[Federal Register Volume 90, Number 88 (Thursday, May 8, 2025)]
[Notices]
[Pages 19546-19562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-07985]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102977; File No. SR-Phlx-2025-20]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Phlx's
FLEX Floor Trading
May 2, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 22, 2025, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Options 8, Section 34, FLEX
Trading.\3\
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\3\ Phlx Options 8, Section 34 rule text was previously amended
by two rule changes which are effective, but not yet operative. See
Securities Exchange Act Release Nos. 97658 (June 7, 2023), 88 FR
38562 (June 13, 2023) (SR-Phlx-2023-22); and 100321 (June 12, 2024),
89 FR 51580 (June 18, 2024) (SR-Phlx-2024-24). Phlx further delayed
the implementation so that it could implement SR-Phlx-2023-22 while
also completing an OCC industry rule change prior. These two prior
rule changes will be implemented at the same time as the rule
changes proposed herein.
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[[Page 19547]]
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/phlx/rulefilings,
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 Exchange 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 these 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 aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Options 8, Section 34, FLEX Trading.
The Exchange also proposes a technical amendment to Options 8, Section
33, Accommodation Transactions.
FLEX Options are customized equity, index, and currency contracts
that allow investors to tailor contract terms for exchange-listed
equity and index options. By way of background, in 2023, the Exchange
filed a rule change to amend the manner in which FLEX Options are
transacted on Phlx's Trading Floor.\4\ Thereafter, the Exchange filed
to delay the implementation of SR-Phlx-2023-22 to on or before August
30, 2024.\5\ Finally, in 2024, Phlx filed a rule change to amend FLEX
Options rules at Options 8, Section 34(b) and further delay the
implementation of SR-Phlx-2023-22 to the end of Q4 2025.\6\ At this
time, the Exchange proposes to further amend the rules proposed in SR-
Phlx-2023-22 and SR-Phx-2024-24, which are immediately effective, but
not yet operative. The Exchange proposes to implement the amendments in
Phlx-2023-22 and SR-Phx-2024-24 at the same time as the proposed
amendments.
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\4\ See Securities Exchange Act Release No. 97658 (June 7,
2023), 88 FR 38562 (June 13, 2023) (SR-Phlx-2023-22) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Various Options 8 Rules) (``SR-Phlx-2023-22''). SR-Phlx-2023-22
amended FLEX Orders in 3 ways. First, the Exchange amended the rules
to require FLEX Orders to be reported into Phlx's Options Floor
Based Management System or ``FBMS,'' thereby further automating the
execution and reporting of FLEX Options. All executed FLEX contracts
will be reported to OPRA and sent to the OCC for clearing, similar
to all other equity, equity index and U.S. dollar-settled foreign
currency options orders executed on the Exchange's trading floor.
Second, the Exchange removed its RFQ process including the BBO
Improvement Interval Process, with the rule change. Third, the
Exchange reorganized Options 8, Section 34 to restructure the rule
to include additional information which describes current FLEX
trading on Phlx. With respect to Cabinet Orders, SR-Phlx-2023-22
amended Options 8, Section 33 to require Cabinet Orders to be
reported into FBMS. With this change, members and member
organizations will be required to record all Cabinet Orders
represented in the trading crowd into FBMS. All executed contracts
will be reported to OPRA and sent to OCC for clearing similar to all
other equity, equity index and U.S. dollar-settled foreign currency
options orders executed on the Exchange's trading floor.
\5\ See Securities Exchange Act Release No. 98919 (November 13,
2023), 88 FR 80363 (November 13, 2023) (SR-Phlx-2023-48) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Delay
the Implementation of the FLEX and Cabinet Automation).
\6\ See Securities Exchange Act Release No. 100321 (June 12,
2024), 89 FR 51580 (June 18, 2024) (SR-Phlx-2024-24) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Delay Implementation of Certain Exchange Options 8 Rules and Amend
Options 8, Section 34(b)). Phlx further delayed the implementation
so that it could implement SR-Phlx-2023-22 while also completing an
OCC industry rule change prior.
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Specifically, the Exchange proposes to (1) clarify the Options 8,
Section 34 functionality that will be available with the implementation
of SR-Phlx-2023-22 and SR-Phx-2024-24; (2) list p.m.-settled FLEX Index
Options that expire on or within two business days of a third Friday-
of-the-month expiration day for a non-FLEX Option; and (3) permit FLEX
Options on certain Exchange-Traded Funds (``ETFs'') to be settled by
delivery in cash if the underlying security meets prescribed criteria.
Each change will be described below.
Options 8, Section 34
First, the Exchange proposes to capitalize certain terms uniformly
throughout Options 8, Section 34. The Exchange proposes to capitalize
the following terms: ``FLEX Options,'' ``FLEX Equity Options,'' ``FLEX
Index Options,'' and ``FLEX Currency Options.'' The Exchange proposes
to amend Options 8, Section 34(f)(4) to define FLEX U. S. dollar-
settled foreign currency options as ``FLEX Currency Options.'' The
Exchange is also underlying [sic] certain text in Options 8, Section
34(k)(2) that appeared deleted in SR-Phlx-2023-22 due to a missing
bracket after the (h).
Second, the Exchange proposes to relocate the exclusion of iShares
Bitcoin Trust ETF (``IBIT''), the Fidelity Wise Origin Bitcoin Fund;
the ARK21Shares Bitcoin ETF, the Grayscale Bitcoin Trust (BTC), the
Grayscale Bitcoin Mini Trust BTC, and the Bitwise Bitcoin ETF from
trading as a FLEX Options from Options 8, Section 34(a) to Options 8,
Section 34(e). The language in Options 8, Section 34(a) currently
states, ``The Exchange will not authorize for trading a FLEX Option on
iShares Bitcoin Trust ETF, the Fidelity Wise Origin Bitcoin Fund; the
ARK21Shares Bitcoin ETF, the Grayscale Bitcoin Trust (BTC), the
Grayscale Bitcoin Mini Trust BTC, and the Bitwise Bitcoin ETF.'' This
non-substantive amendment is intended to place the exception in the
Permissible Series paragraph for ease of locating any exceptions.
Third, the Exchange proposes to relocate current Options 8, Section
34(f)(1)(B) to (f)(1)(A) and state, ``an underlying equity security or
index, as applicable (the index multiplier for FLEX Index Options is
100);''. This proposed rule text reflects the current characteristics
of underlying interest for FLEX Option. The proposed rule text brings
greater clarity to the Rule.
Fourth, the Exchange proposes to amend the language in Options 8,
Section 34(f)(3) which was initially amended to state, ``The Exchange
may determine the smallest increment for exercise prices of FLEX
Options not to exceed two decimal places.'' While not substantively
amending the exercise price, the Exchange proposes to amend this
sentence to state, ``The Exchange may determine the smallest increment
for exercise prices of FLEX Options on a class-by-class basis without
going lower than the $0.01.'' The Exchange believes that the proposed
rule text brings greater clarity to Phlx's rule text and is consistent
with rule text in Cboe Rule 5.3(e)(3).\7\ Also, this rule text is
identical to ISE Options 3A, Section 3(c)(6).\8\
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\7\ Of note, the Exchange is not proposing to provide for Micro
FLEX Index Options or to allow prices to be expressed as a
percentage value, similar to Cboe, because the Exchange does not
offer these features today.
\8\ ISE received approval to trade FLEX on November 22, 2024.
See also Securities Exchange Release Act No. 101720 (November 22,
2024), 89 FR 94986 (November 29, 2024) (SR-ISE-2024-12).
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Fifth, the Exchange proposes to amend the language in Options 8,
Section 34(f)(5) to provide, ``The expiration date may be any business
day (specified to the day, month, and year) no more than 15 years from
the date on which an executed FLEX equity and index option is submitted
to the System and no more than 3 years from the date on which an
executed FLEX currency option is submitted to the System with exercise
settlement value on the expiration date determined by reference
[[Page 19548]]
to the reported level of the index as derived from the opening prices
of the component securities (``a.m. settlement'') or closing prices
(``p.m. settlement'').'' \9\ This amendment aligns the rule text
related to settlement style required for a complex FLEX Order leg with
rule text in Cboe 4.21(b)(4) and ISE Options 3A, Section 3(c). The
Exchange notes that Cboe received approval of its pilot program that
permitted it to list p.m.-settled FLEX Index Options 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'').\10\
Consistent with the Commission's approval of Cboe's proposal, the
Exchange is proposing to allow the listing of FLEX PM Third Friday
Options on Phlx as well, and will align with Cboe Rule
4.21(b)(5)(B)(ii).\11\
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\9\ The Exchange would remove the rule text in current Options
8, Section 34 (f)(5) that provides, ``except that (i) a FLEX index
option that expires on or within two business days prior or
subsequent to a third Friday-of-the-month expiration day for a non-
FLEX option (except quarterly expiring index options) or underlying
currency may only have an.''
\10\ See Securities Exchange Act Release No. 99222 (December 21,
2023), 88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX
Settlement Pilot Approval''). In support of making the pilot a
permanent program, Cboe cited to its own review of pilot data during
the course of the pilot program and a study by the Commission's
Division of Economic and Risk Analysis (``DERA'') staff. See FLEX
Settlement Pilot Approval, notes 18 and 35.
