Document ID: SEC-2018-0061-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq ISE, LLC
Posted Date: 2018-01-12T05:00Z

[Federal Register Volume 83, Number 9 (Friday, January 12, 2018)]
[Notices]
[Pages 1636-1639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00409]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82458; File No. SR-ISE-2017-111]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
of Proposed Rule Change To Establish a Nonstandard Expirations Pilot 
Program

January 8, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 1637]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 21, 2017, 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, 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 proposes to establish a Nonstandard Expirations Pilot 
Program on a pilot basis, for an initial period of twelve months from 
the date of approval of this proposed rule change.
    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.

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this rule filing is to add new Supplementary 
Material .07 to ISE Rule 2009, Terms of Index Options Contracts, to 
permit the listing and trading, on a pilot basis, of p.m.-settled 
options on broad-based indexes with nonstandard expiration dates for an 
initial period of twelve months (the ``Nonstandard Expirations Pilot 
Program'' or ``Pilot Program'') from the date of approval of this 
proposed rule change. The Pilot Program would permit both weekly 
expirations (``Weekly Expirations'') and end of month (``EOM'') 
expirations as explained below. Contract terms for the Weekly 
Expirations and EOM expirations will be similar to those of the a.m. 
settled broad-based index options, except that the exercise settlement 
value will be based on the index value derived from the closing prices 
of component stocks.
Weekly Expirations
    The Exchange proposes to add new Supplementary Material .07(a), 
Weekly Expirations, to Rule 2009. Under the proposed new rule the 
Exchange would be permitted to open for trading Weekly Expirations on 
any broad-based index eligible for standard options trading to expire 
on any Monday, Wednesday, or Friday (other than the third Friday-of-
the-month or days that coincide with an EOM expiration).
    The maximum number of expirations that could be listed for each 
Weekly Expiration (i.e., a Monday expiration, Wednesday expiration, or 
Friday expiration, as applicable) in a given class would be the same as 
the maximum number of expirations permitted for standard options on the 
same broad-based index. Weekly Expirations would not need to be for 
consecutive Monday, Wednesday, or Friday expirations as applicable. 
However, the expiration date of a non-consecutive expiration would not 
be permitted beyond what would be considered the last expiration date 
if the maximum number of expirations were listed consecutively.
    Weekly Expirations that are first listed in a given class could 
expire up to four weeks from the actual listing date. If the last 
trading day of a month were a Monday, Wednesday, or Friday and the 
Exchange were to list EOMs and Weekly Expirations as applicable in a 
given class, the Exchange would list an EOM instead of a Weekly 
Expiration in the given class. Other expirations in the same class 
would not be counted as part of the maximum number of Weekly 
Expirations for a broad-based index class. If the Exchange were not 
open for business on a respective Monday, the normally Monday expiring 
Weekly Expirations would expire on the following business day. If the 
Exchange were not open for business on a respective Wednesday or 
Friday, the normally Wednesday or Friday expiring Weekly Expirations 
would expire on the previous business day.
End of Month (``EOM'') Expirations
    Pursuant to proposed ISE Rule 2009 Supplementary Material .07(b), 
End of Month (``EOM'') Expirations, the Exchange could open for trading 
EOMs on any broad-based index eligible for standard options trading to 
expire on last trading day of the month. EOMs would be subject to all 
provisions of Rule 2009 and treated the same as options on the same 
underlying index that expire on the third Friday of the expiration 
month. However, the EOMs would be P.M.-settled and new series in EOMs 
could be added up to and including on the expiration date for an 
expiring EOM.
    The maximum number of expirations that could be listed for EOMs in 
a given class would be the same as the maximum number of expirations 
permitted for standard options on the same broad-based index. EOM 
expirations would not need to be for consecutive end of month 
expirations. However, the expiration date of a non-consecutive 
expiration may not be beyond what would be considered the last 
expiration date if the maximum number of expirations were listed 
consecutively. EOMs that are first listed in a given class could expire 
up to four weeks from the actual listing date. Other expirations would 
not be counted as part of the maximum numbers of EOM expirations for a 
broad-based index class.
Contract Terms Trading Rules
    Weekly Expirations and EOMs would be subject to the same rules that 
currently govern the trading of standard monthly broad-based index 
options, including sales practice rules, margin requirements, and floor 
trading procedures. Contract terms for Weekly Expirations and EOMs 
would be the same as those for standard monthly broad-based index 
options. Since Weekly Expirations and EOMs will be a new type of 
series, and not a new class, the Exchange proposes that Weekly 
Expirations and EOMs shall be aggregated for any applicable reporting 
and other requirements.\3\ Pursuant to proposed new Supplementary 
Material .07(d) of Rule 2009, transactions in Weekly Expirations and 
EOMs could be effected on the Exchange between the hours of 9:30 a.m. 
(Eastern Time) and 4:15 p.m. (Eastern Time).
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    \3\ See Rule 2006(a)(13) which sets forth the reporting 
requirements for certain market indexes that do not have position 
limits, including NDX. The Exchange is adding Nonstandard 
Expirations to Rule 2004(d) to reflect the aggregation requirement. 
The Exchange notes that the proposed aggregation is consistent with 
the aggregation requirements for other types of option series (e.g. 
quarterly expiring options) that are listed on the Exchange and 
which do not expires on the customary ``third Friday''.
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    The Exchange has analyzed its capacity and represents that it 
believes the Exchange and the Options Price Reporting Authority 
(``OPRA'') have the necessary systems capacity to handle any additional 
traffic associated with the listing of the maximum number

