Document ID: SEC-2019-0516-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE American, LLC
Posted Date: 2019-04-17T04:00Z

[Federal Register Volume 84, Number 74 (Wednesday, April 17, 2019)]
[Notices]
[Pages 16102-16107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-07614]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85628; File No. SR-NYSEAMER-2018-39]

Self-Regulatory Organizations; NYSE American LLC; Notice of 
Filing of Amendment No. 2 to Proposed Rule Change To Allow Flexible 
Exchange Equity Options To Be Cash Settled Where the Underlying 
Security Is a Specified Exchange-Traded Fund

April 11, 2019.
    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 September 20, 2018, NYSE American LLC (``NYSE American '' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The proposed 
rule change was published for comment in the Federal Register on 
October 11, 2018.\3\ On November 19, 2018, pursuant to Section 19(b(2) 
of the Act,\4\ the Commission designated a longer period within which 
to either approve the proposed rule change, disapprove the proposed 
rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\5\ The Commission received one 
comment letter on the proposed rule change.\6\
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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. 84364 (October 4, 
2018), 83 FR 51535 (October 11, 2018) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 84616 (November 19, 
2018), 83 FR 60519 (November 26, 2018). The Commission designated 
January 9, 2019, as the date by which it should approve, disapprove, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.
    \6\ See Letter to Brent J. Fields, Secretary, Commission, from 
Samara Cohen, Head of ETF Global Markets, BlackRock, dated November 
27, 2018.
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    On December 19, 2018, the Commission instituted proceedings under 
Section 19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the proposed rule change.\8\ On March 11, 2019, the Exchange 
filed Amendment No. 1 to the proposed rule change. On March 25, 2019, 
the Exchange withdrew Amendment No. 1 and filed Amendment No. 2 to the 
proposed rule change, which superseded and replaced the proposed rule 
change in its entirety. On April 5, 2019, the Commission extended the 
time period for approving or disapproving the proposal for an 
additional 60 days until June 8, 2019.\9\ The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
modified by Amendment No. 2, from interested persons.\10\
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    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Securities Exchange Act Release No. 84870 (December 19, 
2018), 83 FR 66779 (December 27, 2018) (``Order Instituting 
Proceedings'').
    \9\ See Securities Exchange Act Release No. 85531 (April 5, 
2019).
    \10\ In Amendment No. 2, the Exchange revised the proposal to 
limit the ETFs that could serve as an underlying security for cash-
settled FLEX Equity Options to 25 enumerated ETFs, rather than all 
ETFs included in the Option Penny Pilot. In addition, Amendment No. 
2 amended the proposal to, among other things, (1) describe 
characteristics of ETFs, including the calculation of net asset 
value, the creation and redemption mechanism, and their reliance on 
arbitrage; (2) provide trading data related to the 25 specified ETFs 
proposed to serve as the allowable underlying securities for cash-
settled FLEX Equity Options; (3) describe the requirement in Rule 
906G(b) that members or member organizations may be required to 
provide a report of positions on the same side of the market in 
excess of the level established as the position limit for non-FLEX 
Equity options of the same class; (4) describe in more detail 
existing surveillance procedures relevant to cash-settled FLEX 
Equity Options on the specified ETFs; and (5) make additional 
arguments about why the Exchange believes that cash settlement would 
be appropriate for such options.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend certain rules related to Flexible 
Exchange (``FLEX'') Options. This Amendment No. 2 supersedes the 
original filing and the Partial Amendment No. 1 in its entirety.\11\ 
The proposed rule change is available on the Exchange's website at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.
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    \11\ The original proposal was filed by the Exchange on 
September 18, 2018. See Securities Exchange Act Release No. 84364 
(October 4, 2018), 83 FR 51535 (October 11, 2018). The Exchange 
filed Partial Amendment No. 1 on March 11, 2019 and withdrew it on 
March 25, 2019.

