Document ID: SEC-2018-0716-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq ISE, LLC
Posted Date: 2018-05-08T04:00Z

[Federal Register Volume 83, Number 89 (Tuesday, May 8, 2018)]
[Notices]
[Pages 20875-20882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09696]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83156; File No. SR-ISE-2018-39]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend ISE Rules 
412, Position Limits, and 414, Exercise Limits

May 2, 2018.
    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 April 20, 2018, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') 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.
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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 ISE Rules 412, Position Limits, and 
414, Exercise Limits, to increase the position and exercise limits for 
options on the following exchange traded funds (``ETFs''): iShares 
China Large-Cap ETF (``FXI''), iShares MSCI EAFE ETF (``EFA''), iShares 
MSCI Emerging Markets ETF (``EEM''), iShares Russell 2000 ETF 
(``IWM''), iShares MSCI Brazil Capped ETF (``EWZ''), iShares 20+ Year 
Treasury Bond Fund ETF (``TLT''), PowerShares QQQ Trust (``QQQQ''), and 
iShares MSCI Japan Index (``EWJ'').
    The text of the proposed rule change is available on the Exchange's 
website at http://ise.cchwallstreet.com/, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

[[Page 20876]]

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
Position Limit Increase
    Position limits for options on ETFs such as those subject to this 
proposal are determined pursuant to Exchange Rule 412, and, with 
certain exceptions, vary by tier according to the number of outstanding 
shares and the trading volume of the underlying security. Options in 
the highest tier--i.e., options that overlie securities with the 
largest numbers of outstanding shares and trading volumes--have a 
standard option position limit of 250,000 contracts (with adjustments 
for splits, re-capitalizations, etc.) on the same side of the market. 
In addition, Rule 412 currently sets forth separate position limits for 
options on certain ETFs, including 500,000 contracts for options on EEM 
and IWM, and 900,000 contracts for options on QQQQ.
    The Exchange proposes to revise Rule 412 to increase the position 
limits for options on certain ETFs, as described more fully below.\3\ 
The Exchange believes that increasing the position limits for these 
options will lead to a more liquid and competitive market environment 
for these options that will benefit customers interested in these 
products.
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    \3\ ISE Rule 414 establishes exercise limits for the 
corresponding options at the same levels as the corresponding 
security's position limits. Rule 414 would be amended such that the 
exercise limits for each of these options would be increased to the 
level of the new position limits.
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    First, the Exchange proposes to increase the position limits for 
options on FXI, EFA, EWZ, TLT, and EWJ, each of which fall into the 
highest standard tier set forth in Exchange Rule 412(d)(5). Rule 412, 
Supplementary Material .01, would be amended to increase the current 
position limit of 250,000 contracts for options on these securities to 
500,000 contracts.
    Second, the Exchange proposes to increase the position limits for 
options on EEM and IWM from 500,000 contracts to 1,000,000 
contracts.\4\
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    \4\ The Exchange is also amending Rules 412 and 414 to update 
and correct the names of IWM and EEM, which are currently referred 
to in that rule as the iShares[supreg] Russell 2000[supreg] Index 
Fund and iShares MSCI Emerging Markets Index Fund, respectively.
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    Finally, the Exchange proposes to increase the position limits on 
options on QQQQ from 900,000 contracts to 1,800,000 contracts.
    In support of this proposal, the Exchange represents that the above 
listed ETFs qualify for either: (i) The initial listing criteria set 
forth in Exchange Rule 502(h) for ETFs holding non-U.S. component 
securities; or (ii) for ETFs listed pursuant to generic listing 
standards for series of portfolio depository receipts and index fund 
shares based on international or global indexes under which a 
