[Federal Register Volume 89, Number 127 (Tuesday, July 2, 2024)]
[Notices]
[Pages 54886-54891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-14520]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100438; File No. SR-ISE-2024-12]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To Adopt Rules To List and Trade FLEX Options

June 26, 2024.

I. Introduction

    On March 11, 2024, Nasdaq ISE, LLC (``ISE'' or the ``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 
adopt rules that will govern the listing and trading of flexible 
exchange options (``FLEX Options''). The proposed rule change was 
published for comment in the Federal Register on March 21, 2024.\3\ On 
May 9, 2024, pursuant to section 19(b)(2) of the Act,\4\ the Commission 
designated a longer period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to disapprove the proposed rule change.\5\ The 
Commission has received no comment letters on the proposed rule change. 
The Commission is instituting proceedings pursuant to section 
19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove 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. 99825 (March 21, 
2024), 89 FR 22294 (March 29, 2024) (SR-ISE-2024-12) (Notice of 
Filing of Proposed Rule Change To Adopt Rules to List and Trade FLEX 
Options) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 100086, 86 FR 42528 
(May 15, 2024). The Commission designated June 27, 2024, as the date 
by which the Commission shall approve or disapprove, or institute 
proceedings to determine whether to approve or disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change \7\
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    \7\ For a complete description of the Exchange's proposal, see 
the Notice, supra note 3.
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    The Exchange has proposed to adopt rules in new Options 3A that 
will govern the listing and trading of FLEX Options on the Exchange's 
electronic market.\8\ The proposed electronic trading of FLEX Options 
will allow investors to tailor certain contract terms of exchange-
listed equity and index options, and, as stated by the Exchange, are 
designed to provide investors with greater flexibility in selecting the 
terms of options within the parameters of the Exchange's proposed 
rules.\9\
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    \8\ See note 3, supra.
    \9\ Id.
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    The Exchange states in its proposal that it will allow for the 
trading of FLEX Options on its electronic market in a substantially 
similar manner as Cboe Exchange, Inc.'s (``Cboe'') electronic trading 
of FLEX Options \10\ with certain intended differences to align its 
proposal with its current electronic system (``System'') \11\ and 
auction behavior, as well as to provide increased consistency for 
members trading FLEX Options and non-FLEX Options on the Exchange and 
to account for differences in the proposed scope and operation of FLEX 
trading on the Exchange as compared to Cboe FLEX options trading.\12\
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    \10\ Cboe offers both electronic and open outcry FLEX Options. 
See Notice, 89 FR at 22295.
    \11\ The term ``System'' under the Exchange rules is defined as 
the electronic system operated by the Exchange that receives and 
disseminates quotes, executes orders, and reports transactions. See 
Options 1, Section 1(a)(50).
    \12\ See Cboe Rules 4.20-4.22 and 5.70-5.75. As described in 
more detail in the Notice, the Commission first approved trading of 
FLEX Options based on the Standard and Poor's Corporation 500 and 
100 Stock Indexes on Cboe's predecessor, the Chicago Board Options 
Exchange, Inc., in February 1993. See Notice, 89 FR at 22294, see 
also Securities Exchange Act Release No. 31920 (February 24, 1993), 
58 FR 12280 (March 3, 1993) (SR-CBOE-92-17) (Order Approving and 
Notice of Filing and Order Granting Accelerated Approval to 
Amendment Nos. 1, 2, 3, and 4 to Proposed Rule Changes by the 
Chicago Board Options Exchange, Inc., Relating to FLEX Options) 
(``FLEX Options Approval Order''). In 1996, the Commission approved 
the trading of additional FLEX Options on specified equity 
securities. See Notice, 89 FR at 22294, see also Securities Exchange 
Act Release No. 36841 (February 14, 1996), 61 FR 6666 (February 21, 
1996) (SR-CBOE-95-43) (SR-PSE-95-24) (Order Approving Proposed Rule 
Changes and Notice of Filing and Order Granting Accelerated Approval 
of Amendments by the Chicago Board Options Exchange, Inc. and the 
Pacific Stock Exchange, Inc., Relating to the Listing of Flexible 
Exchange Options on Specified Equity Securities).
