Document ID: SEC-2017-2131-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2017-12-21T05:00Z

[Federal Register Volume 82, Number 244 (Thursday, December 21, 2017)]
[Notices]
[Pages 60651-60654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27469]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82341; File No. SR-Phlx-2017-79]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Amendment No. 2, Order Approving a Proposed Rule Change, as Modified 
by Amendment No. 1 and Granting Accelerated Approval of Amendment No. 
2, of a Proposed Rule Change To Establish a Nonstandard Expirations 
Pilot Program

December 15, 2017.

I. Introduction

    On October 12, 2017, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'' or 
``SEC''), 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 establish a Nonstandard Expirations Pilot Program. On October 
26, 2017, the Exchange filed Amendment No.1 to the proposal to amend 
and replace the original filing in its entirety. The proposed rule 
change was published for comment in the Federal Register on November 2, 
2017.\3\ On December 6, 2017, the Exchange filed a partial amendment to 
the proposed rule change (``Amendment No. 2'').\4\ The Commission 
received no comments on the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 81975 (Oct. 27, 
2017), 82 FR 50921.
    \4\ In Amendment No. 2, the Exchange proposes to provide to the 
Commission, to the extent that data on other weekly or monthly p.m.-
settled products from other exchanges is publicly available, a time 
series analysis of open interest in weekly expiration (``Weekly 
Expiration'') and end of month (``EOM'') series compared to open 
interest in weekly or monthly p.m.-settled products of other 
exchanges 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.
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    This order provides notice of filing of Amendment No. 2, approves 
the proposal, as modified by Amendment No. 1, and approves Amendment 
No. 2 on an accelerated basis, for a pilot period of twelve months.

II. Description of the Amended Proposal

    The Exchange proposes to permit the listing and trading, on a pilot 
basis, of p.m.-settled options on broad-based indexes with nonstandard 
expiration dates for a 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 and EOM expirations 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. The proposal is substantially 
similar to Chicago Board Options Exchange (``CBOE'') Rule 24.9(e), 
Nonstandard Expirations Pilot Program.\5\
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    \5\ See Securities Exchange Act Release Nos. 78531 (August 10, 
2016), 81 FR 54643 (August 16, 2016) (SR-CBOE-2016-046) (Order 
approving expansion of CBOE's Nonstandard Expirations Pilot Program 
to include Monday Expirations); 76909 (January 14, 2016), 81 FR 3512 
(January 21, 2016) (SR-CBOE-2015-106) (Order approving expansion of 
CBOE's Nonstandard Expirations Pilot Program to include Wednesday 
Expirations); 62911 (September 14, 2010), 75 FR 57539 (September 21, 
2010) (SR-CBOE-2009-075) (Order approving CBOE's Nonstandard 
Expirations Pilot Program).
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A. Weekly Expirations

    The Exchange proposes to add new subsection (b)(vii)(1), Weekly 
Expirations, to Rule 1101A, Terms of Options Contracts. 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). Weekly Expirations would be subject to all provisions of 
Rule 1101A and would be treated the same as options on the same 
underlying index that expire on the third Friday of the expiration 
month. Unlike the standard monthly options, however, Weekly Expirations 
would be p.m.-settled. New series in Weekly Expirations could be added 
up to and including on the expiration date for an expiring Weekly 
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

[[Page 60652]]

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.

B. EOM Expirations

    Under the proposal, the Exchange could open for trading EOMs on any 
broad-based index eligible for standard options trading to expire on 
the last trading day of the month. EOMs would be subject to all 
provisions of Rule 1101A 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.

C. Contract Terms and Trading Rules

    The Exchange proposes that 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, except that the exercise settlement 
value will be based on the index value derived from the closing prices 
of component stocks. 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.\6\ Pursuant to new subsection (b)(vii)(4) of 
Rule 1101A, 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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    \6\ See Rule 1001A(d) 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 1001A(e), Aggregation, 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 expire on the customary 
``third Friday''.
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    The Exchange represents that it has analyzed its capacity and 
believes that it and the Options Price Reporting Authority have the 
necessary systems capacity to handle any additional traffic associated 
with the listing of the maximum number nonstandard expirations 
permitted under the Pilot Program.

D. Pilot Program Annual Report

    As part of the Pilot Program, the Exchange proposes to submit a 
Pilot Program report to the Commission at least two months prior to the 
expiration date of the Pilot Program (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, a.m.-settled series, if 
applicable, for the period covered in the annual report as well as for 
the six-month period prior to the initiation of the Pilot Program.
    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 annual 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.

[[Page 60653]]

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.

