Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Proposed Rule Change To Permit the Listing and Trading of NQX Index Options, 61090-61094 [2017-27699]
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Federal Register / Vol. 82, No. 246 / Tuesday, December 26, 2017 / Notices
19b 4(f)(6) thereunder.8 Because the
proposed rule change does not: (i)
Significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
prior to 30 days from the date on which
it was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act and Rule 19b–4(f)(6)(iii)
thereunder.
A proposed rule change filed under
Rule 19b–4(f)(6) 9 normally does not
become operative prior to 30 days after
the date of the filing.10 However,
pursuant to Rule 19b–4(f)(6)(iii),11 the
Commission may designate a shorter
time if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposal may
become operative immediately upon
filing. The Commission believes that
waiving the 30-day operative delay is
consistent with the protection of
investors and the public interest
because doing so will allow the Pilot
Program to continue without
interruption in a manner that is
consistent with the Commission’s prior
approval of the extension and expansion
of the Pilot Program and will allow the
Exchange and the Commission
additional time to analyze the impact of
the Pilot Program. Accordingly, the
Commission designates the proposed
rule change as operative upon filing
with the Commission.12
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
8 17
CFR 240.19b–4(f)(6).
CFR 240.19b–4(f)(6).
10 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires the Exchange to give the
Commission written notice of the Exchange’s intent
to file the proposed rule change along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission. The
Exchange has satisfied this pre-filing requirement.
11 17 CFR 240.19b–4(f)(6)(iii).
12 For purposes only of waiving the operative
delay for this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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under Section 19(b)(2)(B) 13 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
GEMX–2017–57 on the subject line.
should be submitted on or before
January 16, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–27696 Filed 12–22–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82362; File No. SR–ISE–
2017–106]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing of Proposed
Rule Change To Permit the Listing and
Trading of NQX Index Options
December 19, 2017.
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–GEMX–2017–57. 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 website (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 website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–GEMX–2017–57 and
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
6, 2017, Nasdaq ISE, LLC (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to permit the
listing and trading of options based on
1⁄5 the value of the Nasdaq-100 Index
(‘‘Nasdaq-100’’) on a twelve month pilot
basis.
The text of the proposed rule change
is available on the Exchange’s website at
https://ise.cchwallstreet.com/, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
14 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
13 15
PO 00000
U.S.C. 78s(b)(2)(B).
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forth in sections A, B, and C below, of
the most significant aspects of such
statements.
II. NQX Options Contract
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to amend the Exchange’s rules
to permit the listing and trading of
index options on the Nasdaq 100
Reduced Value Index (‘‘NQX’’) on a
twelve month pilot basis. The NQX
options contract will be the same in all
respects as the current Nasdaq-100
(‘‘NDX’’) options contract listed on the
Exchange,3 except that it will be based
on 1⁄5 of the value of the Nasdaq-100,
and will be P.M.-settled with an
exercise settlement value based on the
closing index value of the Nasdaq-100
on the day of expiration.4 The Exchange
believes that the proposed contract will
be valuable for retail and other investors
that wish to trade reduce value options
on the Nasdaq-100, or who wish to
hedge positions in the related E-mini
Nasdaq 100 (‘‘NQ’’) futures contract,
which is also based on 1⁄5 the value of
the Nasdaq-100.
I. Nasdaq-100 Index
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The Nasdaq-100 is a modified market
capitalization-weighted index that
includes 100 of the largest non-financial
companies listed on The Nasdaq Stock
Market (‘‘Nasdaq’’),5 based on market
capitalization.6 It does not contain
securities of financial companies,
including investment companies.
Security types generally eligible for the
Nasdaq-100 include common stocks,
ordinary shares, American Depository
Receipts, and tracking stocks. Security
or company types not included in the
Nasdaq-100 are closed-end funds,
convertible debentures, exchange traded
funds, limited liability companies,
limited partnership interests, preferred
stocks, rights, shares or units of
beneficial interest, warrants, units and
other derivative securities.7
3 See Securities Exchange Act Release No. 51121
(February 1, 2005), 70 FR 6476 (February 7, 2005)
(SR–ISE–2005–01) (Approval Order).
4 In addition to the current Nasdaq-100 index
value, Nasdaq will disseminate an index value for
NQX that is 1⁄5 of the value of the Nasdaq-100.
5 Nasdaq is an affiliate of the Exchange.
6 The Nasdaq-100 is a broad-based index, as
defined in Rule 2001(k).
7 A description of the Nasdaq-100 is available on
Nasdaq’s website at https://
indexes.nasdaqomx.com/docs/methodology_
NDX.pdf.
