[Federal Register Volume 82, Number 27 (Friday, February 10, 2017)]
[Notices]
[Pages 10422-10428]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02736]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79976; File No. SR-NYSEArca-2017-02]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Certain 
Rules Related to Flexible Exchange Options

February 6, 2017.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that on January 25, 2017, NYSE Arca, Inc. (``NYSE Arca'' 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 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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. The proposed rule change is available on 
the Exchange's Web site at www.nyse.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the 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
    The purpose of this filing is to amend certain rules related to 
FLEX Options, as described below.
    FLEX Options are customized equity or index contracts that allow 
investors to tailor contract terms for exchange-listed equity and index 
options.\4\ The Exchange is proposing to allow FLEX Options in ByRDs, 
make available additional settlement styles, modify how exercise prices 
and premiums are expressed, change certain provisions relating to 
floor-based trading, and modify other related provisions pertaining to 
FLEX Options.
---------------------------------------------------------------------------

    \4\ See Rule 5.30(b)(4) (defining ``FLEX option''). See 
generally Section 4, Flexible Exchange Options, Rules 5.30-5.44.
---------------------------------------------------------------------------

FLEX Options for Binary Return Derivatives Contracts (``ByRDs'')
    The Exchange proposes to modify its rules to enable market 
participants to trade FLEX options contracts in ByRDs.\5\ Specifically, 
the Exchange proposes to add a new definition of ``FLEX ByRDs,'' which 
would be a ``Binary Return Derivatives contract on any ByRD-eligible 
underlying security that is subject to the rules in this Section.'' \6\ 
The Exchange also proposes to revise Rule 5.30(b)(15) to include FLEX 
ByRDs in the definition of ``Series of FLEX Options.'' \7\ Because FLEX 
ByRDs would have to be settled in cash, based on the Volume-Weighted 
Average Price (or VWAP) of the underlying security, market participants 
could not modify these terms.\8\ However, market participants may trade 
FLEX ByRDs with non-standard strike prices and/or non-standard 
expiration dates. Regarding position limits, the Exchange proposes to 
add paragraph (b)(ii) to Rule 5.35 to provide that positions in FLEX 
ByRDs shall be the same as Non-FLEX ByRDs, as set forth in Rule 
5.86(a), except that positions in FLEX ByRDs shall be aggregated with 
positions in Non-FLEX ByRDs on the same or similar underlying for the 
purpose of calculating position limits.\9\ The Exchange also proposes 
to include in proposed Rule 5.35(b)(ii) that ``[f]or purposes of the 
position limits established under this Rule, long positions in `Finish 
Low' and short positions in `Finish High' Binary Return Derivatives 
shall be considered to be on the same side of the market; and short 
positions in `Finish Low' and long positions in `Finish High' Binary 
Return Derivatives shall be considered to be on the same side of the 
market.'' \10\ Consistent with these changes, the Exchange also 
proposes to define Non-FLEX ByRDs as ``a Non-FLEX Option that is a 
Binary Return Derivatives contract,'' in new paragraph (b)(22) to Rule 
5.30. The Exchange believes that FLEX ByRDs would enable market 
participants to negotiate terms that differ from standardized ByRDs, 
which would, in turn, provide greater opportunities for investors to 
manage risk through the use of FLEX Options.\11\ The Exchange notes 
that the proposed rules related to FLEX ByRDs are materially identical 
to rules recently approved on another options exchange.\12\
---------------------------------------------------------------------------

    \5\ ByRDs are European-style option contracts on individual 
stocks, exchange-traded funds (``ETFs'') and Index-Linked Securities 
that have a fixed return in cash based on a set strike price; 
satisfy specified listing criteria; and may only be exercised at 
expiration pursuant to the Rules of the Options Clearing Corporation 
(the ``OCC''). See Rules 5.82(b), 5.90. For a description of 
``Exchange-Traded Fund Shares'' and ``Index-Linked Securities,'' see 
also Rule 5.3(g) and (j).
    \6\ See proposed Rule 5.30(b)(19).
    \7\ See proposed Rule 5.30(b)(15) (proposing to add that a 
``Series of FLEX Options'' would include, in the case of FLEX ByRDs, 
all such option contracts of the same class having the same 
expiration date, strike price, and exercise settlement amount).
    \8\ See ``Statutory Basis'' section herein (in the second 
paragraph) for further discussion.
    \9\ The Exchange also proposes to re-format Rule 5.35 to make 
clear the position limits that apply to each of FLEX Index Options 
and FLEX Equity Options. In this regard, the Exchange proposes to 
modify the title of the Rule 5.35 to remove reference to ``Index'' 
and re-titled it as ``Position Limits for FLEX Options.'' Further, 
the Exchange proposes reformatting changes to clarify that Rule 
5.35(a), with proposed sub-parts (i) and (ii), refers to FLEX Index 
Options and proposed Rule 5.35(b), refers to FLEX Equity Options. 
Finally, the Exchange proposes to re-locate current paragraph (d) to 
Rule 5.35 regarding the aggregation of position limits for FLEX 
Index Options to proposed paragraph (a)(iii), which would add 
clarity and consistency to Exchange rules. See proposed Rule 5.35(a) 
and (b).
    \10\ See ``Statutory Basis'' section herein (in the third 
paragraph) for further discussion.
    \11\ The Exchange also proposes to modify Rule 5.32(f)(3)(ii) to 
provide that FLEX ByRDs must be settled the same as non-FLEX ByRDs. 
See proposed Rule 5.32(f)(3)(ii) (discussed herein under 
``Additional Updates to Reflect Trading in FLEX Options''); see also 
Rule 5.89 (Determination of the Settlement Price of ByRDs).
    \12\ See Securities Exchange Act Release Nos. 79125 (October 19, 
2016), 81 FR 73452 (October 25, 2016) (``MKT Approval Order '') 
(order approving modifications to FLEX Options, including adding 
FLEX ByRDs); 78348 (July 15, 2016), 81 FR 47469 (July 21, 2016) 
(``MKT Notice'') (SR-NYSEMKT-2016-48). See also NYSE MKT Rules 
900G(b)(16),(17), (22); 903G(c)(3)(i)-(ii); 906G(b)(ii).
---------------------------------------------------------------------------