\11\ The only broad-based indexes option that would be able to
list as a FLEX PM Third Friday Option is the Nasdaq-100 Index option
(``NDX'' or ``NDX options'') and options based on 1/100 the value of
the Nasdaq-100 (``XND'' or ``XND options''). The Exchange notes that
Cboe lists both NDX and XND electronic FLEX options today pursuant
to a license agreement with Nasdaq. Phlx received approval to permit
the listing of a third-Friday-of-the-month p.m. expiration on NDX
and XND options its standardized market. See Securities Exchange Act
Release No. 98950 (November 15, 2023), 88 FR 81172 (November 21,
2023) (SR-Phlx-2023-45) (Order Approving a Proposed Rule Change To
Permit the Listing and Trading of P.M.-Settled Nasdaq-100 Index
Options With a Third-Friday-of-the-Month Expiration).
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Sixth, the Exchange proposes to re-style Options 8, Section
34(f)(6) to change the title from ``Settlement'' to ``Settlement
type.'' The Exchange also proposes to add a title at (A), ``FLEX Equity
Options.'' At proposed Options 8, Section 34(f)(6)(A)(1) the Exchange
proposes to add rule text to state, ``FLEX Equity Options, other than
as permitted in subparagraph (2) below, are settled with physical
delivery of the underlying security.'' The Exchange proposes to also
introduce FLEX Equity Options that are cash-settled in proposed Options
8, Section 34(f)(6)(A)(2). The Exchange will discuss cash-settled FLEX
Equity Options in greater detail below.
The Exchange proposes to amend Options 8, Section 34(f)(6)(B) to
add a title for FLEX Index Options at (B) and change the current rule
text \12\ to instead provide that the settlement value for FLEX Index
Options may be specified based on the index value reported at the:
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\12\ Initially, the Exchange stated at Options 8, Section
34(f)(6)(A) that ``respecting FLEX index options, the settlement
value may be specified as the index value reported at the: (i) close
(P.M.-settled); and (ii) opening (A.M.-settled) of trading on the
Exchange. American style index options exercised prior to the
expiration date can only settle based on the closing value on the
exercise date. FLEX index options are settled in U.S. dollars.''
(1) close with exercise settlement value determined by reference
to the reported level of the index derived from the reported closing
prices of the component securities (``P.M.-settled'');
(2) opening of trading on the Exchange with exercise settlement
value determined by reference to the reported level of the index
derived from the reported opening prices of the component securities
(``A.M.-settled'').
While not substantively amending the rule text, the Exchange
believes that the proposed text adds clarity by noting how the exercise
value is determined depending on whether the option is a.m.-settled or
p.m.-settled. The Exchange proposes to add a title ``FLEX Currency
Options'' to new Options 8, Section 34(f)(6)(C). The Exchange also
proposes a technical amendment to underline ``Market Maker'' in Options
8, Section 34(g)(3). SR-Phlx-2023-22 inadvertently did not underline
that text, thereby designating it as new text. The Exchange proposes to
remove the following rule text currently in Options 8, Section
34(f)(6)(B), ``American style index options exercised prior to the
expiration date can only settle based on the closing value on the
exercise date.'' This language is not necessary as American Style
Options are defined in Options 1, Section 1(b)(3) to mean an option
contract that may be exercised at any time from its commencement until
its expiration. The definition is not needed in this rule. The Exchange
also relocated the rule text in Options 8, Section 34(f)(6)(B) that
stated, ``FLEX index options are settled in U.S. dollar'' to the
beginning of that section.
Seventh, the Exchange proposes to amend Position Limits in Options
8, Section 34(i) to add a new paragraph stating that,
There shall be no position limits for FLEX Equity Options, other
than as set forth in this paragraph and (4) below. Position limits
for FLEX Equity Options where the underlying security is an ETF that
is settled in cash pursuant to subparagraph (f)(6)(A) shall be
subject to the position limits set forth in Options 9, Section 13,
and subject to the exercise limits set forth in Options 9, Section
15. Positions in such cash-settled FLEX Options shall be aggregated
with positions in physically-settled non-FLEX 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.
The Exchange will describe position limits for cash-settled FLEX
Equity Options on an ETF below with the description of its proposal to
permit a cash-settled ETF.
The Exchange proposes to remove certain numbering as unnecessary in
proposed Options 8, Section 34(i)(2), which is currently Options 8,
Section 34(i)(1). The Exchange would create a new Options 8, Section
34(i)(2) and title it ``Reports.'' The Exchange would remove
``However'' from this new paragraph and start the paragraph with
``Each.''
The Exchange proposes to add the title ``Additional Margin
Requirements'' to proposed Options 8, Section 34(i)(3).
The Exchange proposes to amend proposed Options 8, Section
34(i)(3), current Options 8, Section 34(i)(3), by renumbering it to
``(4)'' and adding a title ``Aggregation of FLEX Positions.'' Further,
the Exchange proposes to note that, ``For purposes of the position
limits and reporting requirements set forth in this Rule, FLEX Option
positions shall not be aggregated with positions in non-FLEX Options
other than as noted in this subparagraphs (i)(1) and (i)(4)(a)-(c), and
positions in 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.'' \13\ Pursuant to
proposed Options 8, Section 34(i)(4)(a), 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 (i.e., the
settlement value for FLEX Index Options is derived from closing prices
on the expiration date) \14\ 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.\15\ Pursuant to proposed Options 8, Section 34(i)(4)(b),
commencing at the close of
[[Page 19549]]
trading two business days prior to the last trading day of the week,
positions in FLEX Index Options that are cash settled \16\ 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.\17\ Pursuant to proposed Options 8, Section 34(i)(4)(c), 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, or Options 9, Section 13, as applicable, and the exercise
limits set forth in Options 9, Section 15, as applicable.\18\
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\13\ The Exchange also proposes to change ``shall'' to ``will in
two places in this paragraph.
\14\ The Exchange is amending this provision to reflect the
current practice with respect to p.m.-settled Index Options,
including FLEX Index Options. Phlx Options 4A, Section 12(a)(6)
provides that P.M.-settled standard index options have an exercise
settlement value that is derived from closing prices on the
expiration day. The Exchange notes that a similar amendment will be
made to ISE Options 3A, Section 18(c)(1) in a separate rule change.
\15\ See Cboe Rule 8.35(d)(1) for materially identical
provisions. See also ISE Options 3A, Section 18(c)(1) for identical
rule text.
\16\ The Exchange notes that all FLEX Index Options will be cash
settled. Cash-settled FLEX Equity Options ETFs will be described
later in this proposal.
\17\ This is based on Cboe Rule 8.35(d)(2), except the Exchange
does not currently list Credit Default Options and will therefore
not incorporate the applicable portion into its proposed rule. See
also ISE Options 3A, Section 18(c)(2) for identical text.
\18\ See Cboe Rule 8.35(d)(3) for materially identical
provisions. See also ISE Options 3A, Section 18(c)(3) for identical
text.
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Eighth, the Exchange proposes to amend Exercise Limits in Options
8, Section 34(j) to provide further detail and rearrange the rule text.
The Exchange proposes to relocate the rule text in Options 8, Section
34(j)(1) that provides, ``Positions in FLEX options shall not be taken
into account when calculating exercise limits for non-FLEX options,
except as provided in paragraph (d) above. The minimum exercise size
shall be the lesser of $1 million underlying equivalent value for FLEX
index options, and 25 contracts for FLEX equity and currency options,
or the remaining size of the position.'' Instead, the Exchange proposes
to provide at Options 8, Section 34(j)(1)(a) that, ``The minimum value
size for FLEX Equity Options and FLEX Currency Options exercises shall
be 25 contracts or the remaining size of the position, whichever is
less.'' Proposed Options 8, Section 34(j)(1)(b) will require that the
minimum value size for FLEX Index Options exercises be $1 million
Underlying Equivalent Value (as defined below) or the remaining
Underlying Equivalent Value of the position, whichever is less.\19\
Proposed Options 8, Section 34(j)(1)(c) will stipulate that except as
provided in proposed subparagraph (i) and (i)(4) above,\20\ FLEX
Options shall not be taken into account when calculating exercise
limits for non-FLEX Option contracts.\21\ Proposed Options 8, Section
34(j)(1)(d) will set forth the definition of Underlying Equivalent
Value as the aggregate value of a FLEX Index Option (index multiplier
times the current index value) multiplied by the number of FLEX Index
Options.\22\ Finally, the Exchange proposes to add a sentence to the
end of Options 8, Section 34(j) that provides, ``There shall be no
exercise limits for broad-based FLEX Index Options (including reduced
value option contracts) on the broad-based indexes listed in Options
4A, Section 6(a).''
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\19\ See Cboe Rule 8.42(g)(2) for materially identical
provisions. See also ISE Options 34A, Section 19(a)(2) for identical
text.
\20\ As described above, proposed Options 8, Section 34(i)(4)
will govern the aggregation of FLEX positions generally, while
proposed Options 8, Section 34(i)(1) will govern the aggregation of
cash-settled FLEX Equity Options specifically and that positions in
such cash-settled FLEX Equity Options will be aggregated with
positions in physically settled options on the same underlying ETF.
Cash-settled FLEX Equity Options will be discussed later in this
filing.
