[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]
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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.
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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. 81371 (August 10,
2017), 82 FR 38942 (``Notice'').
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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\
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\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).
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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\
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\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.
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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\
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\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).
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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\
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\14\ See Proposed Rules 1804, 1805, and 1807.
\15\ See Proposed Rule 308(b) and 1806.
\16\ See Proposed Rules 1804 to 1807.
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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\
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\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).
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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\
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\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).
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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\
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\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.
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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.
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\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).
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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\
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\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.
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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.
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\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).
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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.
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\30\ See 17 CFR 242.600.
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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.
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\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).
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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\
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\33\ Id.
\34\ See Proposed Rule 1802(b)(9) and (d)(10).
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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.
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\35\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-21163 Filed 10-2-17; 8:45 am]
BILLING CODE 8011-01-P