Document ID: SEC-2015-2062-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, LLC,
Posted Date: 2015-12-14T05:00Z

[Federal Register Volume 80, Number 239 (Monday, December 14, 2015)]
[Notices]
[Pages 77399-77402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-31333]

[[Page 77399]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76593; File No. SR-Phlx-2015-94]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change To Make Permanent the Pilot Program 
Eliminating Minimum Value Sizes for Opening Transactions in New Series 
of FLEX Options

December 8, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 25, 2015, NASDAQ OMX 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 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 is filing with the Commission a proposal amend [sic] 
Phlx Rule 1079 (FLEX Index, Equity and Currency Options) to make 
permanent a pilot program that eliminates minimum value sizes for 
opening transactions in new series of FLEX index options and FLEX 
equity options (together known as ``FLEX Options'').\3\
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    \3\ In addition to FLEX Options, FLEX currency options are also 
traded on the Exchange. These flexible index, equity, and currency 
options provide investors the ability to customize basic option 
features including size, expiration date, exercise style, and 
certain exercise prices; and may have expiration dates within five 
years. See Rule 1079. FLEX currency options traded on the Exchange 
are also known as FLEX FX Options. The pilot program discussed 
herein does not encompass FLEX currency options.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.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
    The purpose of this proposed rule change is to amend Phlx Rule 1079 
(FLEX Index, Equity and Currency Options) to make permanent a pilot 
program that eliminates minimum value sizes for opening transactions in 
new series of FLEX Options (the ``Pilot Program'' or ``Pilot''), and to 
indicate that the minimum size of a request for quote (``RFQ'') is one 
contract. The Exchange is requesting the Commission to permanently 
approve the Pilot Program. The Exchange believes that the Pilot Program 
has been successful and well received by its membership and the 
investing public for the period that it has been in operation as a 
pilot program.\4\
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    \4\ The Pilot Program was instituted in 2010 and last extended 
in 2015. See Securities Exchange Act Release Nos. 62900 (September 
13, 2010), 75 FR 57098 (September 17, 2010) (SR-Phlx-2010-123) 
(notice of filing and immediate effectiveness of proposal 
instituting Pilot Program); and 75794 (August 31, 2015), 80 FR 53606 
(September 4, 2015) (SR-Phlx-2015-74) (notice of filing and 
immediate effectiveness extending Pilot Program through January 31, 
2016).
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    Rule 1079 deals with the process of listing and trading FLEX 
equity, index, and currency options on the Exchange. Rule 1079(a)(8)(A) 
currently sets the minimum opening transaction value size in the case 
of a FLEX Option in a newly established (opening) series if there is no 
open interest in the particular series when a RFQ is submitted (except 
as provided in Commentary .01 to Rule 1079): (i) $10 million underlying 
equivalent value, respecting FLEX market index options, and $5 million 
underlying equivalent value respecting FLEX industry index options; \5\ 
(ii) the lesser of 250 contracts or the number of contracts overlying 
$1 million in the underlying securities, with respect to FLEX equity 
options (together the ``minimum value size'').\6\
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    \5\ Market index options and industry index options are broad-
based index options and narrow-based index options, respectively. 
See Rule 1000A(b)(11) and (12).
    \6\ Subsection (a)(8)(A) also provides a third alternative: 
(iii) 50 contracts in the case of FLEX currency options. However, 
this alternative is not part of the Pilot Program and therefore is 
not changed by this proposal.
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    Presently, Commentary .01 to Rule 1079 states that by virtue of the 
Pilot Program ending January 31, 2016, or the date on which the pilot 
is approved on a permanent basis, there shall be no minimum value size 
requirements for FLEX Options as noted in subsections (a)(8)(A)(i) and 
(a)(8)(A)(ii) of Rule 1079. The Exchange now proposes to make the Pilot 
Program permanent.\7\ To accomplish this change, the Exchange is 
proposing to eliminate the rule text describing the Pilot Program, 
which is contained in Commentary .01 to Rule 1079. The Exchange is 
proposing to indicate that the minimum value size requirements for a 
RFQ for FLEX Options as noted in subsections (a)(8)(A)(i) and 
(a)(8)(A)(ii) of Rule 1079 is one contract for all FLEX Options. Thus, 
as a result of the proposed change to make the Pilot Program permanent, 
subsections (a)(8)(A)(i) and (a)(8)(A)(ii) of Rule 1079 would state, in 
pertinent part, that if there is no open interest when an RFQ is 
submitted then the minimum size of an RFQ is: (i) One contract in the 
case of FLEX market index options, and one contract in the case of FLEX 
industry index options; and (ii) One contract in the case of FLEX 
equity options.\8\
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    \7\ The Exchange notes that any positions established under this 
Pilot would not be impacted by the expiration of the Pilot. For 
example, a 10-contract FLEX equity option opening position that 
overlies less than $1 million in the underlying security and expires 
in January 2016 could be established during the Pilot. If the Pilot 
Program were not made permanent or extended, the position would 
continue to exist and any further trading in the series would be 
subject to the minimum value size requirements for continued trading 
in that series.
    \8\ In proposing to make the Pilot Program permanent, the 
Exchange is simply indicating that if there is no open interest when 
an RFQ is submitted then the minimum size of an RFQ will be one 
contract for FLEX market index options, FLEX industry index options, 
and FLEX equity options.
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    In support of approving the Pilot Program on a permanent basis, and 
as required by the Pilot Program's approval order, the Exchange is 
submitting to the Commission a Pilot Program report (``Report''), which 
is a public report detailing the Exchange's experience with the 
Pilot.\9\ The Report covers only opening transactions in new series, as 
per the Pilot. Specifically, the Exchange is providing the Commission 
with a Report that includes: (i) Data and analysis on the open interest 
and trading volume in (a) FLEX equity options that have an opening 
transaction with a minimum size of 0 to 249 contracts and less than $1 
million in underlying value; (b) FLEX index options that have an 
opening

