Document ID: SEC-2018-0229-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq ISE, LLC
Posted Date: 2018-02-07T05:00Z

[Federal Register Volume 83, Number 26 (Wednesday, February 7, 2018)]
[Notices]
[Pages 5470-5473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-02394]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82612; File No. SR-ISE-2017-111]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Order Approving a 
Proposed Rule Change To Establish a Nonstandard Expirations Pilot 
Program

February 1, 2018.

I. Introduction

    On December 21, 2017, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'' or 
``SEC''), pursuant to Section 19(b)(1) of the

[[Page 5471]]

Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to establish a Nonstandard 
Expirations Pilot Program. The proposed rule change was published for 
comment in the Federal Register on January 12, 2018.\3\ The Commission 
received no comments on the proposed rule change.
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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. 82458 (Jan. 8, 
2018), 83 FR 1636.
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    This order approves the proposal for a pilot period of twelve 
months.

II. Description of the Proposal

    The Exchange proposes to permit the listing and trading, on a pilot 
basis, of p.m.-settled options on broad-based indexes with nonstandard 
expiration dates for a period of twelve months (the ``Nonstandard 
Expirations Pilot Program'' or ``Pilot Program'') from the date of 
approval of this proposed rule change. The Pilot Program would permit 
both weekly expirations (``Weekly Expirations'') and end of month 
(``EOM'') expirations similar to those of the a.m.-settled broad-based 
index options, except that the exercise settlement value will be based 
on the index value derived from the closing prices of component stocks. 
The proposal is substantially similar to Chicago Board Options Exchange 
(``CBOE'') Rule 24.9(e), Nonstandard Expirations Pilot Program \4\ as 
well as the Nonstandard Expirations Pilot Program of the Exchange's 
affiliate Nasdaq PHLX LLC (``Phlx'') Rule 1101A.\5\
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    \4\ See Securities Exchange Act Release Nos. 78531 (August 10, 
2016), 81 FR 54643 (August 16, 2016) (SR-CBOE-2016-046) (Order 
approving expansion of CBOE's Nonstandard Expirations Pilot Program 
to include Monday Expirations); 76909 (January 14, 2016), 81 FR 3512 
(January 21, 2016) (SR-CBOE-2015-106) (Order approving expansion of 
CBOE's Nonstandard Expirations Pilot Program to include Wednesday 
Expirations); 62911 (September 14, 2010), 75 FR 57539 (September 21, 
2010) (SR-CBOE-2009-075) (Order approving CBOE's Nonstandard 
Expirations Pilot Program).
    \5\ See Securities Exchange Act Release No. 82341 (December 15, 
2017), 82 FR 60651 (December 21, 2017) (Order approving Phlx's 
Nonstandard Expirations Pilot Program).
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A. Weekly Expirations

    The Exchange proposes to add new Supplementary Material .07(a), 
Weekly Expirations, to Rule 2009. Under the proposed new rule the 
Exchange would be permitted to open for trading Weekly Expirations on 
any broad-based index eligible for standard options trading to expire 
on any Monday, Wednesday, or Friday (other than the third Friday-of-
the-month or days that coincide with an EOM expiration). Weekly 
Expirations would be subject to all provisions of ISE Rule 2009 and 
would be treated the same as options on the same underlying index that 
expire on the third Friday of the expiration month. Unlike the standard 
monthly options, however, Weekly Expirations would be p.m.-settled. New 
series in Weekly Expirations could be added up to and including on the 
expiration date for an expiring Weekly Expiration.
    The maximum number of expirations that could be listed for each 
Weekly Expiration (i.e., a Monday expiration, Wednesday expiration, or 
Friday expiration, as applicable) in a given class would be the same as 
the maximum number of expirations permitted for standard options on the 
same broad-based index. Weekly Expirations would not need to be for 
consecutive Monday, Wednesday, or Friday expirations as applicable. 
However, the expiration date of a non-consecutive expiration would not 
be permitted beyond what would be considered the last expiration date 
if the maximum number of expirations were listed consecutively.
    Weekly Expirations that are first listed in a given class could 
expire up to four weeks from the actual listing date. If the last 
trading day of a month were a Monday, Wednesday, or Friday and the 
Exchange were to list EOMs and Weekly Expirations as applicable in a 
given class, the Exchange would list an EOM instead of a Weekly 
Expiration in the given class. Other expirations in the same class 
would not be counted as part of the maximum number of Weekly 
Expirations for a broad-based index class. If the Exchange were not 
open for business on a respective Monday, the normally Monday expiring 
Weekly Expirations would expire on the following business day. If the 
Exchange were not open for business on a respective Wednesday or 
Friday, the normally Wednesday or Friday expiring Weekly Expirations 
would expire on the previous business day.

