[Federal Register Volume 83, Number 197 (Thursday, October 11, 2018)]
[Notices]
[Pages 51535-51538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22049]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84364; File No. SR-NYSEAMER-2018-39]


Self-Regulatory Organizations; NYSE American LLC; Notice of 
Filing of Proposed Rule Change To Allow Flexible Exchange Equity 
Options Where the Underlying Security is an Exchange-Traded Fund That 
Is Included in the Option Penny Pilot To Be Settled in Cash

October 4, 2018.
    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 September 20, 2018, NYSE American LLC (``NYSE American'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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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 website 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 modify rules to offer an 
alternative settlement for certain FLEX Equity Options.\5\ As proposed, 
FLEX Equity Options where the underlying security is an Exchange-Traded 
Fund (``ETF'') that is included in the Option Penny Pilot \6\ (``FLEX 
ETF Penny Option'') would be settled by physical delivery of the 
underlying ETF or by delivery in cash. Currently, all FLEX Equity 
Options are settled by physical delivery of the underlying security.\7\ 
All FLEX Index Options, however, are currently settled by delivery in 
cash.\8\
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    \4\ See generally Section 15, Flexible Exchange Options, Rules 
900G-910G.
    \5\ The term ``FLEX Equity Option'' means an option on a 
specified underlying security that is subject to the rules in 
Section 15, Flexible Exchange Options Rules. See Rule 900G(b)(10).
    \6\ See Securities and Exchange Act Release No. 55162 (January 
24, 2007), 72 FR 4738 (February 1, 2007) (SR-Amex-2006-106). The 
Option Penny Pilot has been extended numerous times and remains 
operational through December 31, 2018. See Securities Exchange Act 
Release No. 83507 (June 25, 2018), 83 FR 30808 (June 29, 2018) (SR-
NYSEAMER-2018-33).
    \7\ See Rule 903G(c)(3)(i).
    \8\ See Rule 903G(b)(2) and (3).
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    To effectuate this change, the Exchange proposes to adopt new Rule 
903G(c)(3)(ii) \9\ which would provide that the exercise settlement for 
a FLEX ETF Penny Option shall be by physical delivery of the underlying 
security or by delivery in cash.\10\ The proposed rule also adopts a 
definition of the term FLEX ETF Penny Option for purpose of Rule 
903G(3) to mean a FLEX Equity Option whose underlying security is an 
ETF that is included in the Option Penny Pilot.\11\ The Exchange 
believes it is appropriate to introduce cash-settlement as an 
alternative to this group of equity securities because ETFs generally 
have increasingly become a major part of investors' portfolio. The vast 
proliferation of ETFs has greatly

[[Page 51536]]

