Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Surveillance Agreements, 51627-51631 [2015-20931]
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Federal Register / Vol. 80, No. 164 / Tuesday, August 25, 2015 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–75734; File No. SR–
NASDAQ–2015–097]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Surveillance Agreements
August 19, 2015.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
17, 2015, The NASDAQ Stock Market
LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I and II below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend
NOM Chapter IV, Section 3 to allow the
listing of options overlying ETFs 3 that
are listed pursuant to generic listing
standards on equities exchanges for
series of ETFs based on international or
global indexes, pursuant to which a
comprehensive surveillance agreement
is not required.4
The text of the proposed rule change
is available on the Exchange’s Web site
at http://nasdaq.cchwallstreet.com, 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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 ETFs are also referred to in Exchange rules as
‘‘Fund Shares.’’ See, e.g., NOM Chapter IV, Sections
3 and 6.
4 NASDAQ is the principal exchange within the
Group for listing ETFs. NASDAQ has generic listing
standards for Portfolio Depository Receipts
(‘‘PDRs’’) and Index Fund Shares (‘‘IFSs’’). See
NASDAQ Rule 5705(b)(3)(A)(ii) regarding IFSs and
5705(a)(3)(A)(ii) regarding PDRs (IFSs and PDRs are
together known as ETFs in NASDAQ Rule 5705).
See also NYSE MKT Rule 1000 Commentary
.03(a)(B); NYSE Arca Equities Rule 5.2(j)(3)
Commentary .0l(a)(B); and BATS Rule
14.11(b)(3)(A)(ii).
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any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
NOM Chapter IV, Section 3 to allow the
listing of options overlying ETFs 5 that
are listed pursuant to generic listing
standards on equities exchanges for
series of ETFs based on international or
global indexes, pursuant to which a
comprehensive surveillance agreement
is not required.6
This proposal is based on a recent
immediately effective filing of Phlx that
added exactly the same language as
proposed herein, as well as that of other
exchanges,7 and serves to align the rules
of Phlx and the Exchange and other
markets. Adding the proposed language
to NOM Chapter IV, Section 3(i) will
enable the Exchange to list and trade
options on ETFs without a CSSA
provided that the underlying ETF is
listed on an equities exchange pursuant
to the generic listings standards that do
not require a CSSA pursuant to Rule
19b–4(e) of the Exchange Act.8
Rule 19b–4(e) provides that the listing
and trading of a new derivative
5 ETFs are also referred to in Exchange rules as
‘‘Fund Shares.’’ See, e.g., NOM Chapter IV, Sections
3 and 6.
6 NASDAQ is the principal exchange within the
Group for listing ETFs. NASDAQ has generic listing
standards for Portfolio Depository Receipts
(‘‘PDRs’’) and Index Fund Shares (‘‘IFSs’’). See
NASDAQ Rule 5705(b)(3)(A)(ii) regarding IFSs and
5705(a)(3)(A)(ii) regarding PDRs (IFSs and PDRs are
together known as ETFs in NASDAQ Rule 5705).
See also NYSE MKT Rule 1000 Commentary
.03(a)(B); NYSE Arca Equities Rule 5.2(j)(3)
Commentary .0l(a)(B); and BATS Rule
14.11(b)(3)(A)(ii).
7 See Securities Exchange Act Release No. 74553
(March 20, 2015), 80 FR 16072 (March 26, 2015)
(SR-Phlx-2015–27) (notice of filing and immediate
effectiveness to amend Phlx Rule 1009). See also
Securities Exchange Act Release No. 74509 (March
13, 2015), 80 FR 14425 (March 19, 2015) (SR–
MIAX–2015–04) (order approving proposal to
amend MIAX Rule 402). The language proposed in
these Phlx and MIAX filings, as also the language
proposed in this proposal, is similar in all material
respects. Other exchanges have submitted similar
immediately effective filings. See, e.g., Securities
Exchange Act Release Nos. 75132 (June 9, 2015), 80
FR 34175 (June 15, 2015) (SR–BOX–2015–21);
74832 (April 29, 2015), 80 FR 25738 (May 5, 2015)
(SR–ISE–2015–16); 75296 (June 25, 2015), 80 FR
37692 (July 1, 2015) (SR–CBOE–2015–052); and
75440 (July 13, 2015), 80 FR 42587 (July 17, 2015)
(SR–NYSEArca-2015–60).
8 17 CFR 240.19b–4(e).
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51627
securities product by an SRO shall not
be deemed a proposed rule change,
pursuant to paragraph (c)(l) of Rule
19b–4 9 if the Commission has
approved, pursuant to Section 19(b) of
the Act,10 the SRO’s trading rules,
procedures and listing standards for the
product class that would include the
new derivatives securities product, and
the SRO has a surveillance program for
the product class.11 This proposal
allows the Exchange to list and trade
options on ETFs based on international
or global indexes that meet the generic
listing standards.12
The Surveillance Agreement
Requirement for Options on ExchangeTraded Funds
The surveillance agreement
requirement (also known as the
‘‘requirement’’ or ‘‘regime’’) was
initially put into effect on Phlx, which
is the oldest options exchange within
the Group, for options on ETFs well
over a decade ago but has proven to
have anti-competitive effects that are
detrimental to investors.13 Specifically,
the requirement limits the investing
public’s ability to hedge risk or engage
in options strategies that may be
afforded to other investors in domestic
securities.14
The Exchange allows for the listing
and trading of options on ETFs. NOM
Chapter IV, Section 3(i) provides the
listings standards for options on ETFs,
which includes ETFs with non-U.S.
component securities, such as ETFs
based on international or global indexes.
Currently, NOM Chapter IV, Section 3(i)
regarding options on ETFs has a threelevel surveillance agreement
requirement (reproduced in relevant
part):
(i) Any non-U.S. component stocks of
the index or portfolio on which the
Fund Shares are based that are not
9 17
CFR 240.19b–4(c)(1).
U.S.C. 78s(b).
11 When relying on Rule 19b–4(e), the SRO must
submit Form 19b–4(e) to the Commission within
five business days after the SRO begins trading the
new derivative securities products. See Securities
Exchange Act Release No. 40761 (December 8,
1998), 63 FR 70952 (December 22, 1998).
12 See NASDAQ Rule 5705(a)(3)(A)(ii) and
(b)(3)(A)(ii); NYSE MKT Rule 1000, Commentary
.03(a)(B); NYSE Arca Equities Rule 5.20(j)(3) [sic],
Commentary .0l(a)(B); and BATS Rule
14.1l(b)(3)(A)(ii).
13 See Securities Exchange Act Release No. 43921
(February 2, 2001), 66 FR 9739 (February 9, 2001)
(SR–Phlx–2000–107) (notice of filing and approval
order regarding trading of options on ETFs with
surveillance agreements) (the ‘‘ETF approval
order’’). The changes proposed herein relate only to
surveillance agreements for options on global or
international ETFs.
14 Moreover, as noted below the surveillance
agreement requirement is present for the derivative
options on ETFs but not for the underlying ETFs.
10 15
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subject to comprehensive surveillance
agreements do not in the aggregate
represent more than 50% of the weight
of the index or portfolio;
(ii) stocks for which the primary
market is in any one country that is not
subject to a comprehensive surveillance
agreement do not represent 20% or
more of the weight of the index;
(iii) stocks for which the primary
market is in any two countries that are
not subject to comprehensive
surveillance agreements do not
represent 33% or more of the weight of
the index.15
The Exchange proposes to modify the
surveillance agreement requirement for
options on ETFs that are listed pursuant
to generic listing standards for series of
ETFs, based on international or global
indexes—for which case a
comprehensive surveillance agreement
is not required.
