Self-Regulatory Organizations; BOX Options Exchange LLC; Order Granting Approval of a Proposed Rule Change To Amend Rule 5050 Series of Options Contracts Open for Trading To Provide for the Listing and Trading on the Exchange of RealDayTM, 9886-9891 [2017-02541]
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9886
Federal Register / Vol. 82, No. 25 / Wednesday, February 8, 2017 / Notices
Plan. In approving the Plan, the SEC
noted that the Plan ‘‘is necessary and
appropriate in the public interest, for
the protection of investors and the
maintenance of fair and orderly markets,
to remove impediments to, and perfect
the mechanism of a national market
system, or is otherwise in furtherance of
the purposes of the Act.’’ 34 To the
extent that this proposal implements,
interprets or clarifies the Plan and
applies specific requirements to
Industry Members, the Exchange
believes that this proposal furthers the
objectives of the Plan, as identified by
the SEC, and is therefore consistent with
the Act.
(B) Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange notes that the proposed rule
change implements provisions of the
CAT NMS Plan, and is designed to
assist the Exchange in meeting its
regulatory obligations pursuant to the
Plan. The Exchange also notes that the
Proposed Rules 4.5 through 4.16
implement provisions of the CAT NMS
Plan will apply equally to all firms that
trade NMS Securities and OTC Equity
Securities. In addition, all national
securities exchanges and FINRA are
proposing similar rules to apply the
requirements of the CAT NMS Plan to
their members. Therefore, this is not a
competitive rule filing, and, therefore, it
does not impose a burden on
competition.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
(C) Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Written comments were neither
solicited nor 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 Exchange consents,
the Commission will: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
34 Approval
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BatsBZX–2017–08 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–BatsBZX–2017–08. 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 the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
BatsBZX–2017–08 and should be
submitted on or before March 1, 2017.
Order at 84697.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017–02535 Filed 2–7–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79936; File No. SR–BOX–
2016–50]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Order
Granting Approval of a Proposed Rule
Change To Amend Rule 5050 Series of
Options Contracts Open for Trading To
Provide for the Listing and Trading on
the Exchange of RealDayTM Options
Pursuant to a Pilot Program
February 2, 2017.
I. Introduction
On October 26, 2016, BOX Options
Exchange LLC (the ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to provide for the listing and
trading on the Exchange of RealDayTM
Options (‘‘RealDay Options’’) on a pilot
basis. The proposed rule change was
published for comment in the Federal
Register on November 15, 2016.3 The
Commission received one comment
letter on the proposed rule change.4 On
December 20, 2016, pursuant to Section
19(b)(2) of the Act,5 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to approve or disapprove the
proposed rule change.6 This order
approves the proposed rule change.
35 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 79258
(November 8, 2016), 81 FR 80125 (‘‘Notice’’).
4 See Letter from Edward T. Tilly, Chief Executive
Officer, Chicago Board Options Exchange
(‘‘CBOE’’), Incorporated, to Brent J. Fields,
Secretary, Commission, dated December 6, 2016
(‘‘CBOE Letter’’).
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 79613,
81 FR 95206 (December 27, 2016). The Commission
designated February 13, 2017 as the date by which
the Commission would either approve or
disapprove, or institute proceedings to determine
whether to approve of disapprove, the proposed
rule change.
1 15
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Federal Register / Vol. 82, No. 25 / Wednesday, February 8, 2017 / Notices
II. Description of the Proposed Rule
Change
General Description 7
Pursuant to a twelve-month pilot
program, the Exchange proposes to
amend its rules to list and trade on the
Exchange RealDay Options on the
SPDR® S&P 500® Exchange Traded
Fund (‘‘SPY’’). The Exchange states that
RealDay Options are designed and
exclusively licensed by the RealDay
Options Corporation, and would be
exclusively listed on BOX. RealDay
Options would share many
characteristics of existing standardized
options with some distinct variations.
Most notably, at the commencement of
trading of a particular RealDay Option
and until the close of trading on the last
trading day before its expiration, the
numerical value of the strike price
would not be known. However, the
formula used to calculate the strike
price would be fixed and known from
the time of listing.8
The trading of RealDay Options
would in essence be divided into two
periods: The anticipatory period and the
active period. The anticipatory period
would be the period of time from the
day the option is listed up until the
close of trading on the last trading day
before expiration. The active period
would be the expiration day of the
option. During the anticipatory period,
the strike intervals and strike price
setting formula would be known, but
not the numerical value of the strike
prices, because they would depend on
the closing price of SPY from the last
trading day before expiration. RealDay
Options could still be traded in the
anticipatory period in the same manner
as standard options on SPY. During the
active period, the numerical value of the
strike prices would be known. Although
the active period is only one trading
day, RealDay Options could be listed for
up to nine months in advance of the
expiration date, but at least two weeks
prior to their expiration.9
The Exchange has only proposed to
list RealDay Options on SPY, but the
Exchange states that it may seek to list
RealDay Options on additional
asabaliauskas on DSK3SPTVN1PROD with NOTICES
7 For
additional details, including examples
provided by the Exchange with respect to the
proposed operation of RealDay Options, see Notice,
supra note 3.
8 The Exchange describes RealDay Options as
true, or real, one-day options because they are
forward start (or delayed start) options with strike
increments and a strike price setting formula that
are fixed from the time of listing, but with
numerical strike prices determined based on the
formula using the closing price of SPY from the last
trading day before expiration.
9 See Proposed Rule 5050(f).
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securities in the future.10 According to
the Exchange, it has proposed to list
RealDay Options initially on SPY due to
the vast liquidity in the security, which
the Exchange states to be the largest and
most actively traded Exchange Traded
Fund (‘‘ETF’’) in the United States.11
Strike Price, Strike Intervals, Settlement
and Exercise Price
While the numerical value of the
strike prices for RealDay Options would
not be known until the close of trading
on the last trading day before expiration,
the strike intervals and strike price
setting formula would be fixed from
inception.12 The formula would involve
multiplying the closing price of SPY
from the last trading day before
expiration (‘‘Strike Setting Price’’) by
the Strike Multiplier.13 In effect, the
strike price would stay at the same
percentage relationship to the price of
SPY from the time of listing. The
Exchange proposes to only list up to a
maximum of seven strike prices for each
expiration date, consisting of up to three
strike prices with a price greater than
the Strike Setting Price, three strike
prices with a price less than the Strike
Setting Price, and one strike price equal
to the Strike Setting Price.14 The
Exchange proposes to have discretion in
determining the number of strike prices
that would be listed per expiration,
provided that the strike prices satisfy
these restrictions. Additionally, the
Exchange would be required to always
list the strike price that is equal to the
Strike Setting Price for each RealDay
Options expiration. The Exchange
proposes to have the discretion to
determine not to list in-the-money
(‘‘ITM’’) put or call options for any of
the seven strike prices,15 as the
Exchange believes the value of RealDay
Options is in the instruments that are atthe-money and out-of-the-money.
Similar to other options products listed
by the Exchange, the Exchange proposes
to allow for the addition of strike prices
10 See Notice, supra note 3, at 80126 (representing
that, if it were to seek to list RealDay Options on
additional securities, the Exchange would use the
approval process under Form 19b–4).
11 See Notice, supra note 3, at 80126.
12 See proposed Rule 5050(f)(8).
13 The ‘‘Strike Multiplier’’ is the decimal
equivalent of the percentage strike of the specific
option. The Strike Multiplier would be expressed
with three decimal places. For example, an option
that is equal to the Strike Setting price would be
100%, making the Strike Multiplier 1.000.
14 See proposed Rule 5050(f)(2).
15 See proposed Rule 5050(f)(2)(ii). The ITM puts
that the Exchange may decide to not list are those
corresponding to the three strike prices that are
greater than the Strike Setting Price and the ITM
call options are those corresponding to the three
strike prices that are less than the Strike Setting
Price.
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after the initial listing of a RealDay
Option, provided that the Exchange
does not list more than the seven strike
prices permitted by the guidelines
described above.16
The Exchange also proposes
additional procedures in determining
the exact number of strike prices that
may be listed for a RealDay Option.17
Specifically, if the underlying security
is priced at or above $25.00 per share,
the Exchange would be permitted to list
up to all seven permitted strike prices.
