[Federal Register Volume 82, Number 88 (Tuesday, May 9, 2017)]
[Notices]
[Pages 21587-21590]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09315]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80581; File No. SR-Phlx-2017-04]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Amendment No. 1 and Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by 
Amendment No. 1, To Permit the Listing and Trading of P.M.-Settled 
NASDAQ-100 Index[supreg] Options on a Pilot Basis

May 3, 2017.

I. Introduction

    On January 18, 2017, NASDAQ PHLX LLC (``Phlx'' 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 
permit the listing and trading of P.M.-settled NASDAQ-100 Index[supreg] 
(``NASDAQ-100'') options on a pilot basis. The proposed rule change was 
published for comment in the Federal Register on February 3, 2017.\3\ 
On March 14, 2017, the Commission extended the time period within which 
to approve the proposed rule change,

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disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.\4\ On May 2, 
2017, the Exchange filed Amendment No. 1 to the proposed rule 
change.\5\ The Commission received no comment letters 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. 79894 (January 30, 
2017), 82 FR 9259 (``Notice'').
    \4\ See Securities Exchange Act Release No. 80241, 82 FR 14393 
(March 20, 2017).
    \5\ In Amendment No. 1, the Exchange revised its proposal to add 
that raw percentage price change data as well as percentage price 
change data normalized for prevailing market volatility, as measured 
by an appropriate index as agreed by the Commission and the 
Exchange, would be provided as part of the pilot data. When the 
Exchange filed Amendment No. 1 with the Commission, it also 
submitted Amendment No. 1 to the public comment file for SR-Phlx-
2017-04 (available at: www.sec.gov/comments/sr-phlx-2017-04/phlx201704.htm).
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    The Commission is publishing this notice and order to solicit 
comments on the proposed rule change, as modified by Amendment No. 1, 
from interested persons and to institute proceedings pursuant to 
Section 19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1.
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    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal, as Modified by Amendment No. 1

