Self-Regulatory Organizations; NASDAQ PHLX LLC; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Permit the Listing and Trading of P.M.-Settled NASDAQ-100 Index® Options on a Pilot Basis, 37138-37141 [2017-16639]
Download as PDF
37138
Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 9 and paragraph (f) of Rule
19b–4 thereunder.10 At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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:
asabaliauskas on DSKBBXCHB2PROD with NOTICES
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–
BatsEDGX–2017–31 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–BatsEDGX–2017–31. 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 will also be available for
9 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
10 17
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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–
BatsEDGX–2017–31 and should be
submitted on or before August 29, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–16636 Filed 8–7–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81293; File No. SR–Phlx–
2017–04]
Self-Regulatory Organizations;
NASDAQ PHLX LLC; Order Granting
Approval of a Proposed Rule Change,
as Modified by Amendment Nos. 1 and
2, To Permit the Listing and Trading of
P.M.-Settled NASDAQ–100 Index®
Options on a Pilot Basis
August 2, 2017.
I. Introduction
On January 18, 2017, NASDAQ PHLX
LLC (‘‘Phlx’’ or ‘‘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 permit the listing and trading
of P.M.-settled NASDAQ–100 Index®
(‘‘NASDAQ–100’’) options on a pilot
basis. The proposed rule change was
published for comment in the Federal
Register on February 3, 2017.3 On
March 14, 2017, the Commission
extended the time period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.4 On May 2, 2017, the
Exchange filed Amendment No. 1 to the
proposed rule change.5 On May 3, 2017,
11 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. 79894
(January 30, 2017), 82 FR 9259 (‘‘Notice’’).
4 See Securities Exchange Act Release No. 80241,
82 FR 14393 (March 20, 2017).
5 In Amendment No. 1, the Exchange revised its
proposal to add that raw percentage price change
data as well as percentage price change data
normalized for prevailing market volatility, as
1 15
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the Commission instituted proceedings
under Section 19(b)(2)(B) of the Act 6 to
determine whether to approve or
disapprove the proposed rule change, as
modified by Amendment No. 1.7 On
July 25, 2017, the Exchange filed
Amendment No. 2 to the proposed rule
change.8 The Commission received
three comment letters on the proposed
rule change, including two from the
Exchange.9 The Commission is
approving the proposed rule change, as
modified by Amendment Nos. 1 and 2,
subject to a pilot period set to end on
the earlier of: (1) Twelve months
following the date of the first listing of
the options; or (2) December 29, 2018.
II. Description of the Proposal, as
Modified by Amendment Nos. 1 and 2
The Exchange is proposing to amend
its rules to permit the listing and
trading, on a pilot basis, of NASDAQ–
100 options with third-Friday-of-themonth expiration dates, whose exercise
settlement value will be based on the
closing index value, symbol XQC, of the
NASDAQ–100 on the expiration day
(‘‘P.M.-settled’’).
The Exchange represents that the
conditions for listing the proposed
contract (‘‘NDXPM’’) on Phlx will be
similar to those for Full Value Nasdaq
100 Options (‘‘NDX’’), which are already
listed and trading on Phlx, except that
NDXPM will be P.M.-settled.10 In
particular, NDXPM will use a $100
multiplier, and the minimum trading
measured by an appropriate index as agreed by the
Commission and the Exchange, would be provided
as part of the pilot data. When the Exchange filed
Amendment No. 1 with the Commission, it also
submitted Amendment No. 1 to the public comment
file for SR–Phlx–2017–04 (available at:
www.sec.gov/comments/sr-phlx-2017-04/
phlx201704.htm).
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 80581,
82 FR 21587 (May 9, 2017) (‘‘Order Instituting
Proceedings’’).
8 In Amendment No. 2, the Exchange revised the
proposed duration of the pilot program such that
the pilot would terminate on the earlier of: (i)
Twelve months following the date of the first listing
of the options; or (ii) December 29, 2018. When the
Exchange filed Amendment No. 2 with the
Commission, it also submitted Amendment No. 2 to
the public comment file for SR–Phlx–2017–04
(available at: www.sec.gov/comments/sr-phlx-201704/phlx201704.htm). Because Amendment No. 2
does not materially alter the substance of the
proposed rule change or raise unique or novel
regulatory issues, it is not subject to notice and
comment.
9 See Letters to Brent J. Fields, Secretary,
Commission, from Laura G. Dickman, Lead
Counsel, Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’), dated May 30, 2017
(‘‘CBOE Letter’’); Jeffrey S. Davis, Vice President
and Deputy General Counsel, NASDAQ PHLX LLC,
dated June 12, 2017 (‘‘Phlx Letter I’’); and Jeffrey
S. Davis, Vice President and Deputy General
Counsel, NASDAQ PHLX LLC, dated June 29, 2017
(‘‘Phlx Letter II’’).
