Self-Regulatory Organizations; NYSE American LLC; Notice of Filing of Amendment No. 2 to Proposed Rule Change To Allow Flexible Exchange Equity Options To Be Cash Settled Where the Underlying Security Is a Specified Exchange-Traded Fund, 16102-16107 [2019-07614]
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Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) 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.
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NASDAQ–2019–026 and
should be submitted on or before May
8, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Eduardo A. Aleman,
Deputy 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. 2019–07612 Filed 4–16–19; 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–
NASDAQ–2019–026 on the subject line.
Self-Regulatory Organizations; NYSE
American LLC; Notice of Filing of
Amendment No. 2 to Proposed Rule
Change To Allow Flexible Exchange
Equity Options To Be Cash Settled
Where the Underlying Security Is a
Specified Exchange-Traded Fund
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–NASDAQ–2019–026. 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
April 11, 2019.
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85628; File No. SR–
NYSEAMER–2018–39]
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 20, 2018, NYSE American
LLC (‘‘NYSE American ’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The proposed rule
change was published for comment in
the Federal Register on October 11,
2018.3 On November 19, 2018, pursuant
to Section 19(b(2) of the Act,4 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.5
The Commission received one comment
letter on the proposed rule change.6
14 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 84364
(October 4, 2018), 83 FR 51535 (October 11, 2018)
(‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 84616
(November 19, 2018), 83 FR 60519 (November 26,
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.
6 See Letter to Brent J. Fields, Secretary,
Commission, from Samara Cohen, Head of ETF
Global Markets, BlackRock, dated November 27,
2018.
1 15
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On December 19, 2018, the
Commission instituted proceedings
under Section 19(b)(2)(B) of the Act 7 to
determine whether to approve or
disapprove the proposed rule change.8
On March 11, 2019, the Exchange filed
Amendment No. 1 to the proposed rule
change. On March 25, 2019, the
Exchange withdrew Amendment No. 1
and filed Amendment No. 2 to the
proposed rule change, which
superseded and replaced the proposed
rule change in its entirety. On April 5,
2019, the Commission extended the
time period for approving or
disapproving the proposal for an
additional 60 days until June 8, 2019.9
The Commission is publishing this
notice to solicit comments on the
proposed rule change, as modified by
Amendment No. 2, from interested
persons.10
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
certain rules related to Flexible
Exchange (‘‘FLEX’’) Options. This
Amendment No. 2 supersedes the
original filing and the Partial
Amendment No. 1 in its entirety.11 The
proposed rule change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
7 15
U.S.C. 78s(b)(2)(B).
Securities Exchange Act Release No. 84870
(December 19, 2018), 83 FR 66779 (December 27,
2018) (‘‘Order Instituting Proceedings’’).
9 See Securities Exchange Act Release No. 85531
(April 5, 2019).
10 In Amendment No. 2, the Exchange revised the
proposal to limit the ETFs that could serve as an
underlying security for cash-settled FLEX Equity
Options to 25 enumerated ETFs, rather than all
ETFs included in the Option Penny Pilot. In
addition, Amendment No. 2 amended the proposal
to, among other things, (1) describe characteristics
of ETFs, including the calculation of net asset
value, the creation and redemption mechanism, and
their reliance on arbitrage; (2) provide trading data
related to the 25 specified ETFs proposed to serve
as the allowable underlying securities for cashsettled FLEX Equity Options; (3) describe the
requirement in Rule 906G(b) that members or
member organizations may be required to provide
a report of positions on the same side of the market
in excess of the level established as the position
limit for non-FLEX Equity options of the same class;
(4) describe in more detail existing surveillance
procedures relevant to cash-settled FLEX Equity
Options on the specified ETFs; and (5) make
additional arguments about why the Exchange
believes that cash settlement would be appropriate
for such options.
11 The original proposal was filed by the
Exchange on September 18, 2018. See Securities
Exchange Act Release No. 84364 (October 4, 2018),
83 FR 51535 (October 11, 2018). The Exchange filed
Partial Amendment No. 1 on March 11, 2019 and
withdrew it on March 25, 2019.
8 See
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Federal Register / Vol. 84, No. 74 / Wednesday, April 17, 2019 / Notices
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
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
FLEX Options are customized equity
or index contracts that allow investors
to tailor contract terms for exchangelisted equity and index options. The
Exchange seeks to amend NYSE
American Rule 903G(c) to allow for cash
settlement for certain FLEX Equity
Options.12 As proposed, FLEX Equity
Options where the underlying security
is one of 25 enumerated ExchangeTraded Funds (‘‘ETFs’’) would be
capable of being settled by physical
delivery of the underlying ETF or by
delivery in cash. Currently, all FLEX
Equity Options are settled by physical
delivery of the underlying security.13
All FLEX Index Options, however, are
currently settled by delivery in cash.14
To effectuate this change, the
Exchange proposes new paragraph
(c)(3)(ii) to Rule 903G, which would
provide that the exercise settlement for
a FLEX ETF Option with an underlying
security listed in proposed Commentary
.02 would be by physical delivery of the
underlying security or by delivery in
cash.15 The Exchange further proposes
new Commentary .02, which would
provide the name and symbol of each of
25 ETFs listed in the table below.16 The
Exchange believes it is appropriate to
12 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).
13 See Rule 903G(c)(3)(i).
14 See Rule 903G(b)(2) and (3).
15 See proposed Rule 903G(c)(3)(ii). The Exchange
also proposes a non-substantive amendment to Rule
903G to renumber current Rule 903G(c)(3)(ii) as
new Rule 903G(c)(3)(iii).
16 See proposed Rule 903G, Commentary .02.
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introduce cash-settlement as an
alternative to this group of equity
securities because ETFs generally have
increasingly become a major part of
investors’ portfolio. The vast
proliferation of ETFs has greatly
expanded the ability of investors to take
advantage of many unique opportunities
to hedge their portfolio and manage risk.
Investors can take long and/or short
positions—as well as in many cases,
leveraged long or short positions—in
baskets of securities whose components
can include foreign and domestic stock
indexes, currencies, commodities and
bonds. Over the years, ETFs have also
attracted a great deal of options trading.
As described more fully below, the
Exchange believes that the deep
liquidity and robust trading activity in
the 25 ETFs proposed to be eligible for
cash-settled FLEX ETF Options would
mitigate against concerns that their
settlement value would be susceptible
to manipulation.
Characteristics of ETFs
ETFs are funds that have their value
derived from assets owned. The net
asset value (‘‘NAV’’) of an ETF is a daily
calculation that is based off the most
recent closing prices of the assets in the
fund and an actual accounting of the
total cash in the fund at the time of
calculation. The NAV of an ETF is
calculated by taking the sum of the
assets in the fund, including any
securities and cash, subtracting out any
liabilities, and dividing that by the
number of shares outstanding.
Additionally, each ETF is subject to a
creation and redemption mechanism to
ensure the price of the ETF does not
fluctuate too far away from its NAV—
which mechanisms reduce the potential
for manipulative activity. Each business
day, ETFs are required to make publicly
available a portfolio composition file
that describes the makeup of their
creation and redemption ‘‘baskets’’ (i.e.,
a specific list of names and quantities of
securities or other assets designed to
track the performance of the portfolio as
a whole). ETF shares are created when
an Authorized Participant, typically a
market maker or other large institutional
investor, deposits the daily creation
basket or cash with the ETF issuer. In
return for the creation basket or cash (or
both), the ETF issues to the Authorized
Participant a ‘‘creation unit’’ that
consists of a specified number of ETF
shares. For instance, IWM is designed to
track the performance of the Russell
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2000 Index. An Authorized Participant
will purchase all the Russell 2000
constituent securities in the exact same
weight as the index prescribes, then
deliver those shares to the ETF issuer.