Additional Settlement Styles for FLEX Options: Asian and Cliquet Style
    The Exchange proposes to permit parties to FLEX Index Options on

[[Page 10423]]

Broad-Based Index Options to designate Asian style settlement and 
Cliquet style settlement, both of which are currently offered on 
another options exchange.\13\
---------------------------------------------------------------------------

    \13\ See e.g., Chicago Board Options Exchange, Inc. (``CBOE'') 
Rules 24A.1 (Definitions), 24A.4 (Terms of FLEX Options), 24B.1 
(Definitions) and 24B.4 (Terms of FLEX Options). See also NYSE MKT 
Rules 900G(b)(18), (19); 903G(b)(4),(5). FLEX ByRDs could not be 
settled using Asian or Cliquet settlement. See, e.g., supra note 11.
---------------------------------------------------------------------------

    As proposed in new paragraph (e)(5) of Rule 5.32 and new paragraph 
(b)(20) of Rule 5.30, FLEX Index Options on Broad-Based Index Options 
with Asian style settlement would be cash-settled call \14\ option 
contracts for which the final payout would be based on an arithmetic 
average of specified closing prices of an underlying Broad-Based Index 
taken on twelve predetermined monthly observation dates, including the 
expiration date (``Asian option''). The monthly observation dates would 
be determined by working backwards from the farthest out observation 
date prior to the expiration date. When the scheduled observation date 
for an Asian option occurs on a holiday or a weekend, the observation 
would occur on the immediately preceding business day. The exercise 
settlement amount for Asian options would be calculated similarly to 
other options (i.e., the difference between the strike price and the 
averaged settlement value would determine the value, or ``moneyness'' 
of the contract at expiration). Asian options would have a term of 
approximately one year and would expire anytime from 350 to 371 days 
(i.e., approximately 50 to 53 calendar weeks) from the date of initial 
listing. The contract multiplier (or Index Multiplier) for an Asian 
option that settles in U.S. dollars would be $100, for example.\15\ 
Finally, because settlement value is determined by observations taken 
over a 12-month period, Asian style settlement requires European-style 
exercise. An example of an Asian FLEX call option expiring in-the-money 
follows. On January 21, 2015, an investor hedging the value of XYZ 
Index over a year purchases a call option expiring on January 22, 2016 
with a strike price of 2000 and a contract multiplier of $100. The 
option has monthly observation dates occurring on the 23rd of each 
month.
---------------------------------------------------------------------------

    \14\ Puts would not be permitted.
    \15\ See Rule 5.30(b)(9) providing that Index Multiplier means 
the monetary amount, stated in terms of the settlement currency 
specified in the contract, by which the current index value is to be 
multiplied to arrive at the value required to be delivered to the 
holder of a call or by the holder of a put upon valid exercise of 
the option and setting forth the established Index Multipliers for 
FLEX Index Options on domestic indices.

------------------------------------------------------------------------
       Monthly observation date              XYZ index closing value
------------------------------------------------------------------------
23-Feb-15.............................  2025.36.
23-Mar-15.............................  2049.34.
23-Apr-15.............................  2019.77.
22-May-15*............................  1989.65.
23-Jun-15.............................  2005.64.
23-Jul-15.............................  2035.10.
21-Aug-15*............................  2032.15.
23-Sep-15.............................  2076.18.
23-Oct-15.............................  2099.01.
23-Nov-15.............................  2109.32.
23-Dec-15.............................  2085.42.
22-Jan-16.............................  2084.81.
                                       ---------------------------------
  Exercise (Averaged) Settlement Value  24,611.75/12 = 2050.98.
------------------------------------------------------------------------
\*\ Because Asian FLEX options use the ``preceding business day
  convention,'' the dates of May 23, 2015 and August 23, 2015, were not
  used in the above example because those dates will fall on a weekend
  or a holiday. Instead the business days immediately preceding those
  dates were used as the monthly observation date.

