Self-Regulatory Organizations; NYSE American LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Allow Flexible Exchange Equity Options Where the Underlying Security Is an Exchange-Traded Fund That Is Included in the Option Penny Pilot To Be Settled in Cash, 66779-66782 [2018-27992]
Download as PDF
<![CDATA[
Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Notices
necessary or appropriate in furtherance
of the purposes of the Act. Specifically,
the Exchange believes that, by extending
the expiration of the Pilot Program, the
proposed rule change will allow for
further analysis of the Penny Pilot
Program and a determination of how the
Program should be structured in the
future. In doing so, the proposed rule
change will also serve to promote
regulatory clarity and consistency,
thereby reducing burdens on the
marketplace, facilitating investor
protection, and fostering a competitive
environment. In addition, consistent
with previous practices, the Exchange
believes the other options exchanges
will be filing similar extensions of the
Penny Pilot Program.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A) of the Act 8 and Rule 19b–
4(f)(6) 9 thereunder. Because the
foregoing proposed rule change does
not: (i) Significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days after the date of
the filing, 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 19(b)(3)(A) of the
Act 10 and Rule 19b–4(f)(6) 11
thereunder.
A proposed rule change filed under
Rule 19b–4(f)(6) 12 normally does not
become operative prior to 30 days after
the date of filing. However, pursuant to
Rule 19b–4(f)(6)(iii),13 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
8 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
10 15 U.S.C. 78s(b)(3)(A).
11 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
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
requirement.
12 17 CFR 240.19b–4(f)(6).
13 17 CFR 240.19b–4(f)(6)(iii).
khammond on DSK30JT082PROD with NOTICES
9 17
VerDate Sep<11>2014
17:14 Dec 26, 2018
Jkt 247001
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.14 Accordingly, the
Commission designates the proposed
rule change as operative upon filing
with the Commission.15
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
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–
MIAX–2018–38 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–MIAX–2018–38. 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).
14 See Securities Exchange Release No. 61061
(November 24, 2009), 74 FR 62857 (December 1,
2009) (SR–NYSEArca–2009–44).
15 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).
PO 00000
Frm 00109
Fmt 4703
Sfmt 4703
66779
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 20549–1090, 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–MIAX–2018–38 and should
be submitted on or before January 17,
2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Brent J. Fields,
Secretary.
[FR Doc. 2018–27998 Filed 12–26–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84870; File No. SR–
NYSEAMER–2018–39]
Self-Regulatory Organizations; NYSE
American LLC; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change To Allow Flexible
Exchange Equity Options Where the
Underlying Security Is an ExchangeTraded Fund That Is Included in the
Option Penny Pilot To Be Settled in
Cash
December 19, 2018.
I. Introduction
On September 20, 2018, NYSE
American LLC (‘‘NYSE American’’ or
the ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
16 17
E:\FR\FM\27DEN1.SGM
CFR 200.30–3(a)(12).
27DEN1
66780
Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Notices
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
modify the rules related to Flexible
Exchange (‘‘FLEX’’) Options to allow
FLEX Equity Options where the
underlying security is an ExchangeTraded Fund (‘‘ETF’’) that is included in
the Option Penny Pilot to be settled in
cash.3 The proposed rule change was
published for comment in the Federal
Register on October 11, 2018.4 On
November 19, 2018, pursuant to Section
19(b(2) of the Act,5 the Commission
designated a longer period within which
to either approve the proposed rule
change, disapprove the proposed rule
change, or institute proceedings to
determine whether to disapprove the
proposed rule change.6 The Commission
received one comment on the proposed
rule change.7 This order institutes
proceedings under Section 19(b)(2)(B) of
the Act8 to determine whether to
approve or disapprove the proposed
rule change.
II. Description of the Proposal and
Comments Received
The Exchange has proposed to amend
NYSE American Rule 903G(c) to allow
for cash settlement for certain FLEX
Equity Options.9 Currently, FLEX
Equity Options settle by physical
delivery of the underlying security.10
The Exchange proposes, in the case of
a FLEX Equity Option whose underlying
security is an ETF that is included in
the Option Penny Pilot 11 (‘‘FLEX ETF
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 For the definitions of ‘‘FLEX Options,’’ ‘‘FLEX
Equity Options,’’ and ‘‘Option Penny Pilot,’’ see
infra notes 9 and 11.
4 See Securities Exchange Act Release No. 84364
(October 4, 2018), 83 FR 51535 (October 11, 2018)
(‘‘Notice’’).
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 82994
(April 4, 2018), 83 FR 15441 (April 10, 2018). The
Commission designated January 9, 2019, as the date
by which it should approve, disapprove, or institute
proceedings to determine whether to disapprove the
proposed rule change.