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Currently, the Exchange lists and
trades NDX options that are based on
the full value of the Nasdaq-100. In an
effort to attract additional interest in
index options based on the Nasdaq-100,
the Exchange now proposes to list and
trade a new reduced value option
contract based on this index on a twelve
month pilot basis. NQX options will
trade independently of and in addition
to NDX options, and the NQX options
will be subject to the same rules that
presently govern the trading of index
options based on the Nasdaq-100,
including sales practice rules, margin
requirements, trading rules, and
position and exercise limits. Similar to
NDX, NQX options will be Europeanstyle and cash-settled, and will have a
contract multiplier of 100. The contract
specifications for NQX options will
mirror in all respects those of the NDX
options contract already listed on the
Exchange, except that the Exchange
proposes that NQX options will be
based on 1⁄5 of the value of the Nasdaq100, and will be P.M.-settled pursuant
to proposed Rule 2009(a)(6). Similar
features are available with other index
options contracts listed and/or approved
for trading on the Exchange and other
options exchanges, including the
Exchange’s affiliate, Nasdaq Phlx
(‘‘Phlx’’). Specifically, options contracts
based on 1/10 the value of the Nasdaq100, i.e., ‘‘MNX’’ options, are listed on
the Exchange with limited strikes, and
are also currently listed on Phlx and the
Chicago Board Options Exchange
(‘‘CBOE’’). In addition, Phlx recently
received approval to trade P.M.-settled
options on the full value of the Nasdaq100 (‘‘NDXPM’’).8
The value of the Nasdaq-100 has
increased significantly in recent years
such that the value of the index stood
at 6,242.47, as of the opening of trading
on December 5, 2017. As a result of the
increase in the value of the underlying
Nasdaq-100 index, the premium for
NDX options has also increased. The
Exchange believes that this has caused
NDX options to trade at a level that may
be uncomfortably high for certain retail
and other investors. The Exchange
believes that listing options on reduced
values will attract a greater source of
retail customer business. The Exchange
further believes that listing options on
reduced values will provide an
opportunity for investors to trade and
hedge the market risk associated with
the Nasdaq-100.
8 See
Securities Exchange Act Release No. 81293
(August 2, 2017), 82 FR 37138 (August 8, 2017)
(SR–Phlx–2017–04) (Approval Order).
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61091
With an exercise settlement value
based on 1⁄5 of the Nasdaq-100, the
Exchange believes that retail and other
investors would be able to use this
trading vehicle while extending a
smaller outlay of capital. Furthermore,
the proposed reduced value index will
have a notional value at a level that is
comparable to similar products that
have been successful in the market,
including the S&P 500, which had an
index value of 2,639.78 as of the
opening of trading on December 5, 2017,
and the Russell 2000, which had an
index value of 1,532.72 as of the
opening of trading on that date. Finally,
options based on 1⁄5 of the value of the
Nasdaq-100 will be a particularly useful
hedge, as NQ futures are similarly based
on the value of 1⁄5 of the value of the
Nasdaq-100. The Exchange therefore
believes that basing the proposed NQX
options contract on 1⁄5 of the value of
the Nasdaq-100 should attract
additional investors, and, in turn, create
a more active and liquid trading
environment.
NQX options will also be P.M.-settled
as the Exchange believes that market
participants, and in particular, retail
investors, who are the target audience
for this product, prefer P.M.-settled
index options. P.M.-settlement is
preferred by retail investors as it allows
market participants to hedge their
exposure for the full week. A.M.-settled
options by contrast are based on
opening prices on the day of expiration
and therefore stop trading on the day
prior, leaving residual risk on the day of
expiration. Feedback from members that
handle retail order flow has indicated
that P.M.-settlement is needed to garner
retail investor support for this product.
In this regard, the Exchange notes that
there is ample precedent for P.M.settlement of broad-based index options.
As described above, the Exchange’s
affiliate, Phlx, recently received
approval to list NDXPM options. In
addition, CBOE offers P.M.-settled index
options based on both the Standard &
Poor’s 500 index (‘‘SPXW’’),9 and the
Standard & Poor’s 100 index (‘‘OEX’’).10
The Exchange does not believe that
the introduction of a new P.M.-settled
Nasdaq-100 contract will cause any
market disruptions. Similar to other
P.M.-settled index option products, the
Exchange is proposing to list and trade
NQX options contracts pursuant to a
pilot, and will provide data to the
Commission during the pilot period as
described in Section VI below. The
9 See Securities Exchange Act Release No. 80060
(February 17, 2017), 82 FR 11673 (February 24,
2017) (SR–CBOE–2016–091) (Approval Order).
10 OEX has been P.M. settled since 1983.
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Exchange will monitor for any
disruptions caused by P.M.-settlement
of the proposed NQX options contract or
the development of any factors that
could cause such disruptions. P.M.settled options predominate in the overthe-counter (‘‘OTC’’) market, and the
Exchange is not aware of any adverse
effects in the OTC market attributable to
the P.M.-settlement feature. The
Exchange is merely proposing to offer a
P.M.-settled product in an exchange
environment, which offers the
additional benefits of added
transparency, price discovery, and
stability.
III. Trading Hours, Minimum
Increments, Expirations and Strike
Prices
NQX options will be available for
trading during the Exchange’s standard
trading hours for index options, i.e.,
from 9:30 a.m. to 4:15 p.m. New York
time,11 with a minimum trading
increment of $0.05 for options trading
below $3.00 and $0.10 for all other
series.12 NQX options will have
monthly expiration dates on the third
Friday of each month (i.e., Expiration
Friday), and the Exchange proposes to
list NQX options in expiration months
consistent with those of other index
option products available on the
Exchange.13 In addition, the Exchange
may list long-term index options series
(‘‘LEAPS’’) that expire from twelve (12)
to sixty (60) months from the date of
issuance.14 NQX options would also be
eligible to be added to the Short Term
Option Series Program (‘‘Weeklies’’)
and/or Quarterly Options Series
Program (‘‘Quarterlies’’) if designated by
the Exchange pursuant to
Supplementary Material .01 or .02 to
Rule 2009, respectively.15
Generally, pursuant to Rule
2009(c)(1), index options listed on the
Exchange are subject to strike price
intervals of no less than $5, provided
that certain classes of index options
(including NDX and MNX) have strike
price intervals of no less than $2.50 if
the strike price is less than $200. The
Exchange proposes to amend Rule
2009(c)(1) to add NQX options to the list
of classes where strike price intervals of
11 See
Rule 2008(a).