    If, in the above example, the strike price for the Asian FLEX call 
option was 2060, that contract would have expired out-of-the-money. 
This is because the exercise settlement value for this 2060 call option 
is equal to 2050.98 (when rounded). Since the strike price of 2060 is 
more than the 2050.98 exercise settlement value, this option would not 
be exercised and would expire worthless.
    As proposed in new paragraph (e)(6) of Rule 5.32 and new paragraph 
(b)(21) of Rule 5.30, FLEX Index Options on Broad-Based Index Options 
with Cliquet style settlement would be cash-settled call \16\ option 
contracts for which the final payout would be based on the sum of 
monthly returns (i.e., percent changes in the closing value of the 
underlying Broad-Based Index from one month to the next), subject to a 
monthly return ``cap'' (e.g., 3%), applied over twelve monthly 
observation dates (``Cliquet option''). Cliquet options would have a 
term of approximately one year and would expire anytime from 350 to 371 
days (which is approximately 50 to 53 calendar weeks) from the date of 
initial listing. The contract multiplier for a Cliquet option that 
settles in U.S. dollars, for example, would be $100.\17\
---------------------------------------------------------------------------

    \16\ Puts would not be permitted.
    \17\ See id.
---------------------------------------------------------------------------

    The parties to a Cliquet option would designate a set of monthly 
observation dates for each contract and an expiration date for each 
contract. The monthly observation date would be the date each month on 
which the price of the underlying broad-based index would be observed 
for the purpose of calculating the exercise settlement value for 
Cliquet FLEX Options. Each Cliquet FLEX Option would have 12 
consecutive monthly observation dates (which includes an observation on 
the expiration date) and each observation would be based on the closing 
price of the underlying broad-based index. The specific monthly 
observation dates would be determined by working backwards from the 
farthest out observation date prior to the expiration date. When the 
scheduled observation date for a Cliquet option occurs on a holiday or 
a weekend, the observation would occur on the immediately preceding 
business day. The parties may not designate a subsequent business day 
convention for Cliquet options.
    The parties to a Cliquet option would designate a capped monthly 
return (percent change in the closing values of the underlying broad-
based index from one month to the next month) for the contract, which 
would be the maximum monthly return that would be included in the 
calculation of the exercise settlement value for the contract. On each 
monthly observation date, the Exchange would determine the actual 
monthly return (the percent change of the underlying broad-based index) 
using the closing value of the broad-based index on the current monthly 
observation date and the closing value of the broad-based index on the 
previous monthly observation date. The Exchange would then compare the 
actual monthly return to the capped monthly return. The value to be 
included as the monthly return for a Cliquet option would be the lesser 
of the actual monthly return or the capped monthly return.
    For example, if the actual monthly return of the underlying broad-
based index was 1.75% and the designated capped monthly return for a 
Cliquet option was 2%, the 1.75% value would be included (and not the 
2%) as the value for the observation date to determine the exercise 
settlement value. Using this same example, if the actual monthly return 
of the underlying broad-based index was 3.30%, the 2% value would be 
included (and not the 3.30%) as the value of the observation date to 
determine the exercise settlement value. This latter example 
illustrates that Cliquet options have a capped upside. Cliquet options 
do not, however, have a capped downside for the monthly return that 
would be included in determining the exercise settlement value. Drawing 
on this same example, if the actual monthly return of the underlying 
broad-based index was -4.07%, the -4.07% value would be included as the 
value for the observation date to determine the exercise settlement 
value. There would be, however, be a global floor for Cliquet

[[Page 10424]]

options so that if the sum of the monthly returns is negative, a 
Cliquet option would expire worthless.
    Unlike other options, Cliquet options would not have a traditional 
exercise (strike) price. Rather, the exercise (strike) price field for 
a Cliquet option would represent the designated capped monthly return 
for the contract and would be expressed in dollars and cents. For 
example, a capped monthly return of 2.25% would be represented by the 
dollar amount of $2.25. The ``strike'' price for a Cliquet option may 
only be expressed in a dollar and cents amount and the ``strike'' price 
for a Cliquet option may only span a range between $0.05 and $25.95. In 
addition, the ``strike'' price for a Cliquet option may only be 
designated in $0.05 increments, e.g., $1.75, $2.50, $4.15. Increments 
of $0.01 in the ``strike'' price field (representing the capped monthly 
return) would not be permitted.
    The first ``monthly'' return for a Cliquet option would be based on 
the initial reference value, which would be the closing value of the 
underlying broad-based index on the date a new Cliquet option is 
listed. The time period measured for the first ``monthly'' return would 
be between the initial listing date and the first monthly observation 
date. For example, if a Cliquet option was opened on January 1 and the 
parties designated the 31st of each month as the monthly observation 
date, the measurement period for the first monthly return would span 
the time period from January 1 to January 31. The time period measured 
for the second monthly return, and all subsequent monthly returns, 
would run from the 31st of one month to the 31st of the next month (or 
the last Exchange business day of each month depending on the actual 
number of calendar days in each month covered by the contract).
    Cliquet options would have European-style exercise and may not be 
exercised prior to the expiration date. The exercise settlement value 
for Cliquet options would be equal to the initial reference price of 
the underlying broad-based index multiplied by the sum of the monthly 
returns (with the cap applied) on the 12 consecutive monthly 
observation dates, which include the expiration date of the option, 
provided that the sum is greater than 0. If the sum of the monthly 
returns (with the applied cap) is 0 or a less, the option would expire 
worthless.
    An example of a Cliquet option follows. On January 21, 2015, an 
investor hedging the value of the S&P 500 Index over a year purchases a 
Cliquet FLEX call option expiring on January 22, 2016 with a capped 
monthly return of 2% and a contract multiplier of $100. The initial 
reference price of the S&P 500 Index (closing value) on January 21, 
2015 is 2000. The option has monthly observation dates occurring on the 
23rd of each month.

