[Federal Register Volume 88, Number 97 (Friday, May 19, 2023)]
[Notices]
[Pages 32262-32263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-10686]



[[Page 32262]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97506; File No. SR-Phlx-2023-09]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Granting 
Approval of Proposed Rule Change To Permit the Listing and Trading of 
Options on the Nasdaq-100 ESG Index

May 15, 2023.

I. Introduction

    On March 28, 2023, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to permit the 
listing and trading of options on the Nasdaq-100 ESG Index. The 
proposed rule change was published for comment in the Federal Register 
on April 6, 2023.\3\ The Commission has received no comments on the 
proposed rule change. 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. 97232 (March 31, 
2023), 88 FR 20582 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to permit the listing and trading of options 
on the Nasdaq-100 ESG Index (``NDXESG''; and such options, ``NDXESG 
options''). The NDXESG is a broad-based, modified ESG Risk Rating 
Score-adjusted market capitalization-weighted index that is designed to 
measure the performance of the companies in the Nasdaq-100 Index 
(``NDX'') that meet specific environmental, social, and governance 
(``ESG'') criteria outlined in the NDXESG's methodology.\4\ The NDXESG 
at all times consists of a selection of securities in the NDX.\5\ The 
Exchange believes there is unmet market demand for exchange-listed 
security options on the NDXESG,\6\ and that the introduction of NDXESG 
options will attract order flow to the Exchange, increase the variety 
of listed options to investors, and provide a valuable hedging tool to 
investors.\7\
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    \4\ See Notice, 88 FR at 20583 and n.5.
    \5\ See id. at 20583.
    \6\ See id. at 20585.
    \7\ See id. at 20584.
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    The Exchange states that the NDXESG meets the ``broad-based index'' 
definition set forth in the Exchange's rules at Phlx Options 4A, 
section 2(a)(13).\8\ The Exchange also states that the NDXESG meets, 
and NDXESG options would meet, the Exchange's initial and maintenance 
listing criteria for a broad-based index and options thereon, as set 
forth in Phlx Options 4A, sections 3(d) and 3(e).\9\ NDXESG options 
could have up to twelve near-term expiration months, as well as long-
term options series.\10\ In addition, the NDXESG options would be a.m.-
settled and cash-settled contracts with European-style exercise.\11\ 
Strike price intervals would be at no less than $2.50 intervals.\12\ 
The minimum trading increment for NDXESG options would be $0.05 for 
options trading below $3.00 and $0.10 for all other options, and NDXESG 
options would be available for trading during the Exchange's standard 
trading hours for index options.\13\ NDXESG options would also be 
subject to the same margin and suitability rules that apply to the 
Exchange's other index options.\14\
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    \8\ See id. at 20583.
    \9\ See id.
    \10\ See id.
    \11\ See id.
    \12\ See id.
    \13\ See id. at 20584.
    \14\ See id.
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    The position and exercise limits for NDXESG options would be 25,000 
contracts on the same side of the market.\15\ Each member or member 
organization that maintains a position in NDXESG options on the same 
side of the market in excess of 100,000 contracts for its own account 
or for the account of a customer would be required to file a report 
with the Exchange pursuant to proposed Phlx Options 4A, section 
6(c).\16\ The position and exercise limits for FLEX options on the 
NDXESG would also be 25,000 contracts on the same side of the 
market.\17\
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    \15\ See id. The proposed position and exercise limits are in 
accordance with Phlx Options 4A, section 6(a), and Options 4A, 
section 10.
    \16\ See id.
    \17\ See proposed Phlx Options 8, section 34(e).
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    The Exchange states that it has, and that it believes the Options 
Price Reporting Authority (``OPRA'') has, the necessary systems 
capacity to handle additional quotations and message traffic associated 
with the proposed listing and trading of NDXESG options.\18\ The 
Exchange also states that index options are integrated into the 
Exchange's existing surveillance system architecture and are thus 
subject to the relevant surveillance processes.\19\ The Exchange states 
that it has adequate surveillance procedures to monitor trading in 
NDXESG options, thereby aiding in the maintenance of a fair and orderly 
market.\20\
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    \18\ See Notice, 88 FR at 20584.
    \19\ See id.
    \20\ See id.
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    The Exchange also proposes to amend its rule text at Phlx Options 
8, section 34(e), to directly align the position limits for FLEX index 
options with the position limits for the corresponding standard index 
options within Phlx Options 4A, section 6. According to the Exchange, 
this proposed amendment would not change the current position limits 
for FLEX index options, but rather would simply cross-reference the 
index option position limits in Phlx Options 4A, section 6, as opposed 
to restating each position limit within the rule text. Today, the 
position limits for standard index options are identical to the FLEX 
index options on the same index, and with this proposed amendment, 
those position limits would continue to be identical.\21\ Finally, the 
Exchange proposes a technical correction to Phlx Options 4A, section 
6(c), to add an ``or'' within that paragraph.\22\
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    \21\ See id.
    \22\ See id.
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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.\23\ In particular, the Commission finds that 
the proposed rule change is consistent with section 6(b)(5) of the 
Act,\24\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, 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; and 
section 6(b)(8) of the Act,\25\ which requires that the rules of a 
national securities exchange not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.
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    \23\ 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).
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ 15 U.S.C. 78f(b)(8).
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    Permitting the trading of options on an index of securities enables 
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 believes that the Exchange's proposal to 
permit