7 See Letter to Brent J. Fields, Secretary,
Commission, from Samara Cohen, Head of ETF
Global Markets, BlackRock, dated November 27,
2018 (‘‘BlackRock Letter’’).
8 15 U.S.C. 78s(b)(2)(B).
9 A ‘‘FLEX Option’’ is a customized options
contract that is subject to the rules in Section 15,
Flexible Exchange Options. See NYSE American
Rule 900G(b)(1). A ‘‘FLEX Equity Option’’ is an
option on a specified underlying equity security
that is subject to the rules of Section 15. See NYSE
American Rule 900G(b)(10).
10 See NYSE American Rule 903G(c)(3)(i). There
is an exception to physical settlement for settlement
of FLEX Binary Return Derivatives (‘‘ByRDs’’). See
NYSE American Rules 900G(b)(17), 903G(c)(3)(ii),
and 910ByRDs.
11 The ‘‘Option Penny Pilot’’ is a pilot program by
the options exchanges that permits certain option
classes to be quoted in penny or nickel increments
on a pilot basis. See NYSE American Rule 960NY,
khammond on DSK30JT082PROD with NOTICES
2 17
VerDate Sep<11>2014
17:14 Dec 26, 2018
Jkt 247001
Option’’), to allow settlement either by
the delivery of cash or, as currently
permitted under the Exchange rules, by
physical delivery of the underlying
security.12
The Exchange states that it believes
that it is appropriate to introduce cash
settlement as an alternative for FLEX
ETF Options because ETFs generally
have increasingly become a major part
of investors’ portfolios, allowing
investors to take advantage of many
unique opportunities to hedge their
portfolios and manage risk.13 The
Exchange asserts that physical
settlement possess certain risks with
respect to volatility and movement of
the underlying security at expiration
that market participants may need to
hedge against and cash settlement does
not present these same risks.14
The Exchange states that it seeks to
allay concerns about cash-settled equity
options by proposing to adopt cash
settlement as an alternative settlement
method for 64 ETFs that are included in
the Option Penny Pilot.15 The Exchange
adds that generally index options are
cash-settled and derive their value from
a disseminated index price, and that
similarly ETFs typically have their
values linked to a disseminated index
price.16 The Exchange states that the
option classes included in the original
pilot were chosen based on being one of
the most actively-traded multiply-listed
options classes and also states that the
most recent expansion identified the
most-active classes based on the
‘‘underlying security’s ‘national average
daily volume over a six-month
period.’ ’’ 17
Commentary .02. See also Securities Exchange Act
Release No. 55162 (January 24, 2007), 72 FR 4738,
4739 (February 1, 2007) (SR–Amex–2006–106)
(‘‘Option Penny Pilot Approval Order’’). The Option
Penny Pilot is currently set to expire on December
31, 2018. See NYSE American Rule 960NY,
Commentary .02.
12 See proposed NYSE American Rule
903G(c)(3)(ii). The Exchange proposes conforming
changes to NYSE American Rule 903G(c)(3) to
reflect that the proposed rule change would add a
second exception to the general requirement for
physical settlement for FLEX Equity Options. See
proposed NYSE American Rule 903G(c)(3)(i) and
(iii).
13 See Notice, supra note 4, at 51535–36.
14 See id. at 51536. The Exchange also states that
market participants trade cash-settled FLEX ETF
Options in the over-the-counter market and
exchange trading would provide benefits to these
market participants. See id.
15 See id.
16 See id.
17 See id. The Commission notes that the criteria
for qualifying for the Option Penny Pilot is based
on the national average daily volume over a six
month period in the options class itself, not based
on the volume of the underlying ETF. See Securities
Exchange Act Release No. 60711 (September 23,
2009), 74 FR 49419 (September 28, 2009) (SR–
NYSEArca–2009–44) (‘‘Option Penny Pilot
PO 00000
Frm 00110
Fmt 4703
Sfmt 4703
The Exchange states that cash-settled
FLEX ETF Options would be subject to
the same position limits as non-cashsettled FLEX ETF Options (i.e., the
position limits in NYSE American Rule
906G).18 The Exchange represents that it
confirmed with the Options Clearing
Corporation (‘‘OCC’’) that OCC can
support the clearance and settlement of
cash-settled FLEX ETF Options.19 The
Exchange also states that it believes the
Exchange and the Options Price
Reporting Authority (‘‘OPRA’’) have the
necessary systems capacity to handle
the additional traffic associated with the
listing of cash-settled FLEX ETF
Options and that it believes that its
members will not have a capacity issue
as a result of the proposal.20 The
Exchange represents that it does not
believe that the proposed rule change
will cause fragmentation of liquidity.21
The Exchange further represents that it
will monitor the trading volume
associated with the options series listed
as a result of this proposed rule change
and the effect, if any, of these series on
market fragmentation and on the
capacity of the Exchange’s automated
systems.22
The Exchange represents that it will
have an adequate surveillance program
for cash-settled FLEX ETF Options and
states that it intends to use the same
surveillance procedures, including
procedures concerning surveillance for
manipulation, for cash-settled FLEX
ETF Options that it uses for the
Exchange’s other options products.23
The Exchange states that it believes
manipulating the settlement price of
cash-settled FLEX ETF Options would
be difficult because of the size of the
market for such ETFs.24 According to
the Exchange each cash-settled FLEX
ETF Option is sufficiently active so as
to alleviate concerns about the potential
Expansion Order’’) and Securities Exchange Act
Release No. 61106 (December 3, 2009), 74 FR 65193
(December 9, 2009) (NYSEAmex–2009–74) (Option
Penny Pilot Expansion Notice’’).
