Document ID: SEC-2020-0181-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE American, LLC
Posted Date: 2020-02-11T05:00Z

[Federal Register Volume 85, Number 28 (Tuesday, February 11, 2020)]
[Notices]
[Pages 7806-7811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02631]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88131; File No. SR-NYSEAMER-2019-38]

Self-Regulatory Organizations; NYSE American LLC; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Allow Certain 
Flexible Equity Options To Be Cash Settled

February 5, 2020.

I. Introduction

    On October 17, 2019, NYSE American LLC (``NYSE American'' or 
``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 Rules 903G and 906G to allow certain 
Flexible Exchange (``FLEX'') Equity Options to be cash settled.\3\ The 
proposal, as modified by Amendment No. 1, would allow FLEX Equity 
Options to be cash settled where the underlying security is an 
Exchange-Traded Fund (``ETF'') that meets prescribed criteria (``FLEX 
ETF Option'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ For the definition of ``FLEX Equity Option,'' see infra note 
7.
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    The proposed rule change was published for comment in the Federal 
Register on November 7, 2019.\4\ On December 18, 2019, the Commission 
extended the time period within which to approve the proposed rule 
changes, disapprove the proposed rule changes,

[[Page 7807]]

or institute proceedings to determine whether to approve or disapprove 
the proposed rule changes, to February 5, 2020.\5\ On February 4, 2020, 
the Exchange filed Amendment No. 1 to the proposed rule change, which 
supersedes the original filing in its entirety.\6\ The Commission has 
received no comments on the proposed rule change. The Commission is 
publishing this notice to solicit comments on Amendment No. 1 from 
interested persons, and is approving the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \4\ See Securities Exchange Act Release No. 87444 (November 1, 
2019), 84 FR 60120 (November 7, 2019) (``Notice'').
    \5\ See Securities Exchange Act Release No. 87792 (December 18, 
2019), 84 FR 71053 (December 26, 2019).
    \6\ In Amendment No. 1, the Exchange: (1) Limited cash 
settlement as a contract term to those FLEX Equity Options whose 
underlying security is an ETF; (ii) proposed to aggregate positions 
in cash-settled FLEX ETF Options with positions in physically-
settled options on the same underlying ETF for purposes of position 
and exercise limits; (3) proposed to limit the number of ETFs that 
could underlie cash-settled FLEX ETF Options to no more than 50 
underlying ETFs and set a tiebreaker if there are more than 50; (4) 
specified that the Exchange will provide the Commission with annual 
reports for five years that include, at a minimum, certain trading 
information and analysis, and, if any, recommendations, regarding 
the trading of cash-settled FLEX ETF Options; and (5) proposed some 
clarifying changes to its original proposal. Amendment No. 1 
replaces and supersedes the original filing in its entirety and is 
available at: https://www.nyse.com/publicdocs/nyse/markets/nyse-american/rule-filings/filings/2020/NYSEAmex-2019-38,%20Am.%201.pdf.
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II. Description of the Proposal, as Modified by Amendment No. 1