When the surveillance agreement
requirement was instituted in 2001 on
Phlx as discussed, ETFs were,
comparatively speaking, in a
developmental state.16 The first ETF
introduced in 1993 was a broad-based
domestic equity fund tracking the S&P
500 index. The development of ETF
products was very limited during the
first decade of their existence, such that
at the end of 2001, there was a total of
only 102 ETFs listed on U.S. markets.
Since 2001, however, the ETF market
has matured tremendously and grown
exponentially, such that at the end of
2012 there were a total of 1,194 listed
ETFs.17 Many of these are very well
known, highly traded and liquid
products, such as, for example, SPDR
S&P 500 Trust ETF (SPY), iShares MSCI
Emerging Markets ETF (EEM), and
PowerShares QQQ Trust, Series 1 ETF
(QQQ), that market participants from
institutional to retail and public
investors have been using for trading,
hedging, and investing purposes with
varying timelines.18 The ETF market is
one of the most highly-developed,
sophisticated markets that provide
traders and investors the opportunity to
access practically all industries and
enterprises. In 2012 investor demand for
ETFs in all asset classes increased
substantially. And in 2011 the demand
15 See NOM Chapter IV, Section 3(i)i.–iii., which
is re-numbered as NOM Chapter IV, Section
3(i)i.(1)–(3). For consistency, NOM Chapter IV,
Section 3(i)iv.–vi. is re-numbered NOM Chapter IV,
Section 3(i)ii.–iv.
16 See Securities Exchange Act Release No. 43921
(February 2, 2001), 66 FR 9739 (February 9, 2001)
(SR–Phlx–2000–107) (ETF approval order).
17 http://www.icifactbook.org/fb_ch3.html.
18 These can be from intraday exposure (e.g.,
using Daily S&P 500 Bear 3x Shares (SPXS)) to longterm 401(k) or retirement fund exposure (e.g., using
SPY).
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for global and international equity ETFs,
to which the requirement applies, more
than doubled.19 The Exchange believes
that the surveillance agreement
requirement no longer serves a
necessary (or indispensable) function in
today’s highly developed ETF market,20
and actually creates a dynamic that
negatively impacts the number of
markets that can competitively trade
ETF option products, to the detriment of
market participants.
The current surveillance requirement
has, at times, resulted in the investing
public having to forego the opportunity
to hedge risk or engage in other listed
options strategies in a competitive
environment. ETFs may lack active
options contracts that would be more
likely to develop if multiple exchanges
could compete to offer and promote
them. For example, an investor in the
iShares MSCI Indonesia ETF (EIDO) is
not permitted to sell call options or
purchase protective puts simply because
the Exchange cannot obtain a
surveillance agreement with Bursa Efek
Indonesia. However, an investor in
iShares MSCI Emerging Markets Fund
(EEM) is afforded the right to engage in
listed options trading to hedge risk or
execute other beneficial options
strategies. Both underlying exchangetraded funds, EIDO and EEM, are listed
for trading in the U.S., subject to
constant regulatory scrutiny, and
permitted to be purchased and sold via
registered broker/dealers, yet, options
can now be offered only on EEM. The
Exchange believes this disparate
treatment between investors of foreignbased instruments, especially between
those that buy and sell options contracts
on ETFs, which currently require
surveillance agreements, as opposed to
those that buy and sell shares of the
underlying ETFs, which currently do
not have the same onerous surveillance
agreement requirement that ETF options
have,21 is not in the best interest of
19 http://www.icifactbook.org/fb_ch3.html.
20 ETFs and ETPs listed in the United States
gathered $24.6 billion USD in net new assets in
June 2014 which, when combined with positive
market performance, pushed the ETF/ETP industry
in the United States to a new record high of $1.86
trillion USD invested in 1,613 ETFs/ETPs, from 58
providers listed on 3 exchanges. And according to
ETFGI, an independent ETF/ETP research and
consultancy firm in the U.K., ETFs and ETPs listed
globally reached $2.64 trillion USD in assets, a new
record high, at the end of Q2 2014. http://
www.mondovisione.com/media-and-resources/
news/according-to-etfgi-etfs-and-etps-listedglobally-reached-us264-trillion-in-as/.
21 While the surveillance agreement requirement
for options on ETFs found in NOM Chapter IV,
Section 3(i) (see note 15 and related text) has
resulted in significant negative implications for
market participants, there is no such surveillance
agreement requirement for the underlying ETFs. In
particular, when looking to the rules of NASDAQ,
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market participants. The Exchange
therefore proposes to establish that
options on generically-listed global or
international ETFs would not require
surveillance agreements for listing.
The current surveillance agreement
requirements, as well as all other
requirements to list options on ETFs,22
are not affected by this proposal and
will continue to remain in place for
options on ETFs that do not meet
generic listing standards on equities
exchanges for ETFs based on
international and global indexes.
Generic Listing Standards for ExchangeTraded Funds
The Exchange notes that the
Commission has previously approved
generic listing standards pursuant to
Rule 19b–4(e) of the Exchange Act 23 for
ETFs based on indexes that consist of
stocks listed on U.S. exchanges
including NASDAQ, the ETF listing
exchange within the Group.24 In
general, the criteria for the underlying
component securities in the
international and global indexes are
similar to those for the domestic
indexes, but with modifications as
appropriate for the issues and risks
associated with non-U.S. securities.
In addition, the Commission has
previously approved proposals for the
listing and trading of options on ETFs
based on international indexes as well
as global indexes (e.g., based on nonU.S. and U.S. component stocks).25 In
the primary ETF listing venue in the Group,
NASDAQ Rules 5705 regarding ETFs and 5735
regarding Managed Fund Shares (‘‘MFSs’’) have no
explicit requirements concerning surveillance
agreements for regularly listed (non-generic) ETFs
and MFSs, and simply state that FINRA will
implement written surveillance procedures. Section
19(b)(2) filings regarding ETFs and MFSs typically
indicate that the Exchange may obtain information
regarding trading in the shares from FINRA and
markets and other entities that are members of the
Intermarket Surveillance Group (‘‘ISG’’), which
includes securities and futures exchanges, or with
which the Exchange has in place a surveillance
agreement (which is not required by rule).
Regarding ETFs and MFSs listed pursuant to
generic (19b–4(e)) standards and reviewed and
approved for trading under Section 19(b)(2) of the
Act, Rule 5705 simply notes that the Commission’s
approval order may reference surveillance sharing
agreements with respect to non-U.S. component
stocks.
22 For purposes of brevity, these other
requirements are not set forth, but can be found in
NOM Chapter IV, Section 3(i).
23 17 CFR 240.19b–4(e).
24 See Securities Exchange Act Release No. 54739
(November 9, 2006), 71 FR 66993 (November 17,
2006) (SR-Amex-2006–78) (initial order relating to
generic listing standards for ETFs based on
international or global indexes). See also NASDAQ
Rule 5705(a) (3) (A) (ii) and (b) (3) (A) (ii).
