Self-Regulatory Organizations; NYSE American LLC; Notice of Filing of Proposed Rule Change To Allow Certain Flexible Exchange Equity Options To Be Cash Settled, 60120-60125 [2019-24256]

Download as PDF 60120 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87444; File No. SR– NYSEAMER–2019–38] Self-Regulatory Organizations; NYSE American LLC; Notice of Filing of Proposed Rule Change To Allow Certain Flexible Exchange Equity Options To Be Cash Settled November 1, 2019. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that on October 17, 2019, 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 Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rules 903G and 906G related to Flexible Exchange (‘‘FLEX’’) Options. 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. 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 The Exchange proposes to amend Rules 903G and 906G related to FLEX Options. 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 VerDate Sep<11>2014 17:55 Nov 06, 2019 Jkt 250001 FLEX Options are customized equity or index contracts that allow investors to tailor contract terms for exchangelisted equity and index options. The Exchange proposes to amend NYSE American Rule 903G(c) to allow for cash settlement of certain FLEX Equity Options.4 Generally, FLEX Equity Options are settled by physical delivery of the underlying security,5 while all FLEX Index Options are currently settled by delivery in cash.6 As proposed, FLEX Equity Options would be permitted to be settled by delivery in cash if the underlying security meets prescribed criteria. To permit cash settlement of certain FLEX Equity Options, the Exchange proposes new paragraph (c)(3)(ii) to Rule 903G. Proposed Rule 903G(c)(3)(ii) would provide that the exercise settlement for FLEX Equity Options may be by physical delivery of the underlying security or by delivery in cash if the underlying security, measured over the prior six-month period, has an average daily notional value of $500 Million or more and a national average daily volume (ADV) of at least 4,680,000 shares.7 The Exchange also proposes new subparagraph (A) to Rule 903G(c)(3)(ii), which would provide that the Exchange will determine bi-annually the underlying securities that satisfy the notional value and trading volume requirements in Rule 903G(c)(3)(ii) by using trading statistics for the previous six-months.8 Proposed new subparagraph (B) to Rule 903(c)(3)(ii) would further provide that if the Exchange determines pursuant to the bi-annual review that an underlying security ceases to satisfy the requirements under Rule 903G(c)(3)(ii), any new FLEX Equity Options overlying such security entered into will be required to have exercise settlement by physical delivery and any open positions in cash-settled FLEX Equity Options overlying such 4 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). 5 See Rule 903G(c)(3)(i). 6 See Rule 903G(b)(2) and (3). Pursuant to Exchange rules, Binary Return Derivatives (‘‘ByRDs’’) are also settled in cash. See Rule 900ByRDs(b). As discussed below, cash settlement is also permitted in the over-the-counter (‘‘OTC’’) market. 7 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). 8 See proposed Rule 903G(c)(3)(ii)(A). The Exchange plans to conduct the bi-annual review on January 1 and July 1 of each year. The results of the bi-annual review will be announced via a Trader Update. PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 security may be traded to only close the position.9 The Exchange believes it is appropriate to introduce cash settlement as an alternative contract term to the select group of equity securities because they are the most highly liquid and actively-traded securities. As described more fully below, the Exchange believes that the deep liquidity and robust trading activity in securities identified by the Exchange as meeting the criteria mitigate against historic concerns regarding susceptibility to manipulation. The Exchange believes that average daily notional value is an appropriate proxy for selecting underlying securities that are not readily susceptible to manipulation for purposes of establishing a settlement price. Average daily notional value takes into account both the trading activity and the price of an underlying security. As a general matter, the more expensive an underlying security’s price, the less cost-effective manipulation could become. Further, manipulation of the price of a security encounters greater difficulty the more volume that is traded. To calculate average daily notional value (provided in the table below), the Exchange summed the notional value of each trade for each symbol (i.e., the number of shares times the price for each execution in the security) and divided that total by the number of trading days in the six-month period (from January 1, 2019 through June 30, 2019) reviewed by the Exchange. Further, the Exchange proposes that qualifying securities also meet an ADV standard. The purpose for this second criteria is to prevent unusually expensive underlying securities from qualifying under the average daily notional value standard while not being one of the most actively traded securities. The Exchange believes an ADV requirement of 4,680,000 shares a day is appropriate because it represents average trading in the underlying security of 200 shares per second. While no security is immune from all manipulation, the Exchange believes that the combination of average daily 9 See proposed Rule 903G(c)(3)(ii)(B). Pursuant to Rule 920NY, an ATP Holder that is acting as a Market Maker may enter into an opening transaction in order to facilitate closing transactions of another market participant. See https:// www.nyse.com/publicdocs/nyse/markets/arcaoptions/rule-interpretations/2017/NYSE%20Arca %20Options%20RB%2017-01.pdf. The Exchange will revise its guidance to reflect that an ATP Holder acting as a Market Maker in cash-settled FLEX Equity Options can enter into an opening transaction to facilitate closing only transactions of another market participant. E:\FR\FM\07NON1.SGM 07NON1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Notices traded and deeply liquid securities would qualify to have cash settlement as a contract term. As provided in the table below, as of June 30, 2019, the Exchange would be able to provide cash settlement as a contract term for FLEX Equity Options on only 84 underlying securities,10 as only this group of securities would currently meet the notional value and ADV as prerequisite requirements would limit cash settlement of FLEX Options to those underlying securities that would be less susceptible to manipulation in order to establish a settlement price. The Exchange believes that the proposed objective criteria would ensure that only the most robustly Security name SPY ................................ QQQ ............................... AAPL .............................. FB ................................... IWM ................................ MSFT .............................. EEM ................................ NFLX .............................. BABA .............................. TSLA ............................... BA ................................... NVDA .............................. AMD ................................ HYG ................................ EFA ................................. BAC ................................ DIS .................................. JPM ................................ XLF ................................. LLY ................................. EWZ ................................ V ..................................... FXI .................................. QCOM ............................ INTC ............................... UNH ................................ LQD ................................ SPDR S&P 500 ETF Trust ..................................... Invesco QQQ Trust ................................................. Apple Inc. ................................................................ Facebook, Inc. Class A .......................................... iShares Russell 2000 ETF ...................................... Microsoft Corporation ............................................. iShares MSCI Emerging Markets ETF ................... Netflix, Inc. .............................................................. Alibaba Group Holding Ltd. Sponsored ADR ......... Tesla Inc ................................................................. Boeing Company .................................................... NVIDIA Corporation ................................................ Advanced Micro Devices, Inc. ................................ iShares iBoxx High Yield Corporate Bond ETF ..... iShares MSCI EAFE ETF ....................................... Bank of America Corp ............................................ Walt Disney Company ............................................ JPMorgan Chase & Co. .......................................... Financial Select Sector SPDR Fund ...................... Eli Lilly and Company ............................................. iShares MSCI Brazil ETF ....................................... Visa Inc. Class A .................................................... iShares China Large-Cap ETF ............................... QUALCOMM Incorporated ..................................... Intel Corporation ..................................................... UnitedHealth Group Incorporated ........................... iShares iBoxx Investment Grade Corporate Bond ETF. Micron Technology, Inc. ......................................... Cisco Systems, Inc. ................................................ iShares 20+ Year Treasury Bond ETF ................... Health Care Select Sector SPDR Fund ................. Wells Fargo & Company ........................................ Pfizer Inc. ................................................................ Citigroup Inc. ........................................................... SPDR Gold Trust .................................................... Technology Select Sector SPDR Fund .................. Utilities Select Sector SPDR Fund ......................... VanEck Vectors Gold Miners ETF ......................... ProShares UltraPro QQQ ....................................... Johnson & Johnson ................................................ AT&T Inc. ................................................................ Exxon Mobil Corporation ........................................ Industrial Select Sector SPDR Fund ...................... salesforce.com, Inc. ................................................ Energy Select Sector SPDR Fund ......................... Merck & Co., Inc. .................................................... Roku, Inc. Class A .................................................. Chevron Corporation .............................................. Bristol-Myers Squibb Company .............................. Procter & Gamble Company .................................. iShares Core MSCI Emerging Markets ETF .......... Verizon Communications Inc. ................................. Celgene Corporation ............................................... Square, Inc. Class A ............................................... General Electric Company ...................................... Oracle Corporation ................................................. Comcast Corporation Class A ................................ Consumer Staples Select Sector SPDR Fund ....... MU .................................. CSCO ............................. TLT ................................. XLV ................................. WFC ............................... PFE ................................. C ..................................... GLD ................................ XLK ................................. XLU ................................. GDX ................................ TQQQ ............................. JNJ ................................. T ..................................... XOM ............................... XLI .................................. CRM ............................... XLE ................................. MRK ................................ ROKU ............................. CVX ................................ BMY ................................ PG .................................. IEMG .............................. VZ ................................... CELG .............................. SQ .................................. GE .................................. ORCL .............................. CMCSA ........................... XLP ................................. 10 The Exchange notes that TVIX (VelocityShares Daily 2x VIX Short-Term ETN) would qualify under VerDate Sep<11>2014 17:55 Nov 06, 2019 Jkt 250001 requirement of $500 Million or more average daily notional value and a minimum ADV of 4,680,000 shares. The table below provides the list of the 84 securities that, as of June 30, 2019, would be eligible to have cash settlement as a FLEX Equity option contract term. Average daily notional value (1/1/19–6/30/19) Symbol Frm 00070 Fmt 4703 Sfmt 4703 Average daily volume (1/1/19–6/30/19) $21,297,533,471 6,226,236,315 5,411,433,661 3,167,063,717 3,138,717,375 3,081,463,649 2,986,071,029 2,817,672,156 2,742,711,789 2,592,804,463 2,268,537,891 2,219,441,287 1,978,829,372 1,847,494,422 1,716,385,479 1,638,846,503 1,392,946,023 1,360,283,575 1,347,599,180 1,327,459,452 1,257,290,585 1,232,449,824 1,227,285,973 1,211,880,121 1,198,554,195 1,193,149,098 1,168,122,337 76,562,281 35,419,606 29,938,826 18,656,551 20,697,570 26,298,765 70,901,336 8,073,403 16,314,223 10,051,182 6,044,214 13,960,292 77,758,854 21,622,743 26,804,412 57,551,084 11,366,690 12,813,819 51,114,805 10,818,852 29,953,519 8,048,719 28,755,070 18,122,059 24,128,671 4,912,081 9,875,174 1,160,129,353 1,132,706,882 1,065,481,174 1,032,614,044 1,013,529,161 1,006,294,983 982,855,307 976,890,275 969,785,314 967,875,035 960,166,813 958,273,952 948,157,843 934,843,776 912,399,075 909,904,734 892,331,750 890,001,122 873,282,259 862,649,855 855,496,380 844,047,840 833,084,059 830,706,450 815,667,485 810,028,905 789,909,124 787,956,324 765,161,710 764,325,100 750,217,134 30,258,968 21,792,441 8,544,169 11,541,565 21,121,609 24,005,060 15,366,407 7,874,831 13,386,498 16,964,325 43,153,879 18,016,817 6,979,483 30,151,377 11,897,796 12,333,853 5,755,675 13,936,008 11,076,401 13,145,273 7,162,794 17,505,197 8,233,044 16,373,454 14,307,832 9,035,758 11,168,998 80,931,248 14,549,748 19,255,694 13,589,124 the proposed standards. However, options on TVIX are not currently available for trading. PO 00000 60121 E:\FR\FM\07NON1.SGM 07NON1 60122 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Notices Average daily notional value (1/1/19–6/30/19) Symbol Security name SMH ................................ WMT ............................... CVS ................................ PYPL .............................. KO .................................. IYR .................................. SBUX .............................. XOP ................................ VanEck Vectors Semiconductor ETF ..................... Walmart Inc. ............................................................ CVS Health Corporation ......................................... PayPal Holdings Inc. .............................................. Coca-Cola Company .............................................. iShares U.S. Real Estate ETF ................................ Starbucks Corporation ............................................ SPDR S&P Oil & Gas Exploration & Production ETF. SPDR Bloomberg Barclays High Yield Bond ETF Vanguard FTSE Emerging Markets ETF ............... Anadarko Petroleum Corporation ........................... PepsiCo, Inc. .......................................................... AbbVie, Inc. ............................................................ Texas Instruments Incorporated ............................. Twitter, Inc. ............................................................. NIKE, Inc. Class B .................................................. Electronic Arts Inc. .................................................. Consumer Discretionary Select Sector SPDR Fund. Altria Group Inc. ...................................................... iShares Core MSCI EAFE ETF .............................. Medtronic Plc .......................................................... Vanguard Real Estate ETF .................................... iShares JP Morgan USD Emerging Markets Bond ETF. iShares Core U.S. Aggregate Bond ETF ............... DuPont de Nemours, Inc. ....................................... iShares 7–10 Year Treasury Bond ETF ................. JNK ................................. VWO ............................... APC ................................ PEP ................................ ABBV .............................. TXN ................................ TWTR ............................. NKE ................................ EA ................................... XLY ................................. MO .................................. IEFA ................................ MDT ................................ VNQ ................................ EMB ................................ AGG ................................ DWDP ............................. IEF .................................. The Exchange believes that permitting cash settlement as a contract term for FLEX Equity Options for the securities in the above table 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. Today, generally equity options are settled physically at The Options Clearing Corporation (‘‘OCC’’), i.e., upon exercise, shares of the underlying security 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 VerDate Sep<11>2014 17:55 Nov 06, 2019 Jkt 250001 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 have previously received approval that allow for the trading of cash-settled options.11 With respect to position limits, cashsettled FLEX Equity Options would be subject to the position limits set forth in Rule 906G. Accordingly, the Exchange proposes new Rule 906G(b)(ii) which would provide that positions for FLEX Equity Options settled in cash pursuant to Rule 903G(c)(3)(ii) would be subject to the limits set forth in Rule 904, and the exercise limits set forth in Rule 11 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 SPDR S&P 500 Trust on the BOX Options Exchange LLC (‘‘BOX’’). See Securities Exchange Act Release No. 79936 (February 2, 2017), 82 FR 9886 (February 8, 2017) (‘‘RealDay Pilot Program’’). The RealDay Pilot Program was 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). The RealDay Pilot Program was never implemented by BOX. See also Securities Exchange Act Release Nos. 56251 (August 14, 2007), 72 FR 46523 (August 20, 2007) (SR–Amex– 2004–27) (Order approving listing of cash-settled Fixed Return Options (‘‘FROs’’)); and 71957 (April 16, 2014), 79 FR 22563 (April 22, 2014) (SR– NYSEMKT–2014–06) (Order approving name change from FROs to ByRDs and re-launch of these products, with certain modifications). PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 Average daily volume (1/1/19–6/30/19) 743,322,164 691,395,239 690,109,969 688,906,111 686,132,671 685,454,820 680,679,995 631,231,318 7,153,365 6,908,002 11,982,610 6,810,430 14,420,676 8,098,239 9,382,107 21,460,429 618,600,709 612,134,544 584,576,356 583,005,057 570,266,307 568,173,321 567,732,862 555,303,367 548,493,648 529,385,536 12,555,596 14,761,429 9,450,731 4,850,035 7,293,122 5,315,649 16,636,561 6,684,500 5,757,202 4,721,216 529,141,650 524,284,734 519,945,258 517,290,726 516,226,468 10,327,466 8,762,457 5,773,585 6,129,594 4,739,195 513,543,324 510,133,624 506,548,585 4,749,278 11,183,061 4,785,984 905.12 Given that each of the underlying securities that would currently be eligible to have cash-settlement as a contract term have established position and exercise limits applicable to physically-settled options, the Exchange believes it is appropriate for the same position and exercise limits to also apply to cash-settled options. Accordingly, of the 84 underlying securities that would currently be eligible to have cash settlement as a contract term, 76 would have a position limit of 250,000 contracts pursuant to Rule 904, Commentary .07(a).13 Further, pursuant to Rule 904, Commentary .07(f), the position limit for the other eight underlying securities would be as follows: For QQQ and SPY, 1,800,000 contracts; for IWM and EEM, 1,000,000 contracts; and for FXI, EFA, EWZ and TLT, 500,000 contracts.14 12 See proposed Rule 906G(b)(ii). The Exchange also proposes a non-substantive amendment to Rule 906G to renumber current Rule 906G(b)(ii) as new Rule 906G(b)(iii). 13 Rule 904, Commentary .07(a) provides that the position limit shall be 250,000 contracts for options: (i) On an underlying security that had trading volume of at least 100,000,000 shares during the most recent six-month trading period; or (ii) on an underlying security that had trading volume of at least 75,000,000 shares during the most recent sixmonth trading period and has at least 300,000,000 shares currently outstanding. 76 of the 84 underlying securities currently meet the requirements under Commentary .07(a). 14 See Rule 904, Commentary .07(f). E:\FR\FM\07NON1.SGM 07NON1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Notices The Exchange understands that cashsettled FLEX Equity Options are currently traded in the OTC market by a variety of market participants, e.g., hedge funds, proprietary trading firms, and pension funds. The Exchange believes some of these market participants would prefer to trade these instruments on an exchange, where they would be cleared and settled through a regulated clearing agency. The Exchange expects that users of these OTC products would be among the primary users of exchange-traded cash-settled FLEX Equity Options. The Exchange also believes that the trading of cashsettled FLEX Equity Options would allow these same market participants to better manage the risk associated with the volatility of underlying equity positions given the enhanced liquidity that an exchange-traded product would bring. Cash-settled FLEX Equity 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 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 Equity 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 notes that cash-settled FLEX Equity Options would not be available for trading until