Rule 710(a).
13 See Rule 2009(a)(3). Rule 2009(a)(3) currently
provides that the Exchange may list up to six
expiration months in index option contracts at any
one time that may expire at three-month intervals
or in consecutive months. The Exchange intends to
file separately to modify the expiration months
permitted for index option contracts consistent with
Phlx Rule 1101A(b).
14 See Rule 2009(b).
15 The Exchange expects that it will add NQX
options to the Weeklies program.
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12 See
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no less than $2.50 are generally
permitted if the strike price is less than
$200. In addition, Rule 2009(c)(5)
provides finer strike price intervals for
MNX options as these contracts are
based on a reduced value of the Nasdaq100. Specifically, Rule 2009(c)(5)
provides that notwithstanding Rule
2009(c)(1) discussed above, the interval
between strike prices of series of MNX
options will be $1 or greater, subject to
certain conditions. The Exchange
proposes to adopt the same strike price
intervals for NQX options as currently
approved for MNX options. Thus,
notwithstanding Rule 2009(c)(1), the
interval between strike prices of series
of NQX options will be $1 or greater,
subject to the conditions described in
Rule 2009(c)(5), which currently apply
to the listing of strikes in reduced value
MNX contracts. The Exchange will not
list LEAPS on NQX options at intervals
less than $5. If the Exchange determines
to add NQX options to the Weeklies or
Quarterlies programs such options will
be listed with expirations and strike
prices described in Supplementary
Material .01 or .02 to Rule 2009.
IV. Position and Exercise Limits; Margin
As with NDX, in determining
compliance with Rule 2004—i.e.,
Position Limits for Broad-Based Index
Options—there will be no position
limits for broad-based index option
contracts in the NQX class. Although
there will be no position limits for NQX
options, the Exchange proposes to
amend Rule 2004(c) to correctly
describe how positions in reduced-value
options would be aggregated with fullvalue options. Rule 2004(c) provides
that positions in reduced-value index
options shall be aggregated with
positions in full-value indices. In
addition, the rule currently states that
for such purposes, ten reduced-value
contracts shall equal one contract, as
this was consistent with other reducedvalue contracts offered on the
Exchange—i.e., MNX, which is based on
1⁄10 of the value of the Nasdaq-100.
Since the Exchange is proposing to list
a reduced-value NQX contract that is
based on 1⁄5 of the value of the Nasdaq100, the Exchange proposes to amend
this language to state instead that
reduced-value contracts will be counted
consistent with their value (e.g., 5 NQX
reduced-value contracts equal 1 NDX
full-value contract). With this change,
the rule will more accurately reflect
how the Exchange would aggregate
reduced-value and full-value positions
for NQX. In addition, as with NDX,
there would be no exercise limits for
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NQX.16 Finally, the Exchange proposes
to apply broad-based index margin
requirements for the purchase and sale
of NQX options that are the same as
margin requirements currently in place
for NDX options.
V. Surveillance and Capacity
The Exchange represents that it has
sufficient capacity to handle additional
quotations and message traffic
associated with the proposed listing and
trading of NQX options. In addition,
index options are integrated into the
Exchange’s existing surveillance system
architecture and are thus subject to the
relevant surveillance processes. The
Exchange represents that it has adequate
surveillance procedures to monitor
trading in NQX options thereby aiding
in the maintenance of a fair and orderly
market.
VI. Pilot Program Reports
The Exchange proposes to list and
trade NQX options on a pilot basis for
period of twelve months (‘‘Pilot
Program’’). If the Exchange were to
propose an extension of the program or
should the Exchange propose to make
the program permanent, then the
Exchange would submit a filing
proposing such amendments to the
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 an NQX options 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 the 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
16 See Rule 2007(a), which provides that exercise
limits for index options products are equivalent to
the position limits in place for those products.
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reports while the pilot 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:17
(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 is in effect.
These interim reports would also be
provided on a confidential basis.
Finally, the annual report would
contain the following analysis of trading
patterns in Expiration Friday, P.M.settled NQX option series in the pilot:
(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. 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.
17 Based on the data elements to be provided to
the Commission for the NDXPM pilot. See supra
note 7.