    The Exchange is proposing to amend its rules to permit the listing 
and trading, on a pilot basis, of NASDAQ-100 options with third-Friday-
of-the-month expiration dates, whose exercise settlement value will be 
based on the closing index value, symbol XQC, of the NASDAQ-100 on the 
expiration day (``P.M.-settled'').
    The Exchange represents that the conditions for listing the 
proposed contract (``NDXPM'') on Phlx will be similar to those for Full 
Value Nasdaq 100 Options (``NDX''), which are already listed and 
trading on Phlx, except that NDXPM will be P.M.-settled.\7\ In 
particular, NDXPM will use a $100 multiplier, and the minimum trading 
increment will be $0.05 for options trading below $3.00 and $0.10 for 
all other series. Strike price intervals will be set at no less than 
$5.00. Consistent with existing rules for index options, the Exchange 
will allow up to nine near-term expiration months, as well as LEAPS. 
The product will have European-style exercise and will not be subject 
to position limits, though there would be enhanced reporting 
requirements.\8\
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    \7\ See Notice, supra note 3, at 9260.
    \8\ For a more detailed description of the proposed NDXPM 
contract, see Notice, supra note 3.
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    As proposed, the proposal would become effective on a pilot basis 
for a period of twelve months (``Pilot Program''). If the Exchange were 
to propose an extension of the Pilot Program or should the Exchange 
propose to make the Pilot Program permanent, then the Exchange would 
submit a filing proposing such amendments to the Pilot Program. The 
Exchange notes that any positions established under the pilot would not 
be impacted by the expiration of the pilot. For example, a position in 
a P.M.-settled series that expires beyond the conclusion of the pilot 
period could be established during the 12-month pilot. If the Pilot 
Program were not extended, then the position could continue to exist. 
However, the Exchange notes that any further trading in the series 
would be restricted to transactions where at least one side of the 
trade is a closing transaction.
    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 would contain 
an analysis of volume, open interest, and trading patterns. The 
analysis would examine trading in the proposed option product as well 
as trading in the securities that comprise the NASDAQ-100. In addition, 
for series that exceed certain minimum open interest parameters, the 
annual report would provide analysis of index price volatility and 
share trading activity. In addition to the annual report, the Exchange 
would provide the Commission with periodic interim reports while the 
pilot is in effect that would contain some, but not all, of the 
information contained in the annual report. The annual report would be 
provided to the Commission on a confidential basis. The annual report 
would contain the following volume and open interest data:
    (1) Monthly volume aggregated for all trades;
    (2) monthly volume aggregated by expiration date;
    (3) monthly volume for each individual series;
    (4) month-end open interest aggregated for all series;
    (5) month-end open interest for all series aggregated by expiration 
date; and
    (6) month-end open interest for each individual series.
    In addition to the annual report, the Exchange would provide the 
Commission with interim reports of the information listed in Items (1) 
through (6) above periodically as required by the Commission while the 
Pilot Program is in effect. These interim reports would also be 
provided on a confidential basis. The annual report would also contain 
the information noted in Items (1) through (6) above for Expiration 
Friday, A.M.-settled NASDAQ-100 options traded on Phlx.
    In addition, the annual report would contain the following analysis 
of trading patterns in Expiration Friday, P.M.-settled NASDAQ-100 
option series in the Pilot Program: (1) A time series analysis of open 
interest; and (2) an analysis of the distribution of trade sizes. Also, 
for series that exceed certain minimum parameters, the annual report 
would contain the following analysis related to index price changes and 
underlying share trading volume at the close on Expiration Fridays: A 
comparison of index price changes at the close of trading on a given 
Expiration Friday with comparable price changes from a control sample. 
The data would 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 as agreed by the Commission and the 
Exchange, would be provided. The Exchange would provide 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 series. The data would 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 randomly selecting the component securities, and sample 
periods would be determined by the Exchange and the Commission.\9\
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    \9\ See Notice, supra note 3, at 9261 and Amendment No. 1. The 
proposed Pilot Program for NDXPM options is similar to the pilot 
program approved for the listing and trading of P.M.-settled S&P 500 
Index options (``SPXPM options''). See Securities Exchange Act 
Release No. 64011 (March 2, 2011), 76 FR 12775, 12776-77 (March 8, 
2011) (``SPXPM Notice'').
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III. Proceedings To Determine Whether To Approve or Disapprove SR-Phlx-
2017-04, as Modified by Amendment No. 1, and Grounds for Disapproval 
Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \10\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of such proceedings is appropriate at

[[Page 21589]]