OCC represents to the Exchange that it is fully able to clear and settle such options. The Exchange has also analyzed its capacity and represents that it 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 Equity Options. The Exchange believes any additional traffic that would be generated from the introduction of cashsettled FLEX Equity Options would be manageable. The Exchange represents that 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 VerDate Sep<11>2014 17:55 Nov 06, 2019 Jkt 250001 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 Equity 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 Equity Options using means that include its surveillance for manipulation. The Exchange believes that manipulating the settlement price of cash-settled FLEX Equity Options would be difficult based on the size of the market for the securities that are the subject of this proposed rule change. Additionally, the Exchange notes that each cash-settled FLEX Equity Option that is subject to this proposed rule change is sufficiently active so as to alleviate concerns about potential manipulative activity. Further, in the Exchange’s view, the vast liquidity of the 84 underlying securities 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 the options on these securities, the Exchange believes it would be very difficult for a single participant to alter the price of each of the underlying securities in any significant way without exposing the would-be manipulator to regulatory scrutiny. The Exchange further believes any attempt to manipulate the price of the underlying securities would also be cost prohibitive. With respect to regulatory scrutiny, the Exchange 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, PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 60123 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 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 securities and subsequent trading of options on those securities on the Exchange, including cash-settled FLEX Equity Options.15 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 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 Equity Options. 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 should rest on the ability of the Exchange to monitor and detect manipulative activity, not on any perceived threat of 15 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. E:\FR\FM\07NON1.SGM 07NON1 60124 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Notices 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 Equity 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 Equity 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 the OTC market 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 Equity 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’’),16 in general, and furthers 16 15 U.S.C. 78f(b). VerDate Sep<11>2014 17:55 Nov 06, 2019 the objectives of Section 6(b)(5) of the Act,17 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 Equity 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 options on the specified group of equity securities would remove impediments to and perfect the mechanism of a free and open market as cash-settled FLEX Equity 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 a cashsettled product to the benefit of investors and the public interest. The Exchange does not believe that allowing cash settlement as a contract term for options on the specified group of equity securities would render the marketplace for equity options more susceptible to manipulative practices. As illustrated in the table above, each of the qualifying underlying securities is actively traded and highly liquid and thus would not be susceptible to manipulation because, over a six-month period, each security had an average daily notional value of at least $500 Million and an ADV of at least 4,680,000 shares, which indicates that there is substantial liquidity present in the trading of these securities, and that there is significant depth and breadth of market participants providing liquidity and of investor interest. The Exchange believes that the data provided by the Exchange supports the supposition that permitting cash settlement as a FLEX term for the 84 underlying securities that would currently qualify to have cash settlement as a contract term 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 17 15 Jkt 250001 PO 00000 U.S.C. 78f(b)(5). Frm 00073 Fmt 4703 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 Equity Options is not novel in that other exchanges have previously received approval that allow for the trading of cash-settled options. The proposed rule change therefore should not raise issues for the Commission that have not been previously addressed.18 The proposed rule change to permit cash settlement as a contract term for options on the 84 underlying securities is designed to promote just and equitable principles of 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 traded 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 on 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 the proposed cash-settled options. Further, the proposed rule change would result in increased competition by permitting the Exchange to offer products that are currently available for trading only 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 Equity Options. 18 See Sfmt 4703 E:\FR\FM\07NON1.SGM supra note 11. 07NON1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Notices 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 options on the 84 underlying securities that would currently be eligible to have cashsettlement as a contract term would minimize the possibility of manipulation due to the robust liquidity in both the equities 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 transact in FLEX Equity Options with the opportunity for an alternative method of settling their 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 Equity 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. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. VerDate Sep<11>2014 17:55 Nov 06, 2019 Jkt 250001 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 60125 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Jill M. Peterson, Assistant Secretary. [FR Doc. 2019–24256 Filed 11–6–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION • 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–2019–38 on the subject line. [Release No. 34–87442; File No. SR– NYSEAMER–2019–41] Paper Comments November 1, 2019. • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on October 22, 2019, NYSE American LLC (‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. All submissions should refer to File Number SR–NYSEAMER–2019–38. 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). 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–2019–38, and should be submitted on or before November 29, 2019. PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 Self-Regulatory Organizations; NYSE American LLC; Notice of Filing of Proposed Rule Change Regarding the Applicability and Functionality of Certain Order Types on the Exchange I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its rules to clarify the applicability and functionality of certain order types on the Exchange. 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. 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. 19 17 CFR 200.30–3(a)(12). U.S.C.78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 1 15 E:\FR\FM\07NON1.SGM 07NON1