comprehensive surveillance agreement (``CSA'') is not required.\5\ FXI 
tracks the performance of the FTSE China 50 Index, which is composed of 
the 50 largest Chinese stocks.\6\ EEM tracks the performance of the 
MSCI Emerging Markets Index, which is composed of approximately 800 
component securities.\7\ The MSCI Emerging Markets Index consists of 
the following 21 emerging market country indices: Brazil, Chile, China, 
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, 
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South 
Africa, Taiwan, Thailand, and Turkey.\8\ IWM tracks the performance of 
the Russell 2000 Index, which is composed of 2,000 small-cap domestic 
stocks.\9\ EFA tracks the performance of MSCI EAFE Index, which has 
over 900 component securities.\10\ The MSCI EAFE Index is designed to 
represent the performance of large and mid-cap securities across 21 
developed markets, including countries in Europe, Australasia and the 
Far East, excluding the U.S. and Canada.\11\ EWZ tracks the performance 
of the MSCI Brazil 25/50 Index, which is composed of shares of large 
and mid-size companies in Brazil.\12\ TLT tracks the performance of ICE 
U.S. Treasury 20+ Year Bond Index, which is composed of long-term U.S. 
Treasury bonds.\13\ QQQQ tracks the performance of the Nasdaq-100 
Index, which is composed of 100 of the largest domestic and 
international nonfinancial companies listed on the Nasdaq Stock Market 
LLC (``Nasdaq'').\14\ EWJ tracks the MSCI Japan Index, which tracks the 
performance of large and mid-sized companies in Japan.\15\
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    \5\ The Exchange notes that the initial listing criteria for 
options on ETFs that hold non-U.S. component securities are more 
stringent than the maintenance listing criteria for those same ETF 
options. See Exchange Rule 503(h).
    \6\ See https://www.ishares.com/us/products/239536/ishares-china-largecap-etf.
    \7\ See http://us.ishares.com/product_info/fund/overview/EEM.htm.
    \8\ See http://www.msci.com/products/indices/tools/index.html#EM.
    \9\ See https://www.ishares.com/us/products/239710/ishares-russell-2000-etf.
    \10\ See https://www.ishares.com/us/products/239623/.
    \11\ See https://www.msci.com/eafe.
    \12\ See https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf.
    \13\ See https://www.ishares.com/us/products/239454/.
    \14\ See https://www.invesco.com/portal/site/us/financial-professional/etfs/productdetail?productId=QQQ&ticker=QQQ&title=powershares-qqq.
    \15\ See https://www.ishares.com/us/products/239665/EWJ.
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    The Exchange represents that more than 50% of the weight of the 
securities held by the options subject to this proposal are also 
subject to a CSA.\16\ Additionally, the component securities of the 
MSCI Emerging Markets Index on which EEM is based for which the primary 
market is in any one country that is not subject to a CSA do not 
represent 20% or more of the weight of the MSCI Emerging Markets 
Index.\17\ Finally, the component securities of the MSCI Emerging 
Markets Index on which EEM is based, for which the primary market is in 
any two countries that are not subject to CSAs do not represent 33% or 
more of the weight of the MSCI Emerging Markets Index.\18\
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    \16\ See Exchange Rule 502(h)(b)(2).
    \17\ See Exchange Rule 502(h)(b)(3).
    \18\ See Exchange Rule 502(h)(b)(4).
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    Market participants have increased their demand for options on FXI, 
EFA, EWZ, TLT, and EWJ for hedging and trading purposes and the 
Exchange believes the current position limits are too low and may be a 
deterrent to successful trading of options on these securities.
The CBOE Analysis
    The Commission has recently approved a proposed rule change of the 
Chicago Board Options Exchange (``CBOE'') to increase position limits 
for these same options.\19\ The discussion that follows is based upon 
the CBOE's analysis presented in that proposal.
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    \19\ See Securities Exchange Act Release No. 82770 (February 23, 
2018) (approving SR-CBOE-2017-057).
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    In its proposal, CBOE stated that it had collected the following 
trading statistics on the ETFs that are subject to this proposal:

[[Page 20877]]

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                                                                     2017 ADV         Shares
                       ETF                           2017 ADV         (option       outstanding    Fund  market
                                                   (Mil. shares)    contracts)        (Mil.)       cap  ($Mil.)
----------------------------------------------------------------------------------------------------------------
FXI.............................................           15.08          71,944            78.6         3,343.6
EEM.............................................           52.12         287,357           797.4        34,926.1
IWM.............................................           27.46         490,070           253.1        35,809.1
EFA.............................................           19.42          98,844          1178.4        78,870.3
EWZ.............................................           17.08          95,152           159.4         6,023.4
TLT.............................................            8.53          80,476            60.0           7,442
QQQQ............................................           26.25         579,404           351.6        50,359.7
EWJ.............................................            6.06           4,715           303.6        16,625.1
SPY.............................................           64.63       2,575,153          976.23       240,540.0
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    In support of its proposal to increase the position limits for QQQQ 
to 1,800,000 contracts, CBOE compared the trading characteristics of 
QQQQ to that of the SPDR S&P 500 ETF (``SPY''), which has no position 
limits. As shown in the above table, the average daily trading volume 
through August 14, 2017 for QQQQ was 26.25 million shares compared to 
64.63 million shares for SPY. The total shares outstanding for QQQQ are 
351.6 million compared to 976.23 million for SPY. The fund market cap 
for QQQQ is $50,359.7 million compared to $240,540 million for SPY. SPY 
is one of the most actively trading ETFs and is, therefore, subject to 
no position limits. QQQQ is also very actively traded, and while not to 
the level of SPY, should be subject to the proposed higher position 
limits based on its trading characteristics when compared to SPY. The 
proposed position limit coupled with QQQQ's trading behavior would 
continue to address potential manipulative schemes and adverse market 
impact surrounding the use of options and trading in its underlying the 
options.
    In support of its proposal to increase the position limits for EEM 
and IWM from 500,000 contracts to 1,000,000 contracts, CBOE also 
compared the trading characteristics of EEM and IWM to that of QQQQ, 
which currently has a position limit of 900,000 contracts. As shown in 
the above table, the average daily trading volume through July 31, 2017 
for EEM was 52.12 million shares and IWM was 27.46 million shares 
compared to 26.25 million shares for QQQQ. The total shares outstanding 
for EEM are 797.4 million and for IWM are 253.1 million compared to 
351.6 million for QQQQ. The fund market cap for EEM is $34,926.1 
million and IWM is $35,809 million compared to $50,359.7 million for 
QQQQ. EEM, IWM and QQQQ have similar trading characteristics and 
subjecting EEM and IWM to the proposed higher position limit would 
continue be designed to address potential manipulate schemes that may 
arise from trading in the options and their underlying securities. 
These above trading characteristics for QQQQ when compared to EEM and 
IWM also justify increasing the position limit for QQQQ. QQQQ has a 
higher options ADV than EEM and IWM, a higher numbers of shares 
outstanding than IWM and a much higher market cap than EEM and IWM 
which justify doubling the position limit for QQQQ. CBOE concluded 
that, based on these statistics, and as stated above, the proposed 
position limit coupled with QQQQ's trading behavior would continue to 
address potential manipulative schemes and adverse market impact 
surrounding the use of options and trading in the securities underlying 
the options.
    In support of its proposal to increase the position limits for FXI, 
EFA, EWZ, TLT, and EWJ from 250,000 contracts to 500,000 contracts, 
CBOE compared the trading characteristics of FXI, EFA, EWZ, TLT, and 
EWJ to that of EEM and IWM, both of which currently have a position 
limit of 500,000 contracts. As shown in the above table, the average 
daily trading volume through July 31, 2017 for FXI is 15.08 million 
shares, EFA is 19.42 million shares, EWZ is 17.08 million shares, TLT 
is 8.53 million shares, and EWJ is 6.06 million shares compared to 
52.12 million shares for EEM and 27.46 million shares for IWM. The 
total shares outstanding for FXI is 78.6 million, EFA is 1178.4 
million, EWZ is 159.4 million, TLT is 60 million, and EWJ is 303.6 
million compared to 797.4 million for EEM and 253.1 million for IWM. 
The fund market cap for FXI is $3,343.6 million, EFA is $78,870.3 
million, EWZ is $6,023.4 million, TLT is $7,442.4 million, and EWJ is 
$16,625.1 million compared to $34,926.1 million for EEM and $35,809.1 
million for IWM.
    In Partial Amendment No. 1 to its proposed rule change, CBOE 
provided additional analysis and support for its proposed rule 
change.\20\ According to CBOE, market participants' trading activity 
has been adversely impacted by the current position limits as such 
limits have caused options trading in the symbols subject to the 
proposed rule change to move from exchanges to the over-the-counter 
market. CBOE stated it had submitted the proposed rule change at the 
request of market participants whose on-exchange activity has been 
hindered by the existing position limits causing them to be unable to 
provide additional liquidity not just on CBOE, but also on other 
options exchanges on which they participate.
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    \20\ See SR-CBOE-2017-057, Partial Amendment No. 1 (November 22, 
2017).
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    CBOE stated it understood that certain market participants wishing 
to make trades involving a large number of options contracts in the 
symbols subject to the proposed rule change are opting to execute those 
trades in the over-the-counter market, that the over-the counter 
transactions occur via bilateral agreements the terms of which are not 
publicly disclosed to other market participants, and that therefore, 
these large trades do not contribute to the price discovery process 
performed on a lit market. It stated that position limits are designed 
to address potential manipulative schemes and adverse market impact 
surrounding the use of options, such as disrupting the market in the 
security underlying the options, and that the potential manipulative 
schemes and adverse market impact are balanced against the potential of 
setting the limits so low as to discourage participation in the options 
market. It stated that the level of those position limits must be 
balanced between curtailing potential manipulation and the cost of 
preventing potential hedging activity that could be used for legitimate 
economic purposes.
    CBOE observed that the ETFs that underlie options subject to the 
proposed rule change are highly liquid, and are based on a broad set of 
highly liquid securities and other reference assets,