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    The Exchange states that to provide investors with the flexibility 
to designate certain of the terms of the options, and to accommodate 
other distinct features of FLEX Options and the way in which they are 
traded, the Exchange has proposed new rules Options 3A, Sections 1 
through 19 that will only be applicable to the trading of FLEX 
Options.\13\ The proposed rules also make clear that unless otherwise 
provided in Options 3A, the trading of FLEX Options will also be 
subject to all other Exchange rules applicable to the trading of 
options on the Exchange.\14\ The Exchange states that proposed Options 
3A, Section 1(a) setting forth the applicability of Exchange Rules will 
make clear that unless otherwise provided in proposed Options 3A, the 
Exchange's existing rules will continue to apply to FLEX Options, and 
this will provide consistency for Members \15\ trading both FLEX 
Options and non-FLEX Options on the Exchange.\16\ Proposed Options 3A, 
Section 1(b) also contains the definitions that will apply to the 
proposed FLEX Option rules.\17\
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    \13\ See Notice, 89 FR at 22295.
    \14\ See Notice, 89 FR at 22295.
    \15\ See ISE General 1, Section 1(a)(13) (defining ``Member'' as 
``an organization that has been approved to exercise trading rights 
associated with Exchange Rights.'').
    \16\ See Notice, 89 FR at 22314.
    \17\ See Notice, 89 FR at 22295.
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    Proposed Options 3A, Section 2 sets forth the trading hours for 
FLEX Options, which will be the same as the trading hours for 
corresponding non-FLEX Options, as set forth in Options 3, Section 1, 
except the Exchange may determine to narrow or otherwise restrict the 
trading hours for FLEX Options.\18\ As such, the Exchange states that 
the trading hours for FLEX Options would be 9:30 a.m. to 4:00 p.m. 
Eastern time (``ET''), except for FLEX Options on fund shares, index-
linked securities and certain broad based indexes, as each are defined 
under Exchange rules, that will be able to trade until 4:15 p.m. 
ET.\19\ The Exchange states that specifying the trading hours for FLEX 
Options in proposed Options 3A, Section 2(a) will provide increased

[[Page 54887]]

clarity that the trading hours for FLEX Options will generally be the 
same as the trading hours for corresponding non-FLEX Options as set 
forth in Options 3, Section 1.\20\
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    \18\ See id.
    \19\ See id.
    \20\ See Notice, 89 FR at 22314.
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    As set forth more fully in the Notice, proposed Options 3A, Section 
3 provides the classes, permissible series, terms, and fungibility of a 
FLEX Option on the Exchange.\21\ Specifically, the Exchange sets forth 
provisions that would allow it to authorize for trading a FLEX Option 
class on any equity security or index if the Exchange may authorize for 
trading a non-FLEX Option class on that equity security or index, even 
if the Exchange does not list that non-FLEX Option class.\22\ 
Additionally, the Exchange may approve a FLEX Option series for trading 
in any such authorized FLEX Option class.\23\ However, the following 
stipulations would apply: (1) the Exchange will only permit trading in 
a put or call FLEX Option series that does not have the same exercise 
style, same expiration date, and same exercise price as a non-FLEX 
Option series on the same underlying security or index that is already 
available for trading; and (2) a FLEX Order for a FLEX Option series 
may be submitted on any trading day prior to the expiration date.\24\
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    \21\ See Notice, 89 FR at 22295-22296.
    \22\ See Notice, 89 FR at 22295. See also proposed Options 3A, 
Section 3(a).
    \23\ See Notice, 89 FR at 22295. See also proposed Options 3A, 
Section 3(b).
    \24\ See Notice, 89 FR at 22295. See also proposed Options 3A, 
Section 3(b). The Exchange also clarifies that FLEX Options series 
are not pre-established. See Notice, 89 FR at 22295.
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    Proposed Options 3A, Section 3(c) further specifies the terms that 
must be included in a FLEX Order: (1) underlying equity security or 
index, as applicable (the index multiplier for FLEX Index Options is 
100; (2) type of option (i.e., put or call); (3) exercise style, which 
may be American-style or European-style; (4) expiration date, which may 
be any business day (specified to the day, month, and year) no more 
than 15 years from the date on which a Member submits a FLEX Order to 
the System; (5) settlement type for the FLEX Equity Option \25\ or FLEX 
Index Option, as applicable; and (6) exercise price, which may be in 
increments no smaller than $0.01.\26\
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    \25\ As proposed, FLEX Equity Options can only be physically 
settled except for a small subset of FLEX Equity Options with an 
underlying security that is an exchange trade fund (``ETF'') that 
meets certain criteria and can also be cash settled. See proposed 
Options 3A, Section 3(c)(5)(A)(ii). See also notes 27-29, infra and 
accompanying text.
    \26\ See Notice, 89 FR at 22295, 22296. See also proposed 
Options 3A, Section 3(c).
