[Federal Register Volume 90, Number 146 (Friday, August 1, 2025)]
[Notices]
[Pages 36233-36236]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-14544]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103565; File No. SR-PHLX-2024-72]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a
Proposed Rule Change To Permit the Trading of FLEX Options on Shares of
the iShares Bitcoin Trust ETF
July 29, 2025.
I. Introduction
On December 26, 2024, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend Options 8, Section 34, FLEX Trading, to
permit options on shares of the iShares Bitcoin Trust ETF (``IBIT'') to
trade as cash-settled and physically settled FLEX equity options.\3\
The proposed rule change was published for comment in the Federal
Register on January 14, 2025.\4\ On February 27, 2025, pursuant to
Section 19(b)(2) of the Act,\5\ the Commission designated a longer
period within which to approve the proposal, disapprove the proposal,
or institute proceedings to determine whether to disapprove the
proposal.\6\ On March 14, 2025, the Commission instituted proceedings
under Section 19(b)(2)(B) of the Act \7\ to determine whether to
approve or disapprove the proposal.\8\ The Commission received a
comment letter regarding the proposed rule change.\9\ This order
approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Exchange's rules use the term ``exchange-traded fund''
to refer to several types of investment products, including IBIT.
See ISE Options 4, Section 3(h). In its proposal to list and trade
shares of IBIT, The Nasdaq Stock Market LLC states that IBIT is not
an investment company registered under the Investment Company Act of
1940, and that shares of IBIT will be registered with the Commission
on Form S-1. See Securities Exchange Act Release No. 99295 (Jan. 8,
2024), 89 FR 2321, 2322 (Jan. 12, 2024) (File No. SR-Nasdaq-2023-
016) (Notice of Filing of Amendment No. 1 to a Proposed Rule Change
to List and Trade Shares of the iShares Bitcoin Trust Under Nasdaq
Rule 5711(d)).
\4\ See Securities Exchange Act Release No. 102132 (Jan. 7,
2025), 90 FR 3266 (``Notice'').
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 102497 (Feb. 27,
2025), 90 FR 11334 (Mar. 5, 2025). The Commission designated April
14, 2025, as the date by which the Commission shall either approve
or disapprove, or institute proceedings to determine whether to
disapprove, the proposed rule change.
\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ See Securities Exchange Act Release No. 102669 (Mar. 14,
2025), 90 FR 13226 (Mar. 20, 2025).
\9\ Comments received on the proposal are available at https://www.sec.gov/comments/sr-phlx-2024-72/srphlx202472.htm.
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II. Description of the Proposed Rule Change
As described in detail in the Notice, the Exchange proposes to
amend its rules to permit the trading of FLEX equity options on
IBIT.\10\ The Commission approved Nasdaq ISE LLC's (``ISE'') proposal
to list and trade options on IBIT.\11\ Because the Exchange's listing
rules incorporate ISE's listing rules by reference, the Exchange may
list IBIT options.\12\ The
[[Page 36234]]
Exchange's rules currently establish position and exercise limits of
25,000 contracts on the same side of the market for IBIT options.\13\
The Exchange proposes to amend Options 8, Section 34(e) to apply these
position and exercise limits to the proposed FLEX IBIT options and to
provide that positions in FLEX IBIT options will be aggregated with
positions in non-FLEX IBIT options for purposes of calculating position
and exercise limits.\14\ Accordingly, the proposal limits the position
and exercise limits for all IBIT options--FLEX and non-FLEX--to 25,000
contracts.\15\
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\10\ See supra note 4.
\11\ See Securities Exchange Act Release No. 101128 (Sept. 20,
2024), 89 FR 78942 (Sept. 26, 2024) (order approving File No. SR-
ISE-2024-03) (``IBIT Order'').
\12\ See Options 4 and Securities Exchange Act Release No.
101613 (Nov. 13, 2024), 89 FR 91470 (Nov. 19, 2024) (notice of
filing and immediate effectiveness of File No. SR-Phlx-2024-53).
\13\ See Options 9, Section 13(a) and Option 9, Section 15(a).
\14\ See proposed Options 8, Section 34(e).
\15\ See Notice, 90 FR at 3267.
