Document ID: SEC-2017-0158-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX LLC
Posted Date: 2017-02-03T05:00Z

[Federal Register Volume 82, Number 22 (Friday, February 3, 2017)]
[Notices]
[Pages 9259-9263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02258]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79894; File No. SR-Phlx-2017-04]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change To Permit the Listing and Trading of P.M.-
Settled NASDAQ-100 Index[supreg] Options on a Pilot Basis

January 30, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on January 18, 2017, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to

[[Page 9260]]

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 permit the listing and trading of P.M.-
settled NASDAQ-100 Index[supreg] options on a pilot basis.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/ com/, 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
(i) New P.M.-Settled NASDAQ-100 Index Options
    The purpose of this rule filing is to permit the listing and 
trading, on a pilot basis, of NASDAQ-100 Index[supreg] (``NASDAQ-100'') 
options with third-Friday-of-the-month (``Expiration Friday'') 
expiration dates, whose exercise settlement value will be based on the 
closing index value, symbol XQC, of the NASDAQ-100 on the expiration 
day (``P.M.- settled'') for an initial period of twelve months (the 
``Pilot Program'') from the date of approval of this proposed rule 
change.
    The NASDAQ-100, a modified market capitalization-weighted index, 
includes 100 of the largest non-financial companies listed on The 
Nasdaq Stock Market, based on market capitalization. It does not 
contain securities of financial companies including investment 
companies. Security types generally eligible for the NASDAQ-100 include 
common stocks, ordinary shares, American Depository Receipts, and 
tracking stocks. Security or company types not included in the NASDAQ-
100 are closed-end funds, convertible debentures, exchange traded 
funds, limited liability companies, limited partnership interests, 
preferred stocks, rights, shares or units of beneficial interest, 
warrants, units and other derivative securities.\3\
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    \3\ A description of the NASDAQ-100 is available on Nasdaq's Web 
site at https://indexes.nasdaqomx.com/docs/methodology_NDX.pdf.
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    The conditions for listing the proposed contract (``NDXPM'') on 
Phlx will be similar to those for Full Value Nasdaq 100 Options 
(``NDX''), which are already listed and trading on Phlx, except that 
NDXPM will be P.M.-settled.\4\ The proposed contract would use a $100 
multiplier, and the minimum trading increment would be $0.05 for 
options trading below $3.00 and $0.10 for all other series.\5\ Strike 
price intervals would be set at no less than $5.00.\6\ Consistent with 
existing rules for index options, the Exchange would allow up to nine 
near-term expiration months \7\ as well as LEAPS.\8\ The product would 
have European-style exercise, and because it is based on the NASDAQ-
100, there would be no position limits.\9\ The Exchange has the 
flexibility to open for trading additional series in response to 
customer demand.
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    \4\ The Exchange currently lists an A.M. Reduced Value Nasdaq 
100 Option, but does not at this time propose to list a reduced 
value P.M. settled option based on the NASDAQ-100.
    \5\ See Rule 1034.
    \6\ See Rule 1101A, Terms of Option Contracts, section (a).
    \7\ The Exchange wishes to give the same expiration month 
options for NDXPM as are given for NDX, since both options classes 
are derived from the NASDAQ-100.
    \8\ Exchange Rule 1101A(b)(i) provides that after a particular 
class of stock index options has been approved for listing and 
trading on the Exchange, the Exchange shall from time to time open 
for trading series of options therein. Within each approved class of 
stock index options, the Exchange shall open for trading a minimum 