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    As described in more detail in the notice, the Exchange is also 
proposing to allow for cash settlement of certain qualifying FLEX 
Equity Options with an underlying security that is an ETF.\27\ The 
Exchange states that cash-settled FLEX ETF Options will be subject to 
the same trading rules and procedures that govern the trading of other 
FLEX Options on the Exchange and that both NYSE American LLC (``NYSE 
American'') and Cboe allow for cash-settled ETF Options.\28\ The 
Exchange states that introducing cash-settled FLEX ETF 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.\29\ Additionally, the Exchange is proposing 
to allow for FLEX Index Options to be settled in U.S. dollars, and may 
be either a.m.-settled (with exercise settlement value determined by 
reference to the reported level of the index derived from the reported 
opening prices of the component securities) or p.m.-settled (with 
exercise settlement value determined by reference to the reported level 
of the index derived from the reported closing prices of the component 
securities).\30\
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    \27\ See Notice, 89 FR at 22296, 22309-22313, and proposed 
Options 3A, Section 3(c)(5)(A)(ii).
    \28\ See Notice, 89 FR at 22309. See NYSE American Rule 903G and 
Cboe Rule 4.21(b)(5)(A). Proposed Options 3A, Section 3(c)(5)(A)(i) 
provides that other than as allowed under proposed Options 3A, 
Section 3(c)(5)(A)(ii) and (iii), FLEX Options are settled with 
physical delivery of the underlying security.
    \29\ See Notice, 88 FR at 22320.
    \30\ See Notice, 89 FR at 22296 and proposed Options 3A, Section 
3(c)(5)(B). The Exchange notes that Cboe recently received approval 
of a pilot program to list p.m.-settled FLEX Index Options whose 
exercise settlement value is derived from closing prices on the last 
trading day prior to expiration that expire on or within two 
business days of a third Friday-of-the-month expiration day for a 
non-FLEX Option (``FLEX PM Third Friday Options''), and the Exchange 
is proposing to do the same. See also Securities Exchange Act 
Release No. 99222 (December 21, 2023), 88 FR 89771 (December 28, 
2023) (SR-CBOE-2023-018).
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    Furthermore, proposed Options 3A, Section 3(d) covers fungibility 
of FLEX Options and provides that if the Exchange lists for trading a 
non-FLEX Option series with identical terms as a FLEX Option series, 
all existing open positions established under the FLEX trading 
procedures will become fully fungible with transactions in the 
identical non-FLEX Options series and the FLEX Option would from then 
on trade under the non-FLEX Option rules and procedures.\31\ The 
Exchange states that it believes these provisions will provide greater 
transparency around the Exchange's listing standards for FLEX Option 
classes and FLEX Option series, and remain consistent with the Act by 
preventing new FLEX Option positions from being opened when a non-FLEX 
Option with the same terms is listed for trading.\32\ However, the 
Exchange, unlike Cboe, will not permit intraday additions of a non-FLEX 
Options series with identical terms to that of an already-listed FLEX 
Options series for the remainder of the trading day.\33\ The Exchange 
notes, in its proposal, that the non-FLEX Options series could be added 
overnight and begin trading the next trading day at which time all 
identical FLEX Options would become fully fungible with the non-FLEX 
Option and any further trading would be under non-FLEX Option trading 
rules.\34\
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    \31\ See Notice, 89 FR at 22296. See also proposed Options 3A, 
Section 3(d).
    \32\ See Notice, 89 FR at 22314.
    \33\ See Notice, 89 FR at 22296. See also proposed Options 3A, 
Section 3(d)(2).
    \34\ See Notice, 89 FR at 22296 n.38.
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    As proposed, bids and offers for FLEX Options must be expressed in 
U.S. dollars and decimals in the minimum increments as set forth in 
proposed Options 3A, Section 5.\35\ Proposed Options 3A, Section 5 
provides that the Exchange will determine the minimum increment for 
bids and offers on FLEX Options on a class-by-class basis, which may 
not be smaller than $0.01.\36\ The Exchange states this requirement 
will provide clear, transparent language regarding how bids and offers 
for FLEX Options must be expressed and will provide clarity to market 
participants regarding how the Exchange will determine the minimum 
increments for bids and offers on FLEX Options.\37\
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    \35\ See Notice, 89 FR at 22297. See also proposed Options 3A, 
Section 4.
    \36\ See Notice, 89 FR at 22297. See also proposed Options 3A, 
Section 5.