In exchange, the ETF issuer gives the
Authorized Participant a block of
equally valued ETF shares, on a one-forone fair value basis. This process can
also work in reverse. A redemption is
achieved when the Authorized
Participant accumulates a sufficient
number of shares of the ETF to
constitute a creation unit and then
exchanges these ETF shares with the
ETF issuer, thereby decreasing the
supply of ETF shares in the market.
The principal, and perhaps most
important, feature of ETFs is their
reliance on an ‘‘arbitrage function’’
performed by market participants that
influences the supply and demand of
ETF shares and, thus, trading prices
relative to NAV. As noted above, new
ETF shares can be created and existing
shares redeemed based on investor
demand; thus, ETF supply is openended. This arbitrage function helps to
keep an ETF’s price in line with the
value of its underlying portfolio, i.e., it
minimizes deviation from NAV.
Generally, the higher the liquidity and
trading volume of an ETF, the more
likely the price of the ETF will not
deviate from the value of its underlying
portfolio and such ETFs are less
susceptible to price manipulation.
Trading Data for the 25 ETFs Proposed
for Potential Cash Settlement
As illustrated in the table below, the
average deviation of the closing price of
the 25 ETFs from its NAV, on a
percentage basis, is less than 1%. The
close proximity between each ETF’s
NAV and its closing price illustrates
how closely the 25 ETFs selected by the
Exchange are tethered to values beyond
buying and selling at the close. More
specifically, the ETFs that underlie
options subject to this proposal are
highly liquid, and are based on a broad
set of highly liquid securities. The table
below presents descriptive statistics for
the 25 ETFs selected by the Exchange,
as of December 31, 2018, and includes,
for each ETF: The 20-day average
trading volume of the underlying ETF
(in shares and dollar value), the assets
under management, the average
deviation from net asset value, and the
average daily volume of options
contracts traded overlying each ETF.
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20-day average
trading volume
(shares)
20-day average
trading volume
($)
Total fund
assets under
management
($)
Average
deviation
from net
asset value
(NAV)
(percent)
Options
average
daily volume
ETF
ETF ticker
SPDR S&P 500 ETF .........................
Invesco Nasdaq 100 ETF ..................
iShares MSCI Emerging Markets
ETF.
iShares Russell 2000 ETF ................
iShares iBoxx $ High Yield Corporate
Bond ETF.
SPDR S&P Oil & Gas Exploration &
Production ETF.
iShares China Large-Cap ETF ..........
Financial Select Sector SPDR ETF ...
iShares MSCI EAFE ETF ..................
iShares MSCI Brazil ETF ..................
iShares 20+ Year Treasury Bond
ETF.
SPDR S&P Regional Banking ETF ...
VanEck Vectors Gold Miners ETF ....
SPDR Dow Jones Industrial Average
ETF.
SPDR S&P Biotech ETF ...................
Energy Select Sector SPDR ETF ......
Utilities Select Sector SPDR ETF .....
Consumer Staples Select Sector
SPDR ETF.
iShares U.S. Real Estate ETF ...........
Technology Select Sector SPDR ETF
Industrial Select Sector SPDR ETF ..
Healthcare Select Sector ETF ...........
iShares MSCI Japan ETF ..................
Materials Select Sector SPDR ETF ..
VanEck Vectors Junior Gold Miners
ETF.
SPY ................
QQQ ..............
EEM ...............
160,041,302
71,613,353
111,792,871
$40,948,098,000
11,310,618,350
4,439,674,650
$240,106.44
61,145.94
29,314.21
0.02
0.03
0.54
4,611,460
1,108,432
585,794
IWM ...............
HYG ...............
35,158,745
27,488,196
4,861,054,750
2,250,963,000
39,907.42
13,202.49
0.41
0.23
510,309
345,034
XOP ...............
27,040,448
784,296,775
2,406.98
0.07
223,594
FXI .................
XLF ................
EFA ................
EWZ ...............
TLT ................
41,125,843
90,744,549
61,226,608
26,957,238
11,423,906
1,668,342,775
2,206,780,250
3,656,868,050
1,032,776,750
1,364,567,990
5,671.99
22,899.77
62,279.02
7,694.70
8,761.36
0.70
0.04
0.28
0.65
0.11
216,003
209,185
188,666
180,654
123,591
KRE ...............
GDX ...............
DIA .................
12,780,929
61,166,478
6,985,256
625,733,560
1,248,025,595
1,660,420,135
2,926.33
10,575.69
19,700.41
0.05
0.16
0.02
95,607
90,602
83,202
XBI .................
XLE ................
XLU ................
XLP ................
7,488,285
24,766,279
24,430,265
27,738,596
554,592,040
1,502,959,710
1,339,179,575
1,469,257,995
3,608.90
13,431.16
8,383.96
9,572.95
0.10
0.04
0.04
0.04
62,290
57,398
50,759
28,699
IYR .................
XLK ................
XLI .................
XLV ................
EWJ ...............
XLB ................
GDXJ .............
11,283,934
22,235,286
19,012,293
17,397,161
17,714,960
12,685,383
14,662,291
881,610,765
1,407,316,770
1,269,902,155
1,529,979,575
921,963,790
646,247,535
419,654,120
3,434.70
17,305.90
9,689.46
17,987.48
15,253.86
3,634.08
4,273.40
0.07
0.03
0.04
0.04
0.46
0.04
0.23
26,722
21,243
20,789
20,183
13,855
11,552
10,868
As illustrated in the table above, each
of the 25 ETFs is actively traded and
highly liquid and thus not readily
susceptible to manipulation for the
following reasons:
• First, each has a 20-day ADV of at
least 7 million shares which indicates
substantial liquidity present in the
trading of these securities.
• Second, each ETF has a notional
value over that 20-day period of at least
$400 million which implies that the
ETF has significant depth and breadth
of market participants providing
liquidity.
• Third, each ETF has a minimum of
$2 billion of assets under management
which demonstrates broad ownership as
well as depth and breadth of investor
interest.
• Finally, each ETF has an ADV of at
least 10,000 options contracts which
indicates that there is significant
quoting and trading interest in the
options overlying each ETF.
The Exchange believes that this data
indicates that permitting cash
settlement as a FLEX term for the 25
ETFs selected by the Exchange would
broaden the base of investors that use
FLEX Options to manage their trading
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and investment risk, including investors
that currently trade in the OTC market
for customized options, where
settlement restrictions do not apply.
Moreover, introducing cash settlement
as a FLEX term for these 25 ETFs would
be appropriate because the data above
indicates that these are some of the most
actively traded and liquid ETFs and are
therefore not readily susceptible to
manipulation.
Today, all ETF options are settled
physically, i.e., upon exercise, shares of
the underlying ETF must be assumed or
delivered. Physical settlement possesses
certain risks with respect to volatility
and movement of the underlying
security at expiration that market
participants may need to hedge against.
