`[Federal Register Volume 89, Number 230 (Friday, November 29, 2024)]
[Notices]
[Pages 94986-95032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27992]



[[Page 94985]]

Vol. 89

Friday,

No. 230

November 29, 2024

Part IV





Securities and Exchange Commission





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Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of 
Amendment No. 1 and Order Granting Accelerated Approval of a Proposed 
Rule Change, as Modified by Amendment No. 1, To Adopt Rules To List and 
Trade FLEX Options; Notice

  Federal Register / Vol. 89 , No. 230 / Friday, November 29, 2024 / 
Notices  

[[Page 94986]]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101720; File No. SR-ISE-2024-12]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Adopt Rules To 
List and Trade FLEX Options

November 22, 2024.
    On March 11, 2024, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
adopt new Options 3A that will govern the listing and trading of 
Flexible Exchange Options (``FLEX Options'') on the Exchange's 
electronic market. The proposed rule change was published for comment 
in the Federal Register on March 29, 2024.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 99825, 89 FR 22294 
(March 29, 2024) (``Notice''). Comments on the proposed rule change 
can be found at: https://www.sec.gov/comments/sr-ise-2024-12/srise202412.htm.
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    On May 9, 2024, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On June 26, 2024, the Commission instituted 
proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\ 
On September 20, 2024, the Commission designated a longer period for 
Commission action on the proposed rule change.\8\ On November 20, 2024, 
the Exchange submitted Amendment No. 1 to the proposed rule change, 
which replaced and superseded the proposed rule change as originally 
filed.\9\ The Commission is publishing this notice to solicit comments 
on Amendment No. 1 from interested persons, and is approving the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 100086, 89 FR 42528 
(May 15, 2024). The Commission designated June 27, 2024, as the date 
by which the Commission shall approve or disapprove, or institute 
proceedings to determine whether to approve or disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 100438, 89 FR 54886 
(July 2, 2024) (Notice of Order Instituting Proceedings) (``OIP'').
    \8\ See Securities Exchange Act Release No. 101116 (September 
20, 2024), 89 FR 78928 (September 26, 2024) (Extension No. 2). The 
Commission designated November 24, 2024, as the date by which the 
Commission shall approve or disapprove the proposed rule change.
    \9\ On November 20, 2024, the Exchange submitted Amendment No. 1 
to the proposed rule change. Amendment No. 1 is available on the 
Commission's website at: https://www.sec.gov/comments/sr-ise-2024-12/srise202412-541455-1551502.pdf (``Amendment No. 1'').
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I. Self-Regulatory Organization's Description of the Proposed Rule 
Change, as Modified by Amendment No. 1 10
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    \10\ This Section I and II reproduces Amendment No. 1, as filed 
by the Exchange.
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    The Exchange proposes to adopt rules that will govern the listing 
and trading of flexible exchange options (``FLEX Options''). This 
Amendment No. 1 supersedes the original filing in its entirety.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/ise/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 adopt rules in new Options 3A that will 
govern the listing and trading of FLEX Options on the Exchange's 
electronic market. This Amendment No. 1 supersedes the original filing 
in its entirety, and is being filed to better align the proposed rule 
change with the rules of other exchanges and provide more clarity to 
the proposed rule text as well as the description of and statutory 
basis for the proposed rule change. As discussed in further detail 
later in this filing, Amendment No. 1 makes a number of clarifying 
changes to the proposed rule text as well as the following more 
substantive rule text changes from the original filing: (i) excluding 
the iShares Bitcoin Trust ETF from FLEX trading in proposed Options 3A, 
Section 3(a); (ii) clarifying in proposed Options 3A, Section 3(b)(2) 
that on the expiration date, a FLEX Order for the expiring FLEX Option 
series may only be submitted to close out a position in such expiring 
FLEX Option series; (iii) aligning the Exchange's closing only 
provisions in proposed Options 3A, Section 3(d)(2) to already effective 
rules of other options exchanges; (iv) clarifying in proposed Options 
3A, Section 5 which provisions will govern how the minimum increments 
for complex FLEX Orders (including complex FLEX Orders with a stock 
component) will be handled; (v) clarifying in proposed Options 3A, 
Sections 6(a) and 6(b) that only the specified order types, times-in-
force, and order and quote protocols are available for FLEX trading; 
(vi) removing in proposed Options 3A, Section 7(b) the Exchange's 
discretion to determine on a class-by-class basis which complex FLEX 
Orders would not have to adhere to the ratio requirements for the 
standard complex market; (vii) adding language in proposed Options 3A, 
Section 11(a)(2)(A) to describe what would happen if there is a complex 
FLEX Order and subsequently, a non-FLEX Option series is introduced for 
the component leg(s), which would align to already effective rules of 
another options exchange; (viii) adding language in proposed Options 
3A, Sections 12(a)(2) and 13(a)(2) that each leg of a complex FLEX 
Order must be in a permissible FLEX option series that complies with 
proposed Options 3; (ix) specifying in proposed Options 3A, Section 
13(a)(4) that the minimum size requirement will apply to each leg of a 
complex FLEX Order; (x) adding in proposed Options 3A, Section 14(b) 
that the Price Limit for Complex Order protections as applicable to the 
stock component, the Stock-Tied NBBO protections, and the Stock-Tied 
Reg SHO protections will also be available to FLEX Options as complex 
order risk protections; and (xi) aligning the proposed position limits 
for FLEX Index Options in proposed Options 3A, Section 18(a) with the 
position limits for index options in the Exchange's standard index 
options market.
    The Exchange notes that Amendment No. 1 is solely intended to 
further clarify the proposed rule text and conform the rule text with 
the already

[[Page 94987]]

established rules of other exchanges, and to provide additional detail 
and specificity with respect to the proposed rule change and additional 
information in support of the purpose and statutory basis for the 
proposed rule change.
Summary
    The Exchange is proposing this new functionality be implemented in 
connection with a technology migration to enhanced Nasdaq, Inc. 
(``Nasdaq'') functionality that will result in higher performance, 
scalability, and more robust architecture, which will be implemented as 
a day 2 change after the first phase of the system migration was 
implemented in September 2024.\11\ The Exchange intends to begin 
implementation of the proposed rule change by May 12, 2025. The delayed 
implementation of the proposed FLEX rules will ensure that the Exchange 
will have the necessary functionality in place to trade FLEX. The 
Exchange will issue a public notice to Exchange members (``Members'') 
to provide notification of the FLEX implementation date and highlight 
the features for FLEX proposed hereunder.
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    \11\ The Exchange separately proposed a number of rule filings 
in connection with this technology migration. See Securities 
Exchange Act Release Nos. 94897 (May 12, 2022), 87 FR 30294 (May 18, 
2022) (SR-ISE-2022-11); 96362 (November 18, 2022), 87 FR 72539 
(November 25, 2022) (SR-ISE-2022-25); 96518 (December 16, 2022), 87 
FR 78740 (December 22, 2022) (SR-ISE-2022-28); 96818 (February 6, 
2023), 88 FR 8950 (February 10, 2023) (SR-ISE-2023-06); 97605 (May 
26, 2023), 88 FR 36350 (June 2, 2023) (SR-ISE-2023-10); 98066 
(August 7, 2023), 88 FR 54672 (August 11, 2023) (SR-ISE-2023-13); 
98443 (September 20, 2023), 88 FR 66106 (September 26, 2023) (SR-
ISE-2023-19); and 98702 (October 6, 2023), 88 FR 71046 (October 13, 
2023) (SR-ISE-2023-22). As per the previously announced technology 
migration, ISE completed its symbol migration on September 23, 2024. 
See https://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2024-1. As a 
result and prior to any FLEX trading on ISE, the foregoing rule 
changes are currently all effective and operative.
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    As proposed, FLEX Options will be customized options contracts that 
will allow investors to tailor contract terms for exchange-listed 
equity and index options. FLEX Options will be designed to meet the 
needs of investors for greater flexibility in selecting the terms of 
options within the parameters of the Exchange's proposed rules. FLEX 
Options will not be preestablished for trading and will not be listed 
individually for trading on the Exchange. Rather, investors will select 
FLEX Option terms and will be limited by the parameters detailed below 
in their selection of those terms. As a result, FLEX Options would 
allow investors to specify more specific, individualized investment 
objectives than may be available to them in the standardized options 
market.
    Some key features of the new electronic FLEX Options functionality 
are as follows:
     System Availability: The Exchange will not conduct an 
Opening Process pursuant to Options 3, Section 8 in FLEX Options.\12\ 
Orders in FLEX Options may only be submitted through an electronic FLEX 
Auction, a FLEX Price Improvement Auction (``FLEX PIM''), or a FLEX 
Solicited Order Mechanism (``FLEX SOM''), each as discussed in detail 
below.\13\ Accordingly, the Exchange's simple and complex order books 
will not be available for transactions in FLEX Options.\14\
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    \12\ See proposed Options 3A, Section 8(a). Rather, Members may 
begin submitting orders in FLEX Options into one of the proposed 
auction mechanisms (i.e., electronic FLEX Auction, FLEX Price 
Improvement Mechanism, and FLEX Solicited Order Mechanism) once the 
underlying security is open for trading. See proposed Options 3A, 
Section 8(b).
    \13\ See proposed Options 3A, Section 11(a).
    \14\ See proposed Options 3A, Section 10(a).
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     Terms: FLEX Options will be a type of put or call, and 
will allow investors the flexibility to choose an exercise style of 
American or European, an expiration date, a settlement type, and an 
exercise price, all within the parameters specified in the proposed 
rules.\15\ As discussed further below, FLEX Options will not be 
permitted with identical terms as an existing non-FLEX Option series 
listed on the Exchange.\16\
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    \15\ As discussed later in this filing, proposed Options 3A, 
Section 3(c) will govern FLEX Options terms.
    \16\ At least one of the following terms must differ between 
FLEX Options and non-FLEX Options on the same underlying security: 
exercise date, exercise price, or exercise style. See proposed 
Options 3A, Section 3(c).
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     Priority: As discussed in detail below within the 
respective sections for FLEX Auctions, FLEX PIM, and FLEX SOM, the 
Exchange will apply the same priority order for FLEX Options as it 
applies today in its standard non-FLEX market, particularly in its 
standard auction mechanisms such as its standard Solicited Order 
Mechanism and standard Price Improvement Mechanism. Specifically, the 
System \17\ shall execute trading interest at the best price level 
within the System before executing at the next best price. Priority 
Customers shall have priority over non-Priority Customer interest at 
the same price with time priority meaning that priority shall be 
afforded to Priority Customer orders in the sequence in which they are 
received by the System. As set out in Options 1, Section 1(a)(37), the 
term ``Priority Customer'' means a person or entity that (i) is not a 
broker or dealer in securities, and (ii) does not place more than 390 
orders in listed options per day on average during a calendar month for 
its own beneficial account(s).
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    \17\ The term ``System'' means the electronic system operated by 
the Exchange that receives and disseminates quotes, executes orders 
and reports transactions. See Options 1, Section 1(a)(50).
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    Because of their composition, the Exchange believes that FLEX 
Options may allow investors to more closely meet their individual 
investment and hedging objectives by customizing options contracts for 
the purpose of satisfying particular investment objectives that could 
not be met by the standardized markets.
Background
    The Commission approved the trading of FLEX Options in 1993.\18\ At 
the time, the Chicago Board Options Exchange, Inc., now Cboe Exchange, 
Inc. (``Cboe''), proposed FLEX Options based on the Standard and Poor's 
Corporation 500 and 100 Stock Indexes.\19\ These FLEX Options were 
offered as an alternative to an over-the-counter (``OTC'') market in 
customized equity options.\20\ Several years after the initial 
approval, the Commission approved the trading of additional FLEX 
Options on specified equity securities.\21\ In its order, the 
Commission provided: ``The benefits of the Exchanges' options markets 
include, but are not limited to, a centralized market center, an 
auction market with posted transparent market quotations and 
transaction reporting, parameters and procedures for clearance and 
settlement, and the guarantee of the OCC [Options Clearing Corporation] 
for all contracts traded on the Exchange.'' \22\
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    \18\ See Securities Exchange Act Release No. 31920 (February 24, 
1993), 58 FR 12280 (March 3, 1993) (SR-CBOE-92-17) (Order Approving 
and Notice of Filing and Order Granting Accelerated Approval to 
Amendment Nos. 1, 2, 3, and 4 to Proposed Rule Changes by the 
Chicago Board Options Exchange, Inc., Relating to FLEX Options).
    \19\ Id.
    \20\ Id.
    \21\ See Securities Exchange Act Release No. 36841 (February 14, 
1996), 61 FR 6666 (February 21, 1996) (SR-CBOE-95-43) (SR-PSE-95-24) 
(Order Approving Proposed Rule Changes and Notice of Filing and 
Order Granting Accelerated Approval of Amendments by the Chicago 
Board Options Exchange, Inc. and the Pacific Stock Exchange, Inc., 
Relating to the Listing of Flexible Exchange Options on Specified 
Equity Securities).
    \22\ Id. The Exchange notes that the Commission found pursuant 
to Rule 9b-1 under the Act, that FLEX Options, including FLEX Equity 
Options, are standardized options for purposes of the options 
disclosure framework established under Rule 9b-1 of the Act. Id.
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    The Exchange notes that FLEX Options are currently traded on Cboe, 
NYSE American LLC (``NYSE American''), NYSE Arca, Inc. (``NYSE

[[Page 94988]]

Arca''), Nasdaq PHLX LLC (``Phlx''), and FLEX Equity Options on BOX 
Exchange LLC (``BOX'').\23\ The Exchange further notes that Cboe offers 
electronic and open outcry FLEX Options trading while NYSE American, 
NYSE Arca, Phlx and BOX offer only open outcry trading of FLEX Options 
on their respective trading floors.\24\ The Exchange now proposes to 
allow for the trading of FLEX Options on its electronic market \25\ in 
a substantially similar manner as Cboe's electronic FLEX Options, with 
certain intended differences primarily to align to current System 
behavior (and especially current auction behavior) to provide increased 
consistency for Members trading FLEX Options and non-FLEX Options on 
ISE, as discussed in detail below. Further, the Exchange has omitted 
certain Cboe rules from the proposed rules due to differences in scope 
and operation of FLEX trading at Cboe compared to the proposed scope 
and operation of FLEX trading on ISE, each as noted below. For example, 
the Exchange will not include Cboe rule provisions related to open 
outcry trading, Asian- or Cliquet-settled FLEX index options, or FLEX 
index options with an index multiplier of one (``Micro FLEX Index 
Options'') as it does not offer these capabilities today. For the same 
reason, the Exchange will not allow prices in FLEX trading to be 
expressed as percentages under this proposal. The Exchange also will 
not incorporate the concept of a ``FLEX Official'' as this is a floor 
concept and the Exchange does not have a trading floor. As such, 
instead of nullifying FLEX Option transactions that do not conform to 
the terms of the Exchange's proposed FLEX rules,\26\ the Exchange will 
System enforce its proposed FLEX rules and reject at the outset a FLEX 
Option transaction that does not conform to the terms of the proposed 
FLEX rules. The very few instances where the Exchange will not System-
enforce the proposed FLEX rules and will instead apply its surveillance 
patterns will be specifically noted below.
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    \23\ See Cboe Rules 4.20-4.22 and 5.70-5.75, NYSE American Rules 
900G-910G, NYSE Arca Rules 5.30-O-5.41-O, Phlx Options 8, Section 
34, and BOX Rules 5055 and 7605. The Exchange also notes that BOX 
recently received approval from the Commission to allow for the 
trading of FLEX equity options on the BOX trading floor. See 
Securities Exchange Act Release No. 100156 (May 15, 2024), 89 FR 
44721 (May 21, 2024) (SR-BOX-2023-20).
    \24\ See supra note 23.
    \25\ The Exchange is not proposing to add open outcry FLEX 
Options trading as it does not have a trading floor.
    \26\ Cboe Rule 5.75(b) sets forth the responsibilities of FLEX 
Officials, including the responsibility to nullify certain FLEX 
Option transactions that do not conform to Cboe's FLEX rules, and to 
call upon a FLEX Market-Maker with an appointment in a FLEX Option 
class to respond to open outcry FLEX Auctions in that FLEX Option 
class when no other ICMPs respond. The Exchange will not adopt these 
provisions because a FLEX Official is a floor concept and Exchange 
does not have a trading floor (and therefore no open outcry 
auctions).
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Proposal
    Transactions in FLEX Options traded on the Exchange will generally 
be subject to the same rules that apply to the trading of equity 
options and index options. In order, however, to provide investors with 
the flexibility to designate certain of the terms of the options, and 
to accommodate other special features of FLEX Options and the way in 
which they are traded, the Exchange proposes new rules applicable to 
FLEX Options in new Options 3A, Sections 1-19.

A. General Provisions (Section 1)

    Proposed Section 1(a) will set forth the applicability of Exchange 
Rules, and will provide that Options 3A Rules will apply only to FLEX 
Options and that trading of FLEX Options will be subject to all other 
Rules applicable to the trading of options on the Exchange, unless 
otherwise provided in Options 3A. The Exchange has conducted a thorough 
review of its existing trading rules to ensure that the proposed Rules 
in Options 3A accurately reflects the application of the Exchange's 
non-FLEX Option trading rules to FLEX Options,\27\ as well as those 
non-FLEX Option trading rules that would not apply to FLEX Options.\28\
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    \27\ For example, Options 3, Section 1 (Hours of Business) will 
apply to FLEX and non-FLEX Options, except the Exchange may 
determine to narrow or otherwise restrict the trading hours for FLEX 
Options. See proposed Options 3A, Section 2. As another example, 
Options 3, Section 9 (Trading Halts) will apply to FLEX and non-FLEX 
Options. The Exchange notes that pursuant to proposed Options 3A, 
Section 9, it will always halt trading in a FLEX Option class when 
trading in a non-FLEX Option class with the same underlying equity 
security or index is halted on the Exchange. Furthermore, the System 
does not accept a FLEX Order for a FLEX Option series while trading 
in a FLEX Option class is halted.
    \28\ For example, the Exchange's simple and complex order books 
will not be available for transactions in FLEX Options. See proposed 
Options 3A, Section 10. In addition, FLEX Options may not trade via 
the Block Order Mechanism (Options 3, Section 11(a)), simple and 
complex Facilitation Mechanism (Options 3, Section 11(b) and (c)), 
or as simple and complex Customer Cross Orders (Options 3, Section 
12(a) and (b)), simple and complex Qualified Contingent Cross 
(``QCC'') Orders (Options 3, Section 12(c) and (d)), and simple and 
complex QCC with Stock Orders (Options 3, Section 12(e) and (f))). 
If the Exchange intends to allow FLEX Options to trade via any of 
the foregoing auction mechanisms or as any of the foregoing crossing 
orders, the Exchange would be required to file a proposed rule 
change with the Commission to amend its FLEX rules to allow for the 
use of the foregoing trading functionality for FLEX Options.
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    Proposed Section 1(b) will set forth the definitions used 
specifically in Options 3A, namely that the term ``FLEX Option'' means 
a flexible exchange option. A FLEX Option on an equity security may be 
referred to as a ``FLEX Equity Option,'' and a FLEX Option on an index 
may be referred to as a ``FLEX Index Option.'' Further, the term ``FLEX 
Order'' means an order submitted in a FLEX Option pursuant to Options 
3A.
    The Exchange also proposes to add the definition of ``FLEX Order'' 
in Options 3, Section 7 (Order Types) in new paragraph (z). While FLEX 
Orders will also be defined in (and governed by) Options 3A, the 
Exchange believes that it will be useful to market participants to have 
the order types available on ISE centralized within one rule. Lastly, 
the Exchange proposes a non-substantive change to paragraph (y) in 
Options 3, Section 7 to fix a typo.

B. Hours of Business (Section 2)

    Proposed Section 2(a) will provide that the trading hours for FLEX 
Options will be the same as the trading hours for corresponding non-
FLEX Options as set forth in Options 3, Section 1, except the Exchange 
may determine to narrow or otherwise restrict the trading hours for 
FLEX Options.\29\ Therefore, the trading hours for FLEX Options will 
generally be 9:30 a.m. to 4:00 p.m. Eastern time, except for certain 
options products that trade until 4:15 p.m. Eastern time.\30\ This 
would align the proposed trading hours for FLEX Options with the 
current trading hours for corresponding non-FLEX Options.
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    \29\ See Cboe Rule 5.1(b)(3)(A) for materially identical 
provisions.
    \30\ See Options 3, Section 1(c)-(e). These products are 
currently options on Exchange-Traded Fund Shares (as defined in 
Options 4, Section 3(h), options on Index-Linked Securities (as 
defined in Options 4, Section 3(k)(1)), and options on certain 
broad-based indexes, as designated by the Exchange.
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    As it relates to the Exchange's proposed discretion relating to the 
trading hours for FLEX Options, this is consistent with Cboe's FLEX 
Options rules as noted above. The Exchange believes that given the 
unique nature of FLEX, in contrast to the non-FLEX market, it is 
reasonable to permit the Exchange, in its discretion, to narrow or 
otherwise restrict the trading hours for FLEX Options, so long as such 
trading hours occur within the normal options trading hours of the 
Exchange described above. The Exchange would provide adequate advance 
notification to its Members of such changes in FLEX trading hours.

[[Page 94989]]

C. FLEX Option Classes and Permissible Series (Section 3(a) and (b))

    Pursuant to proposed Section 3(a), the Exchange may authorize for 
trading a FLEX Option class on any equity security (except the iShares 
Bitcoin Trust ETF) or index if it may authorize for trading a non-FLEX 
Option class on that equity security or index pursuant to Options 4, 
Section 3 and Options 4A, Section 3,\31\ respectively, even if the 
Exchange does not list that non-FLEX Option class for trading.\32\ The 
Exchange proposes to exclude iShares Bitcoin Trust ETF (``IBIT'') from 
being eligible for trading as a FLEX Option on ISE to be consistent 
with the Commission's approval of IBIT options, which required the 
position limit for IBIT options to be 25,000 contracts.\33\ As 
discussed in the position limits section below, there will generally be 
no position limits for FLEX Equity Options.\34\ The Exchange therefore 
proposes to exclude IBIT options from being eligible to trade as a FLEX 
Option (namely, a FLEX ETF option) to continue to limit the position 
limits for IBIT options. For clarity, this exclusion will apply to both 
physically-settled and cash-settled FLEX ETF options (as further 
described in this filing), such that IBIT options will be excluded from 
being eligible to trade as a physically-settled or a cash-settled FLEX 
ETF option. If the Exchange determines to allow FLEX trading on IBIT 
options at a later date, it will do so by submitting a 19b-4 rule 
filing with the Commission.
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    \31\ Options 4, Section 3 provides the criteria for the listing 
of options on several different underlying types of securities, 
including, for example, securities registered with the SEC under 
Regulation NMS of the Act (``NMS stock'') and exchange-traded funds 
(``ETFs''). Options 4A, Section provides the criteria for the 
listing of options on indexes.
    \32\ See Cboe Rule 4.20 for materially identical provisions.
    \33\ See Securities Exchange Act Release No. 101128 (September 
20, 2024), 89 FR 78942 (September 26, 2024) (SR-ISE-2024-03).
    \34\ See proposed Options 3A, Section 18(b)(1)(A).
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    Proposed Section 3(b) will provide that the Exchange may approve a 
FLEX Option series for trading in any FLEX Option class it may 
authorize for trading pursuant to proposed Section 3(a). FLEX Option 
series are not pre-established. A FLEX Option series is eligible for 
trading on the Exchange upon submission to the System of a FLEX Order 
for that series pursuant to proposed Sections 11 through 13,\35\ 
subject to the following stipulations.\36\ First, the Exchange will 
only permit trading in a put or call FLEX Option series that does not 
have the same exercise style, same expiration date, and same exercise 
price as a non-FLEX Option series on the same underlying security or 
index that is already available for trading. This would include 
permitting trading in a FLEX Option series before a series with 
identical terms is listed for trading as a non-FLEX Option series. If 
the Exchange lists for trading a non-FLEX Option series with identical 
terms as a FLEX Option series, the FLEX Option series will become 
fungible with the non-FLEX Option series pursuant to proposed paragraph 
(d) of Section 3. The System would not accept a FLEX Order for a put or 
call FLEX Option series if a non-FLEX Option series on the same 
underlying security or index with the same expiration date, exercise 
price, and exercise style is already listed for trading.\37\ Second, a 
FLEX Order for a FLEX Option series may be submitted on any trading day 
prior to the expiration date.\38\ The Exchange also proposes to clarify 
in proposed Section 3(b)(2) that on the expiration date, a FLEX Order 
for the expiring FLEX Option series may only be submitted to close out 
a position in such expiring FLEX Option series.\39\
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    \35\ Proposed Sections 11 through 13 of Options 3A will govern 
the electronic FLEX Auction, FLEX PIM, and FLEX SOM, respectively. 
As discussed later in this filing, FLEX Orders may only be submitted 
through an electronic FLEX Auction, FLEX PIM, or FLEX SOM.
    \36\ See proposed Options 3A, Section 3(b), which is based on 
Cboe Rule 4.21(a).
    \37\ See proposed Options 3A, Section 3(b)(1), which is based on 
Cboe Rule 4.21(a)(1).
    \38\ See proposed Options 3A, Section 3(b)(2), which is based on 
Cboe Rule 4.21(a)(2). The Exchange notes that it will System enforce 
which options are eligible to be submitted as FLEX Options. As such, 
the System will reject at the outset a FLEX Option transaction that 
does not conform to the terms of the FLEX rules.
    \39\ The Exchange will System enforce this provision such that 
it will reject an opening position in an expiring FLEX Option series 
on the day of expiration.
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    Third, in the event the relevant expiration is a holiday pursuant 
to General 3 (which incorporates Nasdaq General 3, Rule 1030 by 
reference),\40\ proposed Section 3(d) will apply to options with an 
expiration date that is the business day immediately preceding the 
holiday, except for Monday-expiring Weekly Expirations (as defined in 
Options 4A, Section 3), in which case proposed Section 3(d) will apply 
to options with an expiration date that is a business day immediately 
following the holiday.\41\
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    \40\ ISE General 3 incorporates by reference Series 1000 in 
General 3 of the Rules of The Nasdaq Stock Market, LLC (``Nasdaq'') 
(including Nasdaq Rule 1030).
    \41\ See proposed Options 3A, Section 3(b)(3), which is based on 
Cboe Rule 4.22(c).
---------------------------------------------------------------------------

D. FLEX Options Terms (Section 3(c))

    Proposed Section 3(c) will specify the terms that must be included 
in a FLEX Order.\42\ Specifically, when submitting a FLEX Order for a 
FLEX Option series to the System, the submitting Member must include 
one of each of the terms detailed in proposed subparagraphs (1)-(6) of 
Section 3(c) in the FLEX Order (all other terms of a FLEX Option series 
are the same as those that apply to non-FLEX Options), provided 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,\43\ which terms constitute the FLEX Option 
series.
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    \42\ See Cboe Rule 4.21(b) for similar provisions. The Exchange 
notes that unlike Cboe, it is not proposing FLEX Index Options with 
a multiplier of 1 (i.e., Micro FLEX Index Options) or FLEX Index 
Options that are Asian- or Cliquet-settled as the Exchange does not 
have these capabilities today for index options. For the same 
reason, the Exchange is not proposing to allow exercise prices to be 
expressed as a percentage value. Therefore, the Exchange has not 
incorporated the applicable provisions in this Rule.
    \43\ The Exchange will discuss cash-settled FLEX Equity Options 
overlying an ETF (``cash-settled FLEX ETFs'') later in this filing. 
As discussed below, the Commission previously approved a rule filing 
by NYSE American to permit the listing and trading of this product, 
and Cboe recently filed an immediately effective rule change based 
on NYSE American's filing. See infra notes 243 and 244.
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    As proposed, the submitting Member must specify the following terms 
in the FLEX Order: (1) underlying equity security or index, as 
applicable (the index multiplier for FLEX Index Options is 100); \44\ 
(2) type of option (i.e., put or call); \45\ (3) exercise style, which 
may be American-style or European-style; \46\ (4) expiration date, 
which may be any business day (specified to the day, month, and year) 
no more than 15 years from the date on which a Member submits a FLEX 
Order to the System; \47\ (5) settlement type for the FLEX Equity 
Option or FLEX Index Option, as applicable; \48\ and (6) exercise

[[Page 94990]]

price, which may be in increments no smaller than $0.01.\49\ Further, 
the Exchange may determine the smallest increment for exercise prices 
of FLEX Options on a class-by-class basis without going lower than 
$0.01.\50\ The Exchange notes that the exercise price of the FLEX 
Option would generally be dependent on the price of the underlying 
security.
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    \44\ See proposed Options 3A, Section 3(c)(1), which is based on 
Cboe Rule 4.21(b)(1) except for the provisions relating to Micro 
FLEX Index Options.
    \45\ See proposed Options 3A, Section 3(c)(2), which is based on 
Cboe Rule 4.21(b)(2) except the provisions related to Asian-settled 
or Cliquet-settled FLEX Index Options.
    \46\ See proposed Options 3A, Section 3(c)(3), which is based on 
Cboe Rule 4.21(b)(3) except with respect to Asian-settled or 
Cliquet-settled FLEX Index Options.
    \47\ See proposed Options 3A, Section 3(c)(4), which is based on 
Cboe Rule 4.21(b)(4) except with respect to Asian-settled or 
Cliquet-settled FLEX Index Options.
    \48\ See proposed Options 3A, Section 3(c)(5), which is based on 
Cboe Rule 4.21(b)(5) except with respect to Asian-settled or 
Cliquet-settled FLEX Index Options.
    \49\ See proposed Options 3A, Section 3(c)(6), which is based on 
Cboe Rule 4.21(b)(6) except the Exchange is not proposing Cliquet-
settled Index Options or to allow exercise prices to be expressed as 
a percentage value.
    \50\ See proposed Options 3A, Section 3(c), which is based on 
Cboe Rule 4.21(b) except for the provisions allowing the exercise 
price to be expressed as a percentage amount and with respect to 
Micro FLEX Index Options. As noted above, the Exchange does not 
offer these capabilities today for non-FLEX index options. The 
Exchange will also clarify that it would not go lower than $0.01 
when determining the smallest increment for exercise prices of FLEX 
Options to make clear that it would stay within the stated confines 
of this Rule.
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    As it relates to the settlement type for FLEX Equity Options, the 
Exchange proposes in subparagraph (c)(5)(A)(i) of Options 3A, Section 3 
that FLEX Equity Options, other than as permitted in proposed 
subparagraphs (c)(5)(A)(ii) and (iii), are settled with physical 
delivery of the underlying security. Proposed subparagraph 
(c)(5)(A)(ii) will allow for the cash-settlement of certain qualifying 
FLEX Equity Options with an underlying security that is an ETF.\51\ 
Proposed subparagraph (c)(5)(A)(iii) will provide that FLEX Equity 
Options are subject to the exercise by exception provisions of OCC Rule 
805.
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    \51\ As discussed later in this filing, the Exchange is 
proposing to list and trade cash-settled FLEX ETFs in the same 
manner as NYSE American and Cboe.
---------------------------------------------------------------------------

    As it relates to the settlement type for FLEX Index Options, the 
Exchange proposes in subparagraphs (c)(5)(B)(i) and (ii) of Options 3A, 
Section 3 that FLEX Index Options are settled in U.S. dollars, and may 
be either a.m.-settled (with exercise settlement value determined by 
reference to the reported level of the index derived from the reported 
opening prices of the component securities) or p.m.-settled (with 
exercise settlement value determined by reference to the reported level 
of the index derived from the reported closing prices of the component 
securities). 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'').\52\ 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 ISE as well, 
and will align proposed Section 3(c)(5)(B)(ii) with Cboe Rule 
4.21(b)(5)(B)(ii).\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\ 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'') because the Exchange only received 
approval to list a third-Friday-of-the-month p.m. expiration on NDX 
options its standardized market. See Securities Exchange Act Release 
No. 98935 (November 14, 2023), 88 FR 80792 (November 20, 2023) (SR-
ISE-2023-20) (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).
---------------------------------------------------------------------------

E. FLEX Fungibility (Section 3(d))

    Proposed Section 3(d)(1)(A) will provide that if the Exchange lists 
for trading a non-FLEX Option series with identical terms as a FLEX 
Option series, all existing open positions established under the FLEX 
trading procedures will become fully fungible with transactions in the 
identical non-FLEX Option series.\54\ In addition, proposed Section 
3(d)(1)(B) will provide that any further trading in the series would be 
as non-FLEX Options subject to non-FLEX trading procedures and 
Rules.\55\ The foregoing provisions are materially identical to Cboe 
Rule 4.22(a)(1) and (2).
---------------------------------------------------------------------------

    \54\ An open position resulting from a transaction on the 
Exchange becomes fungible post-trade and is separate from the 
execution occurring on the Exchange. For example, assume a Member 
buys one (1) American style AAPL call option expiring on October 9, 
2024, with a strike price of 150, which is a FLEX series because 
there is no standard option listed with those same terms. Now 
assume, while holding this position, a standard option with the same 
terms is listed (American style AAPL call option expiring on October 
9, 2024, with a strike price of 150). After this standard option is 
listed, the Member purchases one (1) contract in this non-FLEX 
option series. After this second transaction, the Participant will 
have an open position of two (2) contracts in the standard AAPL call 
expiring on October 9, 2024, with a 150 strike price.
    \55\ This includes all priority and trade-through provisions on 
the Exchange. See, e.g., Options 3, Section 10 and Options 5, 
Section 2.
---------------------------------------------------------------------------

    Notwithstanding the above, if a non-FLEX Option series \56\ is 
added intraday, for the balance of that trading day, a position 
established under the FLEX trading procedures may be closed using the 
FLEX trading procedures in this Options 3A against another closing only 
FLEX position. No FLEX Orders may be submitted into an electronic 
auction pursuant to Sections 11(b), 12, or 13 below for a FLEX Option 
series with the same terms as the non-FLEX Option series, unless the 
FLEX Order is a closing order, and it is the day on which the non-FLEX 
Option series was added intraday. Members may only submit responses 
that close out existing FLEX positions.\57\ In the event the non-FLEX 
Option series is added on a trading day after the position is 
established, the holder or writer of a FLEX Option position established 
under the FLEX trading procedures would be permitted to close such 
position as a non-FLEX transaction consistent with the requirements of 
subsection (d)(1) of this rule.\58\ The Exchange will notify Members 
when a FLEX Option series is restricted to closing only transactions. 
The System will reject a transaction in such a restricted series that 
does not conform to the requirements specified in proposed Options 3A, 
Section 3(d).\59\
---------------------------------------------------------------------------

    \56\ Cboe Rule 4.22(b)(1) currently indicates that Cboe's 
closing-only provisions apply if a non-FLEX Option American-style 
series is added intraday. The Exchange, however, believes it is more 
straightforward to apply the closing-only provisions to all non-FLEX 
Option series (i.e., American-style and European-style FLEX Option 
series) instead of limiting these provisions to one type of exercise 
style. As such, the Exchange's proposed language in Options 3A, 
Section 3(d)(2)(A) will instead provide that the Exchange's closing-
only provisions would apply ``if a non-FLEX Option is added 
intraday.'' See BOX Rule 7605(d)(3), which similarly does not limit 
BOX's closing-only provisions to American-style FLEX Options series.
    \57\ See proposed Options 3A, Section 3(d)(2)(A), which is based 
on Cboe Rule 4.22(b)(1) except the Exchange is not incorporating 
Cboe's provisions for open outcry trading as the Exchange does not 
offer open outcry trading today. The Exchange is also adding cross-
cites to its electronic FLEX SOM and FLEX PIM auctions in proposed 
Options 3A, Sections 12 and 13 because the closing only provisions 
in proposed Options 3A, Section 3(d)(2) will also apply to those 
electronic FLEX auctions. Lastly, the Exchange notes that unlike 
Cboe, it is not proposing to add FLEX Index Options with a 
multiplier of 1 (i.e., Micro FLEX Index Options) and will therefore 
not incorporate Cboe's closing only language with respect to Micro 
FLEX Index Options in Rule 4.22(b)(2).
    \58\ See proposed Options 3A, Section 3(d)(2)(B), which is 
materially identical to BOX Rule 5055(f)(3). The Exchange is adding 
this language to clarify how it would handle open FLEX positions if 
an identical non-FLEX Option series is added on the day after.
    \59\ See proposed Options 3A, Section 3(d)(2), which is based on 
Cboe Rule 4.22(b), except the Exchange is replacing the concept of 
``FLEX Official'' from Cboe's rule to ``the System'' as a FLEX 
Official is a floor concept. As such, the Exchange will System 
enforce the rejection of FLEX Options that are fully fungible with a 
non-FLEX Option instead of following Cboe, which specifies that a 
FLEX Official could nullify such a transaction on Cboe.
---------------------------------------------------------------------------