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The Exchange states that the Commission has stated that ``rules
regarding position and exercise limits are intended to prevent the
establishment of options positions that can be used or might create
incentives to manipulate or disrupt the underlying market so as to
benefit the options positions.'' \16\ The Exchange states that, for
this reason the Commission requires that ``position and exercise limits
must be sufficient to prevent investors from disrupting the market for
the underlying security by acquiring and exercising a number of options
contracts disproportionate to the deliverable supply and average
trading volume of the underlying security.'' \17\ The Exchange further
states that based on its review of the data and analysis provided by
the Exchange, the Commission concluded that the 25,000-contract
position limit for non-FLEX IBIT options satisfied these
objectives.\18\
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\16\ See Notice, 90 FR at 3267 (citing the IBIT Order, 89 FR
78946).
\17\ See id.
\18\ See id.
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The Exchange states that the proposed aggregated limit effectively
restricts a market participant from holding positions that could result
in the receipt of more than 2,500,000 shares, aggregated for FLEX IBIT
and non-FLEX IBIT options (if that market participant exercised all its
IBIT options).\19\ The Exchange states that capping the aggregated
position limit at 25,000 contracts will be sufficient to address
concerns related to manipulation and the protection of investors, and
further, that the proposed position and exercise limits are
conservative for IBIT and therefore appropriate given its
liquidity.\20\ As described more fully in the Notice, the Exchange
states that although it proposes an aggregated position limit of 25,000
contracts for all IBIT options, there is evidence to support a higher
position limit.\21\
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\19\ See Notice, 90 FR at 3267.
\20\ See id.
\21\ See Notice, 90 FR at 3267. In the IBIT Order, the
Commission stated that it considered and reviewed the ISE's analysis
that the exercisable risk associated with a position limit of 25,000
contracts represented only 0.4% of the outstanding shares of IBIT.
The Commission stated that it also considered and reviewed the ISE's
statement that with a position limit of 25,000 contracts on the same
side of the market and 611,040,00 shares of IBIT outstanding, 244
market participants would have to simultaneously exercise their
positions to place IBIT under stress. See IBIT Order, 89 FR at
78946.
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The Exchange states that FLEX options on ETFs are currently traded
in the over-the- counter (``OTC'') market by a variety of market
participants, including hedge funds, proprietary trading firms, and
pension funds.\22\ The Exchange states that the proposed FLEX options
may provide a useful risk management and trading vehicle for market
participants and their customers.\23\ The Exchange states that FLEX
IBIT options traded on the Exchange would have several advantages over
contracts traded in the OTC market, including reduced counterparty
credit risk because exchange-traded contracts are issued and guaranteed
by The Options Clearing Corporation (``OCC'') and the price discovery
and dissemination provided by exchange trading, which would lead to
more transparent markets.\24\
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\22\ See id.
\23\ See id.
\24\ See id.
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The Exchange states that it and The Options Price Reporting
Authority have the necessary systems capacity to handle the additional
traffic associated with the listing of FLEX IBIT options.\25\ The
Exchange states that the same surveillance procedures applicable to
other options products listed and traded on the Exchange, including
non-FLEX IBIT options, will apply to the proposed FLEX IBIT options,
and that the Exchange has the necessary systems capacity to support the
proposed options.\26\ The Exchange further states that FLEX options
products (and their respective symbols) are integrated into the
Exchange's existing surveillance system architecture and are thus
subject to the relevant surveillance processes.\27\ The Exchange states
that its market surveillance staff (including staff of the Financial
Industry Regulatory Authority (``FINRA'') who perform surveillance and
investigative work on behalf of the Exchange pursuant to a regulatory
services agreement) conduct surveillances with respect to IBIT (the
underlying exchange-traded product) and, as appropriate, would review
activity in IBIT when conducting surveillances for market abuse or
manipulation in IBIT options.\28\ In addition, the Exchange states that
it is a member of the Intermarket Surveillance Group (``ISG'') under
the Intermarket Surveillance Group Agreement, and that ISG members work
together to coordinate surveillance and investigative information
sharing in the stock, options, and futures markets.\29\ For
surveillance purposes, the Exchange states that it would therefore have
access to information regarding trading activity in the pertinent
underlying securities.\30\ The Exchange states that it does not believe
that allowing FLEX IBIT options would render the marketplace for equity
options more susceptible to manipulative practices.\31\ The Exchange
represents that its existing trading surveillances are adequate to
monitor the trading in IBIT (as well as FLEX IBIT options) on the
Exchange.\32\ In addition, the Exchange states that it has a regulatory
services agreement with FINRA, pursuant to which FINRA conducts certain
surveillances on behalf of the Exchange.\33\ The Exchange further
states that, pursuant to a multi-party 17d-2 joint plan, all options
exchanges allocate regulatory responsibilities to FINRA to conduct
certain options-related market surveillances.\34\ The Exchange states
that it will implement any additional surveillance procedures it deems
necessary to effectively monitor the trading of IBIT options.\35\
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\25\ See id.