Cash settlement may be preferable to
physical delivery in some circumstances
as it does not present the same risk. If
an issue with the delivery of the
underlying security arises, it may
become more expensive (and time
consuming) to reverse the delivery
because the price of the underlying
security would almost certainly have
changed. Reversing a cash payment, on
the other hand, would not involve any
such issue because reversing a cash
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delivery would simply involve the
exchange of cash. Additionally, with
physical settlement, market participants
that have a need to generate cash would
have to sell the underlying security
while incurring the costs associated
with liquidating their position in the
underlying security as well as the risk
of an adverse movement in the price of
the underlying security. The Exchange
notes that cash settlement for options is
not a unique feature and other options
exchanges currently trade cash-settled
options.17
The Exchange understands that there
are concerns that have been raised in
the past regarding cash-settled equity
options. The Exchange seeks to allay
such concerns by proposing to adopt
cash-settlement as an alternative to
17 See e.g., PHLX FX Options traded on Nasdaq
PHLX and S&P 500® Index Options traded on Cboe
Options Exchange. More recently, the Commission
approved, on a pilot basis, the listing and trading
of RealDayTM Options on the BOX Options
Exchange LLC. See Securities Exchange Act Release
No. 79936 (February 2, 2017), 82 FR 9886 (February
8, 2017) (‘‘RealDay Pilot Program’’). The RealDay
Pilot Program has been extended until February 2,
2019. See Securities Exchange Act Release No.
82414 (December 28, 2017), 83 FR 577 (January 4,
2018) (SR–BOX–2017–38).
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ETFs only, and more specifically, to a
narrow universe of 25 ETFs. As a
general matter, all index options traded
today are cash-settled and derive their
value from a disseminated index price.
Similarly, ETFs typically have their
values linked to a disseminated index
price. As noted above, the Exchange
seeks to limit cash-settlement to 25 of
the most liquid and actively traded
ETFs, as evidenced by the data
underlying the 25 ETFs in the table
above.
With respect to position limits, cashsettled FLEX ETF Options would be
subject to the position limits set forth in
Rule 906G. Accordingly, the Exchange
would establish position limits for cashsettled FLEX ETF Options that are the
same as non-cash-settled FLEX ETF
Options. Pursuant to Rule 906G(b), each
member or member organization (other
than a Specialist or Floor Market Maker)
that maintains a position on the same
side of the market in excess of the level
established pursuant to Rule 904 for
Non-FLEX Equity options of the same
class on behalf of its own account or for
the account of a customer is required to
report to the Exchange information on
the FLEX Equity option position,
positions in any related instrument, the
purpose or strategy for the position and
the collateral used by the account.
The Exchange understands that FLEX
ETF Options are currently traded in the
over-the-counter (‘‘OTC’’) market by a
variety of market participants, e.g.,
hedge funds, proprietary trading firms,
and pension funds, to name a few. The
Exchange believes there is room for
significant growth if a comparable
product were introduced for trading on
a regulated market. The Exchange
expects that users of these OTC
products would be among the primary
users of exchange-traded cash-settled
FLEX ETF Options. The Exchange also
believes that the trading of cash-settled
FLEX ETF Options would allow these
same market participants to better
manage the risk associated with the
volatility of underlying ETF positions
given the enhanced liquidity that an
exchange-traded product would bring.
Cash-settled FLEX ETF Options
traded on the Exchange would have
three important advantages over the
contracts that are traded in the OTC
market. First, as a result of greater
standardization of contract terms,
exchange-traded contracts should
develop more liquidity. Second,
counter-party credit risk would be
mitigated by the fact that the contracts
are issued and guaranteed by The
Options Clearing Corporation (‘‘OCC’’).
Finally, the price discovery and
dissemination provided by the
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Exchange and its members would lead
to more transparent markets. The
Exchange believes that its ability to offer
cash-settled FLEX ETF Options would
aid it in competing with the OTC market
and at the same time expand the
universe of products available to
interested market participants. The
Exchange believes that an exchangetraded alternative may provide a useful
risk management and trading vehicle for
market participants and their customers.
The Exchange has confirmed with the
OCC that OCC can support the clearance
and settlement of cash-settled FLEX ETF
Options. The Exchange has analyzed its
capacity and represents that it believes
the Exchange and OPRA have the
necessary systems capacity to handle
the additional traffic associated with the
listing of cash-settled FLEX ETF
Options. The Exchange believes any
additional traffic that would be
generated from the introduction of cashsettled FLEX ETF Options would be
manageable. The Exchange believes
ATP Holders will not have a capacity
issue as a result of this proposed rule
change. The Exchange also represents
that it does not believe this proposed
rule change will cause fragmentation of
liquidity. The Exchange will monitor
the trading volume associated with the
additional options series listed as a
result of this proposed rule change and
the effect (if any) of these additional
series on market fragmentation and on
the capacity of the Exchange’s
automated systems.
The Exchange has an adequate
surveillance program in place for cashsettled FLEX ETF Options and intends
to apply the same program procedures
that it applies to the Exchange’s other
options products. FLEX options
products and their respective symbols
are integrated into the Exchange’s
existing surveillance system
architecture and are thus subject to the
relevant surveillance processes. As a
result, the Exchange believes it would
be able to effectively police the trading
of cash-settled FLEX ETF Options using
means that include its surveillance for
manipulation. The Exchange believes
that manipulating the settlement price
of cash-settled FLEX ETF Options
would be difficult based on the size of
the market for the 25 ETFs that are the
subject of this proposed rule change.
Additionally, the Exchange notes that
each cash-settled FLEX ETF Option that
would be subject to this proposed rule
change is sufficiently active so as to
alleviate concerns about potential
manipulative activity. Further, the vast
liquidity of the 25 ETF options as well
as the underlying equities markets
ensures a multitude of market
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16105
participants at any given time. Given the
high level of participation among
market participants that enter quotes
and/or orders in these ETF options, the
Exchange believes it would be very
difficult for a single participant to alter
the prices of each of the underlying
securities of an ETF in any significant
way without exposing the would-be
manipulator to regulatory scrutiny. The
Exchange further believes any attempt
to manipulate the prices of the
underlying securities of an ETF would
also be cost prohibitive.
With respect to regulatory scrutiny,
the Exchange further believes its
existing surveillance technologies and
procedures adequately address potential
concerns regarding possible
manipulation of the settlement value at
or near the close of the market. The
Exchange notes that the regulatory
program operated by and overseen by
NYSE Regulation includes cross-market
surveillance designed to identify
manipulative and other improper
trading, including spoofing, algorithm
gaming, marking the close and open, as
well as more general, abusive behavior
related to front running, wash sales,
quoting/routing, and Reg SHO
violations, that may occur on the
Exchange and other markets. These
cross-market patterns incorporate
relevant data from various markets
beyond the Exchange and its affiliates,
including data from NYSE Arca, Inc.
and from markets not affiliated with the
Exchange. The Exchange represents that
its existing trading surveillances are
adequate to monitor the trading in the
underlying ETF and subsequent trading
of options on those ETFs on the
Exchange.18
Additionally, for options, the
Exchange utilizes an array of patterns
that monitor manipulation of options, or
manipulation of equity securities
(regardless of venue) for the purpose of
impacting options prices on the
Exchange (i.e., mini-manipulation
strategies). That surveillance coverage is
initiated once options begin trading on
the Exchange. Accordingly, the
Exchange believes that the cross-market
surveillance performed by the Exchange
or FINRA on behalf of the Exchange,
coupled with NYSE Regulation’s own
monitoring for violative activity on the
Exchange comprise a comprehensive
surveillance program that is adequate to
18 Such surveillance procedures generally focus
on detecting securities trading subject to opening
price manipulation, closing price manipulation,
layering, spoofing or other unlawful activity
impacting an underlying security, the option, or
both. The Exchange has price movement alerts,
unusual market activity and order book alerts active
for all trading symbols.
