Document ID: SEC-2014-0657-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE MKT LLC
Posted Date: 2014-04-22T04:00Z

[Federal Register Volume 79, Number 77 (Tuesday, April 22, 2014)]
[Notices]
[Pages 22563-22565]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09080]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71957; File No. SR-NYSEMKT-2014-06]

Self-Regulatory Organizations; NYSE MKT LLC; Order Granting 
Approval of a Proposed Rule Change Amending Section 17, Which Are Rules 
Applicable to Securities Known as Fixed Return Options, To Reflect a 
Name Change to Binary Return Derivatives, a Change to the Calculation 
of the Settlement Price, Updating Rule References, Adding New Text for 
ByRDs Series Available for Trading, Amending the Quoting and Trading 
Increment Applicable to ByRDs, and Adding a New Paragraph 8 to Rule 
975NY(a) and Amending Rule 975NY(d)(1) To Address Obvious Errors in 
ByRDs

April 16, 2014.

I. Introduction

    On February 14, 2014, NYSE MKT LLC (``NYSE MKT'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Section 17 of the NYSE MKT rulebook, 
which are rules applicable to securities known as Fixed Return Options, 
to reflect a name change to Binary Return Derivatives (``ByRDs''), a 
change to the calculation of the settlement price, updating rule 
references, adding new text for ByRDs series available for trading, 
amending the quoting and trading increment applicable to ByRDs, and 
amending Rule 975NY to address obvious and catastrophic errors in 
ByRDs. The proposed rule change was published for comment in the 
Federal Register on March 3, 2014.\3\ The Commission received no 
comment letters on the proposal. This order approves 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. 71613 (February 25, 
2014), 79 FR 11845 (March 3, 2014) (``Notice'').
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II. Description of the Proposal

A. ByRDs

    NYSE MKT proposes to amend Section 17 of its rulebook, which 
contains the rules applicable to securities known as Fixed Return 
Options (``FROs''), to reflect a name change to Binary Return 
Derivatives (``ByRDs''). On August 14, 2007, the Commission approved 
the Exchange's proposed rule change to list and trade cash-settled, 
European-style FROs on individual stocks and exchange-traded funds.\4\ 
FROs are binary options, and differ from other options traded on U.S. 
options exchanges by providing a discontinuous or non-linear payout.\5\ 
In-the-money FROs pay a fixed sum at expiration regardless of the 
magnitude of the difference between the options' exercise price and the 
settlement price. ``Finish High'' FROs return $100 per contract if the 
settlement price of the underlying security is above the strike price 
at expiration, and ``Finish Low'' FROs return $100 per contract if the 
settlement price of the underlying security is below the strike price 
at expiration. Any in-the-money FROs are exercised automatically at 
expiration.\6\
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    \4\ See Securities Exchange Act Release No. 56251 (August 14, 
2007), 72 FR 46523 (August 20, 2007) (``FROs Approval Order'').
    \5\ See FROs Approval Order, supra note 4, at 46523.
    \6\ See FROs Approval Order, supra note 4, at 46523.
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    In March 2009, the Exchange migrated to a new trading system as 
part of its integration with NYSE Euronext. Because the new trading 
system was not optimized to accommodate the trading of FROs, the 
Exchange restricted the opening of new series of FROs and limited 
transactions to closing only.\7\ All open interest in FROs was 
subsequently either closed or expired and the contracts became 
dormant.\8\ NYSE MKT now proposes to re-launch and rename these 
securities as ByRDs, which will be available for both electronic and 
floor trading. With the exception of the proposed rule changes 
described herein, the rules pertaining to FROs will continue to apply 
to ByRDs.
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    \7\ See Notice, supra note 3, at 11845.
    \8\ See Notice, supra note 3, at 11845.
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B. Renaming and Renumbering of Existing Rules and Clarifying Changes

