[Federal Register Volume 84, Number 216 (Thursday, November 7, 2019)]
[Notices]
[Pages 60120-60125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24256]
[[Page 60120]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87444; File No. SR-NYSEAMER-2019-38]
Self-Regulatory Organizations; NYSE American LLC; Notice of
Filing of Proposed Rule Change To Allow Certain Flexible Exchange
Equity Options To Be Cash Settled
November 1, 2019.
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 October 17, 2019, 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 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 Rules 903G and 906G 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 Exchange proposes to amend Rules 903G and 906G related to FLEX
Options.
FLEX Options are customized equity or index contracts that allow
investors to tailor contract terms for exchange-listed equity and index
options. The Exchange proposes to amend NYSE American Rule 903G(c) to
allow for cash settlement of certain FLEX Equity Options.\4\ Generally,
FLEX Equity Options are settled by physical delivery of the underlying
security,\5\ while all FLEX Index Options are currently settled by
delivery in cash.\6\ As proposed, FLEX Equity Options would be
permitted to be settled by delivery in cash if the underlying security
meets prescribed criteria.
---------------------------------------------------------------------------
\4\ A ``FLEX Equity Option'' is an option on a specified
underlying equity security that is subject to the rules of Section
15. See NYSE American Rule 900G(b)(10).
\5\ See Rule 903G(c)(3)(i).
\6\ See Rule 903G(b)(2) and (3). Pursuant to Exchange rules,
Binary Return Derivatives (``ByRDs'') are also settled in cash. See
Rule 900ByRDs(b). As discussed below, cash settlement is also
permitted in the over-the-counter (``OTC'') market.
---------------------------------------------------------------------------
To permit cash settlement of certain FLEX Equity Options, the
Exchange proposes new paragraph (c)(3)(ii) to Rule 903G. Proposed Rule
903G(c)(3)(ii) would provide that the exercise settlement for FLEX
Equity Options may be by physical delivery of the underlying security
or by delivery in cash if the underlying security, measured over the
prior six-month period, has an average daily notional value of $500
Million or more and a national average daily volume (ADV) of at least
4,680,000 shares.\7\
---------------------------------------------------------------------------
\7\ See proposed Rule 903G(c)(3)(ii). The Exchange also proposes
a non-substantive amendment to Rule 903G to renumber current Rule
903G(c)(3)(ii) as new Rule 903G(c)(3)(iii).
---------------------------------------------------------------------------
The Exchange also proposes new sub-paragraph (A) to Rule
903G(c)(3)(ii), which would provide that the Exchange will determine
bi-annually the underlying securities that satisfy the notional value
and trading volume requirements in Rule 903G(c)(3)(ii) by using trading
statistics for the previous six-months.\8\ Proposed new sub-paragraph
(B) to Rule 903(c)(3)(ii) would further provide that if the Exchange
determines pursuant to the bi-annual review that an underlying security
ceases to satisfy the requirements under Rule 903G(c)(3)(ii), any new
FLEX Equity Options overlying such security entered into will be
required to have exercise settlement by physical delivery and any open
positions in cash-settled FLEX Equity Options overlying such security
may be traded to only close the position.\9\
---------------------------------------------------------------------------
\8\ See proposed Rule 903G(c)(3)(ii)(A). The Exchange plans to
conduct the bi-annual review on January 1 and July 1 of each year.
The results of the bi-annual review will be announced via a Trader
Update.
\9\ See proposed Rule 903G(c)(3)(ii)(B). Pursuant to Rule 920NY,
an ATP Holder that is acting as a Market Maker may enter into an
opening transaction in order to facilitate closing transactions of
another market participant. See https://www.nyse.com/publicdocs/nyse/markets/arca-options/rule-interpretations/2017/NYSE%20Arca%20Options%20RB%2017-01.pdf. The Exchange will revise its
guidance to reflect that an ATP Holder acting as a Market Maker in
cash-settled FLEX Equity Options can enter into an opening
transaction to facilitate closing only transactions of another
market participant.
---------------------------------------------------------------------------
The Exchange believes it is appropriate to introduce cash
settlement as an alternative contract term to the select group of
equity securities because they are the most highly liquid and actively-
traded securities. As described more fully below, the Exchange believes
that the deep liquidity and robust trading activity in securities
identified by the Exchange as meeting the criteria mitigate against
historic concerns regarding susceptibility to manipulation.