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17APN1
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monitor for manipulation of the
underlying security and overlying
option. Furthermore, the Exchange
believes that the existing surveillance
procedures at the Exchange are capable
of properly identifying unusual and/or
illegal trading activity, which the
Exchange would utilize to surveil for
aberrant trading in cash-settled FLEX
ETF Options. Finally, the Exchange
notes that routine oversight inspections
of the Exchange’s regulatory programs
by the Commission have not uncovered
any material inconsistencies or
shortcomings in the manner in which
the Exchange’s market surveillance is
conducted.
The Exchange does not believe that
allowing cash settlement as a contract
term would render the marketplace for
equity options more susceptible to
manipulative practices. In addition to
the surveillance procedures and
processes described above,
improvements in audit trails,
recordkeeping practices, and interexchange cooperation over the last two
decades have greatly increased the
Exchange’s ability to detect and punish
attempted manipulative activities. The
Exchange therefore believes that the
decision of whether or not to allow cash
settlement as a contract term for the
proposed 25 FLEX ETF Options should
rest on the ability of the Exchange to
monitor and detect manipulative
activity, not on any perceived threat of
increased attempted manipulative
activity.
Additionally, the Exchange is a
member of the Intermarket Surveillance
Group (‘‘ISG’’) under the Intermarket
Surveillance Group Agreement dated
June 20, 1994. The ISG members work
together to coordinate surveillance and
investigative information sharing in the
stock and options markets. For
surveillance purposes, the Exchange
would therefore have access to
information regarding trading activity in
the pertinent underlying securities.
The proposed rule change is designed
to allow investors seeking to effect cashsettled FLEX ETF Options with the
opportunity for a different method of
settling option contracts at expiration if
they choose to do so. As noted above,
market participants may choose cash
settlement because physical settlement
possesses certain risks with respect to
volatility and movement of the
underlying security at expiration that
market participants may need to hedge
against. The Exchange believes that
offering innovative products flows to
the benefit of the investing public. A
robust and competitive market requires
that exchanges respond to member’s
evolving needs by constantly improving
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18:23 Apr 16, 2019
Jkt 247001
their offerings. Such efforts would be
stymied if exchanges were prohibited
from offering innovative products for
reasons that are generally debated in
academic literature. The Exchange
believes that introducing cash-settled
FLEX ETF Options would further
broaden the base of investors that use
FLEX Options to manage their trading
and investment risk, including investors
that currently trade in the OTC markets
for customized options, where
settlement restrictions do not apply. The
proposed rule change is also designed to
encourage market makers to shift
liquidity from OTC markets onto the
Exchange, which, it believes, will
enhance the process of price discovery
conducted on the Exchange through
increased order flow. The Exchange also
believes that this may open up cashsettled FLEX ETF Options to more retail
investors. The Exchange does not
believe that this proposed rule change
raises any unique regulatory concerns
because existing safeguards—such as
position limits, exercise limits, and
reporting requirements—would
continue to apply.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Securities Exchange Act of 1934
(the ‘‘Act’’),19 in general, and furthers
the objectives of Section 6(b)(5) of the
Act,20 in particular, in that it is 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. Specifically, the
Exchange believes that introducing
cash-settled FLEX ETF Options will
increase order flow to the Exchange,
increase the variety of options products
available for trading, and provide a
valuable tool for investors to manage
risk.
The Exchange believes that the
proposal to permit cash settlement as a
contract term for the proposed 25 FLEX
ETF Options would remove
impediments to and perfect the
mechanism of a free and open market as
cash-settled FLEX ETF Options would
enable market participants to receive
cash in lieu of shares of the underlying
security, which would, in turn provide
greater opportunities for market
participants to manage risk through the
use of cash-settled FLEX ETF Options to
the benefit of investors and the public
19 15
20 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00113
Fmt 4703
interest. The Exchange does not believe
that allowing cash settlement as a
contract term for the proposed 25 FLEX
ETF Options would render the
marketplace for equity options more
susceptible to manipulative practices.
As illustrated in the table above, each of
the 25 ETFs is actively traded and
highly liquid and thus not susceptible to
manipulation for the following reasons.
First, each ETF has a 20-day ADV of at
least 7 million shares which indicates
substantial liquidity present in the
trading of these securities. Second, each
ETF has a notional value over that 20day period of at least $400 million
which implies that the ETF has
significant depth and breadth of market
participants providing liquidity. Third,
each ETF has a minimum of $2 billion
of assets under management which
demonstrates broad ownership as well
as depth and breadth of investor
interest. And finally, each ETF has an
ADV of at least 10,000 options contracts
which indicates that there is significant
quoting and trading interest in the
options overlying each ETF.
The Exchange believes that the data
provided by the Exchange supports the
supposition that permitting cash
settlement as a FLEX term for the 25
ETFs selected by the Exchange would
broaden the base of investors that use
FLEX Options to manage their trading
and investment risk, including investors
that currently trade in the OTC market
for customized options, where
settlement restrictions do not apply.
The Exchange believes that the
proposal to permit cash settlement
would remove impediments to and
perfect the mechanism of a free and
open market because the proposed rule
change would provide ATP Holders
with enhanced methods to manage risk
by receiving cash if they choose to do
so instead of the underlying security. In
addition, this proposal would promote
just and equitable principles of trade
and protect investors and the general
public because cash settlement would
provide investors with an additional
tool to manage their risk. Further, the
Exchange notes that its proposal to
introduce cash-settled FLEX ETF
Options is not novel in that other
exchanges currently offer [sic] cash
settlement for options whose underlying
security is an ETF. The proposed rule
change therefore should not raise any
issues for the Commission that have not
been previously addressed.21
The proposed rule change to permit
cash settlement as a contract term for
the 25 FLEX ETF Options is designed to
promote just and equitable principles of
21 See
Sfmt 4703
E:\FR\FM\17APN1.SGM
supra note 17.
17APN1
Federal Register / Vol. 84, No. 74 / Wednesday, April 17, 2019 / Notices
trade in that the availability of cash
settlement as a contract term would give
market participants an alternative to
trading similar products in the OTC
market. By trading a product in an
exchange-traded environment (that is
currently being used in the OTC
market), the Exchange would be able to
compete more effectively with the OTC
market. The Exchange believes the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that it would lead
to the migration of options currently
trading in the OTC market to trading to
the Exchange. Also, any migration to the
Exchange from the OTC market would
result in increased market transparency.
Additionally, the Exchange believes the
proposed rule change is designed to
remove impediments to and to perfect
the mechanism for a free and open
market and a national market system,
and, in general, to protect investors and
the public interest in that it should
create greater trading and hedging
opportunities and flexibility. The
proposed rule change should also result
in enhanced efficiency in initiating and
closing out positions and heightened
contra-party creditworthiness due to the
role of OCC as issuer and guarantor of
cash-settled FLEX ETF Options. Further,
the proposed rule change would result
in increased competition by permitting
the Exchange to offer products that are
currently used in the OTC market.
Finally, the Exchange represents that
it has an adequate surveillance program
in place to detect manipulative trading
in cash-settled FLEX ETF Options.
Regarding the proposed cash settlement,
the Exchange would use the same
surveillance procedures currently
utilized for the Exchange’s other FLEX
Options. For surveillance purposes, the
Exchange would have access to
information regarding trading activity in
the pertinent underlying securities. The
Exchange believes that limiting cash
settlement to FLEX ETF Options would
minimize the possibility of
manipulation due to the robust liquidity
in both the ETF and options markets.
amozie on DSK9F9SC42PROD with NOTICES
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. The proposal
is designed to increase competition for
order flow on the Exchange in a manner
that is beneficial to investors because it
is designed to provide investors seeking
to effect cash-settled FLEX ETF Option
orders with the opportunity for different
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18:23 Apr 16, 2019
Jkt 247001
methods of settling option contracts at
expiration.
