Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change To Make Permanent the Pilot Program Eliminating Minimum Value Sizes for Opening Transactions in New Series of FLEX Options, 77399-77402 [2015-31333]
Download as PDF
<![CDATA[
Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–76593; File No. SR–Phlx–
2015–94]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To
Make Permanent the Pilot Program
Eliminating Minimum Value Sizes for
Opening Transactions in New Series of
FLEX Options
December 8, 2015.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
25, 2015, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III, 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 Substance of
the Proposed Rule Change
The Exchange is filing with the
Commission a proposal amend [sic]
Phlx Rule 1079 (FLEX Index, Equity and
Currency Options) to make permanent a
pilot program that eliminates minimum
value sizes for opening transactions in
new series of FLEX index options and
FLEX equity options (together known as
‘‘FLEX Options’’).3
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaqomxphlx.cchwall
street.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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 In addition to FLEX Options, FLEX currency
options are also traded on the Exchange. These
flexible index, equity, and currency options provide
investors the ability to customize basic option
features including size, expiration date, exercise
style, and certain exercise prices; and may have
expiration dates within five years. See Rule 1079.
FLEX currency options traded on the Exchange are
also known as FLEX FX Options. The pilot program
discussed herein does not encompass FLEX
currency options.
mstockstill on DSK4VPTVN1PROD with NOTICES
2 17
VerDate Sep<11>2014
17:36 Dec 11, 2015
Jkt 238001
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this proposed rule
change is to amend Phlx Rule 1079
(FLEX Index, Equity and Currency
Options) to make permanent a pilot
program that eliminates minimum value
sizes for opening transactions in new
series of FLEX Options (the ‘‘Pilot
Program’’ or ‘‘Pilot’’), and to indicate
that the minimum size of a request for
quote (‘‘RFQ’’) is one contract. The
Exchange is requesting the Commission
to permanently approve the Pilot
Program. The Exchange believes that the
Pilot Program has been successful and
well received by its membership and the
investing public for the period that it
has been in operation as a pilot
program.4
Rule 1079 deals with the process of
listing and trading FLEX equity, index,
and currency options on the Exchange.
Rule 1079(a)(8)(A) currently sets the
minimum opening transaction value
size in the case of a FLEX Option in a
newly established (opening) series if
there is no open interest in the
particular series when a RFQ is
submitted (except as provided in
Commentary .01 to Rule 1079): (i) $10
million underlying equivalent value,
respecting FLEX market index options,
and $5 million underlying equivalent
value respecting FLEX industry index
options; 5 (ii) the lesser of 250 contracts
or the number of contracts overlying $1
million in the underlying securities,
with respect to FLEX equity options
(together the ‘‘minimum value size’’).6
4 The
Pilot Program was instituted in 2010 and
last extended in 2015. See Securities Exchange Act
Release Nos. 62900 (September 13, 2010), 75 FR
57098 (September 17, 2010) (SR–Phlx–2010–123)
(notice of filing and immediate effectiveness of
proposal instituting Pilot Program); and 75794
(August 31, 2015), 80 FR 53606 (September 4, 2015)
(SR–Phlx–2015–74) (notice of filing and immediate
effectiveness extending Pilot Program through
January 31, 2016).
5 Market index options and industry index
options are broad-based index options and narrowbased index options, respectively. See Rule
1000A(b)(11) and (12).
6 Subsection (a)(8)(A) also provides a third
alternative: (iii) 50 contracts in the case of FLEX
currency options. However, this alternative is not
part of the Pilot Program and therefore is not
changed by this proposal.
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
77399
Presently, Commentary .01 to Rule
1079 states that by virtue of the Pilot
Program ending January 31, 2016, or the
date on which the pilot is approved on
a permanent basis, there shall be no
minimum value size requirements for
FLEX Options as noted in subsections
(a)(8)(A)(i) and (a)(8)(A)(ii) of Rule 1079.
The Exchange now proposes to make
the Pilot Program permanent.7 To
accomplish this change, the Exchange is
proposing to eliminate the rule text
describing the Pilot Program, which is
contained in Commentary .01 to Rule
1079. The Exchange is proposing to
indicate that the minimum value size
requirements for a RFQ for FLEX
Options as noted in subsections
(a)(8)(A)(i) and (a)(8)(A)(ii) of Rule 1079
is one contract for all FLEX Options.