    The Exchange has proposed to amend NYSE American Rule 903G(c) to 
allow for cash settlement of certain FLEX Equity Options.\7\ FLEX 
Equity Options permit investors to specify certain options contract 
terms, within parameters set forth in the Exchange's FLEX rules, such 
as exercise style, expiration date, and exercise prices.\8\ Currently, 
FLEX Equity Options are settled by physical delivery of the underlying 
security.\9\ The Exchange proposed, in the case of a FLEX Equity Option 
with an underlying security that is an Exchange-Traded Fund (i.e., a 
FLEX ETF Option) and that meets prescribed criteria, to allow 
settlement either by delivery in cash or, as currently permitted under 
the Exchange rules, by physical delivery of the underlying 
security.\10\
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    \7\ A ``FLEX Option'' is a customized options contract that is 
subject to the rules of Section 15, Flexible Exchange Options. See 
NYSE American Rule 900G(b)(1). 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).
    \8\ See NYSE American Rule 903G.
    \9\ See NYSE American Rule 903G(c)(3)(i). There is one exception 
for a specific type of option called FLEX Binary Return Derivatives 
(``ByRDs''). See NYSE American Rules 900G(b)(17), 903G(c)(3)(ii), 
and 910ByRDs.
    \10\ See proposed NYSE American Rule 903G(c)(3)(ii). The 
Exchange proposed conforming changes to NYSE American Rule 
903G(c)(3) to reflect that the proposed rule change would add a 
second exception to the general requirement for physical settlement 
for FLEX Equity Options on an eligible ETF. See proposed NYSE 
American Rule 903G(c)(3)(i) and (iii).
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    As proposed, the Exchange would allow for the cash settlement of a 
FLEX ETF Option if the underlying ETF, measured over the prior six-
month period, has (1) an average daily notional value of at least $500 
Million; and (2) a national average daily volume (``ADV'') of at least 
4,680,000 shares.\11\ The Exchange proposed to determine bi-annually 
the underlying ETFs that satisfy these notional value and trading 
volume requirements by using trading statistics for the previous six-
months.\12\ The Exchange also proposed to permit cash settlement as a 
contract term on no more than 50 underlying ETFs, and that if more than 
50 underlying ETFs satisfy the notional value and trading volume 
requirements, to select the top 50 securities based on the ETFs with 
the highest ADV after meeting the initial requirements.\13\ Further, 
the Exchange's proposed rule states that if the Exchange determines 
pursuant to the bi-annual review that an underlying ETF ceases to 
satisfy the specified criteria, any new position overlying such 
security entered into would be required to have exercise settlement by 
physical delivery and any open positions overlying such security would 
be able to be traded only to close the position.\14\
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    \11\ See proposed NYSE American Rule 903G(c)(3)(ii).
    \12\ See proposed NYSE American Rule 903G(c)(3)(ii)(A). The 
Exchange stated that it plans to conduct the bi-annual review on 
January 1 and July 1 of each year, announce the results via a Trader 
Update, and permit FLEX ETF Options any new ETFs that qualify to 
have cash settlement as a contract term beginning on February 1 and 
August 1 of each year. See Amendment No. 1, supra note 6, at n.8.
    \13\ See proposed NYSE American Rule 903G(c)(3)(ii)(A).
    \14\ See proposed NYSE American Rule 903G(c)(3)(ii)(B). The 
Exchange represented that it will provide guidance to reflect that 
an Exchange member acting as a market maker in cash-settled FLEX ETF 
Options can enter into an opening transaction to facilitate closing 
only transactions of another market participant when such orders are 
restricted to closing only transactions. See Amendment No. 1, supra 
note 6, at 5. The Exchange noted in its proposal that this is 
consistent with how it addresses other situations when transactions 
in certain options series are restricted to closing-only 
transactions and represented that this interpretation is consistent 
with a market maker's duty to maintain fair and orderly markets as 
set forth in NYSE American Rule 920NY. See Amendment No. 1, supra 
note 6, at n.10 (citing https://www.nyse.com/publicdocs/nyse/markets/arca-options/rule-interpretations/2017/NYSE%20Arca%20Options%20RB%2017-01.pdf).
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    In support of its proposal, the Exchange stated that it believes it 
is appropriate to introduce cash settlement as an alternative contract 
term to the select group of ETFs because they are ``among the most 
highly liquid and actively-traded securities,'' \15\ and that the deep 
liquidity and robust trading activity in these ETFs, in the Exchange's 
view, mitigate against historic concerns regarding susceptibility to 
manipulation.\16\ The Exchange stated that it believes that average 
daily notional value is an appropriate proxy for selecting underlying 
ETFs that are not readily susceptible to manipulation because it 
believes that as a general matter, the more expensive an underlying 
ETF's price, the less cost-effective manipulation could become, and 
that manipulation of the price of an ETF encounters greater difficulty 
the more volume that is traded.\17\ In addition, the Exchange stated 
that it believes an ADV requirement of 4,680,000 shares a day is 
appropriate because it represents average trading in the underlying ETF 
of 200 shares per second.\18\ The Exchange stated that it believes that 
while no security is immune from all manipulation, the combination of 
average daily notional value and ADV as prerequisite requirements would 
limit cash settlement of FLEX ETF Options to those underlying 
securities that would be less susceptible to manipulation in order to 
establish a settlement price.\19\ The Exchange further stated that it 
believes that permitting cash settlement as a contract term for FLEX 
ETF Options 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.\20\
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    \15\ See Amendment No. 1, supra note 6, at 5.
    \16\ See Amendment No. 1, supra note 6, at 5.
    \17\ See Notice, supra note 4, 84 FR at 60120. See also 
Amendment No. 1, supra note 6, at 6-7. To calculate average daily 
notional value, the Exchange summed the notional value of each trade 
for each symbol (i.e., the number of shares times the price for each 
execution in the security) and divided that total by the number of 
trading days in the six-month period (from July 1, 2019 through 
December 31, 2019) reviewed by the Exchange. See Amendment No. 1, 
supra note 6, at 6-7.
    \18\ See Notice, supra note 4, 84 FR at 60120. See also 
Amendment No. 1, supra note 6, at 7.
    \19\ See Amendment No. 1, supra note 6, at 7.
    \20\ See Amendment No. 1, supra note 6, at 8.
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    The Exchange represented that the table below provides the list of 
the 26 securities that, as of December 31, 2019, would be eligible to 
have cash settlement as a contract term.\21\
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    \21\ See Amendment No. 1, supra note 6, at 7-8.