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61093
of the Nasdaq-100 will encourage
additional participation by retail and
The Exchange believes that the
proposed rule change is consistent with other investors due to the reduced
Section 6(b) of the Act,18 in general, and capital outlay needed to trade these
furthers the objectives of Section 6(b)(5) options. While the Exchange previously
listed a reduced value MNX contract
of the Act,19 in particular, in that it is
that product never attracted significant
designed to promote just and equitable
trading volume. The Exchange believes
principles of trade, to remove
that basing NQX options on 1⁄5 the value
impediments to and perfect the
of the Nasdaq-100 strikes a more
mechanism of a free and open market
appropriate balance than the MNX
and a national market system, and, in
product that is based on 1⁄10 the value
general to protect investors and the
of this index, as this value is more
public interest. Specifically, the
similar to other competitive index
Exchange believes that the listing and
option products and is also helpful for
trading of a reduced value P.M.-settled
market participants that want to hedge
index option contract based on the
exposure to NQ futures that are
Nasdaq-100 will attract order flow to the similarly based on 1⁄5 the value of the
Exchange, increase the variety of listed
Nasdaq-100.
options, and provide a valuable hedge
Furthermore, based on member
tool to retail and other investors.
feedback, the Exchange believes that
The Exchange believes that the
providing P.M.-settlement will make
proposed rule change will further the
this product more attractive to market
Exchange’s goal of introducing new and participants and help garner additional
innovative products to the marketplace. support for this new index options
Specifically, the Exchange believes that
product. Specifically, the Exchange
NQX options would provide additional
believes that P.M.-settlement will be
opportunities for market participants to
attractive to retail and other investors
trade and hedge exposure to the Nasdaq- that want to use these options to hedge
100. The proposed NQ [sic] options
an entire week of risk without leaving
product is similar to NDX options that
residual risk on the day of expiration,
are currently listed and traded on the
and without having to actively manage
Exchange with two important
these positions, for example, by rolling
differences: (1) NQX options will be
their hedge into the next expiration. For
based on 1⁄5 the value of the Nasdaq-100, this reason, other popular index option
and (2) NQX options will be P.M.products have been transitioning to
settled. These differences are based on
P.M.-settlement. For example, due to
the Exchanges experience listing NDX
market demand for P.M.-settlement,
options, and are designed to attract
CBOE recently transitioned its heavily
additional participation from retail and
traded SPX index options to P.M.other investors. Based on feedback
settlement, and removed related A.M.received from members, the Exchange
settled products.20 The Exchange
believes that the proposed contract
believes that market participants
specifications will be attractive to
similarly desire P.M.-settlement for
market participants, and will remove
index options on the Nasdaq-100, and
impediments to and perfect the
proposes to offer such a product so that
mechanism of a free and open market
it can compete effectively with similar
and a national market system.
index option products offered by CBOE.
When cash-settled index options were
Currently, the Exchange believes that
first introduced in the 1980s, they
there is unmet market demand for
generally utilized closing-price
exchange-listed index options on the
settlement procedures (i.e., P.M.Nasdaq-100. This unmet demand stems
settlement). Due to concerns raised by
in part from the high value of the
the Commission on the impact of P.M.Nasdaq-100 and the consequently
settlement on market volatility and the
higher cost of purchasing NDX options.
operation of fair and orderly markets on
The value of the Nasdaq-100 was
6,242.47, as of the opening of trading on the underlying cash market at or near
the close of trading on expiration day,
December 5, 2017, and this high value
however, exchanges moved to A.M.has made it more difficult for retail and
other investors to comfortably purchase settlement for these products. As
discussed in the recent approval of the
options on the index. The Exchange
NDXPM product,21 however, the
believes that a reduced value index
Commission has recognized that these
option would allow additional
risks may be mitigated today by the
participation from these investors.
enhanced closing procedures that are
Specifically, the Exchange believes that
now employed by the primary equity
basing the contract on a reduced value
2. Statutory Basis
18 15
19 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00146
Fmt 4703
20 See
21 See
Sfmt 4703
E:\FR\FM\26DEN1.SGM
CBOE Regulatory Circular RG10–112.
supra note 7.
26DEN1
61094
Federal Register / Vol. 82, No. 246 / Tuesday, December 26, 2017 / Notices
ethrower on DSK3G9T082PROD with NOTICES
markets. The Exchange believes that the
concerns that led to the transition to
A.M.-settlement for index derivatives
have been largely mitigated today.
Opening procedures in the 1990s were
deemed acceptable to mitigate one-sided
order flow driven by index option
expiration. Nasdaq now has an
automated closing cross that that
facilitates orderly closings by
aggregating a large pool of liquidity,
across a variety of order types, in a
single venue. The Exchange believes
that Nasdaq’s closing procedures are
well-equipped to mitigate imbalance
pressure at the close. Furthermore, the
Exchange believes that the proposed
Pilot Program is designed to mitigate
any potential concerns regarding P.M.
settlement. Specifically, the Exchange
believes that the Pilot Program will
provide additional trading and hedging
opportunities for investors while
providing the Commission with data to
monitor for and assess any potential for
adverse market effects of allowing P.M.settlement for NQX options, including
on the underlying component stocks.
Finally, NQX options will be subject
to the same rules that presently govern
the trading of index options based on
the Nasdaq-100, including sales practice
rules, margin requirements, trading
rules, and position and exercise limits.