    \37\ See Notice, 89 FR at 22315.
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    As described in more detail in the Notice and in proposed Options 
3A, Section 6(a), the Exchange may determine to make the order types 
and times-in-force, respectively, in Options 3, Section 7 available on 
a class or System basis for FLEX Orders.\38\ This would provide the 
Exchange with the authority to make certain order types and times-in-
force available on a class or System basis for FLEX Options, similar to 
its ability to do so for non-FLEX Options pursuant to Options 3, 
Section 7.\39\ Additionally, the following order and quote protocols 
will be available for FLEX Orders, FLEX auction notifications, and FLEX 
auction responses: Financial Information

[[Page 54888]]

eXchange (``FIX''),\40\ Ouch to Trade Options (``OTTO''),\41\ and 
Specialized Quote Feed (``SQF'').\42\ The Exchange states that this is 
consistent with the Exchange's existing authority to designate the 
availability of order types and times-in-force for non-FLEX Orders and 
will provide greater transparency as to which existing order and quote 
protocols would be available for FLEX Orders, FLEX auction 
notifications, and FLEX auction responses.\43\
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    \38\ See Notice, 89 FR at 22297. See also proposed Options 3A, 
Section 6(a).
    \39\ See Notice, 89 FR at 22297.
    \40\ See Notice, 89 FR at 22297 n.44 (describing the FIX 
interface).
    \41\ See Notice, 89 FR at 22297 n.45 (describe the OTTO 
interface).
    \42\ See Notice, 89 FR at 22297 n.46 (describing the SQF 
interface).
    \43\ See Notice, 89 FR at 22316.
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    Regarding complex orders for FLEX Options, proposed Options 3A, 
Section 7 provides the Exchange with the ability to make complex 
orders, including a Complex Options Order, Stock-Options Order, and 
Stock-Complex Orders available for FLEX trading.\44\ The Exchange 
further notes that it is not proposing to change the complex ratio 
requirements for non-FLEX complex orders; instead, it is proposing to 
offer this feature only for complex FLEX Orders so that Members may 
submit complex FLEX Orders with any ratio.\45\ The Exchange states it 
believes this proposed rule will provide investors with additional 
transparency regarding order entry requirements for complex FLEX 
Options.\46\ The Exchange also believes that allowing the submission of 
complex FLEX Orders with any ratio will remove impediments to and 
perfect the mechanism of a free and open market and benefit investors, 
because it will provide Members with additional flexibility and 
precision in their investment strategies.\47\
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    \44\ See Notice, 89 FR at 22297. See also proposed Options 3A, 
Section 7.
    \45\ See Notice, 89 FR at 22297. The Exchange also notes that 
Cboe currently permits complex FLEX Orders to be submitted with any 
ratio. See Cboe US Options Complex Book Process, Section 2.1 
(Ratios) and Section 3 (Complex FLEX Order Functionality), available 
at https://cdn.cboe.com/resources/membership/US-Options-Complex-Book-Process.pdf.
    \46\ See Notice, 89 FR at 22316.
    \47\ See id.
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    In lieu of an Opening Process in FLEX Options, Members may begin 
submitting FLEX Orders into an electronic FLEX Auction pursuant to 
proposed Options 3A, Section 11(b), a FLEX Price Improvement Mechanism 
(``FLEX PIM'') pursuant to proposed Options 3A, Section 12, or a FLEX 
Solicitated Order Mechanism (``FLEX SOM'') pursuant to proposed Options 
3A, Section 13 when the underlying security is open for trading.\48\ 
The Exchange states that since FLEX Options are created with terms 
unique to individual investment objectives, and these individually 
defined FLEX Options are customized for each investor, the opening 
process for non-FLEX Options, which is designed in part to determine a 
single opening price based on orders and quotes from multiple members, 
may not be useful for FLEX Options investors.\49\ The Exchange states 
that this proposed rule change will provide clarity to market 
participants regarding the mechanisms available for FLEX trading.\50\ 
The Exchange also believes that allowing Member to begin submitting 
FLEX Orders once the underlying security is open is appropriate, since 
the Exchange believes it will benefit investors for FLEX Options 
trading to not be available until information regarding transaction 
prices of underlying securities or the values of underlying indexes has 
begun to be disseminated in the market.\51\
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    \48\ See Notice, 89 FR at 22297. See also proposed Options 3A, 
Section 8.
    \49\ See Notice, 89 FR at 22298.
    \50\ See Notice, 89 FR at 22316. The Exchange also notes that 
Cboe likewise does not hold an opening trading rotation in FLEX 
Options. See Cboe Rule 5.71.