18 See Notice, supra note 4, at 51536. The
Exchange adds that other existing regulatory
safeguards, such as exercise limits and reporting
requirements, would also continue to apply. See id.
at 51537. The Commission notes that NYSE
American Rule 906G provides generally that there
are no position limits for FLEX Equity Options, but
that positions in FLEX Options that expire on a
third Friday-of-the-month expiration day
(‘‘Expiration Friday’’) will be aggregated with
positions in non-FLEX Options on the same
underlying and subject to the position limits
applicable to such options. See NYSE American
Rule 906G(b).
19 See Notice, supra note 4, at 51536.
20 See id.
21 See id.
22 See id.
23 See id.
24 See id.
E:\FR\FM\27DEN1.SGM
27DEN1
Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Notices
for manipulation.25 The Exchange states
that the vast liquidity of ETF options
and the underlying equities markets and
the high level of participation among
market participants that enter quotes or
orders in ETF options would, according
to the Exchange, make it very difficult
for a single participant to alter the prices
of each security underlying an ETF
without becoming exposed to regulatory
scrutiny and that such attempt at
manipulation would be costprohibitive.26 Moreover, the Exchange
states that it is a member of the
Intermarket Surveillance Group (‘‘ISG’’)
and therefore would have access to
surveillance and investigative
information regarding trading in the
underlying securities.27
The Commission received one
comment letter, which supports the
proposed rule change.28 The commenter
states that it agrees with the Exchange
that the proposal alleviates several
potential challenges associated with
physical settlement and presents
advantages to the end investor. This
commenter asserts that the proposal
would lead to greater standardization of
contract terms, mitigate counterparty
risk, increase price discovery, and
improve information dissemination,
which would lead to greater
transparency.29
khammond on DSK30JT082PROD with NOTICES
III. Proceedings To Determine Whether
To Approve or Disapprove SR–
NYSEAMER–2018–39 and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act to determine
whether the proposal should be
approved or disapproved.30 Institution
of such proceedings is appropriate at
this time in view of the legal and policy
issues raised by the proposed rule
change, as discussed below. Institution
of disapproval proceedings does not
indicate that the Commission has
reached any conclusions with respect to
any of the issues involved.
Pursuant to Section 19(b)(2)(B) of the
Act, the Commission is providing notice
of the grounds for disapproval under
consideration. The Commission is
instituting proceedings to allow for
additional analysis and input
concerning the proposed rule change’s
consistency with the Act 31 and, in
particular, with Section 6(b)(5) of the
Act, which requires, among other
things, that the rules of a national
securities exchange be designed to
prevent fraudulent and manipulative
acts and practices, 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.32
As discussed above, the Exchange
proposes to modify NYSE American
Rule 903G(c)(3)(ii) to allow cash
settlement for FLEX ETF Options. In its
proposal, the Exchange acknowledges
that concerns have been raised in the
past regarding the susceptibility of cashsettled equity options to manipulation.
The Exchange asserts that to address
such concerns, it has proposed to limit
cash settlement to options on a narrow
set of ETFs that are the most actively
traded, as evidenced by the inclusion of
options on those ETFs in the Option
Penny Pilot.33 The Commission notes
that the goal of the Option Penny Pilot
since its inception has been to analyze
the impact of penny quoting on options
spreads, transaction costs, payment for
order flow, and quote message traffic.34
As a result, the Option Penny Pilot
eligibility criterion is based on the
national average daily volume of the
options classes rather than the volume
in the underlying securities.
The Commission notes that critical to
any assessment of the potential for
manipulation when trading cash-settled
options on ETFs is also an analysis of
the liquidity and depth of the market for
both the ETFs underlying the options
and the component securities of the
ETFs themselves. The Exchange has not,
however, provided any specific data,
analysis, and studies demonstrating that
the ETFs underlying the options
included in the Option Penny Pilot have
the liquidity necessary to adequately
address concerns on the risks of
manipulation and potential for market
disruption that may arise from cash
settlement on such options.
