[Federal Register Volume 89, Number 209 (Tuesday, October 29, 2024)]
[Notices]
[Pages 86007-86019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25052]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101413; File No. SR-Phlx-2024-51]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Proposed Rule Change To Amend FLEX Floor Trading Rules

October 23, 2024.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 8, 2024, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to amend Options 8, Section 34, FLEX 
Trading.\3\
---------------------------------------------------------------------------

    \3\ Phlx Options 8, Section 34 rule text was previously amended 
by two rule changes which are effective, but not yet operative. 
These two prior rule changes will be implemented at the same time as 
the rule changes proposed herein. See Securities Exchange Act 
Release Nos. 97658 (June 7, 2023), 88 FR 38562 (June 13, 2023) (SR-
Phlx-2023-22); and 100321 (June 12, 2024), 89 FR 51580 (June 18, 
2024) (SR-Phlx-2024-24). Phlx further delayed the implementation so 
that it could implement SR-Phlx-2023-22 while also completing an OCC 
industry rule change prior.
---------------------------------------------------------------------------

    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Options 8, Section 34, FLEX Trading. 
The Exchange also proposes a technical amendment to Options 8, Section 
33, Accommodation Transactions.
Options 8, Section 34
    FLEX Options are customized equity, index, and currency contracts 
that allow investors to tailor contract terms for exchange-listed 
equity and index options. By way of background, in 2023, the Exchange 
filed a rule change to amend the manner in which FLEX Options are 
transacted on Phlx's Trading Floor.\4\ Thereafter, the Exchange filed 
to delay the implementation of SR-Phlx-2023-22 to

[[Page 86008]]

on or before August 30, 2024.\5\ Finally, in 2024, Phlx filed a rule 
change to amend FLEX Options rules at Options 8, Section 34(b) and 
further delay the implementation of SR-Phlx-2023-22 to the end of Q4 
2025.\6\ At this time, the Exchange proposes to further amend the rules 
proposed in SR-Phlx-2023-22 and SR-Phx-2024-24, which are immediately 
effective, but not yet operative. The Exchange proposes to implement 
the amendments in Phlx-2023-22 and SR-Phx-2024-24 at the same time as 
the proposed amendments.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 97658 (June 7, 
2023), 88 FR 38562 (June 13, 2023) (SR-Phlx-2023-22) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Various Options 8 Rules). SR-Phlx-2023-22 amended FLEX Orders in 3 
ways. First, the Exchange amended the rules to require FLEX Orders 
to be reported into Phlx's Options Floor Based Management System or 
``FBMS,'' thereby further automating the execution and reporting of 
FLEX Options. All executed FLEX contracts will be reported to OPRA 
and sent to the OCC for clearing, similar to all other equity, 
equity index and U.S. dollar-settled foreign currency options orders 
executed on the Exchange's trading floor. Second, the Exchange 
removed its RFQ process including the BBO Improvement Interval 
Process, with the rule change. Third, the Exchange reorganized 
Options 8, Section 34 to restructure the rule to include additional 
information which describes current FLEX trading on Phlx. With 
respect to Cabinet Orders, SR-Phlx-2023-22 amended Options 8, 
Section 33 to require Cabinet Orders to be reported into FBMS. With 
this change, members and member organizations will be required to 
record all Cabinet Orders represented in the trading crowd into 
FBMS. All executed contracts will be reported to OPRA and sent to 
OCC for clearing similar to all other equity, equity index and U.S. 
dollar-settled foreign currency options orders executed on the 
Exchange's trading floor.
    \5\ See Securities Exchange Act Release No. 98919 (November 13, 
2023), 88 FR 80363 (November 13, 2023) (SR-Phlx-2023-48) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Delay 
the Implementation of the FLEX and Cabinet Automation).
    \6\ See Securities Exchange Act Release No. 100321 (June 12, 
2024), 89 FR 51580 (June 18, 2024) (SR-Phlx-2024-24) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Delay Implementation of Certain Exchange Options 8 Rules and Amend 
Options 8, Section 34(b)). Phlx further delayed the implementation 
so that it could implement SR-Phlx-2023-22 while also completing an 
OCC industry rule change prior.
---------------------------------------------------------------------------

    Specifically, the Exchange proposes to (1) clarify the Options 8, 
Section 34 functionality that will be available with the implementation 
of SR-Phlx-2023-22 and SR-Phx-2024-24; (2) list p.m.-settled FLEX Index 
Options whose exercise settlement value is derived from closing prices 
on the last trading day prior to expiration that expire on or within 
two business days of a third Friday-of-the-month expiration day for a 
non-FLEX Option; and (2) permit FLEX Options on certain Exchange-Traded 
Funds (``ETFs'') to be settled by delivery in cash if the underlying 
security meets prescribed criteria. Each change will be described 
below.
Options 8, Section 34
    First, the Exchange proposes to capitalize certain terms uniformly 
throughout Options 8, Section 34. The Exchange proposes to capitalize 
the following terms: ``FLEX Options,'' ``FLEX Equity Options,'' ``FLEX 
Index Options,'' and ``FLEX Currency Options.'' The Exchange proposes 
to amend Options 8, Section 34(f)(4) to define FLEX U. S. dollar-
settled foreign currency options as ``FLEX Currency Options.''
    Second, the Exchange proposes to exclude iShares Bitcoin Trust ETF 
(``IBIT'') from trading as a FLEX Options.
    Third, the Exchange proposes to adopt a new Options 8, Section 
34(f)(1)(B) to state, ``an underlying equity security or index, as 
applicable (the index multiplier for FLEX Index Options is 100).'' This 
proposed rule text reflects the current characteristics of underlying 
interest for FLEX Option. The proposed rule text brings greater clarity 
to the Rule.
    Fourth, the Exchange proposes to amend the language in Options 8, 
Section 34(f)(3) which was initially amended to state, ``The Exchange 
may determine the smallest increment for exercise prices of FLEX 
Options not to exceed two decimal places.'' While not substantively 
amending the exercise price, the Exchange proposes to amend this 
sentence to state, ``The Exchange may determine the smallest increment 
for exercise prices of FLEX Options on a class-by-class basis without 
going lower than the $0.01.'' The Exchange believes that the proposed 
rule text brings greater clarity to Phlx's rule text and is consistent 
with rule text in Cboe Rule 5.3(e)(3).\7\
---------------------------------------------------------------------------

    \7\ Of note, the Exchange is not proposing to provide for Micro 
FLEX Index Options or to allow prices to be expressed as a 
percentage value, similar to Cboe, because the Exchange does not 
offer these features today.
---------------------------------------------------------------------------

    Fifth, the Exchange proposes to amend the language in Options 8, 
Section 34(f)(5) to provide, ``The expiration date may be any business 
day (specified to the day, month, and year) no more than 15 years from 
the date on which an executed FLEX equity and index option is submitted 
to the System and no more than 3 years from the date on which an 
executed FLEX currency option is submitted to the System with exercise 
settlement value on the expiration date determined by reference to the 
reported level of the index as derived from the opening prices of the 
component securities (``a.m. settlement'') or closing prices (``p.m. 
settlement'').'' \8\ This amendment aligns the rule text related to 
settlement style required for a complex FLEX Order leg with rule text 
in Cboe 4.21(b)(4). The Exchange notes that Cboe recently received 
approval of its pilot program that permitted it to list p.m.-settled 
FLEX Index Options whose exercise settlement value is derived from 
closing prices on the last trading day prior to expiration that expire 
on or within two business days of a third Friday-of-the-month 
expiration day for a non-FLEX Option (``FLEX PM Third Friday 
Options'').\9\ Consistent with the Commission's approval of Cboe's 
proposal, the Exchange is proposing to allow the listing of FLEX PM 
Third Friday Options on Phlx as well, and will align with Cboe Rule 
4.21(b)(5)(B)(ii).\10\
---------------------------------------------------------------------------

    \8\ The Exchange would remove the rule text in current Options 
8, Section 34 (f)(5) that provides, ``except that (i) a FLEX index 
option that expires on or within two business days prior or 
subsequent to a third Friday-of-the-month expiration day for a non-
FLEX option (except quarterly expiring index options) or underlying 
currency may only have an.''
    \9\ See Securities Exchange Act Release No. 99222 (December 21, 
2023), 88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX 
Settlement Pilot Approval''). In support of making the pilot a 
permanent program, Cboe cited to its own review of pilot data during 
the course of the pilot program and a study by the Commission's 
Division of Economic and Risk Analysis (``DERA'') staff. See FLEX 
Settlement Pilot Approval, notes 18 and 35.
    \10\ Currently, the only broad-based index option that would be 
able to list as a FLEX PM Third Friday Option is the Nasdaq-100 
Index option (``NDX'' or ``NDX options''). The Exchange also 
received approval to list a third-Friday-of-the-month p.m. 
expiration on its standardized market. See Securities Exchange Act 
Release No. 98950 (November 15, 2023), 88 FR 81172 (November 21, 
2023) (SR-Phlx-2023-45) (Order Approving a Proposed Rule Change To 
Permit the Listing and Trading of P.M.-Settled Nasdaq-100 Index 
Options With a Third-Friday-of-the-Month Expiration).
---------------------------------------------------------------------------

    Sixth, the Exchange proposes to re-style Options 8, Section 
34(f)(6) to change the title from ``Settlement'' to ``Settlement 
type.'' The Exchange also proposes to add a title at (A), ``FLEX Equity 
Options.'' At proposed Options 8, Section 34(f)(6)(A)(1) the Exchange 
proposes to add rule text to state ``FLEX Options, other than as 
permitted in subparagraph (2) below, are settled with physical delivery 
of the underlying security.'' The Exchange proposes to also introduce 
FLEX Equity Options that are cash-settled in proposed Options 8, 
Section 34(f)(6)(A)(2). The Exchange will discuss cash-settled FLEX 
Equity Options in greater detail below. The Exchange proposes to amend 
Options 8, Section 34(f)(6)(A) to add a title for FLEX Index Options at 
(B) and change the current rule text \11\ to instead provide that FLEX 
Index Options may be specified as the index value reported at the
---------------------------------------------------------------------------

    \11\ Initially, the Exchange stated at Options 8, Section 
34(f)(6)(A) that ``respecting FLEX index options, the settlement 
value may be specified as the index value reported at the: (i) close 
(P.M.-settled); and (ii) opening (A.M.-settled) of trading on the 
Exchange. American style index options exercised prior to the 
expiration date can only settle based on the closing value on the 
exercise date. FLEX index options are settled in U.S. dollars.''