10 See Notice, supra note 3, at 9260.
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Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices
increment will be $0.05 for options
trading below $3.00 and $0.10 for all
other series. Strike price intervals will
be set at no less than $5.00. Consistent
with existing rules for index options,
the Exchange will allow up to nine nearterm expiration months, as well as
LEAPS. The product will have
European-style exercise and will not be
subject to position limits, though there
would be enhanced reporting
requirements.11
As proposed, NDXPM would become
subject to a pilot for a period that would
end on the earlier of: (i) Twelve months
following the date of the first listing of
NDXPM; or (ii) December 29, 2018
(‘‘Pilot Program’’). If the Exchange were
to propose an extension of the Pilot
Program or should the Exchange
propose to make the Pilot Program
permanent, then the Exchange would
submit a filing proposing such
amendments to the Pilot Program. The
Exchange notes that any positions
established under the pilot would not be
impacted by the expiration of the pilot.
For example, a position in a P.M.-settled
series that expires beyond the
conclusion of the pilot period could be
established during the pilot. If the Pilot
Program were not extended, then the
position could continue to exist.
However, the Exchange notes that any
further trading in the series would be
restricted to transactions where at least
one side of the trade is a closing
transaction.
The Exchange proposes to submit a
Pilot Program report to Commission at
least two months prior to the expiration
date of the Pilot Program (the ‘‘annual
report’’). The annual report would
contain an analysis of volume, open
interest, and trading patterns. The
analysis would examine trading in the
proposed option product as well as
trading in the securities that comprise
the NASDAQ–100. In addition, for
series that exceed certain minimum
open interest parameters, the annual
report would provide analysis of index
price volatility and share trading
activity. In addition to the annual
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
annual report. The annual report would
be provided to the Commission on a
confidential basis. The annual report
would contain the following volume
and open interest data:
(1) Monthly volume aggregated for all
trades;
11 For a more detailed description of the proposed
NDXPM contract, see Notice, supra note 3.
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(2) monthly volume aggregated by
expiration date;
(3) monthly volume for each
individual series;
(4) month-end open interest
aggregated for all series;
(5) month-end open interest for all
series aggregated by expiration date; and
(6) month-end open interest for each
individual series.
In addition to the annual report, the
Exchange would provide the
Commission with interim reports of the
information listed in Items (1) through
(6) above periodically as required by the
Commission while the Pilot Program is
in effect. These interim reports would
also be provided on a confidential basis.
The annual report would also contain
the information noted in Items (1)
through (6) above for Expiration Friday,
A.M.-settled NASDAQ–100 options
traded on Phlx.
In addition, the annual report would
contain the following analysis of trading
patterns in Expiration Friday, P.M.settled NASDAQ–100 option series in
the Pilot Program: (1) A time series
analysis of open interest; and (2) an
analysis of the distribution of trade
sizes. Also, for series that exceed certain
minimum parameters, the annual report
would contain the following analysis
related to index price changes and
underlying share trading volume at the
close on Expiration Fridays: A
comparison of index price changes at
the close of trading on a given
Expiration Friday with comparable
price changes from a control sample.
The data would include a calculation of
percentage price changes for various
time intervals and compare that
information to the respective control
sample. Raw percentage price change
data as well as percentage price change
data normalized for prevailing market
volatility, as measured by an
appropriate index as agreed by the
Commission and the Exchange, would
be provided. The Exchange would
provide a calculation of share volume
for a sample set of the component
securities representing an upper limit
on share trading that could be
attributable to expiring in-the-money
series. The data would include a
comparison of the calculated share
volume for securities in the sample set
to the average daily trading volumes of
those securities over a sample period.
The minimum open interest parameters,
control sample, time intervals, method
for randomly selecting the component
securities, and sample periods would be
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37139
determined by the Exchange and the
Commission.12
III. Summary of Comments
As noted above, the Commission
received three comment letters on the
proposed rule change, including two
letters from the Exchange.13 In its letter,
CBOE expresses support for Phlx’s
proposal, stating that NDXPM would
not present any novel issues not
considered in connection with SPXPM
options.14 CBOE further states that
many of the concerns regarding P.M.
settlement have been mitigated over
time, and believes the availability of
additional P.M.-settled options would
enhance transparency, price discovery,
and liquidity by moving these products
from the over-the-counter market to an
exchange environment.15 In support of
its position, CBOE states that it has not
observed any adverse effects or impact
on market volatility and the operation of
fair and orderly markets on the
underlying cash market at or near the
close of trading in its SPXPM options.16
In its first comment letter, the
Exchange notes that its proposal is
largely based on CBOE’s pilot program
for SPXPM options.17 In response to a
request from Commission staff that any
pilot data be made public, the Exchange
states that, although it is willing to
participate in further discussion with
the Commission, CBOE, and other
exchanges about the possibility of
making public the data under its Pilot
Program and other similar pilots, the
Exchange does not believe it should be
required to make its Pilot Program
reports public absent the development
of a uniform and transparent approach
regarding pilot reports and other
associated materials to similar proposed
rule changes, such as the SPXPM
options pilot.18 Therefore, the Exchange
maintains that any reports in connection
with its Pilot Program will be submitted
12 See Notice, supra note 3, at 9261 and
Amendment No. 1. The proposed Pilot Program for
NDXPM options is similar to the pilot program
approved for the listing and trading of P.M.-settled
S&P 500 Index options (‘‘SPXPM options’’). See
Securities Exchange Act Release No. 64011 (March
2, 2011), 76 FR 12775, 12776–77 (March 8, 2011).