Agencies

[Federal Register Volume 84, Number 216 (Thursday, November 7, 2019)]
[Notices]
[Pages 60120-60125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24256]



[[Page 60120]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87444; File No. SR-NYSEAMER-2019-38]


Self-Regulatory Organizations; NYSE American LLC; Notice of 
Filing of Proposed Rule Change To Allow Certain Flexible Exchange 
Equity Options To Be Cash Settled

November 1, 2019.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on October 17, 2019, 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 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rules 903G and 906G related to 
Flexible Exchange (``FLEX'') Options. 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.

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
    The Exchange proposes to amend Rules 903G and 906G related to FLEX 
Options.
    FLEX Options are customized equity or index contracts that allow 
investors to tailor contract terms for exchange-listed equity and index 
options. The Exchange proposes to amend NYSE American Rule 903G(c) to 
allow for cash settlement of certain FLEX Equity Options.\4\ Generally, 
FLEX Equity Options are settled by physical delivery of the underlying 
security,\5\ while all FLEX Index Options are currently settled by 
delivery in cash.\6\ As proposed, FLEX Equity Options would be 
permitted to be settled by delivery in cash if the underlying security 
meets prescribed criteria.
---------------------------------------------------------------------------

    \4\ 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).
    \5\ See Rule 903G(c)(3)(i).
    \6\ See Rule 903G(b)(2) and (3). Pursuant to Exchange rules, 
Binary Return Derivatives (``ByRDs'') are also settled in cash. See 
Rule 900ByRDs(b). As discussed below, cash settlement is also 
permitted in the over-the-counter (``OTC'') market.
---------------------------------------------------------------------------

    To permit cash settlement of certain FLEX Equity Options, the 
Exchange proposes new paragraph (c)(3)(ii) to Rule 903G. Proposed Rule 
903G(c)(3)(ii) would provide that the exercise settlement for FLEX 
Equity Options may be by physical delivery of the underlying security 
or by delivery in cash if the underlying security, measured over the 
prior six-month period, has an average daily notional value of $500 
Million or more and a national average daily volume (ADV) of at least 
4,680,000 shares.\7\
---------------------------------------------------------------------------

    \7\ 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).
---------------------------------------------------------------------------

    The Exchange also proposes new sub-paragraph (A) to Rule 
903G(c)(3)(ii), which would provide that the Exchange will determine 
bi-annually the underlying securities that satisfy the notional value 
and trading volume requirements in Rule 903G(c)(3)(ii) by using trading 
statistics for the previous six-months.\8\ Proposed new sub-paragraph 
(B) to Rule 903(c)(3)(ii) would further provide that if the Exchange 
determines pursuant to the bi-annual review that an underlying security 
ceases to satisfy the requirements under Rule 903G(c)(3)(ii), any new 
FLEX Equity Options overlying such security entered into will be 
required to have exercise settlement by physical delivery and any open 
positions in cash-settled FLEX Equity Options overlying such security 
may be traded to only close the position.\9\
---------------------------------------------------------------------------

    \8\ See proposed Rule 903G(c)(3)(ii)(A). The Exchange plans to 
conduct the bi-annual review on January 1 and July 1 of each year. 
The results of the bi-annual review will be announced via a Trader 
Update.
    \9\ See proposed Rule 903G(c)(3)(ii)(B). Pursuant to Rule 920NY, 
an ATP Holder that is acting as a Market Maker may enter into an 
opening transaction in order to facilitate closing transactions of 
another market participant. See https://www.nyse.com/publicdocs/nyse/markets/arca-options/rule-interpretations/2017/NYSE%20Arca%20Options%20RB%2017-01.pdf. The Exchange will revise its 
guidance to reflect that an ATP Holder acting as a Market Maker in 
cash-settled FLEX Equity Options can enter into an opening 
transaction to facilitate closing only transactions of another 
market participant.
---------------------------------------------------------------------------

    The Exchange believes it is appropriate to introduce cash 
settlement as an alternative contract term to the select group of 
equity securities because they are the most highly liquid and actively-
traded securities. As described more fully below, the Exchange believes 
that the deep liquidity and robust trading activity in securities 
identified by the Exchange as meeting the criteria mitigate against 
historic concerns regarding susceptibility to manipulation.
    The Exchange believes that average daily notional value is an 
appropriate proxy for selecting underlying securities that are not 
readily susceptible to manipulation for purposes of establishing a 
settlement price. Average daily notional value takes into account both 
the trading activity and the price of an underlying security. As a 
general matter, the more expensive an underlying security's price, the 
less cost-effective manipulation could become. Further, manipulation of 
the price of a security encounters greater difficulty the more volume 
that is traded. To calculate average daily notional value (provided in 
the table below), the Exchange summed the notional value of each trade 
for each symbol (i.e., the number of shares times the price for each 
execution in the security) and divided that total by the number of 
trading days in the six-month period (from January 1, 2019 through June 
30, 2019) reviewed by the Exchange.
    Further, the Exchange proposes that qualifying securities also meet 
an ADV standard. The purpose for this second criteria is to prevent 
unusually expensive underlying securities from qualifying under the 
average daily notional value standard while not being one of the most 
actively traded securities. The Exchange believes an ADV requirement of 
4,680,000 shares a day is appropriate because it represents average 
trading in the underlying security of 200 shares per second. While no 
security is immune from all manipulation, the Exchange believes that 
the combination of average daily

[[Page 60121]]

notional value and ADV as prerequisite requirements would limit cash 
settlement of FLEX Options to those underlying securities that would be 
less susceptible to manipulation in order to establish a settlement 
price.
    The Exchange believes that the proposed objective criteria would 
ensure that only the most robustly traded and deeply liquid securities 
would qualify to have cash settlement as a contract term. As provided 
in the table below, as of June 30, 2019, the Exchange would be able to 
provide cash settlement as a contract term for FLEX Equity Options on 
only 84 underlying securities,\10\ as only this group of securities 
would currently meet the requirement of $500 Million or more average 
daily notional value and a minimum ADV of 4,680,000 shares. The table 
below provides the list of the 84 securities that, as of June 30, 2019, 
would be eligible to have cash settlement as a FLEX Equity option 
contract term.
---------------------------------------------------------------------------

    \10\ The Exchange notes that TVIX (VelocityShares Daily 2x VIX 
Short-Term ETN) would qualify under the proposed standards. However, 
options on TVIX are not currently available for trading.