[[Page 20878]]

and noted that the Commission has generally looked through to the 
liquidity of securities comprising an index in establishing position 
limits for cash-settled index options. It further noted that options on 
certain broad-based security indexes have no position limits. CBOE 
observed that the Commission has recognized the liquidity of the 
securities comprising the underlying interest of the SPDR S&P 500 ETF 
(``SPY'') in permitting no position limits on SPY options since 
2012,\21\ and expanded position limits for options on EEM, IWM and 
QQQQ.
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    \21\ See Securities Exchange Act Release No. 67937 (September 
27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-091).
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    CBOE stated that the creation and redemption process for these ETFs 
also lessen the potential for manipulative activity, explaining that 
when an ETF company wants to create more ETF shares, it looks to an 
Authorized Participant, which is a market maker or other large 
financial institution, to acquire the securities the ETF is to hold. 
For instance, IWM is designed to track the performance of the Russell 
2000 Index, the Authorized Participant will purchase all the Russell 
2000 constituent securities in the exact same weight as the index, then 
deliver those shares to the ETF provider. In exchange, the ETF provider 
gives the Authorized Participant a block of equally valued ETF shares, 
on a one-for-one fair value basis. The price is based on the net asset 
value, not the market value at which the ETF is trading. The creation 
of new ETF units can be conducted all trading day and is not subject to 
position limits. This process can also work in reverse where the ETF 
company seeks to decrease the number of shares that are available to 
trade. The creation and redemption process, therefore, creates a direct 
link to the underlying components of the ETF, and serves to mitigate 
potential price impact of the ETF shares that might otherwise result 
from increased position limits. The ETF creation and redemption seeks 
to keep ETF share prices trading in line with the ETF's underlying net 
asset value. Because an ETF trades like a stock, its price will 
fluctuate during the trading day, due to simple supply and demand. If 
demand to buy an ETF is high, for instance, the ETF's share price might 
rise above the value of its underlying securities. When this happens, 
the Authorized Participant believes the ETF may now be overpriced, and 
can buy the underlying shares that compose the ETF and then sell ETF 
shares on the open market. This should help drive the ETF's share price 
back toward fair value. Likewise, if the ETF starts trading at a 
discount to the securities it holds, the Authorized Participant can buy 
shares of the ETF and redeem them for the underlying securities. Buying 
undervalued ETF shares should drive the price of the ETF back toward 
fair value. This arbitrage process helps to keep an ETF's price in line 
with the value of its underlying portfolio.
    CBOE stated that in proposing the increased position limits, the 
Exchange considered the availability of economically equivalent 
products and their respective position limits. For instance, some of 
the ETFs underlying options subject to the proposed rule change are 
based on broad-based indices that underlie cash settled options that 
are economically equivalent to the ETF options that are the subject of 
the proposed rule change and have no position limits. Other ETFs are 
based on broad-based indexes that underlie cash-settled options with 
position limits reflecting notional values that are larger than the 
current position limits for ETF analogues (EEM, EFA). Where there was 
no approved index analogue, CBOE stated its belief, based on the 
liquidity, breadth and depth of the underlying market, that the index 
referenced by the ETF would be considered a broad-based index.\22\ CBOE 
argued that if certain position limits are appropriate for the options 
overlying the same index or is an analogue to the basket of securities 
that the ETF tracks, then those same economically equivalent position 
limits should be appropriate for the option overlying the ETF. In 
addition, CBOE observed, the market capitalization of the underlying 
index or reference asset is large enough to absorb any price movements 
that may be caused by an oversized trade. Also, the Authorized 
Participant or issuer may look to the stocks comprising the analogous 
underlying index or reference asset when seeking to create additional 
ETF shares are part of the creation/redemption process to address 
supply and demand or to mitigate the price movement the price of the 
ETF. CBOE offered the following specific examples to illustrate:
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    \22\ CBOE Rule 24.4 and Exchange Rule 2004 set forth the CBOE 
and the ISE position limits for broad-based index options.
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QQQQ
    For example, the PowerShares QQQ Trust or QQQQ is an ETF that 
tracks the Nasdaq 100 Index or NDX, which is an index composed of 100 
of the largest non-financial securities listed on Nasdaq. Options on 
NDX are currently subject to no position limits but share similar 
trading characteristics as QQQQ. Based on QQQQ's share price of $154.54 
\23\ and NDX's index level of 6,339.14, approximately 40 contracts of 
QQQQ equals one contract of NDX. Assume that NDX was subject to the 
standard position limit of 25,000 contracts for broad-based index 
options. Based on the above comparison of notional values, this would 
result in a positon limit equivalent to 1,000,000 contracts for QQQQ as 
NDX's analogue. However, NDX is not subject to position limits and has 
an average daily trading volume of 15,300 contracts. QQQQ is currently 
subject to a position limit of 900,000 contracts but has a much higher 
average daily trading volume of 579,404 contracts. Furthermore, NDX 
currently has a market capitalization of $17.2 trillion and QQQQ has a 
market capitalization of $50,359.7 million, and the component 
securities of NDX, in aggregate, have traded an average of 440 million 
shares per day in 2017, both large enough to absorb any price movement 
cause by a large trade in the QQQQ. The Commission has also approved no 
position limit for NDX, although it has a much lower average daily 
trading volume than its analogue, the QQQQ. Therefore, CBOE concluded 
and the Exchange agrees it was reasonable to increase the positon limit 
for options on the QQQQ from 900,000 to 1,800,000 contracts.
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    \23\ CBOE stated that all share prices used in its analysis were 
based on the closing price of the security on November 16, 2017 and 
cited Yahoo Finance as the source.
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IWM
    The iShares Russell 2000 ETF or IWM, is an ETF that also tracks the 
Russell 2000 Index or RUT, which is an index that is composed of 2,000 
small-cap domestic companies in the Russell 3000 index. Options on RUT 
are currently subject to no position limits but share similar trading 
characteristics as IWM. Based on IWM's share price of $144.77 and RUT's 
index level of 1,486.88, approximately 10 contracts of IWM equals one 
contract of RUT. Assume that RUT was subject to the standard position 
limit of 25,000 contracts for broad-based index options under Exchange 
Rule 24.4(a). Based on the above comparison of notional values, this 
would result in a positon limit equivalent to 250,000 contracts for IWM 
as RUT's analogue. However, RUT is not subject to position limits and 
has an average daily trading volume of 66,200 contracts. IWM is 
currently subject to a position limit of 500,000 contracts but has a 
much higher average daily trading volume of 490,070