[[Page 7808]]

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                                                                              Average daily      Average daily
              Symbol                            Security name                 notional value    volume  (7/1/19-
                                                                            (7/1/19-12/31/19)      12/31/19)
----------------------------------------------------------------------------------------------------------------
SPY..............................  SPDR S&P 500 ETF Trust.................    $19,348,446,943         64,473,579
GDX..............................  VanEck Vectors Gold Miners ETF.........      1,642,832,369         59,224,665
EEM..............................  iShares MSCI Emerging Markets ETF......      2,452,054,515         58,392,976
XLF..............................  Financial Select Sector SPDR Fund......      1,326,369,702         51,114,805
VXX..............................  iPath Series B S&P 500 VIX Short-Term          771,760,803         34,481,358
                                    Futures ETN.
XOP..............................  SPDR S&P Oil & Gas Exploration &               634,221,618         28,045,372
                                    Production ETF.
QQQ..............................  Invesco QQQ Trust......................      4,881,991,635         25,290,206
EWZ..............................  iShares MSCI Brazil ETF................      1,021,953,287         23,573,072
EFA..............................  iShares MSCI EAFE ETF..................      1,547,095,600         23,547,995
FXI..............................  iShares China Large-Cap ETF............        962,138,508         23,499,870
IWM..............................  iShares Russell 2000 ETF...............      2,850,264,638         18,418,308
HYG..............................  iShares iBoxx High Yield Corporate Bond      1,596,947,580         18,385,570
                                    ETF.
GDXJ.............................  VanEck Vectors Junior Gold Miners ETF..        644,620,425         16,792,343
TQQQ.............................  ProShares UltraPro QQQ.................      1,107,279,835         16,739,207
XLU..............................  Utilities Select Sector SPDR Fund......      1,037,188,333         16,587,526
XLE..............................  Energy Select Sector SPDR Fund.........        857,120,647         14,338,385
IEMG.............................  iShares Core MSCI Emerging Markets ETF.        690,635,496         13,711,914
XLP..............................  Consumer Staples Select Sector SPDR            740,499,207         12,203,155
                                    Fund.
TLT..............................  iShares 20+ Year Treasury Bond ETF.....      1,482,683,513         10,608,009
XLK..............................  Technology Select Sector SPDR Fund.....        846,007,077         10,319,276
XLI..............................  Industrial Select Sector SPDR Fund.....        771,117,183          9,884,799
LQD..............................  iShares iBoxx Investment Grade               1,215,543,560          9,602,402
                                    Corporate Bond ETF.
GLD..............................  SPDR Gold Trust........................      1,335,356,112          9,569,458
XLV..............................  Health Care Select Sector SPDR Fund....        776,822,924          8,333,845
IYR..............................  iShares U.S. Real Estate ETF...........        641,445,902          6,981,265
JNK..............................  SPDR Bloomberg Barclays High Yield Bond        632,969,484          5,845,332
                                    ETF.
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    The Exchange proposed that cash-settled FLEX ETF Options would be 
subject to the position limits set forth in NYSE American Rule 904 and 
the exercise limits set forth in NYSE American Rule 905, which rules 
also apply to the standardized options market.\22\ In addition, the 
Exchange proposed that positions in cash-settled options will be 