\21\ See Cboe Rule 8.42(g)(3) for materially identical
provisions. See also ISE Options 3A, Section 19(a)(3) for identical
text.
\22\ See Phlx Options 8, Section 34(b)(8)(D) for materially
identical provisions.
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Options 8, Section 33
The Exchange also proposes to make a technical amendment to Options
8, Section 33, Accommodation Transactions, at paragraph (e) to remove
correct improperly placed parentheticals from SR-Phlx-2024-22.
Cash-Settled FLEX Equity Options on Exchange Traded Funds (``ETFs'')
Generally, FLEX Equity Options will be settled by physical delivery
of the underlying security,\23\ while all FLEX Index Options will be
settled by delivery in cash.\24\ The Exchange proposes to allow FLEX
Equity Options where the underlying security is an ETF to be settled by
delivery in cash if the underlying security meets prescribed criteria.
The Exchange notes that cash-settled FLEX ETF Options will be subject
to the same trading rules and procedures described in Options 8,
Section 34 that will govern the trading of other FLEX Options on the
Exchange. Today, NYSE American Rule 903G,\25\ Cboe Rule 4.21(b)(5)(A)
\26\ and ISE Options 3A, Section 3(c)(5)(A) \27\ allow for cash-settled
FLEX ETF Options as well. The Exchange's proposed rule changes for
cash-settled ETF Options will be based on NYSE American Rule 903G, Cboe
Rule 4.21(b)(5)(A) and ISE Options 3A, Section 3(c)(5)(A).
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\23\ See proposed Options 8, Section 34(f)(6)(A)(1).
\24\ See proposed Options 8, Section 34(f)(6)(A)(2). As
discussed below, cash settlement is also permitted in the OTC
market.
\25\ See Securities Exchange Act Release No. 88131 (February 5,
2020), 85 FR 7806 (February 11, 2020) (SR-NYSEAmer-2019-38) (Notice
of Filing of Amendment No. 1 and Order Granting Accelerated Approval
of a Proposed Rule Change, as Modified by Amendment No. 1, To Allow
Certain Flexible Equity Options To Be Cash Settled).
\26\ Cboe also filed an immediately effective rule change to
allow certain FLEX Options to be cash settled. See Securities
Exchange Act Release No. 98044 (August 2, 2023), 88 FR 53548 (August
8, 2023) (SR-Cboe-2023-036) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Allow Certain Flexible
Exchange Equity Options To Be Cash Settled).
\27\ See also Securities Exchange Release Act No. 101720
(November 22, 2024), 89 FR 94986 (November 29, 2024) (SR-ISE-2024-
12) (Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 1, To Adopt Rules To List and Trade FLEX Options).
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The Exchange proposes rule text in Options 8, Section
34(f)(6)(A)(2) to provide that for FLEX Equity Options with an
underlying security that is an ETF that has an average daily notional
value of $500 million or more and a national average daily volume of at
least 4,680,000 shares,\28\ measured over the prior 6-month period,\29\
settlement may be settled by physical delivery of the underlying
security or by delivery in cash.
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\28\ See Cboe Rule 4.21(b)(5)(A)(ii) for materially identical
provisions.
\29\ As noted below, the Exchange plans to conduct the bi-annual
review on January 1 and July 1 of each year. As such, the six-month
periods will be from January to June, and from July to December each
year.
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The Exchange also proposes in Options 8, Section 34(f) that a FLEX
Equity Option overlying an ETF (cash- or physically-settled) may not be
the same type (put or call) and may not have the same exercise style,
expiration date, and exercise price as a non-FLEX Equity Option
overlying the same ETF.\30\ In other words, regardless of whether a
FLEX Equity Option overlying an ETF is cash or physically settled, at
least one of the exercise style (i.e., American-style or European-
style), expiration date, and exercise price of that FLEX Option must
differ from those terms of a non-FLEX Option overlying the same ETF in
order to list such a FLEX Equity Option. For example, suppose a non-
FLEX SPY option (which
[[Page 19550]]
is physically settled, p.m.-settled and American-style) with a specific
September expiration and exercise price of 475 is listed for trading. A
FLEX Trader could not submit an order to trade a FLEX SPY option that
is cash-settled (or physically settled) and American-style with the
same September expiration and exercise price of 475.
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\30\ See introductory paragraph of Cboe Rule 4.21(b) for
materially identical provisions. All non-FLEX Equity Options
(including on ETFs) are physically settled. Note all FLEX and non-
FLEX Equity Options (including ETFs) are p.m.-settled.
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In addition, the Exchange proposes new Options 8, Section
34(f)(6)(A)(2)(a), which would provide that the Exchange will determine
bi-annually the underlying ETFs that satisfy the notional value and
trading volume requirements in subparagraph (2) by using trading
statistics for the previous six-month period.\31\ The Exchange will
permit cash settlement as a contract term on no more than 50 underlying
ETFs that meet the criteria in subparagraph (2). If more than 50 ETFs
satisfy the notional value and trading volume requirements, the
Exchange will select the top 50 ETFs that have the highest average
daily volume.\32\
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\31\ See proposed Options 8, Section 34(f)(6)(A)(2)(b), which is
based on Cboe Rule 4.21(b)(5)(A)(ii)(a). The Exchange plans to
conduct the bi-annual review on January 1 and July 1 of each year.
As such, the six-month periods will be from January to June, and
from July to December each year. The results of the bi-annual review
will be announced via an Options Trader Alert and any new securities
that qualify would be permitted to have cash settlement as a
contract term beginning on February 1 and August 1 of each year. If
the Exchange initially begins listing cash-settled FLEX Equity
Options on a different date (e.g., September 1), it would initially
list securities that qualified as of the last bi-annual review
(e.g., the one conducted on July 1).
\32\ See proposed Options 8, Section 34(f)(6)(A)(2)(a), which is
based on Cboe Rule 4.21(b)(5)(A)(ii)(a).
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Proposed new Options 8, Section 34(f)(6)(A)(2)(b) would further
provide that if the Exchange determines pursuant to the review
conducted under paragraph (2)(a) of this Rule that an underlying ETF
ceases to satisfy the criteria in subparagraph (2)(a) of this Rule, any
new position overlying such ETF entered into will be required to have
exercise settlement by physical delivery and any open cash-settled FLEX
ETF Option positions may be traded only to close the position.\33\
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\33\ See proposed Options 8, Section 34(f)(6)(A)(2)(b), which is
based on Cboe Rule 4.21(b)(5)(A)(ii)(b). If a listing is closing
only, pursuant to Options 4, Section 4(a), opening transactions by
Market Makers executed to accommodate closing transactions of other
market participants are permitted.
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The Exchange believes it is appropriate to introduce cash
settlement as an alternative contract term to the select group of ETFs
because they are among the most highly liquid and actively traded ETF
securities. As described more fully below, the Exchange believes that
the deep liquidity and robust trading activity in the ETFs identified
by the Exchange as meeting the criteria mitigate against historic
concerns regarding susceptibility to manipulation.
Characteristics of ETFs
ETFs are funds that have their value derived from assets owned. The
net asset value (``NAV'') of an ETF is a daily calculation that is
based off the most recent closing prices of the assets in the fund and
an actual accounting of the total cash in the fund at the time of
calculation. The NAV of an ETF is calculated by taking the sum of the
assets in the fund, including any securities and cash, subtracting out
any liabilities, and dividing that by the number of shares outstanding.
Additionally, each ETF is subject to a creation and redemption
mechanism to ensure the price of the ETF does not fluctuate too far
away from its NAV--which mechanisms the Exchange believes reduce the
potential for manipulative activity. Each business day, ETFs are
required to make publicly available a portfolio composition file that
describes the makeup of their creation and redemption ``baskets''
(i.e., a specific list of names and quantities of securities or other
assets designed to track the performance of the portfolio as a whole).
ETF shares are created when an Authorized Participant,\34\ typically a
market maker or other large institutional investor, deposits the daily
creation basket or cash with the ETF issuer. In return for the creation
basket or cash (or both), the ETF issues to the Authorized Participant
a ``creation unit'' that consists of a specified number of ETF shares.
For instance, IWM is designed to track the performance of the Russell
2000 Index. An Authorized Participant will purchase all the Russell
2000 constituent securities in the exact same weight as the index
prescribes, then deliver those shares to the ETF issuer. In exchange,
the ETF issuer gives the Authorized Participant a block of equally
valued ETF shares, on a one-for-one fair value basis. This process can
also work in reverse. A redemption is achieved when the Authorized
Participant accumulates a sufficient number of shares of the ETF to
constitute a creation unit and then exchanges these ETF shares with the
ETF issuer, thereby decreasing the supply of ETF shares in the market.
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\34\ ``Authorized Participant'' means a member or participant of
a clearing agency registered with the Commission, which has a
written agreement with the exchange-traded fund or one of its
service providers that allows the authorized participant to place
orders for the purchase and redemption of creation units. See SEC
Rule 6c-11(a)(1).