[[Page 20879]]

contracts. The Commission has approved no position limit for RUT, 
although it has a much lower average daily trading volume than its 
analogue, the IWM. Furthermore, RUT currently has a market 
capitalization of $2.4 trillion and IWM has a market capitalization of 
$35,809.1 million, and the component securities of RUT, in aggregate, 
have traded an average of 270 million shares per day in 2017, both 
large enough to absorb any price movement cause by a large trade in the 
IWM. Therefore, CBOE concluded and the Exchange agrees it is reasonable 
to increase the positon limit for options on the IWM from 500,000 to 
1,000,000 contracts.
EEM
    EEM tracks the performance of the MSCI Emerging Markets Index or 
MXEF, which is composed of approximately 800 component securities 
following 21 emerging market country indices: Brazil, Chile, China, 
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, 
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South 
Africa, Taiwan, Thailand, and Turkey. Based on EEM's share price of 
$47.06 and MXEF's index level of 1,136.45, approximately 24 contracts 
of EEM equals one contract of MXEF. MXEF is currently subject to the 
standard position limit of 25,000 contracts for broad-based index 
options. Based on the above comparison of notional values, this would 
result in a position limit economically equivalent to 604,000 contracts 
for EEM as MXEF's analogue. However, MXEF has an average daily trading 
volume of 180 contracts. EEM is currently subject to a position limit 
of 500,000 contracts but has a much higher average daily trading volume 
of 287,357 contracts. Furthermore, MXEF currently has a market 
capitalization of $5.18 trillion and EEM has a market capitalization of 
$34,926.1 million, and the component securities of MXEF, in aggregate, 
have traded an average of 33.6 billion shares per day in 2017, both 
large enough to absorb any price movement cause by a large trade in the 
EEM. Therefore, based on the comparison of average daily trading 
volume, CBOE believed and the Exchange agrees that it is reasonable to 
increase the positon limit for options on the IWM from 500,000 to 
1,000,000 contracts.
EFA
    EFA tracks the performance of MSCI EAFE Index or MXEA, which has 
over 900 component securities designed to represent the performance of 
large and mid-cap securities across 21 developed markets, including 
countries in Europe, Australasia and the Far East, excluding the U.S. 
and Canada. Based on EFA's share price of $69.16 and MXEA's index level 
of 1,986.15, approximately 29 contracts of EFA equals one contract of 
MXEA. MXEA is currently subject to the standard position limit of 
25,000 contracts for broad-based index options. Based on the above 
comparison of notional values, this would result in a positon limit 
economically equivalent to 721,000 contracts for EFA as MXEA's 
analogue. Furthermore, MXEA currently has a market capitalization of 
$18.7 trillion and EFA has a market capitalization of $78,870.3 
million, and the component securities of MXEA, in aggregate, have 
traded an average of 4.6 billion shares per day in 2017, both large 
enough to absorb any price movement cause by a large trade in the EEM. 
However, MXEA has an average daily trading volume of 270 contracts. EFA 
is currently subject to a position limit of 250,000 contracts but has a 
much higher average daily trading volume of 98,844 contracts. Based on 
the above comparisons, CBOE believed and the Exchange agrees that it is 
reasonable to increase the positon limit for options on the EFA from 
250,000 to 500,000 contracts.