F. Units of Trading; Minimum Trading Increments (Sections 4 and 5)

    Proposed Section 4(a) of Options 3A will provide that bids and 
offers for

[[Page 94991]]

FLEX Options must be expressed in U.S. dollars and decimals in the 
minimum increments as set forth in proposed Section 5.\60\ Proposed 
Section 5(a) will provide that the Exchange would determine the minimum 
increment for bids and offers on FLEX Options on a class-by-class 
basis, which may not be smaller than $0.01 for the options leg of a 
FLEX Option.\61\ Proposed Section 5(b) will provide that for the stock 
leg of a FLEX Option, the minimum increments are set forth in Options 
3A, Section 11(b)(1)(G), Section 12(a)(5), and Section 13(a)(5). As 
discussed later in this filing, the foregoing rules specify how minimum 
increments for complex FLEX Orders (including complex FLEX Orders with 
a stock component) would be handled. The Exchange is adding these cross 
cites in the minimum increments rule in proposed Options 3A, Section 
5(b) for transparency and clarity.
---------------------------------------------------------------------------

    \60\ See Cboe Rule 5.3(e)(3) for similar provisions, except the 
Exchange is not proposing to allow prices to be expressed as a 
percentage value, or to provide for Micro FLEX Index Options.
    \61\ See Cboe Rule 5.4(c)(4) for similar provisions, except the 
Exchange is not proposing to allow prices to be expressed as a 
percentage value. The Exchange is also clarifying that this 
provision would apply to the options leg of a FLEX Option.
---------------------------------------------------------------------------

G. Types of Orders; Order and Quote Protocols (Section 6)

    Pursuant to proposed Section 6(a), the Exchange may determine to 
make only the Limit Order and Cancel and Replace Order order types \62\ 
and Immediate or Cancel times-in-force,\63\ respectively, in Options 3, 
Section 7 available on a class or System basis for FLEX Orders.\64\ The 
Exchange notes that it currently has the authority to make certain 
order types and TIFs available on a class or System basis for non-FLEX 
Options pursuant to Options 3, Section 7, and therefore proposes to 
have similar authority with respect to FLEX Options.
---------------------------------------------------------------------------

    \62\ See Options 3, Sections 7(b) and 7(f) for a description of 
Limit Orders and Cancel and Replace Orders, respectively. All of the 
other order types listed in Options 3, Section 7 (such as Customer 
Cross Orders, Qualified Contingent Cross Orders, QCC with Stock 
Orders, Block Orders, and Facilitation Orders) do not apply to FLEX.
    \63\ See Supplementary Material .02(d) to Options 3, Section 7 
for a description of Immediate-or-Cancel. All of the other TIFs in 
Supplementary Material .02 to Options 3, Section 7 will not apply to 
FLEX.
    \64\ See Options 3, Section 7 for descriptions of these order 
types and times-in-force.
---------------------------------------------------------------------------

    Proposed Section 6(b) will provide that only the following order 
and quote protocols in Supplementary Material .03 to Options 3, Section 
7 will be available for FLEX Orders, FLEX auction notifications, and 
FLEX auction responses: \65\
---------------------------------------------------------------------------

    \65\ Notes 58-60 below describe what features are available on 
these protocols today for non-FLEX Options. The Exchange is 
proposing to specify that some of these features (i.e., sending/
receiving FLEX Orders, FLEX notifications and FLEX responses) will 
be available for FLEX Options through the specified protocols as 
described above. While other basic features will be available for 
FLEX Options (for example, the options symbol directory will be 
available for FLEX Options), the Exchange is proposing to specify 
the particular features in proposed Options 3A, Section 6(b) to 
highlight the most important features that would be available 
through these protocols for FLEX trading.
---------------------------------------------------------------------------

     FIX: \66\ FLEX Orders and FLEX auction responses
---------------------------------------------------------------------------

    \66\ ``Financial Information eXchange'' or ``FIX'' is an 
interface that allows Members and their Sponsored Customers to 
connect, send, and receive messages related to orders and auction 
orders to the Exchange. Features include the following: (1) 
execution messages; (2) order messages; (3) risk protection triggers 
and cancel notifications; and (4) post trade allocation messages. 
See Supplementary Material .03(a) to Options 3, Section 7.
---------------------------------------------------------------------------

     OTTO: \67\ FLEX Orders, FLEX auction notifications, and 
FLEX auction responses
---------------------------------------------------------------------------

    \67\ ``Ouch to Trade Options'' or ``OTTO'' is an interface that 
allows Members and their Sponsored Customers to connect, send, and 
receive messages related to orders, auction orders, and auction 
responses to the Exchange. Features include the following: (1) 
options symbol directory messages (e.g., underlying and complex 
instruments); (2) System event messages (e.g., start of trading 
hours messages and start of opening); (3) trading action messages 
(e.g., halts and resumes); (4) execution messages; (5) order 
messages; (6) risk protection triggers and cancel notifications; (7) 
auction notifications; (8) auction responses; and (9) post trade 
allocation messages. See Supplementary Material .03(b) to Options 3, 
Section 7.
---------------------------------------------------------------------------

     SQF: \68\ FLEX auction notifications and FLEX auction 
responses
---------------------------------------------------------------------------

    \68\ ``Specialized Quote Feed'' or ``SQF'' is an interface that 
allows Market Makers to connect, send, and receive messages related 
to quotes, Immediate-or-Cancel Orders, and auction responses to the 
Exchange. Features include the following: (1) options symbol 
directory messages (e.g., underlying and complex instruments); (2) 
System event messages (e.g., start of trading hours messages and 
start of opening); (3) trading action messages (e.g., halts and 
resumes); (4) execution messages; (5) quote messages; (6) Immediate-
or-Cancel Order messages; (7) risk protection triggers and purge 
notifications; (8) opening imbalance messages; (9) auction 
notifications; and (10) auction responses. The SQF Purge Interface 
only receives and notifies of purge requests from the Market Maker. 
Market Makers may only enter interest into SQF in their assigned 
options series. See Supplementary Material .03(c) to Options 3, 
Section 7.
---------------------------------------------------------------------------

H. Complex Orders (Section 7)

    Pursuant to proposed Section 7(a), the Exchange may make complex 
orders, including a Complex Options Order,\69\ Stock-Options Order,\70\ 
and Stock-Complex Order \71\ available for FLEX trading. Complex FLEX 
Orders may have up to the maximum number of legs determined by the 
Exchange.\72\ Each leg of a complex FLEX Order: (1) must be for a FLEX 
Option series authorized for FLEX trading with the same underlying 
equity security or index; (2) must have the same exercise style 
(American or European); and (3) for a FLEX Index Option, may have a 
different settlement type (a.m.-settled or p.m.-settled).\73\ The 
Exchange notes that a non-FLEX complex order can have both am-settled 
and p.m.-settled legs today. The Exchange received approval to permit 
the listing and trading of p.m.-settled NDX options pursuant to 
Supplementary Material .07 to Options 4A, Section 12.\74\ Specifically, 
the Exchange is permitted to list p.m.-settled NDX options that expire 
(1) on any Monday, Tuesday, Wednesday, Thursday, or Friday (other than 
the third Friday-of-the-month or days that coincide with an end-of-
month expiration) \75\ or (2) on the last day of the

[[Page 94992]]

trading month.\76\ In addition, NDX options are also currently allowed 
to be listed as a.m.-settled with a standard expiration (i.e., the 
third-Friday-of-the-month).\77\ Therefore, ISE may currently list NDX 
options that are both a.m.-settled and p.m.-settled for its non-FLEX 
market. As such, the Exchange's FLEX proposal for complex orders in 
this respect will not only align with Cboe's current FLEX complex order 
functionality as noted above,\78\ but will also align with its own 
current non-FLEX complex order functionality.
---------------------------------------------------------------------------

    \69\ A Complex Options Order is an order for a Complex Options 
Strategy, which is the simultaneous purchase and/or sale of two or 
more different options series in the same underlying security, for 
the same account, in a ratio that is equal to or greater than one-
to-three (.333) and less than or equal to three-to-one (3.00) and 
for the purpose of executing a particular investment strategy. See 
Options 3, Section 14(a)(1).
    \70\ A Stock-Option Order is an order for a Stock-Option 
Strategy, which is the purchase or sale of a stated number of units 
of an underlying stock or a security convertible into the underlying 
stock (``convertible security'') coupled with the purchase or sale 
of options contract(s) on the opposite side of the market 
representing either (A) the same number of units of the underlying 
stock or convertible security, or (B) the number of units of the 
underlying stock necessary to create a delta neutral position, but 
in no case in a ratio greater than eight-to-one (8.00), where the 
ratio represents the total number of units of the underlying stock 
or convertible security in the option leg to the total number of 
units of the underlying stock or convertible security in the stock 
leg. See Options 3, Section 14(a)(2).
    \71\ A Stock-Complex Order is an order for a Stock-Complex 
Strategy, which is the purchase or sale of a stated number of units 
of an underlying stock or a security convertible into the underlying 
stock (``convertible security'') coupled with the purchase or sale 
of a Complex Options Strategy on the opposite side of the market 
representing either (A) the same number of units of the underlying 
stock or convertible security, or (B) the number of units of the 
underlying stock necessary to create a delta neutral position, but 
in no case in a ratio greater than eight-to-one (8.00), where the 
ratio represents the total number of units of the underlying stock 
or convertible security in the option legs to the total number of 
units of the underlying stock or convertible security in the stock 
leg. See Options 3, Section 14(a)(3).
    \72\ The Exchange will initially permit a maximum of 10 legs.
    \73\ See Cboe Rule 5.70(b) for similar provisions except the 
Exchange is not proposing Asian-settled or Cliquet-settled FLEX 
Index Options, as currently specified in Cboe Rule 5.70(b)(3).
    \74\ See Securities Exchange Act Release No. 98450(September 20, 
2023), 88 FR 66111 (September 26, 2023) (SR-ISE-2023-08) (Order 
Granting Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, To Make Permanent Certain P.M.-Settled Pilots).
    \75\ See Supplementary Material .07(a) to Options 4A, Section 
12.
    \76\ See Supplementary Material .07(b) to Options 4A, Section 
12.
    \77\ See Options 4A, Section 12(a)(5).
    \78\ See supra note 73.
---------------------------------------------------------------------------

    Pursuant to proposed Section 7(b), complex FLEX Orders will not 
have to adhere to the ratio requirements in Options 3, Sections 
14(a)(1)-(3). Options 3, Sections 14(a)(1)-(3) currently includes the 
complex ratio requirements for Complex Options Strategies, Stock-
Options Strategies, and Stock-Complex Strategies.\79\ The Exchange is 
not changing the complex ratio requirements for non-FLEX complex orders 
under this proposal. Instead, it is proposing to offer this feature 
only for complex FLEX Orders so that Members may submit complex FLEX 
Orders with any ratio.\80\ The Exchange notes that Cboe currently 
permits complex FLEX Orders to be submitted with any ratio.\81\
---------------------------------------------------------------------------

    \79\ See supra notes 69-71.
    \80\ For instance, the Exchange may permit Complex Options 
Strategies with a ratio on the options legs less than one-to-three 
(.333) or greater than three-to-one (3.00), and Stock-Option 
Strategies with a ratio greater than eight-to-one (8.00), where the 
ratio represents the total number of units of the underlying stock 
or convertible security in the option leg(s) to the total number of 
units of the underlying stock or convertible security in the stock 
leg.
    \81\ See Cboe US Options Complex Book Process, Section 2.1 
(Ratios) and Section 3 (Complex FLEX Order Functionality), available 
at https://cdn.cboe.com/resources/membership/US-Options-Complex-Book-Process.pdf. For its non-FLEX market, the Exchange will 
continue to require non-FLEX complex orders to adhere to the complex 
ratios in Options 3, Sections 14(a)(1)-(3), and therefore will not 
permit non-FLEX complex orders to be submitted in any ratio outside 
of those stipulated in Section 14.
---------------------------------------------------------------------------

I. Opening of FLEX Trading (Section 8)

    Proposed Section 8(a) will specify that there will be no Opening 
Process \82\ pursuant to Options 3, Section 8 in FLEX Options. Instead, 
as specified in proposed Section 8(b), Members may begin submitting 
FLEX Orders into an electronic FLEX Auction pursuant to proposed 
Section 11(b), a FLEX PIM pursuant to proposed Section 12, or a FLEX 
SOM pursuant to proposed Section 13 when the underlying security is 
open for trading.\83\ The Exchange will also make clear in proposed 
Section 8(b) that for FLEX Index Options, the term ``underlying 
security'' will have the same meaning as defined in Options 4A, Section 
2(q).\84\
---------------------------------------------------------------------------

    \82\ As described in Options 3, Section 8(c)(i), ISE's ``Opening 
Process'' for an option series is conducted pursuant to Options 3, 
Section 8 paragraphs (f)-(j), on or after 9:30 a.m. Eastern Time if 
the Away Best Bid or Offer, if any, is not crossed and the System 
has received, within two minutes of the opening trade or quote on 
the market for the underlying security, a Valid Width Quote. The 
System will accept a Primary Market Maker's Valid Width Quote or the 
Valid Width Quote of at least one Competitive Market Maker. The term 
``Away Best Bid or Offer'' or ``ABBO'' means the displayed National 
Best Bid or Offer not including the Exchange's Best Bid or Offer. 
See Options 1, Section 1(a)(4).
    \83\ See proposed Options 3A, Section 8(a) and (b), which is 
based on Cboe Rule 5.71 except with respect to open outcry trading 
and trading sessions outside of regular trading hours.
    \84\ Options 4A, Section 2(q) states that the term ``underlying 
security'' or ``underlying securities'' with respect to an index 
options contract means any of the securities that are the basis for 
the calculation of the index.
---------------------------------------------------------------------------

    Because market participants incorporate transaction prices of 
underlying securities or the values of underlying indexes when pricing 
options (including FLEX Options), the Exchange believes that it will 
benefit investors for FLEX Options trading to not be available until 
that information has begun to be disseminated in the market (i.e., when 
the security opens for trading).
    Additionally, the Exchange's Opening Process is used to open or 
reopen a series of options on ISE at a single opening price.\85\ There 
is a period of time before an options series opens during which orders 
placed on the Exchange's order book do not generate trade executions 
but may participate in the Opening Process.\86\ As noted above, FLEX 
Options will not be placed on the Exchange's simple and complex order 
books and therefore will not have an Opening Process.\87\ FLEX Options 
are created with terms unique to individual investment objectives. As 
such, each investor may require FLEX Options with slightly different 
terms than those already created. These individually defined FLEX 
Options are customized for each investor, so the Opening Process may 
not be useful for investors who may create their own FLEX Options 
because the Opening Process is designed, in part, to determine a single 
opening, or reopening, price based on orders and quotes from multiple 
Members. With the bespoke nature of FLEX Options, there is not the 
opportunity, nor the need, to bring together multiple orders and quotes 
as part of an Opening Process.
---------------------------------------------------------------------------

    \85\ See Options 3, Section 8(h) and (j).
    \86\ See Options 3, Section 8(c).
    \87\ See proposed Options 3A, Section 10(a). Instead, Members 
will be required to submit FLEX Orders into an electronic FLEX 
Auction, FLEX PIM, or FLEX SOM. See proposed Options 3A, Section 
11(a).
---------------------------------------------------------------------------

J. Trading Halts (Section 9)

    Proposed Section 9 will provide that the Exchange may halt trading 
in a FLEX Option class pursuant to Options 3, Section 9, and always 
halts trading in a FLEX Option class when trading in a non-FLEX Options 
class with the same underlying equity security or index is halted on 
the Exchange. The System will not accept a FLEX Order for a FLEX Option 
series while trading in a FLEX Option class is halted.\88\
---------------------------------------------------------------------------

    \88\ See Cboe Rule 4.21(a)(3) for materially identical 
provisions.
---------------------------------------------------------------------------

K. Exchange Order Books (Section 10)

    Proposed Section 10 will provide that the Exchange's simple and 
complex order books will not be available for transactions in FLEX 
Options. Accordingly, FLEX Options may only be traded on the Exchange 
by submitting FLEX Orders into a FLEX Electronic Auction pursuant to 
proposed Options 11(b), FLEX PIM pursuant to proposed Options 12, and 
FLEX SOM pursuant to proposed Options 13, each as discussed further 
below. The Exchange notes that its proposal is in line with other 
options exchanges' FLEX rules that do not contemplate the interaction 
of their respective order books with FLEX transactions.\89\
---------------------------------------------------------------------------

    \89\ See e.g., NYSE Arca Rule 5.30-O(c). See also Securities 
Exchange Act Release No. 87235 (October 4, 2019), 84 FR 54671 
(October 10, 2019) (SR-CBOE-2019-084) (among other changes, 
eliminating the availability of an electronic book for FLEX 
Options).
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L. FLEX Options Trading (Section 11)

    Proposed Section 11 will describe the procedures for FLEX trading 
on the Exchange. Specifically, a FLEX Option series will only be 
eligible for trading if a Member submits a FLEX Order for that series 
into an electronic FLEX Auction pursuant to proposed paragraph (b) of 
Options 11, or submits the FLEX Order to a FLEX PIM or FLEX SOM Auction 
pursuant to proposed Section 12 or Section 13, respectively.\90\
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    \90\ See proposed Options 3A, Section 11(a), which is based on 
Cboe Rule 5.72(b) except the Exchange is not proposing an open 
outcry FLEX Auction.
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    Proposed Section 11(a)(1) and (2) will specify the requirements for 
both simple and complex FLEX Orders.
     For a simple FLEX Order, a FLEX Order for a FLEX Option 
series submitted to the System must include all terms for a FLEX Option 
series set forth in proposed Section 3 as described

[[Page 94993]]

above, size, side of the market, and a bid or offer price.\91\ The 
Exchange also proposes that the System will not accept a FLEX Order 
with identical terms as a non-FLEX Option series that is already listed 
for trading to signify that this requirement is System-enforced.
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    \91\ See Cboe Rule 5.72(b)(1) for similar provisions. The 
Exchange does not have an analogous rule as Cboe Rule 5.7, which 
specifies the different trading sessions during which the system is 
available to receive FLEX orders, and thus has not incorporated the 
applicable language. As noted above, the Exchange will accept FLEX 
Orders entered into an electronic FLEX Auction, FLEX PIM or FLEX SOM 
when the underlying security is open for trading. See proposed 
Options 3A, Section 8.
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     For a complex FLEX Order, a FLEX Order for a FLEX Option 
complex strategy submitted to the System must satisfy the criteria for 
a complex FLEX Order set forth in proposed Section 7(a) as described 
above, and include size, side of the market, and a net debit or credit 
price. Additionally, each leg of the FLEX Option complex strategy must 
include all terms for a FLEX Option series set forth in proposed 
Section 3.\92\ Similar to simple FLEX Orders, the Exchange proposes to 
System enforce the stipulation that it will not accept a FLEX Option 
complex strategy if a leg in the order has identical terms as a non-
FLEX Option series that is already listed for trading.\93\ The Exchange 
also proposes to add similar language as BOX to describe what would 
happen if there is a complex FLEX Order and subsequently, a non-FLEX 
Option series is introduced for the component leg(s). Specifically, 
proposed Section 11(a)(2)(A)(i) and (ii) will provide that if a non-
FLEX Option series is added intra-day for a component leg(s) of a 
complex FLEX Order, the holder or writer of a FLEX Option position in 
the component leg(s) resulting from such complex FLEX Order would be 
permitted to close its position(s) under the FLEX trading procedures 
against another closing only FLEX Option position for the balance of 
the trading day on which the non-FLEX Option series is added. If a non-
FLEX Option series is added for a component leg(s) of a complex FLEX 
Order on a trading day after the complex FLEX Order position is 
established, the holder or writer of a FLEX Option position in the 
component leg(s) resulting from such complex FLEX Order would be 
required to execute separate FLEX Option and non-FLEX Option 
transactions to close its position(s), such that FLEX Option component 
leg(s) would trade under the FLEX trading procedures and non-FLEX 
Option component leg(s) would trade subject to the non-FLEX trading 
procedures and rules.\94\ Additionally, a complex FLEX Order submitted 
into the System for an electronic FLEX Auction pursuant to proposed 
Section 11(b), a FLEX PIM pursuant to Section 12, or a FLEX SOM 
pursuant to Section 13 must include a bid or offer price for each leg, 
which leg prices when combined must equal the net price of the complex 
FLEX Order.\95\
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    \92\ See Cboe Rule 5.72(b)(2) for similar provisions. As noted 
above for simple FLEX Orders, the Exchange does not have an 
analogous rule as Cboe Rule 5.7, and thus has not incorporated the 
applicable language. See supra note 91.
    \93\ See proposed Options 3A, Section 11(a)(2)(A).
    \94\ See proposed Options 3A, Section 11(a)(2)(A)(i) and (ii), 
which is materially identical to BOX Rule 7605(d).
    \95\ See proposed Options 3A, Section 11(a)(2)(B), which is 
based on Cboe Rule 5.72(b)(2)(A) except the Exchange will also add 
references to FLEX PIM and FLEX SOM for accuracy and completeness. 
The Exchange will also clarify in its proposed rule that the leg 
prices when combined must equal the net price of the complex FLEX 
Order (additions emphasized). Cboe's rule currently states that the 
leg prices ``must add together to equal'' the net price. However, 
the Exchange notes that sell legs of a complex order are subtracted, 
and therefore proposes the language in Options 3A, Section 
11(a)(2)(B) (instead of copying Cboe Rule 5.72(b)(2)(A)) for greater 
accuracy.
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    Proposed Section 11(b) will describe the electronic FLEX Auction. 
The proposed FLEX Auction will be substantially similar to Cboe's 
electronic FLEX Auction set forth in Cboe Rule 5.72(c), except for 
certain intended differences as further described below.\96\ 
Specifically, a Member may electronically submit a FLEX Order (simple 
or complex) into an electronic FLEX Auction for execution pursuant to 
this paragraph (b). Pursuant to proposed subparagraph (b)(1), a FLEX 
Auction may be initiated if all of the below conditions in proposed 
subparagraph (b)(1)(A)-(G) are met; otherwise, the System rejects or 
cancels a FLEX Order that does not meet the conditions in this 
subparagraph (b)(1).\97\
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    \96\ See also Securities Exchange Act Release No. 87235 (October 
4, 2019), 84 FR 54671 (SR-CBOE-2019-084) (October 10, 2019) 
(adopting an electronic FLEX Auction on Cboe, among other changes).
    \97\ Proposed paragraph (b) is based on Cboe Rule 5.72(c). The 
proposed eligibility requirements for the FLEX Auction in 
subparagraph (b)(1) are similar to Cboe Rule 5.72(c)(1), except as 
noted below.
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     Class: The FLEX Order is in a class of options the 
Exchange is authorized to list for trading on the Exchange.
     Size: There is no minimum size for FLEX Orders.
     Terms: A simple or complex FLEX Order must comply with 
proposed Section 11(a).
     Price: The bid or offer price, or the net debit or credit 
price, as applicable, of the FLEX Order is the ``auction price.''
     Time: A FLEX Order may only be submitted for electronic 
execution in a FLEX Auction after FLEX trading has opened pursuant to 
proposed Section 8.
     Exposure Interval: The submitting Member must designate 
the length of the ``exposure interval,'' which must be between three 
seconds and five minutes.\98\ If the designated time exceeds the market 
close, then the FLEX Auction will end at the market close with an 
execution, if an execution is permitted pursuant to proposed Section 
11(b).\99\
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    \98\ There will be no default setting to the FLEX Auction 
exposure interval. As such, Members will be required to specify the 
exposure interval; otherwise, their FLEX Order will be rejected by 
the System.
    \99\ Cboe Rule 5.72(c)(1)(F) does not specify whether an 
execution would occur (if permitted) when the designated time 
exceeds the market close, and only expressly prohibits the 
designated time from going beyond the market close. While the 
Exchange's rules are silent in this regard, the Exchange notes that 
its proposal will follow current non-FLEX auction behavior, 
including current PIM and SOM behavior. In doing so, the Exchange's 
proposal will promote executions in electronic FLEX Auctions 
(instead of cancelling the FLEX Order) and also prevent executions 
that occur after the market close.
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     Minimum Increment: The price of a simple FLEX Order must 
be in an increment the Exchange determines on a class basis (which may 
not be smaller than the amounts set forth in proposed Section 5 (i.e., 
$0.01)). If the FLEX Order is a complex order, the price must be a net 
price for the complex strategy.\100\ The foregoing rule proposal will 
be substantially similar to the minimum increment requirements in Cboe 
Rules 5.73(a)(5) and 5.74(a)(5). While the Exchange will align to 
Cboe's minimum increment requirements (i.e., $0.01) for the individual 
options legs of a complex FLEX Order entered into a FLEX Auction, the 
Exchange also proposes to align the minimum increment requirements for 
stock-tied FLEX complex strategies with the existing requirements for 
stock-tied non-FLEX complex strategies as set forth in Options 3, 
Section 14(c)(1). As such, proposed Options 3A, Section 11(b)(1)(G) 
will further provide that the prices of Complex Options Strategies (as 
defined in Options 3, Section 14) may

[[Page 94994]]

be expressed in one cent ($0.01) increments, and the options leg of 
Complex Options Strategies may be executed in no smaller than one cent 
($0.01) increments, regardless of the minimum increments otherwise 
applicable to the individual options legs of the order. Prices of 
Stock-Option Strategies or Stock-Complex Strategies (each as defined in 
Options 3, Section 14) may be expressed in any decimal price determined 
by the Exchange,\101\ and the stock leg of a Stock-Option Strategy or 
Stock-Complex Strategy may be executed in any decimal price permitted 
in the equity market. The options leg of a Stock-Option Strategy or 
Stock-Complex Strategy may be executed in no smaller than one cent 
($0.01) increments, regardless of the minimum increments otherwise 
applicable to the individual options legs of the order. Similar to 
stock-tied complex orders today, the Exchange believes that smaller 
minimum increments are appropriate for complex FLEX Orders that contain 
a stock component as the stock component can trade at finer decimal 
increments permitted by the equity market.
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    \100\ See proposed subparagraph (G) of Section 11(b)(1). While 
Cboe's electronic FLEX Auction eligibility requirements in Rule 
5.72(c)(1) are silent on minimum increments, the eligibility 
requirements for Cboe's FLEX AIM and FLEX SAM in Cboe Rules 
5.73(a)(5) and 5.74(a)(5), respectively, address minimum increments. 
The Exchange believes it will be helpful to add a similar 
requirement for electronic FLEX Auctions for greater consistency and 
clarity. The Exchange also notes that unlike Cboe, it is not 
proposing to allow exercise prices to be expressed as percentages, 
and will therefore not incorporate the applicable provisions. As 
discussed above, the Exchange is also incorporating within proposed 
subparagraph (G) the minimum increment provisions for non-FLEX 
complex orders that are stock-tied from Options 3, Section 14(c)(1).
    \101\ The minimum increment for individual options leg of a FLEX 
Order may not be smaller than $0.01, as required under proposed 
Options 3A, Section 5. However, when a stock leg is included in a 
complex strategy (i.e., Stock-Option Strategy or Stock-Complex 
Strategy) for the FLEX Option, then the price for FLEX Stock-Option 
Strategies and FLEX Stock-Complex Strategies can be expressed to 
four decimal places in order to trade at finer decimal increments 
permitted by the equity market. However, the options leg will not be 
permitted to execute in increments smaller than one cent ($0.01). 
This is identical to how a non-FLEX Stock-Option Strategy and a non-
FLEX Stock-Complex Strategy can be priced today. See Options 3, 
Section 14(c)(1) for identical provisions. See also Securities 
Exchange Act Release No. 84373 (October 5, 2018), 83 FR 51730 at 
51732 (October 12, 2018) (SR-ISE-2018-56).
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    Proposed subparagraph (b)(2) of Options 11 will describe the FLEX 
Auction process, and will provide that upon receipt of a FLEX Order 
that meets the conditions in subparagraph (a) as described above, the 
FLEX Auction commences. Proposed subparagraph (b)(2)(A) will describe 
the contents of the FLEX Auction message, and will provide that the 
System initiates a FLEX Auction by sending a FLEX Auction notification 
message to Members detailing the FLEX Option series or complex strategy 
(as applicable), side, size, auction ID,\102\ capacity, and exposure 
interval. Similar to all other auction notifications, FLEX Auction 
notification messages are not disseminated to OPRA.\103\ Like Cboe, the 
FLEX Auction message will not include the price of the auctioned FLEX 
Order. The Exchange believes not including the auction price in the 
notification message will encourage Members to respond with the best 
prices at which they are willing to trade against the auctioned FLEX 
Order. If the message included the price, Members may only respond to 
trade at that price; without the price, Members may respond at better 
prices, which may result in price improvement opportunities for the 
auctioned FLEX Order.
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    \102\ As discussed below, this information on the proposed 
auction message will permit responses to only execute at the 
conclusion of the auction into which the responses were submitted.
    \103\ See Cboe Rule 5.72(c)(2)(A) for similar provisions, except 
with respect to the exposure interval and Attributable designation. 
The Exchange will simply disseminate the duration of the exposure 
interval, instead of calculating and disseminating what time the 
auction will conclude like Cboe. In addition, the Exchange is not 
proposing to offer an Attributable designation for FLEX Orders like 
Cboe does today.
---------------------------------------------------------------------------

    Proposed subparagraph (b)(2)(B) will provide that one or more FLEX 
Auctions in the same FLEX Option series or complex strategy (as 
applicable) may occur at the same time. To the extent there is more 
than one FLEX Auction in a FLEX Option series or complex strategy (as 
applicable) underway at the same time, the FLEX Auctions conclude 
sequentially based on the times at which each FLEX Auction's exposure 
interval concludes. At the time each FLEX Auction concludes, the System 
allocates the FLEX Order pursuant to proposed subparagraph (3) and 
takes into account all FLEX responses submitted during the exposure 
interval.\104\ Generally, if a Member attempts to initiate an 
electronic FLEX Auction in a FLEX Option series while another auction 
in that series is ongoing, the Exchange believes it will provide that 
second FLEX Order with an opportunity for execution in a timely manner 
by initiating another FLEX Auction, rather than having the Member wait 
for the first auction to conclude. The second Member may not be able to 
submit a response to trade in the ongoing FLEX Auction, because the 
terms may not be consistent with that Member's order (for example, 
there may not be sufficient size, and the Member may only receive a 
share of the auctioned order depending on other responses). Therefore, 
the Exchange believes providing this proposed functionality may 
encourage Members to use electronic FLEX Auctions to execute their FLEX 
Orders.
---------------------------------------------------------------------------

    \104\ See Cboe Rule 5.72(c)(2)(B) for materially identical 
provisions.
---------------------------------------------------------------------------

    Proposed subparagraph (b)(2)(C) will provide that the submitting 
Member may cancel a FLEX Auction prior to the end of the exposure 
interval.\105\ Proposed subparagraph (b)(2)(D) will specify the 
conditions for submitting responses to a FLEX Auction. Any Member 
(including the submitting Member) may submit responses to a FLEX 
Auction that are properly marked specifying the FLEX Option series or 
complex strategy (as applicable), bid or offer price or net price 
(respectively), size, side of the market, and the auction ID for the 
FLEX Auction to which the Member is submitting the response. A FLEX 
response may only participate in the FLEX Auction with the auction ID 
specified in the response, which is why the auction notification 
message described above will include an auction ID and responses must 
identify the applicable auction ID.\106\ If there are concurrent FLEX 
Auctions occurring, a Member may submit responses to all ongoing 
auctions, and thus concurrent auctions will not hinder a Member's 
ability to participate in any FLEX Auction.
---------------------------------------------------------------------------

    \105\ See Cboe Rule 5.72(c)(2)(C) for materially identical 
provisions. The Exchange notes that submitting Members may cancel 
but not modify a FLEX Auction prior to the end of the exposure 
interval.
    \106\ See Cboe Rule 5.72(c)(2)(D) for materially identical 
provisions.
---------------------------------------------------------------------------

    A Member using the same badge/ \107\ mnemonic \108\ may only submit 
a single FLEX response per auction ID to a FLEX Auction.\109\ If an 
additional FLEX response is submitted for the same auction ID from the 
same badge/mnemonic, then that FLEX response will automatically replace 
the previous FLEX response.\110\ The System caps the size of a FLEX 
response for the same badge/mnemonic at the size of the FLEX Order 
(i.e., the System ignores the size in excess of the size of the FLEX 
Order when processing the FLEX Auction).\111\

[[Page 94995]]

Given that the Exchange is proposing below to apply a pro-rata 
allocation methodology to executions at the conclusion of the FLEX 
Auction, this provision is intended to prevent a Member from submitting 
a response with an extremely large size into the electronic FLEX 
Auction in order to obtain a larger pro-rata share of the FLEX Order.
---------------------------------------------------------------------------

    \107\ A ``badge'' shall mean an account number, which may 
contain letters and/or numbers, assigned to Market Makers. A Market 
Maker account may be associated with multiple badges. See Options 1, 
Section 1(a)(5).
    \108\ A ``mnemonic'' shall mean an acronym comprised of letters 
and/or numbers assigned to Electronic Access Members. An Electronic 
Access Member account may be associated with multiple mnemonics. See 
Options 1, Section 1(a)(23).
    \109\ A badge and mnemonic are essentially Member identifiers. 
Every order that comes into the System is tied to a badge or 
mnemonic.
    \110\ In other words, the Member does not have to cancel the 
previous FLEX response before submitting an additional one as the 
previous response is automatically replaced. See proposed Options 
3A, Section 11(b)(2)(D)(i), which is based on Cboe Rule 
5.72(c)(2)(D)(i) except the Exchange will not allow Members to 
submit multiple FLEX responses using the same badge/mnemonic, and 
will not aggregate all of the Member's FLEX responses. While not 
specified in the Exchange's current rules, this is consistent with 
current auction behavior, including current PIM and SOM behavior.
    \111\ See proposed Options 3A, Section 11(b)(2)(D)(ii), which is 
based on Cboe Rule 5.72(c)(2)(D)(ii) except the Exchange will not 
aggregate all of the Member's FLEX responses. See supra note 110.
---------------------------------------------------------------------------

    Further, FLEX responses must be on the opposite side of the market 
as the FLEX Order. The System rejects a FLEX response on the same side 
of the market as the FLEX Order.\112\ FLEX responses are not visible to 
Members or disseminated to OPRA.\113\ This is consistent with how Cboe 
treats FLEX responses pursuant to Cboe Rule 5.72(c)(2)(D)(iv). The 
proposed rule change is also consistent with the Exchange's existing 
auctions, in which responses are not visible to the market.\114\ 
Responses to electronic auctions are not firm prior to the conclusion 
of the auction, at which time their price and size are firm. For the 
same reason as the Exchange is proposing not to disseminate the auction 
price on the auction notification message as discussed above, the 
Exchange believes it will encourage Members to submit responses at 
their best possible price if they do not know the prices at which other 
Members are willing to trade.\115\
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    \112\ See proposed Options 3A, Section 11(b)(2)(D)(iii), which 
is based on Cboe Rule 5.72(c)(2)(D)(iii).
    \113\ See proposed Options 3A, Section 11(b)(2)(D)(iv), which is 
based on Cboe Rule 5.72(c)(2)(D)(iv).
    \114\ See Supplementary Material .02 to Options 3, Section 11; 
and Options 3, Section 13(c)(4).
    \115\ For example, if during a FLEX Auction of a buy FLEX Order, 
a Member submitted a response to sell at $1.05, if another Member 
saw that response, it may merely respond to sell at $1.05, or maybe 
$1.04, even though it may ultimately be willing to sell at $1.03. 
Without seeing the other responses, the second Member may instead 
submit a response to sell at $1.03, which could result in price 
improvement for the auctioned order.
---------------------------------------------------------------------------