13 See supra note 9.
14 See CBOE Letter at 2.
15 See id.
16 See id. In its letter, CBOE further proposes that
the Commission approve pilot programs for a set
period of time, such as three years, after which the
respective pilot may become permanent or, if the
Commission finds that the pilot resulted in adverse
effects to the market, conclude. See id. at 3. The
Commission notes that this comment is beyond the
scope of the specific proposed rule change under
consideration.
17 See Phlx Letter I at 1.
18 See id. at 2.
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Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices
to the Commission on a confidential
basis.19
In its second comment letter, the
Exchange responds to the Order
Instituting Proceedings and states that it
does not expect any significant impact
on trading in the underlying securities
of NDXPM given the similarity to
SPXPM options that are currently
trading.20 The Exchange believes that
the changes in the operation and
structure of the options markets over
time, in conjunction with the proposed
NDXPM Pilot Program’s similarity to the
SPXPM options pilot and its lack of
novel issues, further support permitting
trading in NDXPM on a pilot basis.21
The Exchange further states that it
expects the data to be provided under
the NDXPM Pilot Program should be
similar to data submitted in connection
with the SPXPM options pilot, with the
exception of the index to be used to
normalize the pilot data for prevailing
market volatility, for which the
Exchange proposes to work with the
Commission to identify an index it
believes would be more suitable to the
NDXPM Pilot Program.22 The Exchange
also reiterated its belief that the
proposal could benefit investors to the
extent it attracts trading from opaque
over-the-counter markets to an
exchange-listed market and could offer
investors additional flexibility.23
asabaliauskas on DSKBBXCHB2PROD with NOTICES
IV. Discussion and Commission
Findings
After careful consideration of the
proposal, 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,24 and, in particular, the
requirements of Section 6 of the Act.25
Specifically, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,26 which
requires that an exchange have rules
designed to remove impediments to and
perfect the mechanism of a free and
open market and to protect investors
and the public interest, to allow Phlx to
conduct a limited, and carefully
monitored, pilot as proposed.
As noted in the Order Instituting
Proceedings, the Commission has had
19 See
id.
Phlx Letter II at 2–4.
21 See id. at 4–5.
22 See id. at 5–6.
23 See id. at 7.
24 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
25 15 U.S.C. 78f.
26 15 U.S.C. 78f(b)(5).
20 See
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concerns about the potential adverse
effects and impact of P.M. settlement
upon market volatility and the operation
of fair and orderly markets on the
underlying cash market at or near the
close of trading, including for cashsettled derivatives contracts based on a
broad-based index.27 In particular, the
Commission sought input from
commenters to inform its evaluation of
whether P.M.-settled, cash-settled index
options such as NDXPM could impact
volume and volatility on the underlying
cash equities markets at the close of the
trading day, and the potential
consequences this might have for
investors and the overall stability of the
markets.28 The potential impact today
remains unclear, given the significant
changes in the closing procedures of the
primary markets in recent decades. The
Commission is mindful of the historical
experience with the impact of P.M.
settlement of cash-settled index
derivatives on the underlying cash
markets, but recognizes that these risks
may be mitigated today by the enhanced
closing procedures that are now in use
at the primary equity markets.
For the reasons described below, the
Commission believes that Phlx’s
proposed NDXPM Pilot Program is
designed to mitigate concerns regarding
P.M. settlement and will provide
additional trading opportunities for
investors while providing the
Commission with data to monitor the
effects of NDXPM and the impact of
P.M. settlement on the markets. To
assist the Commission in assessing any
potential impact of a P.M.-settled
NASDAQ–100 index option on the
options markets as well as the
underlying cash equities markets, Phlx
will be required to submit data to the
Commission in connection with the
Pilot Program. The Commission believes
that Phlx’s proposed Pilot Program,
together with the data and analysis that
Phlx will provide to the Commission,
will allow Phlx and the Commission to
monitor for and assess any potential for
adverse market effects of allowing P.M.
settlement for Nasdaq–100 index
options, including on the underlying
component stocks. In particular, the
data collected from Phlx’s NDXPM Pilot
Program will help inform the
Commission’s consideration of whether
the Pilot Program should be modified,
discontinued, extended, or permanently
approved. Furthermore, the Exchange’s
ongoing analysis of the Pilot Program
should help it monitor any potential
risks from large P.M.-settled positions
and take appropriate action on a timely
basis if warranted.