FXI
    FXI tracks the performance of the FTSE China 50 Index, which is 
composed of the 50 largest Chinese stocks. There is currently no index 
analogue for FXI approved for options trading. However, the FTSE China 
50 Index currently has a market capitalization of $1.7 trillion and FXI 
has a market capitalization of $2,623.18 million, both large enough to 
absorb any price movement cause by a large trade in FXI. The components 
of the FTSE China 50 Index, in aggregate, have an average daily trading 
volume of 2.3 billion shares. FXI is currently subject to a position 
limit of 250,000 contracts but has a much higher average daily trading 
volume of 15.08 million shares. Based on the above comparisons, CBOE 
believed, and that Exchange agrees, that it is reasonable to increase 
the positon limit for options on the FXI from 250,000 to 500,000 
contracts.
EWZ
    EWZ tracks the performance of the MSCI Brazil 25/50 Index, which is 
composed of shares of large and mid-size companies in Brazil. There is 
currently no index analogue for EWZ approved for options trading. 
However, the MSCI Brazil 25/50 Index currently has a market 
capitalization of $700 billion and EWZ has a market capitalization of 
$6,023.4 million, both large enough to absorb any price movement cause 
by a large trade in EWZ. The components of the MSCI Brazil 25/50 Index, 
in aggregate, have an average daily trading volume of 285 million 
shares. EWZ is currently subject to a position limit of 250,000 
contracts but has a much higher average daily trading volume of 17.08 
million shares. Based on the above comparisons, CBOE believed and the 
Exchange agrees that it is reasonable to increase the positon limit for 
options on the EWZ from 250,000 to 500,000 contracts.
TLT
    TLT tracks the performance of ICE U.S. Treasury 20+ Year Bond 
Index, which is composed of long-term U.S. Treasury bonds. There is 
currently no index analogue for TLT approved for options trading. 
However, the U.S. Treasury market is one of the largest and most liquid 
markets in the world, with over $14 trillion outstanding and turnover 
of approximately $500 billion per day. TLT currently has a market 
capitalization of $7,442.4 million, both large enough to absorb any 
price movement cause by a large trade in TLT. Therefore, the potential 
for manipulation will not increase solely due the increase in position 
limits as set forth in the proposed rule change. Based on the above 
comparisons, CBOE believed and the Exchange agrees it is reasonable to 
increase the positon limit for options on the TLT from 250,000 to 
500,000 contracts.
EWJ
    EWJ tracks the MSCI Japan Index, which tracks the performance of 
large and mid-sized companies in Japan. There is currently no index 
analogue for EWJ approved for options trading. However, the MSCI Japan 
Index has a market capitalization of $3.5 trillion and EWJ has a market 
capitalization of $16,625.1 million, and the component securities of 
the MSCI Japan Index, in aggregate, have traded an average of 1.1 
billion shares per day in 2017, both large enough to absorb any price 
movement cause by a large trade in EWJ. EWJ is currently subject to a 
position limit of 250,000 contracts and has an average daily trading 
volume of 6.6 million shares. Based on the above comparisons, CBOE 
believed and the Exchange agrees that it is reasonable to increase the 
positon limit for options on EWJ from 250,000 to 500,000 contracts.
ISE Analysis and Conclusions
    ISE has reviewed the CBOE analysis set forth above. On the basis of 
that analysis ISE believes that market

[[Page 20880]]