[[Page 77400]]

transaction with a minimum opening size of less than $10 million in 
underlying equivalent value; and (ii) analysis of the types of 
investors that initiated opening FLEX Options transactions (i.e., 
institutional, high net worth, or retail).\10\
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    \9\ A copy of the Report is attached as Exhibit 3.
    \10\ The Report thus discusses only those FLEX option 
transactions that happened because the Pilot was in place.
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    The Exchange believes that there is sufficient investor interest 
and demand in the Pilot Program to warrant its permanent approval and 
indicate one contract as the minimum size of an RFQ for all opening 
transactions in new series of FLEX equity Options and FLEX index 
Options. The Exchange believes that, for the period that the Pilot 
Program has been in operation, it has provided investors with 
additional means of managing their risk exposures and carrying out 
their investment objectives. Furthermore, the Exchange has not 
experienced any adverse market effects with respect to the Pilot 
Program.
    The Exchange believes that eliminating the minimum value size 
requirements for opening transactions in new FLEX series on a permanent 
basis is important and necessary to the Exchange's efforts to create a 
product and market that provide its membership and investors interested 
in FLEX-type options with an improved but comparable alternative to the 
over-the-counter (``OTC'') market in customized options, which can take 
on contract characteristics similar to FLEX Options but are not subject 
to the same restrictions. By making the Pilot Program permanent, market 
participants would continue to have greater flexibility in determining 
whether to execute their customized options in an exchange environment 
or in the OTC market. The Exchange believes that market participants 
would benefit from being able to trade these customized options in an 
exchange environment in several ways, including, but not limited to, 
the following: (i) Enhanced efficiency in initiating and closing out 
positions; (ii) increased market transparency; and (iii) heightened 
contra-party creditworthiness due to the role of The Options Clearing 
Corporation (``OCC'') as issuer and guarantor of FLEX Options. The 
Exchange also believes that the Pilot Program is wholly consistent with 
comments by then Secretary of the Treasury Timothy F. Geithner, to the 
U.S. Senate. In particular, Secretary Geithner has stated that:

    Market efficiency and price transparency should be improved in 
derivatives markets by requiring the clearing of standardized 
contracts through regulated [central counterparties] and by moving 
the standardized part of these markets onto regulated exchanges and 
regulated transparent electronic trade execution systems for OTC 
derivatives and by requiring development of a system for timely 
reporting of trades and prompt dissemination of prices and other 
trade information. Furthermore, regulated financial institutions 
should be encouraged to make greater use of regulated exchange-
traded derivatives. Competition between appropriately regulated OTC 
derivatives markets and regulated exchanges will make both sets of 
markets more efficient and thereby better serve end-users of 
derivatives.\11\
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    \11\ See letter from Secretary Geithner to the Honorable Harry 
Reid, United States Senate (May 13, 2009), located at http://www.financialstability.gov/docs/OTCletter.pdf.