The Exchange believes that average daily notional value is an
appropriate proxy for selecting underlying securities that are not
readily susceptible to manipulation for purposes of establishing a
settlement price. Average daily notional value takes into account both
the trading activity and the price of an underlying security. As a
general matter, the more expensive an underlying security's price, the
less cost-effective manipulation could become. Further, manipulation of
the price of a security encounters greater difficulty the more volume
that is traded. To calculate average daily notional value (provided in
the table below), the Exchange summed the notional value of each trade
for each symbol (i.e., the number of shares times the price for each
execution in the security) and divided that total by the number of
trading days in the six-month period (from January 1, 2019 through June
30, 2019) reviewed by the Exchange.
Further, the Exchange proposes that qualifying securities also meet
an ADV standard. The purpose for this second criteria is to prevent
unusually expensive underlying securities from qualifying under the
average daily notional value standard while not being one of the most
actively traded securities. The Exchange believes an ADV requirement of
4,680,000 shares a day is appropriate because it represents average
trading in the underlying security of 200 shares per second. While no
security is immune from all manipulation, the Exchange believes that
the combination of average daily
[[Page 60121]]
notional value and ADV as prerequisite requirements would limit cash
settlement of FLEX Options to those underlying securities that would be
less susceptible to manipulation in order to establish a settlement
price.
The Exchange believes that the proposed objective criteria would
ensure that only the most robustly traded and deeply liquid securities
would qualify to have cash settlement as a contract term. As provided
in the table below, as of June 30, 2019, the Exchange would be able to
provide cash settlement as a contract term for FLEX Equity Options on
only 84 underlying securities,\10\ as only this group of securities
would currently meet the requirement of $500 Million or more average
daily notional value and a minimum ADV of 4,680,000 shares. The table
below provides the list of the 84 securities that, as of June 30, 2019,
would be eligible to have cash settlement as a FLEX Equity option
contract term.
---------------------------------------------------------------------------
\10\ The Exchange notes that TVIX (VelocityShares Daily 2x VIX
Short-Term ETN) would qualify under the proposed standards. However,
options on TVIX are not currently available for trading.
----------------------------------------------------------------------------------------------------------------
Average daily notional value Average daily volume (1/1/
Symbol Security name (1/1/19-6/30/19) 19-6/30/19)
----------------------------------------------------------------------------------------------------------------
SPY............................. SPDR S&P 500 ETF $21,297,533,471 76,562,281
Trust.
QQQ............................. Invesco QQQ Trust. 6,226,236,315 35,419,606
AAPL............................ Apple Inc......... 5,411,433,661 29,938,826
FB.............................. Facebook, Inc. 3,167,063,717 18,656,551
Class A.
IWM............................. iShares Russell 3,138,717,375 20,697,570
2000 ETF.
MSFT............................ Microsoft 3,081,463,649 26,298,765
Corporation.
EEM............................. iShares MSCI 2,986,071,029 70,901,336
Emerging Markets
ETF.
NFLX............................ Netflix, Inc...... 2,817,672,156 8,073,403
BABA............................ Alibaba Group 2,742,711,789 16,314,223
Holding Ltd.
Sponsored ADR.
TSLA............................ Tesla Inc......... 2,592,804,463 10,051,182
BA.............................. Boeing Company.... 2,268,537,891 6,044,214
NVDA............................ NVIDIA Corporation 2,219,441,287 13,960,292
AMD............................. Advanced Micro 1,978,829,372 77,758,854
Devices, Inc..
HYG............................. iShares iBoxx High 1,847,494,422 21,622,743
Yield Corporate
Bond ETF.
EFA............................. iShares MSCI EAFE 1,716,385,479 26,804,412
ETF.
BAC............................. Bank of America 1,638,846,503 57,551,084
Corp.
DIS............................. Walt Disney 1,392,946,023 11,366,690
Company.
JPM............................. JPMorgan Chase & 1,360,283,575 12,813,819
Co..
XLF............................. Financial Select 1,347,599,180 51,114,805
Sector SPDR Fund.
LLY............................. Eli Lilly and 1,327,459,452 10,818,852
Company.