    (1) close (P.M.-settled); and (with exercise settlement value 
determined by reference to the reported level of the index derived 
from the reported closing prices of the component securities);
    (2) opening (A.M.-settled) of trading on the Exchange (with 
exercise settlement value determined by reference to the reported 
level of the index derived from the reported opening prices of the 
component securities).

    While not substantively amending the rule text, the Exchange 
believes that the proposed text adds clarity by noting how the exercise 
value is determined depending on whether the option is a.m.-settled or 
p.m.-settled. The Exchange proposes to add a title ``FLEX Currency 
Options'' to new Options 8, Section 34(f)(6)(C). The Exchange also

[[Page 86009]]

proposes a technical amendment to underline ``Market Maker'' in Options 
8, Section 34(g)(3). SR-Phlx-2023-22 inadvertently did not underline 
that text, thereby designating it as new text.
    Seventh, the Exchange proposes to amend Position Limits in Options 
8, Section 34(i) to add a new paragraph stating that,

    There shall be no position limits for FLEX Equity Options, other 
than as set forth in this paragraph and (4) below. Position limits 
for FLEX Equity Options where the underlying security is an ETF that 
is settled in cash pursuant to subparagraph (f)(6)(A) shall be 
subject to the position limits set forth in Options 9, Section 13, 
and subject to the exercise limits set forth in Options 9, Section 
15. Positions in such cash-settled FLEX Options shall be aggregated 
with positions in physically-settled options on the same underlying 
ETF for the purpose of calculating the position limits set forth in 
Options 9, Section 13, and the exercise limits set forth in Options 
9, Section 15.

    The Exchange will describe position limits for an ETF that is 
settled in cash below with the description of its proposal to permit a 
cash-settled ETF.
    The Exchange proposes to remove certain numbering as unnecessary in 
proposed Options 8, Section 34(i)(2), which is currently Options 8, 
Section 34(i)(1). The Exchange would create a new Options 8, Section 
34(i)(2) and title it ``Reports.'' The Exchange would remove 
``However'' from this new paragraph and start the paragraph with 
``Each.''
    The Exchange proposes to add the tile ``Additional Margin 
Requirements'' to proposed Options 8, Section 34(i)(3).
    The Exchange proposes to amend proposed Options 8, Section 
34(i)(3), current Options 8, Section 34(i)(3), by renumbering it to 
``(4)'' and adding a title ``Aggregation of FLEX Positions.'' Further, 
the Exchange proposes to note that, ``For purposes of the position 
limits and reporting requirements set forth in this Rule, FLEX Option 
positions shall not be aggregated with positions in non-FLEX Options 
other than as noted in this subparagraphs (i)(3) and (4), and positions 
in FLEX Index Options on a given index shall not be aggregated with 
options on any stocks included in the index or with FLEX Index Option 
positions on another index.'' \12\ Pursuant to proposed Options 8, 
Section 34(i)(4)(a), commencing at the close of trading two business 
days prior to the last trading day of the calendar quarter, positions 
in P.M.-settled FLEX Index Options (i.e., FLEX Index Options having an 
exercise settlement value determined by the level of the index at the 
close of trading on the last trading day before expiration) shall be 
aggregated with positions in Quarterly Options Series on the same index 
with the same expiration and shall be subject to the position limits 
set forth in Options 4A, Section 6.\13\ Pursuant to proposed Options 8, 
Section 34(i)(4)(b), commencing at the close of trading two business 
days prior to the last trading day of the week, positions in FLEX Index 
Options that are cash settled \14\ shall be aggregated with positions 
in Short Term Option Series on the same underlying (e.g., same 
underlying index as a FLEX Index Option) with the same means for 
determining exercise settlement value (e.g., opening or closing prices 
of the underlying index) and same expiration, and shall be subject to 
the position limits set forth in Options 4A, Section 6.\15\ Pursuant to 
proposed Options 8, Section 34(i)(4)(c), as long as the options 
positions remain open, positions in FLEX Options that expire on a third 
Friday-of-the-month expiration day shall be aggregated with positions 
in non-FLEX Options on the same underlying, and shall be subject to the 
position limits set forth in Options 4A, Section 6, or Options 9, 
Section 13, as applicable, and the exercise limits set forth in Options 
9, Section 15, as applicable.\16\
---------------------------------------------------------------------------

    \12\ The Exchange also proposes to change ``shall'' to ``will in 
two places in this paragraph.
    \13\ See Cboe Rule 8.35(d)(1) for materially identical 
provisions.
    \14\ The Exchange notes that all FLEX Index Options will be cash 
settled. Cash-settled ETFs will be described later in this proposal.
    \15\ This is based on Cboe Rule 8.35(d)(2), except the Exchange 
does not currently list Credit Default Options and will therefore 
not incorporate the applicable portion into its proposed rule.
    \16\ See Cboe Rule 8.35(d)(3) for materially identical 
provisions.
---------------------------------------------------------------------------

    Eighth, the Exchange proposes to amend Exercise Limits in Options 
8, Section 34(j) to provide further detail and rearrange the rule text. 
The Exchange proposes to relocate the rule text in Options 8, Section 
34(j)(1) that provides, ``Positions in FLEX options shall not be taken 
into account when calculating exercise limits for non-FLEX options, 
except as provided in paragraph (d) above. The minimum exercise size 
shall be the lesser of $1 million underlying equivalent value for FLEX 
index options, and 25 contracts for FLEX equity and currency options, 
or the remaining size of the position.'' Instead, the Exchange proposes 
to provide at Options 8, Section 34(j)(1)(a) that, ``The minimum value 
size for FLEX Equity Option exercises shall be 25 contracts or the 
remaining size of the position, whichever is less.'' Proposed Options 
8, Section 34(j)(1)(b) will require that the minimum value size for 
FLEX Index Option exercises be $1 million Underlying Equivalent Value 
(as defined below) or the remaining Underlying Equivalent Value of the 
position, whichever is less.\17\ Proposed Options 8, Section 
34(j)(1)(c) will stipulate that except as provided in proposed 
subparagraph (i) and (i)(4) above,\18\ FLEX Options shall not be taken 
into account when calculating exercise limits for non-FLEX Option 
contracts.\19\ Proposed Options 8, Section 34(j)(1)(d) will set forth 
the definition of Underlying Equivalent Value as the aggregate value of 
a FLEX Index Option (index multiplier times the current index value) 
multiplied by the number of FLEX Index Options.\20\ Finally, the 
Exchange proposes to add a sentence to the end of Options 8, Section 
34(j) that provides, ``There shall be no exercise limits for broad-
based FLEX Index Options (including reduced value option contracts) on 
the broad-based index options listed in Options 4A, Section 6(a).''
---------------------------------------------------------------------------

    \17\ See Cboe Rule 8.42(g)(2) for materially identical 
provisions.
    \18\ As described above, proposed Options 8, Section 34(i)(4) 
will govern the aggregation of FLEX positions generally, while 
proposed Options 8, Section 34(i)(1) will govern the aggregation of 
cash-settled FLEX Equity Options specifically and that positions in 
such cash-settled FLEX Equity Options will be aggregated with 
positions in physically settled options on the same underlying ETF. 
Cash-settled FLEX Equity Options will be discussed later in this 
filing.
    \19\ See Cboe Rule 8.42(g)(3) for materially identical 
provisions.
    \20\ See Phlx Options 8, Section 34(b)(8)(D) for materially 
identical provisions.
---------------------------------------------------------------------------

Options 8, Section 33
    The Exchange also proposes to make a technical amendment to Options 
8, Section 33, Accommodation Transactions, at paragraph (e) to remove 
correct improperly placed parentheticals from SR-Phlx-2024-22.
Cash-Settled Exchange Traded Funds (``ETFs'')
    Generally, FLEX Equity Options will be settled by physical delivery 
of the underlying security,\21\ while all FLEX Index Options will be 
settled by delivery in cash.\22\ The Exchange proposes to allow FLEX 
Equity Options where the underlying security is an ETF to be settled by 
delivery in cash if the underlying security meets prescribed criteria. 
The Exchange notes that cash-settled FLEX ETF Options will be subject 
to the same trading rules and procedures described in Options 8, 
Section 34 that will govern the trading