25 See, e.g., Securities Exchange Act Release Nos.
57013 (December 20, 2007), 72 FR 73923 (December
28, 2007) (SR–CBOE–2007–140) (approval order to
list and trade options on iShares MSCI Mexico
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approving ETFs for equities exchange
trading, the Commission thoroughly
considered the structure of the ETFs,
their usefulness to investors and to the
markets, and SRO rules that govern their
trading. The Exchange believes that
allowing the listing of options overlying
ETFs that are listed pursuant to the
generic listing standards on equities
exchanges for ETFs based on
international and global indexes and
applying Rule 19b–4(e) 26 should fulfill
the intended objective of that rule by
allowing options on those ETFs that
have satisfied the generic listing
standards to commence trading, without
the need for the public comment period
and Commission approval. The
proposed rule has the potential to
reduce the time frame for bringing
options on ETFs to market, thereby
reducing the burdens on issuers and
other market participants. The failure of
a particular ETF to comply with the
generic listing standards under Rule
19b–4(e) 27 would not, however,
preclude the Exchange from submitting
a separate filing pursuant to Section
19(b) (2),28 requesting Commission
approval to list and trade options on a
particular ETF. Moreover, the Exchange
notes that the generic standards such as
those in proposed NOM Chapter IV,
Section 3(i) are not new in the options
world, and have been used extensively
for listing options on narrow-based and
broad-based indexes.29
Index Fund, when CBOE did not have in place a
surveillance agreement with the Bolsa Mexicana de
Valores (the ‘‘Bolsa’’)); 57014 (December 20, 2007),
72 FR 73934 (December 28, 2007) (SR–ISE–2007–
111) (approval order to list and trade options on
iShares MSCI Mexico Index Fund, when ISE did
not have in place a surveillance agreement with the
Bolsa); 56778 (November 9, 2007), 72 FR 65113
(November 19, 2007) (SR–AMEX–2007–100)
(approval order to list and trade options on iShares
MSCI Mexico Index Fund, when AMEX did not
have in place a surveillance agreement with the
Bolsa); and 55648 (April 19, 2007), 72 FR 20902
(April 26, 2007) (SR–AMEX–2007–09) (approval
order to list and trade options on Vanguard
Emerging Markets ETF, when AMEX did not have
in place a surveillance agreement with the Bolsa).
See also Securities Exchange Act Release Nos.
50189 (August 12, 2004), 69 FR 51723 (August 20,
2004) (SR–AMEX–2004–05) (approving the listing
and trading of certain Vanguard International
Equity Index Funds); and 44700 (August 14, 2001),
66 FR 43927 (August 21, 2001) (SR–AMEX–2001–
34) (approving the listing and trading of series of
the iShares Trust based on foreign stock indexes).
26 17 CFR 240.19b–4(e).
27 Id.
28 15 U.S.C. 78s(b) (2).
29 NOM Chapter IV, Sections 3 and 6 have, for
example, weighting, capitalization, trading volume,
and minimum number of components standards for
listing options on broad-based and narrow-based
indexes. For a definition of broad-based index
(market index) and narrow-based index (industry
index), see NOM Chapter XIV, Sections 2(k) and (j),
respectively.
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Requirements for Listing and Trading
Options Overlying ETFs Based on
International and Global Indexes
Options on ETFs listed pursuant to
these generic standards for international
and global indexes would be traded, in
all other respects, under the Exchange’s
existing trading rules and procedures
that apply to options on ETFs and
would be covered under the Exchange’s
surveillance program for options on
ETFs.
Pursuant to proposed NOM Chapter
IV, Section 3(i), the Exchange may list
and trade options on an ETF without a
CSSA provided that the ETF is listed
pursuant to generic listing standards for
ETFs based on international or global
indexes, in which case a comprehensive
surveillance agreement is not required.
As noted, one such rule, which
discusses things such as weighting,
capitalization, trading volume,
minimum number of components, and
where components are listed, is
NASDAQ Rule 5705(b)(3)(A)(ii)
regarding ETFs (IFSs and PDRs).30 The
Exchange believes that these generic
listing standards are intended to ensure
that securities with substantial market
capitalization and trading volume
account for a substantial portion of the
weight of an index or portfolio.
The Exchange believes that this
proposed listing standard for options on
ETFs is reasonable for international and
30 NASDAQ Rule 5705(b)(3)(A)(ii) regarding IFSs,
for example, has the following requirements
(reproduced in relevant part): a. component stocks
(excluding Derivative Securities Products) that in
the aggregate account for at least 90% of the weight
of the index or portfolio (excluding Derivative
Securities Products) each shall have a minimum
market value of at least $100 million; b. component
stocks (excluding Derivative Securities Products)
that in the aggregate account for at least 70% of the
weight of the index or portfolio (excluding
Derivative Securities Products) each shall have a
minimum worldwide monthly trading volume of at
least 250,000 shares, or minimum global notional
volume traded per month of $25,000,000, averaged
over the last six months; c. the most heavily
weighted component stock (excluding Derivative
Securities Products) shall not exceed 25% of the
weight of the index or portfolio, and, to the extent
applicable, the five most heavily weighted
component stocks (excluding Derivative Securities
Products) shall not exceed 60% of the weight of the
index or portfolio; d. the index or portfolio shall
include a minimum of 20 component stocks;
provided, however, that there shall be no minimum
number of component stocks if either one or more
series of Index Fund Shares or Portfolio Depositary
Receipts constitute, at least in part, components
underlying a series of Index Fund Shares, or one or
more series of Derivative Securities Products
account for 100% of the weight of the index or
portfolio; and e. each U.S. Component Stock shall
be listed on a national securities exchange and shall
be an NMS Stock as defined in Rule 600 of
Regulation NMS under the Act, and each Non-U.S.
Component Stock shall be listed and traded on an
exchange that has last-sale reporting. NASDAQ
Rule 5705(a)(3)(A)(ii) has similar standards, but
tailored for PDRs.
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global indexes, and, when applied in
conjunction with the other listing
requirements, will result in options
overlying ETFs that are sufficiently
broad in scope and not readily
susceptible to manipulation. The
Exchange also believes that allowing the
Exchange to list options overlying ETFs
that are listed on equities exchanges
pursuant to generic standards for series
of ETFs based on international or global
indexes under which a CSSA is not
required, will result in options
overlying ETFs that are adequately
diversified in weighting for any single
security or small group of securities to
significantly reduce concerns that
trading in options overlying ETFs based
on international or global indexes could
become a surrogate for trading in
unregistered securities.31
The Exchange believes that ETFs
based on international and global
indexes that have been listed pursuant
to the generic standards are sufficiently
defined so as to make options overlying
such ETFs not susceptible instruments
for manipulation. The Exchange
believes that the threat of manipulation
is, as discussed below, sufficiently
mitigated for underlying ETFs that have
been listed on equities exchanges
pursuant to generic listing standards for
series of ETFs based on international or
global indexes under which a
comprehensive surveillance agreement
is not required and for the overlying
options; the Exchange does not see the
need for a CSSA to be in place before
listing and trading options on such
ETFs. The Exchange notes that its
proposal does not replace the need for
a CSSA as provided in current NOM
Chapter IV, Section 3(i). The provisions
of Section 3(i), including the need for a
CSSA, remain materially unchanged
and will continue to apply to options on
ETFs that are not listed on an equities
exchange pursuant to generic listing
standards for series of ETFs based on
international or global indexes pursuant
to which a CSSA is not required.
Instead, proposed NOM Chapter IV,
Section 3(i) adds an additional listing
mechanism for certain qualifying
options on ETFs to be listed on the
Exchange.
Finally, to account for proposed NOM
Chapter IV, Section 3(i) and make
Section 3 easier to follow, the Exchange
proposes technical changes to the
31 The Exchange also notes that not affording
retail investors the ability to trade on a regulated
exchange can be detrimental. While products can be
traded off exchange in the over the counter (‘‘OTC’’)
market, which has increased settlement, clearing,
and market risk as opposed to exchanges, the
relatively unregulated OTC market is usually not a
viable option for retail and public investors.
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formatting of this section of the rule.
Thus, the Exchange proposes renumbering NOM Chapter IV, Section
3(i)i.–iii. to NOM Chapter IV, Section
3(i)i.(1)–(3), respectively. And, for
consistency, the Exchange proposes renumbering NOM Chapter IV, Section
3(i)iv.–vi. to NOM Chapter IV, Section
3(i)ii.–iv., respectively. This is merely
re-numbering and there are no changes
to the language of these parts of Section
3(i).