As noted above, because options in
the Option Penny Pilot are assessed
every six months based on options
trading volume, we believe the 64 ETFs
underlying the options in the Option
Penny Pilot that the Exchange identifies
32 Id.
33 See
Notice, supra note 4, at 51536.
Option Penny Pilot Approval Order, supra
note 11, at 4740. As noted in the 2009 Option
Penny Pilot Expansion Order, for example, the pilot
report provided information on the most active and
least active options classes in the pilot and
analyzed the impact the pilot had on those options
in certain specified areas. See supra note 17, at
49420. See also Option Penny Pilot Expansion
Notice, supra note 17, at 65194.
34 See
25 See
id. at 51536–37.
id. at 51537.
27 See id.
28 See BlackRock Letter, supra note 7.
29 See id.
30 15 U.S.C. 78s(b)(2)(B).
31 15 U.S.C. 78f(b)(5).
26 See
VerDate Sep<11>2014
17:14 Dec 26, 2018
Jkt 247001
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
66781
generally in its proposal were those
eligible for the pilot as of the date the
Exchange submitted its proposal to the
Commission. This raises further
questions, which are not addressed in
the current proposal, as to how the
Exchange will treat options on those
ETFs that become ineligible for the
Option Penny Pilot in the future, as well
as how to analyze the potential for
manipulation and market disruption
from future ETFs underlying options
that are not yet, but later, included in
the Option Penny Pilot and will
therefore become eligible for cash
settlement under the Exchange’s
proposal.
The Exchange also takes the position
that cash settlement for options is not
unique because other options exchanges
trade cash-settled options.35 Cashsettled options on equity securities such
as ETFs that hold specific component
securities, however, are unique and
present distinct issues different from
cash-settled index options that track an
index. The Commission notes that
allowing for cash settlement of FLEX
ETF Options, as proposed, would
permit cash settlement on a significantly
broader set of equity options than that
previously approved. Further, it is not
clear from the Exchange’s proposal how
the expanded use of cash settlement for
equity options may bear on the potential
for manipulation or impact market
quality since, as noted above, the
proposal lacks any supporting data or
analysis on these issues.
The Exchange proposes to apply the
same position limits to cash-settled
FLEX ETF Options as for other FLEX
Equity Options. The Commission notes
that the Exchange generally does not
impose position limits for FLEX Equity
Options unless the FLEX Equity
Options’ expiration coincides with an
Expiration Friday.36 This means that
there would be no position limits,
including on the days leading up to and
surrounding Expiration Friday, for
many of the cash-settled FLEX ETF
Options under the proposal. The
Commission is therefore concerned that
the lack of position limits for nonExpiration Friday expiring cash-settled
FLEX ETF Options could make them
more susceptible to manipulation and
could lead to market disruption.
Finally, the Commission notes that
the proposal would allow for settlement
in cash or by physical delivery on
options that otherwise have the same
terms. The Commission notes that
allowing both physical delivery and
cash settlement alternatives could
35 See
36 See
E:\FR\FM\27DEN1.SGM
Notice, supra note 4, at 51536.
NYSE American Rule 906G(b).
27DEN1
66782
Federal Register / Vol. 83, No. 247 / Thursday, December 27, 2018 / Notices
increase market fragmentation and raise
additional manipulation concerns.
The Commission notes that under the
Commission’s Rules of Practice, the
‘‘burden to demonstrate that a proposed
rule change is consistent with the
Exchange Act and the rules and
regulations issued thereunder . . . is on
the self-regulatory organization [‘SRO’]
that proposed the rule change.’’ 37 The
description of a proposed rule change,
its purpose and operation, its effect, and
a legal analysis of its consistency with
applicable requirements must all be
sufficiently detailed and specific to
support an affirmative Commission
finding,38 and any failure of an SRO to
provide this information may result in
the Commission not having a sufficient
basis to make an affirmative finding that
a proposed rule change is consistent
with the Exchange Act and the
applicable rules and regulations.39
For these reasons, the Commission
believes it is appropriate to institute
proceedings pursuant to Section
19(b)(2)(B) of the Act to determine
whether the proposal should be
approved or disapproved.
IV. Commission’s Solicitation of
Comments
khammond on DSK30JT082PROD with NOTICES
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written view of interested
persons concerning whether the
proposal is consistent with Section
6(b)(5) or any other provision of the Act,
or the rules and regulations thereunder.