    \51\ See Notice, 89 FR at 22316.
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    The Exchange proposes to halt trading in a FLEX Option class 
pursuant to Options 3A, Section 9, and to always halts trading in a 
FLEX Option class when trading in a non-FLEX Options class with the 
same underlying equity security or index is halted on the Exchange.\52\ 
The System will not accept a FLEX Order for a FLEX Option series while 
trading in a FLEX Option class is halted.\53\ The Exchange states that 
proposed Options 3A, Section 9 will provide clarity as to when the 
Exchange would halt trading in FLEX Options.\54\ Proposed Options 3A, 
Section 9 also provides the Exchange with authority to halt trading in 
a FLEX Option pursuant to Options 3, Section 9 even if trading in a 
non-FLEX Option with the same underlying is not halted. The Exchange 
states while such a situation would be rare there may be unusual 
situations that would cause it to halt trading in a FLEX Option.\55\ 
Additionally, the Exchange's simple and complex order books will not be 
available for transactions in FLEX Options, and accordingly, FLEX 
Options may only be traded on the Exchange by submitting FLEX Orders 
into a FLEX Electronic Auction, FLEX PIM, and FLEX SOM.\56\ The 
Exchange states that it believes this proposed rule will make clear 
what mechanisms would and would not be available for FLEX trading: FLEX 
Orders may only be submitted into a FLEX Auction, FLEX PIM, or FLEX 
SOM.\57\
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    \52\ See Notice, 89 FR at 22298. See also proposed Options 3A, 
Section 9.
    \53\ See Notice, 89 FR at 22298.
    \54\ See Notice, 89 FR at 22316.
    \55\ See id.
    \56\ See Notice, 89 FR at 22298. See also proposed Options 3A, 
Section 10. The Exchange also notes that its proposal is in line 
with other options exchanges' FLEX rules that do not contemplate the 
interaction of their respective order books with FLEX transactions.
    \57\ See Notice, 89 FR at 22316.
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    As explained in more detail in the Notice, proposed Options 3A, 
Section 11 specifies the requirements and describes the procedures for 
submitting FLEX Orders for trading on the Exchange for simple and 
complex FLEX Orders and for the electronic FLEX Auction.\58\ 
Specifically, a FLEX Option series will only be eligible for trading if 
a Member submits a FLEX Order for that series into an electronic FLEX 
Auction or submits the FLEX Order to a FLEX PIM or FLEX SOM 
Auction.\59\ Among other things, the provisions of Options 3A, Section 
11 state that the System will not accept a FLEX Order with identical 
terms as a non-FLEX Option series that is already listed. Similarly, 
for complex FLEX orders the System will not accept a FLEX complex 
strategy if any leg in the FLEX Order has identical terms as a non-FLEX 
Option series that is listed for trading. The Exchange states that the 
features of this proposed rule are harmonized with the Exchange's 
current auction functionality for non-FLEX Orders, including PIM and 
SOM, so the Exchange believes this will promote consistency for Members 
participating across different auctions on ISE.\60\
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    \58\ See Notice, 89 FR at 22298. See also proposed Options 3A, 
Section 11. Proposed Options 3A, Section 11(b)(1)(F) also provides 
that an exposure must be between three seconds to five minutes for 
electronic FLEX auctions. The Exchange notes that a submitting 
Member must designate the length of the exposure interval and there 
is no default setting to the FLEX Auction exposure interval. See 
Notice, 89 FR at 22298 and n.67. FLEX PIM and FLEX SOM have the same 
auction periods as FLEX Auctions. See proposed Options 3A, Section 
12(c)(3) (for FLEX PIM) and Section 13(c)(3).
    \59\ See Notice, 89 FR at 22298.
    \60\ See Notice, 89 FR at 22316.
