[Federal Register Volume 80, Number 58 (Thursday, March 26, 2015)]
[Notices]
[Pages 16072-16077]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-06887]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74553; File No. SR-Phlx-2015-27]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Surveillance Agreements

March 20, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on March 16, 2015, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
\3\ filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange, The NASDAQ Stock Market LLC (``NASDAQ''), and 
NASDAQ OMX BX, Inc. (``BX'') are self-regulatory organizations 
(``SROs'') that are wholly owned subsidiaries of The NASDAQ OMX 
Group, Inc. (the ``Group'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 1009 (Criteria for Underlying 
Securities) to allow the listing of options overlying Exchange-Traded 
Fund Shares (``ETFs'') that are listed pursuant to generic listing 
standards on equities exchanges for series of portfolio depositary 
receipts (``PDRs'') and index fund shares (``IFSs'') based on 
international or global indexes, pursuant to which a comprehensive 
surveillance agreement \4\ is not required.
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    \4\ Surveillance agreements are also referred to in Exchange 
rules as ``surveillance sharing agreements'' or ``comprehensive 
surveillance sharing agreements'' (``CSSA''). See, e.g., Rules 1009 
and 803.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend Commentary .06 to Rule 1009 to allow 
the listing of options overlying ETFs \5\ that are listed pursuant to 
generic listing standards on equities exchanges for series of PDRs and 
IFSs based on international or global indexes under which a CSSA is not 
required.\6\ Adding proposed new Commentary .06(b)(i) to Rule 1009 will 
enable the Exchange to list and trade options on ETFs without a CSSA 
provided that the underlying ETF is listed on an equities exchange 
pursuant to the generic listings standards that do not require a CSSA 
pursuant to Rule 19b-4(e) of the Exchange Act.\7\
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    \5\ ETFs are also referred to in Exchange rules as ``Fund 
Shares.'' See, e.g., Rules 1009 and 1009A [sic].
    \6\ NASDAQ is the principal exchange within the Group for 
listing ETFs. NASDAQ has generic listing standards for PDRs and 
IFSs. See NASDAQ Rule 5705(b)(3)(A)(ii) regarding IFSs and 
5705(a)(3)(A)(ii) regarding PDRs (IFSs and PDRs are together known 
as ETFs in NASDAQ Rule 5705). See also NYSE MKT Rule 1000 Commentary 
.03(a)(B); NYSE Arca Equities Rule 5.2(j)(3) Commentary .01(a)(B); 
and BATS Rule 14.11(b)(3)(A)(ii).
    \7\ 17 CFR 240.19b-4(e).
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    Rule 19b-4(e) provides that the listing and trading of a new 
derivative securities product by an SRO shall not be deemed a proposed 
rule change, pursuant to paragraph (c)(l) of Rule 19b-4 \8\ if the 
Commission has approved, pursuant to Section 19(b) of the Act,\9\ the 
SRO's trading rules, procedures and listing standards for the product 
class that would include the new derivatives securities product, and 
the SRO has a surveillance program for the product class.\10\ This 
proposal allows the Exchange to list and trade options on ETFs based on 
international or global indexes that meet the generic listing 
standards.\11\
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    \8\ 17 CFR 240.19b-4(c)(1).
    \9\ 15 U.S.C. 78s(b).
    \10\ When relying on Rule 19b-4(e), the SRO must submit Form 
19b-4(e) to the Commission within five business days after the SRO 
begins trading the new derivative securities products. See 
Securities Exchange Act Release No. 40761 (December 8, 1998), 63 FR 
70952 (December 22, 1998).
    \11\ See NASDAQ Rule 5705(a)(3)(A)(ii) and (b)(3)(A)(ii); NYSE 
MKT Rule 1000, Commentary .03(a)(B); NYSE Arca Equities Rule 
5.20)(3) [sic], Commentary .01(a)(B); and BATS Rule 
14.11(b)(3)(A)(ii).