Although there do not appear to be any
issues relevant to approval or
disapproval that would be facilitated by
an oral presentation of views, data, and
arguments, the Commission will
consider, pursuant to Rule 19b–4, any
request for an opportunity to make an
oral presentation.40
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
37 Rule 700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
38 See id.
39 See id.
40 Section 19(b)(2) of the Exchange Act, as
amended by the Securities Act Amendments of
1975, Public Law 94–29 (June 4, 1975), grants the
Commission flexibility to determine what type of
proceeding—either oral or notice and opportunity
for written comments—is appropriate for
consideration of a particular proposal by a selfregulatory organization. See Securities Act
Amendments of 1975, Senate Comm. on Banking,
Housing & Urban Affairs, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
VerDate Sep<11>2014
17:14 Dec 26, 2018
Jkt 247001
proposal should be approved or
disapproved by January 17, 2019. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by January 31, 2019. The
Commission asks that commenters
address the sufficiency of the
Exchange’s statements in support of the
proposal which are set forth in the
Notice,41 in addition to any other
comments they may wish to submit
about the proposed rule change.
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–
NYSEAMER–2018–39 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–NYSEAMER–2018–39. 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 such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
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–NYSEAMER–2018–39 and
should be submitted on or before
January 17, 2019. Rebuttal comments
should be submitted by January 31,
2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
Brent J. Fields,
Secretary.
[FR Doc. 2018–27992 Filed 12–26–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Securities Act of 1933 Release No. 10592/
December 19, 2018; Securities Exchange
Act of 1934 Release No. 84877/December
19, 2018]
Order Approving Public Company
Accounting Oversight Board Budget
and Annual Accounting Support Fee
for Calendar Year 2019
The Sarbanes-Oxley Act of 2002, as
amended (the ‘‘Sarbanes-Oxley Act’’),1
established the Public Company
Accounting Oversight Board (‘‘PCAOB’’)
to oversee the audits of companies that
are subject to the securities laws, and
related matters, in order to protect the
interests of investors and further the
public interest in the preparation of
informative, accurate, and independent
audit reports. Section 982 of the DoddFrank Wall Street Reform and Consumer
Protection Act (the ‘‘Dodd-Frank Act’’) 2
amended the Sarbanes-Oxley Act to
provide the PCAOB with explicit
authority to oversee auditors of brokerdealers registered with the Securities
and Exchange Commission (the
‘‘Commission’’). The PCAOB is to
accomplish these goals through
registration of public accounting firms
and standard setting, inspection, and
disciplinary programs. The PCAOB is
subject to the comprehensive oversight
of the Commission.
Section 109 of the Sarbanes-Oxley Act
provides that the PCAOB shall establish
a reasonable annual accounting support
fee, as may be necessary or appropriate
to establish and maintain the PCAOB.
Under Section 109(f) of the SarbanesOxley Act, the aggregate annual
accounting support fee shall not exceed
the PCAOB’s aggregate ‘‘recoverable
budget expenses,’’ which may include
operating, capital, and accrued items.
The PCAOB’s annual budget and
accounting support fee are subject to
approval by the Commission. In
42 17
CFR 200.30–3(a)(57).
U.S.C. 7201 et seq.
2 Public Law 111–203, 124 Stat. 1376 (2010).
1 15
41 See
PO 00000
Notice, supra note 4.
Frm 00112
Fmt 4703
Sfmt 4703
E:\FR\FM\27DEN1.SGM
27DEN1
]]>Agencies
[Federal Register Volume 83, Number 247 (Thursday, December 27, 2018)]
[Notices]
[Pages 66779-66782]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27992]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84870; File No. SR-NYSEAMER-2018-39]
Self-Regulatory Organizations; NYSE American LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Allow Flexible Exchange Equity Options Where
the Underlying Security Is an Exchange-Traded Fund That Is Included in
the Option Penny Pilot To Be Settled in Cash
December 19, 2018.
I. Introduction
On September 20, 2018, NYSE American LLC (``NYSE American'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act
[[Page 66780]]
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to modify the rules related to Flexible Exchange (``FLEX'')
Options to allow FLEX Equity Options where the underlying security is
an Exchange-Traded Fund (``ETF'') that is included in the Option Penny
Pilot to be settled in cash.\3\ The proposed rule change was published
for comment in the Federal Register on October 11, 2018.\4\ On November
19, 2018, pursuant to Section 19(b(2) of the Act,\5\ the Commission
designated a longer period within which to either approve the proposed
rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\6\ The Commission received one comment on the proposed rule
change.\7\ This order institutes proceedings under Section 19(b)(2)(B)
of the Act\8\ to determine whether to approve or disapprove the
proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ For the definitions of ``FLEX Options,'' ``FLEX Equity
Options,'' and ``Option Penny Pilot,'' see infra notes 9 and 11.
\4\ See Securities Exchange Act Release No. 84364 (October 4,
2018), 83 FR 51535 (October 11, 2018) (``Notice'').
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 82994 (April 4,
2018), 83 FR 15441 (April 10, 2018). The Commission designated
January 9, 2019, as the date by which it should approve, disapprove,
or institute proceedings to determine whether to disapprove the
proposed rule change.