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    Additionally, in proposed Options 3A, Section 12, the Exchange 
proposes to establish PIM auction functionality for FLEX Options and 
sets forth the FLEX PIM auction eligibility requirements.\61\ Pursuant 
to proposed Options 3A, Section 12, a Member may electronically submit 
for execution an

[[Page 54889]]

order (which may be a simple or complex order) it represents as agent 
against principal interest or a solicited order(s) (except, if such 
order is a simple order, for an order for the account of any FLEX 
Market Maker with an appointment in the applicable FLEX Option class on 
the Exchange), provided it submits such order for electronic execution 
into a FLEX PIM auction pursuant to this proposed rule.\62\ Similarly, 
in proposed Options 3A, Section 13, the Exchange proposes to establish 
SOM auction functionality for FLEX Options.\63\ Pursuant to proposed 
Options 3A, Section 13, a Member may electronically submit for 
execution an order (which may be a simple or complex order) it 
represents as agent against a solicited order if it submits such order 
for electronic execution into a FLEX SOM auction pursuant to this 
proposed rule.\64\ The Exchange states that it believes the proposed 
FLEX PIM and FLEX SOM Auctions will remove impediments to and perfect 
the mechanism of a free and open market, and protect investors and the 
public interest, by offering market participants with auction 
mechanisms for the execution of FLEX Options at potentially improved 
prices.\65\ The Exchange also states that it will align certain aspects 
of the proposed FLEX PIM allocation methodology with its current non-
FLEX PIM allocation methodology.\66\
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    \61\ See Notice, 89 FR at 22302. The Exchange notes that the 
proposed FLEX PIM auction eligibility requirements will be 
substantially similar to Cboe's FLEX AIM eligibility requirements in 
Cboe Rule 5.73, except for certain intended differences. See Cboe 
Rule 5.73.
    \62\ See Notice, 89 FR at 22302.
    \63\ See Notice, 89 FR at 22304. The Exchange notes that the 
proposed FLEX SOM auction eligibility requirements will be 
substantially similar to Cboe's FLEX SAM eligibility requirements in 
Cboe Rule 5.74, except for certain intended differences. See Cboe 
Rule 5.74.
    \64\ See Notice, 89 FR at 22301.
    \65\ See Notice, 89 FR at 22317. The Exchange states that there 
are certain intended differences with CBOE rules ``to align to 
current [ ] auction functionality'' in order to allow the proposed 
FLEX Auction ``to fit more seamlessly into the Exchange's market . . 
. [f]or instance, the Exchange will not allow prices to be expressed 
as percentages in [the electronic FLEX Auction] as it does not have 
this capability today.'' Id.
    \66\ See Notice, 89 FR at 22318.
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    The Exchange proposes to apply the Market Wide Risk Protection and 
Size Limitation as simple order risk protections \67\ and Strategy 
Protection and Size Limitation as complex order risk protections.\68\ 
The Exchange states that it believes that specifying the risk 
protections will benefit investors with additional transparency 
regarding which of the Exchange's risk protections would apply to FLEX 
trading.\69\ The Exchange also believes that applying these risk 
protections to FLEX Options will protect investors and the public 
interest, and maintain fair and orderly markets, by providing market 
participants with more tools to manage their risk.\70\ In addition, the 
Exchange believes that applying these risk protections has the 
potential to promote just and equitable principles of trade by 
providing Members with more tools for managing risk facilitates 
transactions in FLEX Options.\71\
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    \67\ See Notice, 89 FR at 22306 and proposed Options 3A, Section 
14(a).
    \68\ See Notice, 89 FR at 22307 and proposed Options 3A, Section 
14(b). Proposed Options 3A, Section 14(c) provide that the optional 
risk protections from Options 3, Section 28, are available to FLEX 
Options also.
    \69\ See Notice, 89 FR at 22319.
    \70\ See id.
    \71\ See id.
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    Proposed Options 3A, Section 15, specified the data feeds the 
Exchange will disseminate auction notifications for simple and complex 
FLEX Orders.\72\ Specifically, auction notifications for simple FLEX 
orders will be disseminated through the Nasdaq ISE Order Feed,\73\ and 
the Nasdaq ISE Spread Feed for complex FLEX orders.\74\ The Exchange 
states that specifying the data feeds will benefit investors with 
additional transparency regarding which data fees it will disseminate 
auction notifications for simple and complex FLEX Orders.\75\
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    \72\ See Notice, 89 FR at 22307.
    \73\ See id. and proposed Options 3A, Section 15(a).
    \74\ See Notice, 89 FR at 22307 and proposed Options 3A, Section 
15(b).
    \75\ See Notice, 89 FR at 22319.