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The principal, and perhaps most important, feature of ETFs is their
reliance on an ``arbitrage function'' performed by market participants
that influences the supply and demand of ETF shares and, thus, trading
prices relative to NAV. As noted above, new ETF shares can be created
and existing shares redeemed based on investor demand; thus, ETF supply
is open-ended. This arbitrage function helps to keep an ETF's price in
line with the value of its underlying portfolio, i.e., it minimizes
deviation from NAV. Generally, in the Exchange's view, the higher the
liquidity and trading volume of an ETF, the more likely the price of
the ETF will not deviate from the value of its underlying portfolio,
making such ETFs less susceptible to price manipulation.
Trading Data for the ETFs Proposed for Cash Settlement
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 considers 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 June 1, 2024 through January
1, 2025) reviewed by the Exchange.
Further, the Exchange proposes that qualifying ETFs 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 ETF of 200 shares per second. While no
security is immune from all manipulation, the Exchange believes that
the combination of average daily notional value and ADV as prerequisite
requirements would limit cash
[[Page 19551]]
settlement of FLEX ETF Options to those underlying ETFs 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 ETFs would
qualify to have cash settlement as a contract term. As provided in the
table below, from June 1, 2024 through January 1, 2025, the Exchange
would be able to provide cash settlement as a contract term for FLEX
ETF Options on 43 underlying ETFs, 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 43 ETFs that, for the period covering
June 1, 2024 through January 1, 2025, would be eligible to have cash
settlement as a contract term.\35\
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\35\ The Exchange notes that for the period covering June 1,
2024 to January 1, 2025 the iShares Bitcoin Trust ETF (IBIT) meets
the requirements of $500 million or more average daily notional
value and a minimum ADV of 4,680,000 shares. IBIT is not listed in
the above table because as discussed above, the Exchange prohibits
FLEX trading on IBIT options.
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BILLING CODE 8011-01-P
[[Page 19552]]
[GRAPHIC] [TIFF OMITTED] TN08MY25.001
[[Page 19553]]
[GRAPHIC] [TIFF OMITTED] TN08MY25.002
BILLING CODE 8011-01-C
The Exchange believes that permitting cash settlement as a contract
term for FLEX ETF Options for the ETFs in the above table would broaden
the base of
[[Page 19554]]
investors that use FLEX Equity 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 notes that the SEC has previously approved a rule
filing of another exchange that allowed for the trading of cash-settled
options \36\ and, specifically, cash-settled FLEX ETF Options (which
the Exchange proposes to list in the same manner as that exchange).\37\
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\36\ See, e.g., PHLX FX Options traded on Nasdaq PHLX and S&P
500[supreg] Index Options traded on Cboe Options Exchange. 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.
\37\ See Securities Exchange Act Release Nos. 88131 (February 5,
2020), 85 FR 7806 (February 11, 2020) (SR-NYSEAMER-2019-38) (Order
Approving a Proposed Rule Change, as Modified by Amendment No. 1, to
Allow Certain Flexible Equity Options To Be Cash Settled); 97231
(March 31, 2023), 88 FR 20587 (April 6, 2023) (SR-NYSEAMER-2023-22)
(Notice of Filing and Immediate Effectiveness of Proposed Change to
Make a Clarifying Change to the Term Settlement Style Applicable to
Flexible Exchange Options); and 98044 (August 2, 2023), 88 FR 53548
(August 8, 2023) (SR-Cboe-2023-036) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Allow Certain Flexible
Exchange Equity Options To Be Cash Settled.
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Today, 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
may possess certain risks with respect to volatility and movement of
the underlying security at expiration against which market participants
may need to hedge. The Exchange believes 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 as well as the risk of
an adverse movement in the price of the underlying security.
With respect to position and exercise limits, cash-settled FLEX ETF
Options would be subject to the position limits set forth in proposed
Options 8, Section 34(i). Accordingly, the Exchange proposes to add
Options 8, Section 34(i)(1), which would provide that position limits
for cash-settled FLEX Equity Options where the underlying security is
an ETF pursuant to Options 8, Section 34(f)(6)(A)(2) shall be subject
to the position limits set forth in Options 9, Section 13, and subject
to the exercise limits set forth in Options 9, Section 15.\38\ The
proposed rule would further state that positions in such cash-settled
FLEX Equity Options shall be aggregated with positions in physically
settled non-FLEX 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.\39\ The
Exchange further proposes to add in Options 8, Section 34(i)(1) a
cross-reference to subparagraph (f)(6)(A), as subparagraph (i)(1) would
also contain provisions about position limits for FLEX Equity Options
that would be exceptions to the first sentence in this paragraph
stating that FLEX Equity Options have no position limits. The Exchange
also proposes to add in paragraph (i)(4), a cross-reference to proposed
subparagraphs (i)(1) and (i)(4)(a)--(c) as the proposed rule adds
language regarding aggregation of positions for purposes of position
limits, which will be covered by paragraph (i)(4). Given that there are
established position and exercise limits applicable to physically
settled options on each of the underlying ETFs for which cash-settled
FLEX ETF options would available under this proposal, the Exchange
believes it is appropriate for the same position and exercise limits to
apply to those cash settled FLEX ETF options. Accordingly, of the 43
FLEX ETF Options underlying securities that would currently be eligible
to have cash settlement as a FLEX contract term, 30 would have a
position limit of 250,000 contracts pursuant to Options 9, Section
13(d)(5).\40\ Further, pursuant to Supplementary Material .01 to
Options 9, Section 13, six would have a position limit of 500,000
contracts (EWZ, TLT, HYG, XLF, LQD, and GDX); four (EEM, FXI, IWM, and
EFA) would have a position limit of 1,000,000 contracts; one (QQQ)
would have a position limit of 1,800,000 contracts; and one (SPY) would
have a position limit of 3,600,000.\41\
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\38\ The Exchange proposes to add to proposed Options 8, Section
34(i)(1) a cross reference to proposed subparagraph (f)(6)(A), as
proposed Section 34(i)(1) also contains provisions about position
limits for FLEX Equity Options that would be exceptions to the
statement in proposed Section (i)(1) that FLEX Equity Options have
no position limits (in addition to the language in proposed
34(i)(1)). The Exchange also proposes to add to proposed Options 8,
Section 34(i)(4) a cross-reference to proposed subparagraph
subparagraph (i)(1), as the proposed rule adds language regarding
aggregation of positions for purposes of position limits, which will
be covered in proposed Section 34(i)(4).
\39\ See proposed Options 8, Section 34(i)(1), which is based on
Cboe Rule 8.35(c)(1)(B). The aggregation of position and exercise
limits would include all positions on physically settled FLEX and
non-FLEX Options on the same underlying ETFs.
\40\ Options 9, Section 13(d)(5) provides that to be eligible
for the 250,000 contract limit, either the most recent six (6) month
trading volume of the underlying security must have totaled at least
100 million shares or the most recent six-month trading volume of
the underlying security must have totaled at least seventy-five (75)
million shares and the underlying security must have at least 300
million shares currently outstanding. Further as noted above,
options on IBIT will not be available for FLEX trading.
\41\ These were based on position limits as of January 28, 2025.
Position limits are available on at https://www.theocc.com. Position
limits for ETFs are always determined in accordance with the
Exchange's Rules regarding position limits.
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The Exchange understands that cash-settled ETF options are
currently traded in the OTC market by a variety of market participants,
e.g., hedge funds, proprietary trading firms, and pension funds.\42\
These options are not fungible with the exchange listed options. The
Exchange believes some of these market participants would prefer to
trade comparable 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 ETF Options. The Exchange
also believes that the trading
[[Page 19555]]
of cash-settled FLEX ETF 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.
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\42\ As noted above, other options exchanges have received
approval to list certain cash-settled FLEX ETF Options. See
Securities Exchange Act Release No. 88131 (February 5, 2020), 85 FR
7806 (February 11, 2020) (SR-NYSEAmer-2019-38) (Notice of Filing of
Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Allow
Certain Flexible Equity Options To Be Cash Settled). Cboe also filed
an immediately effective rule change to allow certain FLEX Options
to be cash settled. See Securities Exchange Act Release No. 98044
(August 2, 2023), 88 FR 53548 (August 8, 2023) (SR-Cboe-2023-036)
(Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Allow Certain Flexible Exchange Equity Options To Be Cash
Settled).
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In the Exchange's view, cash-settled FLEX ETF 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 ETF
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. Further, the Exchange believes
listing cash-settled FLEX ETF Options would provide investors with
competition on an exchange platform, as other options exchanges have
received Commission approval to list the same options.\43\
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\43\ See supra notes 25-27.
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The Exchange notes that OCC has received approval from the
Commission for rule changes that will accommodate the clearance and
settlement of cash-settled ETF options.\44\ The Exchange has analyzed
its capacity and represents that it has the necessary systems capacity
to handle the additional traffic associated with the listing of cash-
settled FLEX ETF Options. Also, the Exchange understand that The
Options Price Reporting Authority (``OPRA'') has the necessary capacity
as the products are already trading on OPRA today. The Exchange
believes any additional traffic that would be generated from the
introduction of cash-settled FLEX ETF Options would be manageable. The
Exchange expects that members will not have a capacity issue as a
result of this proposed rule change. The Exchange also 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.
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\44\ See Securities Exchange Act Release No. 34-94910 (May 13,
2022), 87 FR 30531 (May 19, 2022) (SR-OCC-2022-003).