of one expiration month and series for each class of approved stock 
index options and may also open for trading series of options having 
not less than nine and up to 60 months to expiration (long-term 
options series) as provided in Rule 1101A(b)(iii). Rule 
1101A(b)(iii) provides that The Exchange may list, with respect to 
any class of stock index options, series of options having not less 
than nine and up to 60 months to expiration, adding up to ten 
expiration months. Such series of options may be opened for trading 
simultaneously with series of options trading pursuant to Rule 
1101A. Strike price interval, bid/ask differential and continuity 
rules shall not apply to such options series until the time to 
expiration is less than nine months.
    \9\ See proposed amendment to Rule 1001A(a)(ii).
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    As with NDX, in determining compliance with Rule 1001A, Position 
Limits, there will be no position limits for broad-based index option 
contracts in the NDXPM class.\10\ Each member or member organization 
(other than Registered Options Traders) that maintains a position on 
the same side of the market in excess of 100,000 contracts for its own 
account, or for the account of a customer, in the aggregate of (i) Full 
Value Nasdaq 100 Options and (ii) NDXPM options, would be required to 
file a report with the Exchange that includes, but is not limited to, 
data related to the option positions, whether such positions are hedged 
and if applicable, a description of the hedge and information 
concerning collateral used to carry the positions.\11\ As with NDX, 
there would be no exercise limits for NDXPM.\12\
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    \10\ See proposed amendment to Rule 1079(d).
    \11\ See Rule 1001A(c) as proposed to be revised.
    \12\ See Rule 1002A which provides that exercise limits for 
index option contracts are equivalent to the position limits 
described in Rule 1001A.
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    As with NDX, whenever the Exchange determines that additional 
margin is warranted in light of the risks associated with an under-
hedged NDXPM option position, the Exchange may consider imposing 
additional margin upon the account maintaining such under-hedged 
position pursuant to its authority under Exchange Rules 1003(b) (for 
non-FLEX options) and 1079(d)(2) (for FLEX options). The trading hours 
for NDXPM will be from 9:30 a.m. ET to 4:00 p.m. ET.\13\
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    \13\ Note that the trading hours for NDX end at 4:15 p.m. ET 
rather than at 4:00 p.m. ET.
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    Regarding NDXPM FLEX Options, there would be no position limits (as 
with NDX FLEX Options). As with NDX FLEX Options, each member or member 
organization (other than a Specialist or Registered Options Trader) 
that maintains a position on the same side of the market in excess of 
100,000 contracts for NDXPM FLEX Options, for its own account or for 
the account of a customer, would be required to report information on 
the FLEX equity option position, positions in any related instrument, 
the purpose or strategy for the position and the collateral used by the 
account. The report would be required to be in the form and manner 
prescribed by the Exchange. Like NDX FLEX Options, there would be no 
exercise limits for NDXPM FLEX Options (including reduced-value option 
contracts).\14\
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    \14\ See Rule 1079(d), as proposed to be revised.
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    In addition, whenever the Exchange determined that a higher margin 
requirement was necessary in light of the risks associated with a NDXPM 
FLEX Option position in excess of the standard limit for NDXPM non-FLEX 
options of the same class, the Exchange could consider imposing 
additional margin upon the account maintaining such under-hedged 
position. Additionally, the clearing firm carrying the account would be 
subject to capital charges under SEC rule 15c3-1 to the