The Exchange represents that it has
adequate surveillance procedures to
monitor trading in these options thereby
helping to ensure the maintenance of a
fair and orderly market, and has
represented that it has sufficient
capacity to handle additional traffic
associated with this new listing.29
For the reasons discussed above, the
Commission finds that Phlx’s proposal
is consistent with the Act, including
Section 6(b)(5) thereof, in that it is
designed to remove impediments to and
perfect the mechanism of a free and
open market, and, in general, to protect
investors and the public interest. In
light of the enhanced closing procedures
at the underlying markets and the
potential benefits to investors discussed
by the Exchange in the Notice,30 the
Commission finds that it is appropriate
and consistent with the Act to approve
Phlx’s proposal on a pilot basis. The
collection of data during the Pilot
Program and Phlx’s active monitoring of
any effects of NDXPM on the markets
will help Phlx and the Commission
assess any impact of P.M. settlement in
today’s market.
27 See Order Instituting Proceedings, supra note 7,
at 21589. See also Securities Exchange Act Release
Nos. 64599 (June 3, 2011), 76 FR 33798, 33801–02
(June 9, 2011) (order instituting proceedings to
determine whether to approve or disapprove a
proposed rule change to allow the listing and
trading of SPXPM options); 65256 (September 2,
2011), 76 FR 55969, 55970–76 (September 9, 2011)
(order approving proposed rule change to establish
a pilot program to list and trade SPXPM options);
and 68888 (February 8, 2013), 78 FR 10668, 10669
(February 14, 2013) (order approving the listing and
trading of SPXPM on CBOE).
28 See Order Instituting Proceedings, supra note 7,
at 21589.
29 See Notice, supra note 3, at 9261. In addition,
the Commission notes that Phlx would have access
to information through its membership in the
Intermarket Surveillance Group with respect to the
trading of the securities underlying the Nasdaq–100
index, as well as tools such as large options
positions reports to assist its surveillance of
NDXPM options. In approving the proposed rule
change, the Commission also has relied upon the
Exchange’s representation that it has the necessary
systems capacity to support new options series that
will result from this proposal. See id.
30 See id. at 9262.
31 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,31 that the
proposed rule change (SR–Phlx–2017–
04), as modified by Amendment Nos. 1
and 2, be, and hereby is, approved,
subject to a pilot period set to expire on
the earlier of: (1) Twelve months
following the date of the first listing of
NDXPM; or (2) December 29, 2018.
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Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–16639 Filed 8–7–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81286; File No. SR–NSCC–
2017–804]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Advance Notice To Expand the
Application of the Family-Issued
Securities Charge
August 2, 2017.
Pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
entitled the Payment, Clearing, and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’) 1 and Rule
19b–4(n)(1)(i) under the Securities
Exchange Act of 1934 (‘‘Act’’),2 notice is
hereby given that on July 10, 2017,
National Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the advance notice SR–NSCC–2017–804
(‘‘Advance Notice’’) as described in
Items I, II and III below, which Items
have been prepared by the clearing
agency.3 The Commission is publishing
this notice to solicit comments on the
Advance Notice from interested
persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Advance
Notice
The Advance Notice consists of
amendments to the NSCC Rules and
Procedures (‘‘Rules’’) 4 in order to (i)
expand the application of NSCC’s
existing family-issued securities charge 5
to apply to all Members, as described
below, and (ii) include a definition of
‘‘Family-Issued Security’’ as a security
32 17
CFR 200.30–3(a)(12).
U.S.C. 5465(e)(1).
2 17 CFR 240.19b–4(n)(1)(i).
3 On July 10, 2017, NSCC filed this Advance
Notice as a proposed rule change (SR–NSCC–2017–
010) with the Commission pursuant to Section
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule
19b–4, 17 CFR 240.19b–4. A copy of the proposed
rule change is available at https://www.dtcc.com/
legal/sec-rule-filings.aspx.
4 Terms not defined herein are defined in the
Rules, available at www.dtcc.com/∼/media/Files/
Downloads/legal/rules/nscc_rules.pdf.
5 The family-issued securities charge is currently
described in Procedure XV, Section I.(B)(1) of the
Rules, supra note 4.
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that was issued by a Member or by an
affiliate of that Member, as described in
greater detail below.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Advance Notice
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the Advance Notice and discussed any
comments it received on the Advance
Notice. The text of these statements may
be examined at the places specified in
Item IV below. The clearing agency has
prepared summaries, set forth in
sections A, B, and C below, of the most
significant aspects of such statements.
(A) Clearing Agency’s Statement on
Comments on the Advance Notice
Received From Members, Participants,
or Others
NSCC has not received or solicited
any written comments relating to this
proposal. NSCC will notify the
Commission of any written comments
received by NSCC.