----------------------------------------------------------------------------------------------------------------
                                                                                      Capped
                                                  S&P 500  index      Actual          monthly         Sum of
            Monthly observation date               closing value      monthly     return  (CMRi)      monthly
                                                       (Si)          return %            %           returns %
----------------------------------------------------------------------------------------------------------------
23-Feb-15.......................................         2025.36            1.27            1.27            1.27
23-Mar-15.......................................         2049.34            1.18            1.18            2.45
23-Apr-15.......................................         2019.77           -1.44           -1.44            1.01
22-May-15*......................................         1989.65           -1.49           -1.49           -0.48
23-Jun-15.......................................         2005.64            0.80            0.80            0.32
23-Jul-15.......................................         2035.10            1.47            1.47            1.79
21-Aug-15*......................................         2032.15           -0.14           -0.14            1.65
23-Sep-15.......................................         2076.18            2.17          **2.00            3.65
23-Oct-15.......................................         2099.01            1.10            1.10            4.75
23-Nov-15.......................................         2109.32            0.49            0.49            5.24
23-Dec-15.......................................         2085.42           -1.13           -1.13            4.11
22-Jan-16.......................................         2084.81           -0.03           -0.03            4.08
                                                 ---------------------------------------------------------------
Exercise Settlement Value.......................                  [(4.08% * 2000.00)] + 2 = 83.60
----------------------------------------------------------------------------------------------------------------
\*\ Because Cliquet FLEX options use the ``preceding business day convention,'' the dates of May 23, 2015, and
  August 23, 2015, were not used in the above example because those dates fall on a weekend or a holiday.
  Instead the business days immediately preceding those dates were used as the monthly observation dates.
\**\ Monthly capped return applied.

    The exercise settlement amount for this January 22, 2016 Cliquet 
option, with a capped monthly 2% return (``strike price'') and a 
contract multiplier of $100 would be equal to $8,360. This value would 
be calculated by summing the monthly capped returns (equal to 4.08%) 
and multiplying that amount by the initial reference price (equal to 
2000), which equals 81.60. The ``strike price'' (2%) amount would then 
be added to that amount (81.60) to arrive at an exercise settlement 
value of 83.60. Because the ``strike price'' field for a Cliquet option 
would be the manner in which the designated capped monthly return would 
be identified for the contract and because the designated monthly 
return for the contract would have been already substantively applied 
to determine the exercise settlement value, the ``strike price'' of 2.0 
would be subtracted from the exercise settlement value before the 
contract multiplier ($100) would be applied [(83.60--2) * 100]. 
Accordingly, resulting payout for this contract would be $8,160.
    If the sum of the monthly capped returns had been negative, this 
option would have expired worthless.
    Regarding the proposed settlement styles, the Exchange would use 
the same surveillance procedures currently utilized for the Exchange's 
other FLEX Options, including FLEX Index Options.\18\ The Exchange 
further represents that these surveillance procedures will be adequate 
to monitor trading in these option products. For surveillance purposes, 
the Exchange would have access to information regarding trading 
activity in the pertinent underlying securities.
---------------------------------------------------------------------------

    \18\ See ``Statutory Basis'' section herein (in the fourth 
paragraph) for further discussion.
---------------------------------------------------------------------------

FLEX Exercise Prices and Premiums
    The Exchange also proposes to modify how exercise prices and 
premiums for FLEX Options may be expressed, which would reflect recent 
changes in the marketplace. The Exchange notes that when it adopted 
rules for FLEX Options,

[[Page 10425]]

strike prices were designated in one-eighth of a dollar, and options 
were priced in fractions of a dollar.\19\ Now that decimalization has 
been applied to options trading, including trading in FLEX Options, 
certain exchange rules have been revised to reflect the decimal 
equivalent of a previously approved fractional term. Thus, the Exchange 
proposes to collapse current Rules 5.32(f)(2) and (f)(5) into a revised 
Rule 5.32(f)(2), to provide that exercise prices and premiums may be 
stated in terms of:
---------------------------------------------------------------------------

    \19\ See Rule 5.32(f)(2) (providing that exercise prices may be 
rounded to the nearest .10 or one-eighth of a dollar) and (f)(5) 
(providing that exercise prices may be rounded to the nearest .10).
---------------------------------------------------------------------------

