the Pilot Program rule text set forth in Commentary .01
to Rule 903G. In connection with its proposal to make the Pilot Program
permanent, and as required by its filing establishing the Pilot
Program,\8\ the Exchange submitted to the Commission an annual Pilot
Report summarizing Pilot Program data collected for year 2013, the most
recent complete year of the Pilot Program.\9\
---------------------------------------------------------------------------
\5\ See Notice, 79 FR at 19162 n.4; see also NYSE MKT Options
Rule (``Rule'') 903G. FLEX Options can be FLEX Index Options or FLEX
Equity Options. See Rules 900G(b)(10) and (b)(11) (defining,
respectively, the terms ``FLEX Equity Option'' and ``FLEX Index
Option'').
\6\ See Commentary .01 to Rule 903G; see also Securities
Exchange Act Release No. 62084 (May 12, 2010), 75 FR 28091 (May 19,
2010) (SR-NYSEAmex-2010-40) (establishing Pilot Program); and 71844
(April 1, 2014), 79 FR 19160 (April 7, 2014) (SR-NYSEMKT-2014-26)
(extending Pilot Program until the earlier of July 31, 2014 or
approval of the Pilot Program on a permanent basis).
\7\ See Rule 903G(a)(4)(ii); see also Rule 900G(b)(9) (defining
the term ``Underlying Equivalent Value'').
\8\ See supra note 6.
\9\ Specifically, the Pilot Report contains data and analysis of
underlying equivalent values, open interest and trading volume, and
analysis of the types of investors that initiated opening FLEX
Equity and Index Options transactions (i.e., institutional, high net
worth, or retail) in new FLEX Option series. See Amendment No. 1,
supra note 4.
---------------------------------------------------------------------------
In its filing, the Exchange also has proposed to make some other
changes to its FLEX Option minimum value size rules, in addition to
requesting that the Pilot Program be made permanent. Rules
903G(a)(4)(iii)-(iv), which are not part of the Pilot Program, set
forth minimum value sizes for other FLEX Option transactions and for
FLEX Quotes. Specifically, pursuant to Rule 903G(a)(4)(iii), for a
transaction in any currently-opened FLEX series, the minimum value size
is: (i) For FLEX Equity Options, the lesser of 100 contracts or the
number of contracts overlying $1 million in the underlying securities
in the case of opening transactions, and 25 contracts in the case of
closing transactions; and (ii) for FLEX Index Options, $1 million
Underlying Equivalent Value in the case of both opening and closing
transactions; or (iii) for either case, the remaining underlying size
or Underlying Equivalent Value on a closing transaction, whichever is
less. Pursuant to Rule 903G(a)(4)(iv), the minimum value size for FLEX
Quotes responsive to a Request for Quotes is 25 contracts in the case
of FLEX Equity Options and $1 million Underlying Equivalent Value in
the case of FLEX Index Options or for either case the remaining
underlying size or Underlying Equivalent Value on a closing
transaction, whichever is less. Even though these minimum value size
requirements set forth in Rules 903G(a)(4)(iii)-(iv) are not part of
the Pilot Program, the Exchange has proposed to eliminate them as well,
in conjunction with making the Pilot Program permanent. In its proposal
the Exchange noted that adopting the same minimum value sizes for
existing and new series, in addition to quotes, will allow market
participants to tailor their FLEX Option transactions to meet their
investment objectives.
By proposing to make permanent the Pilot Program one-contract
minimum for opening transactions in new series of FLEX Options and by
also proposing to eliminate the minimum value size requirements for
FLEX Option transactions in currently-opened series and FLEX Quotes
responsive to a Request for Quotes, the Exchange is seeking to
establish a one-contract minimum size for all FLEX Option transactions
and FLEX Quotes. This one-contract minimum size would be codified in
new Rule 903G(a)(2)(vii). The Exchange states that its proposal for a
one-contract minimum value size for all FLEX Option transactions and
FLEX Quotes is based on similar rules governing minimum value size for
FLEX Options approved for the CBOE.\10\
---------------------------------------------------------------------------
\10\ See Notice, 79 FR at 19164 and n.15 (citing Securities
Exchange Act Release No. 67624 (August 8, 2012), 77 FR 48580 (August
14, 2012) (order approving CBOE's proposal to make permanent its
pilot program eliminating minimum value sizes for FLEX Options)).
---------------------------------------------------------------------------
In addition, as a technical, non-substantive change, the Exchange
has proposed to relocate from current Rule 903G(a)(4)(i) to new Rule
903G(a)(2)(vi) rule text stating that the maximum term for both Equity
and Index FLEX Options shall be fifteen years, and make other non-
substantive changes to the rule.