    A Member may modify or cancel it FLEX Responses during the exposure 
interval.\116\ The minimum price increment for FLEX responses is the 
same as the one the Exchange determines for a class pursuant to 
proposed subparagraph (b)(1)(G) above. A response to a FLEX Auction of 
a complex order must have a net price. The System rejects a FLEX 
response that is not in the applicable minimum increment.\117\
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    \116\ See proposed Options 3A, Section 11(b)(2)(D)(v), which is 
based on Cboe Rule 5.72(c)(2)(D)(v).
    \117\ See proposed Options 3A, Section 11(b)(2)(D)(vi). While 
Cboe's electronic FLEX Auction response requirements in Rule 
5.72(c)(2)(D) are silent on minimum increments, the response 
requirements for Cboe's FLEX AIM and FLEX SAM in Cboe Rules 
5.73(c)(5)(A) and 5.74(c)(5)(A), respectively, have similar 
provisions. The Exchange believes it will be helpful to add a 
similar requirement for electronic FLEX Auction responses for 
greater consistency and clarity. The Exchange also notes that unlike 
Cboe, it is not proposing to allow percentage formats for exercise 
prices of FLEX Options, and will therefore not incorporate the 
applicable provisions.
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    Pursuant to proposed subparagraph (b)(3) of Section 11, the FLEX 
Auction concludes at the end of the exposure interval, unless the 
Exchange halts trading in the affected underlying or the submitting 
Member cancels the FLEX Auction before the end of the exposure 
interval, in which case the FLEX Auction concludes without 
execution.\118\ At the conclusion of the FLEX Auction:
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    \118\ See Cboe Rule 5.72(c)(3) for similar provisions, except 
the Exchange is making minor modifications to replace ``affected 
series'' with ``affected underlying'' and to specify that the 
submitting Member has to cancel the FLEX Auction before the end of 
the exposure period. The foregoing changes are merely clarifications 
to better articulate the functionality.
---------------------------------------------------------------------------

     Pursuant to proposed subparagraph (b)(3)(A), the System 
executes the FLEX Order against the FLEX responses at the best 
price(s), to the price at which the balance of the FLEX Order or the 
FLEX responses can be fully executed (the ``final auction price''). For 
purposes of ranking FLEX responses when determining how to allocate a 
FLEX Order, the term ``price'' refers to the dollar and decimal amount 
of the response bid or offer.\119\
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    \119\ See Cboe Rule 5.72(c)(3)(A) for similar provisions, except 
the Exchange is not proposing to allow percentage values of the 
response bid or offer.
---------------------------------------------------------------------------

     Pursuant to proposed subparagraph (b)(3)(A)(i), if there 
are multiple FLEX responses at the same price level, then the contracts 
in those FLEX responses are allocated proportionally according to Size 
Pro-Rata Priority \120\ with Priority Customer \121\ overlay \122\ (as 
described in Options 3, Section 10(c)(1)(A)). The Exchange notes that 
this is similar to Cboe Rule 5.72(c)(3)(A)(i), except Cboe applies no 
overlays to its size pro-rata allocation methodology whereas the 
Exchange will apply an overlay for Priority Customers on top of its 
standard size pro-rata allocation methodology. This is consistent with 
the Exchange's standard allocation methodology in its SOM and PIM for 
non-FLEX Options where the Priority Customer gets priority treatment 
over non-Priority Customers.\123\
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    \120\ Size Pro-Rata Priority shall mean that if there are two or 
more resting orders or quotes at the same price, the System 
allocates contracts from an incoming order or quote to resting 
orders and quotes beginning with the resting order or quote 
displaying the largest size proportionally according to displayed 
size, based on the total number of contracts displayed at that 
price. See Options 3, Section 10(c).
    \121\ The term ``Priority Customer'' means a person or entity 
that (i) is not a broker or dealer in securities, and (ii) does not 
place more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s). See 
Options 1, Section 1(a)(37).
    \122\ Priority Customer overlay mean that the highest bid and 
lowest offer shall have priority except that Priority Customer 
orders shall have priority over non-Priority Customer interest at 
the same price in the same options series. If there are two or more 
Priority Customer orders for the same options series at the same 
price, priority shall be afforded to such Priority Customer orders 
in the sequence in which they are received by the System. See 
Options 10, Section 10(c)(1)(A).
    \123\ See, e.g., Options 3, Section 11(d)(3)(C) (SOM allocation 
methodology) and Options 3, Section 13(d) (PIM allocation 
methodology).
---------------------------------------------------------------------------

     Pursuant to proposed subparagraph (b)(3)(A)(ii), the 
executable quantity is allocated to the nearest whole number, with 
fractions rounded up for the FLEX response with the higher quantity. 
Further, proposed subparagraph (b)(3)(A)(iii) will provide that if an 
allocation would result in less than one contract, then one contract 
will be allocated. The Exchange is not adopting the rounding and 
allocation language in Cboe Rule 5.72(c)(3)(A)(ii) and (iii), but is 
rather adopting language that is consistent with its current rounding 
and allocation methodology as the Exchange does not allocate fractional 
contracts and instead rounds up to the nearest whole number.\124\
---------------------------------------------------------------------------

    \124\ See Options 3, Section 10(c), Supplementary Material .09 
to Options 3, Section 11, and Supplementary Material .10 to Options 
3, Section 13.
---------------------------------------------------------------------------

    Pursuant to proposed subparagraph (b)(3)(B), the System cancels an 
unexecuted FLEX Order (or unexecuted portion).\125\ Further, proposed 
subparagraph (b)(3)(C) will provide that the System cancels any 
unexecuted responses (or unexecuted portions).\126\
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    \125\ See Cboe Rule 5.72(c)(3)(B) for materially identical 
provisions.
    \126\ See Cboe Rule 5.72(c)(3)(C) for materially identical 
provisions.
---------------------------------------------------------------------------

M. FLEX PIM (Section 12)

    The Exchange proposes to establish PIM auction functionality for 
FLEX Options in Options 3A, Section 12. The proposed FLEX PIM auction 
will be substantially similar to Cboe's FLEX AIM in Cboe Rule 5.73, 
except for certain intended differences as further described below. 
Pursuant to proposed Section 12, a Member (the ``Initiating Member'') 
may electronically submit for execution an order (which may be a simple 
or complex order) it represents as agent (``Agency Order'') against

[[Page 94996]]

principal interest or a solicited order(s) (except, if the Agency Order 
is a simple order, for an order for the account of any FLEX Market 
Maker with an appointment in the applicable FLEX Option class on the 
Exchange) (an ``Initiating Order''), provided it submits the Agency 
Order for electronic execution into a FLEX PIM auction pursuant to this 
Rule.\127\
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    \127\ See Cboe Rule 5.73 for similar provisions, except the 
Exchange will not incorporate the reference to FLEX SPX as this is a 
Cboe-specific product.
---------------------------------------------------------------------------

    Proposed Section 12(a)(1)--(5) will set forth the FLEX PIM auction 
eligibility requirements. Specifically, the Initiating Member may 
initiate a FLEX PIM auction if all of the following conditions are met:
     Class. An Agency Order must in a FLEX Option class the 
Exchange designates as eligible for FLEX PIM auctions.
     FLEX Option Series. The Agency Order and Initiating Order 
must each be a FLEX Order that complies with proposed Section 11(a) in 
a permissible FLEX Option series that complies with proposed Section 3 
above. For a complex FLEX Order, each leg must be in a permissible FLEX 
option series that complies with proposed Section 3 above.\128\
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    \128\ See Cboe Rule 5.73(a)(2) for similar provisions, except 
the Exchange will add a similar stipulation for each leg of a 
complex FLEX Order for clarity.
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     Marking. The Initiating Member must mark an Agency Order 
for FLEX PIM auction processing.
     Size. There will be no minimum size for Agency Orders. The 
Initiating Order must be for the same size as the Agency Order.
     Minimum Increment. The price of the Agency Order and 
Initiating Order for simple FLEX Orders must be in an increment the 
Exchange determines on a class basis (which may not be smaller than the 
amounts set forth in Section 5 above). If the Agency Order and 
Initiating Order are complex orders, the price must be a net price for 
the complex strategy.\129\ While the Exchange will align to Cboe's 
minimum increment requirements (i.e., $0.01) for the individual options 
legs of a complex FLEX Order entered into a FLEX PIM, the Exchange also 
proposes to align the minimum increment requirements for stock-tied 
FLEX complex strategies with the existing requirements for stock-tied 
non-FLEX complex strategies as set forth in Options 3, Section 
14(c)(1). As such, proposed Options 3A, Section 12(a)(5) will further 
provide that the prices of Complex Options Strategies (as defined in 
Options 3, Section 14) may be expressed in one cent ($0.01) increments, 
and the options leg of Complex Options Strategies may be executed in no 
smaller than one cent ($0.01) increments, regardless of the minimum 
increments otherwise applicable to the individual options legs of the 
order. Prices of Stock-Option Strategies or Stock-Complex Strategies 
(each as defined in Options 3, Section 14) may be expressed in any 
decimal price determined by the Exchange,\130\ and the stock leg of a 
Stock-Option Strategy or Stock-Complex Strategy may be executed in any 
decimal price permitted in the equity market. The options leg of a 
Stock-Option Strategy or Stock-Complex Strategy may be executed in no 
smaller than one cent ($0.01) increments, regardless of the minimum 
increments otherwise applicable to the individual options legs of the 
order. Similar to stock-tied complex orders today, the Exchange 
believes that smaller minimum increments are appropriate for complex 
FLEX Orders that contain a stock component as the stock component can 
trade at finer decimal increments permitted by the equity market.
---------------------------------------------------------------------------

    \129\ The Exchange notes that unlike Cboe, it will not allow 
prices to be entered as a percentage value, and therefore will not 
incorporate the applicable language from Cboe Rule 5.73(a)(5) into 
proposed Section 12(a)(5). As discussed above, the Exchange will 
also add existing complex order minimum increment requirements in 
Options 3, Section 14(c)(1) to align the proposed FLEX functionality 
with non-FLEX functionality.
    \130\ The prices of the FLEX Stock-Option Strategies and FLEX 
Stock-Complex Strategies can be expressed to four decimal places, 
which is identical to how the stock portion of a non-FLEX Stock-
Option Strategy and a non-FLEX Stock-Complex Strategy can be priced 
today. However, the options leg will not be permitted to execute in 
increments smaller than one cent ($0.01). See supra note 101.
---------------------------------------------------------------------------

     Time. An Initiating Member may only submit an Agency Order 
to a FLEX PIM auction after trading in FLEX Options is open pursuant to 
proposed Section 8.
    The System will reject or cancel both an Agency Order and 
Initiating Order submitted to a FLEX PIM auction that do not meet the 
conditions in proposed paragraph (a) as described above. The proposed 
FLEX PIM eligibility requirements in proposed Section 12(a) are 
substantially similar to Cboe's FLEX AIM eligibility requirements in 
Cboe Rule 5.73(a), except with respect to the language related to the 
percentage value, as noted above.
    Pursuant to proposed Section 12(b), the Initiating Order must stop 
the entire Agency Order at a specified price. If the Agency Order and 
Initiating Order are Complex Orders, the price must be a net price for 
the complex strategy.\131\ In particular, the Initiating Member must 
specify either of the below; otherwise, the System will reject or 
cancel both an Agency Order and Initiating Order submitted to a FLEX 
PIM auction that do not meet the conditions in this proposed paragraph 
(b).
---------------------------------------------------------------------------

    \131\ See Cboe Rule 5.73(b) for similar provisions, except the 
Exchange will not allow prices to be entered as a percentage value, 
and therefore will not incorporate the applicable language from 
Cboe's rule into proposed Section 12(b).
---------------------------------------------------------------------------

     Pursuant to proposed subparagraph (b)(1), a single price 
at which it seeks to execute the Agency Order against the Initiating 
Order (a ``single-price submission''), including whether it elects to 
have less than its guaranteed allocation (as described in proposed 
Section 12(e)(4) below). This is similar to Cboe Rule 5.73(b)(1), 
except the Exchange is not proposing to allow Initiating Members to 
elect for the Initiating Order to have last priority to trade against 
the Agency Order, and will instead allow them to elect less than their 
guaranteed allocation.\132\ As further discussed below, the proposed 
guaranteed allocation process will be based on the guaranteed 
allocation process available in non-FLEX PIM auctions, and therefore 
the proposed rule change will provide further consistency across the 
Exchange's auction mechanism processes.\133\
---------------------------------------------------------------------------

    \132\ The Exchange will allow the Initiating Member to customize 
their guaranteed allocation percentage of the Initiating Order 
anywhere from 0% up to 50% of the Agency Order (if there is a 
response(s) from one other Member at the same price) or up to 40% of 
the Agency Order (if there are responses from two or more Members at 
the same price). For example, an Agency Order is entered into FLEX 
PIM for 100 contracts. If the Initiating Member only wants to have a 
guaranteed allocation of 10% on the Initiating Order that was 
entered with the Agency Order, the Initiating Member can stipulate 
10% on the Initiating Order. If there are 4 FLEX PIM responses for a 
total of 200 contracts at the end of the auction, then the 
Initiating Member will only get 10 contracts allocated on its 
Initiating Order (i.e., the guaranteed 10% of 100 contracts). Cboe's 
rule does not allow for the Initiating Member's guaranteed 
allocation percentages to be customized. See infra note 158 for 
further discussion on the 50%/40% allocation percentages.
    \133\ See infra note 158 for further discussion on the 50%/40% 
allocation percentages.
---------------------------------------------------------------------------

     Pursuant to subparagraph (b)(2), an initial stop price and 
instruction to automatically match the price and size of all FLEX PIM 
responses (``auto-match'') at each price, up to a designated limit 
price, better than the price at which the balance of the Agency Order 
can be fully executed (the ``final auction price''). This is materially 
identical to Cboe Rule 5.73(b)(2).
    Proposed Section 12(c) will govern the FLEX PIM auction process. 
Specifically, upon receipt of an Agency

[[Page 94997]]

Order that meets the conditions in paragraphs (a) and (b) as described 
above, the FLEX PIM auction process commences. Proposed subparagraphs 
(c)(1)(A) and (B) will describe concurrent FLEX PIM auctions for simple 
Agency Orders and complex Agency Orders, respectively. One or more FLEX 
PIM auctions in the same FLEX Option series or same complex strategy 
(as applicable) may occur at the same time.\134\ To the extent there is 
more than one FLEX PIM auction in a FLEX Option series or complex 
strategy (as applicable) underway at the same time, the FLEX PIM 
auctions will conclude sequentially based on the times at which the 
FLEX PIM auction periods end. At the time each FLEX PIM auction 
concludes, the System allocates the Agency Order pursuant to proposed 
paragraph (e) as described below, and takes into account all FLEX PIM 
responses received during the FLEX PIM auction period. The concurrent 
FLEX PIM auction feature in proposed Section 12(c)(1)(A) and (B) is 
materially identical to Cboe Rule 5.73(c)(1)(A) and (B), and is also 
consistent with the concurrent auction feature proposed above for FLEX 
Auctions. Similar to FLEX Auctions as proposed above, if a Member 
attempts to initiate a FLEX PIM Auction in a FLEX Option series while 
another auction in that series in ongoing, the Exchange believes it 
will provide that second FLEX Order with an opportunity for execution 
in a timely manner by initiating another FLEX PIM Auction, rather than 
requiring the Member to wait for the first auction to conclude. The 
second Member may not be able to submit a response to trade in the 
ongoing FLEX PIM Auction because the terms may not be consistent with 
that Member's order (for example, there may not be sufficient size, and 
the Member may only receive a share of the auctioned order depending on 
other responses). Therefore, the Exchange believes that providing this 
functionality for FLEX PIM may provide additional opportunities for 
execution of FLEX Orders by encouraging Members to use FLEX PIM.
---------------------------------------------------------------------------

    \134\ Further, for complex Agency Orders, PIM auctions in 
different complex strategies may be ongoing at any given time, even 
if the complex strategies have overlapping components. A FLEX PIM 
auction in a complex strategy may be ongoing at the same time as a 
FLEX PIM auction in any component of the complex strategy. See 
proposed subparagraph (c)(1)(B)(i) of Options 3A, Section 12.
---------------------------------------------------------------------------

    Pursuant to proposed Section 12(c)(2), the System initiates the 
FLEX PIM auction process by sending a FLEX PIM auction notification 
message detailing the side, size, auction ID, the length of the FLEX 
PIM auction period, and FLEX Option series or complex strategy, as 
applicable, of the Agency Order to all Members that elect to receive 
FLEX PIM auction notification messages. The Exchange may also determine 
to include the stop price in FLEX PIM auction notification messages, 
which will apply to all FLEX PIM auctions. Similar to all other auction 
notifications, FLEX PIM auction notification messages will not be 
disseminated to OPRA.\135\
---------------------------------------------------------------------------

    \135\ See Cboe Rule 5.73(c)(2) for substantially similar 
provisions except the Exchange will not incorporate the reference to 
SPX as it does not list this symbol.
---------------------------------------------------------------------------

    Proposed Section 12(c)(3) will describe the ``FLEX PIM Auction 
period,'' and is based on Cboe Rule 5.73(c)(3). The FLEX PIM Auction 
period will be defined as a period of time that must be designated by 
the Initiating Member, which may be no less than three seconds and no 
more than five minutes. Similar to the exposure interval for electronic 
FLEX Auctions in Section 11(b) discussed above, the Initiating Member 
will be required to identify a length of time within the specified 
parameters for FLEX PIM as there will be no default for the FLEX PIM 
Auction period. Otherwise, their FLEX Order will be rejected by the 
System. Further, if the designated length of the FLEX PIM Auction 
period exceeds the market close, then the auction will end at the 
market close with an execution, if an execution is permitted by this 
Section 12. Cboe's rule does not specify whether an execution (if 
permitted) would occur if the designated length exceeds the market 
close. However, the Exchange's non-FLEX auctions currently allow 
executions (as permitted by their respective rules) to occur in such 
scenarios, so the Exchange proposes to be consistent with current 
System functionality in this regard.\136\ In doing so, the Exchange's 
proposal will promote executions in FLEX PIM (instead of cancelling the 
FLEX Order) and also prevent executions from occurring after the market 
close.
---------------------------------------------------------------------------

    \136\ While this behavior is not explicitly stated in the 
current Rules, the Exchange's proposal will be consistent with 
current non-FLEX auction behavior, including current PIM and SOM 
behavior.
---------------------------------------------------------------------------

    Proposed Section 12(c)(4) will provide that an Initiating Member 
may not modify or cancel an Agency Order or Initiating Order after 
submission to a FLEX PIM auction, except to improve the price of the 
Initiating Order. This will be similar to Cboe Rule 5.73(c)(4) except 
unlike Cboe, the Exchange will allow a limited exception by allowing 
Initiating Members to improve the price of their Initiating Orders. The 
Exchange notes that this will align to current non-FLEX PIM behavior, 
which allows entering Members to modify their Counter-Side Orders \137\ 
upon entry into the PIM by improving upon the initial price of the 
Counter-Side Order.\138\ Similar to allowing the initiating Member of a 
non-FLEX PIM to improve the initial price of its Counter-Side Order, 
the Exchange believes that it is appropriate to allow the Initiating 
Member of the FLEX PIM to improve the price of its Initiating Order 
(i.e., contra-side to the Agency Order) because it would also improve 
the stop price of the Agency Order that came in together with the 
Initiating Order.\139\
---------------------------------------------------------------------------

    \137\ Counter-Side Orders (i.e., contra-side to the Agency 
Order) for PIM are functionally equivalent to Initiating Orders 
(i.e., contra-side order to the Agency Order) for FLEX PIM. See 
Options 3, Section 13(b) for a description of Counter-Side Orders.
    \138\ See Options 3, Section 13(b)(5) (providing that the 
Crossing Transaction may not be canceled or modified, but the price 
of the Counter-Side Order may be improved during the exposure 
period).
    \139\ As proposed, the Initiating Member enters a paired FLEX 
Order into FLEX PIM consisting of an Agency Order and an Initiating 
Order (which is the contra-side of the Agency Order). This is 
identical to how standard non-FLEX PIM works today in that the 
Initiating Member enters a paired order into standard PIM consisting 
of an Agency Order and a Counter-Side Order (i.e., the PIM Agency 
Order's contra-side, and the functional equivalent to an Initiating 
Order on FLEX PIM).
---------------------------------------------------------------------------

    Proposed Section 12(c)(5) will govern the requirements for FLEX PIM 
responses. Specifically:
     Any Member other than the Initiating Member (the System 
rejects a response with the same badge/mnemonic as the Initiating 
Order) may submit responses to a FLEX PIM auction that are properly 
marked specifying price, size, side, and the auction ID for the FLEX 
PIM auction to which the Member is submitting the response. A FLEX PIM 
response may only participate in the FLEX PIM auction with the auction 
ID specified in the response.\140\
---------------------------------------------------------------------------

    \140\ See proposed Options 3A, Section 12(c)(5), which is based 
on Cboe Rule 5.73(c)(5).
---------------------------------------------------------------------------

     The minimum price increment for FLEX PIM responses is the 
same as the one the Exchange determines for a class pursuant to 
proposed Section 12(a)(5) above. A response to a FLEX PIM auction of a 
complex Agency Order must have a net price. The System will reject a 
FLEX PIM response that is not in the applicable minimum increment.\141\
---------------------------------------------------------------------------

    \141\ See proposed Options 3A, Section 12(c)(5)(A), which is 
based on Cboe Rule 5.73(c)(5)(A) except the Exchange will not allow 
prices to be expressed as a percentage value. Further, the Exchange 
will not incorporate the Cboe rule portions on Index Combo Orders as 
the Exchange does not offer this functionality.
---------------------------------------------------------------------------

     A Member using the same badge/mnemonic may only submit a 
single

[[Page 94998]]

FLEX PIM response per auction ID for a given auction. If an additional 
FLEX PIM response is submitted for the same auction ID from the same 
badge/mnemonic, then that FLEX PIM response will automatically replace 
the previous FLEX PIM response.\142\
---------------------------------------------------------------------------

    \142\ See proposed Options 3A, Section 12(c)(5)(B), which will 
be different from Cboe Rule 5.73(c)(5)(B) because the Exchange will 
not allow Members to submit multiple FLEX PIM responses using the 
same badge/mnemonic, and will not aggregate all of the Member's FLEX 
PIM responses. While the rules are currently silent in this regard, 
this will align to current non-FLEX auction behavior, including PIM 
auction behavior.
---------------------------------------------------------------------------

     The System will cap the size of a FLEX PIM response at the 
size of the Agency Order (i.e., the System will ignore size in excess 
of the size of the Agency Order when processing the FLEX PIM 
auction).\143\
---------------------------------------------------------------------------

    \143\ See proposed Options 3A, Section 12(c)(5)(C), which is 
based on Cboe Rule 5.73(c)(5)(C) except the Exchange will not allow 
Members to submit multiple FLEX PIM responses using the same badge/
mnemonic, and will not aggregate all of the Member's FLEX PIM 
responses. As noted above, this will align to current non-FLEX 
auction functionality, including PIM auction functionality in 
Options 3, Section 13.
---------------------------------------------------------------------------

     FLEX PIM responses must be on the opposite side of the 
market as the Agency Order. The System rejects a FLEX PIM response on 
the same side of the market as the Agency Order.\144\
---------------------------------------------------------------------------

    \144\ See proposed Options 3A, Section 12(c)(5)(D), which is 
materially identical to Cboe Rule 5.73(c)(5)(D).
---------------------------------------------------------------------------

     FLEX PIM responses will not be visible to PIM auction 
participants or disseminated to OPRA.\145\
---------------------------------------------------------------------------

    \145\ See proposed Options 3A, Section 12(c)(5)(E), which is 
materially identical to Cboe Rule 5.73(c)(5)(E).
---------------------------------------------------------------------------

     A Member may modify or cancel its FLEX PIM responses 
during the FLEX PIM auction.\146\
---------------------------------------------------------------------------

    \146\ See proposed Options 3A, Section 12(c)(5)(F), which is 
materially identical to Cboe Rule 5.73(c)(5)(F).
---------------------------------------------------------------------------

    Pursuant to proposed Section 12(d), a FLEX PIM auction concludes at 
the earliest to occur of the following times: (1) the end of the FLEX 
PIM auction period; and (2) any time the Exchange halts trading in the 
affected underlying, provided, however, that in such instance the FLEX 
PIM auction concludes without execution.\147\
---------------------------------------------------------------------------

    \147\ See Cboe Rule 5.73(d) for similar provisions, except the 
Exchange will make a minor clarification that this rule applies when 
the Exchange halts trading in the affected underlying (and not 
series, which is what Cboe currently has in its rule).
---------------------------------------------------------------------------

    Proposed Section 12(e) will govern how executions will occur in 
FLEX PIM. In particular, at the end of the FLEX PIM auction, the System 
allocates the Initiating Order or FLEX PIM responses against the Agency 
Order at the best price(s), to the price at which the balance of the 
Agency Order can be fully executed (the ``final auction price''), as 
follows. For purposes of ranking the Initiating Order and FLEX PIM 
responses when determining how to allocate the Agency Order against the 
Initiating Order and those responses, the term ``price'' refers to the 
dollar and decimal amount of the order or response bid or offer.\148\ 
Proposed subparagraphs (e)(1)-(4) details the FLEX PIM allocation 
methodology for the following scenarios:
---------------------------------------------------------------------------

    \148\ See Cboe Rule 5.73(e) for similar provisions except the 
Exchange will not allow prices to be expressed as a percentage 
value.
---------------------------------------------------------------------------

     No Price Improvement: If the FLEX PIM auction results in 
no price improvement, the System executes the Agency Order at the stop 
price in the following order:
     Priority Customer responses (in time priority); \149\
---------------------------------------------------------------------------

    \149\ See proposed Section 12(e)(1)(A), which is materially 
identical to Cboe Rule 5.73(e)(1)(A).
---------------------------------------------------------------------------

     The Initiating Order for the greater of (1) one contract 
or (2) up to 50% of the Agency Order if there is a response(s) from one 
other Member at the same price or 40% of the Agency Order if there are 
responses from two or more other Members at the same price (which 
percentages are based on the original size of the Agency Order).\150\ 
Unless there are remaining contracts after including all PIM responses, 
under no circumstances does the Initiating Member receive an allocation 
percentage at the final auction price of more than 50% of the initial 
Agency Order in the event there is a response(s) from one other Member 
or 40% of the initial Agency Order in the event there are responses 
from two or more other Members, except when rounding up. The Exchange 
is specifying two limited scenarios in this Rule where the Initiating 
Member may receive an allocation percentage greater than its guaranteed 
allocation percentage, which is either when there are remaining 
contracts after including all PIM responses or when rounding up.\151\ 
As an example of the first scenario, assume an Initiating Member 
submitted a FLEX Order for 20 contracts into FLEX PIM and there are 2 
PIM responses (one for 3 contracts and one for 4 contracts). After the 
7 PIM responses are allocated, the Initiating Member would then receive 
the remaining 13 contracts (which is more than their 40% allocation 
percentage) because there are remaining contracts after all PIM 
responses are included.
---------------------------------------------------------------------------

    \150\ See proposed Section 12(e)(1)(B)(ii), which is based on 
Cboe Rule 5.73(e)(1)(B)(ii) except the percentages will be based on 
the original size of the Agency Order, instead of the number of 
contracts remaining after execution against Priority Customer 
responses like Cboe. This will align to current PIM functionality. 
See Options 3, Section 13(d)(3). See infra note 158 for further 
discussion on the 50%/40% allocation percentages.
    \151\ See proposed Section 12(e)(1)(B), which is based on Cboe 
Rule 5.73(e)(1)(B) except with respect to the two limited scenarios 
discussed above. This behavior relating to the remaining contracts 
scenario and rounding up scenario will align to current PIM 
functionality. While the Exchange's rules are silent on the first 
scenario, the rounding up scenario is specified in Options 3, 
Section 13(d)(7).
---------------------------------------------------------------------------

     All other FLEX PIM responses, allocated on a Size Pro-Rata 
basis (as defined in Options 3, Section 10(c)); \152\ and
---------------------------------------------------------------------------

    \152\ See proposed Section 12(e)(1)(C), which is materially 
identical to Cboe Rule 5.73(e)(1)(C). The Exchange notes that Size 
Pro-Rata (as defined in Options 3, Section 10(c)) is similar to pro-
rata as referenced in the Cboe rule (and as defined in Cboe Rule 
5.32(a)(1)(B)).
---------------------------------------------------------------------------

     The Initiating Order to the extent there are any remaining 
contracts.\153\
---------------------------------------------------------------------------

    \153\ See proposed Section 12(e)(1)(D), which is materially 
identical to Cboe Rule 5.73(e)(1)(D).
---------------------------------------------------------------------------

     Price Improvement With Single-Price Submission: If the 
FLEX PIM auction results in price improvement for the Agency Order and 
the Initiating Member selected a single-price submission, at each price 
better than the final auction price, the System executes the Agency 
Order in the following order:
     Priority Customer responses (in time priority); \154\
---------------------------------------------------------------------------

    \154\ See proposed Section 12(e)(2)(A), which is materially 
identical to Cboe Rule 5.73(e)(2)(A).
---------------------------------------------------------------------------

     Other FLEX PIM responses (in time priority) at prices 
better than the final auction price; and
     All other FLEX PIM responses at the final auction price, 
allocated on a Size Pro-Rata basis (as defined in Options 3, Section 
10(c)).\155\
---------------------------------------------------------------------------

    \155\ See proposed Section 12(e)(2)(B), which is based on Cboe 
Rule 5.73(e)(2)(B), except the Exchange will specify that other FLEX 
PIM responses at prices better than the final auction price will be 
allocated in time priority and all other FLEX PIM responses at the 
final auction price will be allocated on a Size Pro-Rata Basis. 
While the current rules are silent in this regard, this behavior 
follows current System behavior for its PIM functionality.
---------------------------------------------------------------------------

    For example, assume a FLEX PIM Agency Order is sent for 100 
contracts with a price of $1.00 and the Initiating Member selected a 
single-price submission. There are two PIM responses for 5 contracts 
each at $0.98, two PIM responses for 20 contracts each at $0.99, and 
two PIM responses for 40 contracts each at $1.00. The PIM responses at 
$0.98 and $0.99 will be executed in their entirety. The PIM responses 
at $1.00 (final auction price) will be executed on a Size Pro-Rata 
basis. At the final auction price, the System executes any remaining 
contracts from the Agency Order at that

[[Page 94999]]

price in the order set forth in proposed Section 12(e)(1), as described 
above.\156\
---------------------------------------------------------------------------

    \156\ See proposed Section 12(e)(2), which is materially 
identical to Cboe Rule 5.73(e)(2).
---------------------------------------------------------------------------

     Price Improvement With Auto-Match: If the FLEX PIM auction 
results in price improvement for the Agency Order and the Initiating 
Member selected auto-match, at each price better than the final auction 
price up to the designated limit price, the System executes the Agency 
Order against the Initiating Order for the number of contracts equal to 
the aggregate size of all FLEX PIM responses and then executes the 
Agency Order against those responses in the order set forth in proposed 
subparagraph (e)(2) described above. At the final auction price, the 
System executes contracts at that price in the order set forth in 
proposed subparagraph (e)(1) described above.\157\
---------------------------------------------------------------------------

    \157\ See proposed Section 12(e)(3), which is materially 
identical to Cboe Rule 5.73(e)(3).
---------------------------------------------------------------------------

     Guaranteed Allocation: If the Initiating Member selects a 
single-price submission, it may elect for the Initiating Order to have 
less than their guaranteed allocation (50% if there is a response(s) 
from one other Member or 40% if there are responses from two or more 
Members) to trade against the Agency Order. The Initiating Member may 
select a lesser percentage than their guaranteed allocation. If the 
Initiating Member elects 0%, then notwithstanding subparagraphs (e)(1) 
and (2), the System only executes the Initiating Order against any 
remaining Agency Order contracts at the stop price after the Agency 
Order is allocated to all FLEX PIM responses at all prices equal to or 
better than the stop price. Guaranteed allocation information is not 
available to other market participants and may not be modified after it 
is submitted.\158\
---------------------------------------------------------------------------

    \158\ See proposed Section 12(e)(4), which is based on Cboe Rule 
5.73(e)(4) except the Exchange will replace Cboe's last priority 
feature with a guaranteed allocation feature similar to current PIM 
functionality that allows Members to request a lower percentage than 
their guaranteed allocation. See Options 3, Section 13(d)(3). As 
such, the difference between Cboe's rule and ISE's rule will be that 
ISE Members will be able to customize their guaranteed allocation 
percentages for FLEX PIM (which will follow the non-FLEX PIM 
process) while Cboe's rules do not seem to allow this for FLEX AIM. 
The Exchange notes that the proposed guaranteed allocation 
percentages of 50% (if there is a response(s) from one other Member) 
and 40% (if there are responses from two or more Members) for FLEX 
PIM will differ from the current guaranteed allocation percentage of 
40% for standard PIM. As such, the Exchange is aligning to Cboe's 
allocation percentages. The Exchange also notes that its affiliates, 
Nasdaq BX, Inc. (``BX'') and Nasdaq PHLX LLC (``Phlx''), have 
consistent guaranteed allocation percentages for their standard non-
FLEX price improvement auctions, BX PRISM and Phlx PIXL. See BX 
Options 3, Section 13(ii)(A)(1) and Phlx Options 3, Section 
13(b)(5)(B).
---------------------------------------------------------------------------

    Pursuant to proposed Section 12(e)(5), the System cancels any 
unexecuted FLEX PIM responses (or unexecuted portions) at the 
conclusion of the FLEX PIM auction.\159\
---------------------------------------------------------------------------

    \159\ See Cboe Rule 5.73(e)(5) for substantially similar 
provisions.
---------------------------------------------------------------------------

    Lastly, the Exchange proposes a number of policies applicable to 
FLEX PIM as Supplementary Materials to Options 3A, Section 12. 
Specifically, proposed Supplementary Material .01 will provide that a 
Member may only use a FLEX PIM auction where there is a genuine 
intention to execute a bona fide transaction.\160\ Proposed 
Supplementary Material .02 will provide that it will be deemed conduct 
inconsistent with just and equitable principles of trade and a 
violation of Options 9, Section 1 \161\ to engage in a pattern of 
conduct where the Initiating Member breaks up an Agency Order into 
separate orders for the purpose of gaining a higher allocation 
percentage than the Initiating Member would have otherwise received in 
accordance with the allocation procedures contained in proposed 
paragraph (e) above.\162\ Lastly, proposed Supplementary Material .03 
will provide that if an allocation would result in less than one 
contract, then one contract will be allocated.\163\ This aligns to how 
the Exchange currently allocates contracts in PIM.\164\
---------------------------------------------------------------------------

    \160\ See Cboe Rule 5.73, Interpretations and Policies .01 for 
materially identical provisions.
    \161\ Options 9, Section 1 provides that no Member shall engage 
in acts or practices inconsistent with just and equitable principles 
of trade. Persons associated with Members shall have the same duties 
and obligations as Members under the Rules of Options 9.
    \162\ See Cboe Rule 5.73, Interpretations and Policies .02 for 
materially identical provisions.
    \163\ The Exchange notes that it is not proposing to add the 
provision from Cboe Rule 5.73, Interpretations and Policies .03 that 
states: ``A FLEX Official may nullify a transaction following a FLEX 
AIM Auction pursuant to Rule 5.75(b).'' Because the FLEX Official is 
a floor concept and the Exchange does not operate a trading floor, 
the Exchange will not incorporate this concept into its proposed 
FLEX rules. Instead, the Exchange will System-enforce this provision 
by rejecting a FLEX PIM auction that does not comply with the 
provisions in proposed Options 3A, Section 12.
    \164\ See Supplementary Material .10 to Options 3, Section 13.
---------------------------------------------------------------------------

N. FLEX SOM (Section 13)

    The Exchange proposes to establish SOM auction functionality for 
FLEX Options in Options 3A, Section 13. The proposed FLEX SOM auction 
will be substantially similar to Cboe's FLEX SAM in Cboe Rule 5.74, 
except for certain intended differences to align with the Exchange's 
current System functionality for non-FLEX Options, as further described 
below. Pursuant to proposed Section 13, a Member (the ``Initiating 
Member'') may electronically submit for execution an order (which may 
be a simple or complex order) it represents as agent (``Agency Order'') 
against a solicited order (``Solicited Order'') if it submits the 
Agency Order for electronic execution into a FLEX SOM auction pursuant 
to this Rule.\165\
---------------------------------------------------------------------------

    \165\ See Cboe Rule 5.74 for similar provisions, except the 
Exchange will not add Cboe's language that the Solicited Order 
cannot have a Capacity F (i.e., Firm capacity) for the same 
executing firm ID (``EFID'') as the Agency Order for the foregoing 
reasons. Facilitated orders cannot be entered into FLEX SOM (just 
like they cannot be entered into standard SOM today). Since an order 
with the capacity of Firm can be valid for a solicitation order, the 
Exchange will not System enforce the rejection of Firm capacity 
orders to avoid the rejection of contra-side orders that are entered 
with a Firm capacity and are, in fact, solicitations at the outset. 
Instead, it will monitor for compliance with the requirement that 
the contra-side order be a solicitation rather than a facilitation 
through surveillance, as it does today for non-FLEX SOM. The 
applicable rule for the foregoing requirement will be set forth in 
Supplementary Material .02 to Options 3A, Section 13.
---------------------------------------------------------------------------

    Proposed Section 13(a)(1)-(6) will set forth the FLEX SOM auction 
eligibility requirements, and will be substantially similar to Cboe 
Rule 5.74(a)(1)-(6) except as noted below. Specifically, the Initiating 
Member may initiate a FLEX SOM auction if all of the following 
conditions are met:
     Class. An Agency Order must in a FLEX Option class the 
Exchange designates as eligible for FLEX SOM auctions.
     FLEX Option Series. The Agency Order and Solicited Order 
must each be a FLEX Order that complies with proposed Section 11(a) in 
a permissible FLEX Option series that complies with proposed Section 3 
above. For a complex FLEX Order, each leg must be in a permissible FLEX 
option series that complies with Section 3 above.\166\
---------------------------------------------------------------------------

    \166\ See Cboe Rule 5.74(a)(2) for similar provisions, except 
the Exchange will add a similar stipulation for each leg of a 
complex FLEX Order for clarity.
---------------------------------------------------------------------------

     Marking. The Initiating Member must mark an Agency Order 
for FLEX SOM auction processing.
     Size. The Agency Order must be for at least the minimum 
size designated by the Exchange (which may not be less than 500 
standard option contracts). For complex FLEX Orders, this minimum size 
requirement will apply to each leg. The Solicited Order must be for the 
same size as the Agency Order. The System handles each of the Agency 
Order and the Solicited Order as all-or-none.\167\
---------------------------------------------------------------------------

    \167\ See Cboe Rule 5.74(a)(4) for similar provisions except 
unlike Cboe, the Exchange will not allow the Solicited Order to be 
comprised of multiple solicited orders in FLEX SOM to be consistent 
with current non-FLEX SOM functionality in Options 3, Section 11(d). 
In addition, the Exchange will not incorporate Cboe's provisions 
relating to mini options or Micro FLEX Index Options into proposed 
Section 13(a)(4) as the Exchange does not list these products today. 
Further, the Exchange is adding a minor clarification that the 
minimum size requirement will apply to each leg of a complex FLEX 
Order.