EWZ............................. iShares MSCI 1,257,290,585 29,953,519
Brazil ETF.
V............................... Visa Inc. Class A. 1,232,449,824 8,048,719
FXI............................. iShares China 1,227,285,973 28,755,070
Large-Cap ETF.
QCOM............................ QUALCOMM 1,211,880,121 18,122,059
Incorporated.
INTC............................ Intel Corporation. 1,198,554,195 24,128,671
UNH............................. UnitedHealth Group 1,193,149,098 4,912,081
Incorporated.
LQD............................. iShares iBoxx 1,168,122,337 9,875,174
Investment Grade
Corporate Bond
ETF.
MU.............................. Micron Technology, 1,160,129,353 30,258,968
Inc..
CSCO............................ Cisco Systems, 1,132,706,882 21,792,441
Inc..
TLT............................. iShares 20+ Year 1,065,481,174 8,544,169
Treasury Bond ETF.
XLV............................. Health Care Select 1,032,614,044 11,541,565
Sector SPDR Fund.
WFC............................. Wells Fargo & 1,013,529,161 21,121,609
Company.
PFE............................. Pfizer Inc........ 1,006,294,983 24,005,060
C............................... Citigroup Inc..... 982,855,307 15,366,407
GLD............................. SPDR Gold Trust... 976,890,275 7,874,831
XLK............................. Technology Select 969,785,314 13,386,498
Sector SPDR Fund.
XLU............................. Utilities Select 967,875,035 16,964,325
Sector SPDR Fund.
GDX............................. VanEck Vectors 960,166,813 43,153,879
Gold Miners ETF.
TQQQ............................ ProShares UltraPro 958,273,952 18,016,817
QQQ.
JNJ............................. Johnson & Johnson. 948,157,843 6,979,483
T............................... AT&T Inc.......... 934,843,776 30,151,377
XOM............................. Exxon Mobil 912,399,075 11,897,796
Corporation.
XLI............................. Industrial Select 909,904,734 12,333,853
Sector SPDR Fund.
CRM............................. salesforce.com, 892,331,750 5,755,675
Inc..
XLE............................. Energy Select 890,001,122 13,936,008
Sector SPDR Fund.
MRK............................. Merck & Co., Inc.. 873,282,259 11,076,401
ROKU............................ Roku, Inc. Class A 862,649,855 13,145,273
CVX............................. Chevron 855,496,380 7,162,794
Corporation.
BMY............................. Bristol-Myers 844,047,840 17,505,197
Squibb Company.
PG.............................. Procter & Gamble 833,084,059 8,233,044
Company.
IEMG............................ iShares Core MSCI 830,706,450 16,373,454
Emerging Markets
ETF.
VZ.............................. Verizon 815,667,485 14,307,832
Communications
Inc..
CELG............................ Celgene 810,028,905 9,035,758
Corporation.
SQ.............................. Square, Inc. Class 789,909,124 11,168,998
A.
GE.............................. General Electric 787,956,324 80,931,248
Company.
ORCL............................ Oracle Corporation 765,161,710 14,549,748
CMCSA........................... Comcast 764,325,100 19,255,694
Corporation Class
A.
XLP............................. Consumer Staples 750,217,134 13,589,124
Select Sector
SPDR Fund.
[[Page 60122]]
SMH............................. VanEck Vectors 743,322,164 7,153,365
Semiconductor ETF.
WMT............................. Walmart Inc....... 691,395,239 6,908,002
CVS............................. CVS Health 690,109,969 11,982,610
Corporation.
PYPL............................ PayPal Holdings 688,906,111 6,810,430
Inc..
KO.............................. Coca-Cola Company. 686,132,671 14,420,676
IYR............................. iShares U.S. Real 685,454,820 8,098,239
Estate ETF.
SBUX............................ Starbucks 680,679,995 9,382,107
Corporation.
XOP............................. SPDR S&P Oil & Gas 631,231,318 21,460,429
Exploration &
Production ETF.
JNK............................. SPDR Bloomberg 618,600,709 12,555,596
Barclays High
Yield Bond ETF.
VWO............................. Vanguard FTSE 612,134,544 14,761,429
Emerging Markets
ETF.