[[Page 86010]]

of other FLEX Options on the Exchange, with the exception of the rules 
to accommodate the cash-settlement feature proposed as follows. Today, 
NYSE American Rule 903G \23\ and Cboe Rule 4.21(b)(5)(A) \24\ allow for 
cash-settled FLEX ETF Options as well.
---------------------------------------------------------------------------

    \21\ See proposed Options 8, Section 34(f)(6)(A)(1).
    \22\ See proposed Options 8, Section 34(f)(6)(A)(2). As 
discussed below, cash settlement is also permitted in the OTC 
market.
    \23\ See Securities Exchange Act Release No. 88131 (February 5, 
2020), 85 FR 7806 (February 11, 2020) (SR-NYSEAmer-2019-38) (Notice 
of Filing of Amendment No. 1 and Order Granting Accelerated Approval 
of a Proposed Rule Change, as Modified by Amendment No. 1, To Allow 
Certain Flexible Equity Options To Be Cash Settled).
    \24\ Cboe also filed an immediately effective rule change to 
allow certain FLEX Options to be cash settled. See Securities 
Exchange Act Release No. 98044 (August 2, 2023), 88 FR 53548 (August 
8, 2023) (SR-Cboe-2023-036) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Allow Certain Flexible 
Exchange Equity Options To Be Cash Settled).
---------------------------------------------------------------------------

    To permit cash settlement of certain FLEX ETF Options, the Exchange 
proposes rule text in Options 8, Section 34(f)(6)(A)(2) to provide that 
the exercise settlement for a FLEX ETF Option may be by physical 
delivery of the underlying ETF or by delivery in cash if the underlying 
security, measured over a defined six-month period,\25\ 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.\26\
---------------------------------------------------------------------------

    \25\ As noted below, the Exchange plans to conduct the bi-annual 
review on January 1 and July 1 of each year. As such, the six-month 
periods will be from January to June, and from July to December each 
year.
    \26\ See Cboe Rule 4.21(b)(5)(A)(ii) for materially identical 
provisions.
---------------------------------------------------------------------------

    The Exchange also proposes in Options 8, Section 34(f) that a FLEX 
Equity Option overlying an ETF (cash- or physically-settled) may not be 
the same type (put or call) and may not have the same exercise style, 
expiration date, and exercise price as a non-FLEX Equity Option 
overlying the same ETF.\27\ In other words, regardless of whether a 
FLEX Equity Option overlying an ETF is cash or physically settled, at 
least one of the exercise style (i.e., American-style or European-
style), expiration date, and exercise price of that FLEX Option must 
differ from those terms of a non-FLEX Option overlying the same ETF in 
order to list such a FLEX Equity Option. For example, suppose a non-
FLEX SPY option (which is physically settled, p.m.-settled and 
American-style) with a specific September expiration and exercise price 
of 475 is listed for trading. A FLEX Trader could not submit an order 
to trade a FLEX SPY option (which is p.m.-settled) that is cash-settled 
(or physically settled) and American-style with the same September 
expiration and exercise price of 475.
---------------------------------------------------------------------------

    \27\ See introductory paragraph of Cboe Rule 4.21(b) for 
materially identical provisions. All non-FLEX Equity Options 
(including on ETFs) are physically settled. Note all FLEX and non-
FLEX Equity Options (including ETFs) are p.m.-settled.
---------------------------------------------------------------------------

    In addition, the Exchange proposes new Options 8, Section 
34(f)(6)(A)(2)(a), which would provide that the Exchange will determine 
bi-annually the underlying ETFs that satisfy the notional value and 
trading volume requirements in (f)(6)(A)(2) by using trading statistics 
for the defined six-month period.\28\ The proposed rule would further 
provide that the Exchange will permit cash settlement as a contract 
term on no more than 50 underlying ETFs that meet the criteria in this 
subparagraph (f)(6)(A)(2) and that if more than 50 underlying ETFs 
satisfy the notional value and trading volume requirements, then the 
Exchange would select the top 50 ETFs that have the highest average 
daily volume.\29\
---------------------------------------------------------------------------

    \28\ See proposed Options 8, Section 34(f)(6)(A)(2)(b), which is 
based on Cboe Rule 4.21(b)(5)(A)(ii)(a). The Exchange plans to 
conduct the bi-annual review on January 1 and July 1 of each year. 
As such, the six-month periods will be from January to June, and 
from July to December each year. The results of the bi-annual review 
will be announced via an Options Trader Alert and any new securities 
that qualify would be permitted to have cash settlement as a 
contract term beginning on February 1 and August 1 of each year. If 
the Exchange initially begins listing cash-settled FLEX Equity 
Options on a different date (e.g., September 1), it would initially 
list securities that qualified as of the last bi-annual review 
(e.g., the one conducted on July 1).
    \29\ See proposed Options 8, Section 34(f)(6)(A)(2)(a), which is 
based on Cboe Rule 4.21(b)(5)(A)(ii)(a).
---------------------------------------------------------------------------

    Proposed new Options 8, Section 34(f)(6)(A)(2)(b) would further 
provide that if the Exchange determines pursuant to the bi-annual 
review that an underlying ETF ceases to satisfy the requirements under 
proposed (f)(6)(A)(2)(a), any new position overlying such ETF entered 
into will be required to have exercise settlement by physical delivery, 
and any open cash-settled FLEX ETF Option positions may be traded only 
to close the position.\30\
---------------------------------------------------------------------------

    \30\ See proposed Options 8, Section 34(f)(6)(A)(2)(b), which is 
based on Cboe Rule 4.21(b)(5)(A)(ii)(b). If a listing is closing 
only, pursuant to Options 4, Section 4(a), opening transactions by 
Market Makers executed to accommodate closing transactions of other 
market participants are permitted.
---------------------------------------------------------------------------

    The Exchange believes it is appropriate to introduce cash 
settlement as an alternative contract term to the select group of ETFs 
because they are among the most highly liquid and actively traded ETF 
securities. As described more fully below, the Exchange believes that 
the deep liquidity and robust trading activity in the ETFs identified 
by the Exchange as meeting the criteria mitigate against historic 
concerns regarding susceptibility to manipulation.
Characteristics of ETFs
    ETFs are funds that have their value derived from assets owned. The 
net asset value (``NAV'') of an ETF is a daily calculation that is 
based off the most recent closing prices of the assets in the fund and 
an actual accounting of the total cash in the fund at the time of 
calculation. The NAV of an ETF is calculated by taking the sum of the 
assets in the fund, including any securities and cash, subtracting out 
any liabilities, and dividing that by the number of shares outstanding.
    Additionally, each ETF is subject to a creation and redemption 
mechanism to ensure the price of the ETF does not fluctuate too far 
away from its NAV--which mechanisms reduce the potential for 
manipulative activity. Each business day, ETFs are required to make 
publicly available a portfolio composition file that describes the 
makeup of their creation and redemption ``baskets'' (i.e., a specific 
list of names and quantities of securities or other assets designed to 
track the performance of the portfolio as a whole). ETF shares are 
created when an Authorized Participant,\31\ typically a market maker or 
other large institutional investor, deposits the daily creation basket 
or cash with the ETF issuer. In return for the creation basket or cash 
(or both), the ETF issues to the Authorized Participant a ``creation 
unit'' that consists of a specified number of ETF shares. For instance, 
IWM is designed to track the performance of the Russell 2000 Index. An 
Authorized Participant will purchase all the Russell 2000 constituent 
securities in the exact same weight as the index prescribes, then 
deliver those shares to the ETF issuer. In exchange, the ETF issuer 
gives the Authorized Participant a block of equally valued ETF shares, 
on a one-for-one fair value basis. This process can also work in 
reverse. A redemption is achieved when the Authorized Participant 
accumulates a sufficient number of shares of the ETF to constitute a 
creation unit and then exchanges these ETF shares with the ETF issuer, 
thereby decreasing the supply of ETF shares in the market.
---------------------------------------------------------------------------

    \31\ ``Authorized Participant'' means a member or participant of 
a clearing agency registered with the Commission, which has a 
written agreement with the exchange-traded fund or one of its 
service providers that allows the authorized participant to place 
orders for the purchase and redemption of creation units. See SEC 
Rule 6c-11(a)(1).
---------------------------------------------------------------------------

    The principal, and perhaps most important, feature of ETFs is their 
reliance on an ``arbitrage function'' performed by market participants 
that influences the supply and demand of ETF shares and, thus, trading 
prices relative to NAV. As noted above, new

[[Page 86011]]

ETF shares can be created and existing shares redeemed based on 
investor demand; thus, ETF supply is open-ended. This arbitrage 
function helps to keep an ETF's price in line with the value of its 
underlying portfolio, i.e., it minimizes deviation from NAV. Generally, 
in the Exchange's view, the higher the liquidity and trading volume of 
an ETF, the more likely the price of the ETF will not deviate from the 
value of its underlying portfolio, making such ETFs less susceptible to 
price manipulation.
Trading Data for the ETFs Proposed for Cash Settlement
    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 considers 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, 2024 through June 
30, 2024) reviewed by the Exchange.
    Further, the Exchange proposes that qualifying ETFs 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 ETF of 200 shares per second. While no 
security is immune from all manipulation, the Exchange believes that 
the combination of average daily notional value and ADV as prerequisite 
requirements would limit cash settlement of FLEX ETF Options to those 
underlying ETFs 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 ETFs would 
qualify to have cash settlement as a contract term. As provided in the 
below table, from January 1, 2024 to June 30, 2024, the Exchange would 
be able to provide cash settlement as a contract term for FLEX ETF 
Options on 48 underlying ETFs, 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 48 ETFs that, for the period covering January 
1, 2024 through June 30, 2024, would be eligible to have cash 
settlement as a contract term.\32\
---------------------------------------------------------------------------

    \32\ As noted below, options on GBTC and IBIT are not yet 
available.