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to
[[Page 39427]]
a national securities exchange.\11\ In particular, the Commission finds
that the proposed rule change is consistent with Section 6(b)(5) of the
Act,\12\ which requires, among other things, that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, 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; and not be designed to
permit unfair discrimination between customers, issuers, brokers or
dealers.
---------------------------------------------------------------------------
\11\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
FLEX Options were originally designed for use by institutional and
high net worth customers, rather than retail investors.\13\ In
approving CBOE's pilot eliminating minimum value sizes for FLEX
Options, which was the first such pilot to go into effect, the
Commission noted that it had received several comment letters stating
that the proposal would assist institutional customers, but it also
noted that the elimination of the minimum value size requirements
raised the possibility that retail customers would access the FLEX
Options market.\14\ One of the risks to retail investors outlined in
the ODD \15\ is that, because of the customized nature of FLEX Options
and lack of continuous quotes, trading in FLEX Options is often less
deep and liquid than trading in standardized options on the same
underlying interest.\16\ Additionally, the Commission observed that
reducing the minimum value size for opening FLEX Option transactions
increases the potential for the FLEX Options market to act as a
surrogate for the standardized options market, and expressed concern in
this regard because the standardized market contains certain
protections for investors not present in the FLEX Options market.\17\
The Commission stated that, in the event CBOE proposed making its pilot
program permanent, information regarding the types of customers
initiating opening FLEX Options transactions during the pilot would
enable the Commission to evaluate how market participants have
responded to CBOE's pilot program and what types of customers are using
the FLEX Options market.\18\ For these same reasons, at the
Commission's request, the Exchange included in its Pilot Report
information regarding the types of customers that initiated opening
FLEX Option transactions under its Pilot Program.\19\
---------------------------------------------------------------------------
\13\ See Notice, 79 FR at 19163; see also Securities Exchange
Act Release No. 37336 (June 19, 1996), 61 FR 33558 (June 27, 1996)
(order approving SR-Amex-95-57). As noted in the Options Disclosure
Document (``ODD''), which explains the characteristics and risks of
exchange-traded options, flexibly structured options may be useful
to sophisticated investors seeking to manage particular portfolio
and trading risks. Rule 9b-1 under the Act requires that broker-
dealers furnish the ODD to a customer before accepting an order from
the customer to purchase or sell an option contract relating to an
options class that is the subject of the ODD, or approving the
customer's account for the trading of such option. See 17 CFR
240.9b-1(d).
\14\ See Securities Exchange Act Release No. 61439 (January 28,
2010), 75 FR 5831 (February 4, 2010) (order approving SR-CBOE-2009-
087) (``CBOE Pilot Approval Order'').
\15\ See supra note 13.
\16\ In particular, the ODD states that because many of the
terms of FLEX Options are not standardized, it is less likely that
there will be an active secondary market in which holders and
writers of such options will be able to close out their positions by
offsetting sales and purchases. Also, the ODD states that certain
margin requirements for positions in flexibly structured options may
be significantly greater than the margin requirements applicable to
similar positions in other options on the same underlying interest.
\17\ See CBOE Pilot Approval Order, supra note 14. In
particular, the Commission noted that continuous quotes may not
always be available in the FLEX Options market and that FLEX Options
do not have trading rotations at either the opening or closing of
trading. Id.
\18\ Id. The Exchange has submitted a Pilot Report to the
Commission as Exhibit 3 to its filing, as well as other,
confidential reports of data collected during the Pilot Program. See
Amendment No. 1, supra note 4.
\19\ See Amendment No. 1, supra note 4.
---------------------------------------------------------------------------
The Commission believes that these considerations and concerns that
informed its analysis of whether to permanently approve CBOE's pilot
are equally germane to its analysis here. As such, the Commission has
carefully reviewed the Pilot Report that the Exchange provided to the
Commission.\20\ The Pilot Report reflects that, in 2013, 315 opening
transactions in new series of FLEX Equity Options were initiated on the
Exchange with small minimum value sizes made possible by the Pilot
Program, 286 of which were initiated by retail customers, 25 of which
were initiated by institutional customers, and 4 of which were
initiated by high net worth customers.\21\ Moreover, the Pilot Report
indicates that these 315 FLEX Equity Option transactions covered by the
Pilot Program accounted for approximately 3% of the total volume and
approximately 5% of the total value of all opening FLEX Equity Option
transactions in new series--i.e., opening transactions covered by the
Pilot Program as well as opening transactions with value sizes above
the pre-pilot minimum--during 2013.
---------------------------------------------------------------------------
\20\ Id.
\21\ Id. The Pilot Report indicates that there were no opening
transactions in new series of FLEX Index Options during 2013 that
were initiated below the pre-pilot minimum size requirement.