\7\ See Letter to Brent J. Fields, Secretary, Commission, from
Samara Cohen, Head of ETF Global Markets, BlackRock, dated November
27, 2018 (``BlackRock Letter'').
\8\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Description of the Proposal and Comments Received
The Exchange has proposed to amend NYSE American Rule 903G(c) to
allow for cash settlement for certain FLEX Equity Options.\9\
Currently, FLEX Equity Options settle by physical delivery of the
underlying security.\10\ The Exchange proposes, in the case of a FLEX
Equity Option whose underlying security is an ETF that is included in
the Option Penny Pilot \11\ (``FLEX ETF Option''), to allow settlement
either by the delivery of cash or, as currently permitted under the
Exchange rules, by physical delivery of the underlying security.\12\
---------------------------------------------------------------------------
\9\ A ``FLEX Option'' is a customized options contract that is
subject to the rules in Section 15, Flexible Exchange Options. See
NYSE American Rule 900G(b)(1). A ``FLEX Equity Option'' is an option
on a specified underlying equity security that is subject to the
rules of Section 15. See NYSE American Rule 900G(b)(10).
\10\ See NYSE American Rule 903G(c)(3)(i). There is an exception
to physical settlement for settlement of FLEX Binary Return
Derivatives (``ByRDs''). See NYSE American Rules 900G(b)(17),
903G(c)(3)(ii), and 910ByRDs.
\11\ The ``Option Penny Pilot'' is a pilot program by the
options exchanges that permits certain option classes to be quoted
in penny or nickel increments on a pilot basis. See NYSE American
Rule 960NY, Commentary .02. See also Securities Exchange Act Release
No. 55162 (January 24, 2007), 72 FR 4738, 4739 (February 1, 2007)
(SR-Amex-2006-106) (``Option Penny Pilot Approval Order''). The
Option Penny Pilot is currently set to expire on December 31, 2018.
See NYSE American Rule 960NY, Commentary .02.
\12\ See proposed NYSE American Rule 903G(c)(3)(ii). The
Exchange proposes conforming changes to NYSE American Rule
903G(c)(3) to reflect that the proposed rule change would add a
second exception to the general requirement for physical settlement
for FLEX Equity Options. See proposed NYSE American Rule
903G(c)(3)(i) and (iii).
---------------------------------------------------------------------------
The Exchange states that it believes that it is appropriate to
introduce cash settlement as an alternative for FLEX ETF Options
because ETFs generally have increasingly become a major part of
investors' portfolios, allowing investors to take advantage of many
unique opportunities to hedge their portfolios and manage risk.\13\ The
Exchange asserts that physical settlement possess certain risks with
respect to volatility and movement of the underlying security at
expiration that market participants may need to hedge against and cash
settlement does not present these same risks.\14\
---------------------------------------------------------------------------
\13\ See Notice, supra note 4, at 51535-36.
\14\ See id. at 51536. The Exchange also states that market
participants trade cash-settled FLEX ETF Options in the over-the-
counter market and exchange trading would provide benefits to these
market participants. See id.
---------------------------------------------------------------------------
The Exchange states that it seeks to allay concerns about cash-
settled equity options by proposing to adopt cash settlement as an
alternative settlement method for 64 ETFs that are included in the
Option Penny Pilot.\15\ The Exchange adds that generally index options
are cash-settled and derive their value from a disseminated index
price, and that similarly ETFs typically have their values linked to a
disseminated index price.\16\ The Exchange states that the option
classes included in the original pilot were chosen based on being one
of the most actively-traded multiply-listed options classes and also
states that the most recent expansion identified the most-active
classes based on the ``underlying security's `national average daily
volume over a six-month period.' '' \17\
---------------------------------------------------------------------------
\15\ See id.
\16\ See id.
\17\ See id. The Commission notes that the criteria for
qualifying for the Option Penny Pilot is based on the national
average daily volume over a six month period in the options class
itself, not based on the volume of the underlying ETF. See
Securities Exchange Act Release No. 60711 (September 23, 2009), 74
FR 49419 (September 28, 2009) (SR-NYSEArca-2009-44) (``Option Penny
Pilot Expansion Order'') and Securities Exchange Act Release No.
61106 (December 3, 2009), 74 FR 65193 (December 9, 2009) (NYSEAmex-
2009-74) (Option Penny Pilot Expansion Notice'').