---------------------------------------------------------------------------
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. The Exchange believes that
manipulating the settlement price of cash-settled FLEX ETF Options
would be difficult based on the size of the market for the underlying
ETFs that are the subject of this proposed rule change. The Exchange
notes that each underlying ETF in the table above is sufficiently
active to alleviate concerns about potential manipulative activity.
Further, in the Exchange's view, the vast liquidity in the 43
underlying ETFs that would currently be eligible to be traded as cash-
settled FLEX options under the proposal ensures a multitude of market
participants at any given time. Moreover, given the high level of
participation among market participants that enter quotes and/or orders
in physically settled options on these ETFs, the Exchange believes it
would be very difficult for a single participant to alter the price of
the underlying ETF or options overlying such ETF 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 ETF or options overlying such ETF would also be cost
prohibitive. As a result, the Exchange believes there is significant
participation among market participants to prevent manipulation of
cash-settled FLEX ETF Options.
Still, the Exchange believes it has an adequate surveillance
program in place and intends to apply the same program procedures to
cash-settled FLEX ETF Options that it applies to the Exchange's other
options products.\45\ FLEX options products and their respective
symbols will be integrated into the Exchange's existing surveillance
system architecture and will thus be subject to the relevant
surveillance processes, as applicable. The Exchange believes that the
existing surveillance procedures at the Exchange are capable of
properly identifying unusual and/or illegal trading activity, which
procedures the Exchange would utilize to surveil for aberrant trading
in cash-settled FLEX ETF Options.
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\45\ For example, the regulatory program for the Exchange
includes surveillance designed to identify manipulative and other
improper options trading, including, spoofing, marking the close,
front running, wash sales, etc.
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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 Phlx \46\ 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, and quoting/routing, which may occur on the
Exchange or other markets.\47\ 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, today, its existing trading surveillances are
adequate to monitor trading in the underlying ETFs and subsequent
trading of options on those securities listed on the Exchange. Further,
with the introduction of cash-settled FLEX ETF Options, the Exchange
would leverage its existing surveillances to monitor trading in the
underlying ETFs and subsequent trading of options on those securities
listed on the
[[Page 19556]]
Exchange with respect to cash-settled FLEX ETF options.\48\
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\46\ Phlx maintains a regulatory services agreement with
Financial Industry Regulatory Authority, Inc. (``FINRA'') whereby
FINRA provides certain regulatory services to the exchanges,
including cross-market surveillance, investigation, and enforcement
services.
\47\ As it relates to Reg SHO violations, the Exchange will
enforce this through its Stock-Tied Reg SHO price protections in
Options 3, Section 16(b). Specifically, Options 3, Section 16(e)
provides that when the short sale price test in Rule 201 of
Regulation SHO is triggered for a covered security, NES will not
execute a short sale order in the underlying covered security
component of a Complex Order if the price is equal to or below the
current national best bid. However, NES will execute a short sale
order in the underlying covered security component of a Complex
Order if such order is marked ``short exempt,'' regardless of
whether it is at a price that is equal to or below the current
national best bid. If NES cannot execute the underlying covered
security component of a Complex Order in accordance with Rule 201 of
Regulation SHO, the Exchange will hold the Complex Order on the
Complex Order Book, if consistent with Member instructions. The
order may execute at a price that is not equal to or below the
current national best bid. For purposes of this paragraph, the term
``covered security'' shall have the same meaning as in Rule
201(a)(1) of Regulation SHO. This risk protection will apply
wholesale to complex FLEX Orders with a stock component. NES will
only execute the underlying covered security component of a Complex
Order if the underlying covered security component is in accordance
with Rule 201 of Regulation SHO. Additionally, FINRA's regulatory
program addresses Reg SHO compliance for its member firms (which
includes Exchange Members).
\48\ 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.
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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 Phlx's own monitoring for violative activity on
the Exchange comprise a comprehensive surveillance program that is
adequate to monitor for manipulation of the underlying ETF 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 ETF
Options.
In addition to the surveillance procedures and processes described
above, improvements in audit trails (i.e., the Consolidated Audit
Trail), 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. In addition, the
Exchange is a member of the Intermarket Surveillance Group (``ISG'').
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 ETF 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 members' 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 ETF Options would further
broaden the base of investors that use FLEX Equity 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 proposed rule change is also designed to
encourage market makers to shift liquidity from the OTC market onto the
Exchange, which, it believes, would enhance the process of price
discovery conducted on the Exchange through increased order flow. The
Exchange also believes that this may open up cash-settled FLEX ETF
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 (and the aggregation of
cash-settled positions with physically-settled positions), exercise
limits (and the aggregation of cash-settled positions with physically-
settled positions), and reporting requirements--would continue to
apply. The Exchange believes the proposed position and exercise limits
may further help mitigate the concerns that the limits are designed to
address about the potential for manipulation and market disruption in
the options and the underlying securities.\49\
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\49\ See proposed Options 8, Section 34(i)(1), which is based on
Cboe Rule 8.35(c)(1)(B). The aggregation of position and exercise
limits would include all positions on physically settled FLEX and
non-FLEX Options on the same underlying ETFs.
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Given the novel characteristics of cash-settled FLEX ETF Options,
the Exchange will conduct a review of the trading in cash-settled FLEX
ETF Options over an initial five-year period. The Exchange will furnish
five reports to the Commission based on this review, the first of which
would be provided within 60 days after the first anniversary of the
initial listing date of the first cash-settled FLEX ETF Option under
the proposed rule and each subsequent annual report to be provided
within 60 days after the second, third, fourth and fifth anniversary of
such initial listing. At a minimum, each report will provide a
comparison between the trading volume of all cash-settled FLEX ETF
Options listed under the proposed rule and physically settled options
on the same underlying security, the liquidity of the market for such
options products and the underlying ETF, and any manipulation concerns
arising in connection with the trading of cash-settled FLEX ETF Options
under the proposed rule. The Exchange will also provide additional data
as requested by the Commission during this five year period. The
reports will also discuss any recommendations the Exchange may have for
enhancements to the listing standards based on its review. The Exchange
believes these reports will allow the Commission and the Exchange to
evaluate, among other things, the impact such options have, and any
potential adverse effects, on price volatility and the market for the
underlying ETFs, the component securities underlying the ETFs, and the
options on the same underlying ETFs and make appropriate
recommendations, if any, in response to the reports.
Implementation
The Exchange will implement this rule change on or before December
20, 2025. Phlx would commence its implementation with a limited symbol
migration and continue to migrate symbols over several weeks. The
Exchange will issue an Options Trader Alert to member organizations to
provide notification of the symbols that will migrate and the relevant
dates.\50\
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\50\ See https://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2024-17.
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The Exchange will announce the implementation dates to member
organizations in an Options Trader Alert.\51\
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\51\ Phlx Options 8, Section 34 rule text was previously amended
by two rule changes which are effective, but not yet operative. See
Securities Exchange Act Release Nos. 97658 (June 7, 2023), 88 FR
38562 (June 13, 2023) (SR-Phlx-2023-22); and 100321 (June 12, 2024),
89 FR 51580 (June 18, 2024) (SR-Phlx-2024-24). Phlx further delayed
the implementation so that it could implement SR-Phlx-2023-22 while
also completing an OCC industry rule change prior. These two prior
rule changes will be implemented at the same time as the rule
changes proposed herein.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\52\ in general, and furthers the objectives of Section
6(b)(5) of the Act.\53\ Specifically, the Exchange believes the
proposed rule change is consistent with the Section 6(b)(5) \54\
requirements that the rules of an exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
[[Page 19557]]
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities 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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\52\ 15 U.S.C. 78f(b)
\53\ 15 U.S.C. 78f(b)(5).
\54\ 15 U.S.C. 78f(b)(5).
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Permissible Series
The Exchange's proposal to not authorize for trading a FLEX Option
on iShares Bitcoin Trust ETF (``IBIT'') is consistent with ISE's
Approval Order of iShares Bitcoin Trust.\55\ ISE stated that the
position limit for IBIT options shall be 25,000 contracts.\56\ Phlx
proposes to exclude IBIT Options from trading as a FLEX Options to
continue to limit the position limits for IBIT Options.
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\55\ See Securities Exchange Act Release No. 101128 (September
20, 2024), 89 FR 78942 (September 26, 2024) (SR-ISE-2024-03) (Notice
of Filing of Amendment Nos. 4 and 5 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1,
4, and 5, To Permit the Listing and Trading of Options on the
iShares Bitcoin Trust).
\56\ Id.
---------------------------------------------------------------------------
Characteristics of ETFs
The Exchange's proposal to provide in Options 8, Section
34(f)(1)(B) that, ``an underlying equity security or index, as
applicable (the index multiplier for FLEX Index Options is 100)'' is
consistent with the Act and will protect investors and the general
public because this rule text adds transparency to the current
characteristics of underlying interest for FLEX Option.
Minimum Trading Increments
The Exchange's proposal to amend Options 8, Section 34(f)(3) to
provide that, ``The Exchange may determine the smallest increment for
exercise prices of FLEX Options on a class-by-class basis without going
lower than the $0.01.'' is consistent with the Act and will protect
investors and the general public because this rule text provides clear,
transparent language regarding the minimum trading increments for FLEX
Options. The language is consistent with Cboe Rule 5.3(e)(3) except the
Exchange is not proposing to provide for Micro FLEX Index Options or to
allow prices to be expressed as a percentage value because the Exchange
does not offer these features today. Also, this rule text is identical
to ISE Options 3A, Section 3(c)(6).