expanded the ability of investors to take advantage of many unique 
opportunities to hedge their portfolio and manage risk. Investors can 
take long and/or short positions--as well as in many cases, leveraged 
long or short positions--in baskets of securities whose components can 
include foreign and domestic stock indexes, currencies, commodities and 
bonds. Over the years, ETFs have also attracted a great deal of options 
trading.
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    \9\ The Exchange proposes a non-substantive amendment to Rule 
903G to renumber current Rule 903G(c)(3)(ii) as new Rule 
903G(c)(3)(iii).
    \10\ See proposed Rule 903G(c)(3)(ii).
    \11\ Id.
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    Today, all ETF options are settled physically, i.e., upon exercise, 
shares of the underlying ETF must be assumed or delivered. Physical 
settlement possesses certain risks with respect to volatility and 
movement of the underlying security at expiration that market 
participants may need to hedge against. Cash settlement does not 
present the same risk. If an issue with the delivery of the underlying 
security arises, it may become more expensive (and time consuming) to 
reverse the delivery because the price of the underlying security would 
almost certainly have changed. Reversing a cash payment, on the other 
hand, would not involve any such issue because reversing a cash 
delivery would simply involve the exchange of cash. Additionally, with 
physical settlement, market participants that have a need to generate 
cash would have to sell the underlying security while incurring the 
costs associated with liquidating their position in the underlying 
security as well as the risk of an adverse movement in the price of the 
underlying security. The Exchange notes that cash settlement for 
options is not a unique feature and other options exchanges currently 
trade cash-settled options.\12\
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    \12\ See e.g. PHLX FX Options traded on Nasdaq PHLX and S&P 
500[supreg] Index Options traded on Cboe Options Exchange. More 
recently, the Commission approved, on a pilot basis, the listing and 
trading of RealDayTM Options on the BOX Options Exchange 
LLC. See Securities Exchange Act Release No. 79936 (February 2, 
2017), 82 FR 9886 (February 8, 2017) (``RealDay Pilot Program''). 
The RealDay Pilot Program has been extended until February 2, 2019. 
See Securities Exchange Act Release No. 82414 (December 28, 2017), 
83 FR 577 (January 4, 2018) (SR-BOX-2017-38).
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    The Exchange understands that there are concerns that have been 
raised in the past regarding cash-settled equity options. The Exchange 
seeks to allay such concerns by proposing to adopt cash-settlement as 
an alternative to ETFs only, and more specifically, to a narrow 
universe of ETFs, i.e., ETFs that are in the Option Penny Pilot. As a 
general matter, all index options traded today are cash-settled and 
derive their value from a disseminated index price. Similarly, ETFs 
typically have their values linked to a disseminated index price. As 
noted above, the Exchange seeks to limit cash-settlement to a subset of 
ETFs which are the most actively traded, as evidenced by their 
inclusion in the Option Penny Pilot. The Options Penny Pilot is an 
ongoing pilot program that, since 2007, allows certain option classes 
to be quoted in reduced price increments compared to all other option 
classes. More specifically, the Option Penny Pilot specifies that 
options trading at less than $3.00 have trading increment of one cent, 
while those trading at $3.00 or more have trading increments of five 
cents. There are currently 363 classes in the Options Penny Pilot. Each 
class added to the original pilot was chosen because it was one of the 
``most actively-traded multiply-listed options classes.'' Upon the last 
expansion of the pilot, the specific 300 most-active classes were 
identified based on the underlying security's ``national average daily 
volume over a six-month period'' thereby ensuring that the Option Penny 
Pilot continues to include only those classes that are actively traded. 
There are currently only 64 ETFs in the Option Penny Pilot that would 
be subject to the proposed rule change.
    With respect to position limits, cash-settled FLEX ETF Penny 
Options will be subject to the position limits set forth in Rule 906G. 
Accordingly, the Exchange would establish position limits for cash-
settled FLEX ETF Penny Options that are the same as non-cash-settled 
FLEX ETF Penny Options.
    The Exchange understands that FLEX ETF Penny Options are currently 
traded in the over-the-counter (``OTC'') market by a variety of market 
participants, e.g., hedge funds, proprietary trading firms, and pension 
funds, to name a few. The Exchange believes there is room for 
significant growth if a comparable product were introduced for trading 
on a regulated market. The Exchange expects that users of these OTC 
products would be among the primary users of exchange-traded cash-
settled FLEX ETF Penny Options. The Exchange also believes that the 
trading of cash-settled FLEX ETF Penny Options would allow these same 
market participants to better manage the risk associated with the 
volatility of underlying ETF positions given the enhanced liquidity 
that an exchange-traded product would bring.
    Cash-settled FLEX ETF Penny Options traded on the Exchange would 
have three important advantages over the contracts that are traded in 
the OTC market. First, as a result of greater standardization of 
contract terms, exchange-traded contracts should develop more 
liquidity. Second, counter-party credit risk would be mitigated by the 
fact that the contracts are issued and guaranteed by The Options 
Clearing Corporation (``OCC''). Finally, the price discovery and 
dissemination provided by the Exchange and its members would lead to 
more transparent markets. The Exchange believes that its ability to 
offer cash-settled FLEX ETF Penny Options would aid it in competing 
with the OTC market and at the same time expand the universe of 
products available to interested market participants. The Exchange 
believes that an exchange-traded alternative may provide a useful risk 
management and trading vehicle for market participants and their 
customers.
    The Exchange has confirmed with the OCC that OCC can support the 
clearance and settlement of cash-settled FLEX ETF Penny Options. The 
Exchange has analyzed its capacity and represents that it believes the 
Exchange and OPRA have the necessary systems capacity to handle the 
additional traffic associated with the listing of cash-settled FLEX ETF 
Penny Options. The Exchange believes any additional traffic that would 
be generated from the introduction of cash-settled FLEX ETF Penny 
Options will be manageable. The Exchange believes ATP Holders will not 
have a capacity issue as a result of this proposed rule change. The 
Exchange also represents that it does not believe this proposed rule 
change will cause fragmentation of liquidity. The Exchange will monitor 
the trading volume associated with the additional options series listed 
as a result of this proposed rule change and the effect (if any) of 
these additional series on market fragmentation and on the capacity of 
the Exchange's automated systems.
    The Exchange has an adequate surveillance program in place for 
cash-settled FLEX ETF Penny Options and intends to apply the same 
program procedures that it applies to the Exchange's other options 
products. FLEX options products and their respective symbols are 
integrated into the Exchange's existing surveillance system 
architecture and are thus subject to the relevant surveillance 
processes. As a result, the Exchange believes it would be able to 
effectively police the trading of cash-settled FLEX ETF Penny Options 
using means that include its surveillance for manipulation. The 
Exchange believes that manipulating the settlement price of cash-
settled FLEX ETF Penny Options would be difficult based on the size of 
the market for such ETFs. Additionally, the Exchange notes that each 
cash-settled FLEX ETF Penny Option that would be subject to this 
proposed rule change is sufficiently active so as to alleviate concerns 
about

