[Federal Register Volume 82, Number 190 (Tuesday, October 3, 2017)]
[Notices]
[Pages 46111-46114]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21163]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81739; File No. SR-MIAX-2017-39]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Order Granting Approval of a Proposed Rule Change To 
Adopt Rules Relating to Trading in Index Options

September 27, 2017.

I. Introduction

    On August 9, 2017, Miami International Securities Exchange, LLC 
(``MIAX Options'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to the provisions of 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to adopt rules 
relating to trading in index options. The proposed rule change was 
published for comment in the Federal Register on August 16, 2017.\3\ 
The Commission received no comments regarding the proposal. This order 
approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 81371 (August 10, 
2017), 82 FR 38942 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

A. Overview

    The Exchange proposes to adopt new Chapter 18 and amend certain 
rules in the MIAX Options rulebook. The purpose of the Exchange's 
proposal is to establish: (1) Trading rules enabling MIAX Options 
Members to trade index options on the Exchange and (2) generic listing 
standards and maintenance standards to permit the Exchange to list 
``broad-based'' and ``narrow-based'' index options on the Exchange 
pursuant to Rule 19b-4(e) under the Act.\4\ The proposed generic 
listing and maintenance standards for broad-based indices listed and 
traded on the Exchange require, among other things, that options on the 
index be a.m.-settled; that the index be capitalization-weighted, 
modified capitalization-weighted, price-weighted, or equal dollar-
weighted; and that the index be comprised of at least fifty securities, 
all of which must be ``NMS stocks,'' as defined in Rule 600 of 
Regulation NMS.\5\ The proposed generic listing and maintenance 
standards for narrow-based indices require, among other 
characteristics, that the proposed indices must consist of ten or more 
component securities.\6\
---------------------------------------------------------------------------

    \4\ 17 CFR 240.19b-4(e). The term ``broad-based index'' is 
defined as an index designed to be representative of a stock market 
as a whole or of a range of companies in unrelated industries. See 
Proposed Rule 1801(k). The term ``narrow-based index'' is defined as 
an index designed to be representative of a particular industry or a 
group of related industries or an index whose constituents are all 
headquartered within a single country. See Proposed Rule 1801(j).
    \5\ See Proposed Rule 1802(d)(4).
    \6\ See Proposed Rule 1802(b)(2).
---------------------------------------------------------------------------

    In accordance with the proposal, the Exchange will need to file 
additional proposed rule changes with the Commission when the Exchange 
identifies specific products, because the rules related to trading 
options in indices are product specific in many areas.\7\ For purposes 
of this proposed

[[Page 46112]]

rule change, certain rules will indicate that they apply to 
``Specified'' indices. Proposed Rules 1800, 1801(n), 1804(a), 1807(a), 
1809, and 1811 all contain provisions that are dependent upon the 
Exchange identifying specific index products in the rule. Accordingly, 
Proposed Rule 1800 states that where the rules in Chapter 18 indicate 
that particular indices or requirements with respect to particular 
indices will be ``Specified,'' the Exchange will file a proposed rule 
change with the Commission pursuant to Section 19 of the Act \8\ and 
Rule 19b-4 \9\ thereunder to specify such indices or requirements. As 
more fully set forth in the Notice and further described below, the 
proposed new Exchange Rules and changes to existing Exchange Rules, are 
based on the existing rules of other options exchanges.\10\
---------------------------------------------------------------------------

    \7\ See Notice, supra note 3, at 38942-43.
    \8\ 15 U.S.C. 78s.
    \9\ 17 CFR 240.19b-4.
    \10\ See, e.g., Nasdaq ISE, LLC (``ISE'') Rules, Chapter 20, 
Index Rules; NASDAQ PHLX LLC (``Phlx'') Rules 1000A-1108A; and 
Chicago Board Options Exchange, Inc. (``CBOE'') Rules, Chapter XXIV, 
Index Options. See also Notice, supra note 3, at 38942.
---------------------------------------------------------------------------

B. Index Options Trading Rules

    MIAX Options proposes to add new Chapter 18 to the Exchange rules 
and make conforming changes to certain existing Exchange rules.\11\ The 
proposed rules, among other things, set forth general rules that will 
govern the trading sessions for index options, including the days and 
hours of business, the rules governing trading rotations at the 
opening, and the rules related to trading halts or suspensions.\12\ The 
proposed rules further provide for the procedures Members must follow 
with respect to the exercise of American-style, cash settled index 
options.\13\
---------------------------------------------------------------------------

