[Federal Register Volume 90, Number 53 (Thursday, March 20, 2025)]
[Notices]
[Pages 13226-13228]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-04655]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102669; File No. SR-PHLX-2024-72]
Self-Regulatory Organizations; Nasdaq Phlx, LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Permit the Trading of FLEX Options on Shares of
the iShares Bitcoin Trust ETF
March 14, 2025.
I. Introduction
On December 26, 2024, 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'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend Options 8, Section 34, FLEX Trading, to
permit options on shares of the iShares Bitcoin Trust ETF (``IBIT'') to
trade as cash-settled and physically settled FLEX equity options. The
proposed rule change was published for comment in the Federal Register
on January 14, 2025.\3\
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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. 102132 (Jan. 7,
2025), 90 FR 3266 (``Notice'').
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On February 27, 2025, pursuant to Section 19(b)(2) of the Act,\4\
the Commission designated a longer period
[[Page 13227]]
within which to approve the proposal, disapprove the proposal, or
institute proceedings to determine whether to disapprove the
proposal.\5\ The Commission received a comment regarding the proposed
rule change.\6\ This order institutes proceedings under Section
19(b)(2)(B) of the Act \7\ to determine whether to approve or
disapprove the proposed rule change.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 102497 (Feb. 27,
2025), 90 FR 11334 (Mar. 5, 2025) (designating April 14, 2025, as
the date by which the Commission shall either approve or disapprove,
or institute proceedings to determine whether to disapprove, the
proposed rule change).
\6\ Comments received on the proposal are available at https://www.sec.gov/comments/sr-phlx-2024-72/srphlx202472.htm.
\7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change
As described in detail in the Notice, the Exchange proposes to
amend its rules to permit the trading of FLEX equity options on
IBIT.\8\ The Commission approved Nasdaq ISE LLC's (``ISE'') proposal to
list and trade options on IBIT.\9\ Because the Exchange's listing rules
incorporate ISE's listing rules by reference, the Exchange may list
IBIT options.\10\ The Exchange's rules currently establish position and
exercise limits of 25,000 contracts on the same side of the market for
IBIT options.\11\ The Exchange proposes to amend Options 8, Section
34(e) to apply these position and exercise limits to the proposed IBIT
FLEX options and to provide that positions in IBIT FLEX options will be
aggregated with positions in non-FLEX IBIT options for purposes of
calculating position and exercise limits.\12\ Accordingly, the proposal
limits the position and exercise limits for all IBIT options--FLEX and
non-FLEX--to 25,000 contracts.\13\ The Exchange states that capping the
aggregated position limit at 25,000 contracts will be sufficient to
address concerns related to manipulation and the protection of
investors.\14\ In addition, the Exchange states that in approving the
25,000-contract position and exercise limit for IBIT options, the
Commission concluded, based on its review of the data and analysis
provided by ISE, that the proposed position and exercise limits for
IBIT options were designed to prevent investors from disrupting the
market for the underlying security by acquiring and exercising a number
of options contracts disproportionate to the deliverable supply and
average trading volume of the underlying security, and to prevent the
establishment of options positions that could be used or might create
incentives to manipulate or disrupt the underlying market so as to
benefit the options position.\15\
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\8\ See supra note 3.
\9\ See Securities Exchange Act Release No. 101128 (Sept. 20,
2024), 89 FR 78942 (Sept. 26, 2024) (order approving File No. SR-
ISE-2024-03) (``IBIT Order'').
\10\ See Options 4 and Securities Exchange Act Release No.
101613 (Nov. 13, 2024), 89 FR 91470 (Nov. 19, 2024) (notice of
filing and immediate effectiveness of File No. SR-Phlx-2024-53).
\11\ See Options 9, Section 13(a) and Option 9, Section 15(a).
\12\ See proposed Options 8, Section 34(e).
\13\ See Notice, 90 FR at 3267.
\14\ See proposed Options 8, Section 34(e).