\26\ See id.
\27\ See id. The Exchange states that FLEX trading occurs on the
Exchange's trading floor in an open outcry environment. The Exchange
states that surveillance staff monitors FLEX trading in open outcry.
See id. at footnote 24.
\28\ See Notice, 90 FR at 3268.
\29\ See id.
\30\ See id.
\31\ See id. at 3270.
\32\ See id. at 3269.
\33\ See id. at 3268.
\34\ See id. The Exchange states that Section 19(g)(1) of the
Act, among other things, requires every self-regulatory organization
(``SRO'') registered as a national securities exchange or national
securities association to comply with the Act, the rules and
regulations thereunder, and the SRO's own rules, and, absent
reasonable justification or excuse, enforce compliance by its
members and persons associated with its members. See 15 U.S.C.
78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the Act allows
the Commission to relieve an SRO of certain responsibilities with
respect to members of the SRO who are also members of another SRO.
Specifically, Section 17(d)(1) allows the Commission to relieve an
SRO of its responsibilities to: receive regulatory reports from such
members; examine such members for compliance with the Act and the
rules and regulations thereunder, and the rules of the SRO; or carry
out other specified regulatory responsibilities with respect to such
members. See Notice, at 3269 at n.26.
\35\ See id. at 3269.
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[[Page 36235]]
III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange,\36\ and, in particular, the requirements of Section 6 of the
Act.\37\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\38\ which
requires, among other things, that an exchange have rules designed to
prevent fraudulent and manipulative acts and practices and to protect
investors and the public interest.
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\36\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\37\ 15 U.S.C. 78f.
\38\ 15 U.S.C. 78f(b)(5).
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The proposed FLEX IBIT options would permit the creation of
customized options on IBIT, which could help market participants
implement their hedging, risk management, and investment strategies. A
commenter expressed support for the proposal and highlighted the
benefits of the proposed customized options on IBIT.\39\ The commenter
states that the customizable features of FLEX options allow asset
managers to create precise buffer levels and outcome periods that
cannot be achieved using standardized listed options.\40\ In addition,
the proposal will extend to FLEX IBIT options the benefits of trading
on the Exchange's options market, including a centralized market
center, an auction market with posted transparent market quotations and
transaction reporting, parameters and procedures for clearance and
settlement, and the guarantee of OCC for all contracts traded on the
Exchange.\41\
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\39\ See letter from Matt McFarland, Senior Vice President,
Capital Markets, Vest Financial, dated Jan. 27, 2025. The commenter
further states that FLEX options on IBIT would permit the creation
of products with precise payoff terms, which would provide investors
with hedged exposure to IBIT. See id. at 1.
\40\ See id.
\41\ See Securities Exchange Act Release No. 36841 (Feb. 14,
1996), 61 FR 6666, 6668 (Feb. 21, 1996) (File Nos. SR-Cboe-95-43 and
PSE-95-24) (order approving listing of FLEX options on specified
equity securities). In addition, the Exchange states that exchange-
traded FLEX options can be closed with a liquidating transaction,
while OTC FLEX contracts must be held until expiration. See Notice,
90 FR at 3268.
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The Exchange's rules currently provide position and exercise limits
of 25,000 contracts on the same side of the market for IBIT
options.\42\ Although the proposal provides for the trading of FLEX
IBIT options, the proposal maintains the existing position and exercise
limits for IBIT options of 25,000 contracts on the same side of the
market and thus does not raise new regulatory issues with respect to
position and exercise limits.\43\ The Commission finds that the
proposed aggregation of position in FLEX and non-FLEX options when
calculating position and exercise limits is consistent with the Act,
and in particular, with the requirements in Section 6(b)(5) that the
rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices and to protect investors
and the public interest. Position and exercise limits serve as a
regulatory tool designed to deter manipulative schemes and adverse
market impact surrounding the use of options. Since the inception of
standardized options trading, the options exchanges have had rules
limiting the aggregate number of options contracts that a member or
customer may hold or exercise. Options position and exercise limits are
intended to prevent the establishment of options positions that can be
used or might create incentives to manipulate or disrupt the underlying
market to benefit the options position.\44\ In addition, such limits
serve to reduce the possibility of disruption in the options market
itself, especially in illiquid classes.\45\
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\42\ See Options 9, Section 13(a), and Options 9, Section 15(a).