[[Page 9261]]

extent of any margin deficiency resulting from the higher margin 
requirement.\15\
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    \15\ See Rule 1079(d)(2).
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    To explain the basic adoption of NDXPM, the Exchange proposes to 
add Commentary .05 to Rule 1101A, Terms of Options Contracts. This 
proposed new Commentary would provide that in addition to A.M.-settled 
Full Value Nasdaq 100 Options approved for trading on the Exchange 
pursuant to Rule 1101A Commentary .01, the Exchange may also list 
options on the NASDAQ-100 Index whose exercise settlement value is the 
closing value of the NASDAQ-100 Index on the expiration day.\16\ NDXPM 
options would be listed for trading for an initial pilot period ending 
twelve months from the date of approval of the proposed rule change.
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    \16\ Note that the closing value of the NASDAQ-100 may change up 
until 17:15 ET due to corrections to prices of the underlying 
component securities.
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    Precedent exists for P.M. settlement of broad-based index options. 
SPXPM (a P.M. settled index option contract based on the Standard & 
Poor's 500 index) is traded on the Chicago Board Options Exchange 
(``CBOE''). Further, OEX (an index option contract based on the 
Standard & Poor's 100 index) is also traded on CBOE and has been P.M.-
settled since 1983. The Exchange does not believe that any market 
disruptions will be encountered with the introduction of P.M.-settled 
NASDAQ-100 index options. The Exchange will monitor for any such 
disruptions or the development of any factors that could cause such 
disruptions.
    The Exchange also notes that P.M.-settled options predominate in 
the OTC market, and Phlx is not aware of any adverse effects in the 
stock market attributable to the P.M.-settlement feature. Phlx is 
merely proposing to offer a P.M.-settled product in an exchange 
environment which offers the benefit of added transparency, price 
discovery, and stability. In response to any potential concerns that 
disruptive trading conduct could occur as a result of the concurrent 
listing and trading of two index option products based on the same 
index but for which different settlement methodologies exist (i.e., one 
is A.M.-settled and one is P.M.-settled), the Exchange notes that CBOE 
lists and trades both the A.M.-settled S&P 500 index option called SPX 
and a P.M.-settled S&P 500 index option, SPXPM. Phlx is not aware of 
any market disruptions occurring as a result of CBOE offering both 
products.
    The adoption of trading of P.M.-settled options on the NASDAQ-100 
Index on the same exchange that lists A.M.-settled options on the 
NASDAQ-100 Index would provide greater spread opportunities. This 
manner of trading in different products allows a market participant to 
take advantage of the different expiration times, providing expanded 
trading opportunities. In the options market currently, market 
participants regularly trade similar or related products in conjunction 
with each other, which contributes to overall market liquidity.
    The Exchange represents that it has sufficient capacity to handle 
additional traffic associated with this new listing, and that it has in 
place adequate surveillance procedures to monitor trading in these 
options thereby helping to ensure the maintenance of a fair and orderly 
market.
(ii) Pilot Program Reports
    As proposed, the proposal would become effective on a Pilot Program 
basis for period of twelve months. If the Exchange were to propose an 
extension of the program or should the Exchange propose to make the 
program permanent, then the Exchange would submit a filing proposing 
such amendments to the program. The Exchange notes that any positions 
established under the pilot would not be impacted by the expiration of 
the pilot. For example, a position in a P.M.-settled series that 
expires beyond the conclusion of the pilot period could be established 
during the 12-month pilot. If the Pilot Program were not extended, then 
the position could continue to exist. However, the Exchange notes that 
any further trading in the series would be restricted to transactions 
where at least one side of the trade is a closing transaction.
    The Exchange proposes to submit a Pilot Program report to 
Commission at least two months prior to the expiration date of the 
Pilot Program (the ``annual report''). The annual report would contain 
an analysis of volume, open interest, and trading patterns. The 
analysis would examine trading in the proposed option product as well 
as trading in the securities that comprise the NASDAQ-100 index. In 
addition, for series that exceed certain minimum open interest 
parameters, the annual report would provide analysis of index price 
volatility and share trading activity. In addition to the annual 
report, the Exchange would provide the Commission with periodic interim 
reports while the pilot is in effect that would contain some, but not 
all, of the information contained in the annual report. The annual 
report would be provided to the Commission on a confidential basis. The 
annual report would contain the following volume and open interest 
data:
    (1) Monthly volume aggregated for all trades;
    (2) monthly volume aggregated by expiration date;
    (3) monthly volume for each individual series;
    (4) month-end open interest aggregated for all series;
    (5) month-end open interest for all series aggregated by expiration 
date; and
    (6) month-end open interest for each individual series.
    In addition to the annual report, the Exchange would provide the 
Commission with interim reports of the information listed in Items (1) 
through (6) above periodically as required by the Commission while the 
pilot is in effect. These interim reports would also be provided on a 
confidential basis. The annual report would also contain the 
information noted in Items (1) through (6) above for Expiration Friday, 
A.M.-settled NASDAQ-100 index options traded on Phlx.
    In addition, the annual report would contain the following analysis 
of trading patterns in Expiration Friday, P.M.-settled NASDAQ-100 index 
option series in the pilot: (1) A time series analysis of open 
interest; and (2) an analysis of the distribution of trade sizes. Also, 
for series that exceed certain minimum parameters, the annual report 
would contain the following analysis related to index price changes and 
underlying share trading volume at the close on Expiration Fridays: A 
comparison of index price changes at the close of trading on a given 
Expiration Friday with comparable price changes from a control sample. 
The data would include a calculation of percentage price changes for 
various time intervals and compare that information to the respective 
control sample. The Exchange would provide 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 series. The data would 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 
randomly selecting the component securities, and sample periods would 
be determined by the Exchange and the Commission.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with