    (i) A dollar amount; (ii) a method for fixing such a number at the 
time a FLEX Request for Quote or FLEX Order is traded; or (iii) a 
percentage of the price of the underlying security at the time of the 
trade or as of the close of trading on the Exchange on the trade date.
    The Exchange notes that this change would align with the Exchange's 
treatment of FLEX Index Options as well as the rules of other 
exchanges.\20\ In addition, the Exchange proposes to modify Rule 5.32 
by adding new paragraph (e)(2)(C) and modifying paragraph (f)(2) to 
provide that:
---------------------------------------------------------------------------

    \20\ See, e.g., Rule 5.32(e)(2); CBOE Rule 24A.4(b)(2) and 
(c)(2); NYSE MKT Rules 903G(b)(1), (c)(2).

    Exercise prices may be rounded to the nearest minimum tick or 
other decimal increment determined by the Exchange on a class-by-
class basis that may not be smaller than $0.01. Premiums will be 
rounded to the nearest minimum tick. For exercise prices and 
premiums stated using a percentage-based methodology, such values 
may be stated in a percentage increment determined by the Exchange 
on a class-by-class basis that may not be smaller than 0.01% and 
will be rounded as provided above.\21\
---------------------------------------------------------------------------

    \21\ See proposed Rule 5.32(e)(2)(C) and (f)(2). The proposed 
rule removes reference to exercise prices being rounded to the 
nearest tenth or one-eighth of a dollar. See id.

    The Exchange notes that this proposed change is consistent with the 
rules of another options exchange.\22\ The Exchange believes this 
change would provide greater flexibility in terms of describing an 
option contract tailored to the needs of the investor.
---------------------------------------------------------------------------

    \22\ See, e.g., CBOE Rule 24A.4(b)(2) (permitting bids and 
offers, strikes and premiums to be expressed in increments 
determined by the Exchange, which increments may be no smaller than 
$0.01). See also NYSE MKT Rules 903G(b)(1), (c)(2).
---------------------------------------------------------------------------

Additional Updates To Reflect Trading in FLEX Options
    The Exchange is also proposing the following modifications to 
streamline and update FLEX Options Rules:
     ``FLEX'' Options. The Exchange proposes to define ``FLEX'' 
as shorthand for Flexible Options in the title of Section 4.\23\
---------------------------------------------------------------------------

    \23\ See proposed Section 4 (Flexible Exchange (``FLEX'') 
Options). The Exchange also proposes to revise Rule 5.30(b)(2) to 
remove an errant semi-colon from the term ``BBO Improvement 
Interval.''
---------------------------------------------------------------------------

     Flex Post Official. The Exchange proposes to modify the 
name of ``FLEX Post Official'' to eliminate ``Post'' from the title to 
more accurately reflect the position.\24\ When the Exchange first began 
trading FLEX Options, it designated FLEX Post Officials to refer to 
specially qualified Trading Officials stationed at specific FLEX posts 
to address the nuances related to those products (e.g., the method for 
announcing a Request for Quotes and appointing FLEX Qualified Market 
Makers). However, as trading in FLEX Options gained popularity, it 
became apparent that liquidity for FLEX Options was more readily 
available at trading posts where the standard options in the underlying 
security traded rather than at a specific FLEX post. Thus, the Exchange 
proposes to change the name of ``FLEX Post Official'' in Rules 
5.30(b)(7) and 5.38 to eliminate the reference to physical FLEX posts 
and to refer simply to ``FLEX Officials'', which would better reflect 
the realities of trading FLEX Options on the Exchange and clarify and 
add transparency to Exchange rules.\25\
---------------------------------------------------------------------------

    \24\ See proposed Rule 5.30(b)(7) and 5.38.
    \25\ See proposed Rules 5.30(b)(7), 5.37(c), and 5.38. 
Similarly, because there are no longer physical posts on the Trading 
Floor that are solely ``FLEX posts,'' the Exchange proposes to 
remove the FLEX modifier from Rule 5.33(b)(1) and Rule 6.78(e)(1)(C) 
and (E) (Transactions Off the Exchange), such that the revised rule 
text refers only to a ``post.'' See proposed Rules 5.33(b)(1) and 
6.78(e)(1)(C), (E).
---------------------------------------------------------------------------