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[[Page 16073]]

The Surveillance Agreement Requirement for Options on Exchange-Traded 
Funds
    The surveillance agreement requirement (also known as the 
``requirement'' or ``regime'') was initially put into effect for 
options on ETFs well over a decade ago but has proven to have anti-
competitive effects that are detrimental to investors.\12\ 
Specifically, the requirement limits the investing public's ability to 
hedge risk or engage in options strategies that may be afforded to 
other investors in domestic securities.\13\
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    \12\ See Securities Exchange Act Release No. 43921 (February 2, 
2001), 66 FR 9739 (February 9, 2001) (SR-Phlx-2000-107) (notice of 
filing and approval order regarding trading of options on ETFs with 
surveillance agreements) (the ``ETF approval order''). At about the 
same time, the Exchange instituted surveillance agreement 
requirements for options on Trust Issued Receipts (``TIRs''), and 
thereafter other products. See Securities Exchange Act Release No. 
44709 (August 16, 2001), 66 FR 44194 (August 22, 2001) (SR-Phlx-
2001-71) (notice of filing and approval order regarding trading of 
options on TIRs with surveillance agreements). Other exchanges have 
similar requirements. The changes proposed herein relate only to 
surveillance agreements for options on global or international ETFs.
    \13\ Moreover, as noted below the surveillance agreement 
requirement is present for the derivative options on ETFs but not 
for the underlying ETFs.
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    The Exchange allows for the listing and trading of options on ETFs. 
Commentary .06 to Rule 1009 provides the listings standards for options 
on ETFs, which includes [sic] ETFs with non-U.S. component securities, 
such as ETFs based on international or global indexes. Currently, 
Commentary .06 to Rule 1009 regarding options on ETFs has a three-level 
surveillance agreement requirement (reproduced in relevant part):
    (i) Whether any non-U.S. component stocks on which the Fund Shares 
are based that are not subject to comprehensive surveillance agreements 
do not in the aggregate represent more than 50% of the weight of the 
index or portfolio;
    (ii) stocks for which the primary market is in any one country that 
is not subject to a comprehensive surveillance agreement do not 
represent 20% or more of the weight of the index; and
    (iii) stocks for which the primary market is in any two countries 
that are not subject to comprehensive surveillance agreements do not 
represent 33% or more of the weight of the index.\14\
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    \14\ See Commentary .06(b)(i)-(iii) to Rule 1009, which is re-
numbered as Commentary .06(b)(ii)(A)-(C) to Rule 1009.
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The Exchange proposes to modify the surveillance agreement requirement 
for options on ETFs that are listed pursuant to generic listing 
standards for series of PDRs and IFSs, based on international or global 
indexes--for which case a comprehensive surveillance agreement is not 
required.
    The surveillance agreement requirement was instituted in 2001 when 
ETFs were, comparatively speaking, in a developmental state.\15\ The 
first ETF introduced in 1993 was a broad-based domestic equity fund 
tracking the S&P 500 index. The development of ETF products was very 
limited during the first decade of their existence, such that at the 
end of 2001, there was a total of only 102 ETFs listed on U.S. markets. 
Since 2001, however, the ETF market has matured tremendously and grown 
exponentially, such that at the end of 2012 there were a total of 1,194 