The Exchange therefore believes that the
rules applicable to trading in NQX
options are consistent with the
protection of investors and the public
interest. Furthermore, the Exchange
represents that it has sufficient systems
capacity and adequate surveillance
procedures to handle trading in NQX
options.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. NQX options
would be available for trading to all
market participants. The proposed rule
change will facilitate the listing and
trading of a new option product that
will enhance competition among market
participants, to the benefit of investors
and the marketplace. The listing of NQX
will enhance competition by providing
investors with an additional investment
vehicle, in a fully-electronic trading
environment, through which investors
can gain and hedge exposure to the
Nasdaq-100. Furthermore, this product
could offer a competitive alternative to
other existing investment products that
seek to allow investors to gain broad
market exposure. Finally, it is possible
for other exchanges to develop or
VerDate Sep<11>2014
20:21 Dec 22, 2017
Jkt 244001
license the use of a new or different
index to compete with the Nasdaq-100
and seek Commission approval to list
and trade options on such an index.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–ISE–2017–106 and should
be submitted on or before January 16,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Eduardo A. Aleman,
Assistant Secretary.
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:
[FR Doc. 2017–27699 Filed 12–22–17; 8:45 am]
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–
ISE–2017–106 on the subject line.
FQF Trust, et al.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE, Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ISE–2017–106. 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 website (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
PO 00000
Frm 00147
Fmt 4703
Sfmt 4703
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
32942; 812–14742]
December 19, 2017.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
AGENCY:
Notice of an application for an order
under section 6(c) of the Investment
Company Act of 1940 (the ‘‘Act’’) for an
exemption from sections 2(a)(32),
5(a)(1), 22(d), and 22(e) of the Act and
rule 22c–1 under the Act, under
sections 6(c) and 17(b) of the Act for an
exemption from sections 17(a)(1) and
17(a)(2) of the Act, and under section
12(d)(1)(J) for an exemption from
sections 12(d)(1)(A) and 12(d)(1)(B) of
the Act. The requested order would
permit (a) actively-managed series of
certain open-end management
investment companies (‘‘Funds’’) to
issue shares redeemable in large
aggregations only (‘‘Creation Units’’); (b)
secondary market transactions in Fund
shares to occur at negotiated market
prices rather than at net asset value
(‘‘NAV’’); (c) certain Funds to pay
redemption proceeds, under certain
circumstances, more than seven days
22 17
E:\FR\FM\26DEN1.SGM
CFR 200.30–3(a)(12).
26DEN1
Agencies
[Federal Register Volume 82, Number 246 (Tuesday, December 26, 2017)]
[Notices]
[Pages 61090-61094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27699]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82362; File No. SR-ISE-2017-106]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
of Proposed Rule Change To Permit the Listing and Trading of NQX Index
Options
December 19, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 6, 2017, Nasdaq ISE, LLC (``ISE'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to permit the listing and trading of options
based on \1/5\ the value of the Nasdaq-100 Index (``Nasdaq-100'') on a
twelve month pilot basis.
The text of the proposed rule change is available on the Exchange's
website at https://ise.cchwallstreet.com/, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set
[[Page 61091]]
forth in sections A, B, and C below, of the most significant aspects of
such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to amend the Exchange's
rules to permit the listing and trading of index options on the Nasdaq
100 Reduced Value Index (``NQX'') on a twelve month pilot basis. The
NQX options contract will be the same in all respects as the current
Nasdaq-100 (``NDX'') options contract listed on the Exchange,\3\ except
that it will be based on \1/5\ of the value of the Nasdaq-100, and will
be P.M.-settled with an exercise settlement value based on the closing
index value of the Nasdaq-100 on the day of expiration.\4\ The Exchange
believes that the proposed contract will be valuable for retail and
other investors that wish to trade reduce value options on the Nasdaq-
100, or who wish to hedge positions in the related E-mini Nasdaq 100
(``NQ'') futures contract, which is also based on \1/5\ the value of
the Nasdaq-100.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 51121 (February 1,
2005), 70 FR 6476 (February 7, 2005) (SR-ISE-2005-01) (Approval
Order).
\4\ In addition to the current Nasdaq-100 index value, Nasdaq
will disseminate an index value for NQX that is \1/5\ of the value
of the Nasdaq-100.
---------------------------------------------------------------------------
I. Nasdaq-100 Index
The Nasdaq-100 is a modified market capitalization-weighted index
that includes 100 of the largest non-financial companies listed on The
Nasdaq Stock Market (``Nasdaq''),\5\ based on market capitalization.\6\
It does not contain securities of financial companies, including
investment companies. Security types generally eligible for the Nasdaq-
100 include common stocks, ordinary shares, American Depository
Receipts, and tracking stocks. Security or company types not included
in the Nasdaq-100 are closed-end funds, convertible debentures,
exchange traded funds, limited liability companies, limited partnership
interests, preferred stocks, rights, shares or units of beneficial
interest, warrants, units and other derivative securities.\7\
---------------------------------------------------------------------------
\5\ Nasdaq is an affiliate of the Exchange.
\6\ The Nasdaq-100 is a broad-based index, as defined in Rule
2001(k).
\7\ A description of the Nasdaq-100 is available on Nasdaq's
website at https://indexes.nasdaqomx.com/docs/methodology_NDX.pdf.
---------------------------------------------------------------------------
II. NQX Options Contract
Currently, the Exchange lists and trades NDX options that are based
on the full value of the Nasdaq-100. In an effort to attract additional
interest in index options based on the Nasdaq-100, the Exchange now
proposes to list and trade a new reduced value option contract based on
this index on a twelve month pilot basis. NQX options will trade
independently of and in addition to NDX options, and the NQX options
will be subject to the same rules that presently govern the trading of
index options based on the Nasdaq-100, including sales practice rules,
margin requirements, trading rules, and position and exercise limits.