[[Page 32263]]

the listing and trading of NDXESG options could benefit investors by 
providing them with additional investment and hedging alternatives. As 
the Exchange notes, the proposed NDXESG options could become part of 
market participants' investment and hedging strategies related to 
positions in both the NDXESG and NDX in light of the relationship 
between these two indices.\26\ Moreover, options on broad-based, ESG-
related indexes are not novel. For example, options on the S&P 500 ESG 
Index are listed and traded on Cboe Exchange, Inc.\27\ The proposed 
NDXESG options could, therefore, promote competition; further, 
consistent with section 6(b)(8) of the Act, they are not designed to 
impose an unnecessary burden on competition.
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    \26\ See Notice, 88 FR at 20585.
    \27\ See Securities Exchange Act Release No. 89749 (September 2, 
2020), 85 FR 55723 (September 9, 2020).
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    The Commission also believes that the proposal is consistent with 
the protection of investors and the public interest. The NDXESG is a 
broad-based index under the Exchange's rules, and the NDXESG and 
proposed NDXESG options meet the Exchange's criteria for the initial 
listing of options on a broad-based index, which previously have been 
approved by the Commission.\28\ After initial listing, the Exchange's 
maintenance listing criteria, which also have been previously approved 
by the Commission, will apply to NDXESG options.\29\ The Commission 
believes that the application and satisfaction of these listing 
requirements significantly minimize the potential for manipulation of 
the NDXESG or for adverse market impact to result from the listing or 
trading of NDXESG options.
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    \28\ See Notice, 88 FR at 20585; Phlx Options 4A, section 3(d); 
see also Securities Exchange Act Release No. 54158 (July 17, 2006), 
71 FR 41853 (July 24, 2006) (Notice of Filing and Order Granting 
Accelerated Approval of a Proposed Rule Change and Amendment Nos. 1 
and 2 Thereto Relating to Listing Standards for Broad-Based Index 
Options) (``Phlx Listing Standards Approval Order'').
    \29\ See Notice, 88 FR at 20585; Phlx Options 4A, section 3(e); 
see also Phlx Listing Standards Approval Order.
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    In addition, the proposed terms for NDXESG options--such as listing 
up to twelve near-term expiration months and LEAPS, the strike 
interval, a.m.-settlement, cash-settlement, European-style exercise, 
and the minimum trading increment--are consistent with the terms for 
other broad-based index options trading on Phlx, including NDX 
options.\30\ In the same vein, the Exchange rules applicable to broad-
based index options regarding sales practices, customer accounts, 
position and exercise limits, margin requirements, and trading halts 
will apply to the NDXESG options.\31\ Likewise, the Exchange's existing 
surveillance and reporting safeguards for index options will apply to 
NDXESG options.\32\ Further, the Exchange states that it and OPRA have 
the necessary systems capacity to handle the additional message traffic 
associated with the listing of new option series that may result from 
this proposal.\33\ The Commission believes that the Exchange's rules 
governing the trading of index options help to ensure the maintenance 
of fair and orderly markets, including with respect to the proposed 
NDXESG options, which is consistent with the protection of investors 
and the public interest.
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    \30\ See Notice, 88 FR at 20585.
    \31\ See id.
    \32\ See id.
    \33\ See id. at 20584.
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    Importantly, NDXESG options would be subject to the 25,000 contract 
position limit that is generally applicable to broad-based index 
options under Phlx Options 4A, section 6(a), and an equivalent exercise 
limit under Phlx Options 4A, section 10. Further, under amended Phlx 
Options 8, section 34(e), and Phlx Options 8, section 34(f), the 
position and exercise limits for FLEX options on the NDXESG would also 
be 25,000 contracts on the same side of the market. The Commission 
believes that the proposed position and exercise limits also should 
help minimize the potential for manipulation and adverse market impact 
surrounding the use of the NDXESG options.
    Finally, the Commission believes that the proposed amendments to 
correct a technical grammar error in Phlx Options 4A, section 6(c), and 
to align the position limits for FLEX index options in Phlx Options 8, 
section 34(e), with the position limits for the corresponding standard 
index options in Phlx Options 4A, section 6, would clarify the rule 
text, reduce the potential for confusion regarding FLEX index option 
position and exercise limits, and promote internal consistency within 
the Exchange's rules.
    Based on the foregoing, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations 
thereunder.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\34\ that the proposed rule change (SR-Phlx-2023-09) be, and hereby 
is, approved.
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    \34\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-10686 Filed 5-18-23; 8:45 am]
BILLING CODE 8011-01-P