Thus, as a result of the proposed change
to make the Pilot Program permanent,
subsections (a)(8)(A)(i) and (a)(8)(A)(ii)
of Rule 1079 would state, in pertinent
part, that if there is no open interest
when an RFQ is submitted then the
minimum size of an RFQ is: (i) One
contract in the case of FLEX market
index options, and one contract in the
case of FLEX industry index options;
and (ii) One contract in the case of FLEX
equity options.8
In support of approving the Pilot
Program on a permanent basis, and as
required by the Pilot Program’s approval
order, the Exchange is submitting to the
Commission a Pilot Program report
(‘‘Report’’), which is a public report
detailing the Exchange’s experience
with the Pilot.9 The Report covers only
opening transactions in new series, as
per the Pilot. Specifically, the Exchange
is providing the Commission with a
Report that includes: (i) Data and
analysis on the open interest and
trading volume in (a) FLEX equity
options that have an opening
transaction with a minimum size of 0 to
249 contracts and less than $1 million
in underlying value; (b) FLEX index
options that have an opening
7 The Exchange notes that any positions
established under this Pilot would not be impacted
by the expiration of the Pilot. For example, a 10contract FLEX equity option opening position that
overlies less than $1 million in the underlying
security and expires in January 2016 could be
established during the Pilot. If the Pilot Program
were not made permanent or extended, the position
would continue to exist and any further trading in
the series would be subject to the minimum value
size requirements for continued trading in that
series.
8 In proposing to make the Pilot Program
permanent, the Exchange is simply indicating that
if there is no open interest when an RFQ is
submitted then the minimum size of an RFQ will
be one contract for FLEX market index options,
FLEX industry index options, and FLEX equity
options.
9 A copy of the Report is attached as Exhibit 3.
E:\FR\FM\14DEN1.SGM
14DEN1
mstockstill on DSK4VPTVN1PROD with NOTICES
77400
Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Notices
transaction with a minimum opening
size of less than $10 million in
underlying equivalent value; and (ii)
analysis of the types of investors that
initiated opening FLEX Options
transactions (i.e., institutional, high net
worth, or retail).10
The Exchange believes that there is
sufficient investor interest and demand
in the Pilot Program to warrant its
permanent approval and indicate one
contract as the minimum size of an RFQ
for all opening transactions in new
series of FLEX equity Options and FLEX
index Options. The Exchange believes
that, for the period that the Pilot
Program has been in operation, it has
provided investors with additional
means of managing their risk exposures
and carrying out their investment
objectives. Furthermore, the Exchange
has not experienced any adverse market
effects with respect to the Pilot Program.
The Exchange believes that
eliminating the minimum value size
requirements for opening transactions in
new FLEX series on a permanent basis
is important and necessary to the
Exchange’s efforts to create a product
and market that provide its membership
and investors interested in FLEX-type
options with an improved but
comparable alternative to the over-thecounter (‘‘OTC’’) market in customized
options, which can take on contract
characteristics similar to FLEX Options
but are not subject to the same
restrictions. By making the Pilot
Program permanent, market participants
would continue to have greater
flexibility in determining whether to
execute their customized options in an
exchange environment or in the OTC
market. The Exchange believes that
market participants would benefit from
being able to trade these customized
options in an exchange environment in
several ways, including, but not limited
to, the following: (i) Enhanced
efficiency in initiating and closing out
positions; (ii) increased market
transparency; and (iii) heightened
contra-party creditworthiness due to the
role of The Options Clearing
Corporation (‘‘OCC’’) as issuer and
guarantor of FLEX Options. The
Exchange also believes that the Pilot
Program is wholly consistent with
comments by then Secretary of the
Treasury Timothy F. Geithner, to the
U.S. Senate. In particular, Secretary
Geithner has stated that:
Market efficiency and price transparency
should be improved in derivatives markets
by requiring the clearing of standardized
contracts through regulated [central
counterparties] and by moving the
standardized part of these markets onto
regulated exchanges and regulated
transparent electronic trade execution
systems for OTC derivatives and by requiring
development of a system for timely reporting
of trades and prompt dissemination of prices
and other trade information. Furthermore,
regulated financial institutions should be
encouraged to make greater use of regulated
exchange-traded derivatives. Competition
between appropriately regulated OTC
derivatives markets and regulated exchanges
will make both sets of markets more efficient
and thereby better serve end-users of
derivatives.11
The Exchange believes that the
elimination of the minimum value size
requirements for opening FLEX
transactions in new FLEX series on a
permanent basis would provide FLEXparticipating members with greater
flexibility in structuring the terms of
FLEX Options that best comports with
their and their customers’ particular
needs. In this regard, the Exchange
notes that the minimum value size
requirements for opening FLEX
transactions in new FLEX series were
originally put in place to limit
participation in FLEX Options to
sophisticated, high net worth investors
rather than retail investors. However,
the Exchange believes that the
restriction is no longer necessary and is
overly restrictive. The Exchange has
also not experienced any adverse market
effects with respect to the Pilot Program
eliminating the minimum value size
requirements for opening FLEX
transactions in new FLEX series. Again,
based on the Exchange’s experience to
date and throughout the Pilot Program
period, the minimum value size
requirements are at times too large to
accommodate the needs of members and
their customers—who may be
institutional, high net worth, or retail—
that currently participate in the OTC
market. In this regard, the Exchange
notes that, prior to establishing the Pilot
Program, exchanges that allow FLEX
options have received numerous
requests from broker-dealers
representing institutional, high net
worth and retail investors indicating
that the minimum value size
requirements for opening transactions in
new FLEX series prevented them from
bringing transactions that are already
taking place in the OTC market to an
exchange environment.