----------------------------------------------------------------------------------------------------------------
                                                                             Average daily
                                                                          notional value (in     Average daily
               Symbol                           Security name             dollars) (1/1/24-6/ volume (in shares)
                                                                                30/24)         (1/1/24-6/30/24)
----------------------------------------------------------------------------------------------------------------
AGG................................  iShares Core U.S. Aggregate Bond           $806,096,032           8,295,918
                                      ETF.
ARKK...............................  ARK Innovation ETF.................         588,267,283          12,516,087
BIL................................  SPDR Bloomberg 1-3 Month T-Bill ETF         618,700,170           6,753,925
BND................................  Vanguard Total Bond Market Index            514,223,054           7,130,093
                                      Fund ETF.
EEM................................  iShares MSCI Emerging Markets ETF..       1,164,586,979          28,535,696
EFA................................  iShares MSCI EAFE ETF..............       1,104,421,854          14,216,699
EMB................................  iShares JPMorgan USD Emerging               542,748,575           6,149,042
                                      Markets Bond ETF.
EWJ................................  iShares MSCI Japan ETF.............         509,554,399           7,481,823
EWZ................................  iShares MSCI Brazil ETF............         683,919,536          21,690,846
FXI................................  iShares China Large-Cap ETF........       1,027,752,868          42,009,611
GBTC...............................  Grayscale Bitcoin Trust *..........         683,447,931          13,105,251
GDX................................  VanEck Gold Miners ETF.............         774,584,258          24,682,952
GLD................................  SPDR Gold Shares...................       1,511,241,142           7,344,884
HYG................................  iShares iBoxx $ High Yield                2,850,542,598          37,011,783
                                      Corporate Bond ETF.
IBIT...............................  iShares Bitcoin Trust ETF *........       1,338,731,551          35,140,151
IEF................................  iShares 7-10 Year Treasury Bond ETF         743,974,086           7,917,457
IEFA...............................  iShares Core MSCI EAFE ETF.........         577,266,076           7,997,376
IEMG...............................  iShares Core MSCI Emerging Markets          519,063,454          10,129,994
                                      ETF.
IVV................................  iShares Core S&P 500 ETF...........       2,774,452,994           5,417,239
IWM................................  iShares Russell 2000 ETF...........       6,731,230,018          33,649,687
IYR................................  iShares U.S. Real Estate ETF.......         537,339,035           6,177,644
KRE................................  SPDR S&P Regional Banking ETF......         676,589,675          13,902,921
KWEB...............................  KraneShares CSI China Internet ETF.         555,987,739          20,766,407
LQD................................  Shares iBoxx $ Investment Grade           3,007,311,016          27,902,549
                                      Corporate Bond ETF.
NVDL...............................  GraniteShares 2x Long NVDA Daily            682,096,758          11,387,201
                                      ETF.
QQQ................................  Invesco QQQ Trust..................      17,916,413,637          41,065,771
RSP................................  Invesco S&P 500 Equal Weight ETF...         982,482,303           6,062,567
SLV................................  iShares Silver Trust...............         602,178,901          24,515,577
SMH................................  VanEck Semiconductor ETF...........       1,783,514,710           8,199,564
SOXL...............................  Direxion Daily Semiconductor Bull         2,703,451,838          64,700,251
                                      3x Shares.
SOXS...............................  Direxion Daily Semiconductor Bear           695,294,352          92,188,004
                                      3x Shares.
SPXL...............................  Direxion Daily S&P 500 Bull 3X              737,685,244           6,096,062
                                      Shares.
SPY................................  SPDR S&P 500 ETF Trust.............      33,559,628,313          66,151,690
SQQQ...............................  ProShares UltraPro Short QQQ ETF...       1,461,906,416         131,905,524
TLT................................  iShares 20+ Year Treasury Bond ETF.       3,779,166,025          40,682,936
TNA................................  Direxion Daily Small Cap Bull 3X            697,479,128          18,832,200
                                      Shares.

[[Page 86012]]

 
TQQQ...............................  ProShares UltraPro QQQ.............       3,796,209,774          64,941,840
VCIT...............................  Vanguard Intermediate-Term Corp             597,752,071           7,484,828
                                      Bond Idx Fund ETF.
VEA................................  Vanguard Tax Managed Fund FTSE              517,396,977          10,583,858
                                      Developed Markets ETF.
VOO................................  Vanguard S&P 500 ETF...............       2,425,398,743           5,177,005
XBI................................  SPDR S&P Biotech ETF...............         979,943,806          10,728,380
XLE................................  Energy Select Sector SPDR Fund.....       1,411,567,713          15,798,449
XLF................................  Financial Select Sector SPDR Fund..       1,736,012,363          43,157,138
XLI................................  Industrial Select Sector SPDR Fund.       1,114,661,946           9,277,779
XLK................................  Technology Select Sector SPDR Fund.       1,274,025,061           6,202,031
XLP................................  Consumer Staples Select Sector SPDR         907,491,273          12,108,426
                                      Fund.
XLU................................  Utilities Select Sector SPDR Fund..         944,774,031          14,540,920
XLV................................  Health Care Select Sector SPDR Fund       1,127,277,467           7,876,680
----------------------------------------------------------------------------------------------------------------
* Options on this ETF are not yet available.

    The Exchange believes that permitting cash settlement as a contract 
term for FLEX ETF Options for the ETFs in the above table would broaden 
the base of investors that use FLEX Equity 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 notes that the SEC has previously approved a rule 
filing of another exchange that allowed for the trading of cash-settled 
options \33\ and, specifically, cash-settled FLEX ETF Options (which 
the Exchange proposes to list in the same manner as that exchange).\34\
---------------------------------------------------------------------------

    \33\ See, e.g., PHLX FX Options traded on Nasdaq PHLX and S&P 
500[supreg] Index Options traded on Cboe Options Exchange. The 
Commission approved, on a pilot basis, the listing and trading of 
RealDay<SUP>TM</SUP> 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.
    \34\ See Securities Exchange Act Release Nos. 88131 (February 5, 
2020), 85 FR 7806 (February 11, 2020) (SR-NYSEAMER-2019-38) (Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1, to 
Allow Certain Flexible Equity Options To Be Cash Settled); 97231 
(March 31, 2023), 88 FR 20587 (April 6, 2023) (SR-NYSEAMER-2023-22) 
(Notice of Filing and Immediate Effectiveness of Proposed Change to 
Make a Clarifying Change to the Term Settlement Style Applicable to 
Flexible Exchange Options); and 98044 (August 2, 2023), 88 FR 53548 
(August 8, 2023) (SR-Cboe-2023-036) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Allow Certain Flexible 
Exchange Equity Options To Be Cash Settled.
---------------------------------------------------------------------------

    Today, 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 
may possess certain risks with respect to volatility and movement of 
the underlying security at expiration against which market participants 
may need to hedge. The Exchange believes 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 as well as the risk of 
an adverse movement in the price of the underlying security.
    With respect to position and exercise limits, cash-settled FLEX ETF 
Options would be subject to the position limits set forth in proposed 
Options 8, Section 34(i). Accordingly, the Exchange proposes to add 
Options 8, Section 34(i)(1), which would provide that a position in 
FLEX Equity Options where the underlying security is an ETF that is 
settled in cash pursuant to Options 8, Section 34(f)(6)(A) shall be 
subject to the position limits set forth in Options 9, Section 13, and 
subject to the exercise limits set forth in Options 9, Section 15.\35\ 
The proposed rule would further state that positions in such cash-
settled FLEX Equity Options shall be aggregated with positions in 
physically settled options on the same underlying ETF for the purpose 
of calculating the position limits set forth in Options 9, Section 13 
and the exercise limits set forth in Options 9, Section 15.\36\ The 
Exchange further proposes to add in Options 8, Section 34(i)(1) a 
cross-reference to subparagraph (f)(6)(A), as subparagraph (i)(1) would 
also contain provisions about position limits for FLEX Equity Options 
that would be exceptions to the first sentence in this paragraph 
stating that FLEX Equity Options have no position limits. The Exchange 
also proposes to add in paragraph (i)(4), a cross-reference to proposed 
subparagraphs (i)(1) as the proposed rule adds language regarding 
aggregation of positions for purposes of position limits, which will be 
covered by paragraph (i)(4). Given that each of the underlying ETFs 
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 48 underlying securities that would 
currently be

[[Page 86013]]

eligible to have cash settlement as a FLEX contract term, 33 would have 
a position limit of 250,000 contracts pursuant to Options 9, Section 
13(d)(5).\37\ Further, pursuant to Supplementary Material .01 to 
Options 9, Section 13, seven would have a position limit of 500,000 
contracts (EWJ, EWZ, TLT, HYG, XLF, LQD, and GDX); four (EEM, FXI, IWM, 
and EFA) would have a position limit of 1,000,000 contracts; one (QQQ) 
would have a position limit of 1,800,000 contracts; and one (SPY) would 
have a position limit of 3,600,000.\38\
---------------------------------------------------------------------------