aggregated with all positions in physically-settled options on the same 
underlying ETF for the purpose of calculating the position limits set 
forth in Rule 904, and the exercise limits set forth in Rule 905.\23\
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    \22\ See proposed NYSE American Rule 906G(b)(ii). The Exchange 
represented that, out of the 26 underlying ETFs that would currently 
be eligible to have cash settlement as a contract term, 18 would 
have a position limit of 250,000 contracts (see NYSE American Rule 
904, Commentary .07(a)) and the position limit for the other eight 
underlying securities would be as follows: For QQQ and SPY, 
1,800,000 contracts; for IWM and EEM, 1,000,000 contracts; and for 
FXI, EFA, EWZ and TLT, 500,000 contracts (see NYSE American Rule 
904, Commentary .07(f)). See Amendment No. 1, supra note 6, at 9-10. 
The Commission notes that, under the Exchange's rules, the 
applicable exercise limits will be the same as the position limits.
    \23\ See proposed NYSE American Rule 906G(b)(ii). The Exchange 
also proposes a non-substantive amendment to Rule 906G to renumber 
current NYSE American Rule 906G(b)(ii) as new NYSE American Rule 
906G(b)(iii). The Exchange stated that, given that each of the 
underlying securities that would currently be eligible to have cash-
settlement as a contract term have established position and exercise 
limits applicable to physically-settled options, the Exchange 
believes it is appropriate for the same position and exercise limits 
to also apply to cash-settled options. See Notice, supra note 4, 84 
FR at 60122. See also Amendment No. 1, supra note 6, at 9.
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    The Exchange noted in its filing that cash-settled FLEX ETF Options 
would not be available for trading until The Options Clearing 
Corporation (``OCC'') represents to the Exchange that it is fully able 
to clear and settle such options.\24\ The Exchange stated that it 
represents that it and The Options Price Reporting Authority (``OPRA'') 
have the necessary systems capacity to handle the additional traffic 
associated with the listing of cash-settled FLEX ETF Options, and that 
it believes that its members will not have a capacity issue as a result 
of the proposed rule change.\25\ The Exchange also represented that it 
does not believe the proposed rule change will cause fragmentation of 
liquidity.\26\ The Exchange further represented that it will monitor 
for any effects additional trading volume from the proposal may have on 
both market fragmentation and capacity of the Exchange's automated 
systems.\27\
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    \24\ See Notice, supra note 4, 84 FR at 60123. See also 
Amendment No. 1, supra note 6, at 10.
    \25\ See Notice, supra note 4, 84 FR at 60123. See also 
Amendment No. 1, supra note 6, at 10.
    \26\ See Notice, supra note 4, 84 FR at 60123. See also 
Amendment No. 1, supra note 6, at 10.
    \27\ See Notice, supra note 4, 84 FR at 60123. See also, 
Amendment No. 1, supra note 6, at 10.
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    The Exchange stated that it believes that it 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.\28\ The Exchange represented, among 
other things, that its existing trading surveillances are adequate to 
monitor the trading in the underlying securities and subsequent trading 
of options on those securities on the Exchange, including cash-settled 
FLEX ETF Options.\29\ The Exchange noted that the regulatory program 
operated by and overseen by NYSE Regulation includes cross-market 
surveillance designed to identify manipulative and other improper 
trading that may occur on the Exchange and other markets.\30\ The 
Exchange also represented, among other things, that it 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.\31\ In addition, the Exchange 
stated that it believes that improvements in audit trails, 
recordkeeping practices, and inter-exchange cooperation over the last 
two decades have greatly increased the