The Exchange believes that
eliminating the minimum value size
requirements for opening transactions in
11 See
10 The Report thus discusses only those FLEX
option transactions that happened because the Pilot
was in place.
VerDate Sep<11>2014
17:36 Dec 11, 2015
Jkt 238001
letter from Secretary Geithner to the
Honorable Harry Reid, United States Senate (May
13, 2009), located at https://www.financialstability.
gov/docs/OTCletter.pdf.
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
new FLEX series on a permanent basis
would further broaden the base of
investors that use FLEX Options to
manage their trading and investment
risk, including investors that currently
trade in the OTC market for customized
options, where similar size restrictions
do not apply. The Exchange also
believes that this may open up FLEX
Options to more retail investors. The
Exchange does not believe that this
raises any unique regulatory concerns
because existing safeguards—such as
certain position limit, exercise limit,
and reporting requirements—continue
to apply.12 In addition, the Exchange
notes that FLEX Options are subject to
the options disclosure document
(‘‘ODD’’) requirements of Rule 9b–1
under the Act.13 No broker or dealer can
accept an order from a customer to
purchase or sell an option contract
relating to an options class that is the
subject of a definitive ODD (including
FLEX Options), or approve the
customer’s account for the trading of
such an option, unless the broker or
dealer furnishes or has furnished to the
customer a copy of the definitive ODD.
The ODD contains a description, special
features, and special risks of FLEX
Options. Lastly, similar to any other
options, FLEX Options are subject to
supervision and suitability
requirements, such are in Rule 1025
(Supervision of Accounts) and Rule
1026 (Suitability).
In proposing the Pilot Program itself
and in now proposing to make it
permanent, the Exchange is cognizant of
the need for market participants to have
substantial options transaction capacity
and flexibility to hedge their substantial
investment portfolios, on the one hand,
and the potential for adverse effects that
the minimum value size restrictions
were originally designed to address, on
the other. However, the Exchange has
not experienced any adverse market
effects with respect to the Pilot Program.
The Exchange is also cognizant of the
OTC market, in which similar
restrictions on minimum value size do
not apply. In light of these
considerations and Secretary Geithner’s
comments on moving the standardized
parts of OTC contracts onto regulated
exchanges, the Exchange believes that
making the Pilot Program permanent is
appropriate and reasonable and will
provide market participants with
additional flexibility in determining
whether to execute their customized
12 Certain position limit, aggregation and exercise
limit requirements continue to apply to FLEX
Options in accordance with Rule 1001 (Position
Limits) and Rule 1002 (Exercise Limits).
13 17 CFR 240.9b–1.
E:\FR\FM\14DEN1.SGM
14DEN1
Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Notices
mstockstill on DSK4VPTVN1PROD with NOTICES
options in an exchange environment or
in the OTC market. The Exchange
believes that market participants benefit
from being able to trade these
customized options in an exchange
environment in several ways, including,
but not limited to, enhanced efficiency
in initiating and closing out positions,
increased market transparency, and
heightened contra-party
creditworthiness due to the role of OCC
as issuer and guarantor of FLEX
Options.
Pursuant to this filing, the Exchange
is proposing to adopt the existing Pilot
Program on a permanent basis.
Specifically, the Exchange proposes to
eliminate in subsections (a)(8)(A)(i) and
(a)(8)(A)(ii) of Rule 1079 references to
different minimum sizes applicable to
opening FLEX transactions in FLEX
market index Options, FLEX industry
index Options, and FLEX equity
Options, and to indicate that the
minimum size for all three such options
will be one contract; and to eliminate
the Pilot Program set forth in
Commentary .01 to Rule 1079.14 The
proposal to make the Pilot Program
permanent and thereby eliminate the
minimum value size applicable to
opening transactions in new FLEX
series on the Exchange is similar to a
rule change by the NYSE Arca and
CBOE when adopting a similar pilot
program on a permanent basis.15
For the foregoing reasons, the
Exchange believes that the proposed
changes to the minimum value size for
opening transactions in new series of
FLEX equity and index Options are
reasonable and appropriate, promote
just and equitable principles of trade,
and facilitate transactions in securities
while continuing to foster the public
interest and investor protection, and
therefore should be adopted on a
permanent basis. The Exchange will
continue to monitor the usage of FLEX
Options and review whether changes
need to be made to its Rules or the ODD
to address any changes in retail FLEX
Option participation or any other issues
that may occur as a result of the
elimination of the minimum value sizes
on a permanent basis.
14 As noted, in the case of FLEX currency options,
however, which are not in the Pilot Program, the
minimum value would be 50 contracts. Subsection
(a)(8)(A)(ii) to Rule 1079.