    \11\ The Exchange also proposes to amend the following rules to 
account for the trading of index options: MIAX Rule 503 (index 
options in the opening); MIAX Rule 504 (handling of trade 
nullification in index options due to trading halts); MIAX Rule 527 
(limitation of liability regarding the calculation or dissemination 
of index information); and MIAX Rule 603 (obligations of market 
makers).
    \12\ See Proposed Rule 1808.
    \13\ See Proposed Rules 313(a)(3) and 700(h).
---------------------------------------------------------------------------

    The proposed rules also establish position limit and exercise 
limits for index options.\14\ In addition, the proposed rules provide 
for exemption standards from position limits and procedures for 
requesting exemptions from those proposed rules.\15\ The proposed 
position limits and exercise limits, as well as the proposed 
exemptions, are different for broad-based index options and narrow-
based index options.\16\
---------------------------------------------------------------------------

    \14\ See Proposed Rules 1804, 1805, and 1807.
    \15\ See Proposed Rule 308(b) and 1806.
    \16\ See Proposed Rules 1804 to 1807.
---------------------------------------------------------------------------

C. Generic Listing Standards and Maintenance Standards for Broad-Based 
Index Options

    The Exchange also proposes to establish generic listing and 
maintenance standards in proposed Rule 1802 to enable the Exchange to 
list and trade new broad-based index options pursuant to Rule 19b-4(e) 
under the Act.\17\ Proposed Rule 1802(d) sets forth the initial listing 
standards for broad-based index options. The listing standards require, 
among other things, that the underlying index be broad-based, as 
defined in Rule 1801(k); that options on the index be a.m. settled; 
that the index be capitalization-weighted, modified capitalization-
weighted, price-weighted, or equal dollar-weighted; and that the index 
consist of 50 or more component securities, each of which must be an 
``NMS stock'' as defined in Rule 600 of Regulation NMS under the 
Exchange Act.\18\ In addition, Proposed Rule 1802(d) requires that the 
index's component securities meet certain minimum market capitalization 
and average daily trading volume requirements; that no single component 
account for more than 10% of the weight of the index and that the five 
highest weighted component securities represent no more than 33% of the 
weight of the index; that the index value be widely disseminated at 
least once every 15 seconds; and that the Exchange have written 
surveillance procedures in place with respect to the index options. 
Proposed Rule 1802(e) establishes maintenance standards for broad-based 
index options listed pursuant to Proposed Rule 1802(d). The Exchange 
states that the proposed listing and maintenance standards are modeled 
after standards approved by the Commission for other options 
exchanges.\19\
---------------------------------------------------------------------------

    \17\ 17 CFR 240.19b-4(e). Rule 19b-4(e) provides that the 
listing and trading of a new derivative securities product by a 
self-regulatory organization (``SRO'') shall not be deemed a 
proposed rule change, pursuant to paragraph (c)(1) of Rule 19b-4, if 
the Commission has approved, pursuant to Section 19(b) of the Act, 
the SRO's trading rules, procedures, and listing standards for the 
product class that includes the new derivative securities product 
and the SRO has a surveillance program for the product class. When 
relying on Rule 19b-4(e), the SRO must submit Form 19b-4(e) to the 
Commission within five business days after the exchange begins 
trading the new derivative securities products. See Securities 
Exchange Act Release No. 40761 (December 8, 1998), 63 FR 70952 
(December 22, 1998) (File No. S7-13-98).
    \18\ See 17 CFR 242.600.
    \19\ See, e.g., NYSE American LLC (``NYSE American'') Rule 
901C.02(a) and (b); CBOE Rule 24.2(f) and (g); NYSE Arca, Inc. 
(``NYSE Arca'') Rule 5.12-O; Phlx Rule 1009A(d) and (e); and ISE 
Rule 2002(d) and (e).
---------------------------------------------------------------------------