[[Page 7809]]

Exchange's ability to detect and punish attempted manipulative 
activities.\32\
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    \28\ See Amendment No. 1, supra note 6, at 11.
    \29\ See Notice, supra note 4, 84 FR at 60123. See also 
Amendment No. 1, supra note 6, at 11.
    \30\ See Notice, supra note 4, 84 FR at 60123. See also 
Amendment No. 1, supra note 6, at 11.
    \31\ See Notice, supra note 4, 84 FR at 60123. See also 
Amendment No. 1, supra note 6, at 11. The Commission notes that the 
Exchange's surveillance procedures are described in more detail in 
the Notice and in Amendment No. 1 and that these descriptions are 
substantively identical. See Notice, supra note 4, 84 FR 60123-24; 
Amendment No. 1, supra note 6, at 11-12.
    \32\ See Notice, supra note 4, 84 FR at 60123. See also 
Amendment No. 1, supra note 6, at 12.
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    The Exchange represented that it is a member of the Intermarket 
Surveillance Group (``ISG'') under the Intermarket Surveillance Group 
Agreement dated June 20, 1994.\33\ The ISG members work together to 
coordinate surveillance and investigative information sharing in the 
stock and options markets.\34\ For surveillance purposes, the Exchange 
stated that it would have access to information regarding trading 
activity in the pertinent underlying securities.\35\
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    \33\ See Notice, supra note 4, 84 FR at 60123. See also 
Amendment No. 1, supra note 6, at 12.
    \34\ See Notice, supra note 4, 84 FR at 60123. See also 
Amendment No. 1, supra note 6, at 12.
    \35\ See Notice, supra note 4, 84 FR at 60124. See also 
Amendment No. 1, supra note 6, at 12.
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    Finally, the Exchange represented that, given the novel 
characteristics of cash-settled FLEX ETF Options, the Exchange will 
conduct a review of the trading in cash-settled FLEX ETF Options over 
an initial five-year period and furnish annual reports to the SEC based 
on this review.\36\ At a minimum, the reports will provide a comparison 
between the trading volume of all cash-settled FLEX ETF Options listed 
under the proposed rule and physically-settled options on the same 
underlying security, the liquidity of the market for such options 
products and the underlying ETFs, and any manipulation concerns arising 
in connection with the trading of cash-settled FLEX ETF Options under 
the proposed rule, and will also discuss any recommendations the 
Exchange may have for enhancements to the listing standards based on 
its review.\37\
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    \36\ See Amendment No. 1, supra note 6, at 13. The Exchange 
stated that it would provide the first report within 60 days after 
the first anniversary of the initial listing date of the first cash-
settled FLEX ETF Option under the proposal and that each subsequent 
report will be provided within 60 days of the anniversary of the 
initial listing date on an annual basis up until and including year 
five. Id.
    \37\ See Amendment No. 1, supra note 6, at 13.
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III. Discussion and Commission Findings

    After careful review of the proposal, as modified by Amendment No. 
1, the Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\38\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act,\39\ which requires, among other things, that the 
rules of a national securities exchange be 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, 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.
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    \38\ 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).
    \39\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the Exchange's modified proposal would 
allow cash settlement for FLEX Equity Options only on ETFs, and only 
where the underlying ETF, as measured over the prior six-month period, 
has (1) an average daily notional value of at least $500 Million; and 
(2) a national ADV of at least 4,680,000 shares.\40\ The Commission 
notes, and the Exchange has represented, that the 26 ETFs currently 
eligible using the proposed criteria appear to be among some of the 
most liquid and actively-traded ETFs based on their average daily 
volume and average notional value. The Commission believes that, by 
limiting the trading of options permitted to have cash settlement to 
those with underlying ETFs and only where these ETFs are liquid and 
actively traded, along with the other proposed requirements, appears to 
be reasonably designed to mitigate concerns about the susceptibility to 
manipulation of such cash-settled FLEX ETF Options and their underlying 
ETFs and the potential for market disruption. Additionally, the 
proposed aggregated position and exercise limits and surveillance 
procedures discussed below, taken together with the liquid and active 
markets in the underlying eligible ETFs, also appears reasonably 
designed to address and mitigate concerns about the potential for 
manipulation and market disruption in markets for the options and the 
underlying securities.
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    \40\ See supra note 11 and accompanying text.
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    The Commission also notes that the Exchange has proposed to use the 
same position limits and exercise limits for cash-settled FLEX ETF 
Options that are applicable to the non-FLEX standardized options 
market, and to aggregate the positions in cash-settled FLEX ETF Options 
with all positions in physically-settled options on the same underlying 
ETF for purposes of calculating the position and exercise limits.\41\ 
The Commission has previously recognized that position and exercise 
limits serve as a regulatory tool designed to address manipulative 
schemes and adverse market impact surrounding the use of options and 
that the limits can be useful to prevent investors from disrupting the 
market in securities underlying the options as well as the options 
market itself.\42\ The Commission believes therefore that establishing 
position and exercise limits at the same levels as those in the non-
FLEX standardized options market and aggregating those positions with 
all physically-settled options on the same underlying ETFs \43\ can 
further help mitigate the concerns that the limits are designed to 
address about the potential for manipulation and market disruption in 
the options and the underlying securities.
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    \41\ See supra notes 22-23 and accompanying text.
    \42\ See Securities Exchange Act Release No. 82770 (February 23, 
2018), 83 FR 8907, 8910 (March 1, 2018) (SR-CBOE-2017-057).
    \43\ The aggregation of position and exercise limits would 
include all positions on physically-settled FLEX and non-FLEX 
options on the same underlying ETFs.
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    The Commission notes that the Exchange will conduct a biannual 
review of the underlying ETFs to determine whether they no longer meet 
the requirements for cash-settled FLEX ETF Options on those ETFs.\44\ 
The Commission believes that this requirement is a reasonable means to 
limit cash settlement to those FLEX ETF Options that only overlie ETFs 
that continue to meet the specified liquidity and trading volume 
standards. The Commission also believes that while, as part of the 
biannual review, the Exchange can identify new underlying ETFs that 
meet the requirements and are thus eligible for cash-settled FLEX ETF 
Options, limiting the number of qualifying underlying ETFs to 50 will 
prevent the scope of cash settlement on FLEX ETF Options from growing 
considerably without an evaluation about whether the level of the 
requirements remains reasonable.\45\ The Commission further believes 
that selecting the top 50 securities based on ETFs with the highest 
ADV, if more than 50 ETFs otherwise meet the requirements in Rule 
903(G)(c)(3)(ii), appears to be a reasonable tiebreaker. In addition, 
the Commission notes that, should the Exchange determine, pursuant to 
the bi-annual review that an underlying ETF ceases to satisfy the