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[[Page 16103]]

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 self-regulatory organization 
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FLEX Options are customized equity or index contracts that allow 
investors to tailor contract terms for exchange-listed equity and index 
options. The Exchange seeks to amend NYSE American Rule 903G(c) to 
allow for cash settlement for certain FLEX Equity Options.\12\ As 
proposed, FLEX Equity Options where the underlying security is one of 
25 enumerated Exchange-Traded Funds (``ETFs'') would be capable of 
being settled by physical delivery of the underlying ETF or by delivery 
in cash. Currently, all FLEX Equity Options are settled by physical 
delivery of the underlying security.\13\ All FLEX Index Options, 
however, are currently settled by delivery in cash.\14\
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    \12\ A ``FLEX Equity Option'' is an option on a specified 
underlying equity security that is subject to the rules of Section 
15. See NYSE American Rule 900G(b)(10).
    \13\ See Rule 903G(c)(3)(i).
    \14\ See Rule 903G(b)(2) and (3).
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    To effectuate this change, the Exchange proposes new paragraph 
(c)(3)(ii) to Rule 903G, which would provide that the exercise 
settlement for a FLEX ETF Option with an underlying security listed in 
proposed Commentary .02 would be by physical delivery of the underlying 
security or by delivery in cash.\15\ The Exchange further proposes new 
Commentary .02, which would provide the name and symbol of each of 25 
ETFs listed in the table below.\16\ The Exchange believes it is 
appropriate to introduce cash-settlement as an alternative to this 
group of equity securities because ETFs generally have increasingly 
become a major part of investors' portfolio. The vast proliferation of 
ETFs has greatly expanded the ability of investors to take advantage of 
many unique opportunities to hedge their portfolio and manage risk. 
Investors can take long and/or short positions--as well as in many 
cases, leveraged long or short positions--in baskets of securities 
whose components can include foreign and domestic stock indexes, 
currencies, commodities and bonds. Over the years, ETFs have also 
attracted a great deal of options trading.
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    \15\ See proposed Rule 903G(c)(3)(ii). The Exchange also 
proposes a non-substantive amendment to Rule 903G to renumber 
current Rule 903G(c)(3)(ii) as new Rule 903G(c)(3)(iii).
    \16\ See proposed Rule 903G, Commentary .02.
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    As described more fully below, the Exchange believes that the deep 
liquidity and robust trading activity in the 25 ETFs proposed to be 
eligible for cash-settled FLEX ETF Options would mitigate against 
concerns that their settlement value would be susceptible to 
manipulation.
Characteristics of ETFs
    ETFs are funds that have their value derived from assets owned. The 
net asset value (``NAV'') of an ETF is a daily calculation that is 
based off the most recent closing prices of the assets in the fund and 
an actual accounting of the total cash in the fund at the time of 
calculation. The NAV of an ETF is calculated by taking the sum of the 
assets in the fund, including any securities and cash, subtracting out 
any liabilities, and dividing that by the number of shares outstanding.
    Additionally, each ETF is subject to a creation and redemption 
mechanism to ensure the price of the ETF does not fluctuate too far 
away from its NAV--which mechanisms reduce the potential for 
manipulative activity. Each business day, ETFs are required to make 
publicly available a portfolio composition file that describes the 
makeup of their creation and redemption ``baskets'' (i.e., a specific 
list of names and quantities of securities or other assets designed to 
track the performance of the portfolio as a whole). ETF shares are 
created when an Authorized Participant, typically a market maker or 
other large institutional investor, deposits the daily creation basket 
or cash with the ETF issuer. In return for the creation basket or cash 
(or both), the ETF issues to the Authorized Participant a ``creation 
unit'' that consists of a specified number of ETF shares. For instance, 
IWM is designed to track the performance of the Russell 2000 Index. An 
Authorized Participant will purchase all the Russell 2000 constituent 
securities in the exact same weight as the index prescribes, then 
deliver those shares to the ETF issuer. In exchange, the ETF issuer 
gives the Authorized Participant a block of equally valued ETF shares, 
on a one-for-one fair value basis. This process can also work in 
reverse. A redemption is achieved when the Authorized Participant 
accumulates a sufficient number of shares of the ETF to constitute a 
creation unit and then exchanges these ETF shares with the ETF issuer, 
thereby decreasing the supply of ETF shares in the market.
    The principal, and perhaps most important, feature of ETFs is their 
reliance on an ``arbitrage function'' performed by market participants 
that influences the supply and demand of ETF shares and, thus, trading 
prices relative to NAV. As noted above, new ETF shares can be created 
and existing shares redeemed based on investor demand; thus, ETF supply 
is open-ended. This arbitrage function helps to keep an ETF's price in 
line with the value of its underlying portfolio, i.e., it minimizes 
deviation from NAV. Generally, the higher the liquidity and trading 
volume of an ETF, the more likely the price of the ETF will not deviate 
from the value of its underlying portfolio and such ETFs are less 
susceptible to price manipulation.
Trading Data for the 25 ETFs Proposed for Potential Cash Settlement
    As illustrated in the table below, the average deviation of the 
closing price of the 25 ETFs from its NAV, on a percentage basis, is 
less than 1%. The close proximity between each ETF's NAV and its 
closing price illustrates how closely the 25 ETFs selected by the 
Exchange are tethered to values beyond buying and selling at the close. 
More specifically, the ETFs that underlie options subject to this 
proposal are highly liquid, and are based on a broad set of highly 
liquid securities. The table below presents descriptive statistics for 
the 25 ETFs selected by the Exchange, as of December 31, 2018, and 
includes, for each ETF: The 20-day average trading volume of the 
underlying ETF (in shares and dollar value), the assets under 
management, the average deviation from net asset value, and the average 
daily volume of options contracts traded overlying each ETF.