[[Page 1638]]

nonstandard expirations permitted under the Pilot.
Pilot Program
    As stated above, this proposal is to establish a Nonstandard 
Expirations Pilot Program for broad-based index options on a pilot 
basis, for an initial period of twelve months from the date of approval 
of this proposed rule change. If the Exchange were to propose an 
extension of the Pilot or should the Exchange propose to make the Pilot 
permanent, the Exchange would submit a filing proposing such amendments 
to the Pilot.
    Further, any positions established under the Pilot would not be 
impacted by the expiration of the Pilot. For example, if the Exchange 
lists a Weekly Expiration or EOM that expires after the Pilot expires 
(and is not extended) then those positions would continue to exist. 
However, any further trading in those series would be restricted to 
transactions where at least one side of the trade is a closing 
transaction.
    As part of the Pilot, the Exchange will submit a Pilot report to 
the Commission at least two months prior to the expiration date of the 
Pilot (the ``annual report''). The annual report will contain an 
analysis of volume, open interest and trading patterns. In addition, 
for series that exceed certain minimum open interest parameters, the 
annual report will provide analysis of index price volatility and, if 
needed, share trading activity. The annual report will be provided to 
the Commission on a confidential basis.
Analysis of Volume and Open Interest
    For all Weekly Expirations and EOM series, the annual report will 
contain the following volume and open interest data for each broad-
based index overlying Weekly Expiration and EOM options:
    (1) Monthly volume aggregated for all Weekly Expiration and EOM 
series,
    (2) Volume in Weekly Expiration and EOM series aggregated by 
expiration date,
    (3) Month-end open interest aggregated for all Weekly Expiration 
and EOM series,
    (4) Month-end open interest for EOM series aggregated by expiration 
date and open interest for Weekly Expiration series aggregated by 
expiration date,
    (5) Ratio of monthly aggregate volume in Weekly Expiration and EOM 
series to total monthly class volume, and
    (6) Ratio of month-end open interest in EOM series to total month-
end class open interest and ratio of open interest in each Weekly 
Expiration series to total class open interest.
    In addition, the annual report will contain the information noted 
above for standard Expiration Friday, AM-settled series, if applicable, 
for the period covered in the pilot report as well as for the six-month 
period prior to the initiation of the pilot.
    Upon request by the SEC, the Exchange will provide a data file 
containing: (1) Weekly Expiration and EOM option volume data aggregated 
by series, and (2) Weekly Expiration open interest for each expiring 
series and EOM month-end open interest for expiring series.
Monthly Analysis of Weekly Expiration and EOM Trading Patterns
    In the annual report, the Exchange also proposes to identify Weekly 
Expiration and EOM trading patterns by undertaking a time series 
analysis of open interest in Weekly Expiration and EOM series 
aggregated by expiration date compared to open interest in near-term 
standard Expiration Friday A.M.-settled series in order to determine 
whether users are shifting positions from standard series to Weekly 
Expiration and EOM series. In addition, to the extent that data on 
other weekly or monthly P.M. settled products from other exchanges is 
publicly available, the report will also compare open interest with 
these options in order to determine whether users are shifting 
positions from other weekly or monthly P.M. settled products to the 
Weekly Expiration and EOM series. Declining open interest in standard 
series or the weekly or monthly P.M.-settled products of other 
exchanges accompanied by rising open interest in Weekly Expiration and 
EOM series would suggest that users are shifting positions.
Provisional Analysis of Index Price Volatility and Share Trading 
Activity
    For each Weekly Expiration and EOM expiration that has open 
interest that exceeds certain minimum thresholds, the annual report 
will contain the following analysis related to index price changes and, 
if needed, underlying share trading volume at the close on expiration 
dates:
    (1) A comparison of index price changes at the close of trading on 
a given expiration date with comparable price changes from a control 
sample. The data will include a calculation of percentage price changes 
for various time intervals and compare that information to the 
respective control sample. Raw percentage price change data as well as 
percentage price change data normalized for prevailing market 
volatility, as measured by an appropriate index agreed by the 
Commission and the Exchange, will be provided; and
    (2) if needed, a calculation of share volume for a sample set of 
the component securities representing an upper limit on share trading 
that could be attributable to expiring in-the-money Weekly Expiration 
and EOM expirations. The data, if needed, will include a comparison of 
the calculated share volume for securities in the sample set to the 
average daily trading volumes of those securities over a sample period.
    The minimum open interest parameters, control sample, time 
intervals, method for selecting the component securities, and sample 
periods will be determined by the Exchange and the Commission.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\4\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\5\ 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, 
by expanding the ability of investors to hedge risks against market 
movements stemming from economic releases or market events that occur 
during the month and at the end of the month. Accordingly, the Exchange 
believes that weekly expirations and EOMs should create greater trading 
and hedging opportunities and flexibility, and provide customers with 
the ability to more closely tailor their investment objectives.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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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. Specifically, the Exchange does 
not believe the proposal will impose any burden on intramarket 
competition as all market participants will be treated in the same 
manner with respect to Weekly Expirations and EOMs. Additionally, the 
Exchange does not believe the proposal will impose any burden on 
intermarket competition as market participants are welcome to become 
members and trade at ISE if they determine that this proposed rule