---------------------------------------------------------------------------
The Exchange notes that the Pilot Report includes data specific to
opening transactions in new series of FLEX Options pursuant to current
Rule 903G(a)(4)(ii), and does not include data for transactions in
currently-opened FLEX Options series or FLEX Quotes responsive to a
request for quotes pursuant to Rules 903G(a)(4)(iii)-(iv), as such
transactions and FLEX Quotes were not part of the Pilot Program.\22\
The Exchange represents, however, that based on its internal review, if
Rules 903G(a)(4)(iii)-(iv) had been part of the Pilot Program,
transactions in currently-opened FLEX Options series or FLEX Quotes
with small value sizes made permissible by the Pilot Program would have
been de minimis, and would not have materially altered the data in the
Pilot Report.\23\
---------------------------------------------------------------------------
\22\ See Notice, 79 FR at 19164.
\23\ Id.
---------------------------------------------------------------------------
On balance, the Commission believes that it is consistent with the
Act to make the Pilot Program permanent and thus eliminate, on a
permanent basis, the minimum value size requirements set forth in Rule
903G(a)(4)(ii) for opening transactions in new series of FLEX Options.
The protections noted below, including heightened options suitability
requirements, should help to address any concerns about retail
participation in the Exchange's FLEX Options market. Moreover, the
Commission is not aware of any data or analysis to date suggesting that
the trading of FLEX Options has acted as a surrogate for the trading of
standardized options on the Exchange as a result of the Pilot Program.
Indeed, the Commission understands that FLEX Option trading accounts
for less than 1% of the combined trading volume of the standardized and
FLEX Option markets.\24\ In addition, the Pilot Report indicates that
Pilot Program FLEX Option trades account for a very small proportion of
the total volume and total value of all FLEX Option trades. Thus, it
appears that the Pilot Program has not caused significant trading
interest to migrate from the standardized options market to the FLEX
Options market, nor caused, to the best of our knowledge, a
[[Page 39428]]
large number of investors to use FLEX Options to avoid certain
requirements in the standardized market. Based on the current data and
size of the FLEX Options market, and the lack of any evidence to the
contrary, it would appear that investors are using the FLEX Options
market for its intended purpose--to be able to customize certain terms
not available in the standardized options market.
---------------------------------------------------------------------------
\24\ See email dated June 19, 2014 from Glenn H. Gsell, Managing
Director, Intercontinental Exchange, NYSE Regulation, Inc. to
Michael Bradley and David Michehl, Special Counsels, Division of
Trading and Markets, Commission.
---------------------------------------------------------------------------
The Commission also believes that a logical corollary to making the
Pilot Program permanent is to eliminate the minimum value size
requirements set forth in Rules 903G(a)(4)(iii)-(iv) for transactions
in currently-opened FLEX Options series and FLEX Quotes responsive to a
request for quotes. In this regard, the Commission notes that the
Exchange does not believe that the difference between effecting a
transaction in an existing FLEX Option series and effecting a FLEX
transaction in a new series is material to the extent that there should
be different minimum value sizes for the two types of transactions.\25\
In addition, the Exchange believes it would be consistent to apply the
same minimum value size to closing transactions so that investors may
elect to close just a portion of their FLEX position, without being
subject to a minimum value size that may be greater than the equivalent
value size necessary to meet their investment objectives.\26\ Further,
the Exchange believes that it would be consistent to apply the same
minimum value size to FLEX Quotes so that market participants may
respond to a request for quotes with the precise number of contracts or
underlying equivalent value needed to trade with the OTP Holder that
submitted the request. The Commission finds no basis under the Act at
this time for maintaining a minimum value size requirement for
transactions in currently-opened FLEX Option series or FLEX Quotes
responsive to a request for quotes, and believes that these changes
should be approved for reasons similar to those supporting permanent
approval of the Pilot Program. The Commission notes that it is not
aware of any problems resulting from the permanent approval of CBOE's
pilot eliminating FLEX Option minimum value sizes, which included
currently-opened series and FLEX Quotes responsive to a request for
quotes. As a result, the Commission believes that it is appropriate
under the Act, and would promote just and equitable principles of
trade, as well as remove impediments to and perfect the mechanism of a
free and open market and a national market system, to replace the
current minimum value size requirements for all FLEX Option
transactions and FLEX Quotes on the Exchange with a one-contract
minimum size.
---------------------------------------------------------------------------
\25\ See Notice, 79 FR at 19164.
\26\ Id. Currently, the minimum value size for closing
transactions is 25 contracts in the case of FLEX Equity Options and
$1 million Underlying Equivalent Value in the case of FLEX Index
Options, or in either case the remaining underlying size or
Underlying Equivalent Value on a closing transaction, whichever is
less. See Rules 903G(a)(4)(iii)-(iv).