APC............................. Anadarko Petroleum 584,576,356 9,450,731
Corporation.
PEP............................. PepsiCo, Inc...... 583,005,057 4,850,035
ABBV............................ AbbVie, Inc....... 570,266,307 7,293,122
TXN............................. Texas Instruments 568,173,321 5,315,649
Incorporated.
TWTR............................ Twitter, Inc...... 567,732,862 16,636,561
NKE............................. NIKE, Inc. Class B 555,303,367 6,684,500
EA.............................. Electronic Arts 548,493,648 5,757,202
Inc..
XLY............................. Consumer 529,385,536 4,721,216
Discretionary
Select Sector
SPDR Fund.
MO.............................. Altria Group Inc.. 529,141,650 10,327,466
IEFA............................ iShares Core MSCI 524,284,734 8,762,457
EAFE ETF.
MDT............................. Medtronic Plc..... 519,945,258 5,773,585
VNQ............................. Vanguard Real 517,290,726 6,129,594
Estate ETF.
EMB............................. iShares JP Morgan 516,226,468 4,739,195
USD Emerging
Markets Bond ETF.
AGG............................. iShares Core U.S. 513,543,324 4,749,278
Aggregate Bond
ETF.
DWDP............................ DuPont de Nemours, 510,133,624 11,183,061
Inc..
IEF............................. iShares 7-10 Year 506,548,585 4,785,984
Treasury Bond ETF.
----------------------------------------------------------------------------------------------------------------
The Exchange believes that permitting cash settlement as a contract
term for FLEX Equity Options for the securities in the above table
would broaden the base of investors that use FLEX Options to manage
their trading and investment risk, including investors that currently
trade in the OTC market for customized options, where settlement
restrictions do not apply.
Today, generally equity options are settled physically at The
Options Clearing Corporation (``OCC''), i.e., upon exercise, shares of
the underlying security 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 may be
preferable to physical delivery in some circumstances as it 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 have
previously received approval that allow for the trading of cash-settled
options.\11\
---------------------------------------------------------------------------
\11\ 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 SPDR S&P 500 Trust on
the BOX Options Exchange LLC (``BOX''). See Securities Exchange Act
Release No. 79936 (February 2, 2017), 82 FR 9886 (February 8, 2017)
(``RealDay Pilot Program''). The RealDay Pilot Program was 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). The RealDay Pilot Program was never implemented by BOX. See
also Securities Exchange Act Release Nos. 56251 (August 14, 2007),
72 FR 46523 (August 20, 2007) (SR-Amex-2004-27) (Order approving
listing of cash-settled Fixed Return Options (``FROs'')); and 71957
(April 16, 2014), 79 FR 22563 (April 22, 2014) (SR-NYSEMKT-2014-06)
(Order approving name change from FROs to ByRDs and re-launch of
these products, with certain modifications).
---------------------------------------------------------------------------
With respect to position limits, cash-settled FLEX Equity Options
would be subject to the position limits set forth in Rule 906G.
Accordingly, the Exchange proposes new Rule 906G(b)(ii) which would
provide that positions for FLEX Equity Options settled in cash pursuant
to Rule 903G(c)(3)(ii) would be subject to the limits set forth in Rule
904, and the exercise limits set forth in Rule 905.\12\ Given that each
of the underlying securities that would currently be eligible to have
cash-settlement as a contract term have established position and
exercise limits applicable to physically-settled options, the Exchange
believes it is appropriate for the same position and exercise limits to
also apply to cash-settled options. Accordingly, of the 84 underlying
securities that would currently be eligible to have cash settlement as
a contract term, 76 would have a position limit of 250,000 contracts
pursuant to Rule 904, Commentary .07(a).\13\ Further, pursuant to Rule
904, Commentary .07(f), the position limit for the other eight
underlying securities would be as follows: For QQQ and SPY, 1,800,000
contracts; for IWM and EEM, 1,000,000 contracts; and for FXI, EFA, EWZ
and TLT, 500,000 contracts.\14\
---------------------------------------------------------------------------
\12\ See proposed Rule 906G(b)(ii). The Exchange also proposes a
non-substantive amendment to Rule 906G to renumber current Rule
906G(b)(ii) as new Rule 906G(b)(iii).