---------------------------------------------------------------------------
The Exchange states that cash-settled FLEX ETF Options would be
subject to the same position limits as non-cash-settled FLEX ETF
Options (i.e., the position limits in NYSE American Rule 906G).\18\ The
Exchange represents that it confirmed with the Options Clearing
Corporation (``OCC'') that OCC can support the clearance and settlement
of cash-settled FLEX ETF Options.\19\ The Exchange also states that it
believes the Exchange and the Options Price Reporting Authority
(``OPRA'') have the necessary systems capacity to handle the additional
traffic associated with the listing of cash-settled FLEX ETF Options
and that it believes that its members will not have a capacity issue as
a result of the proposal.\20\ The Exchange represents that it does not
believe that the proposed rule change will cause fragmentation of
liquidity.\21\ The Exchange further represents that it will monitor the
trading volume associated with the options series listed as a result of
this proposed rule change and the effect, if any, of these series on
market fragmentation and on the capacity of the Exchange's automated
systems.\22\
---------------------------------------------------------------------------
\18\ See Notice, supra note 4, at 51536. The Exchange adds that
other existing regulatory safeguards, such as exercise limits and
reporting requirements, would also continue to apply. See id. at
51537. The Commission notes that NYSE American Rule 906G provides
generally that there are no position limits for FLEX Equity Options,
but that positions in FLEX Options that expire on a third Friday-of-
the-month expiration day (``Expiration Friday'') will be aggregated
with positions in non-FLEX Options on the same underlying and
subject to the position limits applicable to such options. See NYSE
American Rule 906G(b).
\19\ See Notice, supra note 4, at 51536.
\20\ See id.
\21\ See id.
\22\ See id.
---------------------------------------------------------------------------
The Exchange represents that it will have an adequate surveillance
program for cash-settled FLEX ETF Options and states that it intends to
use the same surveillance procedures, including procedures concerning
surveillance for manipulation, for cash-settled FLEX ETF Options that
it uses for the Exchange's other options products.\23\ The Exchange
states that it believes manipulating the settlement price of cash-
settled FLEX ETF Options would be difficult because of the size of the
market for such ETFs.\24\ According to the Exchange each cash-settled
FLEX ETF Option is sufficiently active so as to alleviate concerns
about the potential
[[Page 66781]]
for manipulation.\25\ The Exchange states that the vast liquidity of
ETF options and the underlying equities markets and the high level of
participation among market participants that enter quotes or orders in
ETF options would, according to the Exchange, make it very difficult
for a single participant to alter the prices of each security
underlying an ETF without becoming exposed to regulatory scrutiny and
that such attempt at manipulation would be cost-prohibitive.\26\
Moreover, the Exchange states that it is a member of the Intermarket
Surveillance Group (``ISG'') and therefore would have access to
surveillance and investigative information regarding trading in the
underlying securities.\27\
---------------------------------------------------------------------------
\23\ See id.
\24\ See id.
\25\ See id. at 51536-37.
\26\ See id. at 51537.
\27\ See id.
---------------------------------------------------------------------------
The Commission received one comment letter, which supports the
proposed rule change.\28\ The commenter states that it agrees with the
Exchange that the proposal alleviates several potential challenges
associated with physical settlement and presents advantages to the end
investor. This commenter asserts that the proposal would lead to
greater standardization of contract terms, mitigate counterparty risk,
increase price discovery, and improve information dissemination, which
would lead to greater transparency.\29\
---------------------------------------------------------------------------
\28\ See BlackRock Letter, supra note 7.
\29\ See id.
---------------------------------------------------------------------------
III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEAMER-2018-39 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act to determine whether the proposal should be
approved or disapproved.\30\ Institution of such proceedings is
appropriate at this time in view of the legal and policy issues raised
by the proposed rule change, as discussed below. Institution of
disapproval proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act, the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis and input concerning the proposed rule change's consistency
with the Act \31\ and, in particular, with Section 6(b)(5) of the Act,
which requires, among other things, that the rules of a national
securities exchange be designed to prevent fraudulent and manipulative
acts and practices, 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.\32\
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78f(b)(5).
\32\ Id.
---------------------------------------------------------------------------
As discussed above, the Exchange proposes to modify NYSE American
Rule 903G(c)(3)(ii) to allow cash settlement for FLEX ETF Options. In
its proposal, the Exchange acknowledges that concerns have been raised
in the past regarding the susceptibility of cash-settled equity options
to manipulation. The Exchange asserts that to address such concerns, it
has proposed to limit cash settlement to options on a narrow set of
ETFs that are the most actively traded, as evidenced by the inclusion
of options on those ETFs in the Option Penny Pilot.\33\ The Commission
notes that the goal of the Option Penny Pilot since its inception has
been to analyze the impact of penny quoting on options spreads,
transaction costs, payment for order flow, and quote message
traffic.\34\ As a result, the Option Penny Pilot eligibility criterion
is based on the national average daily volume of the options classes
rather than the volume in the underlying securities.
---------------------------------------------------------------------------
\33\ See Notice, supra note 4, at 51536.
\34\ See Option Penny Pilot Approval Order, supra note 11, at
4740. As noted in the 2009 Option Penny Pilot Expansion Order, for
example, the pilot report provided information on the most active
and least active options classes in the pilot and analyzed the
impact the pilot had on those options in certain specified areas.