15 See Exchange Act Release No. 72537 (July 3,
2014), 79 FR 39442 (July 10, 2014) (SR–NYSEArca–
2014–25) (order approving proposal to make
permanent NYSE Arca’s FLEX no minimum value
pilot). See also Exchange Act Release No. 67624
(August 8, 2012), 77 FR 48580 (August 14, 2012)
(SR–CBOE–2012–040) (order approving proposal to
make permanent CBOE’s FLEX no minimum value
pilot).
VerDate Sep<11>2014
17:36 Dec 11, 2015
Jkt 238001
2. Statutory Basis
The Exchange’s proposal is consistent
with Section 6(b) of the Act 16 in
general, and furthers the objectives of
Section 6(b)(5) of the Act 17 in
particular, in that it 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, and to remove
impediments to and perfect the
mechanisms of a free and open market
and a national market system.
Specifically, the Exchange believes that
the permanent approval of the Pilot
Program, which eliminates minimum
value size requirements for opening
FLEX transactions in new FLEX series,
would provide greater opportunities for
investors to manage risk through the use
of FLEX Options. Further, the Exchange
notes that it has not experienced any
adverse effects from the operation of the
Pilot Program. The Exchange believes
that making the Pilot Program
permanent does not raise any unique
regulatory concerns.
The Exchange also believes that
eliminating the minimum value size
requirements for opening FLEX
transactions in new FLEX series, thus
affording all market participants with an
equal opportunity to tailor opening
FLEX transactions to meet their own
investment objectives without being
encumbered by a minimum contract
size, will help to remove impediments
to and perfect the mechanism of a free
and open market and a national market
system. In addition, affording market
participants who trade FLEX Options
the same investment tools available to
their counterparts on the NYSE Arca
and CBOE will foster cooperation and
coordination with persons engaged in
facilitating transactions in securities and
will help to remove impediments to a
free and open market and a national
market system. The Exchange believes
that adopting rules similar to those
approved for and in use at NYSE Arca
and CBOE, as discussed, does not raise
any unique regulatory concerns. Lastly,
the Exchange also believes that the
proposed rule change, which provides
all market participants, including public
investors, with additional opportunities
to trade customized options in an
exchange environment and subject to
exchange based rules, is appropriate in
the public interest and for the protection
of investors.
16 15
U.S.C. 78f(b).
17 15 U.S.C. 78f(b)(5).
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
77401
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 not
necessary or appropriate in furtherance
of the purposes of the Act. To the
contrary, the proposal would give
traders and investors the opportunity to
more effectively tailor their trading,
investing and hedging through FLEX
options traded on the Exchange.
Specifically, the proposal is structured
to offer the same enhancement to all
market participants, regardless of
account type, and will not impose a
competitive burden on any participant.
The Exchange believes that adopting
similar FLEX rules to those of NYSE
Arca and CBOE will allow the Exchange
to more efficiently compete for FLEX
Options orders. In addition, the
Exchange believes that adopting the
Pilot Program on a permanent basis will
enable the Exchange to compete with
the OTC market, in which similar
restrictions on minimum value size do
not apply.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will: (A) By order approve or disapprove
the proposed rule change, or (B)
institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposal is
consistent with the Act. Comments may
be submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
E:\FR\FM\14DEN1.SGM
14DEN1
77402
Federal Register / Vol. 80, No. 239 / Monday, December 14, 2015 / Notices
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
Phlx–2015–94 on the subject line.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
[Release No. 34–76589; File No. SR–CBOE–
2015–110]
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–Phlx–2015–94. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
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
offices 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–Phlx–
2015–94, and should be submitted on or
before January 4, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Brent J. Fields,
Secretary.
[FR Doc. 2015–31333 Filed 12–11–15; 8:45 am]
mstockstill on DSK4VPTVN1PROD with NOTICES
BILLING CODE 8011–01–P
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the Certificate
of Incorporation of Its Parent Company
December 8, 2015.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that, on
November 25, 2015, Chicago Board
Options Exchange, Incorporated (the
‘‘Exchange’’ or ‘‘CBOE’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
certificate of incorporation of its parent
Company, CBOE Holdings, Inc. (‘‘CBOE
Holdings’’). The text of the proposed
rule change is available on the
Exchange’s Web site (https://
www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
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.