\13\ Rule 904, Commentary .07(a) provides that the position
limit shall be 250,000 contracts for options: (i) On an underlying
security that had trading volume of at least 100,000,000 shares
during the most recent six-month trading period; or (ii) on an
underlying security that had trading volume of at least 75,000,000
shares during the most recent six-month trading period and has at
least 300,000,000 shares currently outstanding. 76 of the 84
underlying securities currently meet the requirements under
Commentary .07(a).
\14\ See Rule 904, Commentary .07(f).
---------------------------------------------------------------------------
[[Page 60123]]
The Exchange understands that cash-settled FLEX Equity Options are
currently traded in the OTC market by a variety of market participants,
e.g., hedge funds, proprietary trading firms, and pension funds. The
Exchange believes some of these market participants would prefer to
trade these instruments on an exchange, where they would be cleared and
settled through a regulated clearing agency. The Exchange expects that
users of these OTC products would be among the primary users of
exchange-traded cash-settled FLEX Equity Options. The Exchange also
believes that the trading of cash-settled FLEX Equity Options would
allow these same market participants to better manage the risk
associated with the volatility of underlying equity positions given the
enhanced liquidity that an exchange-traded product would bring.
Cash-settled FLEX Equity 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 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 Equity 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 notes that cash-settled FLEX Equity Options would not
be available for trading until OCC represents to the Exchange that it
is fully able to clear and settle such options. The Exchange has also
analyzed its capacity and represents that it and The Options Price
Reporting Authority (OPRA) have the necessary systems capacity to
handle the additional traffic associated with the listing of cash-
settled FLEX Equity Options. The Exchange believes any additional
traffic that would be generated from the introduction of cash-settled
FLEX Equity Options would be manageable. The Exchange represents that
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 Equity 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 Equity Options using means that include its
surveillance for manipulation. The Exchange believes that manipulating
the settlement price of cash-settled FLEX Equity Options would be
difficult based on the size of the market for the securities that are
the subject of this proposed rule change. Additionally, the Exchange
notes that each cash-settled FLEX Equity Option that is subject to this
proposed rule change is sufficiently active so as to alleviate concerns
about potential manipulative activity. Further, in the Exchange's view,
the vast liquidity of the 84 underlying securities 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 the options on these securities, the Exchange believes it would be
very difficult for a single participant to alter the price of each of
the underlying securities in any significant way without exposing the
would-be manipulator to regulatory scrutiny. The Exchange further
believes any attempt to manipulate the price of the underlying
securities would also be cost prohibitive.
With respect to regulatory scrutiny, the Exchange believes its
existing surveillance technologies and procedures adequately address
potential concerns regarding possible manipulation of the settlement
value at or near the close of the market. The Exchange notes that the
regulatory program operated by and overseen by NYSE Regulation includes
cross-market surveillance designed to identify manipulative and other
improper trading, including spoofing, algorithm gaming, marking the
close and open, as well as more general, abusive behavior related to
front running, wash sales, quoting/routing, and Reg SHO violations,
that may occur on the Exchange and other markets. These cross-market
patterns incorporate relevant data from various markets beyond the
Exchange and its affiliates and from markets not affiliated with the
Exchange. The Exchange represents that its existing trading
surveillances are adequate to monitor the trading in the underlying
securities and subsequent trading of options on those securities on the
Exchange, including cash-settled FLEX Equity Options.\15\
---------------------------------------------------------------------------
\15\ Such surveillance procedures generally focus on detecting
securities trading subject to opening price manipulation, closing
price manipulation, layering, spoofing or other unlawful activity
impacting an underlying security, the option, or both. The Exchange
has price movement alerts, unusual market activity and order book
alerts active for all trading symbols.
---------------------------------------------------------------------------
Additionally, for options, the Exchange utilizes an array of
patterns that monitor manipulation of options, or manipulation of
equity securities (regardless of venue) for the purpose of impacting
options prices on the Exchange (i.e., mini-manipulation strategies).
That surveillance coverage is initiated once options begin trading on
the Exchange. Accordingly, the Exchange believes that the cross-market
surveillance performed by the Exchange or FINRA on behalf of the
Exchange, coupled with NYSE Regulation's own monitoring for violative
activity on the Exchange comprise a comprehensive surveillance program
that is adequate to monitor for manipulation of the underlying security
and overlying option. Furthermore, the Exchange believes that the
existing surveillance procedures at the Exchange are capable of
properly identifying unusual and/or illegal trading activity, which the
Exchange would utilize to surveil for aberrant trading in cash-settled
FLEX Equity Options.