[[Page 7810]]

requirements under Rule 903(G)(c)(3)(ii), any new options position 
overlying such ETF would be required to have exercise settlement by 
physical delivery and any open cash-settled FLEX ETF Option positions 
may be traded only to close the position.\46\ The Commission believes 
that this provision is a reasonable means to address how to wind down 
an outstanding cash-settled FLEX ETF Option where the underlying ETF no 
longer qualifies under the liquidity and volume criteria, thereby 
addressing manipulation concerns, while still allowing market 
participants to close out positions.
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    \44\ See supra note 12 and accompanying text.
    \45\ See supra note 13 and accompanying text. At the same time, 
the overall limit of 50 ETFs that can underlie cash settled FLEX ETF 
Options should also provide the Exchange with flexibility to add 
additional ETFs that meet the Exchange's requirements given that the 
current eligible list of ETFs as of December 31, 2019 contains 26 
ETFs.
    \46\ See supra note 14 and accompanying text.
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    The Commission recognizes that the proposal is unique in that it 
would allow options on ETFs that currently are only available to be 
traded on a national securities exchange with physical settlement to 
now have a cash-settlement alternative. The Exchange, acknowledging the 
``novel characteristics'' of its proposal has committed to perform 
periodic data analyses with written assessments and to make such 
analyses and assessments available to the Commission on an annual basis 
for the first five years of trading in the subject options.\47\ As 
noted above, the Exchange has also stated that the reports will discuss 
any recommendations it has on enhancements to its proposed listing 
standards based on these reviews. The Commission notes that the annual 
reports will allow the Commission and the Exchange to evaluate, among 
other things, the impact such options have, and any potential adverse 
effects, on price volatility and the market for the underlying ETFs, 
the component securities underlying the ETFs, and the options on the 
same underlying ETFs and make appropriate recommendations, if any, in 
response to the reports.
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    \47\ See supra notes 36-37 and accompanying text.
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    The Commission notes that surveillance is important, among other 
things, to detect and deter fraudulent and manipulative trading 
activity as well as other violations of Exchange rules and the federal 
securities laws. The Exchange has represented that it has adequate 
surveillance procedures in place to monitor trading in these options 
and the underlying securities, including to detect manipulative trading 
activity in both the options and the underlying ETF.\48\ The Exchange 
further asserted that the liquidity and active markets in the 
underlying ETFs, and the high number of market participants in both the 
underlying ETFs and existing options on the ETFs, helps to minimize the 
possibility of manipulation. The Commission notes that the proposed 
surveillance, along with the liquidity criteria and position and 
exercise limits requirements, appear to be reasonably designed to 
mitigate manipulation concerns. The Commission further notes that under 
Section 19(g) of the Act, the Exchange, as a self-regulatory 
organization, is required to enforce compliance by its members and 
persons associated with its members with the Act, the rules and 
regulations thereunder, and the rules of the Exchange.\49\ The 
Commission understands that the Exchange performs ongoing evaluations 
of its surveillance program to ensure its continued effectiveness and 
the Commission would, therefore, expect the Exchange to continue to 
review its surveillance procedures on an ongoing basis and make any 
necessary enhancements and/or modifications that may be needed for the 
cash settlement of FLEX ETF Options.
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    \48\ See supra notes 28-35 and accompanying text. Among other 
things, the Exchange noted that its regulatory program included 
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. 
Furthermore, the Exchange stated that it has access to information 
regarding trading activity in the pertinent underlying securities as 
a member of ISG. See Amendment No. 1, supra note 6, at 11-12. See 
also id. at n.15.
    \49\ 15 U.S.C. 78s(g).
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    In approving the proposed rule change, the Commission notes that 
cash-settled FLEX ETF Options will be subject to the same trading rules 
and procedures that currently govern the trading of other FLEX Options 
on the Exchange, with the exception of the rules to accommodate the 
cash settlement feature being approved herein. The Commission also 
notes that the Exchange has represented that it will monitor any effect 
additional options series listed under the proposal have on market 
fragmentation and the capacity of the Exchange's automated systems. The 
Commission notes that FLEX ETF Options, as the Exchange represented, 
cannot be traded until OCC represents to the Exchange that it is fully 
able to clear and settle such options.\50\ Finally, the Commission 
expects that the Exchange will take prompt action, including timely 
communication with the Commission and with other self-regulatory 
organizations responsible for oversight of trading in options, the 
underlying ETFs, and the ETFs' component securities, should any 
unanticipated adverse market effects develop.
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    \50\ See supra note 24 and accompanying text. The Commission 
understands that, as of the date of this Order, OCC has not yet made 
the necessary representations for the Exchange to be able to 
commence trading.
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    Based on the Exchange's representations with respect to the 
proposed cash-settlement of FLEX Equity Options, whose underlying 
security is an ETF, and for the foregoing reasons, the Commission finds 
that the proposed rule change, as modified by Amendment No. 1, is 
consistent with the Act.