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 32 in general, and furthers the
objectives of Section 6(b)(5) of the Act 33
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. In
particular, the proposed rule change has
the potential to reduce the time frame
for bringing options on ETFs to market,
thereby reducing the burdens on issuers
and other market participants. The
Exchange also believes that enabling the
listing and trading of options on ETFs
pursuant to this proposed new listing
standard will benefit investors by
providing them with valuable risk
management tools. The Exchange notes
that its proposal does not replace the
need for a CSSA as provided in NOM
Chapter IV, Section 3(i). The provisions
of current Section 3(i), including the
need for a CSSA, remain materially
unchanged and will continue to apply
to options on ETFs that are not listed on
an equities exchange pursuant to
generic listing standards for series of
ETFs based on international or global
indexes under which a comprehensive
surveillance agreement is not required.
Instead, proposed NOM Chapter IV,
Section 3(i) adds an additional listing
mechanism for certain qualifying
options on ETFs to be listed on the
Exchange in a manner that is 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 facilitating
transactions in securities, to remove
impediments to and perfect the
mechanisms of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
The proposal would promote just and
equitable principles of trade. When the
32 15
33 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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surveillance agreement requirement was
instituted as discussed in 2001 on Phlx,
the oldest options exchange in the
Group, ETFs were, comparatively
speaking, in a developmental state.34
The first ETF introduced in 1993 was a
broad-based domestic equity fund
tracking the S&P 500 index. After the
introduction of the first ETF in 1993, the
development of ETF products was very
limited during the first decade of their
existence. Since the end of 2001, when
there was a total of only 102 ETFs listed
on U.S. markets, however, the ETF
market has matured tremendously and
grown exponentially. With a total of
1,194 listed ETFs at the end of 2012, the
ETF market is now one of the most
highly-developed, sophisticated markets
with many very well known, highly
traded and liquid products that provide
traders and investors the opportunity to
access practically all industries and
enterprises. While investor demand for
ETFs in all asset classes increased
substantially, in 2011 the demand for
global and international equity ETFs, to
which the requirement applies, more
than doubled.35 The Exchange believes
that the current surveillance
requirement no longer serves a
necessary function in today’s highly
developed market, and, as discussed,
actually creates a dynamic that
negatively impacts the number of
markets that can competitively trade
ETF option products. This hurts market
participants. The Exchange therefore
proposes to establish that pursuant to
proposed NOM Chapter IV, Section 3(i)
options may be listed on certain ETFs
that are based on global and
international funds and meet generic
listing standards.
The proposal would in general protect
investors and the public interest. The
Exchange believes that modifying the
surveillance agreement requirement for
ETFs would not hinder the Exchange
from performing surveillance duties
designed to protect investors and the
public interest. There are various data
consolidators, vendors, and outlets that
can be used to access data and
information regarding ETFs and the
underlying securities (e.g., Bloomberg,
Dow Jones, FTEN). In addition, firms
that list ETFs on an exchange receive
vast amounts of data relevant to their
products that could be made available to
listing exchanges as needed. The
Exchange has access to the activity of
the direct underlying instrument and
the ETF, and through the Intermarket
34 See Securities Exchange Act Release No. 43921
(February 2, 2001), 66 FR 9739 (February 9,
2001)(SR–Phlx 2000–107)(ETF approval order).
35 http://www.icifactbook.org/fb_ch3.html.
PO 00000
Frm 00100
Fmt 4703
Sfmt 4703
Surveillance Group (‘‘ISG’’) the
Exchange can obtain such information
related to the underlying security as
needed.36 Moreover, other than the
surveillance agreement requirement
there are, as discussed, numerous
requirements must be met to list options
on ETFs on the Exchange.
The proposal would remove
impediments to and perfect the
mechanism of a free and open market
and a national market system. Multiple
listing of ETFs, options, and other
securities and competition are some of
the central features of the current
national market system. The Exchange
believes that the surveillance agreement
requirement has led to clearly anticompetitive results in a market that is
based on competition. As such, the
Exchange believes that the surveillance
agreement requirement for options on
certain ETFs is no longer necessary and
proposes new NOM Chapter IV, Section
3(i). The proposed rule change will
significantly benefit market participants.
As discussed at length, the proposed
rule will negate the negative anticompetitive effect of the current
surveillance agreement requirement that
has resulted in de facto regulatory
monopolies where only solitary
exchanges, or only a few exchanges, are
able to list certain ETF options
products. The Exchange believes this is
inconsistent with Commission policies
and the developing national market
system, as well as the competitive
nature of the market, and therefore
proposes amendment.37 The Exchange
believes that the proposal would
encourage a more open market and
national market system based on
competition and multiple listing. The
generic listing standards for ETFs based
on global or international indexes have
specific requirements regarding relative
weighting, minimum capitalization,
minimum trading volume, and
minimum number of components that
have been approved by the Commission
years ago for foreign ETFs.38 Moreover,
such listing standards have been in
continuous use for listing options on
36 See https://www.isgportal.org/home.html.
Another global organization similar to ISG is The
International Organization of Securities
Commissions (‘‘IOSCO’’).
37 As discussed, the Exchange is decidedly not
proposing that the surveillance agreement
requirement be deleted entirely, but rather that only
those options on ETFs that do not meet very
specific generic listing standards need to have
surveillance agreements in order to list on the
Exchange.
38 See Securities Exchange Act Release No. 54739
(November 9, 2006), 71 FR 66993 (November 17,
2006)(SR–Amex–2006–78)(initial order relating to
generic listing standards for ETFs based on
international or global indexes). See also NASDAQ
Rule 5705(a)(3)(A)(ii) and (b)(3)(A)(ii).
E:\FR\FM\25AUN1.SGM
25AUN1
Federal Register / Vol. 80, No. 164 / Tuesday, August 25, 2015 / Notices
narrow-based and broad-based indexes
on the Exchange.39 Allowing the listing
of options on underlying ETFs based on
global and international indexes that
meet generic listing standards would
encourage a free and open market and
national market system to the benefit of
market participants.
For the above reasons, the Exchange
believes the proposed rule change is
consistent with the requirements of
Section 6(b)(5) of the Act.
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. To the
contrary, the Exchange believes that the
proposal is, as discussed, decidedly procompetitive and is a competitive
response to the inability to list products
because of the surveillance agreement
requirement. The Exchange believes that
the proposed rule change will result in
additional investment options and
opportunities to achieve the investment
objectives of market participants seeking
efficient trading and hedging vehicles,
to the benefit of investors, market
participants, and the marketplace in
general. Competition is one of the
principal features of the national market
system. The Exchange believes that this
proposal will expand competitive
opportunities to list and trade products
on the Exchange as noted.
IV. Solicitation of Comments
asabaliauskas on DSK5VPTVN1PROD with NOTICES
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
Because the proposed rule change
does not (i) significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 40 and Rule 19b–
4(f)(6) thereunder.41
39 See
Chapter XIV, Sections 6 and 3.
U.S.C. 78s(b)(3)(A).
41 17 CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), the Exchange provided the
Commission with written notice of its intent to file
the proposed rule change, along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change.
40 15
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A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 42 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 43
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay so that the proposal may
become operative immediately upon
filing. The Exchange stated that waiver
of the operative delay will allow the
Exchange to list and trade certain ETF
options on the same basis as other
options markets.44 The Commission
believes the waiver of the operative
delay is consistent with the protection
of investors and the public interest.
Therefore, the Commission hereby
waives the operative delay and
designates the proposal operative upon
filing.45
At any time within 60 days of the
filing of the 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. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
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–
NASDAQ–2015–097 on the subject line.
Street, NE., Washington, DC 20549–
1090.
All submissions should refer to File
Number SR–NASDAQ–2015–097. 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 (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 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 such
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–
NASDAQ–2015–097, and should be
submitted on or before September 15,
2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.46
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015–20931 Filed 8–24–15; 8:45 am]
BILLING CODE 8011–01–P
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F
CFR 240.19b–4(f)(6).