participants' trading activity could be adversely impacted by the 
current position limits for FXI, EFA, EWZ, TLT and EWJ and such limits 
may cause options trading in these symbols to move from exchanges to 
the over-the-counter market. The above trading characteristics of FXI, 
EFA, EWZ, TLT and EWJ are either similar to those of EEM and IWM or 
sufficiently active so that the proposed limit would continue to 
address potential manipulation that may arise. Specifically, EFA has 
far more shares outstanding and a larger fund market cap than EEM, IWM, 
and QQQQ. EWJ has more shares outstanding than IWM and only slightly 
fewer shares outstanding than QQQQ.
    On the other hand, while FXI, EWZ and TLT do not exceed EEM, IWM or 
QQQQ in any of the specified areas, they are all actively trading so 
that market participants' trading activity has been impacted by them 
being restricted by the current position limits. The Exchange believes 
that the trading activity and these securities being based on a broad 
basket of underlying securities alleviates concerns as to any potential 
manipulative activity that may arise. In addition, as discussed in more 
detail below, the Exchange's existing surveillance procedures and 
reporting requirements at the Exchange, at other options exchanges, and 
at the several clearing firms are capable of properly identifying 
unusual and/or illegal trading activity.
    On the basis of CBOE's analysis ISE also believes that market 
participants' trading activity could be adversely impacted by the 
current position limits for EEM, IWM and QQQQ. As discussed above, EEM, 
IWM and QQQQ have similar trading characteristics. Subjecting EEM and 
IWM to the proposed higher position limit would continue be designed to 
address potential manipulate schemes that may arise from trading in the 
options and their underlying securities. The trading characteristics 
for QQQQ described above, when compared to EEM and IWM, also justify 
increasing the position limit for QQQQ. QQQQ has a higher options ADV 
than EEM and IWM, a higher numbers of shares outstanding than IWM and a 
much higher market cap than EEM and IWM which justify doubling the 
positon limit for QQQQ. Based on these statistics, the proposed 
position limit coupled with QQQQ's trading behavior would continue to 
address potential manipulative schemes and adverse market impact 
surrounding the use of options and trading in its underlying the 
options.
    The Exchange believes that increasing the position limits for the 
options subject to this proposal would lead to a more liquid and 
competitive market environment for these options, which will benefit 
customers interested in this product. Under the proposal, the reporting 
requirement for the above options would be unchanged. Thus, the 
Exchange would still require that each Member file with the Exchange 
the name, address and social security or tax identification number of 
any customer, as well as any Member, any general or special partner of 
the Member, any officer or director of the Member or any participant, 
as such, in any joint, group or syndicate account with the Member or 
with any partner, officer or director thereof, who, on the previous 
business day held aggregate long or short positions of 200 or more 
options contracts of any single class of options traded on the 
Exchange. The report is also required to indicate for each such class 
of options contracts the number of options contracts comprising each 
such position and, in case of short positions, whether covered or 
uncovered. Additionally, Electronic Access Members that maintain an end 
of day position in excess of 10,000 non-FLEX equity options contracts 
on the same side of the market on behalf of its own account or for the 
account of a customer, are required to report whether such position is 
hedged and provide documentation as to how such position is hedged. 
This report is required at the time the subject account exceeds the 
10,000 contract threshold and thereafter, for customer accounts, when 
the position increases by 2,500 contracts and for proprietary accounts 
when the position increases by 5,000 contracts. Finally, Members are 
also required to report promptly to the Exchange any instance in which 
the Member has reason to believe that a person included in Rule 415(a), 
acting alone or in concert with others, has exceeded or is attempting 
to exceed the position limits established pursuant to Rule 412.\24\
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    \24\ See Exchange Rule 415 for reporting requirements.
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    The Exchange believes that the existing surveillance procedures and 
reporting requirements at the Exchange, other options exchanges, and at 
the several clearing firms are capable of properly identifying unusual 
and/or illegal trading activity. In addition, routine oversight 
inspections of the Exchange's regulatory programs by the Commission 
have not uncovered any material inconsistencies or shortcomings in the 
manner in which the Exchange's market surveillance is conducted. These 
procedures utilize daily monitoring of market movements via automated 
surveillance techniques to identify unusual activity in both options 
and underlying stocks.\25\
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    \25\ These procedures have been effective for the surveillance 
of trading the options subject to this proposal and will continue to 
be employed.
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    Furthermore, large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G.\26\ The positions for 
options subject to this proposal are part of any reportable positions 
and, thus, cannot be legally hidden. Moreover, the Exchange's 
requirement that Members file reports with the Exchange for any 
customer who held aggregate large long or short positions of any single 
class for the previous day will continue to serve as an important part 
of the Exchange's surveillance efforts.
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    \26\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns that a member organization or its customer may try to maintain 
an inordinately large un-hedged position in the options subject to this 
proposal. Current margin and risk-based haircut methodologies serve to 
limit the size of positions maintained by any one account by increasing 
the margin and/or capital that a member organization must maintain for 
a large position held by itself or by its customer.\27\ In addition, 
Rule 15c3-1 \28\ imposes a capital charge on member organizations to 
the extent of any margin deficiency resulting from the higher margin 
requirement.
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    \27\ See Exchange Rule 1202(a), which provides that a Member 
must elect to be bound by the initial and maintenance margin 
requirements of either the CBOE or the New York Stock Exchange as 
the same may be in effect from time to time.
    \28\ 17 CFR 240.15c3-1.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\29\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\30\ 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. As noted above, the Commission has recently approved 
increasing position limits to the levels proposed herein on the same 
ETF options on the CBOE. The Exchange believes that the proposed 
position limits would continue to address potential manipulative 
activity while allowing for potential hedging