(B) Advance Notice Filed Pursuant to
Section 806(e) of the Payment, Clearing,
and Settlement Supervision Act
Description of Proposed Changes
Currently, in calculating its Members’
required deposits to the Clearing Fund,
NSCC excludes positions in FamilyIssued Securities of certain Members
from its parametric volatility Clearing
Fund component (‘‘VaR Charge’’), and
instead charges an amount calculated by
multiplying the absolute value of the
long, net unsettled positions in that
Member’s Family-Issued Securities by a
percentage that is no less than 40
percent (‘‘FIS Charge’’). The FIS Charge
is currently only applied to Members
that are rated 5, 6, or 7 on the Credit
Risk Rating Matrix (‘‘CRRM’’). The
proposed change would expand the
application of the FIS Charge to the
positions in Family-Issued Securities of
all Members to help NSCC cover the
specific wrong-way risk posed by
Family-Issued Securities, as described
further below.6 Therefore, NSCC is
proposing to amend (i) Rule 1
(Definitions and Descriptions) to add a
definition of ‘‘Family-Issued Security,’’
and (ii) Procedure XV (Clearing Fund
Formula and Other Matters) to expand
the application of the FIS Charge to all
Members by moving the description of
FIS Charge from Section I.(B)(1) to
Sections I.(A)(1) and I.(A)(2) in order to
make clear that the FIS Charge would be
included as a component of the Clearing
6 Members that do not trade in Family-Issued
Securities would not be subject to the FIS Charge.
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37141
Fund formula calculated for all
Members.
As a central counterparty, NSCC
occupies an important role in the
securities settlement system by
interposing itself between
counterparties to financial transactions
and thereby reducing the risk faced by
participants and contributing to global
financial stability. The effectiveness of a
central counterparty’s risk controls and
the adequacy of its financial resources
are critical to achieving these riskreducing goals. In that context, NSCC
continuously reviews its margining
methodology in order to ensure the
reliability of its margining in achieving
the desired coverage. In order to be most
effective, NSCC must take into
consideration the risk characteristics
specific to certain securities when
margining those securities.
Among the various risks that NSCC
considers when evaluating the
effectiveness of its margining
methodology are its counterparty risks
and identification and mitigation of
‘‘wrong-way’’ risk, particularly specific
wrong-way risk, defined as the risk that
an exposure to a counterparty is highly
likely to increase when the
creditworthiness of that counterparty
deteriorates. 7 NSCC has identified an
exposure to specific wrong-way risk
when it acts as central counterparty to
a Member with respect to positions in
Family-Issued Securities. In the event
that a Member with unsettled long
positions in Family-Issued Securities
defaults, NSCC would close out those
positions following a likely drop in the
credit-worthiness of the issuer, possibly
resulting in a loss to NSCC.
In 2015, NSCC proposed to address its
exposure to specific wrong-way risk in
two ways.8 First, NSCC proposed to
apply the FIS Charge to its Members
that are rated a 5, 6, or 7 on the CRRM
(i.e., Members on the Watch List).9
7 See Principles for financial market
infrastructures, issued by the Committee on
Payment and Settlement Systems and the Technical
Committee of the International Organization of
Securities Commissions 47 n.65 (April 2012),
available at https://www.bis.org/publ/cpss101a.pdf.
8 See Securities Exchange Act Release No. 76077
(October 5, 2015), 80 FR 61256 (October 9, 2015),
(SR–NSCC–2015–003) (‘‘FIS Phase 1 Rule Change’’).
9 As part of its ongoing monitoring of its
membership, NSCC utilizes the CRRM to rate its
risk exposures to its Members based on a scale from
1 (the strongest) to 7 (the weakest). Members that
fall within the higher risk rating categories (i.e., 5,
6, and 7) are placed on NSCC’s ‘‘Watch List,’’ and
may be subject to enhanced surveillance or
additional margin charges, as permitted under the
Rules. See Rule 2B, Section 4 and Procedure XV,
Section I.(B)(1) of the Rules, supra note 4. See also
Securities Exchange Act Release No. 80734 (May
19, 2017), 82 FR 24174 (May 25, 2017), (SR–DTC–
2017–002, SR–FICC–2017–006, SR–NSCC–2017–
E:\FR\FM\08AUN1.SGM
Continued
08AUN1
Agencies
[Federal Register Volume 82, Number 151 (Tuesday, August 8, 2017)]
[Notices]
[Pages 37138-37141]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16639]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81293; File No. SR-Phlx-2017-04]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Order Granting
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and
2, To Permit the Listing and Trading of P.M.-Settled NASDAQ-100
Index[supreg] Options on a Pilot Basis
August 2, 2017.
I. Introduction
On January 18, 2017, NASDAQ PHLX LLC (``Phlx'' or ``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
permit the listing and trading of P.M.-settled NASDAQ-100 Index[supreg]
(``NASDAQ-100'') options on a pilot basis. The proposed rule change was
published for comment in the Federal Register on February 3, 2017.\3\
On March 14, 2017, the Commission extended the time period within which
to approve the proposed rule change, disapprove the proposed rule
change, or institute proceedings to determine whether to disapprove the
proposed rule change.\4\ On May 2, 2017, the Exchange filed Amendment
No. 1 to the proposed rule change.\5\ On May 3, 2017, the Commission
instituted proceedings under Section 19(b)(2)(B) of the Act \6\ to
determine whether to approve or disapprove the proposed rule change, as
modified by Amendment No. 1.\7\ On July 25, 2017, the Exchange filed
Amendment No. 2 to the proposed rule change.\8\ The Commission received
three comment letters on the proposed rule change, including two from
the Exchange.\9\ The Commission is approving the proposed rule change,
as modified by Amendment Nos. 1 and 2, subject to a pilot period set to
end on the earlier of: (1) Twelve months following the date of the
first listing of the options; or (2) December 29, 2018.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 79894 (January 30,
2017), 82 FR 9259 (``Notice'').