B. EOM Expirations

    Under the proposal, the Exchange could open for trading EOMs on any 
broad-based index eligible for standard options trading to expire on 
the last trading day of the month. EOMs would be subject to all 
provisions of Rule 2009 and treated the same as options on the same 
underlying index that expire on the third Friday of the expiration 
month. However, the EOMs would be p.m.-settled and new series in EOMs 
could be added up to and including on the expiration date for an 
expiring EOM.
    The maximum number of expirations that could be listed for EOMs in 
a given class would be the same as the maximum number of expirations 
permitted for standard options on the same broad-based index. EOM 
expirations would not need to be for consecutive end of month 
expirations. However, the expiration date of a non-consecutive 
expiration may not be beyond what would be considered the last 
expiration date if the maximum number of expirations were listed 
consecutively. EOMs that are first listed in a given class could expire 
up to four weeks from the actual listing date. Other expirations would 
not be counted as part of the maximum numbers of EOM expirations for a 
broad-based index class.

C. Contract Terms and Trading Rules

    The Exchange proposes that Weekly Expirations and EOMs would be 
subject to the same rules that currently govern the trading of standard 
monthly broad-based index options, including sales practice rules, 
margin requirements, and floor trading procedures. Contract terms for 
Weekly Expirations and EOMs would be the same as those for standard 
monthly broad-based index options, except that the exercise settlement 
value will be based on the index value derived from the closing prices 
of component stocks. Since Weekly Expirations and EOMs will be a new 
type of series, and not a new class, the Exchange proposes that Weekly 
Expirations and EOMs shall be aggregated for any applicable reporting 
and other requirements.\6\ Pursuant to proposed Supplementary Material 
.07(d) of Rule 2009, transactions in Weekly Expirations and EOMs could 
be effected on the Exchange between the hours of 9:30 a.m. (Eastern 
Time) and 4:15 p.m. (Eastern Time).
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    \6\ See Rule 2006(a)(13) which sets forth the reporting 
requirements for certain market indexes that do not have position 
limits, including NDX. The Exchange is adding Nonstandard 
Expirations to Rule 2004(d) to reflect the aggregation requirement. 
The Exchange notes that the proposed aggregation is consistent with 
the aggregation requirements for other types of option series (e.g. 
quarterly expiring options) that are listed on the Exchange and 
which do not expire on the customary ``third Friday''.
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    The Exchange represents that it has analyzed its capacity and 
believes that it and the Options Price Reporting Authority have the 
necessary systems capacity to handle any additional traffic associated 
with the listing of the maximum number nonstandard expirations 
permitted under the Pilot Program.

D. Pilot Program Annual Report

    As part of the Pilot Program, the Exchange proposes to submit a 
Pilot Program report to the Commission at

[[Page 5472]]

least two months prior to the expiration date of the Pilot Program (the 
``annual report''). The annual report will contain an analysis of 
volume, open interest and trading patterns. In addition, for series 
that exceed certain minimum open interest parameters, the annual report 
will provide analysis of index price volatility and, if needed, share 
trading activity. The annual report will be provided to the Commission 
on a confidential basis.
Analysis of Volume and Open Interest
    For all Weekly Expirations and EOM series, the annual report will 
contain the following volume and open interest data for each broad-
based index overlying Weekly Expiration and EOM options:
    (1) Monthly volume aggregated for all Weekly Expiration and EOM 
series,
    (2) Volume in Weekly Expiration and EOM series aggregated by 
expiration date,
    (3) Month-end open interest aggregated for all Weekly Expiration 
and EOM series,
    (4) Month-end open interest for EOM series aggregated by expiration 
date and open interest for Weekly Expiration series aggregated by 
expiration date,
    (5) Ratio of monthly aggregate volume in Weekly Expiration and EOM 
series to total monthly class volume, and
    (6) Ratio of month-end open interest in EOM series to total month-
end class open interest and ratio of open interest in each Weekly 
Expiration series to total class open interest.
    In addition, the annual report will contain the information noted 
above for standard Expiration Friday, a.m.-settled series, if 
applicable, for the period covered in the annual report as well as for 
the six-month period prior to the initiation of the Pilot Program.
    Upon request by the SEC, the Exchange will provide a data file 
containing: (1) Weekly Expiration and EOM option volume data aggregated 
by series, and (2) Weekly Expiration open interest for each expiring 
series and EOM month-end open interest for expiring series.
Monthly Analysis of Weekly Expiration and EOM Trading Patterns
    In the annual report, the Exchange also proposes to identify Weekly 
Expiration and EOM trading patterns by undertaking a time series 
analysis of open interest in Weekly Expiration and EOM series 
aggregated by expiration date compared to open interest in near-term 
standard Expiration Friday a.m.-settled series in order to determine 
whether users are shifting positions from standard series to Weekly 
Expiration and EOM series. In addition, to the extent that data on 
other weekly or monthly p.m. settled products from other exchanges is 
publicly available, the annual report will also compare open interest 
with these options in order to determine whether users are shifting 
positions from other weekly or monthly p.m.-settled products to the 
Weekly Expiration and EOM series. Declining open interest in standard 
series or the weekly or monthly p.m.-settled products of other 
exchanges accompanied by rising open interest in Weekly Expiration and 
EOM series would suggest that users are shifting positions.
Provisional Analysis of Index Price Volatility and Share Trading 
Activity
    For each Weekly Expiration and EOM expiration that has open 
interest that exceeds certain minimum thresholds, the annual report 
will contain the following analysis related to index price changes and, 
if needed, underlying share trading volume at the close on expiration 
dates:
    (1) A comparison of index price changes at the close of trading on 
a given expiration date with comparable price changes from a control 
sample. The data will include a calculation of percentage price changes 
for various time intervals and compare that information to the 
respective control sample. Raw percentage price change data as well as 
percentage price change data normalized for prevailing market 
volatility, as measured by an appropriate index agreed by the 
Commission and the Exchange, will be provided; and
    (2) if needed, a calculation of share volume for a sample set of 
the component securities representing an upper limit on share trading 
that could be attributable to expiring in-the-money Weekly Expiration 
and EOM expirations. The data, if needed, will include a comparison of 
the calculated share volume for securities in the sample set to the 
average daily trading volumes of those securities over a sample period.
    The minimum open interest parameters, control sample, time 
intervals, method for selecting the component securities, and sample 
periods will be determined by the Exchange and the Commission.