1 15
18 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
17:36 Dec 11, 2015
2 17
Jkt 238001
PO 00000
Fmt 4703
1. Purpose
On May 21, 2015, CBOE Holdings’
stockholders approved proposed
amendments to the Certificate. On
October 22 [sic], 2015, in accordance
with Article Eleventh of the Certificate,
the Exchange submitted a rule filing
proposing to make the approved
amendments to the Certificate.3 The
Exchange notes however, that it
inadvertently omitted in its rule filing
two changes to the Certificate in the
Exhibit 5 that had been approved by
CBOE Holdings’ shareholders. In order
to conform the current Certificate to the
Certificate approved by CBOE Holdings’
shareholders in May 2015, CBOE
Holdings proposes to correct the
omitted changes. First, in Article Third,
the Exchange had omitted to eliminate
the word ‘‘other’’ from the following
language ‘‘The nature of the business or
purposes to be conducted or promoted
by the Corporation is to engage in any
other lawful act or activity for which
corporations may be organized under
the GCL.’’ The Exchange believes that
the reference to ‘‘other’’ in this section
is unnecessary and that the change is
non-substantive and clarifying in
nature. The Exchange notes that the
proposed change does not affect the
rights of shareholders.
Next, CBOE Holdings proposes to
correct an error related to the ownership
concentration limitation. Particularly,
CBOE Holdings had proposed to remove
references to the 10% ownership
concentration limitation applicable
before CBOE Holdings’ initial public
offering (‘‘IPO’’) in 2010, as discussed in
SR–CBOE–2015–092.4 This change did
not change the current ownership
concentration limitation, which is 20%.
In Article Sixth, subparagraph (b)(iii),
the Exchange inadvertently omitted
references to both 10% and 20%.
Specifically, the language ‘‘10% or 20%
(as applicable at such time)’’ was
eliminated in its entirety. CBOE
Holdings notes that only ‘‘10% or’’ and
‘‘(as applicable at such time)’’ should
have been eliminated (i.e., reference to
20% should have remained).
Accordingly, CBOE Holdings proposes
to add ‘‘20%’’, the current ownership
concentration limitation, back into
Article Sixth, Subparagraph (b)(iii).
3 See Securities Exchange Act Release No. 76282
(October 27, 2015), 80 FR 211 [sic] (November 2,
2015) (SR–CBOE–2015–092).
4 Id.
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00089
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
Sfmt 4703
E:\FR\FM\14DEN1.SGM
14DEN1
]]>Agencies
[Federal Register Volume 80, Number 239 (Monday, December 14, 2015)]
[Notices]
[Pages 77399-77402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-31333]
[[Page 77399]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76593; File No. SR-Phlx-2015-94]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To Make Permanent the Pilot Program
Eliminating Minimum Value Sizes for Opening Transactions in New Series
of FLEX Options
December 8, 2015.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 25, 2015, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III, 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 Substance
of the Proposed Rule Change
The Exchange is filing with the Commission a proposal amend [sic]
Phlx Rule 1079 (FLEX Index, Equity and Currency Options) to make
permanent a pilot program that eliminates minimum value sizes for
opening transactions in new series of FLEX index options and FLEX
equity options (together known as ``FLEX Options'').\3\
---------------------------------------------------------------------------
\3\ In addition to FLEX Options, FLEX currency options are also
traded on the Exchange. These flexible index, equity, and currency
options provide investors the ability to customize basic option
features including size, expiration date, exercise style, and
certain exercise prices; and may have expiration dates within five
years. See Rule 1079. FLEX currency options traded on the Exchange
are also known as FLEX FX Options. The pilot program discussed
herein does not encompass FLEX currency options.
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqomxphlx.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 purpose of this proposed rule change is to amend Phlx Rule 1079
(FLEX Index, Equity and Currency Options) to make permanent a pilot
program that eliminates minimum value sizes for opening transactions in
new series of FLEX Options (the ``Pilot Program'' or ``Pilot''), and to
indicate that the minimum size of a request for quote (``RFQ'') is one
contract. The Exchange is requesting the Commission to permanently
approve the Pilot Program. The Exchange believes that the Pilot Program
has been successful and well received by its membership and the
investing public for the period that it has been in operation as a
pilot program.\4\
---------------------------------------------------------------------------
\4\ The Pilot Program was instituted in 2010 and last extended
in 2015. See Securities Exchange Act Release Nos. 62900 (September
13, 2010), 75 FR 57098 (September 17, 2010) (SR-Phlx-2010-123)
(notice of filing and immediate effectiveness of proposal
instituting Pilot Program); and 75794 (August 31, 2015), 80 FR 53606
(September 4, 2015) (SR-Phlx-2015-74) (notice of filing and
immediate effectiveness extending Pilot Program through January 31,
2016).
---------------------------------------------------------------------------
Rule 1079 deals with the process of listing and trading FLEX
equity, index, and currency options on the Exchange. Rule 1079(a)(8)(A)
currently sets the minimum opening transaction value size in the case
of a FLEX Option in a newly established (opening) series if there is no
open interest in the particular series when a RFQ is submitted (except
as provided in Commentary .01 to Rule 1079): (i) $10 million underlying
equivalent value, respecting FLEX market index options, and $5 million
underlying equivalent value respecting FLEX industry index options; \5\
(ii) the lesser of 250 contracts or the number of contracts overlying
$1 million in the underlying securities, with respect to FLEX equity
options (together the ``minimum value size'').\6\
---------------------------------------------------------------------------
\5\ Market index options and industry index options are broad-
based index options and narrow-based index options, respectively.