IV. Accelerated Approval of Proposed Rule Change, as Modified By 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
1 in the Federal Register. As discussed above, Amendment No. 1 modified 
the original proposed rule change to limit the cash settlement of FLEX 
Equity Options to underlying ETFs, with a maximum cap of 50 such ETFs, 
that have met the originally proposed average daily notional value and 
national average daily volume requirements, using average daily volume 
as a tiebreaker if more than 50 ETFs otherwise qualify. Amendment No 1 
also modified the original proposal to require that the proposed 
position and exercise limits for cash-settled FLEX ETF Options be 
aggregated with all physically-settled options on the same underlying 
ETF. Amendment No. 1 stated that the Exchange would provide a report to 
the Commission annually for five years providing an analysis, along 
with any recommendations, concerning the trading of cash-settled FLEX 
ETF Options. Finally, Amendment No. 1 made some additional clarifying 
changes to the original proposal.
    The Commission notes that the changes made to the original proposal 
in Amendment No. 1 narrows the scope of the proposed rule change and 
limits its applicability to ETFs, which should help to mitigate 
potential risks of manipulation and market disruption. The amendment to 
aggregate position and exercise limits also addressed similar concerns. 
Furthermore, the Commission notes that the original, broader proposal, 
including the proposed numerical eligibility criteria applied to the 
underlying ETFs, was published for comment in the Federal Register and 
no comments were received. The Exchange's annual report requirement 
also supplements the

[[Page 7811]]

proposal and should help the Exchange and the Commission in assessing 
any potential market impacts, including on price volatility, from the 
trading of the cash-settled FLEX ETF Options under the proposal. In 
addition, Amendment No. 1 clarifies and provides additional explanation 
relating to the proposed rule change. The changes and additional 
information in Amendment No. 1 have also assisted the Commission in 
evaluating the proposal and finding that the proposal is consistent 
with the Act.
    Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\51\ to approve the proposed rule change, SR-
NYSEAMER-2019-38, as modified by Amendment No. 1, on an accelerated 
basis.
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    \51\ 15 U.S.C. 78s(b)(2).
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V. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to the proposed rule change is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEAMER-2019-38 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-2019-38. 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-NYSEAMER-2019-38 and should be submitted 
on or before March 3, 2020.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\52\ that the proposed rule change (SR-NYSEAMER-2019-38), as 
modified by Amendment No. 1, be, and hereby is, approved.
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    \52\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-02631 Filed 2-10-20; 8:45 am]
BILLING CODE 8011-01-P