Similar to NDX, NQX options will be European-style and cash-settled,
and will have a contract multiplier of 100. The contract specifications
for NQX options will mirror in all respects those of the NDX options
contract already listed on the Exchange, except that the Exchange
proposes that NQX options will be based on \1/5\ of the value of the
Nasdaq-100, and will be P.M.-settled pursuant to proposed Rule
2009(a)(6). Similar features are available with other index options
contracts listed and/or approved for trading on the Exchange and other
options exchanges, including the Exchange's affiliate, Nasdaq Phlx
(``Phlx''). Specifically, options contracts based on 1/10 the value of
the Nasdaq-100, i.e., ``MNX'' options, are listed on the Exchange with
limited strikes, and are also currently listed on Phlx and the Chicago
Board Options Exchange (``CBOE''). In addition, Phlx recently received
approval to trade P.M.-settled options on the full value of the Nasdaq-
100 (``NDXPM'').\8\
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 81293 (August 2,
2017), 82 FR 37138 (August 8, 2017) (SR-Phlx-2017-04) (Approval
Order).
---------------------------------------------------------------------------
The value of the Nasdaq-100 has increased significantly in recent
years such that the value of the index stood at 6,242.47, as of the
opening of trading on December 5, 2017. As a result of the increase in
the value of the underlying Nasdaq-100 index, the premium for NDX
options has also increased. The Exchange believes that this has caused
NDX options to trade at a level that may be uncomfortably high for
certain retail and other investors. The Exchange believes that listing
options on reduced values will attract a greater source of retail
customer business. The Exchange further believes that listing options
on reduced values will provide an opportunity for investors to trade
and hedge the market risk associated with the Nasdaq-100.
With an exercise settlement value based on \1/5\ of the Nasdaq-100,
the Exchange believes that retail and other investors would be able to
use this trading vehicle while extending a smaller outlay of capital.
Furthermore, the proposed reduced value index will have a notional
value at a level that is comparable to similar products that have been
successful in the market, including the S&P 500, which had an index
value of 2,639.78 as of the opening of trading on December 5, 2017, and
the Russell 2000, which had an index value of 1,532.72 as of the
opening of trading on that date. Finally, options based on \1/5\ of the
value of the Nasdaq-100 will be a particularly useful hedge, as NQ
futures are similarly based on the value of \1/5\ of the value of the
Nasdaq-100. The Exchange therefore believes that basing the proposed
NQX options contract on \1/5\ of the value of the Nasdaq-100 should
attract additional investors, and, in turn, create a more active and
liquid trading environment.
NQX options will also be P.M.-settled as the Exchange believes that
market participants, and in particular, retail investors, who are the
target audience for this product, prefer P.M.-settled index options.
P.M.-settlement is preferred by retail investors as it allows market
participants to hedge their exposure for the full week. A.M.-settled
options by contrast are based on opening prices on the day of
expiration and therefore stop trading on the day prior, leaving
residual risk on the day of expiration. Feedback from members that
handle retail order flow has indicated that P.M.-settlement is needed
to garner retail investor support for this product. In this regard, the
Exchange notes that there is ample precedent for P.M.-settlement of
broad-based index options. As described above, the Exchange's
affiliate, Phlx, recently received approval to list NDXPM options. In
addition, CBOE offers P.M.-settled index options based on both the
Standard & Poor's 500 index (``SPXW''),\9\ and the Standard & Poor's
100 index (``OEX'').\10\
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 80060 (February 17,
2017), 82 FR 11673 (February 24, 2017) (SR-CBOE-2016-091) (Approval
Order).
\10\ OEX has been P.M. settled since 1983.
---------------------------------------------------------------------------
The Exchange does not believe that the introduction of a new P.M.-
settled Nasdaq-100 contract will cause any market disruptions. Similar
to other P.M.-settled index option products, the Exchange is proposing
to list and trade NQX options contracts pursuant to a pilot, and will
provide data to the Commission during the pilot period as described in
Section VI below. The
[[Page 61092]]
Exchange will monitor for any disruptions caused by P.M.-settlement of
the proposed NQX options contract or the development of any factors
that could cause such disruptions. P.M.-settled options predominate in
the over-the-counter (``OTC'') market, and the Exchange is not aware of
any adverse effects in the OTC market attributable to the P.M.-
settlement feature. The Exchange is merely proposing to offer a P.M.-
settled product in an exchange environment, which offers the additional
benefits of added transparency, price discovery, and stability.
III. Trading Hours, Minimum Increments, Expirations and Strike Prices
NQX options will be available for trading during the Exchange's
standard trading hours for index options, i.e., from 9:30 a.m. to 4:15
p.m. New York time,\11\ with a minimum trading increment of $0.05 for
options trading below $3.00 and $0.10 for all other series.\12\ NQX
options will have monthly expiration dates on the third Friday of each
month (i.e., Expiration Friday), and the Exchange proposes to list NQX
options in expiration months consistent with those of other index
option products available on the Exchange.\13\ In addition, the
Exchange may list long-term index options series (``LEAPS'') that
expire from twelve (12) to sixty (60) months from the date of
issuance.\14\ NQX options would also be eligible to be added to the
Short Term Option Series Program (``Weeklies'') and/or Quarterly
Options Series Program (``Quarterlies'') if designated by the Exchange
pursuant to Supplementary Material .01 or .02 to Rule 2009,
respectively.\15\
---------------------------------------------------------------------------
\11\ See Rule 2008(a).