See Rule 1000A(b)(11) and (12).
\6\ Subsection (a)(8)(A) also provides a third alternative:
(iii) 50 contracts in the case of FLEX currency options. However,
this alternative is not part of the Pilot Program and therefore is
not changed by this proposal.
---------------------------------------------------------------------------
Presently, Commentary .01 to Rule 1079 states that by virtue of the
Pilot Program ending January 31, 2016, or the date on which the pilot
is approved on a permanent basis, there shall be no minimum value size
requirements for FLEX Options as noted in subsections (a)(8)(A)(i) and
(a)(8)(A)(ii) of Rule 1079. The Exchange now proposes to make the Pilot
Program permanent.\7\ To accomplish this change, the Exchange is
proposing to eliminate the rule text describing the Pilot Program,
which is contained in Commentary .01 to Rule 1079. The Exchange is
proposing to indicate that the minimum value size requirements for a
RFQ for FLEX Options as noted in subsections (a)(8)(A)(i) and
(a)(8)(A)(ii) of Rule 1079 is one contract for all FLEX Options. Thus,
as a result of the proposed change to make the Pilot Program permanent,
subsections (a)(8)(A)(i) and (a)(8)(A)(ii) of Rule 1079 would state, in
pertinent part, that if there is no open interest when an RFQ is
submitted then the minimum size of an RFQ is: (i) One contract in the
case of FLEX market index options, and one contract in the case of FLEX
industry index options; and (ii) One contract in the case of FLEX
equity options.\8\
---------------------------------------------------------------------------
\7\ The Exchange notes that any positions established under this
Pilot would not be impacted by the expiration of the Pilot. For
example, a 10-contract FLEX equity option opening position that
overlies less than $1 million in the underlying security and expires
in January 2016 could be established during the Pilot. If the Pilot
Program were not made permanent or extended, the position would
continue to exist and any further trading in the series would be
subject to the minimum value size requirements for continued trading
in that series.
\8\ In proposing to make the Pilot Program permanent, the
Exchange is simply indicating that if there is no open interest when
an RFQ is submitted then the minimum size of an RFQ will be one
contract for FLEX market index options, FLEX industry index options,
and FLEX equity options.
---------------------------------------------------------------------------
In support of approving the Pilot Program on a permanent basis, and
as required by the Pilot Program's approval order, the Exchange is
submitting to the Commission a Pilot Program report (``Report''), which
is a public report detailing the Exchange's experience with the
Pilot.\9\ The Report covers only opening transactions in new series, as
per the Pilot. Specifically, the Exchange is providing the Commission
with a Report that includes: (i) Data and analysis on the open interest
and trading volume in (a) FLEX equity options that have an opening
transaction with a minimum size of 0 to 249 contracts and less than $1
million in underlying value; (b) FLEX index options that have an
opening
[[Page 77400]]
transaction with a minimum opening size of less than $10 million in
underlying equivalent value; and (ii) analysis of the types of
investors that initiated opening FLEX Options transactions (i.e.,
institutional, high net worth, or retail).\10\
---------------------------------------------------------------------------
\9\ A copy of the Report is attached as Exhibit 3.
\10\ The Report thus discusses only those FLEX option
transactions that happened because the Pilot was in place.
---------------------------------------------------------------------------
The Exchange believes that there is sufficient investor interest
and demand in the Pilot Program to warrant its permanent approval and
indicate one contract as the minimum size of an RFQ for all opening
transactions in new series of FLEX equity Options and FLEX index
Options. The Exchange believes that, for the period that the Pilot
Program has been in operation, it has provided investors with
additional means of managing their risk exposures and carrying out
their investment objectives. Furthermore, the Exchange has not
experienced any adverse market effects with respect to the Pilot
Program.