[[Page 20881]]

activity for appropriate economic purposes.
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    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(5).
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    The current position limits for the options subject to this 
proposal have inhibited the ability of market makers to make markets on 
the Exchange. Specifically, the proposal is designed to encourage 
market makers to shift liquidity from over the counter markets onto the 
Exchange, which will enhance the process of price discovery conducted 
on the Exchange through increased order flow. The proposal will also 
benefit institutional investors as well as retail traders, and public 
customers, by providing them with a more effective trading and hedging 
vehicle. In addition, the Exchange believes that the structure of the 
ETFs subject to this proposal and the considerable liquidity of the 
market for options on those ETFs diminishes the opportunity to 
manipulate this product and disrupt the underlying market that a lower 
position limit may protect against.
    Increased position limits for select actively traded options, such 
as that proposed herein, is not novel and has been previously approved 
by the Commission. For example, the Commission has previously approved, 
on a pilot basis, eliminating position limits for certain options.\31\ 
Additionally, the Commission has approved similar proposed rule changes 
to increase position limits for options on highly liquid, actively-
traded ETFs,\32\ including a proposal to permanently eliminate the 
position and exercise limits for options overlaying the S&P 500 Index, 
S&P 100 Index, Dow Jones Industrial Average, Nasdaq 100 Index, and the 
Russell 2000(R) Index (``RUT'').\33\ In approving the permanent 
elimination of position and exercise limits for these index options, 
the Commission relied heavily upon the Exchange's surveillance 
capabilities, and the Commission expressed trust in the enhanced 
surveillance and reporting safeguards that the Exchange took in order 
to detect and deter possible manipulative behavior which might arise 
from eliminating position and exercise limits.\34\ Furthermore, as 
described more fully above, options on other ETFs have the position 
limits proposed herein and those ETFs have trading characteristics and 
trading volumes that are similar to those of the ETFs subject to this 
proposed rule change.
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    \31\ See Securities Exchange Act Release Nos. 67672 (August 15, 
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29); 67937 
(September 27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-
091).
    \32\ See Securities Exchange Act Release Nos. 68086 (October 23, 
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066); 64928 
(July 20, 2011), 76 FR 44633 (July 26,2011) (SR-CBOE-2011-065); 
64695 (June 17, 2011), 76 FR 36942 (June 23, 2011) (SR-PHLX-2011-
58); and 55176 (January 25, 2007), 72 FR 4741 (February 1, 2017) 
(SR-CBOE-2007-008.).
    \33\ See Securities Exchange Act Release Nos. 44994 (October 26, 
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22) (elimination 
of position and exercise limits on SPX, OEX, and DJX options) 
(``SPX, OEX, and DJX Position Limit Elimination Approval Order''); 
52650 (October 21, 2005), 70 FR 62147 (October 28, 2005) (SR-CBOE-
2005-41) (elimination of position and exercise limits on NDX 
options) (``NDX Position Limit Elimination Approval Order''); 56651 
(October 12, 2007), 72 FR 59130 (October 18, 2007) (SR-Phlx-2007-71) 
(``RUT Position Limit Elimination Approval Order'').
    \34\ Id.
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    Last, the Commission has expressed the belief that removing 
position and exercise limits may bring additional depth and liquidity 
without increasing concerns regarding intermarket manipulation or 
disruption of the options or the underlying securities.\35\ The 
Exchange's enhanced surveillance and reporting safeguards continue to 
be designed to deter and detect possible manipulative behavior which 
might arise from eliminating position and exercise limits.
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    \35\ Id.
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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 not necessary or appropriate in 
furtherance of the purposes of the Act. On the contrary, the Exchange 
believes that the proposed rule change will result in additional 
opportunities to achieve the investment and trading objectives of 
market participants seeking efficient trading and hedging vehicles, to 
the benefit of investors, market participants, and the marketplace in 
general.

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 foregoing 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 which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \36\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\37\
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    \36\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \37\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and 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. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \38\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \39\ 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 proposed 
rule change may become effective and operative immediately upon filing. 
The Exchange states that waiver of the operative delay would permit the 
Exchange to immediately implement the proposed rule change to increase 
the position limits as proposed herein and thereby seamlessly continue 
to offer traders and the investing public the ability to use these 
products as effective hedging and trading vehicles. The Exchange 
further states that waiver would allow the Exchange to remain 
competitive with other exchanges. The Commission believes that waiver 
of the 30-day operative delay is consistent with the protection of 
investors and the public interest. Therefore, the Commission hereby 
waives the 30-day operative delay and designates the proposed rule 
change as operative upon filing.\40\
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    \38\ 17 CFR 240.19b-4(f)(6).
    \39\ 17 CFR 240.19b-4(f)(6)(iii).
    \40\ 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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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,

[[Page 20882]]

including whether the proposed rule change is consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-ISE-2018-39 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-2018-39. 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 (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-ISE-2018-39 and should be submitted on 
or before May 29, 2018.
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    \41\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-09696 Filed 5-7-18; 8:45 am]
 BILLING CODE 8011-01-P