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[[Page 95000]]

     Minimum Increment. The price of the Agency Order and 
Solicited Order for simple FLEX Orders must be in an increment the 
Exchange determines on a class basis (which may not be smaller than the 
amounts set forth in Section 5 above). If the Agency Order and 
Solicited Order are complex orders, the price must be a net price for 
the complex strategy.\168\ While the Exchange will align to Cboe's 
minimum increment requirements (i.e., $0.01) for the individual options 
legs of a complex FLEX Order entered into a FLEX SOM, the Exchange also 
proposes to align the minimum increment requirements for stock-tied 
FLEX complex strategies with the existing requirements for stock-tied 
non-FLEX complex strategies as set forth in Options 3, Section 
14(c)(1). As such, proposed Options 3A, Section 12(a)(5) will further 
provide that the prices of Complex Options Strategies (as defined in 
Options 3, Section 14) may be expressed in one cent ($0.01) increments, 
and the options leg of Complex Options Strategies may be executed in no 
smaller than one cent ($0.01) increments, regardless of the minimum 
increments otherwise applicable to the individual options legs of the 
order. Prices of Stock-Option Strategies or Stock-Complex Strategies 
(each as defined in Options 3, Section 14) may be expressed in any 
decimal price determined by the Exchange,\169\ and the stock leg of a 
Stock-Option Strategy or Stock-Complex Strategy may be executed in any 
decimal price permitted in the equity market. The options leg of a 
Stock-Option Strategy or Stock-Complex Strategy may be executed in no 
smaller than one cent ($0.01) increments, regardless of the minimum 
increments otherwise applicable to the individual options legs of the 
order. Similar to stock-tied complex orders today, the Exchange 
believes that smaller minimum increments are appropriate for complex 
FLEX Orders that contain a stock component as the stock component can 
trade at finer decimal increments permitted by the equity market.
---------------------------------------------------------------------------

    \168\ The Exchange notes that unlike Cboe, it will not allow 
prices to be entered as a percentage value, and therefore will not 
incorporate the applicable language from Cboe Rule 5.74(a)(5) into 
proposed Section 13(a)(5). As discussed above, the Exchange will 
also incorporate existing minimum increment requirements for non-
FLEX complex orders into proposed Section 13(a)(5) to align the 
proposed FLEX functionality with non-FLEX functionality.
    \169\ The prices for FLEX Stock-Option Strategies and FLEX 
Stock-Complex Strategies can be expressed to four decimal places, 
which is identical to how the stock portion of a non-FLEX Stock-
Option Strategy and a non-FLEX Stock-Complex Strategy can be priced 
today. See supra note 101.
---------------------------------------------------------------------------

     An Initiating Member may only submit an Agency Order to a 
FLEX SOM auction after trading in FLEX Options is open pursuant to 
proposed Section 8.
    The System will reject or cancel both an Agency Order and Solicited 
Order submitted to a FLEX SOM auction that do not meet the conditions 
in proposed paragraph (a) as described above.
    Pursuant to proposed Section 13(b), the Solicited Order must stop 
the entire Agency Order at a specified price. If the Agency Order and 
Solicited Order are complex orders, the price must be a net price for 
the complex strategy. The Initiating Member must specify a single price 
at which it seeks to execute the Agency Order against the Solicited 
Order. Otherwise, the System will reject or cancel both an Agency Order 
and Solicited Order submitted to a FLEX SOM auction that do not meet 
this condition.\170\
---------------------------------------------------------------------------

    \170\ See Cboe Rule 5.74(b) for similar provisions, except the 
Exchange will not allow prices to be entered as a percentage value, 
and therefore will not incorporate the applicable language from 
Cboe's rule into proposed Section 13(b).
---------------------------------------------------------------------------

    Proposed Section 13(c) will govern the FLEX SOM auction process. 
Specifically, upon receipt of an Agency Order that meets the conditions 
in paragraphs (a) and (b) as described above, the FLEX SOM auction 
process commences. Proposed subparagraphs (c)(1)(A) and (B) will 
describe concurrent FLEX SOM auctions for simple Agency Orders and 
complex Agency Orders, respectively, and will be materially identical 
to Cboe Rule 5.74(c)(1)(A) and (B).
    One or more FLEX SOM auctions in the same FLEX Option series or 
same complex strategy (as applicable) may occur at the same time.\171\ 
To the extent there is more than one FLEX SOM auction in a FLEX Option 
series or complex strategy (as applicable) underway at the same time, 
the FLEX SOM auctions will conclude sequentially based on the times at 
which the FLEX SOM auction periods end. At the time each FLEX SOM 
auction concludes, the System allocates the Agency Order pursuant to 
proposed paragraph (e) as described below, and takes into account all 
FLEX SOM responses received during the FLEX SOM auction period. As 
noted above, the proposed concurrent FLEX SOM auction feature is 
consistent with Cboe's concurrent FLEX SAM auctions feature in Cboe 
Rule 5.74(c)(1), and is also consistent with the concurrent auction 
feature proposed above for FLEX Auctions and FLEX PIM. For the same 
reasons stated above for FLEX Auctions and FLEX PIM, the Exchange 
believes that providing this concurrent auction functionality for FLEX 
SOM may provide additional opportunities for execution of FLEX Orders 
by encouraging Members to use FLEX SOM.
---------------------------------------------------------------------------

    \171\ Further, for complex Agency Orders, SOM auctions in 
different complex strategies may be ongoing at any given time, even 
if the complex strategies have overlapping components. A FLEX SOM 
auction in a complex strategy may be ongoing at the same time as a 
FLEX SOM auction in any component of the complex strategy. See 
proposed subparagraph (c)(1)(B)(i) of Options 3A, Section 13.
---------------------------------------------------------------------------

    Pursuant to proposed Section 13(c)(2), the System initiates the 
FLEX SOM auction process by sending a FLEX SOM auction notification 
message detailing the side, size, price, capacity, auction ID, the 
length of the FLEX SOM auction period, and FLEX Option series or 
complex strategy, as applicable, of the Agency Order to all Members 
that elect to receive FLEX SOM auction notification messages. Similar 
to all other auction notifications, FLEX SOM auction notification 
messages will not be disseminated to OPRA. These provisions are 
materially identical to Cboe Rule 5.74(c)(2).
    Proposed Section 13(c)(3) will describe the ``FLEX SOM Auction 
period,'' and is based on Cboe Rule 5.74(c)(3). The FLEX SOM Auction 
period will be defined as a period of time that must be designated by 
the Initiating Member, which may be no less than three seconds and no 
more than five minutes. Similar to the exposure interval for electronic 
FLEX Auctions in Section 11(b) and the FLEX PIM Auction period in 
Section 12(c)(3) as discussed above, the Initiating Member will be 
required to identify a length of time within the specified parameters 
for FLEX SOM as there will be no default for the FLEX SOM Auction 
period. Otherwise, their FLEX Order will be rejected by the System. 
Further, if the designated length of the FLEX SOM Auction period 
exceeds the market close, then the auction will end at the market close 
with an execution, if an execution is permitted by this Section 13. 
Cboe's rule does not specify whether an execution (if permitted) would 
occur if the designated length exceeds the market close. However, the 
Exchange's non-FLEX auctions currently allow executions (as permitted 
by their respective rules) to occur in such scenarios, so the Exchange 
proposes to be consistent with current

[[Page 95001]]

System functionality in this regard.\172\ In doing so, the Exchange's 
proposal will promote executions in FLEX SOM (instead of cancelling the 
FLEX Order) while also preventing executions from occurring after the 
market close.
---------------------------------------------------------------------------

    \172\ While this behavior is not explicitly stated in the 
current Rules, the Exchange's proposal will be consistent with 
current non-FLEX auction behavior, including current PIM and SOM 
behavior.
---------------------------------------------------------------------------

    Proposed Section 13(c)(4) will provide that an Initiating Member 
may not modify an Agency Order or Solicited Order after submission to a 
FLEX SOM auction. This will be similar to Cboe Rule 5.74(c)(4) except 
unlike Cboe, the Exchange will allow Initiating Members to cancel their 
Agency Orders and Solicited Orders upon submission into a FLEX SOM, 
which will align with current SOM functionality.\173\
---------------------------------------------------------------------------

    \173\ This feature is not explicitly stated in the current SOM 
rules in Options 3, Section 11(d), but it is consistent with current 
SOM functionality.
---------------------------------------------------------------------------

    Proposed Section 13(c)(5) will govern the requirements for FLEX SOM 
responses. Specifically:
     Any Member other than the Initiating Member (the response 
cannot have the same badge/mnemonic as the Agency Order) may submit 
responses to a FLEX SOM auction that are properly marked specifying 
size, side, price, and the auction ID for the FLEX SOM auction to which 
the Member is submitting the response. A FLEX SOM response may only 
participate in the FLEX SOM auction with the auction ID specified in 
the response.\174\
---------------------------------------------------------------------------

    \174\ See proposed Options 3A, Section 13(c)(5), which is based 
on Cboe Rule 5.74(c)(5).
---------------------------------------------------------------------------

     The minimum price increment for FLEX SOM responses is the 
same as the one the Exchange determines for a class pursuant to 
proposed Section 12(a)(5) above. A response to a FLEX SOM auction of a 
complex Agency Order must have a net price. The System will reject a 
FLEX SOM response that is not in the applicable minimum increment.\175\
---------------------------------------------------------------------------

    \175\ See proposed Options 3A, Section 13(c)(5)(A), which is 
based on Cboe Rule 5.74(c)(5)(A) except the Exchange will not allow 
prices to be expressed as a percentage value.
---------------------------------------------------------------------------

     A Member using the same badge/mnemonic may only submit a 
single FLEX SOM response per auction ID for a given auction. If an 
additional SOM response is submitted for the same auction ID from the 
same badge/mnemonic, then that FLEX SOM response will automatically 
replace the previous FLEX SOM response.\176\
---------------------------------------------------------------------------

    \176\ See proposed Options 3A, Section 13(c)(5)(B), which will 
be different from Cboe Rule 5.74(c)(5)(B) because the Exchange will 
not allow Members to submit multiple FLEX SOM responses using the 
same badge/mnemonic, and will not aggregate all of the Member's FLEX 
SOM responses. While the Exchange's standard non-FLEX rules are 
currently silent in this regard, the Exchange is making these 
concepts clear in the proposed FLEX language. Ultimately the 
Exchange's proposed FLEX SOM functionality in this regard will align 
to current non-FLEX auction functionality, including SOM auctions in 
Options 3, Section 11(d).
---------------------------------------------------------------------------

     The System will cap the size of a FLEX SOM response at the 
size of the Agency Order (i.e., the System will ignore size in excess 
of the size of the Agency Order when processing the FLEX SOM 
auction).\177\
---------------------------------------------------------------------------

    \177\ See proposed Options 3A, Section 13(c)(5)(C), which is 
based on Cboe Rule 5.74(c)(5)(C) except the Exchange will not allow 
Members to submit multiple FLEX SOM responses using the same badge/
mnemonic, and will not aggregate all of the Member's FLEX SOM 
responses. As noted above, this will align to current non-FLEX 
auction functionality, including SOM auctions in Options 3, Section 
11(d).
---------------------------------------------------------------------------

     FLEX SOM responses must be on the opposite side of the 
market as the Agency Order. The System rejects a FLEX SOM response on 
the same side of the market as the Agency Order.\178\
---------------------------------------------------------------------------

    \178\ See proposed Options 3A, Section 13(c)(5)(D), which is 
materially identical to Cboe Rule 5.74(c)(5)(D).
---------------------------------------------------------------------------

     FLEX SOM responses will not be visible to FLEX SOM auction 
participants or disseminated to OPRA.\179\
---------------------------------------------------------------------------

    \179\ See proposed Options 3A, Section 13(c)(5)(E), which is 
materially identical to Cboe Rule 5.74(c)(5)(E).
---------------------------------------------------------------------------

     A Member may modify or cancel its FLEX SOM responses 
during a FLEX SOM auction.\180\
---------------------------------------------------------------------------

    \180\ See proposed Options 3A, Section 13(c)(5)(F), which is 
materially identical to Cboe Rule 5.74(c)(5)(F).
---------------------------------------------------------------------------

    Pursuant to proposed Section 13(d), a FLEX SOM auction concludes at 
the earliest to occur of the following times: (1) the end of the FLEX 
SOM auction period; and (2) any time the Exchange halts trading in the 
affected underlying, provided, however, that in such instance the FLEX 
SOM auction concludes without execution.\181\
---------------------------------------------------------------------------

    \181\ See Cboe Rule 5.74(d) for similar provisions, except the 
Exchange will make a minor clarification that this rule applies when 
the Exchange halts trading in the affected underlying (and not 
series, which is what Cboe currently has in its rule).
---------------------------------------------------------------------------

    Proposed Section 13(e) will govern how executions will occur in 
FLEX SOM. In particular, at the end of the FLEX SOM auction, the System 
will execute the Agency Order against the Solicited Order or FLEX SOM 
responses at the best price(s) as follows. For purposes of ranking the 
Solicited Order and FLEX SOM responses when determining how to allocate 
the Agency Order against the Solicited Order and those responses, the 
term ``price'' refers to the dollar and decimal amount of the order or 
response bid or offer.\182\ Proposed subparagraphs (e)(1)-(3) detail 
the FLEX SOM allocation methodology for the following scenarios:
---------------------------------------------------------------------------

    \182\ See Cboe Rule 5.74(e) for similar provisions except the 
Exchange will not allow prices to be expressed as a percentage 
value.
---------------------------------------------------------------------------

     Execution Against Solicited Order: The System executes the 
Agency Order against the Solicited Order at the stop price if there are 
no Priority Customer FLEX SOM responses and the aggregate size of FLEX 
SOM responses at an improved price(s) is insufficient to satisfy the 
Agency Order.\183\
---------------------------------------------------------------------------

    \183\ See proposed Section 13(e)(1), which is materially 
identical to Cboe Rule 5.74(e)(1).
---------------------------------------------------------------------------

     Execution Against FLEX SOM Responses: The System executes 
the Agency Order against FLEX SOM responses if (1) there is a Priority 
Customer FLEX SOM response and the aggregate size of that response and 
all other FLEX SOM responses is sufficient to satisfy the Agency Order 
or (2) the aggregate size of FLEX SOM responses at an improved price(s) 
is sufficient to satisfy the Agency Order. The Agency Order executes 
against FLEX SOM responses at each price level. At the price at which 
the balance of the Agency Order can be fully executed, in the following 
order:
     Priority Customer FLEX SOM responses (in time priority); 
\184\ and
---------------------------------------------------------------------------

    \184\ See proposed Section 13(e)(2)(A), which is materially 
identical to Cboe Rule 5.74(e)(2)(A).
---------------------------------------------------------------------------

     All other FLEX SOM responses, allocated on a Size Pro-Rata 
basis (as defined in Options 3, Section 10(c)).\185\
---------------------------------------------------------------------------

    \185\ See proposed Section 13(e)(2)(B), which is materially 
identical to Cboe Rule 5.74(e)(2)(B). The Exchange notes that Size 
Pro-Rata (as defined in Options 3, Section 10(c)) is similar to pro-
rata as referenced in the Cboe rule (and as defined in Cboe Rule 
5.32(a)(1)(B)).
---------------------------------------------------------------------------

     No Execution: The System will cancel the Agency Order and 
Solicited Order with no execution if there is a Priority Customer FLEX 
SOM response and the aggregate size of that response and other FLEX SOM 
responses is insufficient to satisfy the Agency Order.\186\
---------------------------------------------------------------------------

    \186\ See proposed Section 13(e)(3), which is materially 
identical to Cboe Rule 5.74(e)(3).
---------------------------------------------------------------------------

    Pursuant to proposed Section 12(e)(4), the System cancels any 
unexecuted FLEX SOM responses (or unexecuted portions) at the 
conclusion of a FLEX SOM auction.\187\
---------------------------------------------------------------------------

    \187\ See Cboe Rule 5.74(e)(4) for substantially similar 
provisions.
---------------------------------------------------------------------------

    Lastly, the Exchange proposes a number of policies applicable to 
FLEX SOM as Supplementary Materials to Options 3A, Section 13. 
Specifically, proposed Supplementary Material .01 will provide that 
prior to entering Agency Orders into a FLEX SOM auction on behalf of 
customers, Initiating Members must deliver to the customer a written 
notification informing the customer that its order

[[Page 95002]]

may be executed using the FLEX SOM Auction. The written notification 
must disclose the terms and conditions contained in this Rule and be in 
a form approved by the Exchange.\188\ Proposed Supplementary Material 
.02 will provide that under this Rule, Initiating Members may enter 
contra-side orders that are solicited. FLEX SOM provides a facility for 
Members that locate liquidity for their customer orders. Members may 
not use the FLEX SOM auction to circumvent Options 3, Section 22(b) 
limiting principal transactions. This may include, but is not limited 
to, Members entering contra-side orders that are solicited from (1) 
affiliated broker-dealers, or (2) broker-dealers with which the Member 
has an arrangement that allows the Member to realize similar economic 
benefits from the solicited transaction as it would achieve by 
executing the customer order in whole or in part as principal. 
Additionally, any solicited contra-side orders entered by Members to 
trade against Agency Orders may not be for the account of an Exchange 
Market Maker that is assigned to the options class.\189\ Lastly, 
proposed Supplementary Material .03 will provide that if an allocation 
would result in less than one contract, then one contract will be 
allocated.\190\ This aligns to how the Exchange currently allocates 
contracts in SOM.\191\
---------------------------------------------------------------------------

    \188\ See Cboe Rule 5.74, Interpretations and Policies .01 for 
materially identical provisions.
    \189\ See Cboe Rule 5.74, Interpretations and Policies .02 for 
similar provisions. The Exchange is also adding a prohibition 
against solicited contra-side orders being for the account of an 
Exchange Market Maker assigned to the options class to align with 
the current prohibition in Supplementary Material .03 to Options 3, 
Section 11.
    \190\ The Exchange notes that it is not proposing to add the 
provision from Cboe Rule 5.74, Interpretations and Policies .03 that 
states: ``A FLEX Official may nullify a transaction following a FLEX 
SAM Auction pursuant to Rule 5.75(b).'' Because the FLEX Official is 
a floor concept and the Exchange does not operate a trading floor, 
the Exchange will not incorporate this concept into its proposed 
FLEX rules. Instead, the Exchange will System-enforce this provision 
by rejecting a FLEX SAM auction that does not comply with the 
provisions in proposed Options 3A, Section 13.
    \191\ See Supplementary Material .09 to Options 3, Section 11.
---------------------------------------------------------------------------

O. Risk Protections (Section 14)

    The Exchange proposes in Options 3A, Section 14 to specify which of 
the Exchange's risk protections apply to FLEX trading. Risk protections 
are protections in our System to help minimize risk. The risk 
protections specified in proposed Options 3A, Sections 14(a) and 14(b) 
are mandatory whereas the risk protections specified in proposed 
Options 3A, Section 14(c) are optional. Proposed Section 14(a) will 
provide that the following simple order risk protections (as described 
in Options 3, Section 15) are available to FLEX Options: Market Wide 
Risk Protection and Size Limitation.\192\ As set forth in Options 3, 
Section 15(a)(1)(C), Market Wide Risk Protections are mandatory 
activity-based protections that allow Members to establish limits for 
order entry and execution rate during a specified period of time. The 
System maintains separate counts for each of the thresholds specified 
in the rule over rolling periods of time.\193\ Upon triggering the 
specified limits, the System will either delete all open orders and 
prevent entry of new orders for the Member, or prevent entry of new 
orders for the Member. Similar to how Market Wide Risk Protection 
assists Members in better managing their risk in the standard non-FLEX 
market on ISE today, the Exchange believes that applying Market Wide 
Risk Protection to its FLEX market will be beneficial for Members using 
FLEX trading.
---------------------------------------------------------------------------

    \192\ Size Limitation for simple orders is a limit on the number 
of contracts an incoming order may specify. Orders that exceed the 
maximum number of contracts are rejected. The maximum number of 
contracts, which shall not be less than 10,000, is established by 
the Exchange from time-to-time. See Options 3, Section 15(a)(2)(B).
    \193\ As set out in Options 3, Section 15(a)(1)(C), the Market 
Wide Risk Protection will have counting programs that will maintain 
separate counts, over rolling time periods specified by the Member 
for each count, of: (1) the total number of orders entered in the 
regular order book; (2) the total number of orders entered in the 
complex order book with only options legs; (3) the total number of 
Stock-Option and Stock-Complex Orders; (4) the total number of 
contracts traded in regular orders; (5) the total number of 
contracts traded in Complex Options Orders; and (6) the total number 
of contracts traded in Stock-Option and Stock-Complex Orders. As 
applied to FLEX, only items (4) through (6) of the foregoing will 
apply. Items (1) through (3) will not apply to FLEX because there is 
no order book for FLEX. The Exchange notes that Options 3, Section 
15(a)(1)(C)(5) (i.e., item (5) of the foregoing) presently refers to 
Stock-Option and Stock Complex Orders, instead of Complex Options 
Orders. However, ISE will file a clean-up amendment so that 
subparagraph (5) will refer instead to Complex Options Orders. This 
clean-up will align ISE's rule to MRX Options 3, Section 
15(a)(1)(C).
---------------------------------------------------------------------------

    Proposed Section 14(b) will provide that the following complex 
order risk protections (as described in Options 3, Section 16) are 
available to FLEX Options: Strategy Protections (only to FLEX Auctions 
and FLEX responses in proposed Options 3A, Section 11(b)), Size 
Limitation,\194\ the Price Limit for Complex Order protections as 
appliable to the stock component (as described in Options 3, Section 
16(a)),\195\ the Stock-Tied NBBO protections (as described in Options 
3, Section 16(d)),\196\ and the Stock-Tied Reg SHO protections (as 
described in Options 3, Section 16(e)).\197\
---------------------------------------------------------------------------

    \194\ Size Limitation for complex orders is a limit on the 
number of contracts (and shares in the case of a Stock-Option 
Strategy or Stock-Complex Strategy) any single leg of an incoming 
Complex Order may specify. Orders that exceed the maximum number of 
contracts (or shares) are rejected. The maximum number of contracts 
(or shares), which shall not be less than 10,000 (or 100,000 
shares), is established by the Exchange from time-to-time. See 
Options 3, Section 16 (c)(2).
    \195\ The Exchange amended the Price Limits for Complex Order 
protections in Options 3, Section 16(a) for its standard non-FLEX 
complex market as part of the technology migration to enhanced 
Nasdaq functionality discussed above. See supra note 11. See also 
Securities Exchange Act Release No. 98066 (August 7, 2023), 88 FR 
54672 (August 11, 2023) (SR-ISE-2023-13).
    \196\ The Exchange introduced the Stock-Tied NBBO protections in 
Options 3, Section 16(d) for its standard non-FLEX complex market as 
part of the technology migration to enhanced Nasdaq functionality 
discussed above. See supra note 11. See also Securities Exchange Act 
Release No. 98066 (August 7, 2023), 88 FR 54672 (August 11, 2023) 
(SR-ISE-2023-13).
    \197\ The Exchange introduced the Stock-Tied Reg SHO protections 
in Options 3, Section 16(e) for its standard non-FLEX complex market 
as part of the technology migration to enhanced Nasdaq functionality 
discussed above. See supra note 11. See also Securities Exchange Act 
Release No. 98066 (August 7, 2023), 88 FR 54672 (August 11, 2023) 
(SR-ISE-2023-13).
---------------------------------------------------------------------------

    The Strategy Protections listed in Options 3, Section 16(b) are the 
Vertical Spread Protection,\198\ Calendar Spread Protection,\199\ 
Butterfly Spread Protection,\200\ and Box Spread Protection.\201\ These 
Strategy Protections are all aimed at preventing the potential 
execution of the specified complex strategies (i.e., vertical spread, 
calendar spread, butterfly spread, and box spread) outside of specified 
price parameters in order to prevent executions at undesirable prices. 
Today, Strategy Protections do not apply to

[[Page 95003]]

orders and responses submitted into non-FLEX PIM and non-FLEX SOM.\202\ 
The Exchange will align this application to FLEX such that Strategy 
Protections would only apply to FLEX Auctions and FLEX responses in 
proposed Section 11(b) as described above, and not to FLEX Orders and 
responses submitted into FLEX PIM and FLEX SOM.
---------------------------------------------------------------------------

    \198\ The Vertical Spread Protection will apply to a vertical 
spread. A vertical spread is an order to buy a call (put) option and 
to sell another call (put) option in the same security with the same 
expiration but at a higher (lower) strike price. See Options 3, 
Section 16(b)(1).
    \199\ The Calendar Spread Protection will apply to a Calendar 
Spread. A calendar spread is an order to buy a call (put) option 
with a longer expiration and to sell another call (put) option with 
a shorter expiration in the same security at the same strike price. 
See Options 3, Section 16(b)(2).
    \200\ The Butterfly Spread Protection will apply to a butterfly 
spread. A butterfly spread is a three legged Complex Order with the 
following: (1) two legs to buy (sell) the same number of calls 
(puts); (2) one leg to sell (buy) twice the number of calls (puts) 
with a strike price at mid-point of the two legs to buy (sell); (3) 
all legs have the same expiration; and (4) each leg strike price is 
equidistant from the next sequential strike price. See Options 3, 
Section 16(b)(3).
    \201\ The Box Spread Protection will apply to a box spread. A 
box spread is a four legged Complex Order with the following: (1) 
one pair of legs with the same strike price with one leg to buy a 
call (put) and one leg to sell a put (call); (2) a second pair of 
legs with a different strike price from the pair described in (1) 
with one leg to sell a call (put) and one leg to buy a put (call); 
(3) all legs have the same expiration; and (4) all legs have equal 
volume. See Options 3, Section 16(b)(4).
    \202\ See Options 3, Section 16(b), which describes the non-
applicability of the Strategy Protections to certain auction 
mechanisms. See also Securities Exchange Act Release No. 100743 
(August 16, 2024), 89 FR 68014 (August 22, 2024) (SR-ISE-2024-39) 
(effective but not yet operative). As amended by SR-ISE-2024-39, 
Options 3, Section 16(b) would provide that the Strategy Protections 
will not apply when a standard non-FLEX complex order includes at 
least one p.m.-settled leg and at least one a.m.-settled leg. This 
would likewise be true for complex FLEX Orders (i.e., the Strategy 
Protections would not apply when a complex FLEX Order includes at 
least one p.m.-settled leg and at least one a.m.-settled leg).
---------------------------------------------------------------------------

    As noted above, the Exchange adopted the Price Limit for Complex 
Order protections in Options 3, Section 16(a),\203\ the Stock-Tied NBBO 
protections in Options 3, Section 16(d),\204\ and the Stock-Tied Reg 
SHO protections in Options 3, Section 16(e) \205\ (collectively, the 
``Stock-Tied Risk Protections'') as part of SR-ISE-2023-13 for its 
standard non-FLEX complex market. The Exchange is now proposing to 
apply the Stock-Tied Risk Protections to complex FLEX Orders to the 
extent the complex FLEX Order has a stock component. The Price Limits 
for Complex Orders in Options 3, Section 16(a) seek to prevent complex 
executions from occurring outside of certain price limits that are tied 
to the NBBO for the options series or for any stock component. Because 
there will be no book for FLEX trading (and therefore no NBBO for the 
FLEX Options series), the Exchange will not apply the price limit 
protection tied to the NBBO for the options series for FLEX trading. To 
the extent the complex FLEX Order has a stock component, the Exchange 
will only apply the price limit protection tied to the NBBO for the 
stock component. The below is an example of how the Exchange will apply 
the Options 3, Section 16(a) price protection to complex FLEX Orders.
---------------------------------------------------------------------------

    \203\ Specifically, Options 3, Section 16(a) states that as 
provided in Options 3, Section 14(d)(2), the legs of a complex 
strategy may be executed at prices that are inferior to the prices 
available on other exchanges trading the same options series. 
Notwithstanding, the System will not permit any leg of a complex 
strategy to trade through the NBBO for the series or any stock 
component by a configurable amount calculated as the lesser of (i) 
an absolute amount not to exceed $0.10, and (ii) a percentage of the 
NBBO not to exceed 500%, as determined by the Exchange on a class, 
series or underlying basis. A Member can also include an instruction 
on a Complex Order that each leg of the Complex Order is to be 
executed only at a price that is equal to or better than the NBBO 
for the options series or any stock component, as applicable (``Do-
Not-Trade-Through'' or ``DNTT''). As discussed later in this filing, 
the NBBO price limit for the option series will not apply to complex 
FLEX orders; however, the NBBO price limit for the stock component 
will apply.
    \204\ Specifically, Options 3, Section 16(d) provides that for 
Complex Orders in Stock-Option Strategies and Stock-Complex 
Strategies, the Exchange shall electronically communicate the 
underlying security component of a Complex Order to Nasdaq Execution 
Services, LLC (``NES''), its designated broker dealer, for immediate 
execution. Such execution and reporting will not occur on the 
Exchange and will be handled by NES pursuant to applicable rules 
regarding equity trading. NES will ensure that the execution price 
is within the high-low range for the day in that stock at the time 
the Complex Order is processed and within a certain price from the 
current market pursuant to Options 3, Section 16(a). If the stock 
price is not within these parameters, the Complex Order is not 
executable and the Exchange will hold the Complex Order on the Order 
Book, if consistent with Member instructions. This risk protection 
will apply wholesale to complex FLEX Orders with a stock component.
    \205\ Specifically, Options 3, Section 16(e) 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 
hold the Complex Order on the Complex Order Book, if consistent with 
Member instructions. The order may execute at a price that is not 
equal to or below the current national best bid. For purposes of 
this paragraph, the term ``covered security'' shall have the same 
meaning as in Rule 201(a)(1) of Regulation SHO. This risk protection 
will apply wholesale to complex FLEX Orders with a stock component.
---------------------------------------------------------------------------

    Scenario illustrating applicability of the stock buffer described 
in Options 3, Section 16(a) Price Limits for Complex Orders:

IBM Underlying/Stock NBBO is 1.00 x 2.00
Stock buffer is configured to the lesser of $0.05 or 5%
FLEX Option NBBO does not exist, but the minimum trading increment/
minimum price variation (MPV) for option leg executions is $0.01

     FLEX Auction is entered in a Stock-Complex Strategy 
encompassing 2 IBM FLEX Put options: Buy 1 Put (FLEX option leg A) + 
Buy 1 Put (FLEX option leg B) + Buy 100 shares IBM stock: Buy 110 units 
of the A + B + Stock strategy @net price of $1.02.
     A firm responds to Sell 110 @net price of $0.89.