[[Page 16104]]

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                                                                                                                              Average
                                                                        20-day average   20-day average     Total fund    deviation from      Options
                  ETF                             ETF ticker            trading volume   trading volume    assets under      net asset     average daily
                                                                           (shares)            ($)        management ($)    value (NAV)       volume
                                                                                                                             (percent)
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SPDR S&P 500 ETF.......................  SPY.........................      160,041,302   $40,948,098,000     $240,106.44            0.02       4,611,460
Invesco Nasdaq 100 ETF.................  QQQ.........................       71,613,353    11,310,618,350       61,145.94            0.03       1,108,432
iShares MSCI Emerging Markets ETF......  EEM.........................      111,792,871     4,439,674,650       29,314.21            0.54         585,794
iShares Russell 2000 ETF...............  IWM.........................       35,158,745     4,861,054,750       39,907.42            0.41         510,309
iShares iBoxx $ High Yield Corporate     HYG.........................       27,488,196     2,250,963,000       13,202.49            0.23         345,034
 Bond ETF.
SPDR S&P Oil & Gas Exploration &         XOP.........................       27,040,448       784,296,775        2,406.98            0.07         223,594
 Production ETF.
iShares China Large-Cap ETF............  FXI.........................       41,125,843     1,668,342,775        5,671.99            0.70         216,003
Financial Select Sector SPDR ETF.......  XLF.........................       90,744,549     2,206,780,250       22,899.77            0.04         209,185
iShares MSCI EAFE ETF..................  EFA.........................       61,226,608     3,656,868,050       62,279.02            0.28         188,666
iShares MSCI Brazil ETF................  EWZ.........................       26,957,238     1,032,776,750        7,694.70            0.65         180,654
iShares 20+ Year Treasury Bond ETF.....  TLT.........................       11,423,906     1,364,567,990        8,761.36            0.11         123,591
SPDR S&P Regional Banking ETF..........  KRE.........................       12,780,929       625,733,560        2,926.33            0.05          95,607
VanEck Vectors Gold Miners ETF.........  GDX.........................       61,166,478     1,248,025,595       10,575.69            0.16          90,602
SPDR Dow Jones Industrial Average ETF..  DIA.........................        6,985,256     1,660,420,135       19,700.41            0.02          83,202
SPDR S&P Biotech ETF...................  XBI.........................        7,488,285       554,592,040        3,608.90            0.10          62,290
Energy Select Sector SPDR ETF..........  XLE.........................       24,766,279     1,502,959,710       13,431.16            0.04          57,398
Utilities Select Sector SPDR ETF.......  XLU.........................       24,430,265     1,339,179,575        8,383.96            0.04          50,759
Consumer Staples Select Sector SPDR ETF  XLP.........................       27,738,596     1,469,257,995        9,572.95            0.04          28,699
iShares U.S. Real Estate ETF...........  IYR.........................       11,283,934       881,610,765        3,434.70            0.07          26,722
Technology Select Sector SPDR ETF......  XLK.........................       22,235,286     1,407,316,770       17,305.90            0.03          21,243
Industrial Select Sector SPDR ETF......  XLI.........................       19,012,293     1,269,902,155        9,689.46            0.04          20,789