If the underlying security is priced at or
below $10.00 per share, the Exchange
would not list any RealDay Options on
the underlying security. If the
underlying security is priced between
$10.00 and $25.00 per share, the
Exchange would only list one strike
price, which would be equal to the
Strike Setting Price.
The strike price formula would be
used after the close of trading on the last
trading day before expiration in order to
calculate the numerical values of the
strike prices. Specifically, the strike
prices would be determined by
multiplying the Strike Setting Price by
the Strike Multiplier. Rather than
applying the Exchange’s general strike
price interval rules, the strike prices for
RealDay Options would have fixed
strike intervals of 0.50%.18 The strike
prices would be rounded to the nearest
minimum trading increment, if
necessary. If SPY does not open for
trading on the trading day before the
expiration date, the Exchange proposes
to use the last available closing price for
SPY as the Strike Setting Price.
The Exchange proposes to calculate
the exercise and settlement price of
RealDay Options based on the closing
price of SPY on the trading day of
expiration. The exercise-settlement
amount would be equal to the difference
between the settlement price and the
exercise price of the option multiplied
by 100. Exercise would result in the
delivery of cash on the business day
following expiration. If SPY does not
open for trading on the trading day of
expiration, at the close of trading on
expiration, RealDay Options would have
an exercise price that is equal to the
16 See
Notice, supra note 3, at 80127.
proposed Rule 5050(f)(2).
18 See Proposed Rule 5050(f)(3). There would be
one strike price equal to 100% of the Strike Setting
Price (with a Strike Multiplier of 1.000), three strike
prices greater than then Strike Setting Price
determined by adding 0.5%, 1.0%, and 1.5%,
respectively, to the Strike Setting Price (with Strike
Multipliers of 1.005, 1.010, and 1.015, respectively),
and three strike prices lower than the Strike Setting
Price determined by subtracting 0.5%, 1.0%, and
1.5%, respectively, from the Strike Setting Price
(with Strike Multipliers of 0.995, 0.990, and 0.985,
respectively).
17 See
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Federal Register / Vol. 82, No. 25 / Wednesday, February 8, 2017 / Notices
closing price from the last trading day
before expiration.
Other Characteristics
The Exchange proposes that RealDay
Options be P.M. cash-settled and have
European-style exercise provisions.19
These options may expire every trading
day, including days on which monthly
options series, Short Term Options
Series, and Quarterly Options Series on
SPY expire.
The Exchange proposes to list
RealDay Options on SPY with the
symbol ‘‘SPYZ.’’ During the anticipatory
period, the Exchange proposes to list the
strike prices as the Strike Multiplier
because the numerical value of the
strike price would not yet be known.
The Exchange proposes to use three
decimal places to indicate the strike
prices as the Strike Multiplier during
the anticipatory period.20 According to
the Exchange, using three decimal
places is unique and not a practice
currently used for options, which the
Exchange believes would put investors
on notice and aware that the Strike
Multiplier does not represent a strike
price of a typical standard option.21 The
Exchange represents that it has
explained what the three decimal places
would represent to data vendors, the
Options Clearing Corporation, and
various market participants, and the
Exchange represents that they have
confirmed that they would be able to
handle the three decimal places when
RealDay Options are launched.22 The
Exchange also represents that it will
provide information and education to
market participants via circular prior to
the launch of RealDay Options to further
minimize any potential investor
confusion.23
After the close of trading on the last
trading day before expiration, the
decimal would be converted into the
numerical strike price by multiplying
the Strike Setting Price by the Strike
Multiplier.24
The Exchange proposes for RealDay
Options to overlie 100 shares of SPY in
the same manner as standard options on
SPY. The Exchange’s standard trading
hours for SPY options would also apply
to trading in RealDay Options. The
Exchange proposes to apply margin
requirements for the purchase and sale
of RealDay Options that are identical to
the margin requirements for standard
options on SPY.25 The Exchange
proposes to calculate margin
requirements for RealDay Options in the
same manner as margins for standard
options on SPY. The Exchange notes
that margins would be calculated in the
same manner during both the
anticipatory and active periods. The
Exchange states that the strike price
used for calculating the margin would
be the numerical value of the strike
price using the current price of SPY for
the strike setting formula.26 The
Exchange proposes to apply the same
minimum trading increment of $0.01 to
RealDay Options as applicable to
standard options on SPY.27 The
Exchange further proposes that the
position limits for RealDay Options
would be the same as the position limits
for standard options, such that there
would be no position or exercise limits
for RealDay Options on SPY, as with
standard options on SPY.28 In addition,
positions in RealDay Options would be
aggregated with positions in all other
options on SPY.
The Exchange proposes to apply
Section 4000 of its rules, which is
designed to protect public customer
trading, to trading in RealDay Options.
Specifically, Exchange Rules 4020(a)
and (b) prohibit Order Flow Providers
(‘‘OFPs’’) 29 from accepting a Public
Customer order to purchase or write an
option, including RealDay Options,
unless such customer’s account has
been approved in writing by a
designated Options Principal of the
OFP. Additionally, Exchange Rule 4040
asabaliauskas on DSK3SPTVN1PROD with NOTICES
25 See
19 See Proposed Rule 5050(f)(4). See also Notice,
supra note 3, at 80126–27 and 80129–30 (discussing
the Exchange’s representations with respect to the
appropriateness of its proposed settlement and
exercise methodologies for RealDay Options).
20 See Notice, supra note 3, at 80128 (providing
an example of strike prices for RealDay Options
during the anticipatory period).
21 See id. at 80128.
22 See id. at 80128 n.24.
23 See id. at 80128.
24 See id. at 80129 (providing an example of the
conversion into the numerical strike prices). The
Exchange notes that an adjustment to the Strike
Setting Price may be needed in order to remove the
effects of corporate actions, such as cash dividends.
If a dividend is declared, the Exchange would
adjust the Strike Setting Price by subtracting the
declared dividend before multiplying it by the
Strike Multiplier. See id. at 80128 n.25.
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Proposed Rule 5050(f)(6). The Exchange
notes that Options Participants and associated
persons are bound by the initial and maintenance
margin requirements of either CBOE or the New
York Stock Exchange. See Exchange Rule 10120; see
also CBOE Rule 12.3.
26 See Notice, supra note 3, at 80129.
27 See Proposed Rule 5050(f)(5).
28 See Proposed Rule 5050(f)(10). See also
Securities Exchange Act Release No. 67936
(September 27, 2012), 77 FR 60491 (October 3,
2012) (SR–BOX–2012–013). The Exchange noted
that since the removal of any position limits on SPY
is subject to a pilot program, if such pilot is
discontinued and SPY becomes subject to position
limits, then RealDay Options would become subject
to the same position limits as SPY options. See
Notice, supra note 3, at 80130.
29 See Rule 100(a)(45). The term OFP means those
Options Participants representing as agent
Customer Orders on BOX and those non-Market
Maker Participants conducting proprietary trading.
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regarding suitability is designed to
ensure that options, including RealDay
Options, are sold only to customers
capable of evaluating and bearing the
risks associated with trading in the
instrument. Further, Exchange Rule
4050 permits OFPs to exercise
discretionary power with respect to
trading options, including RealDay
Options, in a Public Customer’s account
only if the OFP has received prior
written authorization from the customer
and the account has been accepted in
writing by a designated Options
Principal. Finally, the Exchange states
that Exchange Rules 4030 (Supervision
of Accounts), 4060 (Confirmation to
Public Customers), and 4100 (Delivery
of Current Options Disclosure
Documents and Prospectus) would also
apply to trading in RealDay Options.
The Exchange represents that it has an
adequate surveillance program in place
for RealDay Options and intends to
apply the same program procedures that
it applies to the Exchange’s other
options products, which the Exchange
believes would adequately monitor
trading in RealDay Options.30 The
Exchange stated that it is also a member
of the Intermarket Surveillance Group
(‘‘ISG’’), the members of which work
together to coordinate surveillance and
investigative information sharing in the
stock and options markets.