CFR 240.19b–4(f)(6)(iii).
44 See supra note 7.
45 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
42 17
43 17
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51631
46 17
E:\FR\FM\25AUN1.SGM
CFR 200.30–3(a)(12).
25AUN1
]]>Agencies
[Federal Register Volume 80, Number 164 (Tuesday, August 25, 2015)]
[Notices]
[Pages 51627-51631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-20931]
[[Page 51627]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75734; File No. SR-NASDAQ-2015-097]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to Surveillance Agreements
August 19, 2015.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 17, 2015, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend NOM Chapter IV, Section 3 to allow
the listing of options overlying ETFs \3\ that are listed pursuant to
generic listing standards on equities exchanges for series of ETFs
based on international or global indexes, pursuant to which a
comprehensive surveillance agreement is not required.\4\
---------------------------------------------------------------------------
\3\ ETFs are also referred to in Exchange rules as ``Fund
Shares.'' See, e.g., NOM Chapter IV, Sections 3 and 6.
\4\ NASDAQ is the principal exchange within the Group for
listing ETFs. NASDAQ has generic listing standards for Portfolio
Depository Receipts (``PDRs'') and Index Fund Shares (``IFSs''). See
NASDAQ Rule 5705(b)(3)(A)(ii) regarding IFSs and 5705(a)(3)(A)(ii)
regarding PDRs (IFSs and PDRs are together known as ETFs in NASDAQ
Rule 5705). See also NYSE MKT Rule 1000 Commentary .03(a)(B); NYSE
Arca Equities Rule 5.2(j)(3) Commentary .0l(a)(B); and BATS Rule
14.11(b)(3)(A)(ii).
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaq.cchwallstreet.com, 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 Exchange proposes to amend NOM Chapter IV, Section 3 to allow
the listing of options overlying ETFs \5\ that are listed pursuant to
generic listing standards on equities exchanges for series of ETFs
based on international or global indexes, pursuant to which a
comprehensive surveillance agreement is not required.\6\
---------------------------------------------------------------------------
\5\ ETFs are also referred to in Exchange rules as ``Fund
Shares.'' See, e.g., NOM Chapter IV, Sections 3 and 6.
\6\ NASDAQ is the principal exchange within the Group for
listing ETFs. NASDAQ has generic listing standards for Portfolio
Depository Receipts (``PDRs'') and Index Fund Shares (``IFSs''). See
NASDAQ Rule 5705(b)(3)(A)(ii) regarding IFSs and 5705(a)(3)(A)(ii)
regarding PDRs (IFSs and PDRs are together known as ETFs in NASDAQ
Rule 5705). See also NYSE MKT Rule 1000 Commentary .03(a)(B); NYSE
Arca Equities Rule 5.2(j)(3) Commentary .0l(a)(B); and BATS Rule
14.11(b)(3)(A)(ii).
---------------------------------------------------------------------------
This proposal is based on a recent immediately effective filing of
Phlx that added exactly the same language as proposed herein, as well
as that of other exchanges,\7\ and serves to align the rules of Phlx
and the Exchange and other markets. Adding the proposed language to NOM
Chapter IV, Section 3(i) will enable the Exchange to list and trade
options on ETFs without a CSSA provided that the underlying ETF is
listed on an equities exchange pursuant to the generic listings
standards that do not require a CSSA pursuant to Rule 19b-4(e) of the
Exchange Act.\8\
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\7\ See Securities Exchange Act Release No. 74553 (March 20,
2015), 80 FR 16072 (March 26, 2015) (SR-Phlx-2015-27) (notice of
filing and immediate effectiveness to amend Phlx Rule 1009). See
also Securities Exchange Act Release No. 74509 (March 13, 2015), 80
FR 14425 (March 19, 2015) (SR-MIAX-2015-04) (order approving
proposal to amend MIAX Rule 402). The language proposed in these
Phlx and MIAX filings, as also the language proposed in this
proposal, is similar in all material respects. Other exchanges have
submitted similar immediately effective filings. See, e.g.,
Securities Exchange Act Release Nos. 75132 (June 9, 2015), 80 FR
34175 (June 15, 2015) (SR-BOX-2015-21); 74832 (April 29, 2015), 80
FR 25738 (May 5, 2015) (SR-ISE-2015-16); 75296 (June 25, 2015), 80
FR 37692 (July 1, 2015) (SR-CBOE-2015-052); and 75440 (July 13,
2015), 80 FR 42587 (July 17, 2015) (SR-NYSEArca-2015-60).
\8\ 17 CFR 240.19b-4(e).
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Rule 19b-4(e) provides that the listing and trading of a new
derivative securities product by an SRO shall not be deemed a proposed
rule change, pursuant to paragraph (c)(l) of Rule 19b-4 \9\ if the
Commission has approved, pursuant to Section 19(b) of the Act,\10\ the
SRO's trading rules, procedures and listing standards for the product
class that would include the new derivatives securities product, and
the SRO has a surveillance program for the product class.\11\ This
proposal allows the Exchange to list and trade options on ETFs based on
international or global indexes that meet the generic listing
standards.\12\
---------------------------------------------------------------------------
\9\ 17 CFR 240.19b-4(c)(1).
\10\ 15 U.S.C. 78s(b).
\11\ When relying on Rule 19b-4(e), the SRO must submit Form
19b-4(e) to the Commission within five business days after the SRO
begins trading the new derivative securities products. See
Securities Exchange Act Release No. 40761 (December 8, 1998), 63 FR
70952 (December 22, 1998).
\12\ See NASDAQ Rule 5705(a)(3)(A)(ii) and (b)(3)(A)(ii); NYSE
MKT Rule 1000, Commentary .03(a)(B); NYSE Arca Equities Rule
5.20(j)(3) [sic], Commentary .0l(a)(B); and BATS Rule
14.1l(b)(3)(A)(ii).
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The Surveillance Agreement Requirement for Options on Exchange-Traded
Funds
The surveillance agreement requirement (also known as the
``requirement'' or ``regime'') was initially put into effect on Phlx,
which is the oldest options exchange within the Group, for options on
ETFs well over a decade ago but has proven to have anti-competitive
effects that are detrimental to investors.\13\ Specifically, the
requirement limits the investing public's ability to hedge risk or
engage in options strategies that may be afforded to other investors in
domestic securities.\14\
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 43921 (February 2,
2001), 66 FR 9739 (February 9, 2001) (SR-Phlx-2000-107) (notice of
filing and approval order regarding trading of options on ETFs with
surveillance agreements) (the ``ETF approval order''). The changes
proposed herein relate only to surveillance agreements for options
on global or international ETFs.
\14\ Moreover, as noted below the surveillance agreement
requirement is present for the derivative options on ETFs but not
for the underlying ETFs.
---------------------------------------------------------------------------
The Exchange allows for the listing and trading of options on ETFs.
NOM Chapter IV, Section 3(i) provides the listings standards for
options on ETFs, which includes ETFs with non-U.S. component
securities, such as ETFs based on international or global indexes.
Currently, NOM Chapter IV, Section 3(i) regarding options on ETFs has a
three-level surveillance agreement requirement (reproduced in relevant
part):
(i) Any non-U.S. component stocks of the index or portfolio on
which the Fund Shares are based that are not
[[Page 51628]]
subject to comprehensive surveillance agreements do not in the
aggregate represent more than 50% of the weight of the index or
portfolio;
(ii) stocks for which the primary market is in any one country that
is not subject to a comprehensive surveillance agreement do not
represent 20% or more of the weight of the index;
(iii) stocks for which the primary market is in any two countries
that are not subject to comprehensive surveillance agreements do not
represent 33% or more of the weight of the index.\15\
---------------------------------------------------------------------------
\15\ See NOM Chapter IV, Section 3(i)i.-iii., which is re-
numbered as NOM Chapter IV, Section 3(i)i.(1)-(3). For consistency,
NOM Chapter IV, Section 3(i)iv.-vi. is re-numbered NOM Chapter IV,
Section 3(i)ii.-iv.