The Exchange does not believe that allowing cash settlement as a
contract term would render the marketplace for equity options more
susceptible to manipulative practices. In addition to the surveillance
procedures and processes described above, improvements in audit trails,
recordkeeping practices, and inter-exchange cooperation over the last
two decades have greatly increased the Exchange's ability to detect and
punish attempted manipulative activities. The Exchange therefore
believes that the decision of whether or not to allow cash settlement
as a contract term should rest on the ability of the Exchange to
monitor and detect manipulative activity, not on any perceived threat
of
[[Page 60124]]
increased attempted manipulative activity.
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 proposed rule change is designed to allow investors seeking to
effect cash-settled FLEX Equity Options with the opportunity for a
different method of settling option contracts at expiration if they
choose to do so. As noted above, market participants may choose cash
settlement because 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. The
Exchange believes that offering innovative products flows to the
benefit of the investing public. A robust and competitive market
requires that exchanges respond to member's evolving needs by
constantly improving their offerings. Such efforts would be stymied if
exchanges were prohibited from offering innovative products for reasons
that are generally debated in academic literature. The Exchange
believes that introducing cash-settled FLEX Equity 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 the OTC market 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 Equity
Options to more retail investors. The Exchange does not believe that
this proposed rule change 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''),\16\ in
general, and furthers the objectives of Section 6(b)(5) of the Act,\17\
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 Equity 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.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposal to permit cash settlement
as a contract term for options on the specified group of equity
securities would remove impediments to and perfect the mechanism of a
free and open market as cash-settled FLEX Equity 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 a cash-settled product
to the benefit of investors and the public interest. The Exchange does
not believe that allowing cash settlement as a contract term for
options on the specified group of equity securities would render the
marketplace for equity options more susceptible to manipulative
practices. As illustrated in the table above, each of the qualifying
underlying securities is actively traded and highly liquid and thus
would not be susceptible to manipulation because, over a six-month
period, each security had an average daily notional value of at least
$500 Million and an ADV of at least 4,680,000 shares, which indicates
that there is substantial liquidity present in the trading of these
securities, and that there is significant depth and breadth of market
participants providing liquidity and of investor interest.
The Exchange believes that the data provided by the Exchange
supports the supposition that permitting cash settlement as a FLEX term
for the 84 underlying securities that would currently qualify to have
cash settlement as a contract term would broaden the base of investors
that use FLEX Options to manage their trading and investment risk,
including investors that currently trade in the OTC market for
customized options, where settlement restrictions do not apply.
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 ATP 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 Equity
Options is not novel in that other exchanges have previously received
approval that allow for the trading of cash-settled options. The
proposed rule change therefore should not raise issues for the
Commission that have not been previously addressed.\18\
---------------------------------------------------------------------------
\18\ See supra note 11.
---------------------------------------------------------------------------
The proposed rule change to permit cash settlement as a contract
term for options on the 84 underlying securities is designed to promote
just and equitable principles of trade in that the availability of cash
settlement as a contract term would 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 traded in
the OTC market), the Exchange would 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 would lead to the migration of options currently trading in the
OTC market to trading on the Exchange. Also, any migration to the
Exchange from the OTC market would 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 the proposed cash-settled options. Further, the proposed
rule change would result in increased competition by permitting the
Exchange to offer products that are currently available for trading
only 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 Equity Options.
[[Page 60125]]
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
options on the 84 underlying securities that would currently be
eligible to have cash-settlement as a contract term would minimize the
possibility of manipulation due to the robust liquidity in both the
equities 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 transact in FLEX Equity Options with the opportunity for an
alternative method of settling their 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 Equity Option 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
Within 45 days of the date of publication of this notice in the
Federal Register or such longer period 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-2019-38 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-2019-38. 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-2019-38, and should be
submitted on or before November 29, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
---------------------------------------------------------------------------
\19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24256 Filed 11-6-19; 8:45 am]
BILLING CODE 8011-01-P