this time in view of the legal and policy issues raised by the proposed 
rule change, as discussed below. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, as stated below, the Commission 
seeks and encourages interested persons to provide comments on the 
proposed rule change, as modified by Amendment No. 1.
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    \10\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\11\ the Commission is 
providing notice of the grounds for disapproval under consideration, as 
discussed below. In particular, Section 6(b)(5) of the Act \12\ 
requires that the rules of an exchange be designed, among other things, 
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.
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    \11\ Id.
    \12\ 15 U.S.C. 78f(b)(5).
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    The Commission has had concerns about the potential 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, including for cash-settled derivatives contracts 
based on a broad-based index.\13\ The Commission believes that the 
proposal to allow P.M. settlement of an option on the NASDAQ-100 raises 
questions as to the potential effects on the underlying cash equities 
markets, and thus as to whether it is consistent with the requirements 
of Section 6(b)(5) of the Act, including whether the proposal is 
designed to prevent manipulation, promote just and equitable principles 
of trade, perfect the mechanism of a free and open market and the 
national market system, and protect investors and the public interest.
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    \13\ For a detailed discussion of the history of the concerns 
related to such P.M. settlement, see Securities Exchange Act Release 
Nos. 64599 (June 3, 2011), 76 FR 33798, 33801-02 (June 9, 2011) 
(order instituting proceedings to determine whether to approve or 
disapprove a proposed rule change to allow the listing and trading 
of SPXPM options) and 65256 (September 2, 2011), 76 FR 55969, 55970-
76 (September 9, 2011) (order approving proposed rule change to 
establish a pilot program to list and trade SPXPM options).
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    Accordingly, the Commission solicits comment, analysis, and data 
concerning whether the Exchange's proposal is consistent with the Act. 
The Commission is asking commenters to address the merits of Phlx's 
statements in support of its proposal, in addition to any other 
comments they may wish to submit about the proposed rule change or any 
data or analysis that commenters think may be relevant to the 
Commission's consideration of the proposal. Specifically, the 
Commission seeks input from commenters to inform its evaluation of 
whether P.M. settlement for Phlx's proposed options on the NASDAQ-100 
could impact volume and volatility on the underlying cash equities 
markets at the close of the trading day, and the potential consequences 
this might have for investors and the overall stability of the markets.
    In addition, the Commission seeks input from commenters with 
respect to the operation and structure of the markets today in 
comparison to their operation and structure at the time of the shift to 
A.M. settlement of cash-settled index options, and whether the current 
operation and structure of the markets support, or do not support, 
allowing NASDAQ-100 options on Phlx to be P.M.-settled.
    More generally, the Commission seeks commenters' views on whether 
there are differences between Phlx's proposed product and other P.M.-
settled, cash-settled options that raise novel issues and, if so, 
whether commenters believe such differences warrant different treatment 
or a different pilot design.
    As noted above, the Exchange's proposal seeks to allow the listing 
and trading of NDXPM options on a pilot basis, and the Pilot Program, 
including its associated data and reports, are key in assisting the 
Commission and its staff to analyze the impact of the proposal, 
including with respect to the concerns described above. Thus, the 
Commission is considering and requesting comment on whether commenters 
believe the proposed Pilot Program is appropriate. As noted above, the 
proposed Pilot Program is similar to the pilot program for the listing 
and trading of SPXPM options.\14\ The Commission requests commenters' 
views on whether the proposed Pilot Program would adequately 
demonstrate whether the Commission's concerns about the adverse effect 
and impact of P.M. settlement are, or are not, implicated by the 
listing and trading of P.M.-settled options on the NASDAQ-100 and, if 
not, what information or data the pilot should include. The Commission 
seeks public comment on whether there are differences between the 
listing and trading of SPXPM options and the proposed NDXPM options 
that would warrant differences in the data, analyses, or reports that 
should be required for the Exchange's proposed pilot. In addition, 
Amendment No. 1 of the proposal added that ``[r]aw percentage price 
change data as well as percentage price change data normalized for 
prevailing market volatility, as measured by an appropriate index as 
agreed by the Commission and the Exchange'' would be included as part 
of the pilot. The Commission seeks input on what commenters believe 
would be appropriate data to use with respect to measuring volatility 
for the proposed pilot.
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    \14\ See SPXPM Notice, supra note 9.
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    Finally, the Commission requests any comment, data, or analysis 
that commenters think may be relevant to the Commission's consideration 
of the Exchange's proposal for P.M.-settled options on the NASDAQ-100.

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal, as 
modified by Amendment No. 1, is consistent with Section 6(b)(5) or any 
other provision of the Act, or the rules and regulations thereunder. 
Although there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4, any request for an opportunity to make an oral presentation.\15\
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    \15\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal, as modified by Amendment No. 
1, should be approved or disapproved by May 30, 2017. Any person who 
wishes to file a rebuttal to any other person's submission must file 
that rebuttal by June 13, 2017.
    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

[[Page 21590]]

     Send an email to [email protected]. Please include 
File Number SR-Phlx-2017-04 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-2017-04. 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 these filings 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-Phlx-2017-04 and should be 
submitted on or before May 30, 2017. Rebuttal comments should be 
submitted by June 13, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-09315 Filed 5-8-17; 8:45 am]
BILLING CODE 8011-01-P