listed ETFs.\16\ Many of these are very well known, highly traded and 
liquid products, such as, for example, SPDR S&P 500 Trust ETF (SPY), 
iShares MSCI Emerging Markets ETF (EEM), and PowerShares QQQ Trust, 
Series 1 ETF (QQQQ) [sic], that market participants from institutional 
to retail and public investors have been using for trading, hedging, 
and investing purposes with varying timelines.\17\ The ETF market is 
one of the most highly-developed, sophisticated markets that provide 
traders and investors the opportunity to access practically all 
industries and enterprises. In 2012 investor demand for ETFs in all 
asset classes increased substantially. And in 2011 the demand for 
global and international equity ETFs, to which the requirement applies, 
more than doubled.\18\ The Exchange believes that the surveillance 
agreement requirement no longer serves a necessary (or indispensable) 
function in today's highly developed ETF market,\19\ and actually 
creates a dynamic that negatively impacts the number of markets that 
can competitively trade ETF option products, to the detriment of market 
participants.
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    \15\ See Securities Exchange Act Release No. 43921 (February 2, 
2001), 66 FR 9739 (February 9, 2001) (SR-Phlx-2000-107) (ETF 
approval order).
    \16\ http://www.icifactbook.org/fb_ch3.html.
    \17\ These can be from intraday exposure (e.g., using Daily S&P 
500 Bear 3x Shares (SPXS)) to long-term 401(k) or retirement fund 
exposure (e.g., using SPY).
    \18\ http://www.icifactbook.org/fb_ch3.html.
    \19\ ETFs and ETPs listed in the United States gathered $24.6 
billion USD in net new assets in June 2014 which, when combined with 
positive market performance, pushed the ETF/ETP industry in the 
United States to a new record high of $1.86 trillion USD invested in 
1,613 ETFs/ETPs, from 58 providers listed on 3 exchanges. And 
according to ETFGI, an independent ETF/ETP research and consultancy 
firm in the U.K., ETFs and ETPs listed globally reached $2.64 
trillion USD in assets, a new record high, at the end of Q2 2014. 
http://www.mondovisione.com/media-and-resources/news/according-to-etfgi-etfs-and-etps-listed-globally-reached-us264-trillion-in-as/.
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    The current surveillance requirement has, at times, resulted in the 
investing public having to forego the opportunity to hedge risk or 
engage in other listed options strategies in a competitive environment. 
ETFs may lack active options contracts that would be more likely to 
develop if multiple exchanges could compete to offer and promote them. 
For example, an investor in the iShare [sic] MSCI Indonesia ETF (EIDO) 
is not permitted to sell call options or purchase protective puts 
simply because the Exchange cannot obtain a surveillance agreement with 
Bursa Efek Indonesia. However, an investor in iShare [sic] MSCI 
Emerging Markets Fund (EEM) is afforded the right to engage in listed 
options trading to hedge risk or execute other beneficial options 
strategies. Both underlying exchange-traded funds, EIDO and EEM, are 
listed for trading in the U.S., subject to constant regulatory 
scrutiny, and permitted to be purchased and sold via registered broker/
dealers, yet, options can now be offered only on EEM. The Exchange 
believes this disparate treatment between investors of foreign-based 
instruments, especially between those that buy and sell options 
contracts on ETFs, which currently require surveillance agreements, as 
opposed to those that buy and sell shares of the underlying ETFs, which 
currently do not have the same onerous surveillance agreement 
requirement that ETF options have,\20\ is not in the best interest. The 
Exchange therefore proposes to establish that options on generically-
listed global