The Exchange further represents that
it has the necessary system capacity to
support the additional quotations and
messages that would result from the
listing and trading of RealDay
Options.31 The Exchange intends to
minimize the system capacity required
to list RealDay Options by limiting the
listing to seven strike prices per
expiration. The Exchange also states
that having the discretion to not list ITM
call or put options would further
minimize the required system capacity
to list RealDay Options.
Pilot
The Exchange has filed this proposal
on a pilot basis for a period of twelve
months (the ‘‘Pilot Program’’ or ‘‘Pilot
Period’’).32 The Exchange further states
that, if it were to propose an extension
of the Pilot Program or propose to make
the Pilot Program permanent, the
Exchange would submit a filing to the
Commission proposing such
amendments.33
30 See
Notice, supra note 3, at 80130.
id.
32 See Proposed Rule 5050(f)(9).
33 The Exchange noted that any positions
established under the pilot would not be impacted
by the expiration of the pilot. For example, a
position in a RealDay Options series that expires
beyond the conclusion of the pilot period could be
31 See
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Federal Register / Vol. 82, No. 25 / Wednesday, February 8, 2017 / Notices
The Exchange proposes to submit a
report to the Commission two months
prior to the expiration date of the Pilot
Program (the ‘‘Pilot Report’’).34 The
Pilot Report would contain an analysis
of volume, open interest, and trading
patterns examining trading in RealDay
Options. In addition, for certain series,
the Pilot Report would provide an
analysis of price volatility and trading
activity in additional option series. In
addition to the Pilot Report, the
Exchange would provide the
Commission with periodic interim
reports while the Pilot Program is in
effect that would contain some, but not
all, of the information contained in the
Pilot Report. The Pilot Report would be
provided to the Commission on a
confidential basis.
The Exchange states that the Pilot
Report would contain the following
volume and open interest data for
RealDay Options:
(1) Daily contract trading volume
aggregated for all trades, for all option
series with less than 31 days until
expiration;
(2) daily contract trading volume
aggregated by expiration date, for all
option series with less than 31 days
until expiration;
(3) daily contract trading volume for
each individual series;
(4) daily open interest aggregated for
all series, for all option series with less
than 31 days until expiration;
(5) daily open interest aggregated for
all series by expiration date, for all
option series with less than 31 days
until expiration;
(6) daily open interest for each
individual series;
(7) statistics on the distribution of
trade sizes;
(8) type of market participant trading
(e.g., contract trading volume for each
market participant type); and
(9) 5-minute returns, level changes,
and trading volume for the S&P 500
Index, VIX, SPY, IVV, and expiring
RealDay options between open and
close for the first and second
Wednesday of the month that is a
trading day and trading days when
standard SPY options expire.
In addition to the Pilot Report, the
Exchange would periodically provide
the Commission with interim reports of
the information listed in items (1)
through (9) above as required by the
Commission while the Pilot Program is
in effect. These interim reports will also
established during the 12-month pilot. If the pilot
program were not extended, then the position could
continue to exist. However, any further trading in
the series would be restricted to transactions where
at least one side of the trade is a closing transaction.
34 See Notice, supra note 3, at 80131.
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be provided on a confidential basis. The
initial period of the Exchange’s
proposed Pilot Program is set to expire
on February 2, 2018.
III. Summary of Comment Letter
The Commission received a comment
letter from the Chicago Board Options
Exchange opposing the Exchange’s
RealDay Options proposal.35 The
commenter argues that the proposal
should be disapproved. First, the
commenter questions whether a
RealDay Option can be considered a
securities option and therefore within
the Commission’s jurisdiction. The
commenter asserts that there is no
precedent for classifying RealDay
Options as a securities option 36 and
cites a Seventh Circuit decision holding
that a contract is an option only if,
among other things, it ‘‘establish[es] a
careful balance among premium, strike
price, and duration.’’ 37 The commenter
notes that, for all but ‘‘a tiny portion of
its life’’ (i.e., one day), a RealDay Option
would not have a specified strike price
and believes that there is a ‘‘serious and
novel issue about whether [RealDay
Options] can be considered a securities
option—and therefore can fall within
the Commission’s jurisdiction. . . .’’ 38
In its filing, the Exchange cited to
CBOE’s Delayed Start Options (‘‘DSOs’’)
as precedent for the approval of RealDay
Options.39 The commenter argues that
RealDay Options are ‘‘fundamentally
different’’ from DSOs. The commenter
notes that, in its own filing seeking
approval for DSOs, it represented that
the time interval between setting the
strike price and expiration initially
would be three months, as compared to
one day for RealDay Options. At the
same time, the commenter
acknowledges that it also stated that it
would be able to increase or decrease
that interval, but maintains that it
‘‘never considered reducing that interval
so drastically that the DSO would live
as a fully specified option for but a
single day in a much longer lifespan.’’ 40
In addition, the commenter states that
it would be unprecedented to have a
cash-settled option on an ETF.41 In its
filing, the Exchange cites to other cashsettled options, including CBOE’s SPX
options, as support for the notion that
cash settlement of options is not
35 See
CBOE Letter, supra note 4.
id. at 2.
37 See id. at 2 (citing Chicago Mercantile
Exchange v. SEC, 883 F.2d 537, 546 (7th Cir. 1989)).
38 See id. at 2.
39 See Notice, supra note 3, at 80126 n.3; see also
id. at 80127 n.16.
40 See CBOE Letter, supra note 4, at 2.
41 See id. at 2–3.
36 See
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9889
novel.42 The commenter notes that SPX
options are index options, whereas the
proposed RealDay Option would be an
ETF option, which the commenter notes
‘‘have always been physically
settled.’’ 43 The commenter also argues
that it would be without precedent for
RealDay Options to have European-style
exercise when they would be trading
alongside physically settled options
with American-style exercise on the
same ETF that might have the exact
same strikes and would permitted to
expire on the same day.44
IV. Discussion and Commission
Findings
The Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.45 In particular, the
Commission finds that the proposal is
consistent with Section 6(b)(5) of the
Act,46 which requires, among other
things, that the rules of a national
securities exchange be 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.
Comment Letter
The Commission disagrees with the
commenter’s assertion that, with respect
to the timing of strike price setting,
there is no precedent for RealDay
Options or their classification as
securities options. As noted by both the
Exchange and the commenter, the
Commission previously approved an
options product with a strike price not
specified at the time of issuance (i.e.,
DSOs).47 In its order approving the DSO
product, the Commission examined the
question of whether DSOs should be
designated as standardized options for
purposes of Rule 9b–1 under the Act
and concluded that DSOs should be so
designated.48 In concluding that the
‘‘lack [of] a specified exercise price at
the commencement of trading does not
detract from [the DSOs’] character as
42 See
Notice, supra note 3, at 80126 n.11.
CBOE Letter, supra note 4, at 2–3.
44 See id. at 3.
45 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
46 15 U.S.C. 78f(b)(5).
47 See Securities Exchange Act Release No. 56855
(November 28, 2007), 72 FR 68610 (December 5,
2007) (SR–CBOE–2006–90).
48 See id. at 68612–13 (discussing the
Commission’s designation of DSOs as standardized
options).
43 See
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options,’’ the Commission noted that
each DSO series would trade with a
fixed formula for determining the
numerical strike price,49 which is
similar to the operation of RealDay
Options. Moreover, although CBOE
states that, for DSOs, it never considered
an active period as short as a single day,
it acknowledges that its own rule filing
seeking approval for DSOs stated that it
would be able to increase or decrease
the three-month time interval between
setting the strike price and expiration.