    The Exchange believes that the elimination of the minimum value 
size requirements for opening FLEX transactions in new FLEX series on a 
permanent basis would provide FLEX-participating members with greater 
flexibility in structuring the terms of FLEX Options that best comports 
with their and their customers' particular needs. In this regard, the 
Exchange notes that the minimum value size requirements for opening 
FLEX transactions in new FLEX series were originally put in place to 
limit participation in FLEX Options to sophisticated, high net worth 
investors rather than retail investors. However, the Exchange believes 
that the restriction is no longer necessary and is overly restrictive. 
The Exchange has also not experienced any adverse market effects with 
respect to the Pilot Program eliminating the minimum value size 
requirements for opening FLEX transactions in new FLEX series. Again, 
based on the Exchange's experience to date and throughout the Pilot 
Program period, the minimum value size requirements are at times too 
large to accommodate the needs of members and their customers--who may 
be institutional, high net worth, or retail--that currently participate 
in the OTC market. In this regard, the Exchange notes that, prior to 
establishing the Pilot Program, exchanges that allow FLEX options have 
received numerous requests from broker-dealers representing 
institutional, high net worth and retail investors indicating that the 
minimum value size requirements for opening transactions in new FLEX 
series prevented them from bringing transactions that are already 
taking place in the OTC market to an exchange environment.
    The Exchange believes that eliminating the minimum value size 
requirements for opening transactions in new FLEX series on a permanent 
basis would further broaden the base of investors that use FLEX Options 
to manage their trading and investment risk, including investors that 
currently trade in the OTC market for customized options, where similar 
size restrictions do not apply. The Exchange also believes that this 
may open up FLEX Options to more retail investors. The Exchange does 
not believe that this raises any unique regulatory concerns because 
existing safeguards--such as certain position limit, exercise limit, 
and reporting requirements--continue to apply.\12\ In addition, the 
Exchange notes that FLEX Options are subject to the options disclosure 
document (``ODD'') requirements of Rule 9b-1 under the Act.\13\ No 
broker or dealer can accept an order from a customer to purchase or 
sell an option contract relating to an options class that is the 
subject of a definitive ODD (including FLEX Options), or approve the 
customer's account for the trading of such an option, unless the broker 
or dealer furnishes or has furnished to the customer a copy of the 
definitive ODD. The ODD contains a description, special features, and 
special risks of FLEX Options. Lastly, similar to any other options, 
FLEX Options are subject to supervision and suitability requirements, 
such are in Rule 1025 (Supervision of Accounts) and Rule 1026 
(Suitability).
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    \12\ Certain position limit, aggregation and exercise limit 
requirements continue to apply to FLEX Options in accordance with 
Rule 1001 (Position Limits) and Rule 1002 (Exercise Limits).
    \13\ 17 CFR 240.9b-1.
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    In proposing the Pilot Program itself and in now proposing to make 
it permanent, the Exchange is cognizant of the need for market 
participants to have substantial options transaction capacity and 
flexibility to hedge their substantial investment portfolios, on the 
one hand, and the potential for adverse effects that the minimum value 
size restrictions were originally designed to address, on the other. 
However, the Exchange has not experienced any adverse market effects 
with respect to the Pilot Program. The Exchange is also cognizant of 
the OTC market, in which similar restrictions on minimum value size do 
not apply. In light of these considerations and Secretary Geithner's 
comments on moving the standardized parts of OTC contracts onto 
regulated exchanges, the Exchange believes that making the Pilot 
Program permanent is appropriate and reasonable and will provide market 
participants with additional flexibility in determining whether to 
execute their customized

[[Page 77401]]