     FLEX Trading Procedures and Principles. The Exchange 
proposes to modify Rule 5.33 (FLEX Trading Procedures and Principles) 
to likewise update the rule text to accurately reflect trading in FLEX 
Options. First, the Exchange proposes to modify paragraphs (a)(1) and 
(2) of Rule 5.33, which provide that FLEX Market Makers handle Requests 
for Quotes from OTP Holders and OTP Firms when, [sic] to more 
appropriately reflect that FLEX Officials conduct this work on the 
Exchange. Thus, the Exchange proposes to replace references to FLEX 
Market Maker with FLEX Official in Rule 5.33(a)(1)-(2).\26\ The 
Exchange notes that FLEX Officials are Exchange employees that report 
to the regulatory officer of the Exchange. As such, the Exchange would 
ensure that each FLEX Official, or any other designated qualified 
employees called in to assist the FLEX Official, are properly qualified 
and meet any necessary requirements.\27\ The Exchange believes the 
regulatory oversight of FLEX transactions by a properly qualified FLEX 
Official could help to ensure that FLEX transactions comply with the 
FLEX rules.\28\ The proposal to replace certain duties of a FLEX Market 
Maker with respect to FLEX Options transactions with duties assigned to 
a FLEX Official, who is an Exchange employee, is consistent with the 
FLEX rules of other exchanges.\29\ Second, consistent with the 
foregoing changes, the Exchange proposes to modify Rule 5.33(a)(2) and 
(c)(1)-(3) to more accurately reflect the handling of FLEX Quotes and 
requests for such quotes. When the Exchange introduced FLEX Options, 
the Exchange displayed FLEX Request for Quotes and FLEX Quotes at the 
FLEX post. However, over time, Floor Participants would ask Floor 
Brokers to communicate the existence of trading interest in particular 
FLEX Options through various means to their customers and 
correspondents. Thus, the Exchange proposes to revise the rules to 
reflect that the FLEX Request for Quotes or the FLEX Quotes are 
``disseminated'' (rather than displayed), which would add clarity and 
transparency to Exchange rules.\30\
---------------------------------------------------------------------------

    \26\ The Exchange notes that reference to FLEX Official is 
consistent with proposed Rule 5.30(b)(7).
    \27\ See proposed Rule 5.38 (detailing duties of Exchange 
employees designated to act as FLEX Officials).
    \28\ See id.
    \29\ See, e.g., CBOE Rule 24A.5(a)(i) and (ii), 24A.12(b) ; MKT 
Rule 900G(21) and 910G [sic].
    \30\ See proposed Rule 5.33(a)(2) and (c)(1)-(3).
---------------------------------------------------------------------------

     Obsolete Foreign Currencies. The Exchange proposes to 
modify rule text relating to FLEX Options to remove obsolete references 
to foreign currencies that are no longer in circulation, which would 
add clarity and transparency to Exchange rules. Specifically, the 
Exchange proposes to remove references in the FLEX rules to Deutsche 
Marks and French Francs.\31\
---------------------------------------------------------------------------

    \31\ See proposed Rules 5.30(b)(9), 5.32(e)(4), 5.33(g).
---------------------------------------------------------------------------

     FLEX Options Trading. The Exchange proposes to collapse 
the two separate current Rules 5.31(a) (Hours of Trading) and 5.31(b) 
(Trading Rotations) into a single proposed Rule 5.31, FLEX Option 
Trading, with the paragraphs (a) and (b) providing the same headings 
and substantive rule text, which would add internal consistency to the 
format of Exchange rules.\32\
---------------------------------------------------------------------------

    \32\ See proposed Rule 5.31. The Exchange proposes two non-
substantive revisions to existing rule text to add the word 
``Options'' after ``FLEX'' and capitalizing the ``o'' in Options at 
the end of paragraph (a). Both changes would add clarity to Exchange 
rules by consistently referring to the defined term ``FLEX 
Options.'' See proposed Rule 5.31(a).

---------------------------------------------------------------------------

[[Page 10426]]

     Terms of FLEX Options. The Exchange proposes to modify 
several aspects of Rule 5.32 (Terms of FLEX Options). First, the 
Exchange proposes to clarify that each FLEX Request for Quote and FLEX 
contract must contain the underlying security in the case of FLEX 
Equity Options or (rather than ``and'') underlying index, in the case 
of FLEX Index Options.\33\ The Exchange believes this change would add 
clarity and transparency to Exchange rules.
---------------------------------------------------------------------------

    \33\ See proposed Rule 5.32(b)(1). The Exchange also proposes to 
modify the punctuation Rule 5.32(b)(6) from a period to a semi-colon 
and to add the word ``and'' to add internal consistency to Exchange 
rules.
---------------------------------------------------------------------------

    Second, the Exchange proposes to modify Rule 5.32(b)(7) to make 
clear that the minimum size of one contract for FLEX Options applies to 
both transactions (per current rule text) ``and quotations'' (per 
proposed rule text). This proposed change corresponds to the 
Commission's approval, in 2014, of the Exchange's proposal to adopt on 
a permanent basis its pilot program regarding minimum value sizes for 
opening transactions in new series of FLEX Options and FLEX Quotes.\34\ 
The Exchange believes this change would add clarity and transparency to 
Exchange rules.
---------------------------------------------------------------------------

    \34\ See Securities and Exchange Act Release No. 72537 (July 3, 
2014) 79 FR 39442 (July 10, 2014) (SR-NYSEArca-2014-25). In 
addition, the Exchange proposes to eliminate text from Rule 5.36(b)-
(c) (Exercise Limits) that contradicts the approved one contract 
minimum size for FLEX transactions.
---------------------------------------------------------------------------