[[Page 16074]]

or international ETFs would not require surveillance agreements for 
listing.
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    \20\ While the surveillance agreement requirement for options on 
ETFs found in Commentary .06 to Rule 1009 (see note 14 and related 
text) has resulted in significant negative implications for market 
participants, there is no such surveillance agreement requirement 
for the underlying ETFs. In particular, when looking to the rules of 
NASDAQ, the primary ETF listing venue in the Group, NASDAQ Rules 
5705 regarding ETFs and 5735 regarding Managed Fund Shares 
(``MFSs'') have no explicit requirements concerning surveillance 
agreements for regularly listed (non-generic) ETFs and MFSs, and 
simply state that FINRA will implement written surveillance 
procedures. Section 19(b)(2) filings regarding ETFs and MFSs 
typically indicate that the Exchange may obtain information 
regarding trading in the shares from FINRA and markets and other 
entities that are members of the Intermarket Surveillance Group 
(``ISG''), which includes securities and futures exchanges, or with 
which the Exchange has in place a surveillance agreement (which is 
not required by rule). Regarding ETFs and MFSs listed pursuant to 
generic (19b-4(e)) standards and reviewed and approved for trading 
under Section 19(b)(2) of the Act, Rules 5705 and 5735 [sic] simply 
note that the Commission's approval order may reference surveillance 
sharing agreements with respect to non-U.S. component stocks.
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    The current surveillance agreement requirements, as well as all 
other requirements to list options on ETFs,\21\ are not affected by 
this proposal and will continue to remain in place for options on ETFs 
that do not meet generic listing standards on equities exchanges for 
ETFs based on international and global indexes.
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    \21\ For purposes of brevity, these other requirements are not 
set forth, but can be found in Commentary .06 to Rule 1009.
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Generic Listing Standards for Exchange-Traded Funds
    The Exchange notes that the Commission has previously approved 
generic listing standards pursuant to Rule 19b-4(e) of the Exchange Act 
\22\ for ETFs based on indexes that consist of stocks listed on U.S. 
exchanges including NASDAQ, the ETF listing exchange within the 
Group.\23\ In general, the criteria for the underlying component 
securities in the international and global indexes are similar to those 
for the domestic indexes, but with modifications as appropriate for the 
issues and risks associated with non-U.S. securities.
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    \22\ 17 CFR 240.19b-4(e).
    \23\ See Securities Exchange Act Release No. 54739 (November 9, 
2006), 71 FR 66993 (November 17, 2006) (SR-Amex-2006-78) (initial 
order relating to generic listing standards for ETFs based on 
international or global indexes). See also NASDAQ Rule 
5705(a)(3)(A)(ii) and (b)(3)(A)(ii).
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    In addition, the Commission has previously approved proposals for 
the listing and trading of options on ETFs based on international 
indexes as well as global indexes (e.g., based on non-U.S. and U.S. 
component stocks).\24\ In approving ETFs for equities exchange trading, 
the Commission thoroughly considered the structure of the ETFs, their 
usefulness to investors and to the markets, and SRO rules that govern 
their trading. The Exchange believes that allowing the listing of 
options overlying ETFs that are listed pursuant to the generic listing 
standards on equities exchanges for ETFs based on international and 
global indexes and applying Rule 19b-4(e) \25\ should fulfill the 
intended objective of that rule by allowing options on those ETFs that 
have satisfied the generic listing standards to commence trading, 
without the need for the public comment period and Commission approval. 
The proposed rule has the potential to reduce the time frame for 
bringing options on ETFs to market, thereby reducing the burdens on 
issuers and other market participants. The failure of a particular ETF 
to comply with the generic listing standards under Rule 19b-4(e) \26\ 
would not, however, preclude the Exchange from submitting a separate 
filing pursuant to Section 19(b)(2),\27\ requesting Commission approval 
to list and trade options on a particular ETF. Moreover, the Exchange 
notes that the generic standards such as those in proposed Commentary 
.06(b)(i) to Rule 1009 are not new in the options world, and have been 
used extensively for listing options on narrow-based and broad-based 
indexes.\28\
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    \24\ See, e.g., Securities Exchange Act Release Nos. 57013 
(December 20, 2007), 72 FR 73923 (December 28, 2007) (SR-CBOE-2007-
140) (approval order to list and trade options on iShares MSCI 
Mexico Index Fund, when CBOE did not have in place a surveillance 
agreement with the Bolsa Mexicana de Valores (the ``Bolsa'')); 57014 
(December 20, 2007), 72 FR 73934 (December 28, 2007) (SR-ISE-2007-
111) (approval order to list and trade options on iShares MSCI 
Mexico Index Fund, when ISE did not have in place a surveillance 