\4\ See Securities Exchange Act Release No. 80241, 82 FR 14393
(March 20, 2017).
\5\ In Amendment No. 1, the Exchange revised its proposal to add
that raw percentage price change data as well as percentage price
change data normalized for prevailing market volatility, as measured
by an appropriate index as agreed by the Commission and the
Exchange, would be provided as part of the pilot data. When the
Exchange filed Amendment No. 1 with the Commission, it also
submitted Amendment No. 1 to the public comment file for SR-Phlx-
2017-04 (available at: www.sec.gov/comments/sr-phlx-2017-04/phlx201704.htm).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 80581, 82 FR 21587
(May 9, 2017) (``Order Instituting Proceedings'').
\8\ In Amendment No. 2, the Exchange revised the proposed
duration of the pilot program such that the pilot would terminate on
the earlier of: (i) Twelve months following the date of the first
listing of the options; or (ii) December 29, 2018. When the Exchange
filed Amendment No. 2 with the Commission, it also submitted
Amendment No. 2 to the public comment file for SR-Phlx-2017-04
(available at: www.sec.gov/comments/sr-phlx-2017-04/phlx201704.htm).
Because Amendment No. 2 does not materially alter the substance of
the proposed rule change or raise unique or novel regulatory issues,
it is not subject to notice and comment.
\9\ See Letters to Brent J. Fields, Secretary, Commission, from
Laura G. Dickman, Lead Counsel, Chicago Board Options Exchange,
Incorporated (``CBOE''), dated May 30, 2017 (``CBOE Letter'');
Jeffrey S. Davis, Vice President and Deputy General Counsel, NASDAQ
PHLX LLC, dated June 12, 2017 (``Phlx Letter I''); and Jeffrey S.
Davis, Vice President and Deputy General Counsel, NASDAQ PHLX LLC,
dated June 29, 2017 (``Phlx Letter II'').
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II. Description of the Proposal, as Modified by Amendment Nos. 1 and 2
The Exchange is proposing to amend its rules to permit the listing
and trading, on a pilot basis, of NASDAQ-100 options with third-Friday-
of-the-month expiration dates, whose exercise settlement value will be
based on the closing index value, symbol XQC, of the NASDAQ-100 on the
expiration day (``P.M.-settled'').
The Exchange represents that the conditions for listing the
proposed contract (``NDXPM'') on Phlx will be similar to those for Full
Value Nasdaq 100 Options (``NDX''), which are already listed and
trading on Phlx, except that NDXPM will be P.M.-settled.\10\ In
particular, NDXPM will use a $100 multiplier, and the minimum trading
[[Page 37139]]
increment will be $0.05 for options trading below $3.00 and $0.10 for
all other series. Strike price intervals will be set at no less than
$5.00. Consistent with existing rules for index options, the Exchange
will allow up to nine near-term expiration months, as well as LEAPS.
The product will have European-style exercise and will not be subject
to position limits, though there would be enhanced reporting
requirements.\11\
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\10\ See Notice, supra note 3, at 9260.
\11\ For a more detailed description of the proposed NDXPM
contract, see Notice, supra note 3.
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As proposed, NDXPM would become subject to a pilot for a period
that would end on the earlier of: (i) Twelve months following the date
of the first listing of NDXPM; or (ii) December 29, 2018 (``Pilot
Program''). If the Exchange were to propose an extension of the Pilot
Program or should the Exchange propose to make the Pilot Program
permanent, then the Exchange would submit a filing proposing such
amendments to the Pilot Program. The Exchange notes that any positions
established under the pilot would not be impacted by the expiration of
the pilot. For example, a position in a P.M.-settled series that
expires beyond the conclusion of the pilot period could be established
during the pilot. If the Pilot Program were not extended, then the
position could continue to exist. However, the Exchange notes that any
further trading in the series would be restricted to transactions where
at least one side of the trade is a closing transaction.
The Exchange proposes to submit a Pilot Program report to
Commission at least two months prior to the expiration date of the
Pilot Program (the ``annual report''). The annual report would contain
an analysis of volume, open interest, and trading patterns. The
analysis would examine trading in the proposed option product as well
as trading in the securities that comprise the NASDAQ-100. In addition,
for series that exceed certain minimum open interest parameters, the
annual report would provide analysis of index price volatility and
share trading activity. In addition to the annual 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 annual report. The annual report would be
provided to the Commission on a confidential basis. The annual report
would contain the following volume and open interest data:
(1) Monthly volume aggregated for all trades;
(2) monthly volume aggregated by expiration date;
(3) monthly volume for each individual series;
(4) month-end open interest aggregated for all series;
(5) month-end open interest for all series aggregated by expiration
date; and
(6) month-end open interest for each individual series.