    The Exchange is proposing to modify Rule 5.32(f)(3) to address 
exercise settlement of FLEX Options that are FLEX ByRDs, as the current 
rule only addresses exercise settlement by physical delivery.\35\ 
Specifically, the Exchange proposes to designate the current 
description of exercise settlement by physical delivery as paragraph 
(3)(i) and to make clear this provisions applies solely to FLEX Equity 
Options other than FLEX ByRDs. Finally, the Exchange proposes paragraph 
(3)(ii) to state that exercise settlement and style of FLEX ByRDs would 
be the same as Non-FLEX ByRDs, pursuant to the VWAP settlement 
provision set forth in Rule 5.89 and pursuant to the European exercise 
style set forth in Rule 5.82(b)(1).'' \36\
---------------------------------------------------------------------------

    \35\ Rule 5.32(f)(3) currently provides that ``[e]xercise 
settlement shall be by physical delivery of the underlying security 
or Exchange-Traded Fund Shares.''
    \36\ See proposed Rule 5.32(f)(3)(i)-(ii).
---------------------------------------------------------------------------

    Finally, the Exchange also proposes to modify Commentary .01 to 
Rule 5.32, to provide that FLEX Options may be permitted in puts and 
calls that do not have identical terms, including, as proposed, ``the 
same settlement style.'' Commentary .01 to Rule 5.32 is designed to 
prevent the trading of a FLEX Option that has the exact same terms 
(underlying security, exercise style, expiration date, exercise price 
and, as proposed, settlement style) as a Standard or (non-FLEX) Option. 
In other words, as long as just one term of the FLEX Option is 
different from an existing ``regular'' or ``non-FLEX'' option it may be 
traded as a FLEX Option.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\37\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act,\38\ 
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.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78f(b).
    \38\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposal to add FLEX ByRDs would 
remove impediments to and perfect the mechanism of a free and open 
market as FLEX ByRDs would enable market participants to negotiate 
terms that differ from standardized ByRDs, which would, in turn provide 
greater opportunities for investors to manage risk through the use of 
FLEX Options to the benefit of investors and the public interest. The 
Exchange notes that ByRDs are subject to heightened initial and 
continued listing standards and the settlement price based on an all-
day VWAP, which should address any potential manipulation concerns.\39\ 
The Exchange believes that specifying that FLEX ByRDs can only be 
traded on ByRDs-eligible underlying securities that meet the same 
heightened initial and continued listing standards as ByRDs, thereby 
helping to ensure that only highly capitalized, actively traded stocks 
and ETFs will underlie cash-settled FLEX ByRDs, as well as requiring 
settlement based on all-day VWAP (as required for standardized ByRDs), 
should help to mitigate concerns about manipulation in the underlying 
security to benefit a position in FLEX ByRDs.\40\
---------------------------------------------------------------------------

    \39\ See Securities Exchange Act Release No. 56251 (August 14, 
2007), 72 FR 46523, 46524 (August 20, 2007) (SR-Amex-2004-27) 
(``ByRDs Order''). See also Securities Exchange Act Release No. 
77044 (February 3, 2016), 81 FR 6908 (February 3, 2016) (SR-Arca-
2016-16) (immediate effectiveness filing adopting rules relating to 
ByRDs).
    \40\ See MKT Approval Order, supra note 12, 81 FR at 73457.
---------------------------------------------------------------------------

    The Exchange further believes that establishing position limits for 
FLEX ByRDs to be the same as Non-FLEX ByRDs position limits, which are 
currently 25,000 contracts on the same side of the market,\41\ and 
aggregating positions in Flex ByRDs with Non-FLEX ByRDs on the same or 
similar underlying security for purposes of calculating position limits 
is reasonable and consistent with the Act. In approving position limits 
for ByRDs, the Commission noted that these position limits appeared to 
reasonably balance the promotion of a free and open market for these 
securities with minimization of incentives for market manipulation.\42\ 
By establishing the same position limits for FLEX ByRDs as for Non-FLEX 
ByRDs and, importantly, aggregating such positions on the same side of 
the market,\43\ the Exchange similarly believes that the position limit 
requirements for FLEX ByRDs should help to ensure that the trading of 
FLEX ByRDs would not increase the potential for manipulation and could 
help to minimize such incentives. Moreover, as noted above, because 
FLEX ByRDs must, like standardized ByRDs, be cash settled, European-
style exercise, with a settlement price based on an all-day VWAP (and 
meet heightened listing and continued listing standards), unlike other 
FLEX Options, the only non-standardized terms that can be flexed are 
strike prices and expiration dates. Further, the Exchange would surveil 
trading in FLEX ByRDs utilizing existing surveillance procedures 
pertaining to Non-FLEX ByRDs and FLEX Options. Finally, the Exchange 
notes that its proposal to offer FLEX ByRDs is consistent with the 
rules of another options exchange and therefore raise no novel issues 
for the Commission.\44\
---------------------------------------------------------------------------