----------------------------------------------------------------------------------------------------------------
                                                      Average daily notional value   Average daily volume  (1/1/
             Symbol                  Security name          (1/1/19-6/30/19)                 19-6/30/19)
----------------------------------------------------------------------------------------------------------------
SPY.............................  SPDR S&P 500 ETF                 $21,297,533,471                    76,562,281
                                   Trust.
QQQ.............................  Invesco QQQ Trust.                 6,226,236,315                    35,419,606
AAPL............................  Apple Inc.........                 5,411,433,661                    29,938,826
FB..............................  Facebook, Inc.                     3,167,063,717                    18,656,551
                                   Class A.
IWM.............................  iShares Russell                    3,138,717,375                    20,697,570
                                   2000 ETF.
MSFT............................  Microsoft                          3,081,463,649                    26,298,765
                                   Corporation.
EEM.............................  iShares MSCI                       2,986,071,029                    70,901,336
                                   Emerging Markets
                                   ETF.
NFLX............................  Netflix, Inc......                 2,817,672,156                     8,073,403
BABA............................  Alibaba Group                      2,742,711,789                    16,314,223
                                   Holding Ltd.
                                   Sponsored ADR.
TSLA............................  Tesla Inc.........                 2,592,804,463                    10,051,182
BA..............................  Boeing Company....                 2,268,537,891                     6,044,214
NVDA............................  NVIDIA Corporation                 2,219,441,287                    13,960,292
AMD.............................  Advanced Micro                     1,978,829,372                    77,758,854
                                   Devices, Inc..
HYG.............................  iShares iBoxx High                 1,847,494,422                    21,622,743
                                   Yield Corporate
                                   Bond ETF.
EFA.............................  iShares MSCI EAFE                  1,716,385,479                    26,804,412
                                   ETF.
BAC.............................  Bank of America                    1,638,846,503                    57,551,084
                                   Corp.
DIS.............................  Walt Disney                        1,392,946,023                    11,366,690
                                   Company.
JPM.............................  JPMorgan Chase &                   1,360,283,575                    12,813,819
                                   Co..
XLF.............................  Financial Select                   1,347,599,180                    51,114,805
                                   Sector SPDR Fund.
LLY.............................  Eli Lilly and                      1,327,459,452                    10,818,852
                                   Company.
EWZ.............................  iShares MSCI                       1,257,290,585                    29,953,519
                                   Brazil ETF.
V...............................  Visa Inc. Class A.                 1,232,449,824                     8,048,719
FXI.............................  iShares China                      1,227,285,973                    28,755,070
                                   Large-Cap ETF.
QCOM............................  QUALCOMM                           1,211,880,121                    18,122,059
                                   Incorporated.
INTC............................  Intel Corporation.                 1,198,554,195                    24,128,671
UNH.............................  UnitedHealth Group                 1,193,149,098                     4,912,081
                                   Incorporated.
LQD.............................  iShares iBoxx                      1,168,122,337                     9,875,174
                                   Investment Grade
                                   Corporate Bond
                                   ETF.
MU..............................  Micron Technology,                 1,160,129,353                    30,258,968
                                   Inc..
CSCO............................  Cisco Systems,                     1,132,706,882                    21,792,441
                                   Inc..
TLT.............................  iShares 20+ Year                   1,065,481,174                     8,544,169
                                   Treasury Bond ETF.
XLV.............................  Health Care Select                 1,032,614,044                    11,541,565
                                   Sector SPDR Fund.
WFC.............................  Wells Fargo &                      1,013,529,161                    21,121,609
                                   Company.
PFE.............................  Pfizer Inc........                 1,006,294,983                    24,005,060
C...............................  Citigroup Inc.....                   982,855,307                    15,366,407
GLD.............................  SPDR Gold Trust...                   976,890,275                     7,874,831
XLK.............................  Technology Select                    969,785,314                    13,386,498
                                   Sector SPDR Fund.
XLU.............................  Utilities Select                     967,875,035                    16,964,325
                                   Sector SPDR Fund.
GDX.............................  VanEck Vectors                       960,166,813                    43,153,879
                                   Gold Miners ETF.
TQQQ............................  ProShares UltraPro                   958,273,952                    18,016,817
                                   QQQ.
JNJ.............................  Johnson & Johnson.                   948,157,843                     6,979,483
T...............................  AT&T Inc..........                   934,843,776                    30,151,377
XOM.............................  Exxon Mobil                          912,399,075                    11,897,796
                                   Corporation.
XLI.............................  Industrial Select                    909,904,734                    12,333,853
                                   Sector SPDR Fund.
CRM.............................  salesforce.com,                      892,331,750                     5,755,675
                                   Inc..
XLE.............................  Energy Select                        890,001,122                    13,936,008
                                   Sector SPDR Fund.
MRK.............................  Merck & Co., Inc..                   873,282,259                    11,076,401
ROKU............................  Roku, Inc. Class A                   862,649,855                    13,145,273
CVX.............................  Chevron                              855,496,380                     7,162,794
                                   Corporation.
BMY.............................  Bristol-Myers                        844,047,840                    17,505,197
                                   Squibb Company.
PG..............................  Procter & Gamble                     833,084,059                     8,233,044
                                   Company.
IEMG............................  iShares Core MSCI                    830,706,450                    16,373,454
                                   Emerging Markets
                                   ETF.
VZ..............................  Verizon                              815,667,485                    14,307,832
                                   Communications
                                   Inc..
CELG............................  Celgene                              810,028,905                     9,035,758
                                   Corporation.
SQ..............................  Square, Inc. Class                   789,909,124                    11,168,998
                                   A.
GE..............................  General Electric                     787,956,324                    80,931,248
                                   Company.
ORCL............................  Oracle Corporation                   765,161,710                    14,549,748
CMCSA...........................  Comcast                              764,325,100                    19,255,694
                                   Corporation Class
                                   A.
XLP.............................  Consumer Staples                     750,217,134                    13,589,124
                                   Select Sector
                                   SPDR Fund.