The Exchange believes that eliminating the minimum value size
requirements for opening transactions in new FLEX series on a permanent
basis is important and necessary to the Exchange's efforts to create a
product and market that provide its membership and investors interested
in FLEX-type options with an improved but comparable alternative to the
over-the-counter (``OTC'') market in customized options, which can take
on contract characteristics similar to FLEX Options but are not subject
to the same restrictions. By making the Pilot Program permanent, market
participants would continue to have greater flexibility in determining
whether to execute their customized options in an exchange environment
or in the OTC market. The Exchange believes that market participants
would benefit from being able to trade these customized options in an
exchange environment in several ways, including, but not limited to,
the following: (i) Enhanced efficiency in initiating and closing out
positions; (ii) increased market transparency; and (iii) heightened
contra-party creditworthiness due to the role of The Options Clearing
Corporation (``OCC'') as issuer and guarantor of FLEX Options. The
Exchange also believes that the Pilot Program is wholly consistent with
comments by then Secretary of the Treasury Timothy F. Geithner, to the
U.S. Senate. In particular, Secretary Geithner has stated that:
Market efficiency and price transparency should be improved in
derivatives markets by requiring the clearing of standardized
contracts through regulated [central counterparties] and by moving
the standardized part of these markets onto regulated exchanges and
regulated transparent electronic trade execution systems for OTC
derivatives and by requiring development of a system for timely
reporting of trades and prompt dissemination of prices and other
trade information. Furthermore, regulated financial institutions
should be encouraged to make greater use of regulated exchange-
traded derivatives. Competition between appropriately regulated OTC
derivatives markets and regulated exchanges will make both sets of
markets more efficient and thereby better serve end-users of
derivatives.\11\
---------------------------------------------------------------------------
\11\ See letter from Secretary Geithner to the Honorable Harry
Reid, United States Senate (May 13, 2009), located at https://www.financialstability.gov/docs/OTCletter.pdf.
The Exchange believes that the elimination of the minimum value
size requirements for opening FLEX transactions in new FLEX series on a
permanent basis would provide FLEX-participating members with greater
flexibility in structuring the terms of FLEX Options that best comports
with their and their customers' particular needs. In this regard, the
Exchange notes that the minimum value size requirements for opening
FLEX transactions in new FLEX series were originally put in place to
limit participation in FLEX Options to sophisticated, high net worth
investors rather than retail investors. However, the Exchange believes
that the restriction is no longer necessary and is overly restrictive.
The Exchange has also not experienced any adverse market effects with
respect to the Pilot Program eliminating the minimum value size
requirements for opening FLEX transactions in new FLEX series. Again,
based on the Exchange's experience to date and throughout the Pilot
Program period, the minimum value size requirements are at times too
large to accommodate the needs of members and their customers--who may
be institutional, high net worth, or retail--that currently participate
in the OTC market. In this regard, the Exchange notes that, prior to
establishing the Pilot Program, exchanges that allow FLEX options have
received numerous requests from broker-dealers representing
institutional, high net worth and retail investors indicating that the
minimum value size requirements for opening transactions in new FLEX
series prevented them from bringing transactions that are already
taking place in the OTC market to an exchange environment.
The Exchange believes that eliminating the minimum value size
requirements for opening transactions in new FLEX series on a permanent
basis would further broaden the base of investors that use FLEX Options
to manage their trading and investment risk, including investors that
currently trade in the OTC market for customized options, where similar
size restrictions do not apply. The Exchange also believes that this
may open up FLEX Options to more retail investors. The Exchange does
not believe that this raises any unique regulatory concerns because
existing safeguards--such as certain position limit, exercise limit,
and reporting requirements--continue to apply.\12\ In addition, the
Exchange notes that FLEX Options are subject to the options disclosure
document (``ODD'') requirements of Rule 9b-1 under the Act.\13\ No
broker or dealer can accept an order from a customer to purchase or
sell an option contract relating to an options class that is the
subject of a definitive ODD (including FLEX Options), or approve the
customer's account for the trading of such an option, unless the broker
or dealer furnishes or has furnished to the customer a copy of the
definitive ODD. The ODD contains a description, special features, and
special risks of FLEX Options. Lastly, similar to any other options,
FLEX Options are subject to supervision and suitability requirements,
such are in Rule 1025 (Supervision of Accounts) and Rule 1026
(Suitability).
---------------------------------------------------------------------------
\12\ Certain position limit, aggregation and exercise limit
requirements continue to apply to FLEX Options in accordance with
Rule 1001 (Position Limits) and Rule 1002 (Exercise Limits).
\13\ 17 CFR 240.9b-1.
---------------------------------------------------------------------------
In proposing the Pilot Program itself and in now proposing to make
it permanent, the Exchange is cognizant of the need for market
participants to have substantial options transaction capacity and
flexibility to hedge their substantial investment portfolios, on the
one hand, and the potential for adverse effects that the minimum value
size restrictions were originally designed to address, on the other.
However, the Exchange has not experienced any adverse market effects
with respect to the Pilot Program. The Exchange is also cognizant of
the OTC market, in which similar restrictions on minimum value size do
not apply. In light of these considerations and Secretary Geithner's
comments on moving the standardized parts of OTC contracts onto
regulated exchanges, the Exchange believes that making the Pilot
Program permanent is appropriate and reasonable and will provide market
participants with additional flexibility in determining whether to
execute their customized
[[Page 77401]]
options in an exchange environment or in the OTC market. The Exchange
believes that market participants benefit from being able to trade
these customized options in an exchange environment in several ways,
including, but not limited to, enhanced efficiency in initiating and
closing out positions, increased market transparency, and heightened
contra-party creditworthiness due to the role of OCC as issuer and
guarantor of FLEX Options.