[[Page 1639]]

change has made ISE more attractive or favorable. Finally, all options 
exchanges are free to compete by listing and trading their own broad-
based index options with weekly or end of month expirations.

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. In particular, the Commission 
solicits comment on the following:
     Will the pilot data contemplated in this notice allow the 
Commission to determine whether the weekly and monthly PM-settled 
options proposed in this filing have adverse effects on market 
volatility and the operation of fair and orderly markets in the 
underlying cash market?
     Will the pilot data contemplated in this notice allow the 
Commission to determine whether the weekly and monthly PM-settled 
options proposed in this filing have adverse effects on liquidity, 
volume, open interest, trading patterns, and volatility in other option 
contracts with standard expirations?
     Will the pilot data contemplated in this notice allow the 
Commission to determine whether the weekly and monthly PM-settled 
options proposed in this filing have adverse effects on index price 
volatility?
     Will the weekly and monthly PM-settled options proposed in 
this filing affect the market for options contracts with nonstandard 
expirations offered by CBOE and Phlx? If so, how? In addition, how 
would this proposal affect the data and information related to 
nonstandard expirations that are provided by CBOE and Phlx?
     What concerns do market participants have related to the 
proposed Nonstandard Expirations Pilot Program? If any, please be 
specific in describing your concerns. If any, will the pilot data 
contemplated in this notice allow the Commission to examine whether the 
concerns are valid?
    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-2017-111 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-2017-111. 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-2017-111, and should be submitted on 
or before February 2, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00409 Filed 1-11-18; 8:45 am]
BILLING CODE 8011-01-P