D. Generic Listing Standards and Maintenance Standards for Narrow-Based 
Index Options

    The Exchange further proposes to establish generic listing and 
maintenance standards in Proposed Rule 1802 to enable the Exchange to 
list and trade new narrow-based index options pursuant to Rule 19b-4(e) 
under the Act.\20\ Proposed Rule 1802(b) sets forth the initial listing 
standards for narrow-based index options. The listing standards 
require, among other things, that options on the index be a.m. settled; 
that the index be capitalization-weighted, price-weighted, equal 
dollar-weighted, or modified capitalization-weighted; and that the 
index consist of 10 or more component securities, each of which must be 
an ``NMS stock'' as defined in Rule 600 of Regulation NMS under the 
Exchange Act.\21\ In addition, Proposed Rule 1802(b) requires that the 
index's component securities meet certain minimum market capitalization 
and average daily trading volume requirements; that no single component 
account for more than 30% of the weight of the index and that the five 
highest weighted component securities represent no more than 50% (65% 
for an index consisting of fewer than 25 component securities) of the 
weight of the index; that the index value be widely disseminated at 
least once every 15 seconds; and that non-U.S. component securities 
(stocks or ADRs) that are not subject to comprehensive surveillance 
agreements do not in the aggregate represent more than 20% of the 
weight of the index. Proposed Rule 1802(c) establishes maintenance 
standards for narrow-based index options listed pursuant to Proposed 
Rule 1802(b). The Exchange states that the proposed listing and 
maintenance standards are modeled after standards approved by the 
Commission for other options exchanges.\22\
---------------------------------------------------------------------------

    \20\ 17 CFR 240.19b-4(e). See also supra note 18.
    \21\ See 17 CFR 242.600.
    \22\ See, e.g., NYSE American Rule 901C.03; CBOE Rule 24.2(b) 
and (c); NYSE Arca Rule 5.13-O; Phlx Rule 1009A(b) and (c); and ISE 
Rule 2002(b) and (c).
---------------------------------------------------------------------------

E. Surveillance and Capacity

    The Exchange represents that it has an adequate surveillance 
program in place for index options. The Exchange is a member of the 
Intermarket Surveillance Group (``ISG''), which is comprised of an 
international group of exchanges, market centers, and market 
regulators.\23\

[[Page 46113]]

The Exchange further represents that it has analyzed its capacity and 
believes the Exchange and the Options Price Reporting Authority 
(``OPRA'') have the necessary systems capacity to handle the additional 
traffic associated with the listing and trading of index options.\24\
---------------------------------------------------------------------------

    \23\ See Notice, supra note 3, at 38957. The ISG was formed on 
July 14, 1983, to, among other things, coordinate more effectively 
surveillance and investigative information sharing arrangements in 
the stock and options markets. The purpose of the ISG is to provide 
a framework for the sharing of information and the coordination of 
regulatory efforts among exchanges trading securities and related 
products to address potential intermarket manipulations and trading 
abuses. Id. The ISG plays a crucial role in information sharing 
among markets that trade securities, options on securities, security 
futures products, and futures and options on broad-based security 
indexes. Id.
    \24\ See id.
---------------------------------------------------------------------------

F. Implementation

    The Exchange will announce the implementation date of the proposed 
rule change by Regulatory Circular to be published no later than 90 
days following the approval of the proposed rule change. The 
implementation date will be no later than 90 days following the 
issuance of the Regulatory Circular.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\25\ In particular, 
the Commission believes that the Exchange's proposal to establish 
trading rules and procedures applicable to index options and establish 
generic listing and maintenance standards for broad-based and narrow-
based index options is consistent with Section 6(b)(5) of the Act,\26\ 
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 remove impediments to and perfect the mechanisms of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission's approval of the Exchange's proposed listing 
standards for broad-based and narrow-based index options will allow 
those index option products that satisfy the generic listing standards 
to begin trading pursuant to Rule 19b-4(e) under the Act, without the 
need for notice and comment and Commission approval. The Exchange's 
ability to rely on Rule 19b-4(e) under the Act for these products 
potentially reduces the time frame for listing and trading these 
securities, and thus enhances investors' opportunities.\27\
---------------------------------------------------------------------------

    \27\ The Exchange, however, must maintain regulatory oversight 
over any products listed under the generic listing standards through 
adequate surveillance. The Exchange represents that it has an 
adequate surveillance program in place for index options. See 
Notice, supra note 3, at 38957.
---------------------------------------------------------------------------

A. Index Options Trading Rules

    The Commission believes that trading options on an index of 
securities (including a narrow-based index) permits investors to 
participate in the price movements of the index's underlying securities 
and allows investors holding positions in some or all of such 
securities to hedge the risks associated with their portfolios. The 
Commission further believes that trading options on an index provides 
investors with an important trading and hedging mechanism that is 
designed to reflect accurately the overall movement of the component 
stocks. In particular, the Commission believes that the proposed 
position and exercise limits should serve to minimize potential 
manipulation concerns.