The Commission does not believe that
the strike price setting feature of
RealDay Options is a novel issue, and
believes the same analysis it applied to
DSOs applies to RealDay Options.50
As noted above, CBOE also asserts
that the Exchange’s RealDay Options
proposal is unprecedented because of its
proposed settlement and exercise
methodologies. Among other things, the
commenter criticizes the Exchange for
misleadingly making assertions
regarding cash settlement and options,
noting that while it is not unusual for
index and currency options to be cash
settled, that is not the case with ETF
options (such as the proposed RealDay
Options product). In the Notice, the
Exchange argues that its proposed
settlement and exercise methodologies
are appropriate for the proposed
RealDay Options product.51 Among
other things, the Exchange asserts that
there is a low potential for manipulation
of the settlement value of RealDay
Options on SPY due to the high cost and
regulatory scrutiny that would result
from any attempted manipulation and
the vast liquidity and high level of
participation among market participants
in the market for SPY, making
manipulation very difficult.52 In
addition, while the Exchange notes that
manipulation of the settlement value is
unlikely, it represents that its current
surveillance procedures for its other
options products will be sufficient to
monitor RealDay Options.53 The
Exchange further asserts that this low
potential for manipulation and its
continued monitoring will alleviate any
concerns regarding the P.M., cashsettled nature of RealDay Options.54
According to the Exchange, cash
settlement helps to mitigate the risk that
the price of the security could change
overnight before the investor would be
able to liquidate their position, which
would undermine the intent of the
49 See
id. at 68613.
id.
51 See Notice, supra note 3, at 80126–27.
52 See id. at 80129–30.
53 See id. at 80130.
54 See id. at 80126 and 80129–30.
50 See
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product having an active period
designed to cover only a single trading
day.55 The Exchange further notes that
P.M. settlement is necessary for RealDay
Options to prevent events occurring
after the close from having an effect on
the settlement price, which the
Exchange believes would similarly
undermine the intent of RealDay
Options to cover only one trading day.56
The Commission is cognizant that the
proposed settlement and exercise
features of RealDay Options—while they
exist in options more broadly—would,
taken together, be unique. However,
given the significant liquidity of the
underlying ETF for the proposed
product,57 the Commission initially
believes that the proposed settlement
and exercise features can be appropriate
for RealDay Options on SPY. As
discussed above, though the
Commission believes that the liquidity
of SPY and the proposed surveillance of
RealDay Options can serve to mitigate
manipulation concerns, because of the
proposed features of RealDay Options,
including those with respect to
settlement and exercise, the
Commission believes it is appropriate
for the product to be approved on a pilot
basis such that the Commission may
further review trading in the product to
determine whether its proposed features
including, among other things, cash
settlement, continue to be appropriate.
Importantly, the Commission notes that,
if the Exchange were to propose listing
RealDay Options on any additional
underlying product (i.e., other than
SPY), the Exchange has stated that it
would seek approval for such product
through a proposed rule change and the
Commission would have to evaluate
such different underlying product in the
context of RealDay Options, and
whether or not the proposed settlement
and exercise features, among other
things, for such RealDay Options are
appropriate.
Other Issues
The Commission believes that the
Exchange’s proposal to impose no
position limits on RealDay Options is
appropriate and consistent with the Act.
As noted above, the Exchange proposed
to initially list RealDay Options only on
SPY. The Commission notes that SPY
options are the most actively-traded
options in terms of average daily
volume. The Commission believes that
because these options are extremely
liquid, the potential manipulation and
potential market disruption concerns
55 See
id. at 80126.
id. at 80127.
57 See id. at 80126 and 80129–30.
56 See
PO 00000
Frm 00182
Fmt 4703
Sfmt 4703
that position limits are designed to
address are mitigated in the case of this
product. Moreover, the Commission
believes that having no position limits
for these options may benefit investors
by bringing additional depth and
liquidity to these options without
raising significant concerns about
potential manipulation or potential
market disruption. Further, the
Commission notes that standard options
on SPY are currently not subject to any
position limits under a pilot program,
and the Exchange has proposed to apply
any position limits for standard options
on SPY if that pilot program were
discontinued.58
The Commission also believes that it
is consistent with the Act to apply
margin requirements to the proposed
RealDay Options that are otherwise
applicable to standard options on SPY.
The Commission further believes that
the Exchange’s proposed minimum
trading increments, strike price setting
process,59 and other aspects of the
proposed rule change are appropriate
and consistent with the Act.
As a national securities exchange, the
Exchange is required, under Section
6(b)(1) of the Act,60 to enforce
compliance by its members and persons
associated with its members with the
provisions of the Act, Commission rules
and regulations thereunder, and its own
rules. In this regard, other than for
certain exercise and settlement features
as described above,61 the Commission
notes that trading of RealDay Options
will be subject to many of the same
rules that currently govern the trading of
other options on the Exchange.62 In
addition, as noted above, the Exchange
has asserted that manipulation of the
settlement value of RealDay Options on
SPY will be difficult based on the size
and liquidity of the market for SPY.63
Moreover, the Exchange has represented
that it has an adequate surveillance
program in place for RealDay Options
on SPY, and will monitor for any
potential manipulation of the settlement
value according to its current
58 See
id. at 80130.
Commission notes that, as described
above, the Exchange has represented that it has
informed various market participants about the
nature of the proposed use of three decimal places
to represent the Strike Multiplier, that it has
ensured that these market participants will
understand the meaning of and be able to handle
the three decimal places, and that it will continue
to further educate market participants on this
process to minimize any potential investor
confusion. See Notice, supra note 3, at 80128 n.24.
60 15 U.S.C. 78f(b)(1).
61 See supra notes 12–19 and accompanying text.
62 See Exchange Rule 5050.
63 See supra note 52 and accompanying text.
59 The
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surveillance procedures.64 In approving
the proposed listing and trading of the
proposed RealDay Options, the
Commission has also relied on the
Exchange’s representation that it has the
necessary systems capacity to support
the new options series that will result
from this proposal.65
Pilot
Given the size and liquidity of the
market for SPY, the Commission
believes that the risks of manipulation
and potential market disruption are
significantly mitigated as discussed
above. Notwithstanding this and the
Exchange’s representations in this
regard, the Commission believes that a
prudent approach is warranted with
respect to the Exchange’s proposal to
list RealDay Options on SPY. To the
extent the potential for adverse effects
with regard to the markets for the SPY
ETF, the S&P 500 component securities
underlying the SPY ETF, or RealDay
Options on SPY continues to exist, the
Exchange’s proposal to implement this
change on a pilot basis should help to
address this concern. Accordingly, the
Commission is approving the proposal
on a twelve-month pilot basis. Within
two months of the end of the Pilot
Program the Exchange will be required
to submit to the Commission the Pilot
Report. As described in more detail
above,66 the Pilot Report will contain an
analysis of volume, open interest, and
trading patterns examining trading in
RealDay Options. In addition, for certain
series, the Pilot Report will provide an
analysis of price volatility and trading
activity in additional option series. In
addition to the Pilot Report, the
Exchange will provide the Commission
with periodic interim reports while the
Pilot Program is in effect that would
contain some, but not all, of the
information contained in the Pilot
Report. The Pilot Report will be
provided to the Commission on a
confidential basis. Furthermore, if the
pilot is not extended or permanently
approved by the end of the Pilot
Program, any position in RealDay
Options established during the Pilot
Program would remain in effect, but any
further trading in those RealDay Options
would be restricted to transactions
where at least one side of the trade is
a closing transaction.
The Commission expects that,
throughout the Pilot Program, the
Exchange will monitor for any problems
and collect and analyze on an ongoing
basis the data and information that the
64 See
supra note 30 and accompanying text.
supra note 31 and accompanying text.
66 See supra note 34 and accompanying text.
65 See
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Exchange ultimately intends to include
in the Pilot Report. The Commission
also expects that the Exchange will take
prompt action, including timely
communication with the Commission
and with other marketplace selfregulatory organizations responsible for
oversight of trading in component
stocks, should any unanticipated
adverse market effects develop.
Based on the Exchange’s
representations with respect to the
proposed RealDay Options on SPY and
for the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with the Act.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,67 that the
proposed rule change (SR–BOX–2016–
50) be, and hereby is, approved on a
twelve-month pilot basis set to expire
on February 2, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.68
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017–02541 Filed 2–7–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79934; File No. SR–IEX–
2017–04]
Self-Regulatory Organizations;
Investors Exchange LLC; Notice of
Filing of Proposed Rule Change To
Adopt the Rule Series 11.600 To
Implement the Compliance Rule
Regarding the National Market System
Plan Governing the Consolidated Audit
Trail
February 2, 2017.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on January
30, 2017, the Investors Exchange LLC
(‘‘IEX’’ or the ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the self-regulatory organization.4 The
67 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
4 The Exchange originally filed this proposed rule
change on January 17, 2017 under File No. SR–IEX–
2017–02, and the Exchange subsequently withdrew
that filing on January 30, 2017 and filed this
proposed rule change.