\43\ See IBIT Order, 89 FR at 78946 (discussing the Commission's
approval of the 25,000-contract position and exercise limits for
IBIT options).
\44\ See Securities Exchange Act Release No. 39489 (Dec. 24,
1997), 63 FR 276, 279 (Jan 5. 1998) (order approving File No. SR-
Cboe-97-11).
\45\ See id.
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When the Commission approved the listing of options on IBIT, the
Commission concluded that the proposed position and exercise limits
were designed to prevent investors from disrupting the market for the
underlying security by acquiring and exercising a number of options
contracts disproportionate to the deliverable supply and average
trading volume of the underlying security, and to prevent the
establishment of options positions that could be used or might create
incentives to manipulate or disrupt the underlying market so as to
benefit the options position.\46\ At the same time, the Commission has
recognized that limits must not be established at levels that are so
low as to discourage participation in the options market by
institutions and other investors with substantial hedging needs or to
prevent specialists and market-makers from adequately meeting their
obligations to maintain a fair and orderly market.\47\ This analysis
applies to the proposed position and exercise limits for IBIT FLEX
options as well. By applying the existing IBIT option position and
exercise limits to IBIT FLEX options, and by requiring the aggregation
of positions in FLEX and non-FLEX options for position and exercise
limit purposes, the proposed position and exercise limits for IBIT FLEX
options are designed to prevent investors from disrupting the market
for the underlying security by acquiring and exercising a number of
options contracts disproportionate to the deliverable supply and
average trading volume of the underlying security, and to prevent the
establishment of options positions that could be used or might create
incentives to manipulate or disrupt the underlying market so as to
benefit the options position.
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\46\ See IBIT Order, 89 FR at 78946. See also Securities
Exchange Act Release Nos. 21907 (Mar. 29, 1985), 50 FR 13440, 13441
(Apr. 4, 1985).
\47\ See id.
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As described above, the same surveillance procedures applicable to
other options products listed and traded on the Exchange, including
non-FLEX IBIT options, will apply to the proposed FLEX IBIT
options.\48\ The Exchange states that FLEX options products (and their
respective symbols) are integrated into the Exchange's existing
surveillance system architecture and thus are subject to the relevant
surveillance processes.\49\ The Exchange further states that it will
implement any additional surveillance procedures it deems necessary to
effectively monitor the trading of IBIT options.\50\ In addition, the
Exchange states that its market surveillance staff, including FINRA
staff who perform surveillance and investigative work on behalf of the
Exchange pursuant a regulatory services agreement, conduct
surveillances with respect to IBIT and would review activity in IBIT
when conducting surveillances for market abuse or manipulation in IBIT
options.\51\ The Exchange also states that it is a member of ISG, that
ISG members work together to coordinate surveillance and investigative
information sharing in the stock, options, and futures markets, and
therefore the Exchange would have access to information regarding
trading activity in the pertinent underlying
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securities.\52\ Further, in approving proposals to list bitcoin-based
exchange-traded products (``ETPs''), including IBIT, the Commission
found that there were sufficient means to prevent fraud and
manipulation of bitcoin-based ETPs.\53\
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\48\ See Notice, 90 FR at 3268.
\49\ See id. The Exchange states that FLEX trading occurs on the
Exchange's trading floor in an open outcry environment. The Exchange
states that surveillance staff monitors FLEX trading in open outcry.
See id. at footnote 24.
\50\ See Notice, 90 FR at 3269.
\51\ See id. at 3268.
\52\ See id. at 3269.
\53\ See Securities Exchange Act Release Nos. 99306 (Jan. 10,
2024), 89 FR 3008 (Jan. 17, 2024).
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Together, these surveillance procedures should allow the Exchange
to investigate suspected manipulations or other trading abuses in IBIT
FLEX options. Accordingly, the Commission finds that the Exchange's
surveillance procedures for FLEX IBIT options are designed to prevent
fraudulent and manipulative acts and practices and to protect investors
and the public interest.
IV. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder applicable to a
national securities exchange and, in particular, the requirements of
Section 6(b)(5) of the Act.\54\
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\54\ 15 U.S.C. 78f(b)(5).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\55\ that the proposed rule change (SR-Phlx-2024-72) is approved.
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\55\ 15 U.S.C. 78s(b)(2)
By the Commission.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-14544 Filed 7-31-25; 8:45 am]
BILLING CODE 8011-01-P