agreement with the Bolsa); 56778 (November 9, 2007), 72 FR 65113 
(November 19, 2007) (SR-AMEX-2007-100) (approval order to list and 
trade options on iShares MSCI Mexico Index Fund, when AMEX did not 
have in place a surveillance agreement with the Bolsa); and 55648 
(April 19, 2007), 72 FR 20902 (April 26, 2007) (SR-AMEX-2007-09) 
(approval order to list and trade options on Vanguard Emerging 
Markets ETF, when AMEX did not have in place a surveillance 
agreement with the Bolsa). See also Securities Exchange Act Release 
Nos. 50189 (August 12, 2004), 69 FR 51723 (August 20, 2004) (SR-
AMEX-2001-05) [sic] (approving the listing and trading of certain 
Vanguard International Equity Index Funds); and 44700 (August 14, 
2001), 66 FR 43927 (August 21, 2001) (SR-2001-34) [sic] (approving 
the listing and trading of series of the iShares Trust based on 
foreign stock indexes).
    \25\ 17 CFR 240.19b-4(e).
    \26\ Id.
    \27\ 15 U.S.C. 78s(b)(2).
    \28\ Rule 1009A has, for example, weighting, capitalization, 
trading volume, and minimum number of components standards for 
listing options on narrow-based and broad-based indexes. For a 
definition of broad-based index (market index) and narrow-based 
index (industry index), see Rule 1000A(b)(11) and (12), 
respectively.
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Requirements for Listing and Trading Options Overlying ETFs Based on 
International and Global Indexes
    Options on ETFs listed pursuant to these generic standards for 
international and global indexes would be traded, in all other 
respects, under the Exchange's existing trading rules and procedures 
that apply to options on ETFs and would be covered under the Exchange's 
surveillance program for options on ETFs.
    Pursuant to proposed Commentary .06(b)(i) to Rule 1009, the 
Exchange may list and trade options on an ETF without a CSSA provided 
that the ETF is listed pursuant to generic listing standards for series 
of PDRs and IFSs based on international or global indexes, in which 
case a comprehensive surveillance agreement is not required. As noted, 
one such rule, which discusses things such as weighting, 
capitalization, trading volume, minimum number of components, and where 
components are listed, is NASDAQ Rule 5705(b)(3)(A)(ii) regarding ETFs 
(IFSs and PDRs).\29\ The Exchange believes that these generic listing 
standards are intended to ensure that securities with substantial 
market capitalization and trading volume account for a substantial 
portion of the weight of an index or portfolio.
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    \29\ NASDAQ Rule 5705(b)(3)(A)(ii) regarding IFSs, for example, 
has the following requirements (reproduced in relevant part): a. 
Component stocks (excluding Derivative Securities Products) that in 
the aggregate account for at least 90% of the weight of the index or 
portfolio (excluding Derivative Securities Products) each shall have 
a minimum market value of at least $100 million; b. component stocks 
(excluding Derivative Securities Products) that in the aggregate 
account for at least 70% of the weight of the index or portfolio 
(excluding Derivative Securities Products) each shall have a minimum 
worldwide monthly trading volume of at least 250,000 shares, or 
minimum global notional volume traded per month of $25,000,000, 
averaged over the last six months; c. the most heavily weighted 
component stock (excluding Derivative Securities Products) shall not 
exceed 25% of the weight of the index or portfolio, and, to the 
extent applicable, the five most heavily weighted component stocks 
(excluding Derivative Securities Products) shall not exceed 60% of 
the weight of the index or portfolio; d. the index or portfolio 
shall include a minimum of 20 component stocks; provided, however, 
that there shall be no minimum number of component stocks if either 
one or more series of Index Fund Shares or Portfolio Depositary 
Receipts constitute, at least in part, components underlying a 
series of Index Fund Shares, or one or more series of Derivative 
Securities Products account for 100% of the weight of the index or 
portfolio; and e. each U.S. Component Stock shall be listed on a 
national securities exchange and shall be an NMS Stock as defined in 
Rule 600 of Regulation NMS under the Act, and each Non-U.S. 
Component Stock shall be listed and traded on an exchange that has 
last-sale reporting. NASDAQ Rule 5705(a)(3)(A)(ii) has similar 
standards, but tailored for PDRs.
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    The Exchange believes that this proposed listing standard for 
options on ETFs is reasonable for international and global indexes, 
and, when applied in conjunction with the other listing requirements, 
will result in options overlying ETFs that are sufficiently broad in 
scope and not readily susceptible to manipulation. The Exchange also 
believes that allowing the Exchange to list options overlying ETFs that 
are listed on equities exchanges pursuant to generic standards for 
series of PDRs and IFSs based on international or global indexes under 
which a CSSA is not required, will result in options overlying ETFs 
that are adequately diversified in weighting for any single security or 
small group of securities to significantly reduce concerns that trading 
in options overlying ETFs based on international or global indexes 
could