options in an exchange environment or in the OTC market. The Exchange 
believes that market participants benefit from being able to trade 
these customized options in an exchange environment in several ways, 
including, but not limited to, enhanced efficiency in initiating and 
closing out positions, increased market transparency, and heightened 
contra-party creditworthiness due to the role of OCC as issuer and 
guarantor of FLEX Options.
    Pursuant to this filing, the Exchange is proposing to adopt the 
existing Pilot Program on a permanent basis. Specifically, the Exchange 
proposes to eliminate in subsections (a)(8)(A)(i) and (a)(8)(A)(ii) of 
Rule 1079 references to different minimum sizes applicable to opening 
FLEX transactions in FLEX market index Options, FLEX industry index 
Options, and FLEX equity Options, and to indicate that the minimum size 
for all three such options will be one contract; and to eliminate the 
Pilot Program set forth in Commentary .01 to Rule 1079.\14\ The 
proposal to make the Pilot Program permanent and thereby eliminate the 
minimum value size applicable to opening transactions in new FLEX 
series on the Exchange is similar to a rule change by the NYSE Arca and 
CBOE when adopting a similar pilot program on a permanent basis.\15\
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    \14\ As noted, in the case of FLEX currency options, however, 
which are not in the Pilot Program, the minimum value would be 50 
contracts. Subsection (a)(8)(A)(ii) to Rule 1079.
    \15\ See Exchange Act Release No. 72537 (July 3, 2014), 79 FR 
39442 (July 10, 2014) (SR-NYSEArca-2014-25) (order approving 
proposal to make permanent NYSE Arca's FLEX no minimum value pilot). 
See also Exchange Act Release No. 67624 (August 8, 2012), 77 FR 
48580 (August 14, 2012) (SR-CBOE-2012-040) (order approving proposal 
to make permanent CBOE's FLEX no minimum value pilot).
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    For the foregoing reasons, the Exchange believes that the proposed 
changes to the minimum value size for opening transactions in new 
series of FLEX equity and index Options are reasonable and appropriate, 
promote just and equitable principles of trade, and facilitate 
transactions in securities while continuing to foster the public 
interest and investor protection, and therefore should be adopted on a 
permanent basis. The Exchange will continue to monitor the usage of 
FLEX Options and review whether changes need to be made to its Rules or 
the ODD to address any changes in retail FLEX Option participation or 
any other issues that may occur as a result of the elimination of the 
minimum value sizes on a permanent basis.
2. Statutory Basis
    The Exchange's proposal is consistent with Section 6(b) of the Act 
\16\ in general, and furthers the objectives of Section 6(b)(5) of the 
Act \17\ in particular, in that it is designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanisms of a free and open 
market and a national market system. Specifically, the Exchange 
believes that the permanent approval of the Pilot Program, which 
eliminates minimum value size requirements for opening FLEX 
transactions in new FLEX series, would provide greater opportunities 
for investors to manage risk through the use of FLEX Options. Further, 
the Exchange notes that it has not experienced any adverse effects from 
the operation of the Pilot Program. The Exchange believes that making 
the Pilot Program permanent does not raise any unique regulatory 
concerns.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Exchange also believes that eliminating the minimum value size 
requirements for opening FLEX transactions in new FLEX series, thus 
affording all market participants with an equal opportunity to tailor 
opening FLEX transactions to meet their own investment objectives 
without being encumbered by a minimum contract size, will help to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. In addition, affording market 
participants who trade FLEX Options the same investment tools available 
to their counterparts on the NYSE Arca and CBOE will foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities and will help to remove impediments to a free and open 
market and a national market system. The Exchange believes that 
adopting rules similar to those approved for and in use at NYSE Arca 
and CBOE, as discussed, does not raise any unique regulatory concerns. 
Lastly, the Exchange also believes that the proposed rule change, which 
provides all market participants, including public investors, with 
additional opportunities to trade customized options in an exchange 
environment and subject to exchange based rules, is appropriate in the 
public interest and for the protection of investors.

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. To the contrary, the proposal 
would give traders and investors the opportunity to more effectively 
tailor their trading, investing and hedging through FLEX options traded 
on the Exchange. Specifically, the proposal is structured to offer the 
same enhancement to all market participants, regardless of account 
type, and will not impose a competitive burden on any participant. The 
Exchange believes that adopting similar FLEX rules to those of NYSE 
Arca and CBOE will allow the Exchange to more efficiently compete for 
FLEX Options orders. In addition, the Exchange believes that adopting 
the Pilot Program on a permanent basis will enable the Exchange to 
compete with the OTC market, in which similar restrictions on minimum 
value size do not apply.

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 self-regulatory organization consents, the Commission will: 
(A) By order approve or disapprove the 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 proposal 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

[[Page 77402]]

     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2015-94 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-Phlx-2015-94. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal offices of the Exchange. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-Phlx-2015-94, 
and should be submitted on or before January 4, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-31333 Filed 12-11-15; 8:45 am]
 BILLING CODE 8011-01-P