    NYSE MKT proposes to change the title of Section 17 from ``Fixed 
Return Options'' to ``Binary Return Derivatives'', and replace the 
terms ``Fixed Return Options'' or ``FROs'' in the existing rule text 
with the terms ``Binary Return Derivatives'' or ``ByRDs.'' \9\
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    \9\ See Notice, supra note 3, at 11846.
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    The Exchange is proposing to clarify Rule 900FRO, Applicability; 
Definitions (which is being retitled as ``Rule 900ByRDs''),\10\ by 
amending the rule to state that unless specific rules in Section 17 
govern, or unless the context otherwise requires, the Rule 900NY series 
of rules shall be applicable to the trading of ByRDs. This proposed 
rule change reflects the adoption of the Rule 900NY series of rules, 
which govern trading of options contracts on the Exchange, and which 
replaced the rules in place prior to March 2009 that previously 
governed the trading of FROs. The Exchange is also proposing to amend 
Rule 901FRO, Fixed Return Options Contracts to be Traded (which is 
proposed to be retitled as ``Rule 901ByRDs''), to state that ByRDs 
contracts shall be designated as to expiration date (day, month, and 
year), rather than just expiration month and year. The Exchange also 
has proposed technical, non-substantive changes to Rule 462(d).10, 
Minimum Margins, and Rule 904BIN, Position Limits, to update references 
to Fixed Return Options (FROs) to Binary Return Derivatives 
(ByRDs).\11\
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    \10\ The Exchange is proposing to change all references to Fixed 
Return Options/FROs in the title and text of the Rule 900FRO series 
to Binary Return Derivatives/ByRDs.
    \11\ See Notice, supra note 3, at 11846.
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    The Exchange proposes to delete Rule 918FRO, Trading Rotations, 
Halts and Suspensions, because it contains a reference to Rule 918, 
which has been deleted from the Exchange's rulebook. Rule 918 has been 
replaced by the rules in Section 900NY, which are applicable to the 
trading of ByRDs.\12\
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    \12\ See Notice, supra note 3, at 11847.
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    The Exchange also proposes technical changes to Rule 980FRO, 
Automatic Exercise of Fixed Return Option Contracts (which is proposed 
to be retitled as ``Rule 980ByRDs'') to capitalize the defined term 
``Settlement

[[Page 22564]]

Price.'' \13\ Additionally, the Exchange is proposing to amend Rule 
904FRO, Position Limits, (which is proposed to be retitled as ``Rule 
904ByRDs'') by replacing the term ``underlying stock or Exchange-Traded 
Fund share'' with the term ``underlying security.'' This will ensure 
that Rule 904ByRDs is consistent with Rule 903FRO, Series of FROs Open 
for Trading (which is proposed to be retitled as ``Rule 903ByRDs''), 
and other rule text, which generally refer to underlying ``securities'' 
when discussing options.\14\
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    \13\ See Notice, supra note 3, at 11847.
    \14\ See Notice, supra note 3, at 11846.
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C. Series of ByRDs Open for Trading

    NYSE MKT proposes to adopt three new paragraphs within Rule 903FRO 
(which is proposed to be retitled as ``Rule 903ByRDs'') to specify 
which series of ByRDs option contracts the Exchange may open for 
trading and the permissible strike price intervals. Proposed Rule 
903ByRDs(a) specifies that, except for consecutive week expiration 
series, at the commencement of trading on the Exchange for a particular 
class of ByRDs, the Exchange shall open a minimum of one expiration 
month for each class of ByRDs open for trading on the Exchange. 
Proposed Rule 903ByRDs(b) provides that consecutive week expiration 
series expire at the end of the week, normally a Friday, with 
consecutive week expirations covering the next five calendar weeks. New 
expiration week series will be added for trading on Thursday each week, 
unless Friday is an Exchange holiday, in which case new expiration 
series would be added for trading on Wednesday. Proposed Rule 
903ByRDs(c) provides that the strike price interval for ByRDs contracts 
will be $1 for strike prices between $3 and $200, and $5 for strike 
prices over $200. Proposed Rule 903ByRDs(c) also states that the 
Exchange will initially list series that are no more than 30% away from 
the price of the underlying security, and that the Exchange may list 
additional series if the furthest out of the money strike is less than 
10% out of the money. At such time, the Exchange could list additional 
series that are not more than 30% away from the price of the underlying 
security.\15\
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    \15\ See Notice, supra note 3, at 11846.
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D. Settlement Price