The Exchange notes that it operates in
a highly competitive market in which
market participants can readily direct
order flow to competing venues who
offer similar functionality. The
Exchange believes the proposed rule
change encourages competition amongst
market participants to provide tailored
cash-settled FLEX ETF Option contracts.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as modified by Amendment No.
2, 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–
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
PO 00000
Frm 00114
Fmt 4703
Sfmt 4703
16107
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 May
8, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–07614 Filed 4–16–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85612; File No. SR–FINRA–
2019–011]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Extend the Current
Pilot Program Related to FINRA Rule
11892 (Clearly Erroneous Transactions
in Exchange-Listed Securities)
April 11, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 9,
2019, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by FINRA. FINRA has
designated the proposed rule change as
constituting a ‘‘non-controversial’’ rule
change under paragraph (f)(6) of Rule
19b–4 under the Act,3 which renders
the proposal effective upon receipt of
this filing by the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
22 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(6).
1 15
E:\FR\FM\17APN1.SGM
17APN1
]]>Agencies
[Federal Register Volume 84, Number 74 (Wednesday, April 17, 2019)]
[Notices]
[Pages 16102-16107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-07614]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85628; File No. SR-NYSEAMER-2018-39]
Self-Regulatory Organizations; NYSE American LLC; Notice of
Filing of Amendment No. 2 to Proposed Rule Change To Allow Flexible
Exchange Equity Options To Be Cash Settled Where the Underlying
Security Is a Specified Exchange-Traded Fund
April 11, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 20, 2018, NYSE American LLC (``NYSE American '' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The proposed
rule change was published for comment in the Federal Register on
October 11, 2018.\3\ On November 19, 2018, pursuant to Section 19(b(2)
of the Act,\4\ 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.\5\ The Commission received one
comment letter on the proposed rule change.\6\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 84364 (October 4,
2018), 83 FR 51535 (October 11, 2018) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 84616 (November 19,
2018), 83 FR 60519 (November 26, 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.
\6\ See Letter to Brent J. Fields, Secretary, Commission, from
Samara Cohen, Head of ETF Global Markets, BlackRock, dated November
27, 2018.
---------------------------------------------------------------------------
On December 19, 2018, the Commission instituted proceedings under
Section 19(b)(2)(B) of the Act \7\ to determine whether to approve or
disapprove the proposed rule change.\8\ On March 11, 2019, the Exchange
filed Amendment No. 1 to the proposed rule change. On March 25, 2019,
the Exchange withdrew Amendment No. 1 and filed Amendment No. 2 to the
proposed rule change, which superseded and replaced the proposed rule
change in its entirety. On April 5, 2019, the Commission extended the
time period for approving or disapproving the proposal for an
additional 60 days until June 8, 2019.\9\ The Commission is publishing
this notice to solicit comments on the proposed rule change, as
modified by Amendment No. 2, from interested persons.\10\
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\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ See Securities Exchange Act Release No. 84870 (December 19,
2018), 83 FR 66779 (December 27, 2018) (``Order Instituting
Proceedings'').
\9\ See Securities Exchange Act Release No. 85531 (April 5,
2019).
\10\ In Amendment No. 2, the Exchange revised the proposal to
limit the ETFs that could serve as an underlying security for cash-
settled FLEX Equity Options to 25 enumerated ETFs, rather than all
ETFs included in the Option Penny Pilot. In addition, Amendment No.
2 amended the proposal to, among other things, (1) describe
characteristics of ETFs, including the calculation of net asset
value, the creation and redemption mechanism, and their reliance on
arbitrage; (2) provide trading data related to the 25 specified ETFs
proposed to serve as the allowable underlying securities for cash-
settled FLEX Equity Options; (3) describe the requirement in Rule
906G(b) that members or member organizations may be required to
provide a report of positions on the same side of the market in
excess of the level established as the position limit for non-FLEX
Equity options of the same class; (4) describe in more detail
existing surveillance procedures relevant to cash-settled FLEX
Equity Options on the specified ETFs; and (5) make additional
arguments about why the Exchange believes that cash settlement would
be appropriate for such options.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend certain rules related to Flexible
Exchange (``FLEX'') Options. This Amendment No. 2 supersedes the
original filing and the Partial Amendment No. 1 in its entirety.\11\
The proposed rule change is available on the Exchange's website at
www.nyse.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
---------------------------------------------------------------------------
\11\ The original proposal was filed by the Exchange on
September 18, 2018. See Securities Exchange Act Release No. 84364
(October 4, 2018), 83 FR 51535 (October 11, 2018). The Exchange
filed Partial Amendment No. 1 on March 11, 2019 and withdrew it on
March 25, 2019.
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[[Page 16103]]
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 self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
FLEX Options are customized equity or index contracts that allow
investors to tailor contract terms for exchange-listed equity and index
options. The Exchange seeks to amend NYSE American Rule 903G(c) to
allow for cash settlement for certain FLEX Equity Options.\12\ As
proposed, FLEX Equity Options where the underlying security is one of
25 enumerated Exchange-Traded Funds (``ETFs'') would be capable of
being settled by physical delivery of the underlying ETF or by delivery
in cash. Currently, all FLEX Equity Options are settled by physical
delivery of the underlying security.\13\ All FLEX Index Options,
however, are currently settled by delivery in cash.\14\
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\12\ 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).
\13\ See Rule 903G(c)(3)(i).
\14\ See Rule 903G(b)(2) and (3).
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To effectuate this change, the Exchange proposes new paragraph
(c)(3)(ii) to Rule 903G, which would provide that the exercise
settlement for a FLEX ETF Option with an underlying security listed in
proposed Commentary .02 would be by physical delivery of the underlying
security or by delivery in cash.\15\ The Exchange further proposes new
Commentary .02, which would provide the name and symbol of each of 25
ETFs listed in the table below.\16\ The Exchange believes it is
appropriate to introduce cash-settlement as an alternative to this
group of equity securities because ETFs generally have increasingly
become a major part of investors' portfolio. The vast proliferation of
ETFs has greatly expanded the ability of investors to take advantage of
many unique opportunities to hedge their portfolio and manage risk.
Investors can take long and/or short positions--as well as in many
cases, leveraged long or short positions--in baskets of securities
whose components can include foreign and domestic stock indexes,
currencies, commodities and bonds. Over the years, ETFs have also
attracted a great deal of options trading.
---------------------------------------------------------------------------
\15\ See proposed Rule 903G(c)(3)(ii). The Exchange also
proposes a non-substantive amendment to Rule 903G to renumber
current Rule 903G(c)(3)(ii) as new Rule 903G(c)(3)(iii).
\16\ See proposed Rule 903G, Commentary .02.
---------------------------------------------------------------------------
As described more fully below, the Exchange believes that the deep
liquidity and robust trading activity in the 25 ETFs proposed to be
eligible for cash-settled FLEX ETF Options would mitigate against
concerns that their settlement value would be susceptible to
manipulation.
Characteristics of ETFs
ETFs are funds that have their value derived from assets owned. The
net asset value (``NAV'') of an ETF is a daily calculation that is
based off the most recent closing prices of the assets in the fund and
an actual accounting of the total cash in the fund at the time of
calculation. The NAV of an ETF is calculated by taking the sum of the
assets in the fund, including any securities and cash, subtracting out
any liabilities, and dividing that by the number of shares outstanding.