68 17
PO 00000
Frm 00183
Fmt 4703
Sfmt 4703
9891
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
Pursuant to the provisions of Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’),5 and Rule
19b–4 thereunder,6 IEX is filing with the
Commission a proposed rule change to
adopt the Rule Series 11.600 to
implement the compliance rule
(‘‘Compliance Rule’’) regarding the
National Market System Plan Governing
the Consolidated Audit Trail (the ‘‘CAT
NMS Plan’’ or ‘‘Plan’’).7 The text of the
proposed rule change is available at the
Exchange’s Web site at
www.iextrading.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 the
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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 self-regulatory organization 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
(a) Purpose [sic]
Bats BYX Exchange, Inc., Bats BZX
Exchange, Inc., Bats EDGA Exchange,
Inc., Bats EDGX Exchange, Inc., BOX
Options Exchange LLC, C2 Options
Exchange, Incorporated, Chicago Board
Options Exchange, Incorporated,
Chicago Stock Exchange, Inc., Financial
Industry Regulatory Authority, Inc.,
International Securities Exchange, LLC,
Investors Exchange LLC, ISE Gemini,
LLC, ISE Mercury, LLC, Miami
International Securities Exchange LLC,
MIAX PEARL, LLC, NASDAQ BX, Inc.,
NASDAQ PHLX LLC, The NASDAQ
Stock Market LLC, National Stock
Exchange, Inc., New York Stock
5 15
U.S.C. 78s(b)(1).
CRF 240.19b–4.
7 Unless otherwise specified, capitalized terms
used in this rule filing are defined as set forth
herein or in the CAT NMS Plan.
6 17
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]]>Agencies
[Federal Register Volume 82, Number 25 (Wednesday, February 8, 2017)]
[Notices]
[Pages 9886-9891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02541]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79936; File No. SR-BOX-2016-50]
Self-Regulatory Organizations; BOX Options Exchange LLC; Order
Granting Approval of a Proposed Rule Change To Amend Rule 5050 Series
of Options Contracts Open for Trading To Provide for the Listing and
Trading on the Exchange of RealDay\TM\ Options Pursuant to a Pilot
Program
February 2, 2017.
I. Introduction
On October 26, 2016, BOX Options Exchange LLC (the ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
provide for the listing and trading on the Exchange of RealDay\TM\
Options (``RealDay Options'') on a pilot basis. The proposed rule
change was published for comment in the Federal Register on November
15, 2016.\3\ The Commission received one comment letter on the proposed
rule change.\4\ On December 20, 2016, pursuant to Section 19(b)(2) of
the Act,\5\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to approve or disapprove
the proposed rule change.\6\ This order approves the proposed rule
change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 79258 (November 8,
2016), 81 FR 80125 (``Notice'').
\4\ See Letter from Edward T. Tilly, Chief Executive Officer,
Chicago Board Options Exchange (``CBOE''), Incorporated, to Brent J.
Fields, Secretary, Commission, dated December 6, 2016 (``CBOE
Letter'').
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 79613, 81 FR 95206
(December 27, 2016). The Commission designated February 13, 2017 as
the date by which the Commission would either approve or disapprove,
or institute proceedings to determine whether to approve of
disapprove, the proposed rule change.
---------------------------------------------------------------------------
[[Page 9887]]
II. Description of the Proposed Rule Change
General Description \7\
---------------------------------------------------------------------------
\7\ For additional details, including examples provided by the
Exchange with respect to the proposed operation of RealDay Options,
see Notice, supra note 3.
---------------------------------------------------------------------------
Pursuant to a twelve-month pilot program, the Exchange proposes to
amend its rules to list and trade on the Exchange RealDay Options on
the SPDR[supreg] S&P 500[supreg] Exchange Traded Fund (``SPY''). The
Exchange states that RealDay Options are designed and exclusively
licensed by the RealDay Options Corporation, and would be exclusively
listed on BOX. RealDay Options would share many characteristics of
existing standardized options with some distinct variations. Most
notably, at the commencement of trading of a particular RealDay Option
and until the close of trading on the last trading day before its
expiration, the numerical value of the strike price would not be known.
However, the formula used to calculate the strike price would be fixed
and known from the time of listing.\8\
---------------------------------------------------------------------------
\8\ The Exchange describes RealDay Options as true, or real,
one-day options because they are forward start (or delayed start)
options with strike increments and a strike price setting formula
that are fixed from the time of listing, but with numerical strike
prices determined based on the formula using the closing price of
SPY from the last trading day before expiration.
---------------------------------------------------------------------------
The trading of RealDay Options would in essence be divided into two
periods: The anticipatory period and the active period. The
anticipatory period would be the period of time from the day the option
is listed up until the close of trading on the last trading day before
expiration. The active period would be the expiration day of the
option. During the anticipatory period, the strike intervals and strike
price setting formula would be known, but not the numerical value of
the strike prices, because they would depend on the closing price of
SPY from the last trading day before expiration. RealDay Options could
still be traded in the anticipatory period in the same manner as
standard options on SPY. During the active period, the numerical value
of the strike prices would be known. Although the active period is only
one trading day, RealDay Options could be listed for up to nine months
in advance of the expiration date, but at least two weeks prior to
their expiration.\9\
---------------------------------------------------------------------------
\9\ See Proposed Rule 5050(f).
---------------------------------------------------------------------------
The Exchange has only proposed to list RealDay Options on SPY, but
the Exchange states that it may seek to list RealDay Options on
additional securities in the future.\10\ According to the Exchange, it
has proposed to list RealDay Options initially on SPY due to the vast
liquidity in the security, which the Exchange states to be the largest
and most actively traded Exchange Traded Fund (``ETF'') in the United
States.\11\
---------------------------------------------------------------------------
\10\ See Notice, supra note 3, at 80126 (representing that, if
it were to seek to list RealDay Options on additional securities,
the Exchange would use the approval process under Form 19b-4).
\11\ See Notice, supra note 3, at 80126.
---------------------------------------------------------------------------
Strike Price, Strike Intervals, Settlement and Exercise Price
While the numerical value of the strike prices for RealDay Options
would not be known until the close of trading on the last trading day
before expiration, the strike intervals and strike price setting
formula would be fixed from inception.\12\ The formula would involve
multiplying the closing price of SPY from the last trading day before
expiration (``Strike Setting Price'') by the Strike Multiplier.\13\ In
effect, the strike price would stay at the same percentage relationship
to the price of SPY from the time of listing. The Exchange proposes to
only list up to a maximum of seven strike prices for each expiration
date, consisting of up to three strike prices with a price greater than
the Strike Setting Price, three strike prices with a price less than
the Strike Setting Price, and one strike price equal to the Strike
Setting Price.\14\ The Exchange proposes to have discretion in
determining the number of strike prices that would be listed per
expiration, provided that the strike prices satisfy these restrictions.
Additionally, the Exchange would be required to always list the strike
price that is equal to the Strike Setting Price for each RealDay
Options expiration. The Exchange proposes to have the discretion to
determine not to list in-the-money (``ITM'') put or call options for
any of the seven strike prices,\15\ as the Exchange believes the value
of RealDay Options is in the instruments that are at-the-money and out-
of-the-money. Similar to other options products listed by the Exchange,
the Exchange proposes to allow for the addition of strike prices after
the initial listing of a RealDay Option, provided that the Exchange
does not list more than the seven strike prices permitted by the
guidelines described above.\16\
---------------------------------------------------------------------------
\12\ See proposed Rule 5050(f)(8).
\13\ The ``Strike Multiplier'' is the decimal equivalent of the
percentage strike of the specific option. The Strike Multiplier
would be expressed with three decimal places. For example, an option
that is equal to the Strike Setting price would be 100%, making the
Strike Multiplier 1.000.