[[Page 9262]]

the provisions of Section 6 of the Act,\17\ in general, and with 
Section 6(b)(5) of the Act,\18\ in that it is designed to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest; and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, or to regulate by virtue of any authority conferred by the Act 
matters not related to the purposes of the Act or the administration of 
the Exchange. The Exchange believes that the proposed rule change is 
also consistent with Section 6(b)(8) of the Act \19\ in that it does 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. Specifically, the Exchange 
believes that the introduction of NDXPM options will attract order flow 
to the Exchange, increase the variety of listed options to investors, 
and provide a valuable hedge tool to investors.
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    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ 15 U.S.C. 78f(b)(8).
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    The Commission has previously stated that when cash-settled index 
options were first introduced in the 1980s, they generally utilized 
closing-price settlement procedures (i.e., P.M. settlement). The 
Commission stated it became concerned about the impact of P.M. 
settlement on cash-settled index options on the markets for the 
underlying stocks at the close on expiration Fridays especially during 
the quarterly expirations of the third Friday of March, June, September 
and December when options, index futures, and options on index futures 
all expire simultaneously. The Commission expressed concerns that p.m.-
settlement was believed to have contributed to above-average volume and 
added market volatility on those days, which sometimes led to sharp 
price movements during the last hour of trading, as a consequence of 
which the close of trading on the quarterly expiration Friday became 
known as the ``triple witching hour.'' The Commission observed that 
besides contributing to investor anxiety, heightened volatility during 
the expiration periods created the opportunity for manipulation and 
other abusive trading practices in anticipation of the liquidity 
constraints.\20\
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    \20\ See Securities Exchange Act Release No. 65256 (September 2, 
2011), 76 FR 55569 (September 9, 2011) (approving SR-C2-2011-008).
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    However, the Exchange believes that the above concerns that have 
led to the transition to a.m. settlement for index derivatives have 
been largely mitigated. It believes that expiration pressure in the 
underlying cash markets at the close has been greatly reduced with the 
advent of multiple primary listing and unlisted trading privilege 
markets, and that trading is now widely dispersed among many market 
centers. Additionally, the Exchange notes that opening procedures in 
the 1990s were deemed acceptable to mitigate one-sided order flow 
driven by index option expiration and that Nasdaq uses an automated 
closing cross procedure and has a closing order type that facilitates 
orderly closings. The Nasdaq closing procedures are well-equipped to 
mitigate imbalance pressure at the close. In addition, after-hours 
trading now provides market participants with an alternative to help 
offset market-on-close imbalances.\21\
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    \21\ C2 made similar arguments to justify Commission approval of 
listing of SPXPM. See 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. NDXPM options would be 
available for trading to all market participants. The proposed rule 
change will facilitate the listing and trading of a novel option 
product that will enhance competition among market participants, to the 
benefit of investors and the marketplace. The listing of NDXPM will 
enhance competition by providing investors with an additional 
investment vehicle, in a fully-electronic trading environment, through 
which investors can gain and hedge exposure to NASDAQ-100 stocks. 
Further, this product could offer a competitive alternative to other 
existing investment products that seek to allow investors to gain broad 
market exposure. Also, the Exchange notes that it is possible for other 
exchanges to develop or license the use of a new or different index to 
compete with the NASDAQ-100 and seek Commission approval to list and 
trade options on such an index.

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

    No written comments were either solicited or received.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2017-04 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2017-04. 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

[[Page 9263]]

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-2017-04 and should be 
submitted on or before February 24, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02258 Filed 2-2-17; 8:45 am]
 BILLING CODE 8011-01-P