Additionally, each ETF is subject to a creation and redemption
mechanism to ensure the price of the ETF does not fluctuate too far
away from its NAV--which mechanisms reduce the potential for
manipulative activity. Each business day, ETFs are required to make
publicly available a portfolio composition file that describes the
makeup of their creation and redemption ``baskets'' (i.e., a specific
list of names and quantities of securities or other assets designed to
track the performance of the portfolio as a whole). ETF shares are
created when an Authorized Participant, typically a market maker or
other large institutional investor, deposits the daily creation basket
or cash with the ETF issuer. In return for the creation basket or cash
(or both), the ETF issues to the Authorized Participant a ``creation
unit'' that consists of a specified number of ETF shares. For instance,
IWM is designed to track the performance of the Russell 2000 Index. An
Authorized Participant will purchase all the Russell 2000 constituent
securities in the exact same weight as the index prescribes, then
deliver those shares to the ETF issuer. In exchange, the ETF issuer
gives the Authorized Participant a block of equally valued ETF shares,
on a one-for-one fair value basis. This process can also work in
reverse. A redemption is achieved when the Authorized Participant
accumulates a sufficient number of shares of the ETF to constitute a
creation unit and then exchanges these ETF shares with the ETF issuer,
thereby decreasing the supply of ETF shares in the market.
The principal, and perhaps most important, feature of ETFs is their
reliance on an ``arbitrage function'' performed by market participants
that influences the supply and demand of ETF shares and, thus, trading
prices relative to NAV. As noted above, new ETF shares can be created
and existing shares redeemed based on investor demand; thus, ETF supply
is open-ended. This arbitrage function helps to keep an ETF's price in
line with the value of its underlying portfolio, i.e., it minimizes
deviation from NAV. Generally, the higher the liquidity and trading
volume of an ETF, the more likely the price of the ETF will not deviate
from the value of its underlying portfolio and such ETFs are less
susceptible to price manipulation.
Trading Data for the 25 ETFs Proposed for Potential Cash Settlement
As illustrated in the table below, the average deviation of the
closing price of the 25 ETFs from its NAV, on a percentage basis, is
less than 1%. The close proximity between each ETF's NAV and its
closing price illustrates how closely the 25 ETFs selected by the
Exchange are tethered to values beyond buying and selling at the close.
More specifically, the ETFs that underlie options subject to this
proposal are highly liquid, and are based on a broad set of highly
liquid securities. The table below presents descriptive statistics for
the 25 ETFs selected by the Exchange, as of December 31, 2018, and
includes, for each ETF: The 20-day average trading volume of the
underlying ETF (in shares and dollar value), the assets under
management, the average deviation from net asset value, and the average
daily volume of options contracts traded overlying each ETF.
[[Page 16104]]
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Average
20-day average 20-day average Total fund deviation from Options
ETF ETF ticker trading volume trading volume assets under net asset average daily
(shares) ($) management ($) value (NAV) volume
(percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
SPDR S&P 500 ETF....................... SPY......................... 160,041,302 $40,948,098,000 $240,106.44 0.02 4,611,460
Invesco Nasdaq 100 ETF................. QQQ......................... 71,613,353 11,310,618,350 61,145.94 0.03 1,108,432
iShares MSCI Emerging Markets ETF...... EEM......................... 111,792,871 4,439,674,650 29,314.21 0.54 585,794
iShares Russell 2000 ETF............... IWM......................... 35,158,745 4,861,054,750 39,907.42 0.41 510,309
iShares iBoxx $ High Yield Corporate HYG......................... 27,488,196 2,250,963,000 13,202.49 0.23 345,034
Bond ETF.
SPDR S&P Oil & Gas Exploration & XOP......................... 27,040,448 784,296,775 2,406.98 0.07 223,594
Production ETF.
iShares China Large-Cap ETF............ FXI......................... 41,125,843 1,668,342,775 5,671.99 0.70 216,003
Financial Select Sector SPDR ETF....... XLF......................... 90,744,549 2,206,780,250 22,899.77 0.04 209,185
iShares MSCI EAFE ETF.................. EFA......................... 61,226,608 3,656,868,050 62,279.02 0.28 188,666
iShares MSCI Brazil ETF................ EWZ......................... 26,957,238 1,032,776,750 7,694.70 0.65 180,654
iShares 20+ Year Treasury Bond ETF..... TLT......................... 11,423,906 1,364,567,990 8,761.36 0.11 123,591
SPDR S&P Regional Banking ETF.......... KRE......................... 12,780,929 625,733,560 2,926.33 0.05 95,607
VanEck Vectors Gold Miners ETF......... GDX......................... 61,166,478 1,248,025,595 10,575.69 0.16 90,602
SPDR Dow Jones Industrial Average ETF.. DIA......................... 6,985,256 1,660,420,135 19,700.41 0.02 83,202
SPDR S&P Biotech ETF................... XBI......................... 7,488,285 554,592,040 3,608.90 0.10 62,290
Energy Select Sector SPDR ETF.......... XLE......................... 24,766,279 1,502,959,710 13,431.16 0.04 57,398
Utilities Select Sector SPDR ETF....... XLU......................... 24,430,265 1,339,179,575 8,383.96 0.04 50,759
Consumer Staples Select Sector SPDR ETF XLP......................... 27,738,596 1,469,257,995 9,572.95 0.04 28,699
iShares U.S. Real Estate ETF........... IYR......................... 11,283,934 881,610,765 3,434.70 0.07 26,722
Technology Select Sector SPDR ETF...... XLK......................... 22,235,286 1,407,316,770 17,305.90 0.03 21,243
Industrial Select Sector SPDR ETF...... XLI......................... 19,012,293 1,269,902,155 9,689.46 0.04 20,789
Healthcare Select Sector ETF........... XLV......................... 17,397,161 1,529,979,575 17,987.48 0.04 20,183
iShares MSCI Japan ETF................. EWJ......................... 17,714,960 921,963,790 15,253.86 0.46 13,855
Materials Select Sector SPDR ETF....... XLB......................... 12,685,383 646,247,535 3,634.08 0.04 11,552
VanEck Vectors Junior Gold Miners ETF.. GDXJ........................ 14,662,291 419,654,120 4,273.40 0.23 10,868
--------------------------------------------------------------------------------------------------------------------------------------------------------
As illustrated in the table above, each of the 25 ETFs is actively
traded and highly liquid and thus not readily susceptible to
manipulation for the following reasons:
First, each has a 20-day ADV of at least 7 million shares
which indicates substantial liquidity present in the trading of these
securities.
Second, each ETF has a notional value over that 20-day
period of at least $400 million which implies that the ETF has
significant depth and breadth of market participants providing
liquidity.
Third, each ETF has a minimum of $2 billion of assets
under management which demonstrates broad ownership as well as depth
and breadth of investor interest.
Finally, each ETF has an ADV of at least 10,000 options
contracts which indicates that there is significant quoting and trading
interest in the options overlying each ETF.
The Exchange believes that this data indicates that permitting cash
settlement as a FLEX term for the 25 ETFs selected by the Exchange
would broaden the base of investors that use FLEX Options to manage
their trading and investment risk, including investors that currently
trade in the OTC market for customized options, where settlement
restrictions do not apply. Moreover, introducing cash settlement as a
FLEX term for these 25 ETFs would be appropriate because the data above
indicates that these are some of the most actively traded and liquid
ETFs and are therefore not readily susceptible to manipulation.