    NYSE MKT proposes to add new Commentary .02 to Rule 910FRO, 
Determination of the Settlement Price (which is proposed to be retitled 
as ``Rule 910ByRDs''), to provide that the settlement price will be 
calculated such that it will always round up $.01 in those instances 
when the settlement price \16\ exactly equals an expiring strike price. 
For example, if the calculated settlement price is $20.00, and there 
are expiring ByRDs Finish High and Finish Low contracts with a strike 
price of $20.00, the settlement price will be rounded up to $20.01 so 
that the Finish High options will pay off. The effect of rounding will 
be to have long $20.00 strike Finish High holders receiving $100.00 and 
long $20.00 strike Finish Low holders receiving $0. Under NYSE MKT's 
current rules, it is possible for an investor to hold a position that 
appears to guarantee a pay off at $100.00 at expiration, but that 
instead pays $0. For example, if an investor holds both a $20.00 strike 
Finish High contract and a $20.00 strike Finish Low contract, the 
investor would receive $0 if the settlement price was calculated to 
exactly equal the $20.00 strike price. The proposed rule change will 
avoid a situation where neither the Finish High nor the Finish Low 
ByRDs contract pays off at expiration.\17\
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    \16\ NYSE MKT calculates settlement price based upon an all-day 
volume weighted average price that is based on trading in the 
underlying security on the last trading day prior to expiration. 
NYSE MKT uses composite prices during regular trading hours as 
reported by industry price vendors. See Rule 900FRO/proposed Rule 
900ByRDs(b)(4)-(5); see also FROs Approval Order, supra note 4, at 
46523.
    \17\ See Notice, supra note 3, at 11846-47.
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E. Underlying Securities

    NYSE MKT proposes to amend Commentary .02 to Rule 915FRO, Criteria 
for Underlying Securities (which is proposed to be retitled as ``Rule 
915ByRDs''), to include Section 107 securities \18\ as eligible 
underlying securities upon which ByRDs contracts may be listed. The 
Exchange also proposes to amend Commentary .03 to Rule 916FRO, 
Withdrawal of Approval of Underlying Securities (which is proposed to 
be retitled as ``Rule 916ByRDs''), which describes the criteria 
necessary for the continued approval to introduce new series of ByRDs 
for trading, to include Section 107 Securities.
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    \18\ Section 107 Securities include Index-Linked Securities, 
Commodity-Linked Securities, Currency-Linked Securities, Fixed 
Income-Linked Securities, Futures-Linked Securities, and 
Combination-Linked Securities. See NYSE MKT Rule 915, Commentary 
.11.
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F. Minimum Price Variations

    In approving the trading and listing of FROs, the Commission 
approved a minimum price variation (``MPV'') for FROs in classes not 
included in the Penny Quoting Pilot Program of $0.05, and $0.01 for 
classes in the Penny Quoting Pilot Program.\19\ The Exchange now 
proposes to amend Rule 951FRO, Premium Bids and Offers (which is 
proposed to be retitled as ``Rule 951ByRDs''), to state that the MPV 
for quoting and trading of ByRDs contracts will be $0.01 for all 
series. NYSE MKT is also proposing to delete an obsolete rule reference 
in proposed Rule 951ByRDs to NYSE MKT Rule 951.\20\
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    \19\ See FROs Approval Order, supra note 4, at 45624.
    \20\ See Notice, supra note 3, at 11847.
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G. Bid-Ask Differentials

    NYSE MKT is not proposing to change market makers' quoting 
obligations for ByRDs; however, the Exchange is proposing to delete a 
provision in Rule 958FRO, Maximum Bid-Ask Differentials (which is 
proposed to be retitled as ``Rule 958ByRDs''), that provides that in 
the event the bid-ask differential in the underlying security is 
greater than the bid-ask differential described in Rule 958FRO,\21\ the 
permissible price differential for any in-the-money series may be 
identical to that in the underlying security market.\22\ In addition, 
the Exchange proposes to delete an obsolete reference in proposed Rule 
958ByRDs to Rule 958.
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    \21\ Rule 958FRO/proposed Rule 958ByRDs provides that a market 
maker must bid and offer so as to create differences of no more than 
$0.25 between the bid and offer for each ByRDs contract except 
during the business day of the expiration, or, in the case of an 
option contract expiring on a day that is not a business day, during 
the business day prior to expiration where the maximum permissible 
price differential for ByRDs may be $0.50. See Rule 958FRO/proposed 
Rule 958ByRDs.
    \22\ See Notice, supra note 3, at 11847.
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H. Obvious Errors and Catastrophic Errors

    NYSE MKT proposes to revise Rule 975NY, Obvious Errors and 
Catastrophic Errors, to include a new subsection (a)(8) that addresses 
the handling of transactions in ByRDs option contracts that are subject 
to the Obvious Error provisions of Rule 975NY. Proposed Rule 
975NY(a)(8) provides that any transaction in a ByRDs contract that is 
higher or lower than the Theoretical Price by $0.25 or more shall be 
deemed an obvious error, subject to the adjustment procedures of Rule 
975NY(a)(3), unless such adjustment would result in a price higher than 
$1.02, in which case the adjustment price shall be $1.02.\23\ The 
Exchange also proposes to amend Rule 975NY(a)(1) to add a reference to 
proposed paragraph (a)(8).
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    \23\ See Notice, supra note 3, at 11847.
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    The Exchange also proposes to amend paragraph (d)(1) of Rule 975NY 
to state