See supra note 17, at 49420. See also Option Penny Pilot Expansion
Notice, supra note 17, at 65194.
---------------------------------------------------------------------------
The Commission notes that critical to any assessment of the
potential for manipulation when trading cash-settled options on ETFs is
also an analysis of the liquidity and depth of the market for both the
ETFs underlying the options and the component securities of the ETFs
themselves. The Exchange has not, however, provided any specific data,
analysis, and studies demonstrating that the ETFs underlying the
options included in the Option Penny Pilot have the liquidity necessary
to adequately address concerns on the risks of manipulation and
potential for market disruption that may arise from cash settlement on
such options.
As noted above, because options in the Option Penny Pilot are
assessed every six months based on options trading volume, we believe
the 64 ETFs underlying the options in the Option Penny Pilot that the
Exchange identifies generally in its proposal were those eligible for
the pilot as of the date the Exchange submitted its proposal to the
Commission. This raises further questions, which are not addressed in
the current proposal, as to how the Exchange will treat options on
those ETFs that become ineligible for the Option Penny Pilot in the
future, as well as how to analyze the potential for manipulation and
market disruption from future ETFs underlying options that are not yet,
but later, included in the Option Penny Pilot and will therefore become
eligible for cash settlement under the Exchange's proposal.
The Exchange also takes the position that cash settlement for
options is not unique because other options exchanges trade cash-
settled options.\35\ Cash-settled options on equity securities such as
ETFs that hold specific component securities, however, are unique and
present distinct issues different from cash-settled index options that
track an index. The Commission notes that allowing for cash settlement
of FLEX ETF Options, as proposed, would permit cash settlement on a
significantly broader set of equity options than that previously
approved. Further, it is not clear from the Exchange's proposal how the
expanded use of cash settlement for equity options may bear on the
potential for manipulation or impact market quality since, as noted
above, the proposal lacks any supporting data or analysis on these
issues.
---------------------------------------------------------------------------
\35\ See Notice, supra note 4, at 51536.
---------------------------------------------------------------------------
The Exchange proposes to apply the same position limits to cash-
settled FLEX ETF Options as for other FLEX Equity Options. The
Commission notes that the Exchange generally does not impose position
limits for FLEX Equity Options unless the FLEX Equity Options'
expiration coincides with an Expiration Friday.\36\ This means that
there would be no position limits, including on the days leading up to
and surrounding Expiration Friday, for many of the cash-settled FLEX
ETF Options under the proposal. The Commission is therefore concerned
that the lack of position limits for non-Expiration Friday expiring
cash-settled FLEX ETF Options could make them more susceptible to
manipulation and could lead to market disruption.
---------------------------------------------------------------------------
\36\ See NYSE American Rule 906G(b).
---------------------------------------------------------------------------
Finally, the Commission notes that the proposal would allow for
settlement in cash or by physical delivery on options that otherwise
have the same terms. The Commission notes that allowing both physical
delivery and cash settlement alternatives could
[[Page 66782]]
increase market fragmentation and raise additional manipulation
concerns.
The Commission notes that under the Commission's Rules of Practice,
the ``burden to demonstrate that a proposed rule change is consistent
with the Exchange Act and the rules and regulations issued thereunder .
. . is on the self-regulatory organization [`SRO'] that proposed the
rule change.'' \37\ The description of a proposed rule change, its
purpose and operation, its effect, and a legal analysis of its
consistency with applicable requirements must all be sufficiently
detailed and specific to support an affirmative Commission finding,\38\
and any failure of an SRO to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Exchange Act and the
applicable rules and regulations.\39\
---------------------------------------------------------------------------
\37\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\38\ See id.
\39\ See id.
---------------------------------------------------------------------------
For these reasons, the Commission believes it is appropriate to
institute proceedings pursuant to Section 19(b)(2)(B) of the Act to
determine whether the proposal should be approved or disapproved.
IV. Commission's Solicitation of Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
view of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, or
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\40\
---------------------------------------------------------------------------
\40\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by January 17, 2019. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
January 31, 2019. The Commission asks that commenters address the
sufficiency of the Exchange's statements in support of the proposal
which are set forth in the Notice,\41\ in addition to any other
comments they may wish to submit about the proposed rule change.
---------------------------------------------------------------------------
\41\ See Notice, supra note 4.
---------------------------------------------------------------------------
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-NYSEAMER-2018-39 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-NYSEAMER-2018-39. 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 such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. 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-NYSEAMER-2018-39 and should be submitted
on or before January 17, 2019. Rebuttal comments should be submitted by
January 31, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
---------------------------------------------------------------------------
\42\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------
Brent J. Fields,
Secretary.
[FR Doc. 2018-27992 Filed 12-26-18; 8:45 am]
BILLING CODE 8011-01-P