\14\ See proposed Rule 5050(f)(2).
\15\ See proposed Rule 5050(f)(2)(ii). The ITM puts that the
Exchange may decide to not list are those corresponding to the three
strike prices that are greater than the Strike Setting Price and the
ITM call options are those corresponding to the three strike prices
that are less than the Strike Setting Price.
\16\ See Notice, supra note 3, at 80127.
---------------------------------------------------------------------------
The Exchange also proposes additional procedures in determining the
exact number of strike prices that may be listed for a RealDay
Option.\17\ Specifically, if the underlying security is priced at or
above $25.00 per share, the Exchange would be permitted to list up to
all seven permitted strike prices. If the underlying security is priced
at or below $10.00 per share, the Exchange would not list any RealDay
Options on the underlying security. If the underlying security is
priced between $10.00 and $25.00 per share, the Exchange would only
list one strike price, which would be equal to the Strike Setting
Price.
---------------------------------------------------------------------------
\17\ See proposed Rule 5050(f)(2).
---------------------------------------------------------------------------
The strike price formula would be used after the close of trading
on the last trading day before expiration in order to calculate the
numerical values of the strike prices. Specifically, the strike prices
would be determined by multiplying the Strike Setting Price by the
Strike Multiplier. Rather than applying the Exchange's general strike
price interval rules, the strike prices for RealDay Options would have
fixed strike intervals of 0.50%.\18\ The strike prices would be rounded
to the nearest minimum trading increment, if necessary. If SPY does not
open for trading on the trading day before the expiration date, the
Exchange proposes to use the last available closing price for SPY as
the Strike Setting Price.
---------------------------------------------------------------------------
\18\ See Proposed Rule 5050(f)(3). There would be one strike
price equal to 100% of the Strike Setting Price (with a Strike
Multiplier of 1.000), three strike prices greater than then Strike
Setting Price determined by adding 0.5%, 1.0%, and 1.5%,
respectively, to the Strike Setting Price (with Strike Multipliers
of 1.005, 1.010, and 1.015, respectively), and three strike prices
lower than the Strike Setting Price determined by subtracting 0.5%,
1.0%, and 1.5%, respectively, from the Strike Setting Price (with
Strike Multipliers of 0.995, 0.990, and 0.985, respectively).
---------------------------------------------------------------------------
The Exchange proposes to calculate the exercise and settlement
price of RealDay Options based on the closing price of SPY on the
trading day of expiration. The exercise-settlement amount would be
equal to the difference between the settlement price and the exercise
price of the option multiplied by 100. Exercise would result in the
delivery of cash on the business day following expiration. If SPY does
not open for trading on the trading day of expiration, at the close of
trading on expiration, RealDay Options would have an exercise price
that is equal to the
[[Page 9888]]
closing price from the last trading day before expiration.
Other Characteristics
The Exchange proposes that RealDay Options be P.M. cash-settled and
have European-style exercise provisions.\19\ These options may expire
every trading day, including days on which monthly options series,
Short Term Options Series, and Quarterly Options Series on SPY expire.
---------------------------------------------------------------------------
\19\ See Proposed Rule 5050(f)(4). See also Notice, supra note
3, at 80126-27 and 80129-30 (discussing the Exchange's
representations with respect to the appropriateness of its proposed
settlement and exercise methodologies for RealDay Options).
---------------------------------------------------------------------------
The Exchange proposes to list RealDay Options on SPY with the
symbol ``SPYZ.'' During the anticipatory period, the Exchange proposes
to list the strike prices as the Strike Multiplier because the
numerical value of the strike price would not yet be known. The
Exchange proposes to use three decimal places to indicate the strike
prices as the Strike Multiplier during the anticipatory period.\20\
According to the Exchange, using three decimal places is unique and not
a practice currently used for options, which the Exchange believes
would put investors on notice and aware that the Strike Multiplier does
not represent a strike price of a typical standard option.\21\ The
Exchange represents that it has explained what the three decimal places
would represent to data vendors, the Options Clearing Corporation, and
various market participants, and the Exchange represents that they have
confirmed that they would be able to handle the three decimal places
when RealDay Options are launched.\22\ The Exchange also represents
that it will provide information and education to market participants
via circular prior to the launch of RealDay Options to further minimize
any potential investor confusion.\23\
---------------------------------------------------------------------------
\20\ See Notice, supra note 3, at 80128 (providing an example of
strike prices for RealDay Options during the anticipatory period).
\21\ See id. at 80128.
\22\ See id. at 80128 n.24.
\23\ See id. at 80128.
---------------------------------------------------------------------------
After the close of trading on the last trading day before
expiration, the decimal would be converted into the numerical strike
price by multiplying the Strike Setting Price by the Strike
Multiplier.\24\
---------------------------------------------------------------------------
\24\ See id. at 80129 (providing an example of the conversion
into the numerical strike prices). The Exchange notes that an
adjustment to the Strike Setting Price may be needed in order to
remove the effects of corporate actions, such as cash dividends. If
a dividend is declared, the Exchange would adjust the Strike Setting
Price by subtracting the declared dividend before multiplying it by
the Strike Multiplier. See id. at 80128 n.25.
---------------------------------------------------------------------------
The Exchange proposes for RealDay Options to overlie 100 shares of
SPY in the same manner as standard options on SPY. The Exchange's
standard trading hours for SPY options would also apply to trading in
RealDay Options. The Exchange proposes to apply margin requirements for
the purchase and sale of RealDay Options that are identical to the
margin requirements for standard options on SPY.\25\ The Exchange
proposes to calculate margin requirements for RealDay Options in the
same manner as margins for standard options on SPY. The Exchange notes
that margins would be calculated in the same manner during both the
anticipatory and active periods. The Exchange states that the strike
price used for calculating the margin would be the numerical value of
the strike price using the current price of SPY for the strike setting
formula.\26\ The Exchange proposes to apply the same minimum trading
increment of $0.01 to RealDay Options as applicable to standard options
on SPY.\27\ The Exchange further proposes that the position limits for
RealDay Options would be the same as the position limits for standard
options, such that there would be no position or exercise limits for
RealDay Options on SPY, as with standard options on SPY.\28\ In
addition, positions in RealDay Options would be aggregated with
positions in all other options on SPY.
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\25\ See Proposed Rule 5050(f)(6). The Exchange notes that
Options Participants and associated persons are bound by the initial
and maintenance margin requirements of either CBOE or the New York
Stock Exchange. See Exchange Rule 10120; see also CBOE Rule 12.3.
\26\ See Notice, supra note 3, at 80129.
\27\ See Proposed Rule 5050(f)(5).
\28\ See Proposed Rule 5050(f)(10). See also Securities Exchange
Act Release No. 67936 (September 27, 2012), 77 FR 60491 (October 3,
2012) (SR-BOX-2012-013). The Exchange noted that since the removal
of any position limits on SPY is subject to a pilot program, if such
pilot is discontinued and SPY becomes subject to position limits,
then RealDay Options would become subject to the same position
limits as SPY options. See Notice, supra note 3, at 80130.
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The Exchange proposes to apply Section 4000 of its rules, which is
designed to protect public customer trading, to trading in RealDay
Options. Specifically, Exchange Rules 4020(a) and (b) prohibit Order
Flow Providers (``OFPs'') \29\ from accepting a Public Customer order
to purchase or write an option, including RealDay Options, unless such
customer's account has been approved in writing by a designated Options
Principal of the OFP. Additionally, Exchange Rule 4040 regarding
suitability is designed to ensure that options, including RealDay
Options, are sold only to customers capable of evaluating and bearing
the risks associated with trading in the instrument. Further, Exchange
Rule 4050 permits OFPs to exercise discretionary power with respect to
trading options, including RealDay Options, in a Public Customer's
account only if the OFP has received prior written authorization from
the customer and the account has been accepted in writing by a
designated Options Principal. Finally, the Exchange states that
Exchange Rules 4030 (Supervision of Accounts), 4060 (Confirmation to
Public Customers), and 4100 (Delivery of Current Options Disclosure
Documents and Prospectus) would also apply to trading in RealDay
Options.