    \41\ The exercise limits for FLEX ByRDs will be equivalent to 
the position limits for FLEX ByRDs described in proposed Rule 
5.35(b)(ii). See Rule 5.36.
    \42\ See ByRDs Order, supra note 39, 72 FR at 76525.
    \43\ For purposes of these position limits, long positions in 
``Finish Low'' and short positions in ``Finish High'' ByRDs would be 
considered to be on the same side of the market; and short positions 
in ``Finish Low'' and long positions in ``Finish High'' ByRDs would 
be considered to be on the same side of the market. See proposed 
Rule 5.35 (b)(ii).
    \44\ See MKT Approval Order, supra note 12.
---------------------------------------------------------------------------

    The Exchange believes that the proposal to permit additional 
settlement types--Asian and Cliquet--would remove impediments to and 
perfect the

[[Page 10427]]

mechanism of a free and open market because the proposed rule change 
would provide OTP Holders with enhanced methods to manage risk by more 
finely tailoring a FLEX Option, within specified limits, to the 
underlying security or index through a variety of settlement 
calculations and styles. In addition, this proposal would promote just 
and equitable principles of trade and protect investors and the general 
public because the additional settlement styles for FLEX Options would 
provide investors with additional trading and hedging tools. The 
Exchange also believes that the Exchange's proposal to allow Asian and 
Cliquet style settlement for FLEX Index Options on Broad-Based Index 
Options may give investors and other market participants the ability to 
individually tailor, within specified limits, certain terms of those 
options. Furthermore, the Exchange believes that, since both Asian and 
Cliquet settlement styles depend on multiple measurements in 
determining the settlement value, both settlement styles could to help 
mitigate the potential for manipulation in the underlying 
security(ies). Further, the Exchange notes that its proposal to offer 
Asian and Cliquet-style settlement for FLEX Index Options is consistent 
with the rules of another options exchange and therefore raise no novel 
issues for the Commission.\45\
---------------------------------------------------------------------------

    \45\ See supra note 13.
---------------------------------------------------------------------------

    The Exchange believes the proposed changes to FLEX Exercise Prices 
and Premiums would remove impediments to and perfect the mechanism of a 
free and open market as this change would provide greater flexibility 
in terms of describing an option contract tailored to the needs of the 
investor. In addition, the Exchange believes that the proposal to 
specify how exercise prices and premium for FLEX Index Options and FLEX 
Equity Options will be rounded and how they will be stated using a 
percentage-based methodology should provide greater clarity and allow 
market participants to specify contracts that meet their particular 
needs. In addition, the proposed changes would promote internal 
consistency in our own rules (including by removing a reference to 
fraction pricing to be consistent with the shift to decimal pricing 
found elsewhere in Exchange rules) and would align our rules with that 
of another options exchange and therefore raise no novel issues for the 
Commission.\46\
---------------------------------------------------------------------------

    \46\ See supra note 20.
---------------------------------------------------------------------------

    Regarding the proposed settlement styles, the Exchange would use 
the same surveillance procedures currently utilized for the Exchange's 
other FLEX Options, including FLEX Index Options. The Exchange further 
represents that these surveillance procedures shall be adequate to 
monitor trading in options on these option products. For surveillance 
purposes, the Exchange would have complete access to information 
regarding trading activity in the pertinent underlying securities.
    The Exchange believes the proposal to provide that FLEX Officials, 
and not FLEX Market Makers, would be responsible for assuring that a 
Request for Quotes is submitted properly as a FLEX Option and for 
displaying the terms and specifications of the Request for Quotes would 
remove impediments to and perfect the mechanism of a free and open 
market as the regulatory oversight of FLEX transactions by a properly 
qualified FLEX Official could help to ensure that FLEX transactions 
comply with the FLEX rules.
    Finally, the remaining proposed changes to FLEX Options would 
remove impediments to and perfect the mechanism of a free and open 
market as the changes correct inaccuracies in rule text and update the 
rules to better reflect the Exchange's current practices with respect 
to FLEX Options, which have evolved over time. In particular, the 
Exchange believes that the proposed changes to refer to FLEX Requests 
for Quotes and FLEX Quotes as being disseminated and remove the concept 
of a post specific to the trading of FLEX options will align the rules 
with current trading practices on the Exchange's floor. The Exchange 
believes the proposed changes would provide transparency and internal 
consistency within Exchange rules and operate to protect investors and 
the investing public by making the Exchange rules easier to navigate 
and comprehend.

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 FLEX Option orders with the opportunity for different 
methods of settling option contracts at expiration. The proposed 
changes are also designed to update Exchange rules regarding FLEX 
Options, including by removing obsolete references, which should 
likewise improve the competitiveness of the Exchange by making it a 
more attractive venue for trading.
    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 also believes the 
proposed rule change promotes competition because it would enable the 
Exchange to provide market participants with FLEX Options transaction 
possibilities that are similar to that of other options exchanges. The 
Exchange believes the proposed rules encourage competition amongst 
market participants to provide tailored FLEX Options 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \47\ and Rule 19b-4(f)(6) thereunder.\48\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \48\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \49\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing,

[[Page 10428]]

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-NYSEArca-2017-02 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2017-02. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2017-02, and should 
be submitted on or before March 3, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\50\
---------------------------------------------------------------------------

    \50\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-02736 Filed 2-9-17; 8:45 am]
 BILLING CODE 8011-01-P