[[Page 60122]]

 
SMH.............................  VanEck Vectors                       743,322,164                     7,153,365
                                   Semiconductor ETF.
WMT.............................  Walmart Inc.......                   691,395,239                     6,908,002
CVS.............................  CVS Health                           690,109,969                    11,982,610
                                   Corporation.
PYPL............................  PayPal Holdings                      688,906,111                     6,810,430
                                   Inc..
KO..............................  Coca-Cola Company.                   686,132,671                    14,420,676
IYR.............................  iShares U.S. Real                    685,454,820                     8,098,239
                                   Estate ETF.
SBUX............................  Starbucks                            680,679,995                     9,382,107
                                   Corporation.
XOP.............................  SPDR S&P Oil & Gas                   631,231,318                    21,460,429
                                   Exploration &
                                   Production ETF.
JNK.............................  SPDR Bloomberg                       618,600,709                    12,555,596
                                   Barclays High
                                   Yield Bond ETF.
VWO.............................  Vanguard FTSE                        612,134,544                    14,761,429
                                   Emerging Markets
                                   ETF.
APC.............................  Anadarko Petroleum                   584,576,356                     9,450,731
                                   Corporation.
PEP.............................  PepsiCo, Inc......                   583,005,057                     4,850,035
ABBV............................  AbbVie, Inc.......                   570,266,307                     7,293,122
TXN.............................  Texas Instruments                    568,173,321                     5,315,649
                                   Incorporated.
TWTR............................  Twitter, Inc......                   567,732,862                    16,636,561
NKE.............................  NIKE, Inc. Class B                   555,303,367                     6,684,500
EA..............................  Electronic Arts                      548,493,648                     5,757,202
                                   Inc..
XLY.............................  Consumer                             529,385,536                     4,721,216
                                   Discretionary
                                   Select Sector
                                   SPDR Fund.
MO..............................  Altria Group Inc..                   529,141,650                    10,327,466
IEFA............................  iShares Core MSCI                    524,284,734                     8,762,457
                                   EAFE ETF.
MDT.............................  Medtronic Plc.....                   519,945,258                     5,773,585
VNQ.............................  Vanguard Real                        517,290,726                     6,129,594
                                   Estate ETF.
EMB.............................  iShares JP Morgan                    516,226,468                     4,739,195
                                   USD Emerging
                                   Markets Bond ETF.
AGG.............................  iShares Core U.S.                    513,543,324                     4,749,278
                                   Aggregate Bond
                                   ETF.
DWDP............................  DuPont de Nemours,                   510,133,624                    11,183,061
                                   Inc..
IEF.............................  iShares 7-10 Year                    506,548,585                     4,785,984
                                   Treasury Bond ETF.
----------------------------------------------------------------------------------------------------------------

    The Exchange believes that permitting cash settlement as a contract 
term for FLEX Equity Options for the securities in the above table 
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.
    Today, generally equity options are settled physically at The 
Options Clearing Corporation (``OCC''), i.e., upon exercise, shares of 
the underlying security 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 have 
previously received approval that allow for the trading of cash-settled 
options.\11\
---------------------------------------------------------------------------

    \11\ 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 SPDR S&P 500 Trust on 
the BOX Options Exchange LLC (``BOX''). See Securities Exchange Act 
Release No. 79936 (February 2, 2017), 82 FR 9886 (February 8, 2017) 
(``RealDay Pilot Program''). The RealDay Pilot Program was 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). The RealDay Pilot Program was never implemented by BOX. See 
also Securities Exchange Act Release Nos. 56251 (August 14, 2007), 
72 FR 46523 (August 20, 2007) (SR-Amex-2004-27) (Order approving 
listing of cash-settled Fixed Return Options (``FROs'')); and 71957 
(April 16, 2014), 79 FR 22563 (April 22, 2014) (SR-NYSEMKT-2014-06) 
(Order approving name change from FROs to ByRDs and re-launch of 
these products, with certain modifications).
---------------------------------------------------------------------------

    With respect to position limits, cash-settled FLEX Equity Options 
would be subject to the position limits set forth in Rule 906G. 
Accordingly, the Exchange proposes new Rule 906G(b)(ii) which would 
provide that positions for FLEX Equity Options settled in cash pursuant 
to Rule 903G(c)(3)(ii) would be subject to the limits set forth in Rule 
904, and the exercise limits set forth in Rule 905.\12\ Given that each 
of the underlying securities that would currently be eligible to have 
cash-settlement as a contract term have established position and 
exercise limits applicable to physically-settled options, the Exchange 
believes it is appropriate for the same position and exercise limits to 
also apply to cash-settled options. Accordingly, of the 84 underlying 
securities that would currently be eligible to have cash settlement as 
a contract term, 76 would have a position limit of 250,000 contracts 
pursuant to Rule 904, Commentary .07(a).\13\ Further, pursuant to Rule 
904, Commentary .07(f), the position limit for the other eight 
underlying securities would be as follows: For QQQ and SPY, 1,800,000 
contracts; for IWM and EEM, 1,000,000 contracts; and for FXI, EFA, EWZ 
and TLT, 500,000 contracts.\14\
---------------------------------------------------------------------------