[[Page 22565]]

that transactions in ByRDs contracts over $1.02 shall qualify as 
catastrophic errors if participants request a review under the existing 
provisions of paragraph (d)(3)(A). Transactions in ByRDs contracts that 
qualify as catastrophic errors will be adjusted in accordance with the 
procedures of proposed subsection (i) of paragraph (d)(3)(C), which 
states that any catastrophic error in ByRDs contracts will result in an 
adjustment to $1.02 unless the parties mutually agree to nullify the 
transaction or agree to a different adjustment price.\24\
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    \24\ See Notice, supra note 3, at 11847.
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III. Discussion and Commission Findings

    After careful consideration of the proposal, the Commission finds 
that the proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange,\25\ and, in particular, the requirements 
of Section 6 of the Act.\26\ Specifically, the Commission finds that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\27\ which requires, among other things, that the rules of a 
national securities exchange be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market, and, in general, to protect investors and 
the public interest. The Commission believes that allowing the Exchange 
to relaunch FROs for listing and trading as ByRDs may provide investors 
with a useful investment choice. The proposal should ensure that these 
binary options would continue to receive the benefits of trading on an 
exchange, which include: A centralized forum for price discovery; pre- 
and post-trade transparency; standardized contract specifications; and 
the guarantee of the Options Clearing Corporation (``OCC'').
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    \25\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \26\ 15 U.S.C. 78f.
    \27\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that replacing the references in Section 17 
of NYSE MKT's rules to Fixed Return Options and/or FROs to Binary 
Return Derivatives and/or ByRDs may remove impediments to and perfect 
the mechanism of a free and open market by making the rule text 
consistent with the new name of the options product. The Commission 
also believes that the proposed clarifying changes and the deletions of 
obsolete rule references may reduce potential investor confusion, and 
protect investors and the public interest.
    The Commission believes that permitting the Exchange to list and 
trade consecutive week expiration series may provide market 
participants an investment vehicle that may be more useful for short-
term strategies than cycle month series. In addition, the Commission 
believes that the proposal to include additional eligible underlying 
securities upon which ByRDs contracts may be listed, the proposed 
strike price intervals, and the MPV for quoting and trading all ByRDs 
contracts series are reasonable and consistent with the Act.
    The Commission believes that the proposal to calculate the 
settlement price to always round up $0.01 in instances when the 
settlement price exactly equals an expiring ByRDs option strike price 
is reasonable and may perfect the mechanism of a free and open market. 
In addition, the proposed change may protect investors and reduce 
potential confusion by providing certainty that either the Finish High 
or Finish Low ByRDs option contracts will pay off at expiration.
    The Commission believes that the proposed changes to the obvious 
and catastrophic error rule, Rule 975NY, are consistent with the Act as 
they would protect investors and the public interest by providing 
certainty about how obvious and catastrophic errors in ByRDs would be 
treated. The Commission notes that the new provisions in the obvious 
and catastrophic error rule describe how to determine whether 
transactions in ByRDs contracts should be treated as errors, and if so, 
how they should be adjusted and the maximum adjustment price for such 
errors. The new provisions still require that the transactions be 
erroneous, as provided in Rule 975NY, and set forth specific criteria 
and procedures for the handling of such errors. The Commission 
emphasizes the importance of specific and objective criteria to 
determine how and when to adjust transactions involving obvious or 
catastrophic errors to provide certainty to market participants and to 
reduce confusion. Therefore, the Commission believes that the proposed 
changes to Rule 975NY are appropriate.
    In approving this proposal, the Commission has relied on the 
following representations made by NYSE MKT: (i) The Exchange systems 
have the functionality to support the trading of ByRDs; (ii) the 
Exchange and the Options Price Reporting Authority (``OPRA'') have the 
necessary systems capacity to handle additional traffic associated with 
the re-listing and trading of ByRDs contracts; (iii) the Exchange has 
discussed the proposed listing and trading of ByRDs contracts with the 
OCC, which has represented that it is able to accommodate the clearing 
and settlement of ByRDs contracts; and (iv) the Exchange will monitor 
any increased trading volume associated with the listing of new series 
of ByRDs and will analyze the effect, if any, that the additional 
volume has on the capacity of the Exchange's, OPRA's, and the OCC's 
automated systems.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-NYSEMKT-2014-06), be, and 
hereby is, approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09080 Filed 4-21-14; 8:45 am]
BILLING CODE 8011-01-P