\15\ See Notice, 90 FR at 3267 (citing the IBIT Order, 89 FR at
78946). The Exchange states that the Commission considered and
reviewed the Exchange's analysis that the exercisable risk
associated with a position limit of 25,000 contracts represented
only 0.4% of the outstanding shares of IBIT. The Exchange states
that the Commission also considered and reviewed the Exchange's
statement that with a position limit of 25,000 contracts on the same
side of the market and 611,040,000 shares of IBIT outstanding, 244
market participants would have to simultaneously exercise their
positions to place IBIT under stress. See Notice, 90 FR at 3267
(citing the IBIT Order, 89 FR at 78946),
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The Exchange states that FLEX options on ETFs are currently traded
in the over-the-counter (``OTC'') market by a variety of market
participants, including hedge funds, proprietary trading firms, and
pension funds.\16\ The Exchange states that the proposed FLEX options
could provide a useful risk management and trading vehicle for market
participants and their customers.\17\ The Exchange further states that
FLEX options serve two primary client types in the capital markets: (1)
ETF and structured return issuers who seek European-style options with
bespoke strike and expirations, such that they can tailor their returns
more precisely than they could with standard American-style options;
and (2) with respect to stock lending, certain investors (e.g., banks
and hedge funds) that seek to align their contract durations for calls
and puts, and thereby prefer options with European-style exercise,
which can be exercised only at expiration.\18\ The Exchange states that
FLEX IBIT options traded on the Exchange would have several advantages
over contracts traded in the OTC market, including the potential for
greater liquidity because each exchange-traded FLEX option can be
closed with a liquidating transaction, while OTC FLEX contracts must be
held until expiration; reduced counterparty credit risk because
exchange-traded contracts are issued and guaranteed by The Options
Clearing Corporation (``OCC''); and the price discovery and
dissemination provided by exchange trading.\19\
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\16\ See Notice, 90 FR at 3268.
\17\ See id.
\18\ See id.
\19\ See id.
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The Exchange states that the same surveillance procedures
applicable to other options products listed and traded on the Exchange,
including non-FLEX IBIT options, will apply to the proposed FLEX IBIT
options, and that the Exchange has the necessary systems capacity to
support the proposed options.\20\ The Exchange further states that 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.\21\ The Exchange states
that its market surveillance staff (including staff of the Financial
Industry Regulatory Authority who perform surveillance and
investigative work on behalf of the Exchange pursuant to a regulatory
services agreement) conduct surveillances with respect to IBIT (the
underlying ETF) and, as appropriate, would review activity in IBIT when
conducting surveillances for market abuse or manipulation in IBIT
options.\22\ In addition, the Exchange states that it is a member of
the Intermarket Surveillance Group (``ISG'') under the Intermarket
Surveillance Group Agreement, and that ISG members work together to
coordinate surveillance and investigative information sharing in the
stock, options, and futures markets.\23\ For surveillance purposes, the
Exchange states that it would therefore have access to information
regarding trading activity in the pertinent underlying securities.\24\
The Exchange states that it will implement any additional surveillance
procedures it deems necessary to effectively monitor the trading of
IBIT options.\25\
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\20\ See id.
\21\ See id. The Exchange states that FLEX trading occurs on the
Exchange's trading floor in an open outcry environment. The Exchange
states that surveillance staff monitors FLEX trading in open outcry.
See id. at footnote 24.
\22\ See Notice, 90 FR at 3268.
\23\ See id.
\24\ See id.
\25\ See id. at 3269.
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III. Summary of Comment Received
The Commission received one comment, which expressed support for
the proposal.\26\ The commenter states that FLEX options on IBIT would
permit the creation of products with precise payoff terms, which would
provide investors with hedged exposure to
[[Page 13228]]
IBIT.\27\ The commenter states that these products allow investors to
participate in the underlying reference asset in a manner that is less
risky than taking a long position in the reference asset outright.\28\
In addition, the commenter states that the customizable features of
FLEX options allow asset managers to create precise buffer levels, cash
settlement (for qualifying ETFs), and outcome periods that cannot be
achieved using standardized listed options.\29\
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\26\ See letter from Matt McFarland, Senior Vice President,
Capital Markets, Vest Financial, dated January 27, 2025.
\27\ See id. at 1.
\28\ See id. at 2.
\29\ See id. at 3.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-PHLX-
2024-72 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \30\ 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 comments
on the proposed rule change.
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\30\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\31\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act,\32\ 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.
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\31\ Id.
\32\ 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 that proposed the rule change.'' \33\ 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,\34\ and any failure of a self-
regulatory organization 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 Act and the
applicable rules and regulations.\35\ The Commission is instituting
proceedings to allow for additional consideration and comment on the
issues raised herein, including as to whether the proposal is
consistent with the Act. In particular, the Commission asks commenters
to address whether the proposal includes sufficient analysis to support
a conclusion that the proposal is consistent with the requirements of
Section 6(b)(5) of the Act.
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\33\ 17 CFR 201.700(b)(3).
\34\ See id.
\35\ See id.
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V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, 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 proposal is
consistent with Section 6(b)(5) or any other provision of the Act, and
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 views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\36\
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\36\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants 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 April 10, 2025. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
April 24, 2025.
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-PHLX-2024-72 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-PHLX-2024-72. 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-PHLX-2024-72 and should be
submitted on or before April 10, 2025. Rebuttal comments should be
submitted by April 24, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(57).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2025-04655 Filed 3-19-25; 8:45 am]
BILLING CODE 8011-01-P