FLEX PM Third Friday Options
The Exchange's proposal to amend Options 8, Section 34(f)(5) to
allow the listing of FLEX PM Third Friday Options, is consistent with
the Commission's recent approval of Cboe's proposal to make its pilot a
permanent program.\57\ The Exchange believes that aligning to Cboe will
allow Phlx to compete effectively with Cboe's product offering. Like
Cboe, the Exchange believes that FLEX PM Third Friday Options will
provide investors with greater trading opportunities and flexibility.
The Exchange notes that the Commission recently approved proposals to
make other pilots permitting p.m.-settlement of index options permanent
after finding those pilots were consistent with the Act and the options
subject to those pilots had no significant impact on the market.\58\
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\57\ See Securities Exchange Act Release No. 99222 (December 21,
2023), 88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX
Settlement Pilot Approval''). In support of making the pilot a
permanent program, Cboe cited to its own review of pilot data during
the course of the pilot program and a study by the Commission's
Division of Economic and Risk Analysis (``DERA'') staff. See FLEX
Settlement Pilot Approval, notes 18 and 35.
\58\ See Securities Exchange Act Release Nos. 98454 (September
20, 2023) (SR-CBOE-2023-005) (order approving proposed rule change
to make permanent the operation of a program that allows the
Exchange to list p.m.-settled third Friday-of-the-month SPX options
series) (``SPXPM Approval''); 98455 (September 20, 2023) (SR-CBOE-
2023-019) (order approving proposed rule change to make permanent
the operation of a program that allows the Exchange to list p.m.-
settled third Friday-of-the-month XSP and MRUT options series)
(``XSP and MRUT Approval''); and 98456 (September 20, 2023) (SR-
CBOE-2023-020) (order approving proposed rule change to make the
nonstandard expirations pilot program permanent) (``Nonstandard
Approval''). See also Securities Exchange Act Release Nos. 98451
(September 20, 2023), 88 FR 66088 (September 26, 2023) (SR-Phlx-
2023-07) (Order Granting Approval of a Proposed Rule Change, as
Modified by Amendment No. 1, To Make Permanent Certain P.M.-Settled
Pilots); and 98950 (November 15, 2023), 88 FR 81172 (November 21,
2023) (SR-Phlx-2023-45) (Order Approving a Proposed Rule Change To
Permit the Listing and Trading of P.M.-Settled Nasdaq-100 Index
Options With a Third-Friday-of-the-Month Expiration).
---------------------------------------------------------------------------
The Exchange further believes that permitting Phlx to list FLEX PM
Third Friday Options, similar to Cboe, will remove impediments to and
perfect the mechanism of a free and open market and a national market
system and protect investors, while maintaining a fair and orderly
market. As described in the FLEX Settlement Pilot Approval, Cboe
observed no significant adverse market impact or identified any
meaningful regulatory concerns during the nearly 14-year operation of
the FLEX PM Third Friday Program as a pilot nor during the 15 years
since P.M.-settled index options (SPX) were reintroduced to the
marketplace.\59\
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\59\ Notably, Cboe did not identify any significant economic
impact (including on pricing or volatility or in connection with
reversals) on related futures, the underlying indexes, or the
underlying component securities of the underlying indexes
surrounding the close as a result of the quantity of FLEX PM Third
Friday Options or the amount of expiring open interest in FLEX PM
Third Friday Options, nor any demonstrated capacity for options
hedging activity to impact volatility in the underlying markets. See
Securities Exchange Act Release No. 99222 (December 21, 2023), 88 FR
89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX Settlement
Pilot Approval''). In support of making the pilot a permanent
program, Cboe cited to its own review of pilot data during the
course of the pilot program and a study by the Commission's Division
of Economic and Risk Analysis (``DERA'') staff. See FLEX Settlement
Pilot Approval, notes 18 and 35.
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As discussed in the FLEX Settlement Pilot Approval, the DERA staff
study \60\ and corresponding Cboe study concluded that a significantly
larger amount of non-FLEX p.m.-settled index options had no significant
adverse market impact and caused no meaningful regulatory concerns.
Therefore, Cboe concluded that the relatively small amount of FLEX
Index Option volume would similarly have no significant adverse market
impact or cause no meaningful regulatory concerns.\61\
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\60\ See FLEX Settlement Pilot Approval, citing to Securities
and Exchange Commission, Division of Economic Risk and Analysis,
Memorandum dated February 2, 2021 on Cornerstone Analysis of PM
Cash-Settled Index Option Pilots (September 16, 2020), available at:
https://www.sec.gov/files/Analysis_of_PM_Cash_Settled_Index_Option_Pilots.pdf.
\61\ See Securities Exchange Act Release No. 99222 (December 21,
2023), 88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX
Settlement Pilot Approval''). In support of making the pilot a
permanent program, Cboe cited to its own review of pilot data during
the course of the pilot program and a study by the Commission's
Division of Economic and Risk Analysis (``DERA'') staff. See FLEX
Settlement Pilot Approval, notes 18 and 35. Additionally, these
studies measured any impact on related futures, the underlying
indexes, or the underlying component securities of the underlying
indexes surrounding the close. Despite FLEX SPX options (which
represent approximately half of the year-to-date 2023 volume of FLEX
Index Options but only approximately 0.3% of total SPX volume) not
being included in the DERA staff study and corresponding Cboe study,
those studies concluded that during the time periods covered (which
included the period of time in which the Pilot Program has been
operating), there was no significant economic impact on the
underlying index or related products. Therefore, Cboe concluded that
any FLEX SPX Options that executed during the timeframes covered by
the studies had no significant impact on the underlying index or
related products, as neither DERA staff nor Cboe observed any
significant economic impact on the underlying index or related
product.
---------------------------------------------------------------------------
Cboe also concluded that the introduction of FLEX PM options had no
significant impact on the market quality of corresponding a.m.-settled
options or other options. As discussed in the FLEX Settlement Pilot
Approval, Cboe's analysis conducted after the introduction of SPXW
options with Tuesday and Thursday expirations demonstrated no
statistically significant impact on the bid-ask or effective
[[Page 19558]]
spreads of SPXW options with Monday, Wednesday, and Friday expirations
after trading in the SPXW options with Tuesday and Thursday expirations
began.\62\ Further, Cboe concluded that large FLEX PM Third Friday
Options trades had no material negative impact (and likely no impact)
on quote quality of non-FLEX a.m.-settled options overlying the same
index with similar terms as the FLEX PM Third Friday Option upon
evaluating data that showed that the spreads were relatively stable
before and after large trades.\63\ Therefore, Cboe concluded it is
likely that FLEX PM Third Friday Options have had no significant
negative impact on the market quality of non-FLEX Options with a.m.-
settlement.\64\
---------------------------------------------------------------------------
\62\ See Securities Exchange Act Release No. 99222 (December 21,
2023), 88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX
Settlement Pilot Approval''). In support of making the pilot a
permanent program, Cboe cited to its own review of pilot data during
the course of the pilot program and a study by the Commission's
Division of Economic and Risk Analysis (``DERA'') staff. See FLEX
Settlement Pilot Approval, notes 18 and 35.
\63\ Specifically, Cboe evaluated each FLEX PM Third Friday
Options trade for more than 500 contracts that occurred on Cboe
during a two-year timeframe and analyzed the market quality
(specifically, the average time-weighted quote spread and size 30
minutes prior to the trade and the average time-weighted quote
spread and size 30 minutes after the trade) of series non-FLEX a.m.-
settled options overlying the same index with similar terms as the
FLEX PM Third Friday Option that traded (time to expiration, type
(call or put), and strike price) as set forth in the Cboe's data.
See Securities Exchange Act Release No. 99222 (December 21, 2023),
88 FR 89771 (December 28, 2023) (SR-CBOE-2023-018) (``FLEX
Settlement Pilot Approval''). In support of making the pilot a
permanent program, Cboe cited to its own review of pilot data during
the course of the pilot program and a study by the Commission's
Division of Economic and Risk Analysis (``DERA'') staff. See FLEX
Settlement Pilot Approval, notes 18 and 35.
\64\ The Exchange acknowledges that, while FLEX PM Third Friday
Options has historically represented a very small percentage of
overall volume, it is possible trading in these options may grow in
the future.
---------------------------------------------------------------------------
Additionally, Cboe noted that the significant changes in the
closing procedures of the primary markets in recent decades, including
considerable advances in trading systems and technology, has
significantly minimized risks of any potential impact of FLEX PM Third
Friday Options on the underlying cash markets. As such, Cboe concluded
that listing FLEX PM Third Friday Options did not raise any unique or
prohibitive regulatory concerns and that such trading has not, and will
not, adversely impact fair and orderly markets on expiration Fridays
for the underlying indexes or their component securities.