    \35\ The Exchange proposes to add to proposed Options 8, Section 
34(i)(1) a cross reference to proposed subparagraph (f)(6)(A), as 
proposed Section 34(i)(1) also contains provisions about position 
limits for FLEX Equity Options that would be exceptions to the 
statement in proposed Section (i)(1) that FLEX Equity Options have 
no position limits (in addition to the language in proposed 
34(i)(1)). The Exchange also proposes to add to proposed Options 8, 
Section 34(i)(4) a cross-reference to proposed subparagraph 
subparagraph (i)(1), as the proposed rule adds language regarding 
aggregation of positions for purposes of position limits, which will 
be covered in proposed Section 34(i)(4).
    \36\ See proposed Options 8, Section 34(i)(1), which is based on 
Cboe Rule 8.35(c)(1)(B). The aggregation of position and exercise 
limits would include all positions on physically settled FLEX and 
non-FLEX Options on the same underlying ETFs.
    \37\ Options 9, Section 13(d)(5) provides that to be eligible 
for the 250,000 contract limit, either the most recent six (6) month 
trading volume of the underlying security must have totalled at 
least 100 million shares or the most recent six-month trading volume 
of the underlying security must have totalled at least seventy-five 
(75) million shares and the underlying security must have at least 
300 million shares currently outstanding. Further as noted above, 
options on GBTC and IBIT are not yet available.
    \38\ These were based on position limits as of September 13, 
2024. Position limits are available on at https://www.theocc.com. 
Position limits for ETFs are always determined in accordance with 
the Exchange's Rules regarding position limits.
---------------------------------------------------------------------------

    The Exchange understands that cash-settled ETF options are 
currently traded in the OTC market by a variety of market participants, 
e.g., hedge funds, proprietary trading firms, and pension funds.\39\ 
These options are not fungible with the exchange listed options. The 
Exchange believes some of these market participants would prefer to 
trade comparable 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 ETF Options. The Exchange 
also believes that the trading of cash-settled FLEX ETF Options would 
allow these same market participants to better manage the risk 
associated with the volatility of underlying equity positions given the 
enhanced liquidity that an exchange-traded product would bring.
---------------------------------------------------------------------------

    \39\ As noted above, other options exchanges have received 
approval to list certain cash-settled FLEX ETF Options. See 
Securities Exchange Act Release No. 88131 (February 5, 2020), 85 FR 
7806 (February 11, 2020) (SR-NYSEAmer-2019-38) (Notice of Filing of 
Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Allow 
Certain Flexible Equity Options To Be Cash Settled). Cboe also filed 
an immediately effective rule change to allow certain FLEX Options 
to be cash settled. See Securities Exchange Act Release No. 98044 
(August 2, 2023), 88 FR 53548 (August 8, 2023) (SR-Cboe-2023-036) 
(Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change To Allow Certain Flexible Exchange Equity Options To Be Cash 
Settled).
---------------------------------------------------------------------------

    In the Exchange's view, cash-settled FLEX ETF Options traded on the 
Exchange would have three important advantages over the contracts that 
are traded in the OTC market. First, as a result of greater 
standardization of contract terms, exchange-traded contracts should 
develop more liquidity. Second, counter-party credit risk would be 
mitigated by the fact that the contracts are issued and guaranteed by 
OCC. Finally, the price discovery and dissemination provided by the 
Exchange and its members would lead to more transparent markets. The 
Exchange believes that its ability to offer cash-settled FLEX ETF 
Options would aid it in competing with the OTC market and at the same 
time expand the universe of products available to interested market 
participants. The Exchange believes that an exchange-traded alternative 
may provide a useful risk management and trading vehicle for market 
participants and their customers. Further, the Exchange believes 
listing cash-settled FLEX ETF Options would provide investors with 
competition on an exchange platform, as other options exchanges have 
received Commission approval to list the same options.\40\
---------------------------------------------------------------------------

    \40\ See supra note 39.
---------------------------------------------------------------------------

    The Exchange notes that OCC has received approval from the 
Commission for rule changes that will accommodate the clearance and 
settlement of cash-settled ETF options.\41\ 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 ETF Options. The Exchange believes any additional traffic 
that would be generated from the introduction of cash-settled FLEX ETF 
Options would be manageable. The Exchange expects that members will not 
have a capacity issue as a result of this proposed rule change. The 
Exchange also 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.
---------------------------------------------------------------------------

    \41\ See Securities Exchange Act Release No. 34-94910 (May 13, 
2022), 87 FR 30531 (May 19, 2022) (SR-OCC-2022-003).
---------------------------------------------------------------------------

    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. The Exchange believes that 
manipulating the settlement price of cash-settled FLEX ETF Options 
would be difficult based on the size of the market for the underlying 
ETFs that are the subject of this proposed rule change. The Exchange 
notes that each underlying ETF in the table above is sufficiently 
active to alleviate concerns about potential manipulative activity. 
Further, in the Exchange's view, the vast liquidity in the 48 
underlying ETFs that would currently be eligible to be traded as cash-
settled FLEX options under the proposal ensures a multitude of market 
participants at any given time. Moreover, given the high level of 
participation among market participants that enter quotes and/or orders 
in physically settled options on these ETFs, the Exchange believes it 
would be very difficult for a single participant to alter the price of 
the underlying ETF or options overlying such ETF 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 ETF or options overlying such ETF would also be cost 
prohibitive. As a result, the Exchange believes there is significant 
participation among market participants to prevent manipulation of 
cash-settled FLEX ETF Options.
    Still, the Exchange believes it has an adequate surveillance 
program in place and intends to apply the same program procedures to 
cash-settled FLEX ETF Options that it applies to the Exchange's other 
options products.\42\ FLEX options products and their respective 
symbols will be integrated into the Exchange's existing surveillance 
system architecture and will thus be subject to the relevant 
surveillance processes, as applicable. The Exchange believes that the 
existing surveillance procedures at the Exchange are capable of 
properly identifying unusual and/or illegal trading activity, which 
procedures the Exchange would utilize to surveil for aberrant trading 
in cash-settled FLEX ETF Options.
---------------------------------------------------------------------------

    \42\ For example, the regulatory program for the Exchange 
includes surveillance designed to identify manipulative and other 
improper options trading, including, spoofing, marking the close, 
front running, wash sales, etc.
---------------------------------------------------------------------------

    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

[[Page 86014]]

Phlx \43\ 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, and quoting/routing, 
which may occur on the Exchange or other markets.\44\ 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, today, its existing trading 
surveillances are adequate to monitor trading in the underlying ETFs 
and subsequent trading of options on those securities listed on the 
Exchange. Further, with the introduction of cash-settled FLEX ETF 
Options, the Exchange would leverage its existing surveillances to 
monitor trading in the underlying ETFs and subsequent trading of 
options on those securities listed on the Exchange with respect to 
cash-settled FLEX ETF options.\45\
---------------------------------------------------------------------------

    \43\ Phlx maintains a regulatory services agreement with 
Financial Industry Regulatory Authority, Inc. (``FINRA'') whereby 
FINRA provides certain regulatory services to the exchanges, 
including cross-market surveillance, investigation, and enforcement 
services.
    \44\ As it relates to Reg SHO violations, the Exchange will 
enforce this through its Stock-Tied Reg SHO price protections in 
Options 3, Section 16(b). See supra note 65 for Stock-Tied Reg SHO 
discussion. NES will only execute the underlying covered security 
component of a Complex Order if the underlying covered security 
component is in accordance with Rule 201 of Regulation SHO. 
Additionally, FINRA's regulatory program addresses Reg SHO 
compliance for its member firms (which includes Exchange Members).
    \45\ 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 Phlx's own monitoring for violative activity on 
the Exchange comprise a comprehensive surveillance program that is 
adequate to monitor for manipulation of the underlying ETF and 
overlying option. Furthermore, the Exchange believes that the existing 
surveillance procedures at the Exchange are capable of properly 
identifying unusual and/or illegal trading activity, which the Exchange 
would utilize to surveil for aberrant trading in cash-settled FLEX ETF 
Options.
    In addition to the surveillance procedures and processes described 
above, improvements in audit trails (i.e., the Consolidated Audit 
Trail), 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. In addition, the 
Exchange is a member of the Intermarket Surveillance Group (``ISG''). 
The ISG members work together to coordinate surveillance and 
investigative information sharing in the stock and options markets. For 
surveillance purposes, the Exchange would therefore have access to 
information regarding trading activity in the pertinent underlying 
securities.
    The proposed rule change is designed to allow investors seeking to 
effect cash-settled FLEX ETF Options with the opportunity for a 
different method of settling option contracts at expiration if they 
choose to do so. As noted above, market participants may choose cash 
settlement because physical settlement possesses certain risks with 
respect to volatility and movement of the underlying security at 
expiration that market participants may need to hedge against. The 
Exchange believes that offering innovative products flows to the 
benefit of the investing public. A robust and competitive market 
requires that exchanges respond to members' evolving needs by 
constantly improving their offerings. Such efforts would be stymied if 
exchanges were prohibited from offering innovative products for reasons 
that are generally debated in academic literature. The Exchange 
believes that introducing cash-settled FLEX ETF Options would further 
broaden the base of investors that use FLEX Equity 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 proposed rule change is also designed to 
encourage market makers to shift liquidity from the OTC market onto the 
Exchange, which, it believes, would enhance the process of price 
discovery conducted on the Exchange through increased order flow. The 
Exchange also believes that this may open up cash-settled FLEX ETF 
Options to more retail investors. The Exchange does not believe that 
this proposed rule change raises any unique regulatory concerns because 
existing safeguards--such as position limits (and the aggregation of 
cash-settled positions with physically-settled positions), exercise 
limits (and the aggregation of cash-settled positions with physically-
settled positions), and reporting requirements--would continue to 
apply. The Exchange believes the proposed position and exercise limits 
may further help mitigate the concerns that the limits are designed to 
address about the potential for manipulation and market disruption in 
the options and the underlying securities.\46\
---------------------------------------------------------------------------