Healthcare Select Sector ETF...........  XLV.........................       17,397,161     1,529,979,575       17,987.48            0.04          20,183
iShares MSCI Japan ETF.................  EWJ.........................       17,714,960       921,963,790       15,253.86            0.46          13,855
Materials Select Sector SPDR ETF.......  XLB.........................       12,685,383       646,247,535        3,634.08            0.04          11,552
VanEck Vectors Junior Gold Miners ETF..  GDXJ........................       14,662,291       419,654,120        4,273.40            0.23          10,868
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    As illustrated in the table above, each of the 25 ETFs is actively 
traded and highly liquid and thus not readily susceptible to 
manipulation for the following reasons:
     First, each has a 20-day ADV of at least 7 million shares 
which indicates substantial liquidity present in the trading of these 
securities.
     Second, each ETF has a notional value over that 20-day 
period of at least $400 million which implies that the ETF has 
significant depth and breadth of market participants providing 
liquidity.
     Third, each ETF has a minimum of $2 billion of assets 
under management which demonstrates broad ownership as well as depth 
and breadth of investor interest.
     Finally, each ETF has an ADV of at least 10,000 options 
contracts which indicates that there is significant quoting and trading 
interest in the options overlying each ETF.
    The Exchange believes that this data indicates that permitting cash 
settlement as a FLEX term for the 25 ETFs selected by the Exchange 
would 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 settlement 
restrictions do not apply. Moreover, introducing cash settlement as a 
FLEX term for these 25 ETFs would be appropriate because the data above 
indicates that these are some of the most actively traded and liquid 
ETFs and are therefore not readily susceptible to manipulation.
    Today, all ETF options are settled physically, i.e., upon exercise, 
shares of the underlying ETF must be assumed or delivered. Physical 
settlement possesses certain risks with respect to volatility and 
movement of the underlying security at expiration that market 
participants may need to hedge against. Cash settlement may be 
preferable to physical delivery in some circumstances as it does not 
present the same risk. If an issue with the delivery of the underlying 
security arises, it may become more expensive (and time consuming) to 
reverse the delivery because the price of the underlying security would 
almost certainly have changed. Reversing a cash payment, on the other 
hand, would not involve any such issue because reversing a cash 
delivery would simply involve the exchange of cash. Additionally, with 
physical settlement, market participants that have a need to generate 
cash would have to sell the underlying security while incurring the 
costs associated with liquidating their position in the underlying 
security as well as the risk of an adverse movement in the price of the 
underlying security. The Exchange notes that cash settlement for 
options is not a unique feature and other options exchanges currently 
trade cash-settled options.\17\
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    \17\ See e.g., PHLX FX Options traded on Nasdaq PHLX and S&P 
500[supreg] Index Options traded on Cboe Options Exchange. More 
recently, the Commission approved, on a pilot basis, the listing and 
trading of RealDayTM Options on the BOX Options Exchange 
LLC. See Securities Exchange Act Release No. 79936 (February 2, 
2017), 82 FR 9886 (February 8, 2017) (``RealDay Pilot Program''). 
The RealDay Pilot Program has been extended until February 2, 2019. 
See Securities Exchange Act Release No. 82414 (December 28, 2017), 
83 FR 577 (January 4, 2018) (SR-BOX-2017-38).
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    The Exchange understands that there are concerns that have been 
raised in the past regarding cash-settled equity options. The Exchange 
seeks to allay such concerns by proposing to adopt cash-settlement as 
an alternative to