---------------------------------------------------------------------------
The Exchange proposes to modify the surveillance agreement
requirement for options on ETFs that are listed pursuant to generic
listing standards for series of ETFs, based on international or global
indexes--for which case a comprehensive surveillance agreement is not
required.
When the surveillance agreement requirement was instituted in 2001
on Phlx as discussed, ETFs were, comparatively speaking, in a
developmental state.\16\ The first ETF introduced in 1993 was a broad-
based domestic equity fund tracking the S&P 500 index. The development
of ETF products was very limited during the first decade of their
existence, such that at the end of 2001, there was a total of only 102
ETFs listed on U.S. markets. Since 2001, however, the ETF market has
matured tremendously and grown exponentially, such that at the end of
2012 there were a total of 1,194 listed ETFs.\17\ Many of these are
very well known, highly traded and liquid products, such as, for
example, SPDR S&P 500 Trust ETF (SPY), iShares MSCI Emerging Markets
ETF (EEM), and PowerShares QQQ Trust, Series 1 ETF (QQQ), that market
participants from institutional to retail and public investors have
been using for trading, hedging, and investing purposes with varying
timelines.\18\ The ETF market is one of the most highly-developed,
sophisticated markets that provide traders and investors the
opportunity to access practically all industries and enterprises. In
2012 investor demand for ETFs in all asset classes increased
substantially. And in 2011 the demand for global and international
equity ETFs, to which the requirement applies, more than doubled.\19\
The Exchange believes that the surveillance agreement requirement no
longer serves a necessary (or indispensable) function in today's highly
developed ETF market,\20\ and actually creates a dynamic that
negatively impacts the number of markets that can competitively trade
ETF option products, to the detriment of market participants.
---------------------------------------------------------------------------
\16\ See Securities Exchange Act Release No. 43921 (February 2,
2001), 66 FR 9739 (February 9, 2001) (SR-Phlx-2000-107) (ETF
approval order).
\17\ http://www.icifactbook.org/fb_ch3.html.
\18\ These can be from intraday exposure (e.g., using Daily S&P
500 Bear 3x Shares (SPXS)) to long-term 401(k) or retirement fund
exposure (e.g., using SPY).
\19\ http://www.icifactbook.org/fb_ch3.html.
\20\ ETFs and ETPs listed in the United States gathered $24.6
billion USD in net new assets in June 2014 which, when combined with
positive market performance, pushed the ETF/ETP industry in the
United States to a new record high of $1.86 trillion USD invested in
1,613 ETFs/ETPs, from 58 providers listed on 3 exchanges. And
according to ETFGI, an independent ETF/ETP research and consultancy
firm in the U.K., ETFs and ETPs listed globally reached $2.64
trillion USD in assets, a new record high, at the end of Q2 2014.
http://www.mondovisione.com/media-and-resources/news/according-to-etfgi-etfs-and-etps-listed-globally-reached-us264-trillion-in-as/.
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The current surveillance requirement has, at times, resulted in the
investing public having to forego the opportunity to hedge risk or
engage in other listed options strategies in a competitive environment.
ETFs may lack active options contracts that would be more likely to
develop if multiple exchanges could compete to offer and promote them.
For example, an investor in the iShares MSCI Indonesia ETF (EIDO) is
not permitted to sell call options or purchase protective puts simply
because the Exchange cannot obtain a surveillance agreement with Bursa
Efek Indonesia. However, an investor in iShares MSCI Emerging Markets
Fund (EEM) is afforded the right to engage in listed options trading to
hedge risk or execute other beneficial options strategies. Both
underlying exchange-traded funds, EIDO and EEM, are listed for trading
in the U.S., subject to constant regulatory scrutiny, and permitted to
be purchased and sold via registered broker/dealers, yet, options can
now be offered only on EEM. The Exchange believes this disparate
treatment between investors of foreign-based instruments, especially
between those that buy and sell options contracts on ETFs, which
currently require surveillance agreements, as opposed to those that buy
and sell shares of the underlying ETFs, which currently do not have the
same onerous surveillance agreement requirement that ETF options
have,\21\ is not in the best interest of market participants. The
Exchange therefore proposes to establish that options on generically-
listed global or international ETFs would not require surveillance
agreements for listing.
---------------------------------------------------------------------------
\21\ While the surveillance agreement requirement for options on
ETFs found in NOM Chapter IV, Section 3(i) (see note 15 and related
text) has resulted in significant negative implications for market
participants, there is no such surveillance agreement requirement
for the underlying ETFs. In particular, when looking to the rules of
NASDAQ, the primary ETF listing venue in the Group, NASDAQ Rules
5705 regarding ETFs and 5735 regarding Managed Fund Shares
(``MFSs'') have no explicit requirements concerning surveillance
agreements for regularly listed (non-generic) ETFs and MFSs, and
simply state that FINRA will implement written surveillance
procedures. Section 19(b)(2) filings regarding ETFs and MFSs
typically indicate that the Exchange may obtain information
regarding trading in the shares from FINRA and markets and other
entities that are members of the Intermarket Surveillance Group
(``ISG''), which includes securities and futures exchanges, or with
which the Exchange has in place a surveillance agreement (which is
not required by rule). Regarding ETFs and MFSs listed pursuant to
generic (19b-4(e)) standards and reviewed and approved for trading
under Section 19(b)(2) of the Act, Rule 5705 simply notes that the
Commission's approval order may reference surveillance sharing
agreements with respect to non-U.S. component stocks.
---------------------------------------------------------------------------
The current surveillance agreement requirements, as well as all
other requirements to list options on ETFs,\22\ are not affected by
this proposal and will continue to remain in place for options on ETFs
that do not meet generic listing standards on equities exchanges for
ETFs based on international and global indexes.
---------------------------------------------------------------------------
\22\ For purposes of brevity, these other requirements are not
set forth, but can be found in NOM Chapter IV, Section 3(i).
---------------------------------------------------------------------------
Generic Listing Standards for Exchange-Traded Funds
The Exchange notes that the Commission has previously approved
generic listing standards pursuant to Rule 19b-4(e) of the Exchange Act
\23\ for ETFs based on indexes that consist of stocks listed on U.S.
exchanges including NASDAQ, the ETF listing exchange within the
Group.\24\ In general, the criteria for the underlying component
securities in the international and global indexes are similar to those
for the domestic indexes, but with modifications as appropriate for the
issues and risks associated with non-U.S. securities.
---------------------------------------------------------------------------
\23\ 17 CFR 240.19b-4(e).
\24\ See Securities Exchange Act Release No. 54739 (November 9,
2006), 71 FR 66993 (November 17, 2006) (SR-Amex-2006-78) (initial
order relating to generic listing standards for ETFs based on
international or global indexes). See also NASDAQ Rule 5705(a) (3)
(A) (ii) and (b) (3) (A) (ii).