\12\ See Rule 710(a).
\13\ See Rule 2009(a)(3). Rule 2009(a)(3) currently provides
that the Exchange may list up to six expiration months in index
option contracts at any one time that may expire at three-month
intervals or in consecutive months. The Exchange intends to file
separately to modify the expiration months permitted for index
option contracts consistent with Phlx Rule 1101A(b).
\14\ See Rule 2009(b).
\15\ The Exchange expects that it will add NQX options to the
Weeklies program.
---------------------------------------------------------------------------
Generally, pursuant to Rule 2009(c)(1), index options listed on the
Exchange are subject to strike price intervals of no less than $5,
provided that certain classes of index options (including NDX and MNX)
have strike price intervals of no less than $2.50 if the strike price
is less than $200. The Exchange proposes to amend Rule 2009(c)(1) to
add NQX options to the list of classes where strike price intervals of
no less than $2.50 are generally permitted if the strike price is less
than $200. In addition, Rule 2009(c)(5) provides finer strike price
intervals for MNX options as these contracts are based on a reduced
value of the Nasdaq-100. Specifically, Rule 2009(c)(5) provides that
notwithstanding Rule 2009(c)(1) discussed above, the interval between
strike prices of series of MNX options will be $1 or greater, subject
to certain conditions. The Exchange proposes to adopt the same strike
price intervals for NQX options as currently approved for MNX options.
Thus, notwithstanding Rule 2009(c)(1), the interval between strike
prices of series of NQX options will be $1 or greater, subject to the
conditions described in Rule 2009(c)(5), which currently apply to the
listing of strikes in reduced value MNX contracts. The Exchange will
not list LEAPS on NQX options at intervals less than $5. If the
Exchange determines to add NQX options to the Weeklies or Quarterlies
programs such options will be listed with expirations and strike prices
described in Supplementary Material .01 or .02 to Rule 2009.
IV. Position and Exercise Limits; Margin
As with NDX, in determining compliance with Rule 2004--i.e.,
Position Limits for Broad-Based Index Options--there will be no
position limits for broad-based index option contracts in the NQX
class. Although there will be no position limits for NQX options, the
Exchange proposes to amend Rule 2004(c) to correctly describe how
positions in reduced-value options would be aggregated with full-value
options. Rule 2004(c) provides that positions in reduced-value index
options shall be aggregated with positions in full-value indices. In
addition, the rule currently states that for such purposes, ten
reduced-value contracts shall equal one contract, as this was
consistent with other reduced-value contracts offered on the Exchange--
i.e., MNX, which is based on \1/10\ of the value of the Nasdaq-100.
Since the Exchange is proposing to list a reduced-value NQX contract
that is based on \1/5\ of the value of the Nasdaq-100, the Exchange
proposes to amend this language to state instead that reduced-value
contracts will be counted consistent with their value (e.g., 5 NQX
reduced-value contracts equal 1 NDX full-value contract). With this
change, the rule will more accurately reflect how the Exchange would
aggregate reduced-value and full-value positions for NQX. In addition,
as with NDX, there would be no exercise limits for NQX.\16\ Finally,
the Exchange proposes to apply broad-based index margin requirements
for the purchase and sale of NQX options that are the same as margin
requirements currently in place for NDX options.
---------------------------------------------------------------------------
\16\ See Rule 2007(a), which provides that exercise limits for
index options products are equivalent to the position limits in
place for those products.
---------------------------------------------------------------------------
V. Surveillance and Capacity
The Exchange represents that it has sufficient capacity to handle
additional quotations and message traffic associated with the proposed
listing and trading of NQX options. In addition, index options are
integrated into the Exchange's existing surveillance system
architecture and are thus subject to the relevant surveillance
processes. The Exchange represents that it has adequate surveillance
procedures to monitor trading in NQX options thereby aiding in the
maintenance of a fair and orderly market.
VI. Pilot Program Reports
The Exchange proposes to list and trade NQX options on a pilot
basis for period of twelve months (``Pilot Program''). If the Exchange
were to propose an extension of the program or should the Exchange
propose to make the program permanent, then the Exchange would submit a
filing proposing such amendments to the 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 an NQX options
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 the
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
[[Page 61093]]
reports while the pilot 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:\17\
---------------------------------------------------------------------------
\17\ Based on the data elements to be provided to the Commission
for the NDXPM pilot. See supra note 7.
---------------------------------------------------------------------------
(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 is in effect. These interim reports would also be provided on a
confidential basis.
Finally, the annual report would contain the following analysis of
trading patterns in Expiration Friday, P.M.-settled NQX option series
in the pilot: (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. 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.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\18\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\19\ in particular, in that it
is designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general to protect
investors and the public interest. Specifically, the Exchange believes
that the listing and trading of a reduced value P.M.-settled index
option contract based on the Nasdaq-100 will attract order flow to the
Exchange, increase the variety of listed options, and provide a
valuable hedge tool to retail and other investors.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change will further
the Exchange's goal of introducing new and innovative products to the
marketplace. Specifically, the Exchange believes that NQX options would
provide additional opportunities for market participants to trade and
hedge exposure to the Nasdaq-100. The proposed NQ [sic] options product
is similar to NDX options that are currently listed and traded on the
Exchange with two important differences: (1) NQX options will be based
on \1/5\ the value of the Nasdaq-100, and (2) NQX options will be P.M.-
settled. These differences are based on the Exchanges experience
listing NDX options, and are designed to attract additional
participation from retail and other investors. Based on feedback
received from members, the Exchange believes that the proposed contract
specifications will be attractive to market participants, and will
remove impediments to and perfect the mechanism of a free and open
market and a national market system.