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    Pursuant to proposed Options 3A, Section 16, which governs FLEX 
Market Makers on the Exchange, a FLEX Market Maker will automatically 
receive an appointment in the same FLEX option class(es) as its non-
FLEX class appointments selected pursuant to Options 2, Section 3.\76\ 
In addition, each FLEX Market Maker would be required to fulfill all 
the obligations of a Market Maker under Options 2 and comply with the 
applicable provisions, except FLEX Market Makers would not need to 
provide continuous quotes in FLEX Options.\77\ The Exchange states that 
the proposed FLEX Market Maker provisions will provide clarity and 
transparency as to how FLEX Market Makers are appointed and their 
related obligations.\78\ Additionally, proposed Options 3A, Section 17 
sets forth the requirement that, in order to a FLEX Market Maker to 
effect any transaction in FLEX Options, one or more effective Letter(s) 
of Guarantee must be issued by a Clearing Member and filed with the 
Exchange accepting financial responsibility for all FLEX transactions 
made by the FLEX Market Maker pursuant to Options 6, Section 4.\79\ The 
Exchange states that it believes that the existing Letter of Guarantee 
continues to protect investors and the public interest because it 
signifies that the clearing member has accepted financial 
responsibility for transactions in all options entered into by the 
Market Maker, which will protect the counterparties of those trades and 
such protections will flow to other clearing members and ultimately to 
the OCC as the central counterparty and guarantor of both FLEX and non-
FLEX Option transactions.\80\
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    \76\ See Notice, 89 FR at 22307.
    \77\ See id. See also proposed Options 3A, Section 16(b).
    \78\ See Notice, 89 FR at 22319. The Exchange also notes that 
these provisions are substantially similar to other options 
exchanges, notably Cboe and Nasdaq PHLX LLC (``Phlx''). See Cboe 
Rules 3.58(c) and 5.57 and Phlx Options 8, Section 34(d)(1) for 
materially identical provisions.
    \79\ See Notice, 89 FR at 22307.
    \80\ See Notice, 89 FR at 22319.
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    Proposed Options 3A, Section 18, provides detail on the position 
limits for FLEX Options, including for FLEX Index Options and for FLEX 
Equity Options.\81\ Additionally, proposed Options 3A, Section 19 
details the exercise limits for FLEX Options, which shall be equivalent 
to the FLEX position limits prescribed in proposed Options 3A, Section 
18 above.\82\ The Exchange states that it believes these proposed 
position and exercise limits are reasonably designed to prevent a 
Member from using FLEX Index Options to evade the position limits 
applicable to comparable non-FLEX Index Options.\83\ Additionally, by 
establishing the proposed position and exercise limits for FLEX Index 
Options and, importantly, aggregating such positions in the manner 
described in the proposal,\84\ the Exchange believes that

[[Page 54890]]

the position and exercise limit requirements for FLEX Index Options 
should help to ensure that the trading of FLEX Index Options would not 
increase the potential for manipulation or market disruption and could 
help to minimize such incentives.\85\
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    \81\ See Notice, 89 FR at 22307. The Exchange also notes that 
proposed Options 3A, Section 18 will be based on the FLEX Options 
position limit rules on Cboe and Phlx.
    \82\ See Notice, 89 FR at 22308. The Exchange also notes that 
proposed Options 3A, Section 18 will be based on the FLEX Options 
exercise limit rules on Cboe and Phlx.
    \83\ See Notice, 89 FR at 22319. The Exchange also notes that 
proposed position and exercise limits are consistent with the rules 
of other options exchanges that offer FLEX Index Options, and 
therefore, from their perspective, should raise no novel issues for 
the Commission.
    \84\ See Notice, 89 FR at 22308. Proposed Options 3A, Section 
18(c) governs the aggregation of FLEX positions and provides that 
for purposes of the position limits and reporting requirements for 
FLEX Options, FLEX Option positions will not be aggregated with 
positions in non-FLEX Options other than in specific circumstances. 
One such circumstances is that commencing at the close of trading 
two business days prior to the last trading day of the calendar 
quarter, positions in P.M.-settled FLEX Index Options shall be 
aggregated with positions in Quarterly Options Series on the same 
index with the same expiration and shall be subject to the position 
limits set forth in Options 4A, Section 6 or Section 7, as 
applicable. See proposed Options 3A, Section 18(c)(1). Additionally, 
commencing at the close of trading two business days prior to the 
last trading day of the week, positions in FLEX Index Options that 
are cash settled shall be aggregated with positions in Short Term 
Option Series on the same underlying (e.g., same underlying index as 
a FLEX Index Option) with the same means for determining exercise 
settlement value (e.g., opening or closing prices of the underlying 
index) and same expiration, and shall be subject to the position 
limits set forth in Options 4A, Section 6 or Section 7, as 
applicable. See proposed Options 3A, Section 18(c)(2). Finally, as 
long as the options positions remain open, positions in FLEX Options 
that expire on a third Friday-of-the-month expiration day shall be 
aggregated with positions in non-FLEX Options on the same 
underlying, and shall be subject to the position limits set forth in 
Options 4A, Section 6, Options 4A, Section 7, or Options 9, Section 
13, as applicable, and the exercise limits set forth in Options 9, 
Section 15, as applicable. See proposed Options 3A, Section 
18(c)(3). Cash-settled ETF FLEX Options would be subject to the 
aggregated with positions in physically settled options on the same 
underlying ETF for the purpose of calculating the position limits 
set forth in Options 9, Section 13 and the exercise limits set forth 
in Options 9, Section 15. See proposed Options 3A, Section 
18(b)(1)(B). Furthermore, FLEX Index Options on a given index shall 
not be aggregated with options on any stocks included in the index 
or with FLEX Index Option positions on another index. See proposed 
Options 3A, Section 18(a).