    \12\ See proposed Rule 906G(b)(ii). The Exchange also proposes a 
non-substantive amendment to Rule 906G to renumber current Rule 
906G(b)(ii) as new Rule 906G(b)(iii).
    \13\ Rule 904, Commentary .07(a) provides that the position 
limit shall be 250,000 contracts for options: (i) On an underlying 
security that had trading volume of at least 100,000,000 shares 
during the most recent six-month trading period; or (ii) on an 
underlying security that had trading volume of at least 75,000,000 
shares during the most recent six-month trading period and has at 
least 300,000,000 shares currently outstanding. 76 of the 84 
underlying securities currently meet the requirements under 
Commentary .07(a).
    \14\ See Rule 904, Commentary .07(f).

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[[Page 60123]]

    The Exchange understands that cash-settled FLEX Equity Options are 
currently traded in the OTC market by a variety of market participants, 
e.g., hedge funds, proprietary trading firms, and pension funds. The 
Exchange believes some of these market participants would prefer to 
trade these instruments on an exchange, where they would be cleared and 
settled through a regulated clearing agency. The Exchange expects that 
users of these OTC products would be among the primary users of 
exchange-traded cash-settled FLEX Equity Options. The Exchange also 
believes that the trading of cash-settled FLEX Equity Options would 
allow these same market participants to better manage the risk 
associated with the volatility of underlying equity positions given the 
enhanced liquidity that an exchange-traded product would bring.
    Cash-settled FLEX Equity 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 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 Equity 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 notes that cash-settled FLEX Equity Options would not 
be available for trading until OCC represents to the Exchange that it 
is fully able to clear and settle such options. The Exchange has also 
analyzed its capacity and represents that it 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 Equity Options. The Exchange believes any additional 
traffic that would be generated from the introduction of cash-settled 
FLEX Equity Options would be manageable. The Exchange represents that 
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 Equity 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 Equity Options using means that include its 
surveillance for manipulation. The Exchange believes that manipulating 
the settlement price of cash-settled FLEX Equity Options would be 
difficult based on the size of the market for the securities that are 
the subject of this proposed rule change. Additionally, the Exchange 
notes that each cash-settled FLEX Equity Option that is subject to this 
proposed rule change is sufficiently active so as to alleviate concerns 
about potential manipulative activity. Further, in the Exchange's view, 
the vast liquidity of the 84 underlying securities 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 the options on these securities, the Exchange believes it would be 
very difficult for a single participant to alter the price of each of 
the underlying securities in any significant way without exposing the 
would-be manipulator to regulatory scrutiny. The Exchange further 
believes any attempt to manipulate the price of the underlying 
securities would also be cost prohibitive.
    With respect to regulatory scrutiny, the Exchange 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 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 
securities and subsequent trading of options on those securities on the 
Exchange, including cash-settled FLEX Equity Options.\15\
---------------------------------------------------------------------------

    \15\ 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.
---------------------------------------------------------------------------

    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 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 Equity Options.
    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 should rest on the ability of the Exchange to 
monitor and detect manipulative activity, not on any perceived threat 
of

[[Page 60124]]

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 Equity 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 Equity 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 the OTC market 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 Equity 
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''),\16\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act,\17\ 
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 Equity 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.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposal to permit cash settlement 
as a contract term for options on the specified group of equity 
securities would remove impediments to and perfect the mechanism of a 
free and open market as cash-settled FLEX Equity 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 a cash-settled product 
to the benefit of investors and the public interest. The Exchange does 
not believe that allowing cash settlement as a contract term for 
options on the specified group of equity securities would render the 
marketplace for equity options more susceptible to manipulative 
practices. As illustrated in the table above, each of the qualifying 
underlying securities is actively traded and highly liquid and thus 
would not be susceptible to manipulation because, over a six-month 
period, each security had an average daily notional value of at least 
$500 Million and an ADV of at least 4,680,000 shares, which indicates 
that there is substantial liquidity present in the trading of these 
securities, and that there is significant depth and breadth of market 
participants providing liquidity and of investor interest.
    The Exchange believes that the data provided by the Exchange 
supports the supposition that permitting cash settlement as a FLEX term 
for the 84 underlying securities that would currently qualify to have 
cash settlement as a contract term 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 Equity 
Options is not novel in that other exchanges have previously received 
approval that allow for the trading of cash-settled options. The 
proposed rule change therefore should not raise issues for the 
Commission that have not been previously addressed.\18\
---------------------------------------------------------------------------

    \18\ See supra note 11.
---------------------------------------------------------------------------

    The proposed rule change to permit cash settlement as a contract 
term for options on the 84 underlying securities is designed to promote 
just and equitable principles of 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 traded 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 on 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 the proposed cash-settled options. Further, the proposed 
rule change would result in increased competition by permitting the 
Exchange to offer products that are currently available for trading 
only 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 Equity Options.

[[Page 60125]]

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 
options on the 84 underlying securities that would currently be 
eligible to have cash-settlement as a contract term would minimize the 
possibility of manipulation due to the robust liquidity in both the 
equities 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 transact in FLEX Equity Options with the opportunity for an 
alternative method of settling their 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 Equity 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSEAMER-2019-38 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-NYSEAMER-2019-38. 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). 
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-2019-38, and should be 
submitted on or before November 29, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24256 Filed 11-6-19; 8:45 am]
 BILLING CODE 8011-01-P
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