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\29\ See Rule 100(a)(45). The term OFP means those Options
Participants representing as agent Customer Orders on BOX and those
non-Market Maker Participants conducting proprietary trading.
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The Exchange represents that it has an adequate surveillance
program in place for RealDay Options and intends to apply the same
program procedures that it applies to the Exchange's other options
products, which the Exchange believes would adequately monitor trading
in RealDay Options.\30\ The Exchange stated that it is also a member of
the Intermarket Surveillance Group (``ISG''), the members of which work
together to coordinate surveillance and investigative information
sharing in the stock and options markets.
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\30\ See Notice, supra note 3, at 80130.
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The Exchange further represents that it has the necessary system
capacity to support the additional quotations and messages that would
result from the listing and trading of RealDay Options.\31\ The
Exchange intends to minimize the system capacity required to list
RealDay Options by limiting the listing to seven strike prices per
expiration. The Exchange also states that having the discretion to not
list ITM call or put options would further minimize the required system
capacity to list RealDay Options.
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\31\ See id.
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Pilot
The Exchange has filed this proposal on a pilot basis for a period
of twelve months (the ``Pilot Program'' or ``Pilot Period'').\32\ The
Exchange further states that, if it were to propose an extension of the
Pilot Program or propose to make the Pilot Program permanent, the
Exchange would submit a filing to the Commission proposing such
amendments.\33\
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\32\ See Proposed Rule 5050(f)(9).
\33\ The Exchange noted that any positions established under the
pilot would not be impacted by the expiration of the pilot. For
example, a position in a RealDay Options series that expires beyond
the conclusion of the pilot period could be established during the
12-month pilot. If the pilot program were not extended, then the
position could continue to exist. However, any further trading in
the series would be restricted to transactions where at least one
side of the trade is a closing transaction.
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[[Page 9889]]
The Exchange proposes to submit a report to the Commission two
months prior to the expiration date of the Pilot Program (the ``Pilot
Report'').\34\ The Pilot Report would contain an analysis of volume,
open interest, and trading patterns examining trading in RealDay
Options. In addition, for certain series, the Pilot Report would
provide an analysis of price volatility and trading activity in
additional option series. In addition to the Pilot Report, the Exchange
would provide the Commission with periodic interim reports while the
Pilot Program is in effect that would contain some, but not all, of the
information contained in the Pilot Report. The Pilot Report would be
provided to the Commission on a confidential basis.
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\34\ See Notice, supra note 3, at 80131.
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The Exchange states that the Pilot Report would contain the
following volume and open interest data for RealDay Options:
(1) Daily contract trading volume aggregated for all trades, for
all option series with less than 31 days until expiration;
(2) daily contract trading volume aggregated by expiration date,
for all option series with less than 31 days until expiration;
(3) daily contract trading volume for each individual series;
(4) daily open interest aggregated for all series, for all option
series with less than 31 days until expiration;
(5) daily open interest aggregated for all series by expiration
date, for all option series with less than 31 days until expiration;
(6) daily open interest for each individual series;
(7) statistics on the distribution of trade sizes;
(8) type of market participant trading (e.g., contract trading
volume for each market participant type); and
(9) 5-minute returns, level changes, and trading volume for the S&P
500 Index, VIX, SPY, IVV, and expiring RealDay options between open and
close for the first and second Wednesday of the month that is a trading
day and trading days when standard SPY options expire.
In addition to the Pilot Report, the Exchange would periodically
provide the Commission with interim reports of the information listed
in items (1) through (9) above as required by the Commission while the
Pilot Program is in effect. These interim reports will also be provided
on a confidential basis. The initial period of the Exchange's proposed
Pilot Program is set to expire on February 2, 2018.
III. Summary of Comment Letter
The Commission received a comment letter from the Chicago Board
Options Exchange opposing the Exchange's RealDay Options proposal.\35\
The commenter argues that the proposal should be disapproved. First,
the commenter questions whether a RealDay Option can be considered a
securities option and therefore within the Commission's jurisdiction.
The commenter asserts that there is no precedent for classifying
RealDay Options as a securities option \36\ and cites a Seventh Circuit
decision holding that a contract is an option only if, among other
things, it ``establish[es] a careful balance among premium, strike
price, and duration.'' \37\ The commenter notes that, for all but ``a
tiny portion of its life'' (i.e., one day), a RealDay Option would not
have a specified strike price and believes that there is a ``serious
and novel issue about whether [RealDay Options] can be considered a
securities option--and therefore can fall within the Commission's
jurisdiction. . . .'' \38\
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\35\ See CBOE Letter, supra note 4.
\36\ See id. at 2.
\37\ See id. at 2 (citing Chicago Mercantile Exchange v. SEC,
883 F.2d 537, 546 (7th Cir. 1989)).
\38\ See id. at 2.
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In its filing, the Exchange cited to CBOE's Delayed Start Options
(``DSOs'') as precedent for the approval of RealDay Options.\39\ The
commenter argues that RealDay Options are ``fundamentally different''
from DSOs. The commenter notes that, in its own filing seeking approval
for DSOs, it represented that the time interval between setting the
strike price and expiration initially would be three months, as
compared to one day for RealDay Options. At the same time, the
commenter acknowledges that it also stated that it would be able to
increase or decrease that interval, but maintains that it ``never
considered reducing that interval so drastically that the DSO would
live as a fully specified option for but a single day in a much longer
lifespan.'' \40\
---------------------------------------------------------------------------
\39\ See Notice, supra note 3, at 80126 n.3; see also id. at
80127 n.16.
\40\ See CBOE Letter, supra note 4, at 2.
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In addition, the commenter states that it would be unprecedented to
have a cash-settled option on an ETF.\41\ In its filing, the Exchange
cites to other cash-settled options, including CBOE's SPX options, as
support for the notion that cash settlement of options is not
novel.\42\ The commenter notes that SPX options are index options,
whereas the proposed RealDay Option would be an ETF option, which the
commenter notes ``have always been physically settled.'' \43\ The
commenter also argues that it would be without precedent for RealDay
Options to have European-style exercise when they would be trading
alongside physically settled options with American-style exercise on
the same ETF that might have the exact same strikes and would permitted
to expire on the same day.\44\
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\41\ See id. at 2-3.
\42\ See Notice, supra note 3, at 80126 n.11.
\43\ See CBOE Letter, supra note 4, at 2-3.
\44\ See id. at 3.
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IV. Discussion and Commission Findings
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\45\ In
particular, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\46\ which requires, among other things,
that the rules of a national securities exchange be 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.
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\45\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\46\ 15 U.S.C. 78f(b)(5).
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Comment Letter
The Commission disagrees with the commenter's assertion that, with
respect to the timing of strike price setting, there is no precedent
for RealDay Options or their classification as securities options. As
noted by both the Exchange and the commenter, the Commission previously
approved an options product with a strike price not specified at the
time of issuance (i.e., DSOs).\47\ In its order approving the DSO
product, the Commission examined the question of whether DSOs should be
designated as standardized options for purposes of Rule 9b-1 under the
Act and concluded that DSOs should be so designated.\48\ In concluding
that the ``lack [of] a specified exercise price at the commencement of
trading does not detract from [the DSOs'] character as
[[Page 9890]]
options,'' the Commission noted that each DSO series would trade with a
fixed formula for determining the numerical strike price,\49\ which is
similar to the operation of RealDay Options. Moreover, although CBOE
states that, for DSOs, it never considered an active period as short as
a single day, it acknowledges that its own rule filing seeking approval
for DSOs stated that it would be able to increase or decrease the
three-month time interval between setting the strike price and
expiration. The Commission does not believe that the strike price
setting feature of RealDay Options is a novel issue, and believes the
same analysis it applied to DSOs applies to RealDay Options.\50\
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\47\ See Securities Exchange Act Release No. 56855 (November 28,
2007), 72 FR 68610 (December 5, 2007) (SR-CBOE-2006-90).
\48\ See id. at 68612-13 (discussing the Commission's
designation of DSOs as standardized options).
\49\ See id. at 68613.
\50\ See id.