[[Page 16075]]

become a surrogate for trading in unregistered securities.\30\
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    \30\ The Exchange also notes that not affording retail investors 
the ability to trade on a regulated exchange can be detrimental. 
While products can be traded off exchange in the over the counter 
(``OTC'') market, which has increased settlement, clearing, and 
market risk as opposed to exchanges, the relatively unregulated OTC 
market is usually not a viable option for retail and public 
investors.
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    The Exchange believes that ETFs based on international and global 
indexes that have been listed pursuant to the generic standards are 
sufficiently defined so as to make options overlying such ETFs not 
susceptible instruments for manipulation. The Exchange believes that 
the threat of manipulation is, as discussed below, sufficiently 
mitigated for underlying ETFs that have been listed on equities 
exchanges pursuant to generic listing standards for series of PDRs and 
IFSs based on international or global indexes under which a 
comprehensive surveillance agreement is not required and for the 
overlying options; the Exchange does not see the need for a CSSA to be 
in place before listing and trading options on such ETFs. The Exchange 
notes that its proposal does not replace the need for a CSSA as 
provided in current Commentary .06(b) to Rule 1009. The provisions of 
Commentary .06(b), including the need for a CSSA, remain materially 
unchanged and will continue to apply to options on ETFs that are not 
listed on an equities exchange pursuant to generic listing standards 
for series of PDRs and IFSs based on international or global indexes. 
Instead, proposed Commentary .06(b)(i) adds an additional listing 
mechanism for certain qualifying options on ETFs to be listed on the 
Exchange.
    Finally, to account for proposed Commentary .06(b) to Rule 1009 and 
make Commentary .06 easier to follow, the Exchange proposes technical 
changes to the formatting of this section of the rule. The Exchange 
proposes re-numbering Commentary .06(b)(i), (ii) and (iii) as 
Commentary .06(b)(ii)(A), (B), and (C), respectively; and re-numbering 
Commentary .06(b)(iv) and (v) as Commentary .06(b)(iii) and (iv), 
respectively. This is merely re-numbering and there are no changes to 
the language of these sections of Commentary .06.
No Economic Risk
    The proposal does not raise a concern regarding economic risk or 
manipulation. The proposal does not increase the risk of manipulation 
of the ETF itself, as the ETF trades in the U.S. and trading is subject 
to the U.S. surveillance requirement and follows Exchange rules. One 
might try to argue that the proposal raises a concern about a 
theoretical manipulation risk of the underlying international 
components of the ETF trading in the U.S. If such manipulation were 
successful, the argument would go, then the ETF could be fairly priced 
relative to its components but the price of the components potentially 
may not reflect fair market value. The Exchange firmly believes that 
the proposal does not raise any such theoretical concern.
    For manipulation to be successful the expected cost of the 
contemplated manipulation must be less than the expected gain. In other 
words, manipulation will not be attempted if the prospective profit 
from the attempt is zero or less, even ignoring the quite real costs 
associated with regulatory risk. In approving the rules for narrow 
based indices, it was thought that the costs of manipulating such an 
index based on component securities with the same parameters as those 
proposed ETFs would be prohibitive relative to any prospective gains. 
The Exchange's proposal does not suggest a different paradigm.
    Moreover, the Commission reviewed and approved the ability to list 
ETFs without surveillance agreements if they meet the generic listing 
standards for ETFs based on international or global indices. The 
Exchange believes that the argument and economic conclusion that 
allowing the listing of options on these same underlying ETFs with 
components outside the U.S. that are sufficiently large, transparent, 
diversified, and liquid to make manipulation unprofitable is valid.
    A second theoretical source of manipulation risk may be seen to be 
the creation/redemption process for ETFs. If the creation/redemption 
process could be manipulated then the market price of the ETF could 
materially differ from the fair value of the ETF derived from a fair 
market value of the components. Again, the Exchange does not agree that 
this is a significant manipulation risk for ETFs, let alone options on 
ETF. As noted, ETFs are a much more mature asset class today than in 
2001 when the current rules were adopted. The development of ETFs as an 
established asset class and the listing and trading of ETFs, including 
the creation/redemption process, has developed immensely since the 
introduction of ETFs, and options on them. Since manipulation of the 
creation/redemption process would create economic profits for the 
manipulator, but such manipulation has not been manifest during the 
significant expansion of ETFs as an international asset class, this 
offers convincing evidence that manipulation risk in the creation/
redemption process is, indeed, theoretical and not an increased risk 
with this proposal regarding the listing of ETF options. The Exchange 
believes that its proposal will not lead to increased economic risk.
    The Exchange requests approval of its proposal to allow the listing 
of options overlying ETFs (PDRs and IFSs) based on international or 
global indexes, without a comprehensive surveillance agreement. The 
proposal will, as discussed, be beneficial to investors and is in 
conformity with the Act.
 2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \31\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \32\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest. In particular, the proposed rule change has the potential to 
reduce the time frame for bringing options on ETFs to market, thereby 
reducing the burdens on issuers and other market participants. The 
Exchange also believes that enabling the listing and trading of options 
on ETFs pursuant to this proposed new listing standard will benefit 
investors by providing them with valuable risk management tools. The 
Exchange notes that its proposal does not replace the need for a CSSA 
as provided in Commentary .06 to Rule 1009. The provisions of current 
Commentary .06, including the need for a CSSA, remain materially 
unchanged and will continue to apply to options on ETFs that are not 
listed on an equities exchange pursuant to generic listing standards 
for series of PDRs and IFSs based on international or global indexes 
under which a comprehensive surveillance agreement is not required. 
Instead, proposed Commentary .06(b)(i) to Rule 1009 adds an additional 
listing mechanism for certain qualifying options on ETFs to be listed 
on the Exchange in a manner that is 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 facilitating transactions in securities, to remove 
impediments to and perfect the mechanisms of a free and open market and 
a national market system and, in