FLEX Auction timer passes & auction concludes

     The firm's response trades with the FLEX Auction order 110 
@net price of $0.97 because the stock component cannot trade at any 
price lower than $0.95 ($1.00-$0.05 [price limit for stock component] = 
$0.95) and the FLEX option legs cannot trade at any price lower than 
$0.01 as this is the minimum trading increment for option legs; 
therefore, the minimum stock price of $0.95 plus the $0.01 minimum 
option leg price means that, despite the $0.89 limit price on the 
response, the strategy cannot trade below $0.97 ($0.95 + [$0.01*2 
legs]).
    As it relates to the other Stock-Tied Risk Protections (i.e., the 
Stock-Tied NBBO protections and the Stock-Tied Reg SHO protections), 
these will apply wholesale to complex FLEX Orders with a stock 
component as noted above.
    Proposed Section 14(c) will provide that the optional risk 
protections in Options 3, Section 28 are available to FLEX 
Options.\206\ In particular, the following are optional risk 
protections in Options 3, Section 28: (1) notional dollar value per 
order (which will be calculated as quantity multiplied by limit price 
multiplied by number of underlying shares), (2) daily aggregate 
notional dollar value, (3) quantity per order, and (4) daily aggregate 
quantity. In sum, Members may set thresholds for each of the foregoing 
protections in order to limit the quantity and notional value they can 
send per order and on aggregate for the day.
---------------------------------------------------------------------------

    \206\ The Exchange introduced the optional risk protections in 
Options 3, Section 28 as part of the technology migration to 
enhanced Nasdaq functionality discussed above. See Securities 
Exchange Act Release No. 96818 (February 6, 2023), 88 FR 8950 
(February 10, 2023) (SR-ISE-2023-06).
---------------------------------------------------------------------------

P. Data Feeds (Section 15)

    The Exchange proposes to specify in Options 3A, Section 15 which 
data feeds it will disseminate auction notifications for simple and 
complex FLEX Orders. Proposed Section 15(a) will provide that auction 
notifications for simple FLEX Orders will be disseminated through the 
Order Feed, as described in Options 3, Section 23(a)(2).\207\ Proposed 
Section 15(b) will provide that auction notifications for complex FLEX 
Orders will be disseminated through the Spread Feed, as described in 
Options 3, Section

[[Page 95004]]

23(a)(5).\208\ The Exchange notes that this aligns to current 
functionality where simple auction notifications are disseminated over 
the Order Feed and complex auction notifications are disseminated over 
the Spread Feed. Today, simple and complex auction notifications inform 
Members that an auction order has been accepted by the System and that 
an auction is commencing. Auction notifications also contain all of the 
relevant information Members need to respond to that particular 
auction.\209\ As proposed, the simple and complex FLEX auction 
notifications will likewise inform Members that a FLEX auction order 
has been accepted by the System, a FLEX auction is commencing, and will 
also contain all of the relevant information Members need to respond to 
that particular FLEX auction.\210\ The FLEX auction notifications will 
specify that a particular auction is FLEX versus non-FLEX. As is the 
case today for non-FLEX auctions, FLEX auction notifications 
disseminated over the Order Feed and the Spread Feed will be available 
to all Members that elect to receive such notification messages.
---------------------------------------------------------------------------

    \207\ The Nasdaq ISE Order Feed (``Order Feed'') provides 
information on new orders resting on the book (e.g. price, quantity 
and market participant capacity). In addition, the feed also 
announces all auctions. The data provided for each option series 
includes the symbols (series and underlying security), put or call 
indicator, expiration date, the strike price of the series, and 
whether the option series is available for trading on ISE and 
identifies if the series is available for closing transactions only. 
The feed also provides order imbalances on opening/reopening.
    \208\ Nasdaq ISE Spread Feed (``Spread Feed'') is a feed that 
consists of: (1) options orders for all Complex Orders (i.e., 
spreads, buy-writes, delta neutral strategies, etc.); (2) data 
aggregated at the top five price levels (BBO) on both the bid and 
offer side of the market; (3) last trades information. The Spread 
Feed provides updates, including prices, side, size and capacity, 
for every Complex Order placed on the ISE Complex Order book. The 
Spread Feed shows: (1) aggregate bid/ask quote size; (2) aggregate 
bid/ask quote size for Professional Customer Orders; and (3) 
aggregate bid/ask quote size for Priority Customer Orders for ISE 
traded options. The feed also provides Complex Order auction 
notifications. The Exchange notes that as applied to FLEX, the 
majority of the data elements in the Spread Feed will not applicable 
to FLEX Options (e.g., data aggregated at the top five price levels 
(BBO) on both the bid and offer side of the market and aggregate 
bid/ask quote size). While other data elements (e.g., options orders 
for all Complex Orders and last trades information) also apply to 
FLEX, the Exchange is pointing out auction notifications in the 
proposed rule to be transparent about the most salient feature for 
complex FLEX Orders.
    \209\ For example, at the commencement of a standard, non-FLEX 
PIM auction, the Exchange sends a broadcast message (i.e., auction 
notification) that includes the series, price and size of the Agency 
Order, and whether it is to buy or sell, through the Order Feed. See 
Options 3, Section 13(c).
    \210\ For example, at the commencement of a FLEX PIM Auction, 
the Exchange would send FLEX PIM Auction notification message 
detailing the side, size, auction ID, the length of the FLEX PIM 
Auction period, and FLEX Option series or complex strategy, as 
applicable, of the Agency Order to all Members that elect to receive 
FLEX PIM Auction notification messages. See proposed Options 3A, 
Section 12(c)(2).
---------------------------------------------------------------------------

Q. FLEX Market Makers (Section 16)

    Proposed Section 16 will govern FLEX Market Makers on the Exchange. 
Pursuant to proposed Section 16(a), a FLEX Market Maker will 
automatically receive an appointment in the same FLEX option class(es) 
as its non-FLEX class appointments selected pursuant to Options 2, 
Section 3.\211\ Only the Primary Market Maker in the non-FLEX Option 
may be the assigned Primary Market Maker in that FLEX Option.\212\ 
Today, in order for Market Makers to submit auction responses in option 
classes through SQF, they need to be appointed to that option 
class.\213\ As such, the Exchange is automatically carrying over the 
FLEX Market Maker's non-FLEX options class appointment as its FLEX 
option class appointment in order to allow the FLEX Market Maker to 
respond to the electronic FLEX Auction, FLEX PIM, and FLEX SOM as 
described above.
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    \211\ See Cboe Rule 3.58(c) for materially identical provisions.
    \212\ The Exchange notes that this requirement is based on Phlx 
Options 8, Section 34(d)(1), which currently states that only the 
Lead Market Maker in the non-FLEX option may be the assigned 
Specialist in that FLEX option. Primary Market Maker on ISE is 
analogous to a Lead Market Maker on Phlx.
    \213\ See supra note 68 describing SQF features available in the 
Exchange's non-FLEX market today (including the ability for Market 
Makers to currently send auction responses). As discussed above, the 
Exchange is proposing to also allow FLEX auction responses through 
SQF.
---------------------------------------------------------------------------

    Proposed Section 16(b) will provide that each FLEX Market Maker 
must fulfill all the obligations of a Market Maker under Options 2 and 
must comply with the applicable provisions, except FLEX Market Makers 
do not need to provide continuous quotes in FLEX Options.\214\
---------------------------------------------------------------------------

    \214\ See Cboe Rule 5.57 for similar provisions related to FLEX 
Market Makers. The Exchange will not impose continuing quoting 
obligations on FLEX Market Makers (similar to Cboe) given that such 
obligations are relevant for book trading. As discussed above, there 
will be no book trading for FLEX Options. As discussed above, the 
Exchange will not incorporate provisions related to FLEX Officials 
like Cboe as this is generally a floor trading concept and the 
Exchange does not have a trading floor.
---------------------------------------------------------------------------

R. Letters of Guarantee (Section 17)

    The Exchange proposes in Options 3A, Section 17(a) to provide that 
no FLEX Market Maker shall effect any transaction in FLEX Options 
unless one or more effective Letter(s) of Guarantee has been issued by 
a Clearing Member and filed with the Exchange accepting financial 
responsibility for all FLEX transactions made by the FLEX Market Maker 
pursuant to Options 6, Section 4.\215\
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    \215\ Options 6, Section 4 provides that no Market Maker shall 
make any transactions on the Exchange unless a Letter of Guarantee 
has been issued for such Member by a Clearing Member and filed with 
the Exchange, and unless such Letter of Guarantee has not been 
revoked pursuant to paragraph (c) of this Rule. A Letter of 
Guarantee shall provide that the issuing Clearing Member accepts 
financial responsibilities for all Exchange Transactions made by the 
guaranteed Member.
---------------------------------------------------------------------------

S. Position Limits (Section 18)

    The Exchange proposes to detail the position limits for FLEX 
Options in Options 3A, Section 18. As discussed below, proposed Section 
18 will be based on the FLEX Options position limit rules on Cboe and 
its own market.
    Proposed Section 18(a) will govern the position limits for FLEX 
Index Options. Specifically, proposed Section 18(a)(1) will provide 
that except as provided in proposed Section 18(a)(2)-(4) below, FLEX 
Index Options shall be subject to the same position limits governing 
index options as provided for in Options 4A, Sections 6 and 7.\216\ 
Proposed Section 18(a)(2) will provide that except as otherwise 
provided in subparagraph (a)(3) of this Rule, in no event shall the 
position limits for broad-based FLEX Index Options exceed 25,000 
contracts on the same side of the market.\217\ Proposed Section 
18(a)(3) will provide that there shall be no position limits for broad-
based index options listed in Options 4A, Section 6(a).\218\ However, 
each Member (other than FLEX Market Makers) that maintains a FLEX 
broad-based index option position on the same side of the market in 
excess of 100,000 contracts in NDX or RUT for its own account or for 
the account of a customer, shall report information as to whether the 
positions are hedged and provide documentation as to how such contracts 
are hedged, in the manner and form required by the Exchange. In 
calculating the applicable contract-reporting amount, reduced-value 
contracts will be aggregated with full-value contracts and counted by 
the amount by which they equal a full-value contract (e.g., 10 MNX 
options equal 1 NDX full-value contract). The Exchange may impose other 
reporting requirements as well as the limit at which the reporting 
requirement may be triggered.\219\ Whenever the Exchange

[[Page 95005]]

determines that additional margin is warranted in light of the risks 
associated with an under-hedged FLEX NDX or RUT options position, the 
Exchange may impose additional margin upon the account maintaining such 
under-hedged position pursuant to its authority under Options 6C, 
Section 5. The clearing firm carrying the account also will be subject 
to capital charges under Rule 15c3-1 under the Exchange Act to the 
extent of any margin deficiency resulting from the higher margin 
requirements.\220\
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    \216\ Options 4A, Sections 6 and 7 presently set forth the 
position limits for broad-based and industry index options, 
respectively.
    \217\ This separate same side position limit for broad-based 
FLEX Index Options (except for the ones noted below) is based on the 
Exchange's same side position limit for its standard market as set 
forth in Options 4A, Section 6(a).
    \218\ As such the following broad-based index options listed in 
Options 4A, Section 6(a) will have no position limits for FLEX Index 
Options: options on the Nasdaq 100 Index, Mini Nasdaq 100 Index, 
Nations VolDex Index, Nasdaq 100 Reduced Value Index, and Nasdaq 
Micro Index Options.
    \219\ See Options 4A, Section 9(a)(13) (setting forth the same 
reporting requirements for the Exchange's standard non-FLEX index 
options market). See also Cboe Rule 8.35(b) for similar reporting 
requirements.
    \220\ See Options 4A, Section 9(a)(14) (setting forth the same 
stipulation for the Exchange's standard index options market). See 
also Cboe Rule 8.35(b) for similar stipulations.
---------------------------------------------------------------------------

    Proposed Section 18(a)(4) will provide that industry-based FLEX 
Index Options shall be subject to separate position limits of 18,000, 
24,000, or 31,500 contracts, depending on the position limit tier 
determined pursuant to Options 4A, Section 7(a)(1).\221\
---------------------------------------------------------------------------

    \221\ The proposed position limits align to the Exchange's non-
FLEX position limits for industry index options in Options 4A, 
Section 7(a)(1).
---------------------------------------------------------------------------

    Proposed Section 18(b) will govern the position limits for FLEX 
Equity Options. Pursuant to proposed Section 18(b)(1)(A), there will 
generally be no position limits for FLEX Equity Options with the 
exceptions noted below.\222\ Pursuant to proposed Section 18(b)(2), 
each Member (other than a Market Maker) that maintains a position on 
the same side of the market in excess of the standard limit under 
Options 9, Section 13 for non-FLEX Equity Options of the same class on 
behalf of its own account or for the account of a customer shall report 
information on the FLEX Equity option position, positions in any 
related instrument, the purpose or strategy for the position, and the 
collateral used by the account. This report shall be in the form and 
manner prescribed by the Exchange.\223\ Pursuant to proposed Section 
18(b)(3), whenever the Exchange determines that a higher margin 
requirement is necessary in light of the risks associated with a FLEX 
Equity option position in excess of the standard limit for non-FLEX 
Equity options of the same class, the Exchange may consider imposing 
additional margin upon the account maintaining such under-hedged 
position, pursuant to its authority under Options 6C, Section 5.\224\ 
Additionally, it should be noted that the clearing firm carrying the 
account will be subject to capital charges under Rule 15c3-1 under the 
Exchange Act to the extent of any margin deficiency resulting from the 
higher margin requirement.\225\
---------------------------------------------------------------------------

    \222\ See Cboe Rule 8.35(c)(1)(A) for materially identical 
provisions. Like Cboe, the Exchange's rule will have exceptions for 
the aggregation of FLEX positions (proposed Section 18(c)) and for 
position limits for cash-settled FLEX Equity Options where the 
underlying security is an ETF (proposed Section 18(b)(1)(B), which 
will be discussed later in this filing).
    \223\ See Cboe Rule 8.35(c)(2) for materially identical 
provisions.
    \224\ Options 6C, Section 5 provides that the amount of margin 
prescribed by these Rules is the minimum which must be required 
initially and subsequently maintained with respect to each account 
affected thereby; but nothing in these Rules shall be construed to 
prevent a Member from requiring margin in an amount greater than 
that specified. Further, the Exchange may at any time impose higher 
margin requirements with respect to such positions when it deems 
such higher margin requirements to be advisable.
    \225\ See Cboe Rule 8.35(c)(3) for materially identical 
provisions.
---------------------------------------------------------------------------

    Proposed Section 18(c) will govern the aggregation of FLEX 
positions. Specifically, for purposes of the position limits and 
reporting requirements set forth in this Section 18, FLEX Option 
positions shall not be aggregated with positions in non-FLEX Options 
other than as provided in this Section 18(c) and in Section 
18(b)(1)(B),\226\ 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.\227\ 
Pursuant to proposed Section 18(c)(1), 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 or Section 7, 
as applicable.\228\ Pursuant to proposed Section 18(c)(2), 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 
\229\ 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 (for broad-based index options) or Section 7 (for 
narrow-based index options), as applicable.\230\ Pursuant to proposed 
Section 18(c)(3), 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, Options 4A, Section 7, or Options 9, 
Section 13, as applicable, and the exercise limits set forth in Options 
9, Section 15, as applicable.\231\
---------------------------------------------------------------------------

    \226\ Proposed Section 18(b)(1)(B) will set forth the position 
limits for cash-settled FLEX ETF options and will be discussed later 
in this filing.
    \227\ See Cboe Rule 8.35(d) for materially identical provisions.
    \228\ See Cboe Rule 8.35(d)(1) for materially identical 
provisions.
    \229\ The Exchange notes that all FLEX Index Options will be 
cash settled.
    \230\ 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.
    \231\ See Cboe Rule 8.35(d)(3) for materially identical 
provisions.
---------------------------------------------------------------------------

T. Exercise Limits (Section 19)

    The Exchange proposes to detail the exercise limits for FLEX 
Options in Options 3A, Section 19. As discussed below, proposed Section 
19 will be based on the FLEX Options exercise limit rules on Cboe and 
Phlx.
    Proposed Section 19(a) will provide that exercise limits for FLEX 
Options shall be equivalent to the FLEX position limits prescribed in 
proposed Section 18.\232\ There shall be no exercise limits for broad-
based FLEX Index Options (including reduced value option contracts) on 
broad-based index options listed in Options 4A, Section 6(a).\233\
---------------------------------------------------------------------------

    \232\ Proposed Section 19(a) is based on Cboe Rule 8.42(g) 
except the Exchange will not incorporate references to Cboe-specific 
products like Micro FLEX Index Options, FLEX Individual Stock or ETF 
Based Volatility Index Options. Similarly, the Exchange will replace 
the references to Cboe-specific broad-based index options like SPX, 
VIX, etc. with the broad-based index options in Options 4A, Section 
6(a), which are similar index products on ISE.
    \233\ As such the following broad-based index options listed in 
Options 4A, Section 6(a) will have no exercise limits for FLEX Index 
Options: options on the Nasdaq 100 Index, Mini Nasdaq 100 Index, 
Nations VolDex Index, Nasdaq 100 Reduced Value Index, and Nasdaq 
Micro Index Options.
---------------------------------------------------------------------------

    Proposed Section 19(a)(1) will require that the minimum value size 
for FLEX Equity Option exercises be 25 contracts or the remaining size 
of the position, whichever is less.\234\ Proposed Section 19(a)(2) 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.\235\ Proposed Section 19(a)(3) will stipulate that except as 
provided in

[[Page 95006]]

proposed Section 18(b)(1)(B) and Section 18(c) above,\236\ FLEX Options 
shall not be taken into account when calculating exercise limits for 
non-FLEX Option contracts.\237\ Lastly, proposed Section 19(a)(4) 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.\238\
---------------------------------------------------------------------------

    \234\ See Cboe Rule 8.42(g)(1) for materially identical 
provisions.
    \235\ See Cboe Rule 8.42(g)(2) for materially identical 
provisions.
    \236\ As described above, proposed Section 18(c) will govern the 
aggregation of FLEX positions generally, while proposed Section 
18(b)(1)(B) 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.
    \237\ See Cboe Rule 8.42(g)(3) for materially identical 
provisions.
    \238\ See Phlx Options 8, Section 34(b)(8)(D) for materially 
identical provisions.
---------------------------------------------------------------------------

U. Capacity and Surveillances

    The Exchange has analyzed its capacity and represents that it 
believes the Exchange and the Options Price Reporting Authority 
(``OPRA'') have the necessary systems capacity to handle the additional 
message traffic associated with the listing of new series that may 
result from the introduction of FLEX Options.\239\
---------------------------------------------------------------------------

    \239\ The Exchange will report FLEX Option trades and, if 
necessary, trade cancellations to OPRA.
---------------------------------------------------------------------------

    Additionally, the Exchange believes it has an adequate surveillance 
program in place and intends to apply the same program procedures to 
FLEX Options that is applied to the Exchange's other options products, 
as applicable. FLEX Option products and their respective symbols will 
be integrated into the Exchange's existing surveillance system 
architecture and will be subject to the relevant surveillance 
processes. The Exchange believes that any potential risk of 
manipulative activity is mitigated by these existing surveillance 
technologies, procedures, and reporting requirements, which allow the 
Exchange to properly identify disruptive and/or manipulative trading 
activity. Additionally, taking into consideration that FLEX Options 
have unique characteristics, the Exchange has reviewed its catalog of 
patterns and updated a number of patterns to include FLEX Options 
transactions for when they begin trading. The Exchange will 
periodically review its surveillance procedures and make any changes 
that the Exchange believes are necessary for FLEX trading.
    As discussed in more detail in the ``Cash-Settled FLEX ETFs'' 
section below, the Exchange is also a member of the Intermarket 
Surveillance Group (``ISG''),\240\ and works with other self-regulatory 
organizations and exchanges on intermarket surveillance related issues 
through its participation in the ISG. As discussed in the ``Cash-
Settled FLEX ETFs'' section below, the Exchange and all other ISG 
members can and do share information for regulatory purposes.
---------------------------------------------------------------------------

    \240\ ISG is an industry organization formed in 1983 to 
coordinate intermarket surveillance among the SROs by cooperatively 
sharing regulatory information pursuant to a written agreement 
between the parties. The goal of the ISG's information sharing is to 
coordinate regulatory efforts to address potential intermarket 
trading abuses and manipulations.
---------------------------------------------------------------------------

V. Cash-Settled FLEX ETFs

    The Exchange proposes to include rule text in proposed Options 3A, 
Section 3(c) and Section 18, each as discussed above, to allow for cash 
settlement of certain FLEX Equity Options. Generally, as discussed 
above, FLEX Equity Options will be settled by physical delivery of the 
underlying security,\241\ while all FLEX Index Options will be settled 
by delivery in cash.\242\ 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 above that will 
govern the trading 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 \243\ and Cboe Rule 
4.21(b)(5)(A) \244\ allow for cash-settled FLEX ETF Options as well. 
The Exchange's proposed rule changes for cash-settled ETF Options will 
be based on NYSE American Rule 903G and Cboe Rule 4.21(b)(5)(A).
---------------------------------------------------------------------------

    \241\ See proposed Options 3A, Section 3(c)(5)(A)(i).
    \242\ See proposed Options 3A, Section 3(c)(5)(B). As discussed 
below, cash settlement is also permitted in the OTC market. Trading 
in cash-settled FLEX ETF Options will not commence until the related 
reporting requirements are finalized.
    \243\ 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).
    \244\ 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 Section 3(c)(5)(A)(ii) 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,\245\ 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.\246\
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    \245\ 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.
    \246\ See Cboe Rule 4.21(b)(5)(A)(ii) for materially identical 
provisions.
---------------------------------------------------------------------------

    The Exchange also proposes in Section 3(c) 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.\247\ 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 that is cash-settled (or physically settled) 
and American-style with the same September expiration and exercise 
price of 475.
---------------------------------------------------------------------------

    \247\ 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 subparagraph (a) to Section 
3(c)(5)(A)(ii), which would provide that the Exchange will determine 
bi-annually the underlying ETFs that satisfy the notional value and 
trading volume requirements in Section 3(c)(5)(A)(ii) by using trading 
statistics for the defined six-month period.\248\ The

[[Page 95007]]

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 (ii) 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.\249\
---------------------------------------------------------------------------

    \248\ See proposed Options 3A, Section 3(c)(5)(A)(ii)(a), 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).
    \249\ See proposed Options 3A, Section 3(c)(5)(A)(ii)(a), which 
is based on Cboe Rule 4.21(b)(5)(A)(ii)(a).
---------------------------------------------------------------------------

    Proposed new subparagraph (b) to Section 3(c)(5)(A)(ii) 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 Section 3(c)(5)(A)(ii), 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.\250\
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    \250\ See proposed Section 3(c)(5)(A)(ii)(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 the Exchange believes 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,\251\ 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.
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    \251\ ``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).
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    The principal, and perhaps most important, feature of ETFs is their 
reliance on an ``arbitrage function'' performed by market participants 
that influences the supply and demand of ETF shares and, thus, trading 
prices relative to NAV. As noted above, new ETF shares can be created 
and existing shares redeemed based on investor demand; thus, ETF supply 
is open-ended. This arbitrage function helps to keep an ETF's price in 
line with the value of its underlying portfolio, i.e., it minimizes 
deviation from NAV. Generally, 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.

[[Page 95008]]

    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 46 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 46 ETFs that, for the period covering January 
1, 2024 through June 30, 2024, would be eligible to have cash 
settlement as a contract term.\252\

----------------------------------------------------------------------------------------------------------------
                                                                              Average daily      Average daily
                                                                              notional value       volume (in
                   Symbol                            Security name          (in dollars) (1/1/ shares) (1/1/24-6/
                                                                               24-6/30/24)           30/24)
----------------------------------------------------------------------------------------------------------------
AGG........................................  iShares Core U.S. Aggregate        $ 806,096,032          8,295,918
                                              Bond ETF.
ARKK.......................................  ARK Innovation ETF...........        588,267,283         12,516,087
BIL........................................  SPDR Bloomberg 1-3 Month T-          618,700,170          6,753,925
                                              Bill ETF.
BND........................................  Vanguard Total Bond Market           514,223,054          7,130,093
                                              Index Fund ETF.
EEM........................................  iShares MSCI Emerging Markets      1,164,586,979         28,535,696
                                              ETF.
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
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.
IEF........................................  iShares 7-10 Year Treasury           743,974,086          7,917,457
                                              Bond ETF.
IEFA.......................................  iShares Core MSCI EAFE ETF...        577,266,076          7,997,376
IEMG.......................................  iShares Core MSCI Emerging           519,063,454         10,129,994
                                              Markets 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                555,987,739         20,766,407
                                              Internet ETF.
LQD........................................  Shares iBoxx $ Investment          3,007,311,016         27,902,549
                                              Grade Corporate Bond ETF.
NVDL.......................................  GraniteShares 2x Long NVDA           682,096,758         11,387,201
                                              Daily ETF.
QQQ........................................  Invesco QQQ Trust............     17,916,413,637         41,065,771
RSP........................................  Invesco S&P 500 Equal Weight         982,482,303          6,062,567
                                              ETF.
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       2,703,451,838         64,700,251
                                              Bull 3x Shares.
SOXS.......................................  Direxion Daily Semiconductor         695,294,352         92,188,004
                                              Bear 3x Shares.
SPXL.......................................  Direxion Daily S&P 500 Bull          737,685,244          6,096,062
                                              3X Shares.
SPY........................................  SPDR S&P 500 ETF Trust.......     33,559,628,313         66,151,690
SQQQ.......................................  ProShares UltraPro Short QQQ       1,461,906,416        131,905,524
                                              ETF.
TLT........................................  iShares 20+ Year Treasury          3,779,166,025         40,682,936
                                              Bond ETF.
TNA........................................  Direxion Daily Small Cap Bull        697,479,128         18,832,200
                                              3X Shares.
TQQQ.......................................  ProShares UltraPro QQQ.......      3,796,209,774         64,941,840
VCIT.......................................  Vanguard Intermediate-Term           597,752,071          7,484,828
                                              Corp Bond Idx Fund ETF.
VEA........................................  Vanguard Tax Managed Fund            517,396,977         10,583,858
                                              FTSE 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          1,411,567,713         15,798,449
                                              Fund.
XLF........................................  Financial Select Sector SPDR       1,736,012,363         43,157,138
                                              Fund.
XLI........................................  Industrial Select Sector SPDR      1,114,661,946          9,277,779
                                              Fund.
XLK........................................  Technology Select Sector SPDR      1,274,025,061          6,202,031
                                              Fund.
XLP........................................  Consumer Staples Select              907,491,273         12,108,426
                                              Sector SPDR Fund.
XLU........................................  Utilities Select Sector SPDR         944,774,031         14,540,920
                                              Fund.
XLV........................................  Health Care Select Sector          1,127,277,467          7,876,680
                                              SPDR Fund.
----------------------------------------------------------------------------------------------------------------

    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.
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    \252\ The Exchange notes that for the period covering January 1, 
2024 through June 30, 2024, both the Grayscale Bitcoin Trust (GBTC) 
and iShares Bitcoin Trust ETF meet the requirements of $500 million 
or more average daily notional value and a minimum ADV of 4,680,000 
shares. These two ETFs are not listed in the above table because as 
discussed above, the Exchange is prohibiting FLEX trading on IBIT 
options. As it relates to GBTC, the Exchange would need to file a 
19b-4 rule filing with the Commission to list GBTC options on the 
Exchange's standard non-FLEX market. In the event, however, that the 
Exchange files to list GBTC options on its standard non-FLEX market, 
it would still prohibit FLEX trading on GBTC options under this 
proposal. The Exchange will have system controls in place to ensure 
that it will only list FLEX Options on ETFs for which it has proper 
authority, even if those ETFs meet the numerical eligibility 
criteria.
    \253\ 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 
RealDayTM Options on the SPDR S&P 500 Trust on the BOX 
Options Exchange LLC (``BOX''). See Securities Exchange Act Release 
No. 79936 (February 2, 2017), 82 FR 9886 (February 8, 2017) 
(``RealDay Pilot Program''). The RealDay Pilot Program was extended 
until February 2, 2019. See Securities Exchange Act Release No. 
82414 (December 28, 2017), 83 FR 577 (January 4, 2018) (SR-BOX-2017-
38). The RealDay Pilot Program was never implemented by BOX. See 
also Securities Exchange Act Release Nos. 56251 (August 14, 2007), 
72 FR 46523 (August 20, 2007) (SR-Amex-2004-27) (Order approving 
listing of cash-settled Fixed Return Options (``FROs'')); and 71957 
(April 16, 2014), 79 FR 22563 (April 22, 2014) (SR-NYSEMKT-2014-06) 
(Order approving name change from FROs to ByRDs and re-launch of 
these products, with certain modifications.

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[[Page 95009]]

    The Exchange notes that the SEC has previously approved a rule 
filing of another exchange that allowed for the trading of cash-settled 
options \253\ and, specifically, cash-settled FLEX ETF Options (which 
the Exchange proposes to list in the same manner as that 
exchange).\254\
---------------------------------------------------------------------------

    \254\ 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 3A, Section 18. Accordingly, the Exchange proposes to add 
subparagraph (b)(1)(B) of Options 3A, Section 18, 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 3A, Section 
3(c)(5)(A)(ii) 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.\255\ 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.\256\ The Exchange further proposes to add in subparagraph (b)(1)(A) 
of Section 18 a cross-reference to subparagraph (b)(1)(B) of Section 
18, as subparagraph (b)(1)(B) would also contain provisions about 
position limits for FLEX Equity Options that would be exceptions to the 
statement in Options 3A, Section 18(b)(1)(A) that FLEX Equity Options 
have no position limits. The Exchange also proposes to add in paragraph 
(c) of Section 18, a cross-reference to proposed subparagraph 
(b)(1)(B), as the proposed rule adds language regarding aggregation of 
positions for purposes of position limits, which will be covered by 
paragraph (c). 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 
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).\257\ 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.\258\
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    \255\ The Exchange proposes to add to proposed Options 3A, 
Section 18(b)(1)(A) a cross reference to proposed paragraph (c) of 
Section 18, as proposed Section 18(c) also contains provisions about 
position limits for FLEX Equity Options that would be exceptions to 
the statement in proposed Section 18(b)(1)(A) that FLEX Equity 
Options have no position limits (in addition to the language in 
proposed Section 18(b)(1)(B). The Exchange also proposes to add to 
proposed Section 18(c) a cross-reference to proposed subparagraph 
(b)(1)(B) of Section 18, as the proposed rule adds language 
regarding aggregation of positions for purposes of position limits, 
which will be covered in proposed Section 18(c).
    \256\ See proposed Options 3A, Section 18(b)(1)(B), 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.
    \257\ 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 will not be available for FLEX trading.
    \258\ 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.\259\ 
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.
---------------------------------------------------------------------------

    \259\ As noted above, other options exchanges have received 
approval to list certain cash-settled FLEX ETF Options. See supra 
notes 243 and 244.
---------------------------------------------------------------------------

    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

[[Page 95010]]

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.\260\
---------------------------------------------------------------------------

    \260\ See supra notes 243 and 244.
---------------------------------------------------------------------------

    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 and is now clearing these 
products.\261\ 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.
---------------------------------------------------------------------------

    \261\ 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 46 
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.\262\ The Exchange will periodically review its 
surveillance procedures and make any changes that the Exchange believes 
are necessary for FLEX trading. 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.
---------------------------------------------------------------------------

    \262\ 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 ISE \263\ 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.\264\ 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.\265\
---------------------------------------------------------------------------

    \263\ ISE maintains a regulatory services agreements with 
Financial Industry Regulatory Authority, Inc. (``FINRA'') whereby 
FINRA provides certain regulatory services to the exchanges, 
including cross-market surveillance, investigation, and enforcement 
services.
    \264\ 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(e). See supra note 205 for Stock-Tied Reg SHO 
discussion. NES will only execute Stock-Option Strategies and Stock-
Complex Strategies 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).
    \265\ 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 ISE'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.,

[[Page 95011]]

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 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.\266\
---------------------------------------------------------------------------

    \266\ See supra note 256.
---------------------------------------------------------------------------

    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.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\267\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act.\268\ Specifically, the Exchange believes 
the proposed rule change is consistent with the Section 6(b)(5) \269\ 
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.
---------------------------------------------------------------------------

    \267\ 15 U.S.C. 78f(b)
    \268\ 15 U.S.C. 78f(b)(5).
    \269\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the adoption of the proposed rules 
allowing FLEX Options to trade on ISE in the manner specified above is 
consistent with the goals of the Act to remove impediments to and 
perfect the mechanism of a free and open market because it will benefit 
market participants by providing an additional venue for market 
participants to provide and seek liquidity for FLEX Options. As the 
Commission noted in its order granting FLEX trading on Cboe and what 
was then the Pacific Stock Exchange (now NYSE Arca), trading FLEX 
Options on an exchange is an alternative to trading customized options 
in OTC markets and carries with it the advantages of exchange markets 
such as transparency, parameters and procedures for clearance and 
settlement, and a centralized counterparty clearing agency.\270\ 
Therefore, the Exchange believes the proposed rule change will promote 
these same benefits for the market as a whole by providing an 
additional venue for market participants to trade customized FLEX 
Options. The Exchange believes that providing an additional venue for 
FLEX Options will be beneficial by increasing competition for order 
flow and executions.
---------------------------------------------------------------------------

    \270\ See Securities Exchange Act Release No. 36841 (February 
14, 1996), 61 FR 6666 (February 21, 1996) (SR-CBOE-95-43) (SR-PSE-
95-24) (Order Approving the Trading of Flexibly Structured Equity 
Options by CBOE and PSE).
---------------------------------------------------------------------------

    In general, transactions in FLEX Options will be subject to many of 
the same rules that currently apply to non-FLEX Options traded on the 
Exchange. In order to provide investor with the flexibility to 
designate terms of the options and accommodate the special trading of 
FLEX Options, however, the Exchange is proposing to add new rules in 
proposed Options 3A that will apply solely to FLEX Options. As noted 
above, the proposed rules are largely consistent with Cboe's rules 
pertaining to electronic FLEX Options, with certain intended 
differences primarily to align to current System behavior (and 
especially current auction behavior) to provide increased consistency 
for Members trading FLEX Options and non-FLEX Options on ISE, each as 
discussed above and below. Further, the Exchange has omitted certain 
Cboe rules from the proposed rules due to

[[Page 95012]]

differences in scope and operation of FLEX trading at Cboe compared to 
the proposed scope and operation of FLEX trading on ISE, each as noted 
above. For example, the Exchange will not include Cboe rule provisions 
related to floor trading, Asian- or Cliquet-settled FLEX Index Options, 
or Micro FLEX Index Options as it does not offer these capabilities 
today. For the same reason, the Exchange will not allow prices in FLEX 
trading to be expressed as percentages under this proposal.
    The Exchange further believes that its proposal is designed to 
prevent fraudulent and manipulative acts and practices as the Exchange 
believes that it has an adequate surveillance program in place and 
intends to apply the same program procedures to FLEX Options that is 
applied to the Exchange's other options products, as applicable. As 
described above, FLEX Option products and their respective symbols will 
be integrated into the Exchange's existing surveillance system 
architecture and will be subject to the relevant surveillance 
processes, thereby allowing the Exchange to properly identify 
disruptive and/or manipulative trading activity.

A. General Provisions (Section 1)

    The Exchange believes that proposed Section 1(a) setting forth the 
applicability of Exchange Rules will make clear that unless otherwise 
provided in proposed Options 3A, the Exchange's existing rules will 
continue to apply to FLEX Options, which will provide consistency for 
Members trading both FLEX Options and non-FLEX Options on ISE.
    The Exchange believes that the defined terms proposed in Section 
1(b) will provide increased clarity to Members by specifying 
definitions like ``FLEX Option'' and ``FLEX Order'' that are used 
throughout Options 3A. The Exchange further believes that adding the 
definition of ``FLEX Order'' in Options 3, Section 7(z) will add 
transparency as to which order types would be available on ISE. Lastly, 
the non-substantive change proposed in Options 3, Section 7(y) will 
bring clarity and avoid potential confusion for market participants.

B. Hours of Business (Section 2)

    The Exchange believes that specifying the trading hours for FLEX 
Options in proposed Section 2(a) will provide increased clarity that 
the trading hours for FLEX Options will generally be the same as the 
trading hours for corresponding non-FLEX Options as set forth in 
Options 3, Section 1. As noted above, the proposed language is 
materially identical to Cboe Rule 5.1(b)(3)(A).
    As it relates to the Exchange's proposed discretion relating to the 
trading hours for FLEX Options, this is consistent with Cboe's FLEX 
Options rules as noted above. The Exchange believes that because of the 
unique nature of FLEX, in contrast to the non-FLEX market, it is 
reasonable to permit the Exchange, in its discretion, to narrow or 
otherwise restrict the trading hours for FLEX Options, so long as such 
trading hours occur within the normal options trading hours of the 
Exchange described above. The Exchange would provide adequate advance 
notification to its Members of such changes in FLEX trading hours.

C. FLEX Option Classes and Permissible Series (Section 3(a) and (b))

    The Exchange believes that the proposed rule text in Sections 3(a) 
and 3(b) will provide greater transparency around the Exchange's 
listing standards for FLEX Option classes and FLEX Option series. As 
described above, the Exchange is proposing to exclude IBIT options from 
being eligible for trading as a FLEX Option on ISE. The Exchange 
believes this is consistent with the Act because it aligns to ISE's 
approval order of IBIT options, which required the position limit for 
IBIT options to be 25,000 contracts. As discussed in the position 
limits section above, there will generally be no position limits for 
FLEX Equity Options. The Exchange therefore proposes to exclude IBIT 
options from being eligible to trade as a FLEX Option to continue to 
limit the position limits for IBIT options.
    Proposed Section 3(b)(1), which will prevent FLEX Options and non-
FLEX Options with the same terms from trading concurrently by System 
enforcing this restriction, is consistent with the Act because this 
restriction will address concerns that FLEX Options would act as a 
surrogate for the trading of non-FLEX Options. In particular, a non-
FLEX Option trading pursuant to Options 3 has different priority rules 
than a FLEX Option trading pursuant to proposed Options 3A.\271\ 
Allowing an option with the same terms to trade under both rules 
concurrently would result in inconsistent order handling and could 
allow the order priority of non-FLEX Orders to be circumvented. 
Therefore, the Exchange proposes to prevent this situation by 
permitting FLEX Options transactions only in options with a different 
term (exercise style, expiration date, or exercise price) than a non-
FLEX Option on the same underlying security or index that is already 
listed for trading. As noted above, the proposed language in Section 
3(a) and Section 3(b) is substantially similar to Cboe Rule 4.20, Rule 
4.21(a), and Rule 4.22(c) respectively, except the Exchange is 
clarifying in proposed Section 3(b)(2) that on the expiration date, a 
FLEX Order for the expiring FLEX Option series may only be submitted to 
close out a position in such expiring FLEX Option series. \272\
---------------------------------------------------------------------------

    \271\ For example, the Exchange's order books will be 
inapplicable to FLEX Orders and thus certain priority provisions in 
Options 3, Section 10 applicable to non-FLEX Orders will not be 
applicable to FLEX Orders, such as the enhanced Primary Market Maker 
priority in Section 10(c)(1)(B), Preferred Market Maker priority in 
Section 10(c)(1)(C), and entitlement for orders of 5 contracts or 
fewer in Section 10(c)(1)(D). FLEX Options will instead be subject 
to the priority provisions in Options 3A, Section 11(b)(3)(A) 
(electronic FLEX Auctions), Section 12(e) (FLEX PIM), and Section 
13(e) (FLEX SOM).
    \272\ The Exchange will System enforce this provision such that 
it will reject an opening position in an expiring FLEX Option series 
on the day of expiration.
---------------------------------------------------------------------------

D. FLEX Options Terms (Section 3(c))

    The Exchange believes that the terms of FLEX Options pursuant to 
proposed Options 3A, Section 3(c) serve to perfect the mechanism of a 
free and open market and a national market system because they will 
permit investors to customize some of the terms of their FLEX Options 
to implement more precise trading strategies, which may not be possible 
using non-FLEX Options. These investors may have improved capability to 
execute strategies to meet their specific investment objectives by 
using customized FLEX Options. However, only certain terms as specified 
in proposed Section 3(c) are subject to flexible structuring by the 
parties to the FLEX Option transactions, and most of such terms have a 
specified number of alternative configurations. The Exchange believes 
that these restrictions are reasonable and designed to further the 
objectives of the Act and to promote just and equitable principles of 
trade because limiting FLEX Option terms enables the efficient, 
centralized clearance and settlement and active secondary trading of 
opened FLEX Options. As noted above, these terms are consistent with 
Cboe Rule 4.21(b) except the Exchange will not incorporate applicable 
Cboe provisions relating to Asian- or Cliquet-settled FLEX Options, 
Micro FLEX Index Options, or relating to prices that are expressed as a 
percentage value because the Exchange does not offer these features 
today.