[[Page 16105]]

ETFs only, and more specifically, to a narrow universe of 25 ETFs. As a 
general matter, all index options traded today are cash-settled and 
derive their value from a disseminated index price. Similarly, ETFs 
typically have their values linked to a disseminated index price. As 
noted above, the Exchange seeks to limit cash-settlement to 25 of the 
most liquid and actively traded ETFs, as evidenced by the data 
underlying the 25 ETFs in the table above.
    With respect to position limits, cash-settled FLEX ETF Options 
would be subject to the position limits set forth in Rule 906G. 
Accordingly, the Exchange would establish position limits for cash-
settled FLEX ETF Options that are the same as non-cash-settled FLEX ETF 
Options. Pursuant to Rule 906G(b), each member or member organization 
(other than a Specialist or Floor Market Maker) that maintains a 
position on the same side of the market in excess of the level 
established pursuant to Rule 904 for Non-FLEX Equity options of the 
same class on behalf of its own account or for the account of a 
customer is required to report to the Exchange 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 Exchange understands that FLEX ETF Options are currently traded 
in the over-the-counter (``OTC'') market by a variety of market 
participants, e.g., hedge funds, proprietary trading firms, and pension 
funds, to name a few. The Exchange believes there is room for 
significant growth if a comparable product were introduced for trading 
on a regulated market. The Exchange expects that users of these OTC 
products would be among the primary users of exchange-traded cash-
settled FLEX ETF Options. The Exchange also believes that the trading 
of cash-settled FLEX ETF Options would allow these same market 
participants to better manage the risk associated with the volatility 
of underlying ETF positions given the enhanced liquidity that an 
exchange-traded product would bring.
    Cash-settled FLEX ETF Options traded on the Exchange would have 
three important advantages over the contracts that are traded in the 
OTC market. First, as a result of greater standardization of contract 
terms, exchange-traded contracts should develop more liquidity. Second, 
counter-party credit risk would be mitigated by the fact that the 
contracts are issued and guaranteed by The Options Clearing Corporation 
(``OCC''). Finally, the price discovery and dissemination provided by 
the Exchange and its members would lead to more transparent markets. 
The Exchange believes that its ability to offer cash-settled FLEX ETF 
Options would aid it in competing with the OTC market and at the same 
time expand the universe of products available to interested market 
participants. The Exchange believes that an exchange-traded alternative 
may provide a useful risk management and trading vehicle for market 
participants and their customers.
    The Exchange has confirmed with the OCC that OCC can support the 
clearance and settlement of cash-settled FLEX ETF Options. The Exchange 
has analyzed its capacity and represents that it believes the Exchange 
and OPRA have the necessary systems capacity to handle the additional 
traffic associated with the listing of cash-settled FLEX ETF Options. 
The Exchange believes any additional traffic that would be generated 
from the introduction of cash-settled FLEX ETF Options would be 
manageable. The Exchange believes ATP Holders will not have a capacity 
issue as a result of this proposed rule change. The Exchange also 
represents that it does not believe this proposed rule change will 
cause fragmentation of liquidity. The Exchange will monitor the trading 
volume associated with the additional options series listed as a result 
of this proposed rule change and the effect (if any) of these 
additional series on market fragmentation and on the capacity of the 
Exchange's automated systems.
    The Exchange has an adequate surveillance program in place for 
cash-settled FLEX ETF Options and intends to apply the same program 
procedures that it applies to the Exchange's other options products. 
FLEX options products and their respective symbols are integrated into 
the Exchange's existing surveillance system architecture and are thus 
subject to the relevant surveillance processes. As a result, the 
Exchange believes it would be able to effectively police the trading of 
cash-settled FLEX ETF Options using means that include its surveillance 
for manipulation. The Exchange believes that manipulating the 
settlement price of cash-settled FLEX ETF Options would be difficult 
based on the size of the market for the 25 ETFs that are the subject of 
this proposed rule change. Additionally, the Exchange notes that each 
cash-settled FLEX ETF Option that would be subject to this proposed 
rule change is sufficiently active so as to alleviate concerns about 
potential manipulative activity. Further, the vast liquidity of the 25 
ETF options as well as the underlying equities markets ensures a 
multitude of market participants at any given time. Given the high 
level of participation among market participants that enter quotes and/
or orders in these ETF options, the Exchange believes it would be very 
difficult for a single participant to alter the prices of each of the 
underlying securities of an ETF in any significant way without exposing 
the would-be manipulator to regulatory scrutiny. The Exchange further 
believes any attempt to manipulate the prices of the underlying 
securities of an ETF would also be cost prohibitive.
    With respect to regulatory scrutiny, the Exchange further believes 
its existing surveillance technologies and procedures adequately 
address potential concerns regarding possible manipulation of the 
settlement value at or near the close of the market. The Exchange notes 
that the regulatory program operated by and overseen by NYSE Regulation 
includes cross-market surveillance designed to identify manipulative 
and other improper trading, including spoofing, algorithm gaming, 
marking the close and open, as well as more general, abusive behavior 
related to front running, wash sales, quoting/routing, and Reg SHO 
violations, that may occur on the Exchange and other markets. These 
cross-market patterns incorporate relevant data from various markets 
beyond the Exchange and its affiliates, including data from NYSE Arca, 
Inc. and from markets not affiliated with the Exchange. The Exchange 
represents that its existing trading surveillances are adequate to 
monitor the trading in the underlying ETF and subsequent trading of 
options on those ETFs on the Exchange.\18\
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    \18\ Such surveillance procedures generally focus on detecting 
securities trading subject to opening price manipulation, closing 
price manipulation, layering, spoofing or other unlawful activity 
impacting an underlying security, the option, or both. The Exchange 
has price movement alerts, unusual market activity and order book 
alerts active for all trading symbols.
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    Additionally, for options, the Exchange utilizes an array of 
patterns that monitor manipulation of options, or manipulation of 
equity securities (regardless of venue) for the purpose of impacting 
options prices on the Exchange (i.e., mini-manipulation strategies). 
That surveillance coverage is initiated once options begin trading on 
the Exchange. Accordingly, the Exchange believes that the cross-market 
surveillance performed by the Exchange or FINRA on behalf of the 
Exchange, coupled with NYSE Regulation's own monitoring for violative 
activity on the Exchange comprise a comprehensive surveillance program 
that is adequate to