Today, all ETF options are settled physically, i.e., upon exercise,
shares of the underlying ETF must be assumed or delivered. Physical
settlement possesses certain risks with respect to volatility and
movement of the underlying security at expiration that market
participants may need to hedge against. Cash settlement may be
preferable to physical delivery in some circumstances as it does not
present the same risk. If an issue with the delivery of the underlying
security arises, it may become more expensive (and time consuming) to
reverse the delivery because the price of the underlying security would
almost certainly have changed. Reversing a cash payment, on the other
hand, would not involve any such issue because reversing a cash
delivery would simply involve the exchange of cash. Additionally, with
physical settlement, market participants that have a need to generate
cash would have to sell the underlying security while incurring the
costs associated with liquidating their position in the underlying
security as well as the risk of an adverse movement in the price of the
underlying security. The Exchange notes that cash settlement for
options is not a unique feature and other options exchanges currently
trade cash-settled options.\17\
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\17\ See e.g., PHLX FX Options traded on Nasdaq PHLX and S&P
500[supreg] Index Options traded on Cboe Options Exchange. More
recently, the Commission approved, on a pilot basis, the listing and
trading of RealDayTM Options on the BOX Options Exchange
LLC. See Securities Exchange Act Release No. 79936 (February 2,
2017), 82 FR 9886 (February 8, 2017) (``RealDay Pilot Program'').
The RealDay Pilot Program has been extended until February 2, 2019.
See Securities Exchange Act Release No. 82414 (December 28, 2017),
83 FR 577 (January 4, 2018) (SR-BOX-2017-38).
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The Exchange understands that there are concerns that have been
raised in the past regarding cash-settled equity options. The Exchange
seeks to allay such concerns by proposing to adopt cash-settlement as
an alternative to
[[Page 16105]]
ETFs only, and more specifically, to a narrow universe of 25 ETFs. As a
general matter, all index options traded today are cash-settled and
derive their value from a disseminated index price. Similarly, ETFs
typically have their values linked to a disseminated index price. As
noted above, the Exchange seeks to limit cash-settlement to 25 of the
most liquid and actively traded ETFs, as evidenced by the data
underlying the 25 ETFs in the table above.
With respect to position limits, cash-settled FLEX ETF Options
would be subject to the position limits set forth in Rule 906G.
Accordingly, the Exchange would establish position limits for cash-
settled FLEX ETF Options that are the same as non-cash-settled FLEX ETF
Options. Pursuant to Rule 906G(b), each member or member organization
(other than a Specialist or Floor Market Maker) that maintains a
position on the same side of the market in excess of the level
established pursuant to Rule 904 for Non-FLEX Equity options of the
same class on behalf of its own account or for the account of a
customer is required to report to the Exchange information on the FLEX
Equity option position, positions in any related instrument, the
purpose or strategy for the position and the collateral used by the
account.
The Exchange understands that FLEX ETF Options are currently traded
in the over-the-counter (``OTC'') market by a variety of market
participants, e.g., hedge funds, proprietary trading firms, and pension
funds, to name a few. The Exchange believes there is room for
significant growth if a comparable product were introduced for trading
on a regulated market. The Exchange expects that users of these OTC
products would be among the primary users of exchange-traded cash-
settled FLEX ETF Options. The Exchange also believes that the trading
of cash-settled FLEX ETF Options would allow these same market
participants to better manage the risk associated with the volatility
of underlying ETF positions given the enhanced liquidity that an
exchange-traded product would bring.
Cash-settled FLEX ETF Options traded on the Exchange would have
three important advantages over the contracts that are traded in the
OTC market. First, as a result of greater standardization of contract
terms, exchange-traded contracts should develop more liquidity. Second,
counter-party credit risk would be mitigated by the fact that the
contracts are issued and guaranteed by The Options Clearing Corporation
(``OCC''). Finally, the price discovery and dissemination provided by
the Exchange and its members would lead to more transparent markets.
The Exchange believes that its ability to offer cash-settled FLEX ETF
Options would aid it in competing with the OTC market and at the same
time expand the universe of products available to interested market
participants. The Exchange believes that an exchange-traded alternative
may provide a useful risk management and trading vehicle for market
participants and their customers.
The Exchange has confirmed with the OCC that OCC can support the
clearance and settlement of cash-settled FLEX ETF Options. The Exchange
has analyzed its capacity and represents that it believes the Exchange
and OPRA have the necessary systems capacity to handle the additional
traffic associated with the listing of cash-settled FLEX ETF Options.
The Exchange believes any additional traffic that would be generated
from the introduction of cash-settled FLEX ETF Options would be
manageable. The Exchange believes ATP Holders will not have a capacity
issue as a result of this proposed rule change. The Exchange also
represents that it does not believe this proposed rule change will
cause fragmentation of liquidity. The Exchange will monitor the trading
volume associated with the additional options series listed as a result
of this proposed rule change and the effect (if any) of these
additional series on market fragmentation and on the capacity of the
Exchange's automated systems.
The Exchange has an adequate surveillance program in place for
cash-settled FLEX ETF Options and intends to apply the same program
procedures that it applies to the Exchange's other options products.
FLEX options products and their respective symbols are integrated into
the Exchange's existing surveillance system architecture and are thus
subject to the relevant surveillance processes. As a result, the
Exchange believes it would be able to effectively police the trading of
cash-settled FLEX ETF Options using means that include its surveillance
for manipulation. The Exchange believes that manipulating the
settlement price of cash-settled FLEX ETF Options would be difficult
based on the size of the market for the 25 ETFs that are the subject of
this proposed rule change. Additionally, the Exchange notes that each
cash-settled FLEX ETF Option that would be subject to this proposed
rule change is sufficiently active so as to alleviate concerns about
potential manipulative activity. Further, the vast liquidity of the 25
ETF options as well as the underlying equities markets ensures a
multitude of market participants at any given time. Given the high
level of participation among market participants that enter quotes and/
or orders in these ETF options, the Exchange believes it would be very
difficult for a single participant to alter the prices of each of the
underlying securities of an ETF in any significant way without exposing
the would-be manipulator to regulatory scrutiny. The Exchange further
believes any attempt to manipulate the prices of the underlying
securities of an ETF would also be cost prohibitive.
With respect to regulatory scrutiny, the Exchange further believes
its existing surveillance technologies and procedures adequately
address potential concerns regarding possible manipulation of the
settlement value at or near the close of the market. The Exchange notes
that the regulatory program operated by and overseen by NYSE Regulation
includes cross-market surveillance designed to identify manipulative
and other improper trading, including spoofing, algorithm gaming,
marking the close and open, as well as more general, abusive behavior
related to front running, wash sales, quoting/routing, and Reg SHO
violations, that may occur on the Exchange and other markets. These
cross-market patterns incorporate relevant data from various markets
beyond the Exchange and its affiliates, including data from NYSE Arca,
Inc. and from markets not affiliated with the Exchange. The Exchange
represents that its existing trading surveillances are adequate to
monitor the trading in the underlying ETF and subsequent trading of
options on those ETFs on the Exchange.\18\
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\18\ Such surveillance procedures generally focus on detecting
securities trading subject to opening price manipulation, closing
price manipulation, layering, spoofing or other unlawful activity
impacting an underlying security, the option, or both. The Exchange
has price movement alerts, unusual market activity and order book
alerts active for all trading symbols.
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Additionally, for options, the Exchange utilizes an array of
patterns that monitor manipulation of options, or manipulation of
equity securities (regardless of venue) for the purpose of impacting
options prices on the Exchange (i.e., mini-manipulation strategies).