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As noted above, CBOE also asserts that the Exchange's RealDay
Options proposal is unprecedented because of its proposed settlement
and exercise methodologies. Among other things, the commenter
criticizes the Exchange for misleadingly making assertions regarding
cash settlement and options, noting that while it is not unusual for
index and currency options to be cash settled, that is not the case
with ETF options (such as the proposed RealDay Options product). In the
Notice, the Exchange argues that its proposed settlement and exercise
methodologies are appropriate for the proposed RealDay Options
product.\51\ Among other things, the Exchange asserts that there is a
low potential for manipulation of the settlement value of RealDay
Options on SPY due to the high cost and regulatory scrutiny that would
result from any attempted manipulation and the vast liquidity and high
level of participation among market participants in the market for SPY,
making manipulation very difficult.\52\ In addition, while the Exchange
notes that manipulation of the settlement value is unlikely, it
represents that its current surveillance procedures for its other
options products will be sufficient to monitor RealDay Options.\53\ The
Exchange further asserts that this low potential for manipulation and
its continued monitoring will alleviate any concerns regarding the
P.M., cash-settled nature of RealDay Options.\54\ According to the
Exchange, cash settlement helps to mitigate the risk that the price of
the security could change overnight before the investor would be able
to liquidate their position, which would undermine the intent of the
product having an active period designed to cover only a single trading
day.\55\ The Exchange further notes that P.M. settlement is necessary
for RealDay Options to prevent events occurring after the close from
having an effect on the settlement price, which the Exchange believes
would similarly undermine the intent of RealDay Options to cover only
one trading day.\56\
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\51\ See Notice, supra note 3, at 80126-27.
\52\ See id. at 80129-30.
\53\ See id. at 80130.
\54\ See id. at 80126 and 80129-30.
\55\ See id. at 80126.
\56\ See id. at 80127.
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The Commission is cognizant that the proposed settlement and
exercise features of RealDay Options--while they exist in options more
broadly--would, taken together, be unique. However, given the
significant liquidity of the underlying ETF for the proposed
product,\57\ the Commission initially believes that the proposed
settlement and exercise features can be appropriate for RealDay Options
on SPY. As discussed above, though the Commission believes that the
liquidity of SPY and the proposed surveillance of RealDay Options can
serve to mitigate manipulation concerns, because of the proposed
features of RealDay Options, including those with respect to settlement
and exercise, the Commission believes it is appropriate for the product
to be approved on a pilot basis such that the Commission may further
review trading in the product to determine whether its proposed
features including, among other things, cash settlement, continue to be
appropriate. Importantly, the Commission notes that, if the Exchange
were to propose listing RealDay Options on any additional underlying
product (i.e., other than SPY), the Exchange has stated that it would
seek approval for such product through a proposed rule change and the
Commission would have to evaluate such different underlying product in
the context of RealDay Options, and whether or not the proposed
settlement and exercise features, among other things, for such RealDay
Options are appropriate.
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\57\ See id. at 80126 and 80129-30.
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Other Issues
The Commission believes that the Exchange's proposal to impose no
position limits on RealDay Options is appropriate and consistent with
the Act. As noted above, the Exchange proposed to initially list
RealDay Options only on SPY. The Commission notes that SPY options are
the most actively-traded options in terms of average daily volume. The
Commission believes that because these options are extremely liquid,
the potential manipulation and potential market disruption concerns
that position limits are designed to address are mitigated in the case
of this product. Moreover, the Commission believes that having no
position limits for these options may benefit investors by bringing
additional depth and liquidity to these options without raising
significant concerns about potential manipulation or potential market
disruption. Further, the Commission notes that standard options on SPY
are currently not subject to any position limits under a pilot program,
and the Exchange has proposed to apply any position limits for standard
options on SPY if that pilot program were discontinued.\58\
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\58\ See id. at 80130.
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The Commission also believes that it is consistent with the Act to
apply margin requirements to the proposed RealDay Options that are
otherwise applicable to standard options on SPY. The Commission further
believes that the Exchange's proposed minimum trading increments,
strike price setting process,\59\ and other aspects of the proposed
rule change are appropriate and consistent with the Act.
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\59\ The Commission notes that, as described above, the Exchange
has represented that it has informed various market participants
about the nature of the proposed use of three decimal places to
represent the Strike Multiplier, that it has ensured that these
market participants will understand the meaning of and be able to
handle the three decimal places, and that it will continue to
further educate market participants on this process to minimize any
potential investor confusion. See Notice, supra note 3, at 80128
n.24.
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As a national securities exchange, the Exchange is required, under
Section 6(b)(1) of the Act,\60\ to enforce compliance by its members
and persons associated with its members with the provisions of the Act,
Commission rules and regulations thereunder, and its own rules. In this
regard, other than for certain exercise and settlement features as
described above,\61\ the Commission notes that trading of RealDay
Options will be subject to many of the same rules that currently govern
the trading of other options on the Exchange.\62\ In addition, as noted
above, the Exchange has asserted that manipulation of the settlement
value of RealDay Options on SPY will be difficult based on the size and
liquidity of the market for SPY.\63\ Moreover, the Exchange has
represented that it has an adequate surveillance program in place for
RealDay Options on SPY, and will monitor for any potential manipulation
of the settlement value according to its current
[[Page 9891]]
surveillance procedures.\64\ In approving the proposed listing and
trading of the proposed RealDay Options, the Commission has also relied
on the Exchange's representation that it has the necessary systems
capacity to support the new options series that will result from this
proposal.\65\
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\60\ 15 U.S.C. 78f(b)(1).
\61\ See supra notes 12-19 and accompanying text.
\62\ See Exchange Rule 5050.
\63\ See supra note 52 and accompanying text.
\64\ See supra note 30 and accompanying text.
\65\ See supra note 31 and accompanying text.
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Pilot
Given the size and liquidity of the market for SPY, the Commission
believes that the risks of manipulation and potential market disruption
are significantly mitigated as discussed above. Notwithstanding this
and the Exchange's representations in this regard, the Commission
believes that a prudent approach is warranted with respect to the
Exchange's proposal to list RealDay Options on SPY. To the extent the
potential for adverse effects with regard to the markets for the SPY
ETF, the S&P 500 component securities underlying the SPY ETF, or
RealDay Options on SPY continues to exist, the Exchange's proposal to
implement this change on a pilot basis should help to address this
concern. Accordingly, the Commission is approving the proposal on a
twelve-month pilot basis. Within two months of the end of the Pilot
Program the Exchange will be required to submit to the Commission the
Pilot Report. As described in more detail above,\66\ the Pilot Report
will contain an analysis of volume, open interest, and trading patterns
examining trading in RealDay Options. In addition, for certain series,
the Pilot Report will provide an analysis of price volatility and
trading activity in additional option series. In addition to the Pilot
Report, the Exchange will provide the Commission with periodic interim
reports while the Pilot Program is in effect that would contain some,
but not all, of the information contained in the Pilot Report. The
Pilot Report will be provided to the Commission on a confidential
basis. Furthermore, if the pilot is not extended or permanently
approved by the end of the Pilot Program, any position in RealDay
Options established during the Pilot Program would remain in effect,
but any further trading in those RealDay Options would be restricted to
transactions where at least one side of the trade is a closing
transaction.
---------------------------------------------------------------------------
\66\ See supra note 34 and accompanying text.
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The Commission expects that, throughout the Pilot Program, the
Exchange will monitor for any problems and collect and analyze on an
ongoing basis the data and information that the Exchange ultimately
intends to include in the Pilot Report. The Commission also expects
that the Exchange will take prompt action, including timely
communication with the Commission and with other marketplace self-
regulatory organizations responsible for oversight of trading in
component stocks, should any unanticipated adverse market effects
develop.
Based on the Exchange's representations with respect to the
proposed RealDay Options on SPY and for the foregoing reasons, the
Commission finds that the proposed rule change is consistent with the
Act.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\67\ that the proposed rule change (SR-BOX-2016-50) be, and hereby
is, approved on a twelve-month pilot basis set to expire on February 2,
2018.
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\67\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\68\
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\68\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-02541 Filed 2-7-17; 8:45 am]
BILLING CODE 8011-01-P