---------------------------------------------------------------------------
In addition, the Commission has previously approved proposals for
the listing and trading of options on ETFs based on international
indexes as well as global indexes (e.g., based on non-U.S. and U.S.
component stocks).\25\ In
[[Page 51629]]
approving ETFs for equities exchange trading, the Commission thoroughly
considered the structure of the ETFs, their usefulness to investors and
to the markets, and SRO rules that govern their trading. The Exchange
believes that allowing the listing of options overlying ETFs that are
listed pursuant to the generic listing standards on equities exchanges
for ETFs based on international and global indexes and applying Rule
19b-4(e) \26\ should fulfill the intended objective of that rule by
allowing options on those ETFs that have satisfied the generic listing
standards to commence trading, without the need for the public comment
period and Commission approval. The proposed rule has the potential to
reduce the time frame for bringing options on ETFs to market, thereby
reducing the burdens on issuers and other market participants. The
failure of a particular ETF to comply with the generic listing
standards under Rule 19b-4(e) \27\ would not, however, preclude the
Exchange from submitting a separate filing pursuant to Section 19(b)
(2),\28\ requesting Commission approval to list and trade options on a
particular ETF. Moreover, the Exchange notes that the generic standards
such as those in proposed NOM Chapter IV, Section 3(i) are not new in
the options world, and have been used extensively for listing options
on narrow-based and broad-based indexes.\29\
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\25\ See, e.g., Securities Exchange Act Release Nos. 57013
(December 20, 2007), 72 FR 73923 (December 28, 2007) (SR-CBOE-2007-
140) (approval order to list and trade options on iShares MSCI
Mexico Index Fund, when CBOE did not have in place a surveillance
agreement with the Bolsa Mexicana de Valores (the ``Bolsa'')); 57014
(December 20, 2007), 72 FR 73934 (December 28, 2007) (SR-ISE-2007-
111) (approval order to list and trade options on iShares MSCI
Mexico Index Fund, when ISE did not have in place a surveillance
agreement with the Bolsa); 56778 (November 9, 2007), 72 FR 65113
(November 19, 2007) (SR-AMEX-2007-100) (approval order to list and
trade options on iShares MSCI Mexico Index Fund, when AMEX did not
have in place a surveillance agreement with the Bolsa); and 55648
(April 19, 2007), 72 FR 20902 (April 26, 2007) (SR-AMEX-2007-09)
(approval order to list and trade options on Vanguard Emerging
Markets ETF, when AMEX did not have in place a surveillance
agreement with the Bolsa). See also Securities Exchange Act Release
Nos. 50189 (August 12, 2004), 69 FR 51723 (August 20, 2004) (SR-
AMEX-2004-05) (approving the listing and trading of certain Vanguard
International Equity Index Funds); and 44700 (August 14, 2001), 66
FR 43927 (August 21, 2001) (SR-AMEX-2001-34) (approving the listing
and trading of series of the iShares Trust based on foreign stock
indexes).
\26\ 17 CFR 240.19b-4(e).
\27\ Id.
\28\ 15 U.S.C. 78s(b) (2).
\29\ NOM Chapter IV, Sections 3 and 6 have, for example,
weighting, capitalization, trading volume, and minimum number of
components standards for listing options on broad-based and narrow-
based indexes. For a definition of broad-based index (market index)
and narrow-based index (industry index), see NOM Chapter XIV,
Sections 2(k) and (j), respectively.
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Requirements for Listing and Trading Options Overlying ETFs Based on
International and Global Indexes
Options on ETFs listed pursuant to these generic standards for
international and global indexes would be traded, in all other
respects, under the Exchange's existing trading rules and procedures
that apply to options on ETFs and would be covered under the Exchange's
surveillance program for options on ETFs.
Pursuant to proposed NOM Chapter IV, Section 3(i), the Exchange may
list and trade options on an ETF without a CSSA provided that the ETF
is listed pursuant to generic listing standards for ETFs based on
international or global indexes, in which case a comprehensive
surveillance agreement is not required. As noted, one such rule, which
discusses things such as weighting, capitalization, trading volume,
minimum number of components, and where components are listed, is
NASDAQ Rule 5705(b)(3)(A)(ii) regarding ETFs (IFSs and PDRs).\30\ The
Exchange believes that these generic listing standards are intended to
ensure that securities with substantial market capitalization and
trading volume account for a substantial portion of the weight of an
index or portfolio.
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\30\ NASDAQ Rule 5705(b)(3)(A)(ii) regarding IFSs, for example,
has the following requirements (reproduced in relevant part): a.
component stocks (excluding Derivative Securities Products) that in
the aggregate account for at least 90% of the weight of the index or
portfolio (excluding Derivative Securities Products) each shall have
a minimum market value of at least $100 million; b. component stocks
(excluding Derivative Securities Products) that in the aggregate
account for at least 70% of the weight of the index or portfolio
(excluding Derivative Securities Products) each shall have a minimum
worldwide monthly trading volume of at least 250,000 shares, or
minimum global notional volume traded per month of $25,000,000,
averaged over the last six months; c. the most heavily weighted
component stock (excluding Derivative Securities Products) shall not
exceed 25% of the weight of the index or portfolio, and, to the
extent applicable, the five most heavily weighted component stocks
(excluding Derivative Securities Products) shall not exceed 60% of
the weight of the index or portfolio; d. the index or portfolio
shall include a minimum of 20 component stocks; provided, however,
that there shall be no minimum number of component stocks if either
one or more series of Index Fund Shares or Portfolio Depositary
Receipts constitute, at least in part, components underlying a
series of Index Fund Shares, or one or more series of Derivative
Securities Products account for 100% of the weight of the index or
portfolio; and e. each U.S. Component Stock shall be listed on a
national securities exchange and shall be an NMS Stock as defined in
Rule 600 of Regulation NMS under the Act, and each Non-U.S.
Component Stock shall be listed and traded on an exchange that has
last-sale reporting. NASDAQ Rule 5705(a)(3)(A)(ii) has similar
standards, but tailored for PDRs.
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The Exchange believes that this proposed listing standard for
options on ETFs is reasonable for international and global indexes,
and, when applied in conjunction with the other listing requirements,
will result in options overlying ETFs that are sufficiently broad in
scope and not readily susceptible to manipulation. The Exchange also
believes that allowing the Exchange to list options overlying ETFs that
are listed on equities exchanges pursuant to generic standards for
series of ETFs based on international or global indexes under which a
CSSA is not required, will result in options overlying ETFs that are
adequately diversified in weighting for any single security or small
group of securities to significantly reduce concerns that trading in
options overlying ETFs based on international or global indexes could
become a surrogate for trading in unregistered securities.\31\
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\31\ The Exchange also notes that not affording retail investors
the ability to trade on a regulated exchange can be detrimental.
While products can be traded off exchange in the over the counter
(``OTC'') market, which has increased settlement, clearing, and
market risk as opposed to exchanges, the relatively unregulated OTC
market is usually not a viable option for retail and public
investors.
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The Exchange believes that ETFs based on international and global
indexes that have been listed pursuant to the generic standards are
sufficiently defined so as to make options overlying such ETFs not
susceptible instruments for manipulation. The Exchange believes that
the threat of manipulation is, as discussed below, sufficiently
mitigated for underlying ETFs that have been listed on equities
exchanges pursuant to generic listing standards for series of ETFs
based on international or global indexes under which a comprehensive
surveillance agreement is not required and for the overlying options;
the Exchange does not see the need for a CSSA to be in place before
listing and trading options on such ETFs. The Exchange notes that its
proposal does not replace the need for a CSSA as provided in current
NOM Chapter IV, Section 3(i). The provisions of Section 3(i), including
the need for a CSSA, remain materially unchanged and will continue to
apply to options on ETFs that are not listed on an equities exchange
pursuant to generic listing standards for series of ETFs based on
international or global indexes pursuant to which a CSSA is not
required. Instead, proposed NOM Chapter IV, Section 3(i) adds an
additional listing mechanism for certain qualifying options on ETFs to
be listed on the Exchange.