III. Discussion and Commission's Findings

    After careful review of the proposed rule change, the Commission 
finds that the proposal is consistent with the requirements of the Act 
and the rules and regulations thereunder that are applicable to a 
national securities exchange.\7\ Specifically, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\8\ 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 regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and to protect 
investors and the public interest.
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    \7\ In approving this rule change, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    While the Commission has had concerns about the adverse effects and 
impact of p.m.-settlement upon market volatility and the operation of 
fair and orderly markets on the underlying cash market at or near the 
close of trading, it has approved on a limited basis p.m.-settlement 
for cash-settled options.\9\ More specifically, the Commission approved 
on a pilot basis CBOE's nearly identical Nonstandard Expirations Pilot 
Program.\10\ Phlx's proposal includes one additional data element in 
the annual report: An analysis of publically available data concerning 
trading patterns with respect to other p.m.-settled products from other 
exchanges. In all other aspects, Phlx's proposal conforms to CBOE's 
Nonstandard Expirations Pilot Program.
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    \9\ See, e.g., Securities Exchange Act Release Nos. 31800 
(February 1, 1993), 58 FR 7274 (February 5, 1993) (SR-CBOE-92-13) 
(Order approving CBOE's listing of p.m.-settled, cash-settled 
options on certain broad-based indexes); 61439 (January 28, 2010), 
75 FR 5831 (February 4, 2010) (SR-CBOE-2009-087) (Order approving 
CBOE's listing of p.m.-settled FLEX options on a pilot basis); 70087 
(July 31, 2013), 78 FR 47809 (August 6, 2013) (SR-CBOE-2013-055) 
(Order approving the addition of p.m.-settled mini-SPX index options 
to the SPXPM Pilot for p.m.-settled SPX index options); 81293 
(August 2, 2017), 82 FR 37138 (August 8, 2017) (SR-Phlx-2017-04) 
(Order approving Phlx to list and trade of p.m.-Settled NASDAQ-100 
Index(R) Options on a Pilot Basis).
    \10\ See supra note 5.
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    The Commission believes that the proposal strikes a reasonable 
balance between the Phlx's desire to offer a wider array of investment 
opportunities and the need to avoid unnecessary proliferation of 
options series that may burden certain liquidity providers and further 
stress options quotation and transaction infrastructure. Phlx's 
proposed twelve-month Pilot Program will allow for both the Exchange 
and the Commission to continue monitoring the potential for adverse 
market effects of p.m.-settlement on the market, including the 
underlying cash equities markets, at the expiration of these options.
    The Commission notes that Phlx will provide the Commission with the 
annual report analyzing volume and open interest of EOMs and Weekly 
Expirations that will also contain information and analysis of EOMs and 
Weekly Expirations trading patterns and index price volatility and 
share trading activity for series that exceed minimum parameters. This 
information should be useful to the Commission as it evaluates whether 
allowing p.m.-settlement for EOMs and Weekly Expirations has resulted 
in increased market and price volatility in the underlying component 
stocks, particularly at expiration. The Pilot Program information 
should help the Commission and the Exchange assess the impact on the 
markets and determine whether changes to these programs are necessary 
or appropriate. Furthermore, the Exchange's ongoing analysis of the 
Pilot Program should help it monitor any potential risks from large 
p.m.-settled positions and take appropriate action, if warranted.

IV. Solicitation of Comments on Amendment No. 2 to the Proposed Rule 
Change

    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. 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-Phlx-2017-79 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2017-79. 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

[[Page 60654]]

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-Phlx-2017-79, and should be 
submitted on or before January 11, 2018.

V. Accelerated Approval of Amendment No. 2

    The Commission finds good cause to approve Amendment No. 2 prior to 
the thirtieth day after the date of publication of notice of Amendment 
No. 2 in the Federal Register. As described above, the Exchange 
proposes to establish a Nonstandard Expirations Pilot Program based 
upon, and substantially similar to, CBOE's Rule 24.9(e), Nonstandard 
Expirations Pilot Program, previously approved by the Commission. 
Amendment No. 2 proposes to provide additional data to the Commission 
that was not applicable to CBOE's Nonstandard Expirations Pilot Program 
specifically because it would provide data to the Commission on the 
effect of a subsequent pilot program on the CBOE's existing pilot 
program. The Exchange's proposed Amendment No. 2 does not otherwise 
change its proposal. The Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\11\ to approve Amendment No. 2 on an 
accelerated basis.
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    \11\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-Phlx-2017-79), as modified 
by Amendment No. 1, be approved, and Amendment No. 2 thereto be 
approved on an accelerated basis, for a pilot period of twelve months.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Robert W. Errett,
Deputy Secretary.
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    \13\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2017-27469 Filed 12-20-17; 8:45 am]
 BILLING CODE 8011-01-P