[[Page 51537]]

potential manipulative activity. Further, the vast liquidity of ETF 
options as well as the underlying equities markets ensures a multitude 
of market participants at any given time. Given the high level of 
participation among market participants that enter quotes and/or orders 
in ETF options, the Exchange believes it would be very difficult for a 
single participant to alter the prices of each of the underlying 
securities of an ETF in any significant way without exposing the would-
be manipulator to regulatory scrutiny. The Exchange further believes 
any attempt to manipulate the prices of the underlying securities of an 
ETF would also be cost prohibitive.
    Additionally, the Exchange is a member of the Intermarket 
Surveillance Group (``ISG'') under the Intermarket Surveillance Group 
Agreement dated June 20, 1994. The ISG members work together to 
coordinate surveillance and investigative information sharing in the 
stock and options markets. For surveillance purposes, the Exchange 
would therefore have access to information regarding trading activity 
in the pertinent underlying securities.
    The Exchange believes that introducing cash-settled FLEX ETF Penny 
Options would further broaden the base of investors that use FLEX 
Options to manage their trading and investment risk, including 
investors that currently trade in the OTC markets for customized 
options, where settlement restrictions do not apply. The proposed rule 
change is also designed to encourage market makers to shift liquidity 
from OTC markets onto the Exchange, which, it believes, will enhance 
the process of price discovery conducted on the Exchange through 
increased order flow. The Exchange also believes that this may open up 
cash-settled FLEX ETF Penny Options to more retail investors. The 
Exchange does not believe that this raises any unique regulatory 
concerns because existing safeguards--such as position limits, exercise 
limits, and reporting requirements--would continue to apply.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\13\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act,\14\ 
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. Specifically, 
the Exchange believes that introducing cash-settled FLEX ETF Penny 
Options will increase order flow to the Exchange, increase the variety 
of options products available for trading, and provide a valuable tool 
for investors to manage risk.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposal to add cash-settled FLEX 
ETF Penny Options would remove impediments to and perfect the mechanism 
of a free and open market as cash-settled FLEX ETF Penny Options would 
enable market participants to receive cash in lieu of shares of the 
underlying security, which would, in turn provide greater opportunities 
for market participants to manage risk through the use of cash-settled 
FLEX ETF Penny Options to the benefit of investors and the public 
interest.
    The Exchange believes that the proposal to permit cash settlement 
would remove impediments to and perfect the mechanism of a free and 
open market because the proposed rule change would provide OTP [sic] 
Holders with enhanced methods to manage risk by receiving cash if they 
choose to do so instead of the underlying security. In addition, this 
proposal would promote just and equitable principles of trade and 
protect investors and the general public because cash settlement would 
provide investors with an additional tool to manage their risk. 
Further, the Exchange notes that its proposal to introduce cash-settled 
FLEX ETF Penny Options is not novel in that other exchanges currently 
offer [sic] cash settlement for options whose underlying security is an 
ETF. The proposed rule change therefore should not raise any issues for 
the Commission that have not been previously addressed.\15\
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    \15\ See supra note 12.
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    The proposed rule change to permit cash-settled FLEX ETF Penny 
Options is designed to promote just and equitable principles of trade 
in that the availability of cash-settled FLEX ETF Penny Options will 
give market participants an alternative to trading similar products in 
the OTC market. By trading a product in an exchange-traded environment 
(that is currently being used in the OTC market), the Exchange will be 
able to compete more effectively with the OTC market. The Exchange 
believes the proposed rule change is designed to prevent fraudulent and 
manipulative acts and practices in that it will hopefully lead to the 
migration of options currently trading in the OTC market to trading to 
the Exchange. Also, any migration to the Exchange from the OTC market 
will result in increased market transparency. Additionally, the 
Exchange believes the proposed rule change is designed to remove 
impediments to and to perfect the mechanism for a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest in that it should create greater trading and 
hedging opportunities and flexibility. The proposed rule change should 
also result in enhanced efficiency in initiating and closing out 
positions and heightened contra-party creditworthiness due to the role 
of OCC as issuer and guarantor of cash-settled FLEX ETF Penny Options. 
Further, the proposed rule change will result in increased competition 
by permitting the Exchange to offer products that are currently used in 
the OTC market.
    Finally, the Exchange represents that it has an adequate 
surveillance program in place to detect manipulative trading in cash-
settled FLEX ETF Penny Options. Regarding the proposed cash settlement, 
the Exchange would use the same surveillance procedures currently 
utilized for the Exchange's other FLEX Options. For surveillance 
purposes, the Exchange would have access to information regarding 
trading activity in the pertinent underlying securities. The Exchange 
believes that limiting cash settlement to FLEX ETF Penny Options will 
minimize the possibility of manipulation due to the robust liquidity in 
both the ETF and options markets.

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 cash-settled FLEX ETF Penny Option orders with the 
opportunity for different methods of settling option contracts at 
expiration.
    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 believes the 
proposed rule change encourages competition amongst market participants 
to provide tailored cash-settled FLEX ETF Penny Option contracts.

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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

    Within 45 days of the date of publication of this notice in the 
Federal Register or up to 90 days (i) as the Commission may designate 
if it finds such longer period to be appropriate and publishes its 
reasons for so finding or (ii) as to which the self-regulatory 
organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSEAMER-2018-39 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-NYSEAMER-2018-39. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEAMER-2018-39, and should be 
submitted on or before November 1, 2018.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-22049 Filed 10-10-18; 8:45 am]
 BILLING CODE 8011-01-P