[[Page 95013]]

    As discussed above, the Exchange is proposing to allow the listing 
of FLEX PM Third Friday Options on ISE, consistent with the 
Commission's recent approval of Cboe's proposal to make its pilot a 
permanent program.\273\ The Exchange believes that aligning to Cboe 
will allow ISE 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.\274\
---------------------------------------------------------------------------

    \273\ See supra note 52.
    \274\ 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. 98450 
(September 20, 2023), 88 FR 66111 (September 26, 2023) (SR-ISE-2023-
08) (order approving proposed rule change to make permanent certain 
p.m.-settled pilots); and 98935 (November 14, 2023), 88 FR 80792 
(November 20, 2023) (SR-ISE-2023-20) (order approving a proposed 
rule change to permit the listing and trading of p.m.-settled 
Nasdaq-100 Index[supreg] Options with a third-Friday-of-the-month 
expiration).
---------------------------------------------------------------------------

    The Exchange further believes that permitting ISE 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.\275\
---------------------------------------------------------------------------

    \275\ 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 
supra note 52.
---------------------------------------------------------------------------

    As discussed in the FLEX Settlement Pilot Approval, the DERA staff 
study \276\ 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, Cboe concluded that the relatively small amount of FLEX 
Index Option volume would similarly have no significant adverse market 
impact or cause no meaningful regulatory concerns.\277\
---------------------------------------------------------------------------

    \276\ See FLEX Settlement Pilot Approval, citing to Securities 
and Exchange Commission, Division of Economic Risk and Analysis, 
Memorandum dated February 2, 2021 on Cornerstone Analysis of PM 
Cash-Settled Index Option Pilots (September 16, 2020), available at: 
https://www.sec.gov/files/Analysis_of_PM_Cash_Settled_Index_Option_Pilots.pdf.
    \277\ See supra note 52. 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, Cboe concluded 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.
---------------------------------------------------------------------------

    Cboe also concluded that the introduction of FLEX PM options had 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.\278\ 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.\279\ Therefore, Cboe concluded that 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.\280\
---------------------------------------------------------------------------

    \278\ See supra note 52.
    \279\ 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 supra note 52.
    \280\ Cboe acknowledged 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. See supra note 52.
---------------------------------------------------------------------------

    Additionally, Cboe noted that 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, Cboe concluded 
that listing FLEX PM Third Friday Options did 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.
    The Exchange notes that p.m.-settled options were previously 
approved on ISE's standard market,\281\ including p.m.-settled third-
Friday-of-the-month expirations for NDX options.\282\ In the P.M.-
Settled Pilot Permanency Approval, the Commission stated it believed 
that the evidence contained in the Exchange's filing, the Exchange's 
pilot data and reports, and the DERA staff study \283\ analysis 
demonstrate that the Exchange's pilot programs have benefitted 
investors and other market participants by providing more flexible 
trading and hedging opportunities while

[[Page 95014]]

also having no disruptive impact on the market.\284\ The Commission 
also stated that the market for p.m.-settled options has grown in size 
over the course of the Exchange's pilot programs, and analysis of the 
pilot data did not identify any significant economic impact on the 
underlying component securities surrounding the close as a result of 
expiring p.m.-settled options nor did it indicate a deterioration in 
market quality (as measured by relative quoted spreads) for an existing 
product when a new p.m.-settled expiration was introduced.\285\ 
Further, the Commission stated that significant changes in closing 
procedures in the decades since index options moved to a.m. settlement 
may also serve to mitigate the potential impact of p.m.-settled index 
options on the underlying cash markets.\286\
---------------------------------------------------------------------------

    \281\ See Securities Exchange Act Release No. 98450 (September 
20, 2023), 88 FR 66111 (September 26, 2023) (SR-ISE-2023-08) (Order 
Granting Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, To Make Permanent Certain P.M.-Settled Pilots) 
(``P.M.-Settled Pilot Permanency Approval'').
    \282\ See Securities Exchange Act Release No. 98935 (November 
14, 2023), 88 FR 80792 (November 20, 2023) (SR-ISE-2023-20) (Order 
Approving a Proposed Rule Change To Permit the Listing and Trading 
of P.M.-Settled Nasdasq-100 Index[supreg] Options With a Third-
Friday-of-the-Month Expiration) (``P.M. Third Friday NDX Options 
Approval'').
    \283\ See P.M.-Settled Pilot Permanency Approval, citing to 
Securities and Exchange Commission, Division of Economic Risk and 
Analysis, Memorandum dated February 2, 2021 on Cornerstone Analysis 
of PM Cash-Settled Index Option Pilots (September 16, 2020) (also 
referred to therein as the ``Pilot Memo''), available at: https://www.sec.gov/files/Analysis_of_PM_Cash_Settled_Index_Option_Pilots.pdf.
    \284\ See P.M.-Settled Pilot Permanency Approval.
    \285\ See id.
    \286\ See id.
---------------------------------------------------------------------------

    In support of its proposal to list p.m.-settled third-Friday-of-
the-month expirations for NDX options on its standard market, the 
Exchange pointed to, among other things, the data it provided 
underlying the P.M.-Settled Pilot Permanency Approval.\287\ In 
reviewing this data from the Exchange (and other options exchanges in 
support of similar proposals to list and trade certain p.m.-settled 
broad-based index options) as well as the DERA staff study analysis, 
the Commission concluded that analysis of the pilot data did not 
identify any significant economic impact on the underlying component 
securities surrounding the close as a result of expiring p.m.-settled 
options nor did it indicate a deterioration in market quality for an 
existing product when a new p.m.-settled expiration was 
introduced.\288\ Further, the Commission made similar findings as those 
in the P.M.-Settled Pilot Permanency Approval that significant changes 
in closing procedures in the decades since index options moved to a.m. 
settlement may also serve to mitigate the potential impact of p.m.-
settled index options on the underlying cash markets.\289\ The Exchange 
has observed no significant adverse market impact or identified any 
meaningful regulatory concerns since the introduction of p.m.-settled 
index options on its standard market.\290\ Given that the Exchange 
anticipates FLEX PM Third Friday Options to have a relatively smaller 
amount of volume compared to its standard non-FLEX p.m.-settled index 
options market, the Exchange believes that introducing FLEX PM Third 
Friday coupled with the other findings in Cboe's FLEX Settlement Pilot 
Approval would likely have no significant adverse market impact or 
cause any meaningful regulatory concerns as well.
---------------------------------------------------------------------------

    \287\ See P.M.-Settled Pilot Permanency Approval and P.M. Third 
Friday NDX Options Approval in notes 272 and 273, respectively.
    \288\ See P.M. Third Friday NDX Options Approval.
    \289\ See id.
    \290\ While the Exchange has received approval to list p.m.-
settled third Friday-of-the-month expirations for NDX options on its 
standard market pursuant to the Third Friday NDX Options Approval, 
the Exchange has not listed them to date. The Exchange will launch 
p.m.-settled third-Friday-of-the-month expirations on NDX options on 
or before the launch of electronic FLEX on ISE.
---------------------------------------------------------------------------

E. FLEX Fungibility (Section 3(d))

    The Exchange believes that the FLEX fungibility provisions in 
proposed Options 3A, Section 3(d) are consistent with the Act by 
preventing new FLEX Option positions from being opened when a non-FLEX 
Option with the same terms is listed for trading. Pursuant to proposed 
Section 3(d)(1), a FLEX Option with the same terms as a subsequently 
added non-FLEX Option would become fungible with the non-FLEX Option. 
Accordingly, once a non-FLEX Option is added with the same terms as an 
outstanding FLEX Option, the FLEX Option would effectively become a 
standardized, non-FLEX Option and trade under the same rules and 
procedures that apply to any other standard non-FLEX Option. The 
Exchange believes that enforcing consistent order handling for 
identical and fungible options prevents fraudulent and manipulative 
acts and practices, and promotes just and equitable principles of trade 
to protect investors and the public interest by ensuring consistent 
treatment of these options. As noted above, proposed Section 3(d)(1) is 
materially identical to Cboe Rule 4.22(a).
    Additionally, pursuant to proposed Section 3(d)(2)(A), if a non-
FLEX Option series \291\ is added intraday, for the balance of that 
trading day, a position established under the FLEX trading procedures 
may be closed using the FLEX trading procedures in this Options 3A 
against another closing only FLEX position. No FLEX Orders may be 
submitted into an electronic auction pursuant to Options 3A, Sections 
11(b), 12, or 13 for a FLEX Option series with the same terms as the 
non-FLEX Option series, unless the FLEX Order is a closing order, and 
it is the day on which the non-FLEX Option series was added intraday; 
Members may only submit responses that close out existing FLEX 
positions. The Exchange notifies Members when a FLEX Option series is 
restricted to closing only transactions. The System will reject a 
transaction in such a restricted series that does not conform to these 
requirements.
---------------------------------------------------------------------------

    \291\ As noted above, Cboe Rule 4.22(b)(1) currently indicates 
that Cboe's closing-only provisions apply if a non-FLEX Option 
American-style series is added intraday. The Exchange, however, 
believes it is more straightforward to apply the closing-only 
provisions to all non-FLEX Option series (i.e., American-style and 
European-style FLEX Option series) instead of limiting these 
provisions to one type of exercise style. As such, the Exchange's 
proposed language in Options 3A, Section 3(d)(2)(A) will instead 
provide that the Exchange's closing-only provisions would apply ``if 
a non-FLEX Option is added intraday.'' See BOX Rule 7605(d)(3), 
which similarly does not limit BOX's closing-only provisions to 
American-style FLEX Options series.
---------------------------------------------------------------------------

    This proposed rule will prevent an option with the same terms from 
trading both a FLEX Option series and a non-FLEX Option series 
concurrently, while providing a narrow exception for closing positions. 
The Exchange believes that providing a narrow exception to permit such 
closing only transactions will help investors close out their 
outstanding FLEX Option positions the same day as the identical non-
FLEX Option is added. As noted above, proposed Section 3(d)(2) is 
substantially similar to other options exchanges.\292\
---------------------------------------------------------------------------

    \292\ In particular, proposed Options 3A, Sections 3(d)(2)(A) 
and (B) are based on Cboe Rule 4.22(b) and BOX Rule 5055(f)(3), 
respectively. See supra notes 57 and 58.
---------------------------------------------------------------------------

F. Units of Trading; Minimum Trading Increments (Sections 4 and 5)

    The Exchange believes that the proposed rule text in Section 4(a) 
provides clear, transparent language regarding how bids and offers for 
FLEX Options must be expressed. As noted above, proposed Section 4(a) 
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 and does not intend to introduce such features 
under this proposal.
    The Exchange similarly believes that proposed Section 5(a) provides 
clarity to market participants that the Exchange will determine the 
minimum increments for bids and offers on FLEX Options on a class-by-
class basis, which may be no smaller than $0.01 for the options leg of 
a FLEX Option. Allowing FLEX Options to trade in increments as small as 
$0.01 is consistent with the Act because it provides investors with 
increased ability to meet their specific investment objectives and 
allows for increased opportunities for price improvement through a 
finer trading increment. As noted above, proposed Section 5(a) is 
consistent with Cboe

[[Page 95015]]

Rule 5.4(c)(4) except the Exchange is not proposing to allow prices to 
be expressed as a percentage value and the Exchange is also clarifying 
that proposed Section 5(a) would apply to the options leg of a FLEX 
Option. The Exchange is also proposing to clarify in proposed Section 
5(b) that the stock leg of a FLEX Option will be subject to the minimum 
increment rules in proposed Options 3A, Section 11(b)(1)(G), Section 
12(a)(5), and Section 13(a)(5) for greater transparency around how 
minimum increments for complex FLEX Orders (including complex FLEX 
Orders with a stock component) would be handled.

G. Types of Orders; Order and Quote Protocols (Section 6)

    The Exchange believes that specifying in proposed Section 6(a) that 
it may make the order types and TIFs specified in Options 3, Section 7 
available on a class or System basis for FLEX Orders is consistent with 
the Exchange's existing authority to designate the availability of 
order types and times-in-force for non-FLEX Orders.\293\ As noted 
above, only the following order types in Options 3, Section 7 would 
apply to FLEX at this time: Limit Orders and Cancel and Replace Orders. 
Also as noted above, only the Immediate-or-Cancel TIF described in 
Supplementary Material .02(d) would apply to FLEX. Given that FLEX 
Orders will only be eligible to submitted into an electronic FLEX 
Auction, FLEX PIM, or FLEX SOM, and not rest on the order book or route 
away (for which most of the order types and TIFs set forth in Options 
3, Section 7 are relevant), the Exchange believes that these are 
appropriate designations for FLEX Orders. Because there is no existing 
market for FLEX Options on the Exchange, the Exchange believes that 
permitting FLEX Options to be submitted as limit orders is appropriate 
to ensure execution of FLEX Orders at reasonable prices (i.e., at the 
Member's specified price or better). The Exchange also believes that it 
is appropriate to allow FLEX Orders to be submitted as Cancel and 
Replace orders so that Members can cancel and replace their FLEX Order 
in a single message. The Exchange further believes that it is 
appropriate to allow FLEX Orders to have a TIF of Immediate-or-Cancel 
because that is how the Exchange currently treats all auction orders in 
its standard non-FLEX market today. Specifically, the Exchange 
considers all orders that are entered into one of its non-FLEX auction 
mechanisms (e.g., SOM Orders and PIM Orders) to have a TIF of 
Immediate-or-Cancel. By their terms, these orders will be: (1) executed 
either on entry or after an exposure period, or (2) cancelled.\294\ 
Because FLEX Orders may only be submitted into one of the proposed 
auctions described above (FLEX Auction, FLEX PIM, FLEX SOM), the 
Exchange will likewise consider FLEX Orders like its non-FLEX auction 
orders today.
---------------------------------------------------------------------------

    \293\ See introductory paragraph to Options 3, Section 7.
    \294\ See Supplementary Material .02(d)(3) to Options 3, Section 
7.
---------------------------------------------------------------------------

    The Exchange further believes proposed Section 6(b) will provide 
greater transparency as to which existing order and quote protocols 
would be available for FLEX Orders, FLEX auction notifications, and 
FLEX auction responses.

H. Complex Orders (Section 7)

    The Exchange believes the proposed Section 7 will provide investors 
with additional transparency regarding order entry requirements for 
complex FLEX Options. As noted above, the proposed complex FLEX Order 
entry requirements will be consistent with Cboe Rule 5.70(b), except 
the Exchange will not offer Asian-settled or Cliquet-settled FLEX Index 
Options.
    The Exchange also believes that allowing the submission of complex 
FLEX Orders with any ratio will remove impediments to and perfect the 
mechanism of a free and open market and benefit investors, because it 
will provide Members with additional flexibility and precision in their 
investment strategies. As noted above, Cboe already offers this feature 
for complex FLEX Orders, so the Exchange believes that the proposed 
changes will promote a free and open market and a national market 
system by providing an additional venue for market participants to 
execute complex FLEX Orders with any ratio.\295\
---------------------------------------------------------------------------

    \295\ See supra note 81.
---------------------------------------------------------------------------

I. Opening of FLEX Trading (Section 8)

    The Exchange believes that proposed Section 8, which will specify 
that there will be no Opening Process in FLEX Options and that Members 
may begin submitting FLEX Orders into an electronic FLEX Auction, a 
FLEX PIM, or a FLEX SOM when the underlying security is open for 
trading, will provide clarity to market participants regarding the 
mechanisms available for FLEX trading. The Exchange will not conduct an 
Opening Process in FLEX Options due to the customized nature of these 
products and the fact that there will be no requirement for specific 
FLEX Option series to be quoted or traded each day. The Exchange notes 
that Cboe likewise does not hold an opening trading rotation in FLEX 
Options.\296\
---------------------------------------------------------------------------

    \296\ See Cboe Rule 5.71. See supra note 83.
---------------------------------------------------------------------------

    The Exchange also believes that allowing Member to begin submitting 
FLEX Orders once the underlying security is open is appropriate. 
Because market participants incorporate transaction prices of 
underlying securities or the values of underlying indexes when pricing 
options (which will include FLEX Options), the Exchange believes it 
will benefit investors for FLEX Options trading to not be available 
until that information has begun to be disseminated in the market. 
Because the Exchange will have no electronic book of resting orders for 
FLEX Options (and no Opening Process), being ``open'' for FLEX trading 
merely means that Members may submit FLEX Orders into one of the 
specified FLEX auction mechanisms once the underlying is open, at the 
conclusion of which executions in those auction mechanisms may occur 
(which are all discussed in the respective FLEX Auction, FLEX PIM, and 
FLEX SOM sections above).

J. Trading Halts (Section 9)

    The Exchange believes that proposed Section 9 will provide clarity 
as to when the Exchange would halt trading in FLEX Options. The reasons 
why the Exchange would halt trading in a non-FLEX Option class (e.g., 
trading in the underlying security is halted) would generally be 
reasons why the Exchange would halt a FLEX Option class, and therefore 
the Exchange will always halt trading in a FLEX Option class when 
trading in a non-FLEX Option class with the same underlying equity 
security or index is halted on the Exchange. Proposed Section 9 also 
provides the Exchange with authority to halt trading in a FLEX Option, 
even if trading in a non-FLEX Option with the same underlying is not 
halted. While such situation would be rare, there may be unusual 
circumstances that would cause the Exchange to halt trading in the FLEX 
Option. As noted above, the proposed halt provisions are consistent 
with Cboe Rule 4.21(a)(3).

K. Exchange Order Books (Section 10)

    The Exchange believes that specifying in proposed Section 10 that 
the Exchange's simple and complex order books will not be available for 
transactions in FLEX Options will make clear what mechanisms would be 
available for FLEX trading (or not). FLEX Orders may only be submitted 
into a FLEX Auction, FLEX PIM, or FLEX SOM. As noted above, proposed

[[Page 95016]]

Section 10 is consistent with the FLEX rules of other options exchanges 
that similarly do not contemplate the interaction of their respective 
order books with FLEX transactions.\297\
---------------------------------------------------------------------------

    \297\ See supra note 89.
---------------------------------------------------------------------------

L. FLEX Options Trading (Section 11)

    The Exchange believes that proposed Section 11(a), which specifies 
the requirements for submitting FLEX Orders for trading, is consistent 
with the Act. Proposed Section 11(a) will set forth which mechanisms 
would be available for FLEX Orders (i.e., electronic FLEX Auction, FLEX 
PIM, or FLEX SOM) and the order entry requirements for simple and 
complex FLEX Orders. As noted above, these provisions will be 
substantially similar to the FLEX rules of other options 
exchanges.\298\ The Exchange believes that System-enforcing the 
stipulation that it will not accept simple or complex FLEX Orders if 
the order or leg, as applicable, has identical terms as a non-FLEX 
Option series that is already listed for trading will prevent options 
with the same terms to trade as both a FLEX Options and non-FLEX 
Option, thereby eliminating any potential concerns around inconsistent 
order handling.
---------------------------------------------------------------------------

    \298\ In particular, proposed Options 3A, Section 11(a) is based 
on Cboe Rule 5.72(b) and BOX Rule 7605(d). See supra notes 90-92 and 
note 94.
---------------------------------------------------------------------------

    The Exchange believes that the electronic FLEX Auction as described 
in proposed Section 11(b) will remove impediments to and perfect the 
mechanism of a free and open market, and protect investors and the 
public interest. The proposed FLEX Auction will offer market 
participants with an auction mechanism for the execution of FLEX 
Options at potentially improved prices that is substantially similar in 
all respects to Cboe Rule 5.72(c), except for certain intended 
differences to align to current auction functionality in order to allow 
the proposed FLEX Auction to fit more seamlessly into the Exchange's 
market. For instance, the Exchange will not allow prices to be 
expressed as percentages in the electronic FLEX Auction as it does not 
have this capability today. The Exchange will also follow current non-
FLEX auction behavior by allowing the FLEX Auction to end at the market 
close with an execution (if an execution is permitted pursuant to 
proposed Section 11(b)) in the event the designated exposure interval 
exceeds the market close.\299\ In doing so, the Exchange's proposal 
will promote executions in electronic FLEX Auctions (instead of 
cancelling the FLEX Order) while also preventing executions after the 
market close. The Exchange will also align the minimum increment 
requirements in proposed Section 11(b)(1)(G) for stock-tied FLEX 
complex strategies with its existing requirements for stock-tied non-
FLEX complex strategies in Options 3, Section 14(c)(1). Furthermore, 
pursuant to proposed Section 11(b)(2)(D), the Exchange would not allow 
Members to submit multiple FLEX responses using the same badge/mnemonic 
and would also not aggregate all of those responses at the same price 
in order to align to current auction functionality for non-FLEX Orders. 
Additionally, the Exchange will also specify in proposed Section 
11(b)(2)(D) that an additional FLEX response from the same badge/
mnemonic for the same auction ID will automatically replace the 
previous FLEX response. \300\ The Exchange will also align the proposed 
FLEX Auction allocation methodology (i.e., Priority Customer Size Pro-
Rata and one contract allocation) \301\ and related rounding (i.e., 
rounding up for the higher response quantity) \302\ with current 
auction functionality in those respects.\303\ The Exchange believes 
that the proposed priority and allocation rules for the FLEX Auction 
will ensure a fair and orderly market by maintaining the priority of 
orders and protecting Priority Customer orders, while still affording 
the opportunity for price improvement during each FLEX Auction 
commenced on the Exchange. As noted above, all of the foregoing 
features are harmonized with the Exchange's current auction 
functionality for non-FLEX Orders, including PIM and SOM, so the 
Exchange believes that this will promote consistency for Members 
participating across different auctions on ISE.
---------------------------------------------------------------------------

    \299\ See proposed Options 3A, Section 11(b)(1)(F). While the 
current rules are silent in this regard, the Exchange notes that its 
proposal will follow current SOM and PIM behavior. See generally 
Options 3, Sections 11(d) and 13.
    \300\ While this behavior is not specified in the Exchange's 
current rules, auction responses are currently handled in the same 
manner for SOM and PIM. See generally Options 3, Sections 11(d)(2) 
and 13(c).
    \301\ See proposed Options 3A, Sections 11(b)(3)(A)(i) and 
(iii).
    \302\ See proposed Options 3A, Sections 11(b)(3)(A)(ii).
    \303\ See, e.g., Options 3, Section 11(d)(3)(C) (SOM allocation 
methodology); Options 3, Section 13(d) (PIM allocation methodology); 
Supplementary Material .09 to Options 3, Section 11; and 
Supplementary Material .10 to Options 3, Section 13.
---------------------------------------------------------------------------

    Furthermore, unlike Cboe, the Exchange will not include certain 
details in the proposed FLEX Auction notification message in proposed 
Section 11(b)(2)(A) like what time the auction will conclude or whether 
the FLEX Order is Attributable. For simplicity, the Exchange will 
instead disseminate the duration of the exposure interval, instead of 
calculating and disseminating what time the auction will conclude, and 
will not offer an Attributable designation for FLEX Orders.
    Otherwise, the general framework of the proposed electronic FLEX 
Auction in Section 11(b) (such as the eligibility requirements, the 
auction process and conclusion, and execution provisions) is consistent 
with the framework for Cboe's electronic FLEX Auctions in Cboe Rule 
5.72(c). The clarity in how the proposed FLEX Auction will function and 
its consistency with similar auctions at another exchange will help 
promote a fair and orderly national options market system.
    Like Cboe, the Exchange believes that the proposed auction exposure 
interval periods strike an appropriate balance between allowing 
executions of FLEX Orders to be completed in a timely fashion and 
providing Members sufficient time to price the unique terms of FLEX 
Options. As noted above, the submitting Member must designate the 
length of the exposure interval (which will be included in the auction 
notification message) to be between three seconds and five minutes, 
which is identical to Cboe's range of exposure intervals for their 
electronic FLEX Auctions in Cboe Rule 5.72(c)(1)(F). The Exchange 
believes it is appropriate to require the submitting Member to 
establish the length of the auction period (which will be included in 
the auction notification message), as the Member is in the best 
position to determine a reasonable period of time to provide other 
Members to respond based on the complexity of the FLEX Option series 
that is the subject of the auction, as well as based on market 
conditions (for example, in a volatile market, the Member may believe 
it is in the best interests of a customer to have a shorter auction 
period given quickly changing prices).
    The Exchange believes that the proposed rule change to allow 
multiple electronic FLEX Auctions overlap will benefit investors, as it 
may lead to an increase in Exchange volume and permit the Exchange to 
compete with the OTC market, while providing for additional 
opportunities for price discovery and execution. Although electronic 
FLEX Auctions will be allowed to overlap, the Exchange does not believe 
that this raises any issues that are not addressed through the proposal 
as described above. For example, although overlapping, each auction 
will be started in a sequence

[[Page 95017]]

and with a time that will determine its processing. Thus, even if there 
are two auctions that commence and conclude, at nearly the same time, 
each auction will have a distinct conclusion at which time the auction 
will be allocated. Additionally, FLEX Orders submitted into an 
electronic FLEX Auction will be able to execute only against FLEX 
responses submitted to that auction. If market participants desire to 
have interest execute against both FLEX Orders subject to concurrent 
FLEX Auctions, market participants may submit responses to both 
auctions. Additionally, the proposed concurrent auction feature is 
materially identical to Cboe's electronic FLEX Auction feature in Cboe 
Rule 5.72(c)(2)(B).

M. FLEX PIM and FLEX SOM (Sections 12 and 13)

    The Exchange believes that the FLEX PIM and FLEX SOM Auctions as 
described in proposed Sections 12 and 13, respectively, will remove 
impediments to and perfect the mechanism of a free and open market, and 
protect investors and the public interest. The proposed FLEX PIM and 
FLEX SOM Auctions will offer market participants with auction 
mechanisms for the execution of FLEX Options at potentially improved 
prices that are substantially similar to Cboe's FLEX AIM and FLEX SAM 
set forth in Cboe Rule 5.73 and 5.74, respectively, except for certain 
intended differences to align to the Exchange's current PIM and SOM 
auction functionality to allow the proposed FLEX PIM and SOM Auctions 
to fit more seamlessly into the Exchange's market. For instance, the 
Exchange will not allow prices to be expressed as percentages in FLEX 
PIM or FLEX SOM as it does not have this capability today. For FLEX 
SOM, the Exchange will not allow the Solicited Order to be comprised of 
multiple solicited orders in FLEX SOM to be consistent with current 
non-FLEX SOM functionality in Options 3, Section 11(d). The Exchange 
will also align the minimum increment requirements for stock-tied FLEX 
complex strategies submitted into FLEX PIM or FLEX SOM with its 
existing requirements for stock-tied non-FLEX complex strategies in 
Options 3, Section 14(c)(1). The Exchange will also follow current non-
FLEX PIM and SOM behavior by allowing the FLEX PIM or FLEX SOM Auction 
to end at the market close with an execution (if an execution is 
permitted pursuant to proposed Section 12 or Section 13, as applicable) 
in the event the designated length of the auction period exceeds the 
market close.\304\ In doing so, the Exchange's proposal will promote 
executions in FLEX PIM and FLEX SOM (instead of cancelling the FLEX 
Order) while also preventing executions after the market close. 
Furthermore, pursuant to Sections 12(c)(5)(B) and 13(c)(5)(B) (as 
applicable), the Exchange would not allow Members to submit multiple 
FLEX PIM or FLEX SOM responses using the same badge/mnemonic and would 
also not aggregate all of those responses at the same price in order to 
align to current PIM and SOM functionality for non-FLEX Orders. 
Additionally, the Exchange will also specify that an additional FLEX 
PIM or SOM response from the same badge/mnemonic for the same auction 
ID will automatically replace the previous FLEX PIM or SOM 
response.\305\ The Exchange will also align to current PIM 
functionality by allowing a limited exception to the restriction in 
proposed Section 12(c)(4) against modifying or canceling a FLEX PIM 
Agency Order or Initiating Order by allowing Initiating Members to 
improve the price of their Initiating Orders.\306\ The Exchange will 
also align to current SOM functionality by allowing Initiating Members 
to cancel (but not modify) their FLEX SOM Agency Orders and Solicited 
Orders pursuant to proposed Section 13(c)(4).\307\
---------------------------------------------------------------------------

    \304\ See proposed Options 3A, Sections 12(c)(3) and 13(c)(3). 
While the current rules are silent in this regard, the Exchange 
notes that its proposal will follow current SOM and PIM behavior. 
See generally Options 3, Sections 11(d) and 13.
    \305\ While this behavior is not specified in the Exchange's 
current rules, auction responses are currently handled in the same 
manner for SOM and PIM. See generally Options 3, Sections 11(d)(2) 
and 13(c).
    \306\ See supra note 138 and accompanying text.
    \307\ As noted above, while this feature is not explicitly 
stated in the current SOM rules in Options 3, Section 13(d), it is 
consistent with current SOM functionality.
---------------------------------------------------------------------------

    The Exchange will also align certain aspects of the proposed FLEX 
PIM allocation methodology with its current non-FLEX PIM allocation 
methodology. First, the Exchange will base the allocation percentages 
set forth in proposed Section 12(e)(1)(B)(ii) on the original size of 
the Agency Order, instead of the number of contract remaining after 
execution against Priority Customer responses like Cboe Rule 
5.73(e)(1)(B)(ii). As noted above, this will align to current PIM 
behavior in Options 3, Section 13(d)(3). Second, the Exchange will 
specify two limited scenarios in proposed Section 12(e)(1)(B) where the 
Initiating Member could receive an allocation percentage that is 
greater than the Initiating Member's guaranteed allocation (i.e., when 
there are remaining contracts after including all PIM responses or when 
rounding up). As noted above, while Cboe does not have these exceptions 
noted in Cboe Rule 5.73(e)(1)(B), this will be consistent with current 
PIM behavior.\308\ Third, the Exchange will specify in proposed Section 
12(e)(2)(B) that other FLEX PIM responses at prices better than the 
final auction price will be allocated in time priority and all other 
FLEX PIM responses at the final auction price will be allocated on a 
Size Pro-Rata Basis.\309\ Fourth, the Exchange will replace Cboe's last 
priority allocation in Cboe Rule 5.73(e)(4) with a guaranteed 
allocation feature in proposed Section 12(e)(4), which will be similar 
to a current PIM feature currently in Options 3, Section 13(d)(3) that 
allows Members to request a lower percentage than their guaranteed 
allocation.\310\ For both FLEX PIM and FLEX SOM, the Exchange will also 
specify that if an allocation would result in less than one contract, 
then one contract will be allocated.\311\ This would align to current 
SOM and PIM allocation.\312\ As noted above, all of the foregoing 
features are consistent with the Exchange's current PIM and SOM auction 
functionality for non-FLEX Orders, so the Exchange believes that this 
will promote consistency for Members participating across different 
auctions on ISE.
---------------------------------------------------------------------------

    \308\ See supra note 151.
    \309\ See supra note 155.
    \310\ See supra note 158.
    \311\ See proposed Supplementary Material .03 to Options 3A, 
Section 11 and Supplementary Material .03 to Options 3A, Section 12.
    \312\ See Supplementary Material .09 to Options 3, Section 11 
and Supplementary Material .10 to Options 3, Section 13).
---------------------------------------------------------------------------

    As it relates to FLEX PIM's proposed guaranteed allocation 
percentages of 50% (if there is a response(s) from one other Member) or 
40% (if there are responses from two or more Members), these 
percentages will align to other options exchanges as noted above.\313\ 
While the foregoing percentages for FLEX PIM differ from the current 
guaranteed allocation percentage of 40% for the Exchange's non-FLEX 
PIM, the Exchange does not believe that this percentage difference will 
put market participants using one type of PIM auction (i.e., FLEX 
versus non-FLEX PIM) on ISE at a competitive disadvantage against 
market participants using the other PIM auction type. FLEX PIM is a 
separate auction functionality and can only be used for FLEX Options. 
Once a FLEX Option series becomes fully fungible with an identical non-
FLEX Option series, that

[[Page 95018]]

non-FLEX Option series can no longer be submitted into a FLEX PIM 
auction and must instead be entered into one of the Exchange's other 
auction mechanisms (such as standard PIM) if the market participant 
desires to utilize an auction mechanism. Furthermore, the FLEX market 
is unique in that there is no order book, no opening, and no quoting 
versus its standard non-FLEX market which has all of those features and 
therefore has a myriad of other ways in which market participants may 
access liquidity. The Exchange therefore does not believe offering a 
different guaranteed allocation percentage for its FLEX PIM would place 
market participants using non-FLEX PIM at a competitive disadvantage 
given the reasons set out above.
---------------------------------------------------------------------------

    \313\ See supra note 158.
---------------------------------------------------------------------------

    Otherwise, the general frameworks of the proposed FLEX PIM and FLEX 
SOM Auctions in Sections 12 and 13 (such as the eligibility 
requirements, stop price requirements, auction process and conclusion, 
and execution provisions) are consistent with the frameworks for Cboe's 
FLEX AIM and FLEX SAM in Cboe Rules 5.73 and 5.74, respectively. The 
clarity in how FLEX PIM and FLEX SOM will function and their 
consistency with similar auctions at another exchange will help promote 
a fair and orderly national options market system. For example, the 
proposed range for the length of each of the FLEX PIM and FLEX SOM 
Auction periods is consistent with the range for the auction periods of 
the Cboe's FLEX AIM and FLEX SAM Auctions in Cboe Rules 5.73(c)(3) and 
5.74(c)(3), respectively. Like Cboe, the Exchange believes it is 
appropriate to provide a reasonable and sufficient amount of time in 
which market participants may submit responses because of the unique 
terms of FLEX Options. Therefore, the Exchange is proposing that the 
minimum length of a FLEX PIM or FLEX SOM Auction be three seconds. The 
Exchange also proposes a maximum length of an auction period to be five 
minutes, as the Exchange also believes it is appropriate to provide for 
efficient and timely executions so that customers do not potentially 
miss a market. The proposed rule change also requires the Initiating 
Member to establish the length of the auction period (which will be 
included in the auction notification message), as the Member is in the 
best position to determine a reasonable period of time to provide other 
Members to respond based on the complexity of the FLEX Option series 
that is the subject of the auction, as well as based on market 
conditions (for example, in a volatile market, the Member may believe 
it is in the best interests of a customer to have a shorter auction 
period given quickly changing prices).
    The proposal will also allow FLEX PIM and FLEX SOM Auctions to 
occur concurrently with other FLEX PIM and FLEX SOM Auctions. As 
discussed above, the Exchange is aligning with current Cboe FLEX AIM 
and FLEX SAM behavior in Cboe Rules 5.73(c)(1) and 5.74(c)(1), 
respectively. Like Cboe, the Exchange does not believe that allowing 
FLEX PIM and FLEX SOM Auctions to overlap would raise any issues that 
are not addressed by proposal. For example, although overlapping, each 
FLEX PIM or FLEX SOM Auction will be started in a sequence and with a 
duration that determines its processing. Thus, even if there are two 
FLEX PIM or FLEX SOM Auctions that commence and conclude, at nearly the 
same time, each Auction will have a distinct conclusion at which time 
the Auction will be allocated, and only against responses submitted 
into that Auction. As discussed above, each FLEX PIM or FLEX SOM 
response is required to specifically identify the FLEX PIM or FLEX SOM 
Auction, respectively, for which it is targeted and if not fully 
executed, will be cancelled back at the conclusion of the Auction. 
Thus, responses will be specifically considered and executed only in 
the specified Auction. As a general matter, issues with concurrent 
auctions can relate to the interaction of auctioned orders with contra-
side interest resting on the book at the end of various auctions. As 
noted above, there will be no order book available for FLEX trading, so 
there can be no conflict among contra-side interest resting on the book 
and FLEX PIM or FLEX SOM responses with respect to executions. Further, 
because there is no book for FLEX Options, there are no events that 
cause a FLEX PIM or FLEX SOM to conclude prior to the end of auction 
exposure period that would result in an execution, and therefore, the 
same event could not cause multiple auctions to conclude early.
    Like Cboe, the Exchange will apply a Size Pro-Rata execution 
algorithm with a Priority Customer overlay for FLEX PIM and FLEX 
SOM.\314\ The Exchange believes that the proposed priority and 
allocation rules for FLEX PIM and FLEX SOM will ensure a fair and 
orderly market by maintaining the priority of orders and protecting 
Priority Customer orders, while still affording the opportunity for 
price improvement during each FLEX PIM and FLEX SOM Auction commenced 
on the Exchange.
---------------------------------------------------------------------------

    \314\ See proposed Options 3A, Sections 12(e) and 13(e). As 
noted above, this is also consistent with the Exchange's current 
priority and allocation methodology for non-FLEX auctions, including 
SOM and PIM. See Options 3, Section 11(d)(3)(C) and Section 13(d).
---------------------------------------------------------------------------

N. Risk Protections (Section 14)

    The Exchange believes that specifying the risk protections in 
proposed Options 3A, Section 14 will benefit investors with additional 
transparency regarding which of the Exchange's risk protections in 
Options 3, Sections 15 (simple order risk protections, 16 (complex 
order risk protections), and 28 (optional risk protections) would apply 
to FLEX trading. The Exchange also believes that applying the foregoing 
risk protections to FLEX Options will protect investors and the public 
interest, and maintain fair and orderly markets, by providing market 
participants with more tools to manage their risk. In addition, 
providing Members with more tools for managing risk facilitates 
transactions in FLEX Options because Members will have more confidence 
that risk protections are in place. As a result, apply the foregoing 
risk protections has the potential to promote just and equitable 
principles of trade.