Finally, to account for proposed NOM Chapter IV, Section 3(i) and
make Section 3 easier to follow, the Exchange proposes technical
changes to the
[[Page 51630]]
formatting of this section of the rule. Thus, the Exchange proposes re-
numbering NOM Chapter IV, Section 3(i)i.-iii. to NOM Chapter IV,
Section 3(i)i.(1)-(3), respectively. And, for consistency, the Exchange
proposes re-numbering NOM Chapter IV, Section 3(i)iv.-vi. to NOM
Chapter IV, Section 3(i)ii.-iv., respectively. This is merely re-
numbering and there are no changes to the language of these parts of
Section 3(i).
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \32\ in general, and furthers the objectives of Section
6(b)(5) of the Act \33\ 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. In particular, the proposed rule change has the potential to
reduce the time frame for bringing options on ETFs to market, thereby
reducing the burdens on issuers and other market participants. The
Exchange also believes that enabling the listing and trading of options
on ETFs pursuant to this proposed new listing standard will benefit
investors by providing them with valuable risk management tools. The
Exchange notes that its proposal does not replace the need for a CSSA
as provided in NOM Chapter IV, Section 3(i). The provisions of current
Section 3(i), including the need for a CSSA, remain materially
unchanged and will continue to apply to options on ETFs that are not
listed on an equities exchange pursuant to generic listing standards
for series of ETFs based on international or global indexes under which
a comprehensive surveillance agreement is not required. Instead,
proposed NOM Chapter IV, Section 3(i) adds an additional listing
mechanism for certain qualifying options on ETFs to be listed on the
Exchange in a manner that is 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 facilitating transactions in securities, to remove
impediments to and perfect the mechanisms of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78f(b)(5).
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The proposal would promote just and equitable principles of trade.
When the surveillance agreement requirement was instituted as discussed
in 2001 on Phlx, the oldest options exchange in the Group, ETFs were,
comparatively speaking, in a developmental state.\34\ The first ETF
introduced in 1993 was a broad-based domestic equity fund tracking the
S&P 500 index. After the introduction of the first ETF in 1993, the
development of ETF products was very limited during the first decade of
their existence. Since the end of 2001, when there was a total of only
102 ETFs listed on U.S. markets, however, the ETF market has matured
tremendously and grown exponentially. With a total of 1,194 listed ETFs
at the end of 2012, the ETF market is now one of the most highly-
developed, sophisticated markets with many very well known, highly
traded and liquid products that provide traders and investors the
opportunity to access practically all industries and enterprises. While
investor demand for ETFs in all asset classes increased substantially,
in 2011 the demand for global and international equity ETFs, to which
the requirement applies, more than doubled.\35\ The Exchange believes
that the current surveillance requirement no longer serves a necessary
function in today's highly developed market, and, as discussed,
actually creates a dynamic that negatively impacts the number of
markets that can competitively trade ETF option products. This hurts
market participants. The Exchange therefore proposes to establish that
pursuant to proposed NOM Chapter IV, Section 3(i) options may be listed
on certain ETFs that are based on global and international funds and
meet generic listing standards.
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\34\ See Securities Exchange Act Release No. 43921 (February 2,
2001), 66 FR 9739 (February 9, 2001)(SR-Phlx 2000-107)(ETF approval
order).
\35\ http://www.icifactbook.org/fb_ch3.html.
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The proposal would in general protect investors and the public
interest. The Exchange believes that modifying the surveillance
agreement requirement for ETFs would not hinder the Exchange from
performing surveillance duties designed to protect investors and the
public interest. There are various data consolidators, vendors, and
outlets that can be used to access data and information regarding ETFs
and the underlying securities (e.g., Bloomberg, Dow Jones, FTEN). In
addition, firms that list ETFs on an exchange receive vast amounts of
data relevant to their products that could be made available to listing
exchanges as needed. The Exchange has access to the activity of the
direct underlying instrument and the ETF, and through the Intermarket
Surveillance Group (``ISG'') the Exchange can obtain such information
related to the underlying security as needed.\36\ Moreover, other than
the surveillance agreement requirement there are, as discussed,
numerous requirements must be met to list options on ETFs on the
Exchange.
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\36\ See https://www.isgportal.org/home.html. Another global
organization similar to ISG is The International Organization of
Securities Commissions (``IOSCO'').
---------------------------------------------------------------------------
The proposal would remove impediments to and perfect the mechanism
of a free and open market and a national market system. Multiple
listing of ETFs, options, and other securities and competition are some
of the central features of the current national market system. The
Exchange believes that the surveillance agreement requirement has led
to clearly anti-competitive results in a market that is based on
competition. As such, the Exchange believes that the surveillance
agreement requirement for options on certain ETFs is no longer
necessary and proposes new NOM Chapter IV, Section 3(i). The proposed
rule change will significantly benefit market participants. As
discussed at length, the proposed rule will negate the negative anti-
competitive effect of the current surveillance agreement requirement
that has resulted in de facto regulatory monopolies where only solitary
exchanges, or only a few exchanges, are able to list certain ETF
options products. The Exchange believes this is inconsistent with
Commission policies and the developing national market system, as well
as the competitive nature of the market, and therefore proposes
amendment.\37\ The Exchange believes that the proposal would encourage
a more open market and national market system based on competition and
multiple listing. The generic listing standards for ETFs based on
global or international indexes have specific requirements regarding
relative weighting, minimum capitalization, minimum trading volume, and
minimum number of components that have been approved by the Commission
years ago for foreign ETFs.\38\ Moreover, such listing standards have
been in continuous use for listing options on
[[Page 51631]]
narrow-based and broad-based indexes on the Exchange.\39\ Allowing the
listing of options on underlying ETFs based on global and international
indexes that meet generic listing standards would encourage a free and
open market and national market system to the benefit of market
participants.
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\37\ As discussed, the Exchange is decidedly not proposing that
the surveillance agreement requirement be deleted entirely, but
rather that only those options on ETFs that do not meet very
specific generic listing standards need to have surveillance
agreements in order to list on the Exchange.
\38\ See Securities Exchange Act Release No. 54739 (November 9,
2006), 71 FR 66993 (November 17, 2006)(SR-Amex-2006-78)(initial
order relating to generic listing standards for ETFs based on
international or global indexes). See also NASDAQ Rule
5705(a)(3)(A)(ii) and (b)(3)(A)(ii).
\39\ See Chapter XIV, Sections 6 and 3.
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For the above reasons, the Exchange believes the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.
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. To the contrary, the
Exchange believes that the proposal is, as discussed, decidedly pro-
competitive and is a competitive response to the inability to list
products because of the surveillance agreement requirement. The
Exchange believes that the proposed rule change will result in
additional investment options and opportunities to achieve the
investment objectives of market participants seeking efficient trading
and hedging vehicles, to the benefit of investors, market participants,
and the marketplace in general. Competition is one of the principal
features of the national market system. The Exchange believes that this
proposal will expand competitive opportunities to list and trade
products on the Exchange as noted.
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
Because the proposed rule change does not (i) significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate, it has become effective pursuant to Section
19(b)(3)(A) of the Act \40\ and Rule 19b-4(f)(6) thereunder.\41\
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\40\ 15 U.S.C. 78s(b)(3)(A).
\41\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \42\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \43\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposal may become operative immediately upon filing. The Exchange
stated that waiver of the operative delay will allow the Exchange to
list and trade certain ETF options on the same basis as other options
markets.\44\ The Commission believes the waiver of the operative delay
is consistent with the protection of investors and the public interest.
Therefore, the Commission hereby waives the operative delay and
designates the proposal operative upon filing.\45\
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\42\ 17 CFR 240.19b-4(f)(6).
\43\ 17 CFR 240.19b-4(f)(6)(iii).
\44\ See supra note 7.
\45\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the 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. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
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-NASDAQ-2015-097 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2015-097. 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 (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 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 such 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-NASDAQ-2015-097, and should
be submitted on or before September 15, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
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\46\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-20931 Filed 8-24-15; 8:45 am]
BILLING CODE 8011-01-P