[[Page 16106]]

monitor for manipulation of the underlying security and overlying 
option. Furthermore, the Exchange believes that the existing 
surveillance procedures at the Exchange are capable of properly 
identifying unusual and/or illegal trading activity, which the Exchange 
would utilize to surveil for aberrant trading in cash-settled FLEX ETF 
Options. Finally, the Exchange notes that routine oversight inspections 
of the Exchange's regulatory programs by the Commission have not 
uncovered any material inconsistencies or shortcomings in the manner in 
which the Exchange's market surveillance is conducted.
    The Exchange does not believe that allowing cash settlement as a 
contract term would render the marketplace for equity options more 
susceptible to manipulative practices. In addition to the surveillance 
procedures and processes described above, improvements in audit trails, 
recordkeeping practices, and inter-exchange cooperation over the last 
two decades have greatly increased the Exchange's ability to detect and 
punish attempted manipulative activities. The Exchange therefore 
believes that the decision of whether or not to allow cash settlement 
as a contract term for the proposed 25 FLEX ETF Options should rest on 
the ability of the Exchange to monitor and detect manipulative 
activity, not on any perceived threat of increased attempted 
manipulative activity.
    Additionally, the Exchange is a member of the Intermarket 
Surveillance Group (``ISG'') under the Intermarket Surveillance Group 
Agreement dated June 20, 1994. The ISG members work together to 
coordinate surveillance and investigative information sharing in the 
stock and options markets. For surveillance purposes, the Exchange 
would therefore have access to information regarding trading activity 
in the pertinent underlying securities.
    The proposed rule change is designed to allow investors seeking to 
effect cash-settled FLEX ETF Options with the opportunity for a 
different method of settling option contracts at expiration if they 
choose to do so. As noted above, market participants may choose cash 
settlement because physical settlement possesses certain risks with 
respect to volatility and movement of the underlying security at 
expiration that market participants may need to hedge against. The 
Exchange believes that offering innovative products flows to the 
benefit of the investing public. A robust and competitive market 
requires that exchanges respond to member's evolving needs by 
constantly improving their offerings. Such efforts would be stymied if 
exchanges were prohibited from offering innovative products for reasons 
that are generally debated in academic literature. The Exchange 
believes that introducing cash-settled FLEX ETF Options 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 markets for customized options, where settlement 
restrictions do not apply. The proposed rule change is also designed to 
encourage market makers to shift liquidity from OTC markets onto the 
Exchange, which, it believes, will enhance the process of price 
discovery conducted on the Exchange through increased order flow. The 
Exchange also believes that this may open up cash-settled FLEX ETF 
Options to more retail investors. The Exchange does not believe that 
this proposed rule change raises any unique regulatory concerns because 
existing safeguards--such as position limits, exercise limits, and 
reporting requirements--would continue to apply.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\19\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act,\20\ 
in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, 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. Specifically, 
the Exchange believes that introducing cash-settled FLEX ETF Options 
will increase order flow to the Exchange, increase the variety of 
options products available for trading, and provide a valuable tool for 
investors to manage risk.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposal to permit cash settlement 
as a contract term for the proposed 25 FLEX ETF Options would remove 
impediments to and perfect the mechanism of a free and open market as 
cash-settled FLEX ETF Options would enable market participants to 
receive cash in lieu of shares of the underlying security, which would, 
in turn provide greater opportunities for market participants to manage 
risk through the use of cash-settled FLEX ETF Options to the benefit of 
investors and the public interest. The Exchange does not believe that 
allowing cash settlement as a contract term for the proposed 25 FLEX 
ETF Options would render the marketplace for equity options more 
susceptible to manipulative practices. As illustrated in the table 
above, each of the 25 ETFs is actively traded and highly liquid and 
thus not susceptible to manipulation for the following reasons. First, 
each ETF has a 20-day ADV of at least 7 million shares which indicates 
substantial liquidity present in the trading of these securities. 
Second, each ETF has a notional value over that 20-day period of at 
least $400 million which implies that the ETF has significant depth and 
breadth of market participants providing liquidity. Third, each ETF has 
a minimum of $2 billion of assets under management which demonstrates 
broad ownership as well as depth and breadth of investor interest. And 
finally, each ETF has an ADV of at least 10,000 options contracts which 
indicates that there is significant quoting and trading interest in the 
options overlying each ETF.
    The Exchange believes that the data provided by the Exchange 
supports the supposition that permitting cash settlement as a FLEX term 
for the 25 ETFs selected by the Exchange would 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 settlement restrictions do not apply.
    The Exchange believes that the proposal to permit cash settlement 
would remove impediments to and perfect the mechanism of a free and 
open market because the proposed rule change would provide ATP Holders 
with enhanced methods to manage risk by receiving cash if they choose 
to do so instead of the underlying security. In addition, this proposal 
would promote just and equitable principles of trade and protect 
investors and the general public because cash settlement would provide 
investors with an additional tool to manage their risk. Further, the 
Exchange notes that its proposal to introduce cash-settled FLEX ETF 
Options is not novel in that other exchanges currently offer [sic] cash 
settlement for options whose underlying security is an ETF. The 
proposed rule change therefore should not raise any issues for the 
Commission that have not been previously addressed.\21\
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    \21\ See supra note 17.
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    The proposed rule change to permit cash settlement as a contract 
term for the 25 FLEX ETF Options is designed to promote just and 
equitable principles of