III. Discussion and Commission's Findings

    After careful review of the proposed rule change, the Commission 
finds that the proposal is consistent with the requirements of the Act 
and the rules and regulations thereunder that are applicable to a 
national securities exchange.\7\ Specifically, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\8\ 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, 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 to protect 
investors and the public interest.
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    \7\ In approving this rule change, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    While the Commission has had concerns about the adverse effects and 
impact of p.m.-settlement upon market volatility and the operation of 
fair and orderly markets on the underlying cash market at or near the 
close of trading, it has approved on a limited basis p.m.-settlement 
for cash-settled options.\9\ More specifically, the Commission approved 
on a pilot basis CBOE's nearly identical and Phlx's identical 
Nonstandard Expirations Pilot Programs.\10\
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    \9\ See, e.g., Securities Exchange Act Release Nos. 31800 
(February 1, 1993), 58 FR 7274 (February 5, 1993) (SR-CBOE-92-13) 
(Order approving CBOE's listing of p.m.-settled, cash-settled 
options on certain broad-based indexes); 61439 (January 28, 2010), 
75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) (Order approving 
CBOE's listing of p.m.-settled FLEX options on a pilot basis); 70087 
(July 31, 2013), 78 FR 47809 (August 6, 2013) (SR-CBOE-2013-055) 
(Order approving the addition of p.m.-settled mini-SPX index options 
to the SPXPM Pilot for p.m.-settled SPX index options); 81293 
(August 2, 2017), 82 FR 37138 (August 8, 2017) (SR-Phlx-2017-04) 
(Order approving Phlx to list and trade of p.m.-settled NASDAQ-100 
Index(R) Options on a Pilot Basis).
    \10\ See supra notes 4-5.
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    Like Phlx, the Exchange patterns its proposal after CBOE's and 
includes the same additional data element that Phlx includes in the 
annual report: An analysis of publicly available data concerning 
trading patterns with respect to other p.m.-settled products from other 
exchanges. In all other aspects, the Exchange's proposed and Phlx's and 
CBOE's existing Nonstandard Expirations Pilot Programs are identical.
    The Commission believes that the Exchange's proposal strikes a 
reasonable balance between the Exchange's desire to offer a wider array 
of investment opportunities and the need to avoid unnecessary 
proliferation of options series that may burden certain liquidity 
providers and further stress options

[[Page 5473]]

quotation and transaction infrastructure. The Exchange's proposed 
twelve-month Pilot Program will allow for both the Exchange and the 
Commission to continue monitoring the potential for adverse market 
effects of p.m.-settlement on the market, including the underlying cash 
equities markets, at the expiration of these options.
    The Commission notes that the Exchange will provide the Commission 
with the annual report analyzing volume and open interest of EOMs and 
Weekly Expirations that will also contain information and analysis of 
EOMs and Weekly Expirations trading patterns and index price volatility 
and share trading activity for series that exceed minimum parameters. 
This information should be useful to the Commission as it evaluates 
whether allowing p.m.-settlement for EOMs and Weekly Expirations has 
resulted in increased market and price volatility in the underlying 
component stocks, particularly at expiration. The Pilot Program 
information should help the Commission and the Exchange assess the 
impact on the markets and determine whether changes to these programs 
are necessary or appropriate. Furthermore, the Exchange's ongoing 
analysis of the Pilot Program should help it monitor any potential 
risks from large p.m.-settled positions and take appropriate action, if 
warranted.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-ISE-2017-111) be approved 
for a pilot period of twelve months.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-02394 Filed 2-6-18; 8:45 am]
 BILLING CODE 8011-01-P