    \85\ See Notice, 89 FR at 22319.
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    Further, the Exchange noted that it has analyzed its capacity and 
represents that it believes the Exchange and the Options Price 
Reporting Authority (``OPRA'') has the necessary systems capacity to 
handle the additional message traffic associated with the listing of 
new series that may result from the introduction of FLEX Options.\86\ 
The Exchange stated, in its proposal, that, it believes any additional 
traffic that would be generated from the introduction of cash-settled 
FLEX ETF Options would be manageable, and it expects members will not 
have a capacity issue as a result of this proposed rule change.\87\ In 
addition, the Exchange stated that it will monitor the trading volume 
associated with the additional options series listed as a result of the 
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.\88\
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    \86\ See Notice, 88 FR at 22308.
    \87\ See Notice, 88 FR at 22312.
    \88\ See Notice, 88 FR at 22312.
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    The Exchange also intends to integrate FLEX Option products and 
their respective symbols into the Exchange's existing surveillance 
system architecture, within which they will be subject to the relevant 
surveillance processes.\89\ The Exchange stated, in its proposal, that 
it implements procedures to detect potential market manipulation and 
unusual activity, and that it also works with other SROs and exchanges 
on intermarket surveillance related issues.\90\
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    \89\ See Notice, 88 FR at 22308.
    \90\ See Notice, 88 FR at 22320.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-ISE-
2024-12 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to section 
19(b)(2)(B) of the Act \91\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide 
additional comment on the proposed rule change to inform the 
Commission's analysis of whether to approve or disapprove the proposed 
rule change.
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    \91\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to section 19(b)(2)(B) of the Act,\92\ the Commission is 
providing notice of the grounds for disapproval under consideration. As 
described above, the Exchange has proposed to adopt rules that will 
govern the listing and trading of FLEX Options. The Commission is 
instituting proceedings to allow for additional analysis of, and input 
from commenters with respect to, the proposed rule change's consistency 
with the Act, and in particular, section 6(b)(5) of the Act, 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 mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.\93\
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    \92\ Id.
    \93\ 15 U.S.C. 78f(b)(5).
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
self-regulatory organization [`SRO'] that proposed the rule change.'' 
\94\ The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\95\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\96\
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    \94\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \95\ Id.
    \96\ Id.
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    For these reasons, the Commission believes it is appropriate to 
institute proceedings pursuant to section 19(b)(2)(B) of the Exchange 
Act \97\ to determine whether the proposal should be approved or 
disapproved.
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    \97\ 15 U.S.C. 78s(b)(2)(B).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their data, views, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is consistent with section 6(b)(5) of the Act \98\ or any other 
provision of the Act, or the rules and regulations thereunder. Although 
there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of data, 
views, and arguments, the Commission will consider, pursuant to Rule 
19b-4 under the Act,\99\ any request for an opportunity to make an oral 
presentation.\100\
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    \98\ 15 U.S.C. 78f(b)(5).
    \99\ 17 CFR 240.19b-4.
    \100\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants to 
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is 
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Acts Amendments of 1975, 
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 
94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by July 23, 2024. Any person who wishes to file a 
rebuttal to any other person's

[[Page 54891]]

submission must file that rebuttal by August 6, 2024. The Commission 
asks that commenters address the sufficiency of the Exchange's 
statements in support of the proposal, in addition to any other 
comments they may wish to submit about the proposed rule change. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-ISE-2024-12 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-ISE-2024-12. 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 (https://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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-ISE-2024-12 and should be 
submitted on or before July 23, 2024. Rebuttal comments should be 
submitted by August 6, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\101\
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    \101\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-14520 Filed 7-1-24; 8:45 am]
BILLING CODE 8011-01-P