B. Generic Listing and Maintenance Standards for Broad-Based and 
Narrow-Based Index Options

    In considering the proposed generic listing and maintenance 
standards for broad-based and narrow-based index options, the 
Commission notes that they are consistent with the listing and 
maintenance standards for broad-based and narrow-based index options 
that other exchanges \28\ have developed and that the Commission has 
previously approved.\29\ The Commission finds that the generic 
standards covering minimum capitalization, monthly trading volume, and 
relative weightings of component stocks are designed to ensure that the 
trading markets for component stocks are adequately capitalized and 
sufficiently liquid, and that no one stock or stock group dominates the 
index. Thus, the Commission believes that the satisfaction of these 
requirements significantly minimizes the potential for manipulation of 
the index.
---------------------------------------------------------------------------

    \28\ See, e.g., NYSE American Rules 901C.02 and 901C.03; CBOE 
Rule 24.2; NYSE Arca Rules 5.12-O and 5.13-O; Phlx Rule 1009A; and 
ISE Rule 2002.
    \29\ See, e.g., Securities Exchange Act Release Nos. 48405 
(August 25, 2003), 68 FR 52257 (September 2, 2003) (SR-ISE-2003-05) 
(order approving trading rules for index options and generic listing 
and maintenance standards for narrow-based index options); 52578 
(October 7, 2005), 70 FR 60590 (October 18, 2005) (SR-ISE-2005-27) 
(order approving generic listing and maintenance standards for 
broad-based index options); and 75650 (August 7, 2015), 80 FR 48600 
(August 13, 2015) (SR-EDGX-2015-18) (order approving options trading 
rules, including generic listing and maintenance standards for 
broad-based and narrow-based index options).
---------------------------------------------------------------------------

    The Commission also finds the requirements that all securities 
comprising the index be an ``NMS stock'' as defined in Rule 600 of 
Regulation NMS under the Act,\30\ and that the index value be 
disseminated at least once every 15 seconds during trading hours of the 
index, will contribute significantly to the transparency of the market 
for such index options.
---------------------------------------------------------------------------

    \30\ See 17 CFR 242.600.
---------------------------------------------------------------------------

    The Commission further notes that the Exchange's rules that are 
applicable to broad-based and narrow-based index options, including 
provisions addressing sales practices, floor trading procedures, 
position and exercise limits, margin requirements, and trading halts 
and suspensions, will continue to apply to any broad-based or narrow-
based index options listed pursuant to Rule 19b-4(e) under the Act.

C. Surveillance

    As noted above,\31\ the Commission believes that the Exchange must 
maintain regulatory oversight over any products listed under the 
generic listing standards through adequate surveillance, and the 
Exchange represents that it has an adequate surveillance program in 
place for index options. The Commission also believes that a 
surveillance sharing agreement between an Exchange proposing to list a 
stock index derivative product and the exchange(s) trading the stocks 
underlying the derivative product is an important measure for 
surveillance of the derivative and underlying securities markets. The 
Commission notes that such agreements ensure the availability of 
information necessary to detect and deter potential manipulations and 
other trading abuses, thereby making the stock index product less 
readily susceptible to manipulation. When a new derivative securities 
product based upon domestic securities is listed and traded on an 
exchange pursuant to Rule 19b-4(e) under the Act, the exchange should 
determine that the markets upon which all of the U.S. component 
securities trade are members of the ISG, which provides information 
relevant to the surveillance of the trading of securities on other 
market centers.\32\ In this regard, all of the registered national 
securities exchanges, including the Exchange, as

[[Page 46114]]

well as the Financial Industry Regulatory Authority (FINRA), are 
members of the ISG.
---------------------------------------------------------------------------

    \31\ See supra note 27.
    \32\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (File No. S7-13-98).
---------------------------------------------------------------------------

    For new derivative securities products based on securities from a 
foreign market, the SRO should have a comprehensive Intermarket 
Surveillance Agreement with the market for the securities underlying 
the new securities product.\33\ Accordingly, the Commission finds that 
the requirement that no more than 20% of the weight of the index may be 
comprised of non-U.S. component securities (stocks or ADRs) that are 
not subject to a comprehensive surveillance sharing agreement between 
the particular U.S. exchange and the primary market of the underlying 
security will continue to ensure that the Exchange has the ability to 
adequately surveil trading in the broad-based and narrow-based index 
options and the ADR components of the index.\34\
---------------------------------------------------------------------------

    \33\ Id.
    \34\ See Proposed Rule 1802(b)(9) and (d)(10).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\35\ that the proposed rule change (SR-MIAX-2017-39), be and hereby 
is approved.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
---------------------------------------------------------------------------

    \36\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-21163 Filed 10-2-17; 8:45 am]
 BILLING CODE 8011-01-P