That surveillance coverage is initiated once options begin trading on
the Exchange. Accordingly, the Exchange believes that the cross-market
surveillance performed by the Exchange or FINRA on behalf of the
Exchange, coupled with NYSE Regulation's own monitoring for violative
activity on the Exchange comprise a comprehensive surveillance program
that is adequate to
[[Page 16106]]
monitor for manipulation of the underlying security and overlying
option. Furthermore, the Exchange believes that the existing
surveillance procedures at the Exchange are capable of properly
identifying unusual and/or illegal trading activity, which the Exchange
would utilize to surveil for aberrant trading in cash-settled FLEX ETF
Options. Finally, the Exchange notes that routine oversight inspections
of the Exchange's regulatory programs by the Commission have not
uncovered any material inconsistencies or shortcomings in the manner in
which the Exchange's market surveillance is conducted.
The Exchange does not believe that allowing cash settlement as a
contract term would render the marketplace for equity options more
susceptible to manipulative practices. In addition to the surveillance
procedures and processes described above, improvements in audit trails,
recordkeeping practices, and inter-exchange cooperation over the last
two decades have greatly increased the Exchange's ability to detect and
punish attempted manipulative activities. The Exchange therefore
believes that the decision of whether or not to allow cash settlement
as a contract term for the proposed 25 FLEX ETF Options should rest on
the ability of the Exchange to monitor and detect manipulative
activity, not on any perceived threat of increased attempted
manipulative activity.
Additionally, the Exchange is a member of the Intermarket
Surveillance Group (``ISG'') under the Intermarket Surveillance Group
Agreement dated June 20, 1994. The ISG members work together to
coordinate surveillance and investigative information sharing in the
stock and options markets. For surveillance purposes, the Exchange
would therefore have access to information regarding trading activity
in the pertinent underlying securities.
The proposed rule change is designed to allow investors seeking to
effect cash-settled FLEX ETF Options with the opportunity for a
different method of settling option contracts at expiration if they
choose to do so. As noted above, market participants may choose cash
settlement because physical settlement possesses certain risks with
respect to volatility and movement of the underlying security at
expiration that market participants may need to hedge against. The
Exchange believes that offering innovative products flows to the
benefit of the investing public. A robust and competitive market
requires that exchanges respond to member's evolving needs by
constantly improving their offerings. Such efforts would be stymied if
exchanges were prohibited from offering innovative products for reasons
that are generally debated in academic literature. The Exchange
believes that introducing cash-settled FLEX ETF Options would further
broaden the base of investors that use FLEX Options to manage their
trading and investment risk, including investors that currently trade
in the OTC markets for customized options, where settlement
restrictions do not apply. The proposed rule change is also designed to
encourage market makers to shift liquidity from OTC markets onto the
Exchange, which, it believes, will enhance the process of price
discovery conducted on the Exchange through increased order flow. The
Exchange also believes that this may open up cash-settled FLEX ETF
Options to more retail investors. The Exchange does not believe that
this proposed rule change raises any unique regulatory concerns because
existing safeguards--such as position limits, exercise limits, and
reporting requirements--would continue to apply.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\19\ in
general, and furthers the objectives of Section 6(b)(5) of the Act,\20\
in particular, in that it is 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. Specifically,
the Exchange believes that introducing cash-settled FLEX ETF Options
will increase order flow to the Exchange, increase the variety of
options products available for trading, and provide a valuable tool for
investors to manage risk.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78f(b).
\20\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposal to permit cash settlement
as a contract term for the proposed 25 FLEX ETF Options would remove
impediments to and perfect the mechanism of a free and open market as
cash-settled FLEX ETF Options would enable market participants to
receive cash in lieu of shares of the underlying security, which would,
in turn provide greater opportunities for market participants to manage
risk through the use of cash-settled FLEX ETF Options to the benefit of
investors and the public interest. The Exchange does not believe that
allowing cash settlement as a contract term for the proposed 25 FLEX
ETF Options would render the marketplace for equity options more
susceptible to manipulative practices. As illustrated in the table
above, each of the 25 ETFs is actively traded and highly liquid and
thus not susceptible to manipulation for the following reasons. First,
each ETF has a 20-day ADV of at least 7 million shares which indicates
substantial liquidity present in the trading of these securities.
Second, each ETF has a notional value over that 20-day period of at
least $400 million which implies that the ETF has significant depth and
breadth of market participants providing liquidity. Third, each ETF has
a minimum of $2 billion of assets under management which demonstrates
broad ownership as well as depth and breadth of investor interest. And
finally, each ETF has an ADV of at least 10,000 options contracts which
indicates that there is significant quoting and trading interest in the
options overlying each ETF.
The Exchange believes that the data provided by the Exchange
supports the supposition that permitting cash settlement as a FLEX term
for the 25 ETFs selected by the Exchange would broaden the base of
investors that use FLEX Options to manage their trading and investment
risk, including investors that currently trade in the OTC market for
customized options, where settlement restrictions do not apply.
The Exchange believes that the proposal to permit cash settlement
would remove impediments to and perfect the mechanism of a free and
open market because the proposed rule change would provide ATP Holders
with enhanced methods to manage risk by receiving cash if they choose
to do so instead of the underlying security. In addition, this proposal
would promote just and equitable principles of trade and protect
investors and the general public because cash settlement would provide
investors with an additional tool to manage their risk. Further, the
Exchange notes that its proposal to introduce cash-settled FLEX ETF
Options is not novel in that other exchanges currently offer [sic] cash
settlement for options whose underlying security is an ETF. The
proposed rule change therefore should not raise any issues for the
Commission that have not been previously addressed.\21\
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\21\ See supra note 17.
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The proposed rule change to permit cash settlement as a contract
term for the 25 FLEX ETF Options is designed to promote just and
equitable principles of
[[Page 16107]]
trade in that the availability of cash settlement as a contract term
would give market participants an alternative to trading similar
products in the OTC market. By trading a product in an exchange-traded
environment (that is currently being used in the OTC market), the
Exchange would be able to compete more effectively with the OTC market.
The Exchange believes the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that it would lead to
the migration of options currently trading in the OTC market to trading
to the Exchange. Also, any migration to the Exchange from the OTC
market would result in increased market transparency. Additionally, the
Exchange believes the proposed rule change is designed to remove
impediments to and to perfect the mechanism for a free and open market
and a national market system, and, in general, to protect investors and
the public interest in that it should create greater trading and
hedging opportunities and flexibility. The proposed rule change should
also result in enhanced efficiency in initiating and closing out
positions and heightened contra-party creditworthiness due to the role
of OCC as issuer and guarantor of cash-settled FLEX ETF Options.
Further, the proposed rule change would result in increased competition
by permitting the Exchange to offer products that are currently used in
the OTC market.
Finally, the Exchange represents that it has an adequate
surveillance program in place to detect manipulative trading in cash-
settled FLEX ETF Options. Regarding the proposed cash settlement, the
Exchange would use the same surveillance procedures currently utilized
for the Exchange's other FLEX Options. For surveillance purposes, the
Exchange would have access to information regarding trading activity in
the pertinent underlying securities. The Exchange believes that
limiting cash settlement to FLEX ETF Options would minimize the
possibility of manipulation due to the robust liquidity in both the ETF
and options markets.
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. The proposal is designed to
increase competition for order flow on the Exchange in a manner that is
beneficial to investors because it is designed to provide investors
seeking to effect cash-settled FLEX ETF Option orders with the
opportunity for different methods of settling option contracts at
expiration.
The Exchange notes that it operates in a highly competitive market
in which market participants can readily direct order flow to competing
venues who offer similar functionality. The Exchange believes the
proposed rule change encourages competition amongst market participants
to provide tailored cash-settled FLEX ETF Option contracts.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 2, 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-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 May 8, 2019.
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,
Deputy Secretary.
[FR Doc. 2019-07614 Filed 4-16-19; 8:45 am]
BILLING CODE 8011-01-P