[[Page 16107]]

trade in that the availability of cash settlement as a contract term 
would give market participants an alternative to trading similar 
products in the OTC market. By trading a product in an exchange-traded 
environment (that is currently being used in the OTC market), the 
Exchange would be able to compete more effectively with the OTC market. 
The Exchange believes the proposed rule change is designed to prevent 
fraudulent and manipulative acts and practices in that it would lead to 
the migration of options currently trading in the OTC market to trading 
to the Exchange. Also, any migration to the Exchange from the OTC 
market would result in increased market transparency. Additionally, the 
Exchange believes the proposed rule change is designed to remove 
impediments to and to perfect the mechanism for a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest in that it should create greater trading and 
hedging opportunities and flexibility. The proposed rule change should 
also result in enhanced efficiency in initiating and closing out 
positions and heightened contra-party creditworthiness due to the role 
of OCC as issuer and guarantor of cash-settled FLEX ETF Options. 
Further, the proposed rule change would result in increased competition 
by permitting the Exchange to offer products that are currently used in 
the OTC market.
    Finally, the Exchange represents that it has an adequate 
surveillance program in place to detect manipulative trading in cash-
settled FLEX ETF Options. Regarding the proposed cash settlement, the 
Exchange would use the same surveillance procedures currently utilized 
for the Exchange's other FLEX Options. For surveillance purposes, the 
Exchange would have access to information regarding trading activity in 
the pertinent underlying securities. The Exchange believes that 
limiting cash settlement to FLEX ETF Options would minimize the 
possibility of manipulation due to the robust liquidity in both the ETF 
and options markets.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposal is designed to 
increase competition for order flow on the Exchange in a manner that is 
beneficial to investors because it is designed to provide investors 
seeking to effect cash-settled FLEX ETF Option orders with the 
opportunity for different methods of settling option contracts at 
expiration.
    The Exchange notes that it operates in a highly competitive market 
in which market participants can readily direct order flow to competing 
venues who offer similar functionality. The Exchange believes the 
proposed rule change encourages competition amongst market participants 
to provide tailored cash-settled FLEX ETF Option contracts.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 2, is consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSEAMER-2018-39 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEAMER-2018-39. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such 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-NYSEAMER-2018-39, and should be 
submitted on or before May 8, 2019.

    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,
Deputy Secretary.
[FR Doc. 2019-07614 Filed 4-16-19; 8:45 am]
BILLING CODE 8011-01-P