[[Page 16076]]

general, to protect investors and the public interest.
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    \31\ 15 U.S.C. 78f(b).
    \32\ 15 U.S.C. 78f(b)(5).
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    The proposal would promote just and equitable principles of trade. 
The surveillance agreement requirement was instituted in 2001 when ETFs 
were, comparatively speaking, in a developmental state.\33\ The first 
ETF introduced in 1993 was a broad-based domestic equity fund tracking 
the S&P 500 index. After the introduction of the first ETF in 1993, the 
development of ETF products was very limited during the first decade of 
their existence. Since the end of 2001, when there was a total of only 
102 ETFs listed on U.S. markets, however, the ETF market has matured 
tremendously and grown exponentially. With a total of 1,194 listed ETFs 
at the end of 2012, the ETF market is now one of the most highly-
developed, sophisticated markets with many very well known, highly 
traded and liquid products that provide traders and investors the 
opportunity to access practically all industries and enterprises. While 
investor demand for ETFs in all asset classes increased substantially, 
in 2011 the demand for global and international equity ETFs, to which 
the requirement applies, more than doubled.\34\ The Exchange believes 
that the current surveillance requirement no longer serves a necessary 
function in today's highly developed market, and, as discussed, 
actually creates a dynamic that negatively impacts the number of 
markets that can competitively trade ETF option products. This hurts 
market participants. The Exchange therefore proposes to establish that 
pursuant to proposed Commentary .06(b)(i) to Rule 1009 options may be 
listed on certain ETFs that are based on global and international funds 
and meet generic listing standards.
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    \33\ See Securities Exchange Act Release No. 43921 (February 2, 
2001), 66 FR 9739 (February 9, 2001) (SR-Phlx-2000-107) (ETF 
approval order).
    \34\ http://www.icifactbook.org/fb_ch3.html.
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    The proposal would in general protect investors and the public 
interest. The Exchange believes that modifying the surveillance 
agreement requirement for ETFs would not hinder the Exchange from 
performing surveillance duties designed to protect investors and the 
public interest. There are various data consolidators, vendors, and 
outlets that can be used to access data and information regarding ETFs 
and the underlying securities (e.g., Bloomberg, Dow Jones, FTEN). In 
addition, firms that list ETFs on an exchange receive vast amounts of 
data relevant to their products that could be made available to listing 
exchanges as needed. The Exchange has access to the activity of the 
direct underlying instrument and the ETF, and through the Intermarket 
Surveillance Group (``ISG'') the Exchange can obtain such information 
related to the underlying security as needed.\35\ Moreover, other than 
the surveillance agreement requirement there are, as discussed, 
numerous requirements in Rule 1009 that must be met to list options on 
ETFs on the Exchange.
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    \35\ See https://www.isgportal.org/home.html. Another global 
organization similar to ISG is The International Organization of 
Securities Commissions (``IOSCO'').
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    The proposal would remove impediments to and perfect the mechanism 
of a free and open market and a national market system. Multiple 
listing of ETFs, options, and other securities and competition are some 
of the central features of the current national market system. The 
Exchange believes that the surveillance agreement requirement has led 
to clearly anti-competitive results in a market that is based on 
competition. As such, the Exchange believes that the surveillance 
agreement requirement for options on certain ETFs is no longer 
necessary and proposes new Commentary .06(b)(i) to Rule 1009. The 
proposed rule change will significantly benefit market participants. As 
discussed at length, the proposed rule will negate the negative anti-
competitive effect of the current surveillance agreement requirement 
that has resulted in de facto regulatory monopolies where only solitary 
exchanges, or only a few exchanges, are able to list certain ETF 
options products. The Exchange believes this is inconsistent with 
Commission policies and the developing national market system, as well 
as the competitive nature of the market, and therefore proposes 
amendment.\36\ The Exchange believes that the proposal would encourage 
a more open market and national market system based on competition and 
multiple listing. The generic listing standards for ETFs based on 
global or international indexes have specific requirements regarding 
relative weighting, minimum capitalization, minimum trading volume, and 
minimum number of components that have been approved by the Commission 
years ago for foreign ETFs.\37\ Moreover, such listing standards have 
been in continuous use for listing options on narrow-based and broad-
based indexes on the Exchange.\38\ Allowing the listing of options on 
underlying ETFs based on global and international indexes that meet 
generic listing standards would encourage a free and open market and 
national market system to the benefit of market participants.
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    \36\ As discussed, the Exchange is decidedly not proposing that 
the surveillance agreement requirement be deleted entirely, but 
rather that only those options on ETFs that do not meet very 
specific generic listing standards need to have surveillance 
agreements in order to list on the Exchange.
    \37\ See Securities Exchange Act Release No. 54739 (November 9, 
2006), 71 FR 66993 (November 17, 2006) (SR-Amex-2006-78) (initial 
order relating to generic listing standards for ETFs based on 
international or global indexes). See also NASDAQ Rule 
5705(a)(3)(A)(ii) and (b)(3)(A)(ii).
    \38\ See Rule 1009A(b) and (d).
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    Finally, the Exchange's proposal for limiting the necessity of 
surveillance agreements to list options on ETFs does not, as discussed 
above, raise a concern regarding manipulation. The Exchange believes 
that its proposal is not indicative of increased economic risk.
    For the above reasons, the Exchange believes the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