    \46\ See proposed Options 8, Section 34(i)(1), which is based on 
Cboe Rule 8.35(c)(1)(B). The aggregation of position and exercise 
limits would include all positions on physically settled FLEX and 
non-FLEX Options on the same underlying ETFs.
---------------------------------------------------------------------------

    Given the novel characteristics of cash-settled FLEX ETF Options, 
the Exchange will conduct a review of the trading in cash-settled FLEX 
ETF Options over an initial five-year period. The Exchange will furnish 
five reports to the Commission based on this review, the first of which 
would be provided within 60 days after the first anniversary of the 
initial listing date of the first cash-settled FLEX ETF Option under 
the proposed rule and each subsequent annual report to be provided 
within 60 days after the second, third, fourth and fifth anniversary of 
such initial listing. At a minimum, each report will provide a 
comparison between the trading volume of all cash-settled FLEX ETF 
Options listed under the proposed rule and physically settled options 
on the same underlying security, the liquidity of the market for such 
options products and the underlying ETF, and any manipulation concerns 
arising in connection with the trading of cash-settled FLEX ETF Options 
under the proposed rule. The Exchange will also provide additional data 
as requested by the Commission during this five year period. The 
reports will also discuss any recommendations the Exchange may have for 
enhancements to the listing standards based on its review. The Exchange 
believes these reports will allow the Commission and the Exchange to 
evaluate, among other things, the impact such options have, and any 
potential adverse effects, on price volatility and the market for the 
underlying ETFs, the component securities underlying the ETFs, and the 
options on the same underlying ETFs and make appropriate 
recommendations, if any, in response to the reports.
Implementation
    The Exchange proposes to implement this rule change on or before 
December 23, 2024. The Exchange will announce

[[Page 86015]]

an implementation date by issuing an Options Trader Alert.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\47\ in general, and furthers the objectives of Section 
6(b)(5) of the Act.\48\ Specifically, the Exchange believes the 
proposed rule change is consistent with the Section 6(b)(5) \49\ 
requirements that the rules of an exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities 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.
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78f(b)
    \48\ 15 U.S.C. 78f(b)(5).
    \49\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Permissible Series
    The Exchange's proposal to not authorize for trading a FLEX Option 
on iShares Bitcoin Trust ETF (``IBIT'') is consistent with ISE's 
Approval Order of iShares Bitcoin Trust.\50\ ISE stated that the 
position limit for IBIT options shall be 25,000 contracts.\51\ Phlx 
proposes to exclude IBIT Options from trading as a FLEX Options to 
continue to limit the position limits for IBIT Options.
---------------------------------------------------------------------------

    \50\ See Securities Exchange Act Release No. 101128 (September 
20, 2024), 89 FR 78942 (September 26, 2024) (SR-ISE-2024-03) (Notice 
of Filing of Amendment Nos. 4 and 5 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 
4, and 5, To Permit the Listing and Trading of Options on the 
iShares Bitcoin Trust).
    \51\ Id.
---------------------------------------------------------------------------

Characteristics of ETFs
    The Exchange's proposal to provide in Options 8, Section 
34(f)(1)(B) that, ``an underlying equity security or index, as 
applicable (the index multiplier for FLEX Index Options is 100)'' is 
consistent with the Act and will protect investors and the general 
public because this rule text adds transparency to the current 
characteristics of underlying interest for FLEX Option.
Minimum Trading Increments
    The Exchange's proposal to amend Options 8, Section 34(f)(3) to 
provide that, ``The Exchange may determine the smallest increment for 
exercise prices of FLEX Options on a class-by-class basis without going 
lower than the $0.01.'' is consistent with the Act and will protect 
investors and the general public because this rule text provides clear, 
transparent language regarding the minimum trading increments for FLEX 
Options. The language is consistent with Cboe Rule 5.3(e)(3) except the 
Exchange is not proposing to provide for Micro FLEX Index Options or to 
allow prices to be expressed as a percentage value because the Exchange 
does not offer these features today.
FLEX PM Third Friday Options
    The Exchange's proposal to amend Options 8, Section 34(f)(5) to 
allow the listing of FLEX PM Third Friday Options, is consistent with 
the Commission's recent approval of Cboe's proposal to make its pilot a 
permanent program.\52\ The Exchange believes that aligning to Cboe will 
allow Phlx to compete effectively with Cboe's product offering. Like 
Cboe, the Exchange believes that FLEX PM Third Friday Options will 
provide investors with greater trading opportunities and flexibility. 
The Exchange notes that the Commission recently approved proposals to 
make other pilots permitting p.m.-settlement of index options permanent 
after finding those pilots were consistent with the Act and the options 
subject to those pilots had no significant impact on the market.\53\
---------------------------------------------------------------------------

    \52\ See Securities Exchange Act Release No. 99222 (December 21, 
2023), 88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX 
Settlement Pilot Approval''). In support of making the pilot a 
permanent program, Cboe cited to its own review of pilot data during 
the course of the pilot program and a study by the Commission's 
Division of Economic and Risk Analysis (``DERA'') staff. See FLEX 
Settlement Pilot Approval, notes 18 and 35.
    \53\ See Securities Exchange Act Release Nos. 98454 (September 
20, 2023) (SR-CBOE-2023-005) (order approving proposed rule change 
to make permanent the operation of a program that allows the 
Exchange to list p.m.-settled third Friday-of-the-month SPX options 
series) (``SPXPM Approval''); 98455 (September 20, 2023) (SR-CBOE-
2023-019) (order approving proposed rule change to make permanent 
the operation of a program that allows the Exchange to list p.m.-
settled third Friday-of-the-month XSP and MRUT options series) 
(``XSP and MRUT Approval''); and 98456 (September 20, 2023) (SR-
CBOE-2023-020) (order approving proposed rule change to make the 
nonstandard expirations pilot program permanent) (``Nonstandard 
Approval''). See also Securities Exchange Act Release Nos. 98451 
(September 20, 2023), 88 FR 66088 (September 26, 2023) (SR-Phlx-
2023-07) (Order Granting Approval of a Proposed Rule Change, as 
Modified by Amendment No. 1, To Make Permanent Certain P.M.-Settled 
Pilots); and 98950 (November 15, 2023), 88 FR 81172 (November 21, 
2023) (SR-Phlx-2023-45) (Order Approving a Proposed Rule Change To 
Permit the Listing and Trading of P.M.-Settled Nasdaq-100 Index 
Options With a Third-Friday-of-the-Month Expiration).
---------------------------------------------------------------------------

    The Exchange further believes that permitting Phlx to list FLEX PM 
Third Friday Options, similar to Cboe, will remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system and protect investors, while maintaining a fair and orderly 
market. As described in the FLEX Settlement Pilot Approval, Cboe 
observed no significant adverse market impact or identified any 
meaningful regulatory concerns during the nearly 14-year operation of 
the FLEX PM Third Friday Program as a pilot nor during the 15 years 
since P.M.-settled index options (SPX) were reintroduced to the 
marketplace.\54\
---------------------------------------------------------------------------

    \54\ Notably, Cboe did not identify any significant economic 
impact (including on pricing or volatility or in connection with 
reversals) on related futures, the underlying indexes, or the 
underlying component securities of the underlying indexes 
surrounding the close as a result of the quantity of FLEX PM Third 
Friday Options or the amount of expiring open interest in FLEX PM 
Third Friday Options, nor any demonstrated capacity for options 
hedging activity to impact volatility in the underlying markets. See 
Securities Exchange Act Release No. 99222 (December 21, 2023), 88 FR 
89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX Settlement 
Pilot Approval''). In support of making the pilot a permanent 
program, Cboe cited to its own review of pilot data during the 
course of the pilot program and a study by the Commission's Division 
of Economic and Risk Analysis (``DERA'') staff. See FLEX Settlement 
Pilot Approval, notes 18 and 35.
---------------------------------------------------------------------------

    As discussed in the FLEX Settlement Pilot Approval, the DERA staff 
study and corresponding Cboe study concluded that a significantly 
larger amount of non-FLEX p.m.-settled index options had no significant 
adverse market impact and caused no meaningful regulatory concerns. 
Therefore, the Exchange believes it is reasonable to conclude that the 
relatively small amount of FLEX Index Option volume would similarly 
have no significant adverse market impact or cause no meaningful 
regulatory concerns.\55\
---------------------------------------------------------------------------

    \55\ See Securities Exchange Act Release No. 99222 (December 21, 
2023), 88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX 
Settlement Pilot Approval''). In support of making the pilot a 
permanent program, Cboe cited to its own review of pilot data during 
the course of the pilot program and a study by the Commission's 
Division of Economic and Risk Analysis (``DERA'') staff. See FLEX 
Settlement Pilot Approval, notes 18 and 35. Additionally, these 
studies measured any impact on related futures, the underlying 
indexes, or the underlying component securities of the underlying 
indexes surrounding the close. Despite FLEX SPX options (which 
represent approximately half of the year-to-date 2023 volume of FLEX 
Index Options but only approximately 0.3% of total SPX volume) not 
being included in the DERA staff study and corresponding Cboe study, 
those studies concluded that during the time periods covered (which 
included the period of time in which the Pilot Program has been 
operating), there was no significant economic impact on the 
underlying index or related products. Therefore, the Exchange 
believes it is reasonable to conclude that any FLEX SPX Options that 
executed during the timeframes covered by the studies had no 
significant impact on the underlying index or related products, as 
neither DERA staff nor Cboe observed any significant economic impact 
on the underlying index or related product.
---------------------------------------------------------------------------