In addition to the annual report, the Exchange would provide the
Commission with interim reports of the information listed in Items (1)
through (6) above periodically as required by the Commission while the
Pilot Program is in effect. These interim reports would also be
provided on a confidential basis. The annual report would also contain
the information noted in Items (1) through (6) above for Expiration
Friday, A.M.-settled NASDAQ-100 options traded on Phlx.
In addition, the annual report would contain the following analysis
of trading patterns in Expiration Friday, P.M.-settled NASDAQ-100
option series in the Pilot Program: (1) A time series analysis of open
interest; and (2) an analysis of the distribution of trade sizes. Also,
for series that exceed certain minimum parameters, the annual report
would contain the following analysis related to index price changes and
underlying share trading volume at the close on Expiration Fridays: A
comparison of index price changes at the close of trading on a given
Expiration Friday with comparable price changes from a control sample.
The data would include a calculation of percentage price changes for
various time intervals and compare that information to the respective
control sample. Raw percentage price change data as well as percentage
price change data normalized for prevailing market volatility, as
measured by an appropriate index as agreed by the Commission and the
Exchange, would be provided. The Exchange would provide a calculation
of share volume for a sample set of the component securities
representing an upper limit on share trading that could be attributable
to expiring in-the-money series. The data would include a comparison of
the calculated share volume for securities in the sample set to the
average daily trading volumes of those securities over a sample period.
The minimum open interest parameters, control sample, time intervals,
method for randomly selecting the component securities, and sample
periods would be determined by the Exchange and the Commission.\12\
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\12\ See Notice, supra note 3, at 9261 and Amendment No. 1. The
proposed Pilot Program for NDXPM options is similar to the pilot
program approved for the listing and trading of P.M.-settled S&P 500
Index options (``SPXPM options''). See Securities Exchange Act
Release No. 64011 (March 2, 2011), 76 FR 12775, 12776-77 (March 8,
2011).
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III. Summary of Comments
As noted above, the Commission received three comment letters on
the proposed rule change, including two letters from the Exchange.\13\
In its letter, CBOE expresses support for Phlx's proposal, stating that
NDXPM would not present any novel issues not considered in connection
with SPXPM options.\14\ CBOE further states that many of the concerns
regarding P.M. settlement have been mitigated over time, and believes
the availability of additional P.M.-settled options would enhance
transparency, price discovery, and liquidity by moving these products
from the over-the-counter market to an exchange environment.\15\ In
support of its position, CBOE states that it has not observed any
adverse effects or impact on market volatility and the operation of
fair and orderly markets on the underlying cash market at or near the
close of trading in its SPXPM options.\16\
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\13\ See supra note 9.
\14\ See CBOE Letter at 2.
\15\ See id.
\16\ See id. In its letter, CBOE further proposes that the
Commission approve pilot programs for a set period of time, such as
three years, after which the respective pilot may become permanent
or, if the Commission finds that the pilot resulted in adverse
effects to the market, conclude. See id. at 3. The Commission notes
that this comment is beyond the scope of the specific proposed rule
change under consideration.
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In its first comment letter, the Exchange notes that its proposal
is largely based on CBOE's pilot program for SPXPM options.\17\ In
response to a request from Commission staff that any pilot data be made
public, the Exchange states that, although it is willing to participate
in further discussion with the Commission, CBOE, and other exchanges
about the possibility of making public the data under its Pilot Program
and other similar pilots, the Exchange does not believe it should be
required to make its Pilot Program reports public absent the
development of a uniform and transparent approach regarding pilot
reports and other associated materials to similar proposed rule
changes, such as the SPXPM options pilot.\18\ Therefore, the Exchange
maintains that any reports in connection with its Pilot Program will be
submitted
[[Page 37140]]
to the Commission on a confidential basis.\19\
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\17\ See Phlx Letter I at 1.
\18\ See id. at 2.
\19\ See id.
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In its second comment letter, the Exchange responds to the Order
Instituting Proceedings and states that it does not expect any
significant impact on trading in the underlying securities of NDXPM
given the similarity to SPXPM options that are currently trading.\20\
The Exchange believes that the changes in the operation and structure
of the options markets over time, in conjunction with the proposed
NDXPM Pilot Program's similarity to the SPXPM options pilot and its
lack of novel issues, further support permitting trading in NDXPM on a
pilot basis.\21\ The Exchange further states that it expects the data
to be provided under the NDXPM Pilot Program should be similar to data
submitted in connection with the SPXPM options pilot, with the
exception of the index to be used to normalize the pilot data for
prevailing market volatility, for which the Exchange proposes to work
with the Commission to identify an index it believes would be more
suitable to the NDXPM Pilot Program.\22\ The Exchange also reiterated
its belief that the proposal could benefit investors to the extent it
attracts trading from opaque over-the-counter markets to an exchange-
listed market and could offer investors additional flexibility.\23\
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\20\ See Phlx Letter II at 2-4.
\21\ See id. at 4-5.
\22\ See id. at 5-6.
\23\ See id. at 7.