Currently, the Exchange believes that there is unmet market demand
for exchange-listed index options on the Nasdaq-100. This unmet demand
stems in part from the high value of the Nasdaq-100 and the
consequently higher cost of purchasing NDX options. The value of the
Nasdaq-100 was 6,242.47, as of the opening of trading on December 5,
2017, and this high value has made it more difficult for retail and
other investors to comfortably purchase options on the index. The
Exchange believes that a reduced value index option would allow
additional participation from these investors. Specifically, the
Exchange believes that basing the contract on a reduced value of the
Nasdaq-100 will encourage additional participation by retail and other
investors due to the reduced capital outlay needed to trade these
options. While the Exchange previously listed a reduced value MNX
contract that product never attracted significant trading volume. The
Exchange believes that basing NQX options on \1/5\ the value of the
Nasdaq-100 strikes a more appropriate balance than the MNX product that
is based on \1/10\ the value of this index, as this value is more
similar to other competitive index option products and is also helpful
for market participants that want to hedge exposure to NQ futures that
are similarly based on \1/5\ the value of the Nasdaq-100.
Furthermore, based on member feedback, the Exchange believes that
providing P.M.-settlement will make this product more attractive to
market participants and help garner additional support for this new
index options product. Specifically, the Exchange believes that P.M.-
settlement will be attractive to retail and other investors that want
to use these options to hedge an entire week of risk without leaving
residual risk on the day of expiration, and without having to actively
manage these positions, for example, by rolling their hedge into the
next expiration. For this reason, other popular index option products
have been transitioning to P.M.-settlement. For example, due to market
demand for P.M.-settlement, CBOE recently transitioned its heavily
traded SPX index options to P.M.-settlement, and removed related A.M.-
settled products.\20\ The Exchange believes that market participants
similarly desire P.M.-settlement for index options on the Nasdaq-100,
and proposes to offer such a product so that it can compete effectively
with similar index option products offered by CBOE.
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\20\ See CBOE Regulatory Circular RG10-112.
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When cash-settled index options were first introduced in the 1980s,
they generally utilized closing-price settlement procedures (i.e.,
P.M.-settlement). Due to concerns raised by the Commission on the
impact of P.M.-settlement on market volatility and the operation of
fair and orderly markets on the underlying cash market at or near the
close of trading on expiration day, however, exchanges moved to A.M.-
settlement for these products. As discussed in the recent approval of
the NDXPM product,\21\ however, the Commission has recognized that
these risks may be mitigated today by the enhanced closing procedures
that are now employed by the primary equity
[[Page 61094]]
markets. The Exchange believes that the concerns that led to the
transition to A.M.-settlement for index derivatives have been largely
mitigated today. Opening procedures in the 1990s were deemed acceptable
to mitigate one-sided order flow driven by index option expiration.
Nasdaq now has an automated closing cross that that facilitates orderly
closings by aggregating a large pool of liquidity, across a variety of
order types, in a single venue. The Exchange believes that Nasdaq's
closing procedures are well-equipped to mitigate imbalance pressure at
the close. Furthermore, the Exchange believes that the proposed Pilot
Program is designed to mitigate any potential concerns regarding P.M.
settlement. Specifically, the Exchange believes that the Pilot Program
will provide additional trading and hedging opportunities for investors
while providing the Commission with data to monitor for and assess any
potential for adverse market effects of allowing P.M.-settlement for
NQX options, including on the underlying component stocks.
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\21\ See supra note 7.
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Finally, NQX options will be subject to the same rules that
presently govern the trading of index options based on the Nasdaq-100,
including sales practice rules, margin requirements, trading rules, and
position and exercise limits. The Exchange therefore believes that the
rules applicable to trading in NQX options are consistent with the
protection of investors and the public interest. Furthermore, the
Exchange represents that it has sufficient systems capacity and
adequate surveillance procedures to handle trading in NQX options.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. NQX options would be
available for trading to all market participants. The proposed rule
change will facilitate the listing and trading of a new option product
that will enhance competition among market participants, to the benefit
of investors and the marketplace. The listing of NQX will enhance
competition by providing investors with an additional investment
vehicle, in a fully-electronic trading environment, through which
investors can gain and hedge exposure to the Nasdaq-100. Furthermore,
this product could offer a competitive alternative to other existing
investment products that seek to allow investors to gain broad market
exposure. Finally, it is possible for other exchanges to develop or
license the use of a new or different index to compete with the Nasdaq-
100 and seek Commission approval to list and trade options on such an
index.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the 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 [email protected]. Please
include File Number SR-ISE-2017-106 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2017-106. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-ISE-2017-106 and should be submitted on
or before January 16, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27699 Filed 12-22-17; 8:45 am]
BILLING CODE 8011-01-P