    The Exchange also believes the introduction of FLEX PM options had

[[Page 86016]]

no significant impact on the market quality of corresponding a.m.-
settled options or other options. As discussed in the FLEX Settlement 
Pilot Approval, Cboe's analysis conducted after the introduction of 
SPXW options with Tuesday and Thursday expirations demonstrated no 
statistically significant impact on the bid-ask or effective spreads of 
SPXW options with Monday, Wednesday, and Friday expirations after 
trading in the SPXW options with Tuesday and Thursday expirations 
began.\56\ Further, Cboe concluded that large FLEX PM Third Friday 
Options trades had no material negative impact (and likely no impact) 
on quote quality of non-FLEX a.m.-settled options overlying the same 
index with similar terms as the FLEX PM Third Friday Option upon 
evaluating data that showed that the spreads were relatively stable 
before and after large trades.\57\ Therefore, the Exchange believes 
Cboe's evaluation effectively demonstrates it is likely that FLEX PM 
Third Friday Options have had no significant negative impact on the 
market quality of non-FLEX Options with a.m.-settlement.\58\
---------------------------------------------------------------------------

    \56\ See Securities Exchange Act Release No. 99222 (December 21, 
2023), 88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX 
Settlement Pilot Approval''). In support of making the pilot a 
permanent program, Cboe cited to its own review of pilot data during 
the course of the pilot program and a study by the Commission's 
Division of Economic and Risk Analysis (``DERA'') staff. See FLEX 
Settlement Pilot Approval, notes 18 and 35.
    \57\ Specifically, Cboe evaluated each FLEX PM Third Friday 
Options trade for more than 500 contracts that occurred on Cboe 
during a two-year timeframe and analyzed the market quality 
(specifically, the average time-weighted quote spread and size 30 
minutes prior to the trade and the average time-weighted quote 
spread and size 30 minutes after the trade) of series non-FLEX a.m.-
settled options overlying the same index with similar terms as the 
FLEX PM Third Friday Option that traded (time to expiration, type 
(call or put), and strike price) as set forth in the Cboe's data. 
See Securities Exchange Act Release No. 99222 (December 21, 2023), 
88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX 
Settlement Pilot Approval''). In support of making the pilot a 
permanent program, Cboe cited to its own review of pilot data during 
the course of the pilot program and a study by the Commission's 
Division of Economic and Risk Analysis (``DERA'') staff. See FLEX 
Settlement Pilot Approval, notes 18 and 35.
    \58\ The Exchange acknowledges that, while FLEX PM Third Friday 
Options has historically represented a very small percentage of 
overall volume, it is possible trading in these options may grow in 
the future.
---------------------------------------------------------------------------

    Additionally, the significant changes in the closing procedures of 
the primary markets in recent decades, including considerable advances 
in trading systems and technology, has significantly minimized risks of 
any potential impact of FLEX PM Third Friday Options on the underlying 
cash markets. As such, the Exchange believes that this proposal does 
not raise any unique or prohibitive regulatory concerns and that such 
trading has not, and will not, adversely impact fair and orderly 
markets on expiration Fridays for the underlying indexes or their 
component securities.
FLEX Options Terms
    The Exchange's proposal to amend Options 8, Section 34(f)(6)(A) to 
note how the exercise value is determined depending on whether it is 
a.m.-settled or p.m.-settled is consistent with the Act and will 
protect investors and the general public because this rule text adds 
transparency to the current settlement of FLEX Index Options.
Position and Exercise Limits
    Position and exercise limits are designed to address potential 
manipulative schemes and adverse market impacts surrounding the use of 
options, such as disrupting the market in the security underlying the 
options. While position and exercise limits should address and 
discourage the potential for manipulative schemes and adverse market 
impact, if such limits are set too low, participation in the options 
market may be discouraged. The Exchange believes that any decision 
regarding imposing position and exercise limits for FLEX Options must 
therefore be balanced between mitigating concerns of any potential 
manipulation and the cost of inhibiting potential hedging activity that 
could be used for legitimate economic purposes.
    As it relates to FLEX Index Options, the Exchange believes that the 
proposed amendments to position and exercise limits in Options 8, 
Section 34(i) and (j) are reasonably designed to prevent a member 
organization from using FLEX Index Options to evade the position limits 
applicable to comparable non-FLEX Index Options. Further, by 
establishing the proposed position and exercise limits for FLEX Index 
Options and, importantly, aggregating such positions in the manner 
described in proposed Options 8, Section 34(i)(4) the Exchange believes 
that the position and exercise limit requirements for FLEX Index 
Options should help to ensure that the trading of FLEX Index Options 
would not increase the potential for manipulation or market disruption 
and could help to minimize such incentives. The Exchange also notes 
that proposed position and exercise limits are consistent with the 
rules of other options exchanges that offer FLEX Index Options, as well 
as the rules of its own standard non-FLEX index options market, and 
therefore raise no novel issues for the Commission.\59\
---------------------------------------------------------------------------

    \59\ See Cboe Rules 8.35(a), (b), (d), and 8.42(g) and Phlx 
Options 4A, Sections 6(a), 9(a)(13), and 9(a)(14).
---------------------------------------------------------------------------

    As it relates to FLEX Equity Options, while no position limits are 
proposed for FLEX Equity Options, there are several mitigating factors, 
which include aggregation of FLEX Equity Option and non-FLEX Equity 
Option positions that expire on a third Friday-of-the-month and 
subjecting those positions to position and exercise limits, and daily 
monitoring of market activity. Similar to the other exchanges that 
trade FLEX Equity Options, the Exchange believes that eliminating 
position and exercise limits for FLEX Equity Options, while requiring 
positions in FLEX Equity Options that expire on a third Friday-of-the-
month to be aggregated with positions in non-FLEX Equity Options on the 
same underlying security,\60\ removes impediments to and perfects the 
mechanism of a free and open market and a national market system 
because it allows the Exchange to create a product and market that is 
an improved but comparable alternative to the OTC market in customized 
options. OTC transactions occur through bilateral agreements, the terms 
of which are not publicly disclosed to the marketplace. As such, OTC 
transactions do not contribute to the price discovery process that 
exists on a public exchange.
---------------------------------------------------------------------------

    \60\ See proposed Options 8, Section 34(i)(4)(c) and Section 
34(j)(1)(c). See also Cboe Rules 8.35(d)(3) and 8.42(g)(3); NYSE 
Arca Rules 5.35-O(a)(iii), (b) and 5.36-O; NYSE American Rules 906G 
and 907G; and Phlx Options 8, Section 34(e) and (f).
---------------------------------------------------------------------------

    The Exchange believes that the proposed elimination of position and 
exercise limits for FLEX Equity Options may encourage market 
participants to transfer their liquidity demands from OTC markets to 
exchanges and enable liquidity providers to provide additional 
liquidity to Phlx through transactions in FLEX Equity Options. The 
Exchange notes that the Commission previously approved the elimination 
of position and exercise limits for FLEX Equity Options, finding that 
such elimination would allow exchanges ``to better compete with the 
growing OTC market in customized equity options, thereby encouraging 
fair competition among brokers and dealers and exchange markets.'' \61\ 
The Commission has also stated that the elimination of position and 
exercise limits for FLEX Equity

[[Page 86017]]

Options ``could potentially expand the depth and liquidity of the FLEX 
equity market without significantly increasing concerns regarding 
intermarket manipulations or disruptions of the options or the 
underlying securities.'' \62\
---------------------------------------------------------------------------

    \61\ See Securities Exchange Act Release No. 42223 (December 10, 
1999), 64 FR 71158, 71159 (December 20, 1999) (SR-Amex-99-40) (SR-
PCX-99-41) (SR-CBOE-99-59) (Order Granting Accelerated Approval to 
Proposed Rule Change Relating to the Permanent Approval of the 
Elimination of Position and Exercise Limits for FLEX Equity 
Options).
    \62\ See id.
---------------------------------------------------------------------------

    Additionally, the Exchange believes that requiring positions in 
FLEX Equity Options that expire on a third Friday-of-the-month to be 
aggregated with positions in non-FLEX Equity Options on the same 
underlying security subjects FLEX Equity Options and non-FLEX Equity 
Options to the same position and exercise limits on third Friday-of-
the-month expirations. These limitations are intended to serve as a 
safeguard against potential adverse effects of large FLEX Equity Option 
positions expiring on the same day as non-FLEX Equity Option positions. 
As noted above, Cboe Rules 8.35(d)(3) and 8.42(g)(3) have the same 
requirements.
    The Exchange believes that any potential risk of manipulative 
activity is mitigated by existing surveillance technologies, 
procedures, and reporting requirements at the Exchange, which allows 
the Exchange to properly identify disruptive and/or manipulative 
trading activity. In addition to its own surveillance programs, the 
Exchange also works with other SROs and exchanges on intermarket 
surveillance related issues. Through its participation in ISG, the 
Exchange shares information and coordinates inquiries and 
investigations with other exchanges designed to address potential 
intermarket manipulation and trading abuses. The Exchange also notes 
that FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement.\63\ The Exchange 
also represents that it is reviewing its procedures to detect potential 
manipulation in light of any changes required for FLEX Options to 
confirm appropriate surveillance coverage. These procedures utilize 
daily monitoring of market activity via automated surveillance 
techniques to identify unusual activity in both options and their 
underlying securities and are designed to protect investors and the 
public interest by ensuring that the Exchange has an adequate 
surveillance program in place.
---------------------------------------------------------------------------

