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]

Download as PDF 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). asabaliauskas on DSK5VPTVN1PROD with NOTICES 2 17 VerDate Sep<11>2014 17:10 Aug 24, 2015 Jkt 235001 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). PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 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 E:\FR\FM\25AUN1.SGM 25AUN1 51628 Federal Register / Vol. 80, No. 164 / Tuesday, August 25, 2015 / Notices asabaliauskas on DSK5VPTVN1PROD with NOTICES 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). VerDate Sep<11>2014 17:10 Aug 24, 2015 Jkt 235001 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, PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 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 E:\FR\FM\25AUN1.SGM 25AUN1 Federal Register / Vol. 80, No. 164 / Tuesday, August 25, 2015 / Notices asabaliauskas on DSK5VPTVN1PROD with NOTICES 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. VerDate Sep<11>2014 17:10 Aug 24, 2015 Jkt 235001 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. PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 51629 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. E:\FR\FM\25AUN1.SGM 25AUN1 51630 Federal Register / Vol. 80, No. 164 / Tuesday, August 25, 2015 / Notices asabaliauskas on DSK5VPTVN1PROD with NOTICES 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). VerDate Sep<11>2014 17:10 Aug 24, 2015 Jkt 235001 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 VerDate Sep<11>2014 17:10 Aug 24, 2015 Jkt 235001 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 PO 00000 Frm 00101 Fmt 4703 Sfmt 9990 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 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\
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    \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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    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\
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    \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).
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    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\
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    \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\
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    \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\
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    \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.
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    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.
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    \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.
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    \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.
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    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).
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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.
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    \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'').
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    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