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IV. Discussion and Commission Findings
After careful consideration of the proposal, 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,\24\ and, in particular, the requirements
of Section 6 of the Act.\25\ Specifically, the Commission finds that
the proposed rule change is consistent with Section 6(b)(5) of the
Act,\26\ which requires that an exchange have rules designed to remove
impediments to and perfect the mechanism of a free and open market and
to protect investors and the public interest, to allow Phlx to conduct
a limited, and carefully monitored, pilot as proposed.
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\24\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\25\ 15 U.S.C. 78f.
\26\ 15 U.S.C. 78f(b)(5).
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As noted in the Order Instituting Proceedings, the Commission has
had concerns about the potential adverse effects and impact of P.M.
settlement upon market volatility and the operation of fair and orderly
markets on the underlying cash market at or near the close of trading,
including for cash-settled derivatives contracts based on a broad-based
index.\27\ In particular, the Commission sought input from commenters
to inform its evaluation of whether P.M.-settled, cash-settled index
options such as NDXPM could impact volume and volatility on the
underlying cash equities markets at the close of the trading day, and
the potential consequences this might have for investors and the
overall stability of the markets.\28\ The potential impact today
remains unclear, given the significant changes in the closing
procedures of the primary markets in recent decades. The Commission is
mindful of the historical experience with the impact of P.M. settlement
of cash-settled index derivatives on the underlying cash markets, but
recognizes that these risks may be mitigated today by the enhanced
closing procedures that are now in use at the primary equity markets.
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\27\ See Order Instituting Proceedings, supra note 7, at 21589.
See also Securities Exchange Act Release Nos. 64599 (June 3, 2011),
76 FR 33798, 33801-02 (June 9, 2011) (order instituting proceedings
to determine whether to approve or disapprove a proposed rule change
to allow the listing and trading of SPXPM options); 65256 (September
2, 2011), 76 FR 55969, 55970-76 (September 9, 2011) (order approving
proposed rule change to establish a pilot program to list and trade
SPXPM options); and 68888 (February 8, 2013), 78 FR 10668, 10669
(February 14, 2013) (order approving the listing and trading of
SPXPM on CBOE).
\28\ See Order Instituting Proceedings, supra note 7, at 21589.
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For the reasons described below, the Commission believes that
Phlx's proposed NDXPM Pilot Program is designed to mitigate concerns
regarding P.M. settlement and will provide additional trading
opportunities for investors while providing the Commission with data to
monitor the effects of NDXPM and the impact of P.M. settlement on the
markets. To assist the Commission in assessing any potential impact of
a P.M.-settled NASDAQ-100 index option on the options markets as well
as the underlying cash equities markets, Phlx will be required to
submit data to the Commission in connection with the Pilot Program. The
Commission believes that Phlx's proposed Pilot Program, together with
the data and analysis that Phlx will provide to the Commission, will
allow Phlx and the Commission to monitor for and assess any potential
for adverse market effects of allowing P.M. settlement for Nasdaq-100
index options, including on the underlying component stocks. In
particular, the data collected from Phlx's NDXPM Pilot Program will
help inform the Commission's consideration of whether the Pilot Program
should be modified, discontinued, extended, or permanently approved.
Furthermore, the Exchange's ongoing analysis of the Pilot Program
should help it monitor any potential risks from large P.M.-settled
positions and take appropriate action on a timely basis if warranted.
The Exchange represents that it has adequate surveillance
procedures to monitor trading in these options thereby helping to
ensure the maintenance of a fair and orderly market, and has
represented that it has sufficient capacity to handle additional
traffic associated with this new listing.\29\
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\29\ See Notice, supra note 3, at 9261. In addition, the
Commission notes that Phlx would have access to information through
its membership in the Intermarket Surveillance Group with respect to
the trading of the securities underlying the Nasdaq-100 index, as
well as tools such as large options positions reports to assist its
surveillance of NDXPM options. In approving the proposed rule
change, the Commission also has relied upon the Exchange's
representation that it has the necessary systems capacity to support
new options series that will result from this proposal. See id.
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For the reasons discussed above, the Commission finds that Phlx's
proposal is consistent with the Act, including Section 6(b)(5) thereof,
in that it is designed to remove impediments to and perfect the
mechanism of a free and open market, and, in general, to protect
investors and the public interest. In light of the enhanced closing
procedures at the underlying markets and the potential benefits to
investors discussed by the Exchange in the Notice,\30\ the Commission
finds that it is appropriate and consistent with the Act to approve
Phlx's proposal on a pilot basis. The collection of data during the
Pilot Program and Phlx's active monitoring of any effects of NDXPM on
the markets will help Phlx and the Commission assess any impact of P.M.
settlement in today's market.
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\30\ See id. at 9262.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\31\ that the proposed rule change (SR-Phlx-2017-04), as modified
by Amendment Nos. 1 and 2, be, and hereby is, approved, subject to a
pilot period set to expire on the earlier of: (1) Twelve months
following the date of the first listing of NDXPM; or (2) December 29,
2018.
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\31\ 15 U.S.C. 78s(b)(2).
[[Page 37141]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-16639 Filed 8-7-17; 8:45 am]
BILLING CODE 8011-01-P