---------------------------------------------------------------------------
Existing safeguards--such as position reporting requirements and
margin requirements--will continue to apply to FLEX Options.\27\
Further, as noted above, under Rule 9b-1 under the Act,\28\ all
customers of a broker-dealer with options accounts approved to trade
FLEX Options must receive the ODD, which contains specific disclosures
about the characteristics and special risks of trading FLEX
Options.\29\ In addition, similar to other options, FLEX Options are
subject to Trading Permit Holder supervision and suitability
requirements, such as in Rules 922 and 923, respectively.\30\ In
addition to ensuring that FLEX Options are suitable for their
customers, broker-dealers also must take into account the
characteristics of the FLEX market, as compared to the standardized
market, when satisfying their best execution obligations. The
Commission believes that the safeguards in place are reasonably
designed to help mitigate potential risks for retail investors and
other market participants investing in FLEX Options.
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\27\ Certain position limit, aggregation and exercise limit
requirements continue to apply to FLEX Options in accordance with
Rule 906G (Position Limits) and Rule 907G (Exercise Limits). But the
Commission notes that certain FLEX Options do not have position or
exercise limits.
\28\ 17 CFR 240.9b-1.
\29\ See supra notes 13 and 16.
\30\ See Notice, 79 FR at 19163.
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The Exchange believes that permanently removing the minimum value
size requirements for FLEX Options will give investors a more viable,
exchange-traded alternative to customized options in the OTC market,
which are not subject to minimum value size requirements.\31\
Furthermore, the Exchange has represented that broker-dealers have
indicated to the Exchange that the minimum value size requirements have
prevented them from bringing transactions on the Exchange that are
already taking place in the OTC market.\32\ Therefore, it appears
possible that eliminating the minimum value sizes for all FLEX Options
transactions and FLEX Quotes could further incent trading interest in
customized options to move from the OTC market to the Exchange. To the
extent investors choose to trade FLEX Options on the Exchange in lieu
of the OTC market as a result of the permanent removal of the minimum
value size requirements, such action should benefit investors. As the
Commission has previously noted, there are certain benefits to trading
on an exchange, such as enhanced efficiency in initiating and closing
out positions, increased market transparency, and heightened contra-
party creditworthiness due to the role of the Options Clearing
Corporation as issuer and guarantor of FLEX Options.\33\
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\31\ Id.
\32\ Id.
\33\ See Securities Exchange Act Release No. 57429 (March 4,
2008), 73 FR 13058 (March 11, 2008) (order approving SR-CBOE-2006-
36).
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IV. Solicitation of Comments on Amendment No. 1
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
to 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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEMKT-2014-21 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-NYSEMKT-2014-21. 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 Web site (https://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 Web site viewing and
[[Page 39429]]
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; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEMKT-2014-21 and should
be submitted on or before July 31, 2014.
V. Accelerated Approval of Proposal, as Modified by Amendment No. 1
In Amendment No. 1, the Exchange submitted a revised Pilot Report
that corrects errors in the total FLEX Equity Option contract trading
volume under the pilot, total FLEX Index Option contract trading volume
under the pilot, and total number of FLEX Index Option trades under the
pilot reported in the original Pilot Report. The revised Pilot Report
also makes corresponding adjustments to other figures reported in the
Pilot Report, as well non-substantive changes to certain descriptive
language in the Pilot Report. The Commission believes that these
corrections to the Pilot Report do not substantively alter the findings
in the Pilot Report or diminish their support for approval of the pilot
on a permanent basis. Accordingly, the Commission also finds good
cause, pursuant to Section 19(b)(2) of the Act,\34\ for approving the
proposed rule change, as modified by Amendment No. 1, prior to the
thirtieth day after the date of publication of notice in the Federal
Register.
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\34\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
In summary, the Commission believes, for the reasons noted above,
that the proposed rule change to permanently approve the Pilot Program
as well as remove the minimum size requirements for currently-opened
FLEX Option series and FLEX Quotes, thereby permanently removing the
minimum size requirements for all FLEX Options on the Exchange, is
consistent with the Act and Section 6(b)(5) thereunder in particular,
and should be approved, as amended. The Exchange has committed, and the
Commission expects the Exchange, to continue to monitor the usage of
FLEX Options, whether changes need to be made to its rules or the ODD
to address any changes in retail FLEX Option participation, and for any
other issues that may occur as a result of the elimination of the
minimum value sizes on a permanent basis, including whether FLEX Option
trades are being used as a surrogate for trading options in the
standardized market.\35\
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\35\ See Notice, 79 FR at 19164 (Exchange representing that it
will continue to monitor the usage of FLEX Options and whether any
changes to its rules or the ODD are necessary).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\36\ that the proposed rule change (SR-NYSEMKT-2014-21) be, and it
hereby is, approved, on an accelerated basis, as amended.
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\36\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-16095 Filed 7-9-14; 8:45 am]
BILLING CODE 8011-01-P