O. Data Feeds (Section 15)

    The Exchange believes that specifying the data feeds in proposed 
Options 3A, Section 15 will benefit investors with additional 
transparency regarding which data feeds it will disseminate auction 
notifications for simple and complex FLEX Orders. As discussed above, 
the Exchange proposes to disseminate auction notifications for simple 
FLEX Orders through the Order Feed and auction notifications for 
complex FLEX Orders through the Spread Feed, which will be consistent 
with how non-FLEX simple and complex auction notifications are 
disseminated today.

P. FLEX Market Makers and Letters of Guarantee (Sections 16 and 17)

    The Exchange believes that the proposed FLEX Market Maker 
provisions in Section 16 will provide clarity and transparency as to 
how FLEX Market Makers are appointed and their related obligations. As 
noted above, these provisions are substantially similar to other 
options exchanges, notably Cboe and Phlx.\315\
---------------------------------------------------------------------------

    \315\ See supra notes 211-214.
---------------------------------------------------------------------------

    Pursuant to proposed Section 17, the Exchange will ensure that all 
FLEX transactions effected by FLEX Market Makers will be covered by an 
effective Letter of Guarantee.\316\ The Exchange

[[Page 95019]]

believes that the Letter of Guarantee will protect investors and the 
public interest because it signifies that the clearing member has 
accepted financial responsibility for transactions in all options 
entered into by the Market Maker, which will protect the counterparties 
of those trades and such protections will flow to other clearing 
members and ultimately to the OCC as the central counterparty and 
guarantor of both FLEX and non-FLEX Option transactions. The Exchange 
will notify all clearing members of the new FLEX rules to confirm that 
all clearing members' Letters of Guarantee will cover all financial 
responsibilities for all FLEX transactions by FLEX Market Makers, and 
will require additions to their effective Letters of Guarantee to 
provide full coverage, where necessary. The Exchange believes this will 
ensure that all FLEX Market Makers will be covered by effective Letters 
of Guarantee for their FLEX transactions.
---------------------------------------------------------------------------

    \316\ Today, all ISE Market Makers are required to enter into a 
Letter of Guarantee pursuant to Options 6, Section 4. Cboe Rule 
3.61(e) separately requires FLEX Market Makers to provide a Letter 
of Guarantee issued by a clearing member and filed with the Exchange 
accepting responsibility for all FLEX transactions made by the FLEX 
Market Maker.
---------------------------------------------------------------------------

Q. Position and Exercise Limits (Sections 18 and 19)

    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 position and exercise limits in Sections 18(a), 18(c), and 
19(a) are reasonably designed to prevent a Member 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 Sections 18(c)(1), 
(c)(2), and 19(a)(3), 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 another 
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.\317\
---------------------------------------------------------------------------

    \317\ See Cboe Rules 8.35(a), (b), (d), and 8.42(g) and ISE 
Options 4A, Sections 6(a), 7(a)(1), 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,\318\ removes impediments to and perfects the 
mechanism of a free and open market and a national market system 
because it allow 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.
---------------------------------------------------------------------------

    \318\ See proposed Options 3A, Section 18(c)(3) and Section 
19(a)(3). 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 ISE 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.'' 
\319\ The Commission has also stated that the elimination of position 
and exercise limits for FLEX Equity 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.'' \320\
---------------------------------------------------------------------------

    \319\ 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).
    \320\ 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.

[[Page 95020]]

    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.\321\ 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 and would make any changes 
that the Exchange believes are necessary for FLEX trading. 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.
---------------------------------------------------------------------------

    \321\ The Exchange notes that it is responsible for FINRA's 
performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The Exchange believes that proposed Section 18(b)(2) and (3) 
further mitigates concerns for potential market manipulation and/or 
disruption in the underlying markets and thus protects investors and 
the public interest because position reporting will be required (other 
than for a Market Maker) and the Exchange may determine that a higher 
margin requirement is necessary in light of the risks associated with a 
FLEX Equity Option position in excess of the standard limit for non-
FLEX Equity Options of the same class. The Exchange may, pursuant to 
its authority under Options 6C, Section 5, impose additional margin 
upon the account maintaining such under-hedged position as a safeguard 
against potential adverse effects of large FLEX Equity Option 
positions. The Exchange notes that the clearing firm carrying the 
account will be subject to capital charges under SEC Rule 15c3-1 to the 
extent of any margin deficiency resulting from a higher margin 
requirement imposed by the Exchange.
    Lastly, the Exchange notes that other exchanges currently trading 
FLEX options have similar position and exercise limits described 
above.\322\
---------------------------------------------------------------------------

    \322\ See Cboe Rules 8.35(d) and 8.42(g); and Phlx Options 8, 
Section 34(e) and (f).
---------------------------------------------------------------------------

R. Cash-Settled FLEX ETF Options

    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.\323\
---------------------------------------------------------------------------

    \323\ See supra notes 243 and 244.
---------------------------------------------------------------------------

    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 46 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.\324\ The proposed 
rule change therefore should not raise issues for the Commission that 
it has not previously addressed.
---------------------------------------------------------------------------

    \324\ See supra notes 243 and 244.
---------------------------------------------------------------------------

    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 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

[[Page 95021]]

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, 46 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, ISE 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.\325\ 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.\326\ 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.
---------------------------------------------------------------------------

    \325\ Among other things, ISE's regulatory program include 
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(e). See supra note 205 for Stock-Tied Reg SHO discussion. 
NES will only execute Stock-Option Strategies and Stock-Complex 
Strategies if the underlying covered security component is in 
accordance with Rule 201 of Regulation SHO.
    \326\ 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

    Additionally, the Exchange will monitor any effect additional 
options series listed under the proposed rule change will 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.

S. Section 11(a) Analysis

    The Exchange believes that the proposed FLEX rules in Options 3A, 
including the proposed electronic FLEX Auction in Options 3A, Section 
11(b), proposed FLEX PIM in Options 3A, Section 12, and proposed FLEX 
SOM in Options 3A, Section 13, are consistent with Section 11(a)(1) of 
the Act \327\ and the rules promulgated thereunder. Generally, Section 
11(a)(1) of the Act restricts any member of a national securities 
exchange from effecting any transaction on such exchange for (i) the 
member's own account, (ii) the account of a person associated with the 
member, or (iii) an account over which the member or a person 
associated with the member exercises investment discretion 
(collectively referred to as ``covered accounts''), unless a specific 
exemption is available. Examples of common exemptions include the 
exemption for transactions by broker dealers acting in the capacity of 
a market maker under Section 11(a)(1)(A),\328\ the ``G'' exemption for 
yielding priority to non-members under Section 11(a)(1)(G) of the Act 
and Rule 11a1-1(T) thereunder,\329\ and the ``Effect vs. Execute'' 
exemption under Rule 11a2-2(T) under the Act.\330\ The ``Effect vs. 
Execute'' exemption permits an exchange member, subject to certain 
conditions, to effect transactions for covered accounts by arranging 
for an unaffiliated member to execute transactions on the exchange. To 
comply with Rule 11a2-2(T)'s conditions, a member: (i) must transmit 
the order from off the exchange floor; (ii) may not participate in the 
execution of the transaction once it has been transmitted to the member 
performing

[[Page 95022]]

the execution; \331\ (iii) may not be affiliated with the executing 
member; and (iv) with respect to an account over which the member has 
investment discretion, neither the member nor its associated person may 
retain any compensation in connection with effecting the transaction 
except as provided in the Rule. For the reasons set forth below, the 
Exchange believes that Members entering orders and responses into the 
electronic FLEX Auction pursuant to proposed Options 3A, Section 11(b), 
FLEX PIM pursuant to proposed Options 3A, Section 12, and FLEX SOM 
pursuant to proposed Options 3A, Section 13 would satisfy the 
requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \327\ 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a member of a 
national securities exchange from effecting transactions on that 
exchange for its own account, the account of an associated person, 
or an account over which it or its associated person exercises 
investment discretion unless an exception applies.
    \328\ 15 U.S.C. 78k(a)(1)(A).
    \329\ 15 U.S.C. 78k(a)(1)(G) and 17 CFR 240.11a1-1(T).
    \330\ 17 CFR 240.11a2-2(T).
    \331\ The member may, however, participate in clearing and 
settling the transaction.
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s first requirement is that orders for covered 
accounts be transmitted from off the exchange floor. The Exchange does 
not operate a physical trading floor. In the context of automated 
trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\332\ The Exchange represents that the System and the 
proposed FLEX auction mechanisms described above will receive all FLEX 
Orders and FLEX responses electronically through remote terminals or 
computer-to-computer interfaces. The Exchange represents that FLEX 
Orders and FLEX responses for covered accounts from Members will be 
transmitted from a remote location directly to the proposed FLEX 
auction mechanisms described above by electronic means.
---------------------------------------------------------------------------

    \332\ See, e.g., Securities Exchange Act Release Nos. 95445 
(August 8, 2022), 87 FR 49894 (August 12, 2022) (SR-MEMX-2022-10) 
(approving options trading on MEMX Options); 61419 (January 26, 
2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) (approving 
BATS options trading); 59154 (December 23, 2008), 73 FR 80468 
(December 31, 2008) (SR-BSE-2008-48) (approving equity securities 
listing and trading on BSE); 57478 (March 12, 2008), 73 FR 14521 
(March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080) 
(approving NOM options trading); 53128 (January 13, 2006), 71 FR 
3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq 
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November 
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
---------------------------------------------------------------------------

    The second condition of Rule 11a2-2(T) requires that neither a 
member nor an associated person participate in the execution of its 
order once the order is transmitted to the floor for execution. The 
Exchange represents that, upon submission to the FLEX Auction, FLEX 
PIM, or FLEX SOM, a FLEX Order or FLEX response will be executed 
automatically pursuant to the rules set forth in proposed Options 3A, 
Section 11(b) (for FLEX Auctions), Section 12 (for FLEX PIM), and 
Section 13(for FLEX SOM). In particular, execution of a FLEX Order 
(including the Agency and the Initiating or Solicited Order, as 
applicable) or a FLEX response sent to the applicable auction mechanism 
depends not on the Member entering the FLEX Order or FLEX response, but 
rather on what other FLEX responses are present and the priority of 
those FLEX responses. Thus, at no time following the submission of a 
FLEX Order or FLEX response is a Member or any associated person of 
such Member able to acquire control or influence over the result or 
timing of the FLEX Order or FLEX response execution.\333\ Once the FLEX 
Order (including the Agency Order and Initiating or Solicited Order (as 
applicable)) has been transmitted, the Member that transmitted such 
order into the FLEX Auction, FLEX PIM, or FLEX SOM (as applicable) will 
not participate in the execution of the FLEX Order. Members submitting 
the FLEX Orders (including the Agency Orders and Initiating or 
Solicited Orders (as applicable)) into the applicable FLEX auction 
mechanisms will relinquish control to cancel their FLEX Orders entered 
into the FLEX Auction, or modify or cancel their Agency Orders and 
Initiating or Solicited Orders (as applicable) entered into FLEX PIM 
and FLEX SOM.\334\ Further, no Member, including the Member submitting 
the FLEX Order into the applicable FLEX auction mechanisms described 
above, will see FLEX responses submitted into any of the FLEX auction 
mechanisms and therefore will not be able to influence or guide the 
execution of their FLEX Orders or FLEX responses, as applicable.
---------------------------------------------------------------------------

    \333\ The submitting Member may cancel a FLEX Auction prior to 
the end of the exposure interval. See proposed Options 3A, Section 
11(b)(2)(C). Members may modify or cancel FLEX responses during the 
exposure interval. See Options 3A, Section 11(b)(2)(D)(v). An 
Initiating Member may not cancel or modify an Agency Order or 
Initiating Order after it has been submitted into FLEX PIM, except 
to improve the price of the Initiating Order. See proposed Options 
3A, Section 12(c)(4). Members may modify or cancel their responses 
after being submitted to into a FLEX PIM. See proposed Options 3A, 
Section 12(c)(5)(F). An Initiating Member may not modify an Agency 
Order or Solicited Order after it has been submitted into FLEX SOM. 
See proposed Options 3A, Section 13(c)(4). Members may modify or 
cancel their responses after being submitted to into a FLEX SOM. See 
proposed Options 3A, Section 12(c)(5)(F). The Commission has stated 
that the nonparticipation requirement does not preclude members from 
cancelling or modifying orders, or from modifying instructions for 
executing orders, after they have been transmitted so long as the 
modifications or cancellations are also transmitted from off the 
floor. See Securities Exchange Act Release No. 14563 (March 14, 
1978), 43 FR 11542, 11547 (the ``1978 Release'').
    \334\ See id.
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s third condition requires that the order be 
executed by an exchange member who is unaffiliated with the member 
initiating the order. The Commission has stated that the requirement is 
satisfied when automated exchange facilities, such as the FLEX Auction, 
FLEX PIM, and FLEX SOM are used, as long as the design of these systems 
ensures that members do not possess any special or unique trading 
advantages in handling their orders after transmitting them to the 
exchange.\335\ The Exchange represents that the FLEX Auction, FLEX PIM, 
and FLEX SOM are designed so that no Member has any special or unique 
trading advantage in the handling of its FLEX Orders after transmitting 
its FLEX Orders to the applicable FLEX auction mechanism.
---------------------------------------------------------------------------

    \335\ In considering the operation of automated execution 
systems operated by an exchange, the Commission noted that, while 
there is not an independent executing exchange member, the execution 
of an order is automatic once it has been transmitted into the 
system. Because the design of these systems ensures that members do 
not possess any special or unique trading advantages in handling 
their orders after transmitting them to the exchange, the Commission 
has stated that executions obtained through these systems satisfy 
the independent execution requirement of Rule 11a2-2(T). See 1979 
Release.
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s fourth condition requires that, in the case of a 
transaction effected for an account with respect to which the 
initiating member or an associated person thereof exercises investment 
discretion, neither the initiating member nor any associated person 
thereof may retain any compensation in connection with effecting the 
transaction, unless the person authorized to transact business for the 
account has expressly provided otherwise by written contract referring 
to Section 11(a) of the Act and Rule 11a2-2(T) thereunder.\336\ The 
Exchange

[[Page 95023]]

recognizes that Members relying on Rule 11a2-2(T) for transactions 
effected pursuant to the proposed FLEX rules, and in particular through 
the applicable FLEX auction mechanisms described above, must comply 
with this condition of the Rule and the Exchange will enforce this 
requirement pursuant to its obligations under Section 6(b)(1) of the 
Act to enforce compliance with federal securities laws.
---------------------------------------------------------------------------

    \336\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 
11a2-2(T)(d) requires a member or associated person authorized by 
written contract to retain compensation, in connection with 
effecting transactions for covered accounts over which such member 
or associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement which amount must be exclusive of all amounts paid to 
others during that period for services rendered to effect such 
transactions. See also 1978 Release, at 11548 (stating ``[t]he 
contractual and disclosure requirements are designed to assure that 
accounts electing to permit transaction-related compensation do so 
only after deciding that such arrangements are suitable to their 
interests'').
---------------------------------------------------------------------------

    The Exchange therefore believes that the proposed rules in Options 
3A governing FLEX trading, including the proposed FLEX Auction, FLEX 
PIM, and FLEX SOM, are consistent with Rule 11a2-2(T).

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 Members 
who wish to trade FLEX Options will be able to trade such options in 
the same manner. Additionally, positions in FLEX Options of all Members 
will be subject to the same position limits, and such positions will be 
aggregated in the same manner as described in proposed Section 18(c).
    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. As 
discussed above, other options exchanges currently offer electronic 
FLEX trading and cash-settled FLEX ETF Options on their respective 
markets. The Exchange believes that its proposal will allow ISE to 
compete with these other exchanges and provide an additional execution 
venue for these transactions for market participants. Thus, the 
Exchange believes that its proposal will promote inter-market 
competition by increasing the number of exchanges where electronic FLEX 
trading and cash-settled FLEX ETF Options will be available. The 
proposal also 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.

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. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange.\337\ In 
particular, the Commission finds that the proposed rule change, as 
amended, is consistent with Section 6(b)(1) and 6(b)(5) \338\ of the 
Exchange Act. Section 6(b)(5) of the Exchange Act \339\ requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices; to 
promote just and equitable principles of trade; to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, and 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. Section 
6(b)(5) also requires that the rules of a national securities exchange 
not be designed to permit unfair discrimination among customers, 
issuers, brokers, or dealers. Further, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(1) of 
the Exchange Act,\340\ which requires, among other things, that a 
national securities exchange be so organized and have the capacity to 
carry out the purposes of the Exchange Act, and to comply and enforce 
compliance by its members and persons associated with its members, with 
the provisions of the Exchange Act, the rules and regulations 
thereunder.
---------------------------------------------------------------------------

    \337\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \338\ 15 U.S.C. 78f(b)(1) and (5).
    \339\ 15 U.S.C. 78f(b)(5).
    \340\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    Specifically, the Exchange is proposing to list and trade FLEX 
Options \341\ on the Exchange's electronic market. FLEX Options allow 
market participants to customize certain specified terms (i.e., 
expiration date, exercise price and exercise style) of equity and index 
options. The Exchange states that FLEX Options are currently traded on 
the Chicago Exchange, Inc. (``Cboe''), NYSE American LLC (``NYSE 
American''), NYSE Arca, Inc. (``NYSE Arca''), Nasdaq PHLX LLC 
(``Phlx''), and FLEX Equity Options are currently traded on BOX 
Exchange LLC (``BOX'').\342\ The Exchange further states that it 
believes its proposal will allow the Exchange to compete with these 
other exchanges and provide an additional execution venue in FLEX 
Options for market participants.\343\
---------------------------------------------------------------------------

    \341\ See proposed Options 3A, Section 1(b) which defines a FLEX 
Option as a ``flexible exchange option'' and includes FLEX Options 
on an equity security (a ``FLEX Equity Option'') and on an index (a 
``FLEX Index Option''),
    \342\ See supra note 23. All of the exchanges trade FLEX Options 
in open outcry on their respective trading floors, while Cboe also 
offers electronic FLEX Options trading.
    \343\ See Amendment No. 1, at 145.
---------------------------------------------------------------------------

    The Exchange has proposed to allow for the trading of FLEX Options 
on its electronic market in a substantially similar manner as Cboe's 
electronic FLEX Options, with certain differences primarily intended to 
align its rules to current System \344\ and auction behavior in order 
to provide increased consistency for Members trading FLEX Options and 
non-FLEX Options on ISE.\345\ While the trading procedures applicable 
to FLEX Options will be similar to those for trading non-FLEX Options 
under the Exchange's electronic System, as discussed in more detail 
below, proposed Options 3A will specifically address the trading of 
FLEX Options including rules to address their customized nature as well 
as those non-FLEX options rules that are not applicable to FLEX 
Options.\346\ The Exchange's proposal is also consistent with the FLEX 
rules of other national securities exchanges that trade FLEX Options, 
and according to the Exchange are primarily based on, with certain 
exceptions, CBOE FLEX rules.\347\ The

[[Page 95024]]

Commission believes that the Exchange's proposal is designed to provide 
investors with a tailored or customized product for equity and index 
options that can be traded on the Exchange that may be more suitable to 
their investment needs. For the reasons described in more detail below, 
the Commission believes the proposal is consistent with the Exchange 
Act.
---------------------------------------------------------------------------

    \344\ The term ``System'' means the electronic system operated 
by the Exchange that receives and disseminates quotes, executes 
orders and reports transactions. See Options 1, Section 1(a)(50).
    \345\ For example, the Exchange states it is not proposing to 
add open outcry FLEX Options trading as it does not have a trading 
floor. See Notice, 89 FR 22295 n. 15.
    \346\ For example, proposed Options 3A, Section 10 states that 
the Exchange simple and complex order books will not be available 
for FLEX Options.
    \347\ In its proposal, ISE described the FLEX rules of Cboe upon 
which its proposed FLEX rules are based and, where there were 
differences, described those and the reasons for those differences. 
For example, the Exchange stated it primarily based its rules on 
Cboe but omitted certain rules that are floor based because it 
doesn't have a trading floor, such as Cboe Rule 5.75(b) which sets 
for the responsibilities of FLEX Officials, including the 
responsibility to nullify certain FLEX Option transactions that do 
not conform to Cboe's FLEX rules, and to call upon a FLEX Market-
Maker with an appointment in a FLEX Option class to respond to open 
outcry FLEX Auctions in that FLEX Option class when no other ICMP's 
respond. See, e.g., Amendment No. 1, at note 18. See also Amendment 
No. 1, at pages 146-153 for a list of the similar rules and 
differences between Cboe rules and new Exchange Rule Options 3A.
---------------------------------------------------------------------------

A. FLEX Equity and Index Options Requirements

1. General Provisions (Section 1)
    FLEX Options traded on the Exchange will generally be subject to 
the same rules that apply to the trading of equity options and index 
options on the Exchange, unless otherwise provided in proposed Options 
3A Rules.\348\ Among other things, proposed Options 3A Rules will 
provide the framework under which FLEX Options would be eligible for 
trading on the Exchange, including, but not limited to, the terms under 
which FLEX Options would be available (detailing the underlying 
security, type, exercise price and style, and expiration date), the 
form of settlement, fungibility provisions, minimum quoting and trading 
increments, exercise by exception requirements, position and exercise 
limits, trading halts and letters of guarantee. In addition, there will 
be no simple or complex order books available for FLEX Options which is 
consistent with the rules of other national securities exchanges that 
trade FLEX Options.\349\ FLEX Options, as discussed in more detail 
below, will be traded by orders being inputted into the Exchange's 
electronic FLEX Auction, FLEX Price Improvement Auction (FLEX PIM), or 
FLEX Solicited Order Mechanism (``SOM''). As the Exchange states these 
auction functionalities are similar to the Systems for executing non-
FLEX options with differences to accommodate the customized nature of 
FLEX Options and that there is no order book available or continuous 
quotes in FLEX Options. As stated by the Exchange FLEX Options in its 
electronic market will trade in a substantially similar manner to 
Cboe's electronic FLEX Options. Further, the Exchange has represented 
that it has conducted a thorough review of its existing trading rules 
to ensure that the proposed Rules in Options 3A accurately reflect the 
application of the Exchange's non-FLEX Option trading rules to FLEX 
Options, as well as those non-FLEX Options trading rules that would not 
apply to FLEX Options. The ISE proposal, as stated above, is also 
consistent with the FLEX rules of other national securities exchanges 
that trade FLEX Options.\350\
---------------------------------------------------------------------------

    \348\ See proposed Options 3A, Section 1(a) that sets forth the 
applicability of Exchange Rules and provides that Options 3A Rules 
apply only to FLEX Options and that trading of FLEX Options will be 
subject to all other Rules applicable to the trading of options on 
the Exchange, unless otherwise provided in Options 3A.
    \349\ See supra note 83. Because of the customized nature of 
FLEX Options and that there are no pre-established outstanding 
series in FLEX Options such options are not continuously quoted and 
there is no national best bid and offer in FLEX Options.
    \350\ See supra note 347.
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2. FLEX Option Classes, Permissible Series and Fungibility (Section 3)
    Proposed Section 3(a) allows the Exchange to authorize for trading 
a FLEX Option class on any equity security, with the exception of the 
iShares Bitcoin Trust ETF (``IBIT''), or index if it may authorize for 
trading a non-FLEX Option class on that equity security or index, even 
if the Exchange does not list that non-FLEX Option class for 
trading.\351\ The Exchange proposes to exclude IBIT from being eligible 
for trading as a FLEX Option on ISE to be consistent with the 
Commission's approval of IBIT options, which required the position 
limit for IBIT options to be 25,000 contracts.\352\ As discussed in the 
position limits section below, there will generally be no position 
limits for FLEX Equity Options.\353\ For clarity, this exclusion will 
apply to both physically-settled and cash-settled FLEX ETF options, 
such that IBIT options will be excluded from being eligible to trade as 
a physically-settled or a cash-settled FLEX ETF option. If the Exchange 
determines to allow FLEX trading on IBIT options at a later date, it 
will do so by submitting a 19b-4 rule filing with the Commission.
---------------------------------------------------------------------------

    \351\ Proposed Section 3(b) would allow the Exchange to approve 
a FLEX Option series for trading in any FLEX Option class it may 
authorize for trading pursuant to proposed Section 3(a).
    \352\ See Securities Exchange Act Release No. 101128 (September 
20, 2024), 89 FR 78942 (September 26, 2024) (SR-ISE-2024-03). See 
also Amendment No. 1, at 14.
    \353\ See proposed Options 3A, Section 18(b)(1)(A).
---------------------------------------------------------------------------

    FLEX Options will only be permitted in puts and calls that do not 
have the same exercise style (American or European), same expiration 
date and same exercise price as Non-FLEX Options that are already 
available for trading on the same underlying security, provided the 
option is otherwise eligible for trading. The Exchange states that its 
System enforces these requirements and that its System will not accept 
a FLEX Order for a put or call FLEX Option series if a non-FLEX Option 
series on the same underlying security or index with the same 
expiration date, exercise price, and exercise style is already listed 
for trading. Under the proposal a FLEX Order for a FLEX Option may be 
submitted on any trading day prior to the expiration date although on 
the expiration date, a FLEX Order for the expiring FLEX Option series 
may only be submitted to close out a position in such expiring FLEX 
Option series.\354\
---------------------------------------------------------------------------

    \354\ See Proposed Options 3A Section 3(b)(2). The Exchange 
represented that the Exchange's System will enforce this provision 
such that it will reject an opening position in an expiring FLEX 
Option series on the day of expiration. See Amendment No. 1, at 15, 
note 3. See also Proposed Options 3A Section 3(d) when expiration 
falls on a holiday.
---------------------------------------------------------------------------

    FLEX Options can also be listed before an option with identical 
terms is listed for trading as a non-FLEX Option. Proposed Section 
3(d)(1) provides that if the Exchange lists for trading a non-FLEX 
Option series with identical terms as a FLEX Option series, (A) all 
existing open positions established under the FLEX trading procedures 
will become fully fungible with transactions in the identical non-FLEX 
Option series and (B) any further trading in the series would be as 
non-FLEX Options subject to non-FLEX trading procedures and rules. If a 
non-FLEX Option Series is added intraday, for the balance of that 
trading day, a position established under the FLEX trading procedures 
may be closed using the FLEX trading procedures only against another 
closing only FLEX position.\355\ The Exchange will notify Members when 
a FLEX Option series is restricted to closing only transactions and the 
System will reject a transaction in such a restricted series that does 
not conform to the requirements specified in proposed Section 3(d).
---------------------------------------------------------------------------

    \355\ This is because in the event a Non-FLEX Equity Option with 
identical terms to a FLEX Equity Option is listed intraday, OCC 
could not net the positions in the contracts until the next day 
potentially leading to assignment risk. See Securities Exchange Act 
Release No. 62321 (June 17, 2010), 75 FR at 36131 (June 24, 2010).
---------------------------------------------------------------------------

    As the Commission has previously stated, it has been concerned 
about FLEX Options acting as a surrogate for trading in standardized 
non-FLEX Options given the protections for investors in the non-FLEX 
Options market, and the fungibility provisions could help to mitigate 
some of these concerns.\356\ The Commission continues to believe that 
requiring FLEX Options

[[Page 95025]]

to be fungible with their non-FLEX counterparts could help to address 
the surrogacy concerns and ensure that market participants can avail 
themselves of the protections provided in the standardized market.
---------------------------------------------------------------------------

    \356\ See Securities Exchange Act Release No. 59417 (February 
18, 2009), 74 FR 8591 (February 25, 2009) (Order providing for 
fungibility of FLEX and non-FLEX option series with same terms upon 
listing of non-FLEX option series).
---------------------------------------------------------------------------

    The proposed rule text should provide greater transparency around 
the Exchange's listing standards and ensure that the listing and 
trading of FLEX Options is consistent with ISE's approval order of IBIT 
options.
3. FLEX Options Terms (Section 3(c))
    Proposed Section 3(c) specifies the terms that must be included in 
a FLEX Order. Such terms include: (1) the underlying equity security or 
index; (2) the type of option (i.e., put or call); (3) the exercise 
style (American or European); (4) the expiration date with terms no 
longer than 15 years; \357\ (5) the settlement type; and (6) the 
exercise price, in increments no smaller than $0.01. The Exchange may 
determine the smallest increment for exercise prices of FLEX Options on 
a class-by-class basis, without going lower than $0.01.
---------------------------------------------------------------------------

    \357\ 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 a member submits a FLEX Order to the system. See proposed 
Options 3A, Section 3(c)(4).
---------------------------------------------------------------------------

    The Exchange has noted that the terms applicable to FLEX Options 
are consistent with rules previously approved by the Commission for 
other exchanges in that they will permit investors to customize some of 
the terms of their FLEX Options to implement more precise trading 
strategies.
    Under the proposal, settlement for index options can be either a.m. 
(settlement value determined by reported opening prices of component 
securities) or p.m. (settlement value determined by reported closing 
prices of component securities). The Exchange has proposed to permit 
p.m. settlement in FLEX Index Options, including on the third Friday of 
the month (known as ``Expiration Fridays'') similar to that approved 
for another national securities exchange. In the context of approving 
CBOE's Flex PM Pilot on a permanent basis the Commission stated that 
the CBOE's pilot data and reports, demonstrated that its pm pilot has 
benefited investors and other market participants by providing more 
flexible trading and hedging opportunities while also having shown no 
evidence of an adverse impact on the market. The Commission further 
stated, among other things, that the market for FLEX PM Third Friday 
Options had remained relatively small compared to non-FLEX p.m.-settled 
index options and the studies and analysis of the pilot data did not 
identify any adverse market impact on the underlying indexes, 
components of those indexes or related products or any significant 
impact on market quality of a.m.-settled index options.\358\ The 
Commission has made similar conclusions in approving rules on p.m. 
settlement for non-FLEX Options including on the P.M.-settled Nasdaq-
100 Index (``NDX'') Options with a Third-Friday-of-the-Month 
expiration.\359\ Further, significant changes in closing procedures in 
the decades since index options moved to a.m. settlement may also serve 
to mitigate the potential impact of p.m.-settled index options on the 
underlying cash markets.
---------------------------------------------------------------------------

    \358\ Id. As noted above, for Third-Friday expirations ISE 
currently only has authority to trade non-FLEX on the NDX and 
therefore would only be allowed to trade P.M.-settled Third-Friday-
of-the-Month index options on the NDX. See Securities Exchange Act 
Release No. 98935 (November 14, 2023), 88 FR 80792 (November 20, 
2023) (SR-ISE-2023-20).
    \359\ See Securities Exchange Act Release Nos. 99222 (December 
21, 2023) (SR-CBOE-2023-018) (order making permanent the operation 
of Cboe's FLEX Options pilot program regarding permissible exercise 
settlement values for FLEX Index Options); 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. 98450 (September 20, 
2023), 88 FR 66111 (September 26, 2023) (SR-ISE-2023-08) (order 
approving proposed rule change to make permanent certain p.m.-
settled pilots); and 98935 (November 14, 2023), 88 FR 80792 
(November 20, 2023) (SR-ISE-2023-20) (order approving a proposed 
rule change to permit the listing and trading of p.m.-settled 
Nasdaq-100 Index[supreg] Options with a third-Friday-of-the-month 
expiration).
---------------------------------------------------------------------------

4. Types of Orders; Order and Quote Protocols (Sections 6 and 7)
    Proposed Section 6(a) provides that the Exchange may determine to 
make only the Limit Order and Cancel and Replace Order order types 
available on a class or System basis for FLEX Orders. The Exchange may 
also determine to make only the Immediate-or-Cancel time-in-force 
available on a class or System basis for FLEX Orders. Proposed Section 
6(b) provides that the only order and quote protocols that will be 
available for FLEX Orders, FLEX auction notifications, and FLEX auction 
responses are: FIX (``Financial Information eXchange''); OTTO (``Ouch 
to Trade Options''); and SQF (``Specialized Quote Feed'').
    Proposed Section 6 could aid in FLEX Order executions and should 
provide greater transparency as to which order and quote protocols will 
be available for FLEX Orders, FLEX auction notifications, and FLEX 
auction responses.
    Proposed Section 7(a) covers the operation of complex orders, 
include a Complex Options Order, Stock-Options Order, and Stock-Complex 
Order. Each leg of a complex FLEX Order: (1) must be for a FLEX Option 
series authorized for FLEX trading with the same underlying equity 
security or index; (2) must have the same exercise style; and (3) for a 
FLEX Index Option, may have a different settlement type (a.m.-settled 
or p.m.-settled). Also, each options leg of a complex order cannot go 
below the $0.01 minimum increment.
    Proposed Section 7 will provide investors with additional 
transparency regarding order entry of complex FLEX Options and will 
remove impediments to and perfect the mechanism of a free and open 
market, benefiting investors.
5. Opening of FLEX Trading and Trading Halts (Sections 8 and 9)
    Proposed Section 8(a) provides that there will be no Opening 
Process. Members may begin submitting FLEX Orders into an electronic 
FLEX Auction pursuant to proposed Section 11(b), a FLEX PIM pursuant to 
proposed Section 12, or a FLEX SOM pursuant to proposed Section 13 when 
the underlying security is open for trading. Proposed Options 3A, 
Section 8(a) and (b) are based on Cboe Rule 5.71, except with respect 
to open outcry trading and trading sessions outside of regular trading 
hours.\360\ The Exchange stated its belief that because market 
participants incorporate transaction prices of underlying securities or 
the value of underlying indexes when pricing options (including FLEX 
Options), the Exchange believes that it will benefit investors for FLEX 
Options trading to not be available until that information has begun to 
be disseminated in the market.
---------------------------------------------------------------------------

    \360\ See Amendment No. 1, at note 75.
---------------------------------------------------------------------------

    In addition, proposed Section 9 provides that the Exchange may halt 
trading in a FLEX Option and will always halt trading in a FLEX Options 
class when trading in a non-FLEX Options class with the same underlying 
equity security or index is halted on the Exchange.
    Proposed Section 9 adds clarity and transparency as to when FLEX 
Orders can be submitted since there is no opening process, as in the 
non-FLEX