The Exchange notes that p.m.-settled options were previously
approved on Phlx's standard market,\65\ including p.m.-settled third-
Friday-of-the-month expirations for NDX and NXD options.\66\ In the
P.M.-Settled Pilot Permanency Approval, the Commission stated it
believed that the evidence contained in the Exchange's filing, the
Exchange's pilot data and reports, and the DERA staff study \67\
analysis demonstrate that the Exchange's pilot programs have benefitted
investors and other market participants by providing more flexible
trading and hedging opportunities while also having no disruptive
impact on the market.\68\ The Commission also stated that the market
for p.m.-settled options has grown in size over the course of the
Exchange's pilot programs, and analysis of the pilot data did not
identify any significant economic impact on the underlying component
securities surrounding the close as a result of expiring p.m.-settled
options nor did it indicate a deterioration in market quality (as
measured by relative quoted spreads) for an existing product when a new
p.m.-settled expiration was introduced.\69\ Further, the Commission
stated that significant changes in closing procedures in the decades
since index options moved to a.m. settlement may also serve to mitigate
the potential impact of p.m.-settled index options on the underlying
cash markets.\70\
---------------------------------------------------------------------------
\65\ See Securities Exchange Act Release No. 98451 (September
20, 2023), 88 FR 66088 (September 26, 2023) (SR-Phlx-2023-07) (Order
Granting Approval of a Proposed Rule Change, as Modified by
Amendment No. 1, To Make Permanent Certain P.M.-Settled Pilots)
(``P.M.-Settled Pilot Permanency Approval'').
\66\ See Securities Exchange Act Release No. 98950 (November 15,
2023), 88 FR 81172(November 21, 2023) (SR-Phlx-2023-45) (Order
Approving a Proposed Rule Change To Permit the Listing and Trading
of P.M.-Settled Nasdasq-100 Index[supreg] Options With a Third-
Friday-of-the-Month Expiration) (``P.M. Third Friday NDX Options
Approval'').
\67\ See P.M.-Settled Pilot Permanency Approval, citing to
Securities and Exchange Commission, Division of Economic Risk and
Analysis, Memorandum dated February 2, 2021 on Cornerstone Analysis
of PM Cash-Settled Index Option Pilots (September 16, 2020) (also
referred to therein as the ``Pilot Memo''), available at: https://www.sec.gov/files/Analysis_of_PM_Cash_Settled_Index_Option_Pilots.pdf.
\68\ See P.M.-Settled Pilot Permanency Approval.
\69\ See id.
\70\ See id.
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In support of its proposal to list p.m.-settled third-Friday-of-
the-month expirations for NDX and XND options on its standard market,
the Exchange pointed to, among other things, the data it provided
underlying the P.M.-Settled Pilot Permanency Approval.\71\ In reviewing
this data from the Exchange (and other options exchanges in support of
similar proposals to list and trade certain p.m.-settled broad-based
index options) as well as the DERA staff study analysis, the Commission
concluded that analysis of the pilot data did not identify any
significant economic impact on the underlying component securities
surrounding the close as a result of expiring p.m.-settled options nor
did it indicate a deterioration in market quality for an existing
product when a new p.m.-settled expiration was introduced.\72\ Further,
the Commission made similar findings as those in the P.M.-Settled Pilot
Permanency Approval that significant changes in closing procedures in
the decades since index options moved to a.m. settlement may also serve
to mitigate the potential impact of p.m.-settled index options on the
underlying cash markets.\73\ The Exchange has observed no significant
adverse market impact or identified any meaningful regulatory concerns
since the introduction of p.m.-settled index options on its standard
market.\74\ Given that the Exchange anticipates FLEX PM Third Friday
Options to have a relatively smaller amount of volume compared to its
standard non-FLEX p.m.-settled index options market, the Exchange
believes that introducing FLEX PM Third Friday coupled with the other
findings in Cboe's FLEX Settlement Pilot Approval would likely have no
significant adverse market impact or cause any meaningful regulatory
concerns as well.
---------------------------------------------------------------------------
\71\ See P.M.-Settled Pilot Permanency Approval and P.M. Third
Friday NDX Options Approval in notes 55 and 56, respectively.
\72\ See P.M. Third Friday NDX Options Approval.
\73\ See id.
\74\ While the Exchange has received approval to list p.m.-
settled third Friday-of-the-month expirations for NDX options on its
standard market pursuant to the Third Friday NDX Options Approval,
the Exchange has not listed them to date. The Exchange will launch
p.m.-settled third-Friday-of-the-month expirations on NDX options
concurrent with the launch of this rule proposal.
---------------------------------------------------------------------------
FLEX Options Terms
The Exchange's proposal to amend Options 8, Section 34(f)(6)(B) to
note the settlement style for FLEX Index Options depending on whether
it is a.m.-settled or p.m.-settled is consistent with the Act and will
protect investors and the general public because this rule text adds
transparency to the current settlement of FLEX Index Options.
Position and Exercise Limits
Position and exercise limits are designed to address potential
manipulative schemes and adverse market impacts surrounding the use of
options, such as disrupting the market in the security underlying the
options. While position and exercise limits should address and
discourage the potential for manipulative schemes and
[[Page 19559]]
adverse market impact, if such limits are set too low, participation in
the options market may be discouraged. The Exchange believes that any
decision regarding imposing position and exercise limits for FLEX
Options must therefore be balanced between mitigating concerns of any
potential manipulation and the cost of inhibiting potential hedging
activity that could be used for legitimate economic purposes.
As it relates to FLEX Index Options, the Exchange believes that the
proposed amendments to position and exercise limits in Options 8,
Section 34(i) and (j) are reasonably designed to prevent a member
organization from using FLEX Index Options to evade the position limits
applicable to comparable non-FLEX Index Options. Further, by
establishing the proposed position and exercise limits for FLEX Index
Options and, importantly, aggregating such positions in the manner
described in proposed Options 8, Section 34(i)(4) the Exchange believes
that 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. The Exchange also notes
that proposed position and exercise limits are consistent with the
rules of other options exchanges that offer FLEX Index Options, as well
as the rules of its own standard non-FLEX index options market, and
therefore raise no novel issues for the Commission.\75\
---------------------------------------------------------------------------
\75\ See Cboe Rules 8.35(a), (b), (d), and 8.42(g) and Phlx
Options 4A, Sections 6(a), 9(a)(13), and 9(a)(14).
---------------------------------------------------------------------------
As it relates to FLEX Equity Options, while no position limits are
proposed for FLEX Equity Options, there are several mitigating factors,
which include aggregation of FLEX Equity Option and non-FLEX Equity
Option positions that expire on a third Friday-of-the-month and
subjecting those positions to position and exercise limits, and daily
monitoring of market activity. Similar to the other exchanges that
trade FLEX Equity Options, the Exchange believes that eliminating
position and exercise limits for FLEX Equity Options, while requiring
positions in FLEX Equity Options that expire on a third Friday-of-the-
month to be aggregated with positions in non-FLEX Equity Options on the
same underlying security,\76\ removes impediments to and perfects the
mechanism of a free and open market and a national market system
because it allows the Exchange to create a product and market that is
an improved but comparable alternative to the OTC market in customized
options. OTC transactions occur through bilateral agreements, the terms
of which are not publicly disclosed to the marketplace. As such, OTC
transactions do not contribute to the price discovery process that
exists on a public exchange.
---------------------------------------------------------------------------
\76\ See proposed Options 8, Section 34(i)(4)(c) and Section
34(j)(1)(c). See also Cboe Rules 8.35(d)(3) and 8.42(g)(3); NYSE
Arca Rules 5.35-O(a)(iii), (b) and 5.36-O; NYSE American Rules 906G
and 907G; and Phlx Options 8, Section 34(e) and (f).
---------------------------------------------------------------------------
The Exchange believes that the proposed elimination of position and
exercise limits for FLEX Equity Options may encourage market
participants to transfer their liquidity demands from OTC markets to
exchanges and enable liquidity providers to provide additional
liquidity to Phlx through transactions in FLEX Equity Options. The
Exchange notes that the Commission previously approved the elimination
of position and exercise limits for FLEX Equity Options, finding that
such elimination would allow exchanges ``to better compete with the
growing OTC market in customized equity options, thereby encouraging
fair competition among brokers and dealers and exchange markets.'' \77\
The Commission has also stated that the elimination of position and
exercise limits for FLEX Equity Options ``could potentially expand the
depth and liquidity of the FLEX equity market without significantly
increasing concerns regarding intermarket manipulations or disruptions
of the options or the underlying securities.'' \78\
---------------------------------------------------------------------------
\77\ See Securities Exchange Act Release No. 42223 (December 10,
1999), 64 FR 71158, 71159 (December 20, 1999) (SR-Amex-99-40) (SR-
PCX-99-41) (SR-CBOE-99-59) (Order Granting Accelerated Approval to
Proposed Rule Change Relating to the Permanent Approval of the
Elimination of Position and Exercise Limits for FLEX Equity
Options).
\78\ See id.
---------------------------------------------------------------------------
Additionally, the Exchange believes that requiring positions in
FLEX Equity Options that expire on a third Friday-of-the-month to be
aggregated with positions in non-FLEX Equity Options on the same
underlying security subjects FLEX Equity Options and non-FLEX Equity
Options to the same position and exercise limits on third Friday-of-
the-month expirations. These limitations are intended to serve as a
safeguard against potential adverse effects of large FLEX Equity Option
positions expiring on the same day as non-FLEX Equity Option positions.