Pursuant to this filing, the Exchange is proposing to adopt the
existing Pilot Program on a permanent basis. Specifically, the Exchange
proposes to eliminate in subsections (a)(8)(A)(i) and (a)(8)(A)(ii) of
Rule 1079 references to different minimum sizes applicable to opening
FLEX transactions in FLEX market index Options, FLEX industry index
Options, and FLEX equity Options, and to indicate that the minimum size
for all three such options will be one contract; and to eliminate the
Pilot Program set forth in Commentary .01 to Rule 1079.\14\ The
proposal to make the Pilot Program permanent and thereby eliminate the
minimum value size applicable to opening transactions in new FLEX
series on the Exchange is similar to a rule change by the NYSE Arca and
CBOE when adopting a similar pilot program on a permanent basis.\15\
---------------------------------------------------------------------------
\14\ As noted, in the case of FLEX currency options, however,
which are not in the Pilot Program, the minimum value would be 50
contracts. Subsection (a)(8)(A)(ii) to Rule 1079.
\15\ See Exchange Act Release No. 72537 (July 3, 2014), 79 FR
39442 (July 10, 2014) (SR-NYSEArca-2014-25) (order approving
proposal to make permanent NYSE Arca's FLEX no minimum value pilot).
See also Exchange Act Release No. 67624 (August 8, 2012), 77 FR
48580 (August 14, 2012) (SR-CBOE-2012-040) (order approving proposal
to make permanent CBOE's FLEX no minimum value pilot).
---------------------------------------------------------------------------
For the foregoing reasons, the Exchange believes that the proposed
changes to the minimum value size for opening transactions in new
series of FLEX equity and index Options are reasonable and appropriate,
promote just and equitable principles of trade, and facilitate
transactions in securities while continuing to foster the public
interest and investor protection, and therefore should be adopted on a
permanent basis. The Exchange will continue to monitor the usage of
FLEX Options and review whether changes need to be made to its Rules or
the ODD to address any changes in retail FLEX Option participation or
any other issues that may occur as a result of the elimination of the
minimum value sizes on a permanent basis.
2. Statutory Basis
The Exchange's proposal is consistent with Section 6(b) of the Act
\16\ in general, and furthers the objectives of Section 6(b)(5) of the
Act \17\ in particular, in that it 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, and to
remove impediments to and perfect the mechanisms of a free and open
market and a national market system. Specifically, the Exchange
believes that the permanent approval of the Pilot Program, which
eliminates minimum value size requirements for opening FLEX
transactions in new FLEX series, would provide greater opportunities
for investors to manage risk through the use of FLEX Options. Further,
the Exchange notes that it has not experienced any adverse effects from
the operation of the Pilot Program. The Exchange believes that making
the Pilot Program permanent does not raise any unique regulatory
concerns.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange also believes that eliminating the minimum value size
requirements for opening FLEX transactions in new FLEX series, thus
affording all market participants with an equal opportunity to tailor
opening FLEX transactions to meet their own investment objectives
without being encumbered by a minimum contract size, will help to
remove impediments to and perfect the mechanism of a free and open
market and a national market system. In addition, affording market
participants who trade FLEX Options the same investment tools available
to their counterparts on the NYSE Arca and CBOE will foster cooperation
and coordination with persons engaged in facilitating transactions in
securities and will help to remove impediments to a free and open
market and a national market system. The Exchange believes that
adopting rules similar to those approved for and in use at NYSE Arca
and CBOE, as discussed, does not raise any unique regulatory concerns.
Lastly, the Exchange also believes that the proposed rule change, which
provides all market participants, including public investors, with
additional opportunities to trade customized options in an exchange
environment and subject to exchange based rules, is appropriate in the
public interest and for the protection of investors.
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 not necessary or appropriate in
furtherance of the purposes of the Act. To the contrary, the proposal
would give traders and investors the opportunity to more effectively
tailor their trading, investing and hedging through FLEX options traded
on the Exchange. Specifically, the proposal is structured to offer the
same enhancement to all market participants, regardless of account
type, and will not impose a competitive burden on any participant. The
Exchange believes that adopting similar FLEX rules to those of NYSE
Arca and CBOE will allow the Exchange to more efficiently compete for
FLEX Options orders. In addition, the Exchange believes that adopting
the Pilot Program on a permanent basis will enable the Exchange to
compete with the OTC market, in which similar restrictions on minimum
value size do not apply.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or (B)
institute proceedings to determine whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposal is
consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
[[Page 77402]]
Send an email to rule-comments@sec.gov. Please include
File Number SR-Phlx-2015-94 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2015-94. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
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 offices 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-Phlx-2015-94,
and should be submitted on or before January 4, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
---------------------------------------------------------------------------
\18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Brent J. Fields,
Secretary.
[FR Doc. 2015-31333 Filed 12-11-15; 8:45 am]
BILLING CODE 8011-01-P