[[Page 95026]]

Options market, and when the Exchange would halt trading in FLEX 
Options.
6. FLEX Options Auction Trading (Sections 11, 12 and 13)
    Proposed Section 11 details the procedures for FLEX trading on the 
Exchange. A FLEX Options series will only be eligible for trading if a 
Member submits a FLEX Order for that series into an electronic FLEX 
Auction pursuant to paragraph (b) of Options 11, or submits the FLEX 
Order to a FLEX PIM or FLEX SOM Auction pursuant to proposed Section 12 
or proposed Section 13, respectively. Proposed Section 11(a) specifies 
the requirements for simple and complex FLEX Orders while proposed 
Section 11(b) describes how the electronic FLEX Auction will work.
    The Exchange has represented that it will System enforce the 
stipulation that it will not accept simple or complex FLEX Orders if 
the FLEX Order or any leg of a complex FLEX Order, as applicable, has 
identical terms as a non-FLEX Option series that is already listed for 
trading. The proposed FLEX Auction will offer market participants with 
an auction mechanism that offers potentially improved prices. The 
initiating Member must designate the length of the exposure interval 
for the order which must be between three seconds and five minutes, 
which is the same exposure time frame under Cboe' electronic auction 
rules. Each auction will remain open for the designated time between 
three seconds and five minutes and if the designated time exceeds the 
market close, the auction will end at the market close with an 
execution, if permitted.\361\ The proposed FLEX Auction will promote 
executions in electronic FLEX Auctions while also preventing executions 
after the market close. In addition, the Exchange will not allow 
Members to submit multiple FLEX responses using the same badge/mnemonic 
and will not aggregate all responses at the same price. Proposed 
Section 11(b)(2)(D) specifies that an additional FLEX response from the 
same badge/mnemonic for the same auction ID will automatically replace 
the previous FLEX response.
---------------------------------------------------------------------------

    \361\ See proposed Options 3A, Section 11(b)(1)(F).
---------------------------------------------------------------------------

    The Exchange believes that having these features harmonized with 
the Exchange's current auction functionality for non-FLEX Orders will 
promote consistency for Members participating across different auctions 
on ISE. Importantly, the Exchange has stated that its System will 
prohibit a FLEX Order from being accepted if it has the same terms 
(i.e., expiration date, exercise price, and exercise style) of a non-
FLEX Option.
    Use of the electronic FLEX Auction, that is similar in function to 
existing functionality with differences to accommodate FLEX and the 
accompanying clarity this will provide to Members and market 
participants, should be beneficial to market participants and should be 
beneficial to market participants.
    Proposed Section 12 establishes the FLEX price improvement 
mechanism (``PIM''). The FLEX PIM is a price improvement mechanism 
auction that allows Members to provide price improvement opportunities 
for transactions. A Member may electronically submit for execution an 
order it represents as agent against principal interest or a solicited 
order(s), provided it submits the Agency Order for electronic execution 
into a FLEX PIM auction. The proposed FLEX PIM is substantially similar 
to Cboe's FLEX AIM except that the FLEX PIM will not allow prices to be 
entered as a percentage value. Proposed Section 13 establishes the FLEX 
solicited order mechanism (``SOM'') auction functionality for FLEX 
Options. The FLEX SOM is an auction that allows Members to submit 
complex orders for a single-price all-or-none execution. A Member may 
electronically submit for execution an order it represents as agent 
against a solicited order if it submits the Agency Order for electronic 
execution into a FLEX SOM auction.
    As with the FLEX Auction, the initiating Member must designate the 
length of the exposure interval for the order which must be between 
three seconds and five minutes. Both the FLEX PIM and FLEX SOM auctions 
will remain open for the designated time between three seconds and five 
minutes and if the designated time exceeds the market close, the 
auction will end at the market close with an execution, if 
permitted.\362\ The Exchange's FLEX PIM and FLEX SOM, unlike Cboe's 
FLEX PIM and FLEX SAM, respectively, specifies that if the designated 
length of the FLEX PIM or SOM auction period exceeds the market close, 
then the auction will end at the market close with an execution, if an 
execution is permitted.
---------------------------------------------------------------------------

    \362\ See proposed Options 3A, Section 12(c)(3).
---------------------------------------------------------------------------

    The FLEX Auctions, FLEX PIM and FLEX SOM rules also provide 
provisions on order execution priority and allocations. Generally, FLEX 
Auctions, FLEX PIM and FLEX SOM will apply the same priorities as it 
applies under its current rules for non-FLEX options. The System will 
execute trading interest at the best price with Priority Customers 
\363\ having priority over non-Priority Customers at the same price 
with time priority (i.e., meaning that priority shall be afforded to 
Priority Customer orders in the sequence received by the System). 
Allocations generally follow the exiting rules for the exchange non-
FLEX auctions but the Exchange is aligning its rule with CBOE's rules 
instead of providing the standard 40% for standard PIM.\364\ The 
clarity in how FLEX PIM and FLEX SOM Auctions will function, as well as 
the explanations for the differences between the FLEX PIM and SOM and 
Cboe's FLEX AIM and SAM, should be beneficial to market participants.
---------------------------------------------------------------------------

    \363\ See Amendment No. 1, at 50-54.
    \364\ See Amendment No. 1, at note 150.
---------------------------------------------------------------------------

7. Risk Protections (Section 14)
    Proposed Section 14 specifies which of the Exchange's risk 
protections apply to FLEX trading. Specifically, the Market Wide Risk 
Protection and Size Limitation will be available to FLEX Options. 
Market Wide Risk Protections are mandatory activity-based protections 
that allow Members to establish limits for order entry and execution 
rate during a specified period of time. The Size Limitation is a limit 
on the number of contracts an incoming order may specify. Orders that 
exceed the maximum number of contracts are rejected. This maximum is 
established by the Exchange from time-to-time.
    Proposed Section 14(b) provides that the following complex order 
risk protections are available to FLEX Options: Strategy Protections 
(only to FLEX Auctions and FLEX responses in proposed Section 11(b)), 
Size Limitation, the Price Limit for Complex Order protection as 
applicable to the stock component, the Stock-Tied NBBO protections, and 
the Stock-Tied Reg SHO protections. The Exchange notes that the risk 
protections specified in proposed Sections 14(a) and 14(b) are 
mandatory.
    Proposed Section 14(c) provides that the following optional risk 
protections (from Options 3, Section 28) are available: (1) notional 
dollar value per order; (2) daily aggregate notional dollar value; (3) 
quantity per order; and (4) daily aggregate quantity.
    Applying these risk protections to FLEX Options will protect 
investors and the public interest, and may help with maintaining fair 
and orderly markets, by providing market participants with more tool 
with which to manage their risk.

[[Page 95027]]

8. FLEX Market Makers and Letters of Guarantee (Sections 16 and 17)
    Proposed Section 16 governs FLEX Market Makers. Proposed Section 
16(a) provides that a FLEX Market Maker will automatically receive an 
appointment in the same FLEX option class(es) as its non-FLEX class 
appointments, but only the Primary Market Maker in the non-FLEX Option 
may be assigned Primary Market Maker in that FLEX Option. Proposed 
Section 16(b) provides that FLEX Market Makers do not need to provide 
continuous quotes in FLEX Options, but a FLEX Market Maker must fulfill 
all of the obligations of a Market Maker under Options 2 and must 
comply with the applicable provisions.
    Proposed Section 17(a) provides that no FLEX Market Maker shall 
effect any transactions in FLEX Options unless one or more effective 
Letter(s) of Guarantee has been issued by a Clearing Member and filed 
with the Exchange accepting financial responsibility for all FLEX 
transactions made by the FLEX Market Maker pursuant to Options 6, 
Section 4. The Letters of Guarantee for FLEX transactions of FLEX 
market makers should, as the Exchange states, help to protect investors 
and the public interest because they signify that the clearing member 
has accepted financial responsibility for such FLEX transactions thus 
protecting the counterparties to those trades.\365\
---------------------------------------------------------------------------

    \365\ See Amendment No. 1, at 129.
---------------------------------------------------------------------------

    The provisions contained in proposed Sections 16 and 17 will 
provide additional clarity and transparency as to how FLEX Market 
Makers are appointed and their responsibilities and will ensure that 
the appropriate guarantees are available to market participants for 
FLEX transactions.
9. Position Limits and Exercise Limits (Sections 18 and 19)
    Proposed Section 18 details the position limits for FLEX Options. 
Specifically, proposed Section 18(a) governs the position limits for 
FLEX Index Options and provides that FLEX Index Options will be subject 
to the same position limits governing non-FLEX index options in Options 
4A, Sections 6 and 7. However, except as provided in Options 4A, 
Section 6(a) as set forth below, in no event shall the positions limits 
for broad-based FLEX Index Options exceed 25,000 contracts on the same 
side of the market. In addition, there shall be no position limits for 
those broad-based index options listed in Options 4A, Section 
6(a).\366\
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    \366\ The broad-based index options listing in Options 4A, 
Section 6(a) currently are options on Nasdaq 100 Index, Mini Nasdaq 
100 Index; Nations VolDex Index, Nasdaq 100 Reduced Value Index; and 
Nasdaq Micro Index Options.
---------------------------------------------------------------------------

    Each Member (other than FLEX Market Makers) that maintains a FLEX 
broad-based index position on the same side of the market in excess of 
100,000 contracts in NDX or RUT for its own account, or for the account 
of a customer, shall report information as to whether the positions are 
hedged and provide documentation as to how such contracts are hedged, 
in the manner and form required by the Exchange. In addition, industry-
based FLEX Index Options shall be subject to separate position limits 
of 18,000, 24,000, or 31,500 contracts, depending on the position limit 
tier determined pursuant to Options 4A, Section 7(a)(1).\367\
---------------------------------------------------------------------------

    \367\ See proposed Options 3A, Section 18(a)(4). The Commission 
notes that these position limits are identical to those in place for 
Cboe. See Cboe Rules 8.32 and 8.35.
---------------------------------------------------------------------------

    Proposed Section 18(b) governs the position limits for FLEX Equity 
Options. Proposed Section 18(b)(1)(A) provides that there will 
generally be no position limits for FLEX Equity Options except for FLEX 
cash-settled ETFs, as discussed in detail below.\368\ Each Member 
(other than a Market Maker) that maintains a position on the same side 
of the market in excess of the standard limit under Options 9, Section 
13 for non-FLEX Equity Options of the same class on behalf of its own 
account or for the account of a customer shall report information on 
the FLEX Equity option position, positions in any related instrument, 
the purpose or strategy for the position and the collateral used by the 
account, in the form and manner prescribed by the Exchange. Whenever 
the Exchange determines that a higher margin requirement is necessary 
in light of the risks associated with a FLEX Equity Options position in 
excess of the standard position limit for Non-FLEX Equity Options of 
the same class, the Exchange may consider imposing additional margin 
upon the account maintaining such under-hedged position.\369\
---------------------------------------------------------------------------

    \368\ See Amendment No. 1, at 76-77 and Proposed 3A, Section 
18(b)((1)(B).
    \369\ The clearing firm carrying the account will be subject to 
capital charges under SEC Rule 15c3-1 to the extent of any margin 
deficiency resulting from a higher margin requirement.
---------------------------------------------------------------------------

    Proposed Section 18(c) governs the aggregation of FLEX positions 
and states that for purposes of the position limits and reporting 
requirements, FLEX Option positions shall not be aggregated with 
positions in non-FLEX Options except in certain situations provided for 
in proposed Section 18(c) and in proposed Section 18(b)(1)(B) (setting 
forth position limits for cash-settled FLEX ETF options discussed 
below. Proposed Section 18(c)(1) states that 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 shall be 
aggregated with position 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 or Section 7, as applicable. In 
addition, proposed Section 18(c)(2) states that commencing at the close 
of trading two business day prior to the last trading day of the week, 
positions in FLEX Index Options that are cash settled shall be 
aggregated with positions in Short Term Option Series on the same 
underlying with the same means for determining exercise settlement 
value and same expiration, and shall be subject to the position limits 
set forth in Options 4A, Section 6 or Section 7, as applicable. 
Finally, proposed Section 18(c)(3) states that for as long as the 
options positions remain open, positions in FLEX Options that expire on 
the third Friday-of-the-month shall be aggregated with positions in 
non-FLEX Options on the same underlying security and shall be subject 
to the position limits set forth in Options 4A, Section 6 or Section 7, 
or Options 9, Section 13, as applicable, and the exercise limits set 
forth in Options 9, Section 15.
    Proposed Section 19(a) provides that exercise limits for FLEX 
Options shall be equivalent to the FLEX position limits prescribed in 
proposed Section 18.\370\ In addition, there shall be no exercise 
limits for those broad-based index options listed in Options 4A, 
Section 6(a).\371\
---------------------------------------------------------------------------

    \370\ Proposed Options 3A, Section 19(a)(1) indicates 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 3A, Section 19(a)(2) indicates that the minimum 
value size for FLEX Index Option exercises shall be $1 million in 
Underlying Equivalent Value (as defined in Section 19) or the 
remaining Underlying Value of the position, whichever is less.
    \371\ See Amendment No. 1, at 80.
---------------------------------------------------------------------------

    The enhanced reporting requirements and margin provisions as well 
as the requirement that FLEX Options that expire on an Expiration 
Friday be subject to, and aggregated with, standard non-FLEX Options 
position and exercise limits are the same position and exercise limit 
requirements that apply under the rules of the other exchanges that 
currently trade FLEX Options. It is therefore appropriate for ISE to 
have the same position and exercise limit rules for FLEX Options as 
these other exchange markets. As the Commission has previously stated,

[[Page 95028]]

while it cannot entirely rule out the potential for future adverse 
effects on the securities markets for the FLEX Options or component 
securities underlying FLEX Options, the continued enhanced market 
surveillance of positions should help the Exchange to take the 
appropriate action in order to avoid any manipulation or market risk 
concerns.\372\ The Commission expects ISE, as it has the other 
exchanges trading FLEX Options, to take prompt action including timely 
communication with the Commission and other marketplace self-regulatory 
organizations responsible for oversight of trading in FLEX Options and 
the underlying stocks, should any unanticipated adverse market effects 
develop.
---------------------------------------------------------------------------

    \372\ The Commission, for example stated, in approving FLEX 
Equity Options with no position limits, that the monitoring of 
accounts should provide the Exchanges with information necessary to 
determine whether to impose additional margin and/or assess capital 
charges and also determine whether a large position could have an 
undue effect on the underlying market and to take the appropriate 
action. See Securities Exchange Act Release No. 42223 (December 10, 
1999), 64 FR 71158 (December 20, 1999) (Order approving the 
elimination of position and exercise limits for FLEX Equity 
Options). See also Securities Exchange Act Release No. 42346 
(January 18. 2000), 65 FR 4010 (January 25, 2000) (Order approving 
the elimination of position and exercise limits for FLEX Equity 
Options).
---------------------------------------------------------------------------

10. Summary
    The Commission notes that the listing and trading rules are modeled 
on FLEX rules previously approved by the Commission. Furthermore, the 
Commission believes that the Exchanges rules governing its hours of 
business, minimum increments, the trading auctions, position and 
exercise limits, letters of guarantee, and trading halts, among other 
things, are consistent with the Exchange Act, and Section 6(b)(5) \373\ 
therein. Finally, the Commission notes that the proposed rules are 
substantially similar to those already approved for other Exchanges, in 
particular, those of Cboe.\374\
---------------------------------------------------------------------------

    \373\ Id.
    \374\ See Securities Exchange Act Release No. 99222 (December 
21, 2023), 88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018).
---------------------------------------------------------------------------

B. Cash-Settled FLEX ETFs

    The Commission also believes, for the reasons discussed below, that 
the portion of the proposed rules to trade cash settled FLEX ETFs that 
meet certain specified criteria are consistent with the requirements of 
Section 6(b)(5) of the Act,\375\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest.
---------------------------------------------------------------------------

    \375\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange's proposal would allow cash settlement for FLEX Equity 
Options only on ETFs, and only where the underlying ETF, as measured 
over the prior six-month period, has (1) an average daily notional 
value of at least $500 Million; and (2) a national ADV of at least 
4,680,000 shares.\376\ The Commission notes, and the Exchange has 
represented, that the 46 ETFs \377\ currently eligible using the 
proposed criteria appear to be among some of the most liquid and 
actively-traded ETFs based on their average daily volume and average 
notional value. The Commission believes that, by limiting the trading 
of options permitted to have cash settlement to those with underlying 
ETFs and only where these ETFs are liquid and actively traded, along 
with the other proposed requirements, appears to be reasonably designed 
to mitigate concerns about the susceptibility to manipulation of such 
cash-settled FLEX ETF Options and their underlying ETFs and the 
potential for market disruption. Additionally, the proposed aggregated 
position and exercise limits and surveillance procedures discussed 
below, taken together with the liquid and active markets in the 
underlying eligible ETFs, also appears reasonably designed to address 
and mitigate concerns about the potential for manipulation and market 
disruption in markets for the options and the underlying securities.
---------------------------------------------------------------------------

    \376\ See Amendment No. 1, at 82-83. These are the same 
requirements that both Cboe and NYSE American have to trade FLEX-
cash settled ETFs. 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) and 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).
    \377\ See Amendment No. 1, at 14 and 87.
---------------------------------------------------------------------------

    The Commission also notes that the Exchange has proposed to use the 
same position limits and exercise limits for cash-settled FLEX ETF 
Options that are applicable to the non-FLEX standardized options 
market, and to aggregate the positions in cash-settled FLEX ETF Options 
with all positions on physically-settled options on the same underlying 
ETF for purposes of calculating the position and exercise limits.\378\ 
This is structured the same as on other exchanges that currently trade 
cash-settled FLEX ETFs under the same criteria described above. The 
Commission has previously recognized that position and exercise limits 
serve as a regulatory tool designed to address manipulative schemes and 
adverse market impact surrounding the use of options and that the 
limits can be useful to prevent investors from disrupting the market in 
securities underlying the options as well as the options market 
itself.\379\ The Commission believes therefore that establishing 
position and exercise limits at the same levels as those in the non-
FLEX standardized options market and aggregating those positions with 
all physically-settled options on the same underlying ETFs \380\ can 
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.
---------------------------------------------------------------------------

    \378\ See Amendment No. 1, at note 248 and accompanying text.
    \379\ See Securities Exchange Act Release No. 82770 (February 
23, 2018), 83 FR 8907, 8910 (March 1, 2018) (SR-CBOE-2017-057).
    \380\ The aggregation of position and exercise limits would 
include all positions on physically-settled FLEX and non-FLEX 
options on the same underlying ETFs.
---------------------------------------------------------------------------

    The Commission notes that the Exchange will conduct a biannual 
review of the underlying ETFs to determine whether they no longer meet 
the requirements for cash-settled FLEX ETF Options on those ETFs.\381\ 
The Commission believes that this requirement is a reasonable means to 
limit cash settlement to those FLEX ETF Options that only overlie ETFs 
that continue to meet the specified liquidity and trading volume 
standards. The Commission also believes that while, as part of the 
biannual review, the Exchange can identify new underlying ETFs that 
meet the requirements and are thus eligible for cash-settled FLEX ETF 
Options, limiting the number of qualifying underlying ETFs to 50 will 
prevent the scope of cash settlement on FLEX ETF Options from growing 
considerably without an evaluation about whether the level of the 
requirements remains reasonable.\382\ The Commission further believes 
that selecting the top 50 securities based on ETFs with the highest 
ADV, if more than 50 ETFs otherwise meet the

[[Page 95029]]

requirements in Section 3(c), appears to be a reasonable tiebreaker. In 
addition, the Commission notes that, should the Exchange determine, 
pursuant to the bi-annual review that an underlying ETF ceases to 
satisfy the requirements under Section 3(c), any new options position 
overlying such ETF would 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.\383\ The Commission believes 
that this provision is a reasonable means to address how to wind down 
an outstanding cash-settled FLEX ETF Option where the underlying ETF no 
longer qualifies under the liquidity and volume criteria, thereby 
addressing manipulation concerns, while still allowing market 
participants to close out positions.
---------------------------------------------------------------------------

    \381\ See Amendment No. 1, at note 237 and accompanying text.
    \382\ See Amendment No. 1, at 84. At the same time, the overall 
limit of 50 ETFs that can underlie cash settled FLEX ETF Options 
should also provide the Exchange with flexibility to add additional 
ETFs that meet the Exchange's requirements given that the current 
eligible list of ETFs as of June 30, 2024 contains 46 ETFs.
    \383\ See Amendment No. 1, at 84.
---------------------------------------------------------------------------

    While two exchanges commenced trading FLEX cash settled ETFs in 
August, 2023 under similar rules as those proposed by ISE, the proposal 
is significant in that the large majority of exchange traded equity 
options are still physically settled and the proposal would allow 
options on ETFs that currently are only available to be traded on ISE 
with physical settlement to now have a cash-settlement alternative as a 
FLEX Option on the specified ETFs. The Exchange, acknowledging the 
``novel characteristics'' of its proposal has committed to perform 
periodic data analyses with written assessments and to make such 
analyses and assessments available to the Commission on an annual basis 
for the first five years of trading in the subject options.\384\ As 
noted above, the Exchange has also stated that the reports will discuss 
any recommendations it has on enhancements to its proposed listing 
standards based on these reviews. The Commission notes that the annual 
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.
---------------------------------------------------------------------------

    \384\ See Amendment No. 1, at 99. The Exchange has represented 
that trading in cash-settled FLEX ETF Options will not commence 
until the related reporting requirements are finalized. See 
Amendment No. 1, at note 234.
---------------------------------------------------------------------------

    The Commission notes that surveillance is important, 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. The Exchange has represented that it has adequate 
surveillance procedures in place to monitor trading in these options 
and the underlying securities, including to detect manipulative trading 
activity in both the options and the underlying ETF and to identify 
unusual and/or illegal trading activity.\385\ The Commission notes that 
the proposed surveillance, along with the liquidity criteria and 
position and exercise limits requirements, appear to be reasonably 
designed to mitigate manipulation concerns. The Exchange has 
represented that it will periodically review its surveillance 
procedures and make any enhancements and/or modifications that might be 
needed for cash settlement of FLEX ETF Options.
---------------------------------------------------------------------------

    \385\ See Amendment No. 1, at 97-98. Among other things, the 
Exchange noted that its regulatory program included cross-market 
surveillance designed to identify manipulative and other improper 
trading, including spoofing, algorithm gaming, marking the close and 
open, as well as more general abusive behavior related to front 
running, wash sales, quoting/routing, and Reg SHO violations, that 
may occur on the Exchange and other markets. Furthermore, the 
Exchange stated that it has access to information regarding trading 
activity in the pertinent underlying securities as a member of ISG. 
See Amendment No. 1, at note 317.
---------------------------------------------------------------------------

    The Commission notes that cash-settled FLEX ETF Options will be 
subject to the same trading rules and procedures that will govern the 
trading of FLEX Options on the Exchange, with the exception of the 
rules to accommodate the cash settlement feature being approved herein. 
The Commission also notes that the Exchange has represented that it 
will monitor any effect additional options series listed under the 
proposal have on market fragmentation and the capacity of the 
Exchange's automated systems.\386\ Finally, the Commission expects that 
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.
---------------------------------------------------------------------------

    \386\ See Amendment No. 1, at 95.
---------------------------------------------------------------------------

    Based on the Exchange's representations with respect to the 
proposed cash-settlement of FLEX Equity Options, whose underlying 
security is an ETF, and that the proposed rules are substantially 
similar to other exchanges trading similar FLEX Options as well as the 
on-going reporting requirement, the Commission believes this part of 
the Exchange's proposal is consistent with the Act.

C. Section 11(a) of the Exchange Act

    Section 11(a)(1) of the Act \387\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\388\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\389\ (iii) may not be affiliated with the executing member; and (iv) 
with respect to an account over which the member or an associated 
person has investment discretion, neither the member nor its associated 
person may retain any compensation in connection with effecting the 
transaction except as provided in the Rule. For the reasons set forth 
below, the Commission believes that Members entering orders and 
responses into the electronic FLEX Auction, FLEX PIM and FLEX SOM could 
satisfy the requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \387\ 15 U.S.C. 78k(a)(1).
    \388\ 17 CFR 240.11a2-2(T).
    \389\ This prohibition also applies to associated persons. The 
member may, however, participate in clearing and settling the 
transaction.
---------------------------------------------------------------------------

    The Rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. In the context of automated 
trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\390\ ISE represents that

[[Page 95030]]

it does not operate a physical trading floor and that the System and 
the proposed FLEX auction mechanisms will receive all FLEX Orders and 
FLEX responses electronically through remote terminals or computer-to-
computer interfaces.\391\ The Exchange also represents that FLEX Orders 
and FLEX Responses for covered accounts from Members will be 
transmitted from a remote location directly to the proposed auction 
mechanisms by electronic means. Therefore, the Commission believes that 
the proposed FLEX auction mechanisms satisfy the off-floor transmission 
requirement.
---------------------------------------------------------------------------

    \390\ See, e.g., Securities Exchange Act Release Nos. 61419 
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) 
(approving BATS options trading); 59154 (December 23, 2008), 73 FR 
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity 
securities listing and trading on BSE); 57478 (March 12, 2008), 73 
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71 
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq 
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November 
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
    \391\ See Amendment No. 1, at 141.
---------------------------------------------------------------------------

    Second, the Rule requires that the member and any associated person 
not participate in the execution of its order after the order has been 
transmitted. The Exchange represents that at no time following the 
submission of an order is a Member or any associated person of such 
Member able to acquire control or influence over the result or timing 
of the order's execution.\392\ According to the Exchange, execution of 
a FLEX Order (including the Agency and Initiating or Solicited Order, 
as applicable) or a FLEX response sent to the applicable auction 
mechanism depends not on the Member entering the FLEX Order or FLEX 
response, but rather on what other FLEX responses are present and the 
priority of those FLEX responses.\393\ Accordingly, the Commission 
believes that a member does not participate in the execution of an 
order submitted to the proposed FLEX auction mechanisms.
---------------------------------------------------------------------------

    \392\ See Amendment No. 1, at 142-3 (also representing, among 
other things, that no Member, including the Member submitting the 
FLEX Order into the applicable FLEX auction mechanisms, will see 
FLEX responses submitted into any of the FLEX auction mechanisms and 
therefore will not be able to influence or guide the execution of 
their FLEX Orders or FLEX responses, as applicable).
    \393\ See Amendment No. 1, at 142. The Exchange also states that 
the submitting Member may cancel a FLEX Auction prior to the end of 
the exposure interval. See proposed Options 3A, Section 11(b)(2)(C). 
Members may modify or cancel FLEX responses during the exposure 
interval. See Options 3A, Section 11(b)(2)(D)(v). An Initiating 
Member may not cancel or modify an Agency Order or Initiating Order 
after it has been submitted into FLEX PIM, except to improve the 
price of the Initiating Order. See proposed Options 3A, Section 
12(c)(4). Members may modify or cancel their responses after being 
submitted to into a FLEX PIM. See proposed Options 3A, Section 
12(c)(5)(F). An Initiating Member may not modify an Agency Order or 
Solicited Order after it has been submitted into FLEX SOM. See 
proposed Options 3A, Section 13(c)(4). Members may modify or cancel 
their responses after being submitted to into a FLEX SOM. See 
proposed Options 3A, Section 12(c)(5)(F). The Commission has stated 
that the non-participation condition is satisfied under such 
circumstances so long as such modifications or cancellations are 
also transmitted from off the floor. See Securities Exchange Act 
Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) 
(``1978 Release'') (stating that the ``non-participation requirement 
does not prevent initiating members from canceling or modifying 
orders (or the instructions pursuant to which the initiating member 
wishes orders to be executed) after the orders have been transmitted 
to the executing member, provided that any such instructions are 
also transmitted from off the floor'').
---------------------------------------------------------------------------

    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated exchange facilities, such as the FLEX Auction, FLEX PIM, 
and FLEX SOM, are used, as long as the design of these systems ensures 
that members do not possess any special or unique trading advantages in 
handling their orders after transmitting them to the exchange.\394\ ISE 
represents that the auctions are designed so that no Member has any 
special or unique trading advantage in the handling of its orders after 
transmitting its orders to the mechanism.\395\ Based on the Exchange's 
representation, the Commission believes that the proposed FLEX auction 
mechanisms satisfy this requirement.
---------------------------------------------------------------------------

    \394\ In considering the operation of automated execution 
systems operated by an exchange, the Commission noted that, while 
there is not an independent executing exchange member, the execution 
of an order is automatic once it has been transmitted into the 
system. Because the design of these systems ensures that members do 
not possess any special or unique trading advantages in handling 
their orders after transmitting them to the exchange, the Commission 
has stated that executions obtained through these systems satisfy 
the independent execution requirement of Rule 11a2-2(T). See 1979 
Release.
    \395\ See Amendment No. 1, at 143.
---------------------------------------------------------------------------

    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\396\ ISE represents that Members relying on Rule 11a2-
2(T) for transactions effected through the proposed FLEX auction 
mechanisms must comply with this condition of the Rule and that the 
Exchange will enforce this requirement pursuant to its obligations 
under Section 6(b)(1) of the Act to enforce compliance with federal 
securities laws.\397\
---------------------------------------------------------------------------

    \396\ In addition, Rule 11a2-2(T)(d) requires a member or 
associated person authorized by written contract to retain 
compensation, in connection with effecting transactions for covered 
accounts over which such member or associated persons thereof 
exercises investment discretion, to furnish at least annually to the 
person authorized to transact business for the account a statement 
setting forth the total amount of compensation retained by the 
member or any associated person thereof in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, at 
11548 (stating ``[t]he contractual and disclosure requirements are 
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
    \397\ See Amendment No. 1, at 144.
---------------------------------------------------------------------------

D. Surveillance and Regulation

    The Commission believes that surveillance is important, 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. The Exchange has stated that it has an adequate 
surveillance program and will be integrating FLEX Options and their 
symbols into the existing surveillance system and processes. The 
Exchange believes this will allow the Exchange to properly identify 
disruptive and/or manipulative activity. The Exchange has also 
represented that it has taken into consideration that FLEX Options have 
unique characteristics and has reviewed its catalog of patterns and 
updated a number of patterns to include FLEX Options transactions when 
they begin trading. In addition, the Exchange has represented that it 
will periodically review its surveillance procedures and make any 
changes that the Exchange believes are necessary for FLEX trading. 
Furthermore, the Exchange represents that it believes it and the 
Options Price Reporting Authority (``OPRA'') have the necessary systems 
capacity to handle the additional message traffic associated with the 
listing of new series that may result from the introduction of FLEX 
Options.\398\
---------------------------------------------------------------------------

    \398\ See Amendment No. 1, at 80. The Exchange noted that it 
will report FLEX Equity Options trades and, if necessary, trade 
cancels to OPRA. See Amendment No. 1, note 231.
---------------------------------------------------------------------------

    The Exchange's proposed regulatory structure raises no new 
regulatory issues. As discussed above, the Exchange states that the 
FLEX provisions will be Systems enforced such that the system will 
reject an order if it does not conform to the FLEX rules. The Exchange 
has also incorporated FLEX Options into its surveillance program to 
cover it says the few instances where it will not Systems

[[Page 95031]]

enforce and to detect manipulative and illegal activity and will 
periodically review its surveillance to see if changes will be needed 
for FLEX. Accordingly, the Commission finds that the Exchange's 
proposed regulatory structure, including the Exchange's proposed 
application of its existing rules along with the proposed rule changes 
and the updates to its surveillance program to monitor issues unique to 
FLEX trading are consistent with the Exchange Act and, in particular, 
the Section 6(b)(5) requirement that a national securities exchange's 
rules be designed to prevent fraudulent and manipulative acts and 
practices; promote just and equitable principles of trade, and protect 
investors and the public interest.\399\ The Commission also finds that 
the Exchange's proposed regulatory structure is consistent with the 
requirements of Section 6(b)(1) of the Exchange Act, which requires a 
national securities exchange to be so organized and have the capacity 
to be able to carry out the purposes of the Exchange Act and to comply, 
and to enforce compliance by its members and persons associated with 
its members, with the Exchange Act and the rules and regulations 
thereunder, and the rules of the Exchange.\400\
---------------------------------------------------------------------------

    \399\ See 15 U.S.C. 78f(b)(5).
    \400\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change, as modified by 
Amendment No. 1, is consistent with the Exchange Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-ISE-2024-12 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to file number SR-ISE-2024-12. 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-ISE-2024-12 and should be 
submitted on or before December 20, 2024.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1 prior to the thirtieth day after 
the date of publication of notice of the filing of Amendment No. 1 in 
the Federal Register. The Commission notes that the original proposal 
was published for comment in the Federal Register.\401\
---------------------------------------------------------------------------

    \401\ See Notice, supra note 3; OIP, supra note 11.
---------------------------------------------------------------------------

    In Amendment No. 1, the Exchange amended the proposal to make a 
number of clarifying changes to the proposal and the proposed rule text 
as well as the following more substantive rule text changes from the 
original filing: (i) excluding the iShares Bitcoin Trust ETF from FLEX 
trading in proposed Options 3A, Section 3(a); (ii) clarifying in 
proposed Options 3A, Section 3(b)(2) that on the expiration date, a 
FLEX Order for the expiring FLEX Option series may only be submitted to 
close out a position in such expiring FLEX Option series; (iii) 
aligning the Exchange's closing only provisions in proposed Options 3A, 
Section 3(d)(2) to already effective rules of other options exchanges; 
(iv) clarifying in proposed Options 3A, Section 5 which provisions will 
govern how the minimum increments for complex FLEX Orders (including 
complex FLEX Orders with a stock component) will be handled; (v) 
clarifying in proposed Options 3A, Sections 6(a) and 6(b) that only the 
specified order types, times-in-force, and order and quote protocols 
are available for FLEX trading; (vi) removing in proposed Options 3A, 
Section 7(b) the Exchange's discretion to determine on a class-by-class 
basis which complex FLEX Orders would not have to adhere to the ratio 
requirements for the standard complex market; (vii) adding language in 
proposed Options 3A, Section 11(a)(2)(A) to describe what would happen 
if there is a complex FLEX Order and subsequently, a non-FLEX Option 
series is introduced for the component leg(s), which would align to 
already effective rules of another options exchange; (viii) adding 
language in proposed Options 3A, Sections 12(a)(2) and 13(a)(2) that 
each leg of a complex FLEX Order must be in a permissible FLEX option 
series that complies with proposed Options 3; (ix) specifying in 
proposed Options 3A, Section 13(a)(4) that the minimum size requirement 
will apply to each leg of a complex FLEX Order; (x) adding in proposed 
Options 3A, Section 14(b) that the Price Limit for Complex Order 
protections as applicable to the stock component, the Stock-Tied NBBO 
protections, and the Stock-Tied Reg SHO protections will also be 
available to FLEX Options as complex order risk protections; and (xi) 
aligning the proposed position limits for FLEX Index Options in 
proposed Options 3A, Section 18(a) with the position limits for index 
options in the Exchange's standard index options market. These changes 
help to clarify the proposal by providing additional specificity and 
justification about the proposal as well as making the proposed rule 
substantially similar to the existing rules of other national 
securities exchanges.
    For these reasons, the changes and additional information in 
Amendment No. 1 assist the Commission in evaluating the Exchange's 
proposal and in determining that it is consistent with the Exchange 
Act. Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Exchange Act,\402\ to approve the proposed rule change, 
as modified by Amendment No. 1, on an accelerated basis.
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    \402\ 15 U.S.C. 78f(b)(2).

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[[Page 95032]]

VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange. In addition, the Commission finds, 
pursuant to Rule 9b-1 under the Exchange Act, that FLEX Options are 
standardized options for purposes of the options disclosure framework 
established under Rule 9b-1 of the Exchange Act.\403\
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    \403\ 17 CFR 240.9b-1(a)(4). As part of the original approval 
process of the FLEX Options framework, the Commission delegated to 
the Director of the Division of Market Regulation the authority to 
authorize the issuance of orders designating securities as 
``standardized options'' pursuant to Rule 9b-1(a)(4) under the Act. 
See Securities Exchange Act Release No. 31911 (February 23, 1993), 
58 FR 11792 (March 1, 1993).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\404\ that the proposed rule change SR-ISE-2024-12, as 
modified by Amendment No. 1, be, and it hereby is, approved on an 
accelerated basis.
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    \404\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\405\
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    \405\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27992 Filed 11-27-24; 8:45 am]
BILLING CODE 8011-01-P`