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. To the contrary, the 
Exchange believes that the proposal is, as discussed, decidedly pro-
competitive and is a competitive response to the inability to list 
products because of the surveillance agreement requirement. The 
Exchange believes that the proposed rule change will result in 
additional investment options and opportunities to achieve the 
investment objectives of market participants seeking efficient trading 
and hedging vehicles, to the benefit of investors, market participants, 
and the marketplace in general. Competition is one of the principal 
features of the national market system. The Exchange believes that this 
proposal will expand competitive opportunities to list and trade 
products on the Exchange as noted.

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

    No written comments were either solicited or received.

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

    Because the proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on

[[Page 16077]]

which it was filed, or such shorter time as the Commission may 
designate, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \39\ and Rule 19b-4(f)(6) 
thereunder.\40\
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    \39\ 15 U.S.C. 78s(b)(3)(A).
    \40\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \41\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \42\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing. The Exchange 
stated that waiver of the operative delay will permit the Exchange to 
list and trade certain ETF options on the same basis as another options 
market.\43\ The Commission believes the waiver of the operative delay 
is consistent with the protection of investors and the public interest. 
Therefore, the Commission hereby waives the operative delay and 
designates the proposal operative upon filing.\44\
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    \41\ 17 CFR 240.19b-4(f)(6).
    \42\ 17 CFR 240.19b-4(f)(6)(iii).
    \43\ See Securities Exchange Act Release No. 74509 (March 13, 
2015), 80 FR 14425 (March 19, 2015) (SR-MIAX-2015-04).
    \44\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#8ffdfae3eaa2ece0e2e2eae1fbfccffceaeca1e8e0f9"><span class="__cf_email__" data-cfemail="691b1c050c440a0604040c071d1a291a0c0a470e061f">[email protected]</span></a>. Please include 
File Number SR-Phlx-2015-27 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2015-27. 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 Web site (http://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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2015-27 and should be 
submitted on or before April 16, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-06887 Filed 3-25-15; 8:45 am]
BILLING CODE 8011-01-P


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