As noted above, Cboe Rules 8.35(d)(3) and 8.42(g)(3) have the same
requirements. Also, ISE Options 3A, Section 18(c)(1) has identical rule
text.
The Exchange believes that any potential risk of manipulative
activity is mitigated by existing surveillance technologies,
procedures, and reporting requirements at the Exchange, which allows
the Exchange to properly identify disruptive and/or manipulative
trading activity. In addition to its own surveillance programs, the
Exchange also works with other SROs and exchanges on intermarket
surveillance related issues. Through its participation in ISG, the
Exchange shares information and coordinates inquiries and
investigations with other exchanges designed to address potential
intermarket manipulation and trading abuses. The Exchange also notes
that FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement.\79\ The Exchange
also represents that it is reviewing its procedures to detect potential
manipulation in light of any changes required for FLEX Options to
confirm appropriate surveillance coverage. These procedures utilize
daily monitoring of market activity via automated surveillance
techniques to identify unusual activity in both options and their
underlying securities and are designed to protect investors and the
public interest by ensuring that the Exchange has an adequate
surveillance program in place.
---------------------------------------------------------------------------
\79\ The Exchange notes that it is responsible for FINRA's
performance under this regulatory services agreement.
---------------------------------------------------------------------------
Lastly, the Exchange notes that other exchanges currently trading
FLEX options have similar position and exercise limits described
above.\80\
---------------------------------------------------------------------------
\80\ See Cboe Rules 8.35(d) and 8.42(g).
---------------------------------------------------------------------------
Cash-Settled FLEX Equity Options on Exchange Traded Funds (``ETFs'')
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.
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 ETF 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
[[Page 19560]]
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 the proposed
bi-annual review to determine eligibility for an underlying ETF to have
cash settlement as a contract term would remove impediments to and
perfect the mechanism of a free and open market as it would permit the
Exchange to select only those underlying ETFs that are actively traded
and have robust liquidity as each qualifying ETF would be required to
meet the average daily notional value and average daily volume
requirements, as well as to select the same underlying ETFs on which
other exchanges may list cash-settled FLEX ETF Options.\81\
---------------------------------------------------------------------------
\81\ See Securities Exchange Act Release No. 88131 (February 5,
2020), 85 FR 7806 (February 11, 2020) (SR-NYSEAmer-2019-38) (Notice
of Filing of Amendment No. 1 and Order Granting Accelerated Approval
of a Proposed Rule Change, as Modified by Amendment No. 1, To Allow
Certain Flexible Equity Options To Be Cash Settled). Cboe also filed
an immediately effective rule change to allow certain FLEX Options
to be cash settled. See Securities Exchange Act Release No. 98044
(August 2, 2023), 88 FR 53548 (August 8, 2023) (SR-Cboe-2023-036)
(Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Allow Certain Flexible Exchange Equity Options To Be Cash
Settled).
---------------------------------------------------------------------------
The Exchange believes the proposed change that, for FLEX ETF
Options, at least one of exercise style, expiration date, and exercise
price must differ from options in the non-FLEX market will provide
clarity and eliminate confusion regarding permissible terms of FLEX ETF
Options, including the proposed cash-settled FLEX ETF Options.
The Exchange believes that the data provided by the Exchange
supports the supposition that permitting cash settlement as a FLEX term
for the 43 underlying ETFs that would currently qualify to have cash
settlement as a contract term would broaden the base of investors that
use FLEX Equity 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
for certain FLEX ETF options would remove impediments to and perfect
the mechanism of a free and open market because the proposed rule
change would provide members and member organizations 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 another exchange has previously received approval that
allows for the trading of cash-settled options, and, specifically,
cash-settled FLEX ETF Options in an identical manner as the Exchange
proposes to list them pursuant to this rule filing.\82\ The proposed
rule change therefore should not raise issues for the Commission that
it has not previously addressed.
---------------------------------------------------------------------------
\82\ See supra notes 25-27.
---------------------------------------------------------------------------
The proposed rule change to permit cash settlement as a contract
term for options on up to 50 ETFs 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 and are approved to trade on another options
exchange.
The Exchange believes that establishing position limits for cash-
settled FLEX ETF Options to be the same as physically settled options
on the same underlying security, and aggregating positions in cash-
settled FLEX ETF Options with physically settled options on the same
underlying security for purposes of calculating position limits is
reasonable and consistent with the Act. By establishing the same
position limits for cash-settled FLEX ETF Options as for physically
settled options on the same underlying security and, importantly,
aggregating such positions, the Exchange believes that the position
limit requirements for cash-settled FLEX ETF Options should help to
ensure that the trading of cash-settled FLEX ETF Options would not
increase the potential for manipulation or market disruption and could
help to minimize such incentives. For the same reasons, the Exchange
believes the proposed exercise limits are reasonable and consistent
with the Act.
Finally, the Exchange represents that it has an adequate
surveillance program in place to detect manipulative trading in cash-
settled FLEX ETF Options and the underlying ETFs. 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
ETFs. The Exchange believes that limiting cash settlement to no more
than 50 underlying ETFs (currently, 43 ETFs would 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.
As a self-regulatory organization, the Exchange recognizes the
importance of surveillance, among other things, to detect and deter
fraudulent and manipulative trading activity as well as other
violations of Exchange rules and the federal securities laws. As
discussed above, Phlx has adequate surveillance procedures in place to
monitor trading in cash-settled FLEX ETF Options and the underlying
securities, including to detect manipulative trading activity in both
the options and the underlying ETF.\83\ The Exchange further notes the
[[Page 19561]]
liquidity and active markets in the underlying ETFs, and the high
number of market participants in both the underlying ETFs and existing
options on the ETFs, helps to minimize the possibility of manipulation.
The Exchange further notes that under Section 19(g) of the Act, the
Exchange, as a self-regulatory organization, is required to enforce
compliance by its members and persons associated with its members with
the Act, the rules and regulations thereunder, and the rules of the
Exchange.\84\ The Exchange believes its surveillance, along with the
liquidity criteria and position and exercise limits requirements, are
reasonably designed to mitigate manipulation and market disruption
concerns and will permit it to enforce compliance with the proposed
rules and other Exchange rules in accordance with Section 19(g) of the
Act. The Exchange performs ongoing evaluations of its surveillance
program to ensure its continued effectiveness and will continue to
review its surveillance procedures on an ongoing basis and make any
necessary enhancements and/or modifications that may be needed for the
cash settlement of FLEX ETF Options.
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\83\ Among other things, Phlx's regulatory program 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, and quoting/routing, which may
occur on the Exchange and other markets. Furthermore, the Exchange
stated that it has access to information regarding trading activity
in the pertinent underlying securities as a member of ISG. As it
relates to Reg SHO violations, the Exchange will enforce this
through its Stock-Tied Reg SHO price protections in Options 3,
Section 16(b). Specifically, Options 3, Section 16(b) provides that
when the short sale price test in Rule 201 of Regulation SHO is
triggered for a covered security, NES will not execute a short sale
order in the underlying covered security component of a Complex
Order if the price is equal to or below the current national best
bid. However, NES will execute a short sale order in the underlying
covered security component of a Complex Order if such order is
marked ``short exempt,'' regardless of whether it is at a price that
is equal to or below the current national best bid. If NES cannot
execute the underlying covered security component of a Complex Order
in accordance with Rule 201 of Regulation SHO, the Exchange will
cancel back the Complex Order to the entering member organization.
For purposes of this paragraph, the term ``covered security'' shall
have the same meaning as in Rule 201(a)(1) of Regulation SHO. NES
will only execute the underlying covered security component of a
Complex Order if the underlying covered security component is in
accordance with Rule 201 of Regulation SHO.
\84\ 15 U.S.C. 78s(g).
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Additionally, the Exchange will monitor any effect additional
options series listed under the proposed rule change may have on market
fragmentation and the capacity of the Exchange's automated systems. The
Exchange will take prompt action, including timely communication with
the Commission and with other self-regulatory organizations responsible
for oversight of trading in options, the underlying ETFs, and the ETFs'
component securities, should any unanticipated adverse market effects
develop.
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 Exchange does not believe that the proposed rule change will
impose any burden on intra-market competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as all member
organizations who wish to trade FLEX Options will be able to trade such
options in the same manner. Additionally, positions in FLEX Options of
all member organizations will be subject to the same position limits,
and such positions will be aggregated in the same manner as described
in proposed Options 8, Section 34(i)(4).
The Exchange also does not believe that the proposed rule change
will impose any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. The
proposal promotes inter-market competition by providing another
alternative (i.e., exchange markets) to bilateral OTC trading of
options with flexible terms. Exchange markets, in contrast with
bilateral OTC trading, are centralized, transparent, and have the
guarantee of OCC for options traded.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not:
(i) significantly affect the protection of investors or the public
interest;
(ii) impose any significant burden on competition; and
(iii) become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \85\ and
Rule 19b-4(f)(6) \86\ thereunder.
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\85\ 15 U.S.C. 78s(b)(3)(A).
\86\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or 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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-Phlx-2025-20 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-2025-20. 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
[[Page 19562]]
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-2025-20 and
should be submitted on or before May 29, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\87\
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\87\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-07985 Filed 5-7-25; 8:45 am]
BILLING CODE 8011-01-P