    \63\ The Exchange notes that it is responsible for FINRA's 
performance under this regulatory services agreement.
---------------------------------------------------------------------------

    Lastly, the Exchange notes that other exchanges currently trading 
FLEX options have similar position and exercise limits described 
above.\64\
---------------------------------------------------------------------------

    \64\ See Cboe Rules 8.35(d) and 8.42(g).
---------------------------------------------------------------------------

Cash-Settled Exchange Traded Funds (``ETFs'')
    Introducing cash-settled FLEX ETF Options will increase order flow 
to the Exchange, increase the variety of options products available for 
trading, and provide a valuable tool for investors to manage risk.
    The Exchange believes that the proposal to permit cash settlement 
as a contract term for 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 ETF Options would enable 
market participants to receive cash in lieu of shares of the underlying 
security, which would, in turn provide greater opportunities for market 
participants to manage risk through the use of 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 the proposed bi-annual review to determine eligibility for an 
underlying ETF to have cash settlement as a contract term would remove 
impediments to and perfect the mechanism of a free and open market as 
it would permit the Exchange to select only those underlying ETFs that 
are actively traded and have robust liquidity as each qualifying ETF 
would be required to meet the average daily notional value and average 
daily volume requirements, as well as to select the same underlying 
ETFs on which other exchanges may list cash-settled FLEX ETF 
Options.\65\
---------------------------------------------------------------------------

    \65\ See Securities Exchange Act Release No. 88131 (February 5, 
2020), 85 FR 7806 (February 11, 2020) (SR-NYSEAmer-2019-38) (Notice 
of Filing of Amendment No. 1 and Order Granting Accelerated Approval 
of a Proposed Rule Change, as Modified by Amendment No. 1, To Allow 
Certain Flexible Equity Options To Be Cash Settled). Cboe also filed 
an immediately effective rule change to allow certain FLEX Options 
to be cash settled. See Securities Exchange Act Release No. 98044 
(August 2, 2023), 88 FR 53548 (August 8, 2023) (SR-Cboe-2023-036) 
(Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change To Allow Certain Flexible Exchange Equity Options To Be Cash 
Settled).
---------------------------------------------------------------------------

    The Exchange believes the proposed change that, for FLEX ETF 
Options, at least one of exercise style, expiration date, and exercise 
price must differ from options in the non-FLEX market will provide 
clarity and eliminate confusion regarding permissible terms of FLEX ETF 
Options, including the proposed cash-settled FLEX ETF Options.
    The Exchange believes that the data provided by the Exchange 
supports the supposition that permitting cash settlement as a FLEX term 
for the 48 underlying ETFs that would currently qualify to have cash 
settlement as a contract term would broaden the base of investors that 
use FLEX Equity 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 
for certain FLEX ETF options would remove impediments to and perfect 
the mechanism of a free and open market because the proposed rule 
change would provide members and member organizations 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 another exchange has previously received approval that 
allows for the trading of cash-settled options, and, specifically, 
cash-settled FLEX ETF Options in an identical manner as the Exchange 
proposes to list them pursuant to this rule filing.\66\ The proposed 
rule change therefore should not raise issues for the Commission that 
it has not previously addressed.
---------------------------------------------------------------------------

    \66\ See supra note 39.
---------------------------------------------------------------------------

    The proposed rule change to permit cash settlement as a contract 
term for options on up to 50 ETFs 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

[[Page 86018]]

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 and are approved to trade on another options 
exchange.
    The Exchange believes that establishing position limits for cash-
settled FLEX ETF Options to be the same as physically settled options 
on the same underlying security, and aggregating positions in cash-
settled FLEX ETF Options with physically settled options on the same 
underlying security for purposes of calculating position limits is 
reasonable and consistent with the Act. By establishing the same 
position limits for cash-settled FLEX ETF Options as for physically 
settled options on the same underlying security and, importantly, 
aggregating such positions, the Exchange believes that the position 
limit requirements for cash-settled FLEX ETF Options should help to 
ensure that the trading of cash-settled FLEX ETF Options would not 
increase the potential for manipulation or market disruption and could 
help to minimize such incentives. For the same reasons, the Exchange 
believes the proposed exercise limits are reasonable and consistent 
with the Act.
    Finally, the Exchange represents that it has an adequate 
surveillance program in place to detect manipulative trading in cash-
settled FLEX ETF Options and the underlying ETFs. 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 
ETFs. The Exchange believes that limiting cash settlement to no more 
than 50 underlying ETFs (currently, 48 ETFs would 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.
    As a self-regulatory organization, the Exchange recognizes the 
importance of surveillance, among other things, to detect and deter 
fraudulent and manipulative trading activity as well as other 
violations of Exchange rules and the federal securities laws. As 
discussed above, Phlx has adequate surveillance procedures in place to 
monitor trading in cash-settled FLEX ETF Options and the underlying 
securities, including to detect manipulative trading activity in both 
the options and the underlying ETF.\67\ The Exchange further notes the 
liquidity and active markets in the underlying ETFs, and the high 
number of market participants in both the underlying ETFs and existing 
options on the ETFs, helps to minimize the possibility of manipulation. 
The Exchange further notes that under Section 19(g) of the Act, the 
Exchange, as a self-regulatory organization, is required to enforce 
compliance by its members and persons associated with its members with 
the Act, the rules and regulations thereunder, and the rules of the 
Exchange.\68\ The Exchange believes its surveillance, along with the 
liquidity criteria and position and exercise limits requirements, are 
reasonably designed to mitigate manipulation and market disruption 
concerns and will permit it to enforce compliance with the proposed 
rules and other Exchange rules in accordance with Section 19(g) of the 
Act. The Exchange performs ongoing evaluations of its surveillance 
program to ensure its continued effectiveness and will continue to 
review its surveillance procedures on an ongoing basis and make any 
necessary enhancements and/or modifications that may be needed for the 
cash settlement of FLEX ETF Options.
---------------------------------------------------------------------------

    \67\ Among other things, Phlx's regulatory program 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, and quoting/routing, which may 
occur on the Exchange and other markets. Furthermore, the Exchange 
stated that it has access to information regarding trading activity 
in the pertinent underlying securities as a member of ISG. As it 
relates to Reg SHO violations, the Exchange will enforce this 
through its Stock-Tied Reg SHO price protections in Options 3, 
Section 16(b). Specifically, Options 3, Section 16(b) provides that 
when the short sale price test in Rule 201 of Regulation SHO is 
triggered for a covered security, NES will not execute a short sale 
order in the underlying covered security component of a Complex 
Order if the price is equal to or below the current national best 
bid. However, NES will execute a short sale order in the underlying 
covered security component of a Complex Order if such order is 
marked ``short exempt,'' regardless of whether it is at a price that 
is equal to or below the current national best bid. If NES cannot 
execute the underlying covered security component of a Complex Order 
in accordance with Rule 201 of Regulation SHO, the Exchange will 
cancel back the Complex Order to the entering member organization. 
For purposes of this paragraph, the term ``covered security'' shall 
have the same meaning as in Rule 201(a)(1) of Regulation SHO. NES 
will only execute the underlying covered security component of a 
Complex Order if the underlying covered security component is in 
accordance with Rule 201 of Regulation SHO.
    \68\ 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

    Additionally, the Exchange will monitor any effect additional 
options series listed under the proposed rule change may have on market 
fragmentation and the capacity of the Exchange's automated systems. The 
Exchange will take prompt action, including timely communication with 
the Commission and with other self-regulatory organizations responsible 
for oversight of trading in options, the underlying ETFs, and the ETFs' 
component securities, should any unanticipated adverse market effects 
develop.

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 Exchange does not believe that the proposed rule change will 
impose any burden on intra-market competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as all member 
organizations who wish to trade FLEX Options will be able to trade such 
options in the same manner. Additionally, positions in FLEX Options of 
all member organizations will be subject to the same position limits, 
and such positions will be aggregated in the same manner as described 
in proposed Options 8, Section 34(i)(4).
    The Exchange also does not believe that the proposed rule change 
will impose any burden on inter-market competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. The 
proposal promotes inter-market competition by providing another 
alternative (i.e., exchange markets) to bilateral OTC trading of 
options with flexible terms. Exchange markets, in contrast with 
bilateral OTC trading, are centralized, transparent, and have the 
guarantee of OCC for options traded.

[[Page 86019]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

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

IV. Solicitation of Comments

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

Electronic Comments

    <bullet> Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#9ceee9f0f9b1fff3f1f1f9f2e8efdceff9ffb2fbf3ea"><span class="__cf_email__" data-cfemail="eb999e878ec6888486868e859f98ab988e88c58c849d">[email protected]</span></a>. Please include 
file number SR-Phlx-2024-51 on the subject line.

Paper Comments

    <bullet> 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-Phlx-2024-51. 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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-Phlx-2024-51 and should be 
submitted on or before November 19, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\69\
---------------------------------------------------------------------------

    \69\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-25052 Filed 10-28-24; 8:45 am]
BILLING CODE 8011-01-P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>