[Federal Register Volume 91, Number 20 (Friday, January 30, 2026)]
[Notices]
[Pages 4145-4152]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2026-01822]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104692; File No. SR-NYSEARCA-2026-04]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend Rules
5.32-O and 5.35-O Related to Flexible Exchange Options
January 27, 2026.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that on January 15, 2026, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 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 Rules 5.32-O and 5.35-O related to
Flexible Exchange (``FLEX'') Options. Specifically, the Exchange
proposes to allow for cash-settlement of certain FLEX Equity Options.
The proposed rule change is available on the Exchange's website at
www.nyse.com and at the principal office of the Exchange.
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 self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rules 5.32-O and 5.35-O related to
FLEX Options. The proposal is substantially identical to approved rules
on NYSE American LLC.\4\
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\4\ See NYSE American Rules 903G(c)(3)(iii) and 906G. See also
Securities and Exchange 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) (the ``American
FLEX Approval Order'').
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FLEX Options are customized equity or index contracts that allow
investors to tailor contract terms for exchange-listed equity and index
options. The Exchange proposes to amend NYSE Arca Rule 5.32-O(f) to
allow for cash settlement of certain FLEX Equity Options.\5\ Generally,
FLEX Equity Options are settled by physical delivery of the underlying
security,\6\ while all FLEX Index Options are currently settled by
delivery in cash.\7\ As proposed, ``FLEX ETF Options'' where the
underlying security is an Exchange-Traded Fund Share would be permitted
to be settled by delivery in cash if the underlying security meets
prescribed criteria, which criteria has been approved by the Securities
and Exchange Commission (``SEC'' or ``Commission'').\8\
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\5\ A ``FLEX Equity Option'' is an option on a specified
underlying equity security or Exchange-Traded Fund Share. See Rule
5.30-O(b)(5).
\6\ See Rule 5.32-O(f)(3)(i).
\7\ See Rules 5.32-O (e)(2) and (3). Pursuant to Exchange rules,
Binary Return Derivatives (``ByRDs'') are also settled in cash. See
Rule 5.82-O(b). As discussed below, cash settlement is also
permitted in the over-the-counter (``OTC'') market.
\8\ See generally American FLEX Approval Order, supra note 4.
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To permit cash settlement of certain FLEX ETF Options, the Exchange
[[Page 4146]]
proposes new paragraph (f)(3)(ii) to Rule 5.32-O. Proposed Rule 5.32-
O(f)(3)(ii) would provide that the exercise settlement for a FLEX ETF
Option may be by physical delivery of the underlying security or by
delivery in cash if the underlying security, measured over the prior
six-month period, has an average daily notional value of $500 million
or more and a national average daily volume (ADV) of at least 4,680,000
shares.\9\
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\9\ See proposed Rule 5.32-O(f)(3)(ii). The Exchange also
proposes a non-substantive amendment to Rule 5.32-O to renumber
current Rule 5.32-O(f)(3)(ii) as new Rule 5.32-O(f)(3)(iii).
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The Exchange also proposes new sub-paragraph (A) to Rule 5.32-
O(f)(3)(ii), which would provide that the Exchange will determine bi-
annually the underlying securities that satisfy the notional value and
trading volume requirements in Rule 5.32-O(f)(3)(ii) by using trading
statistics for the previous six-months.\10\ The proposed rule would
further provide that the Exchange will permit cash settlement as a
contract term on no more than 50 underlying ETFs that meet the criteria
in Rule 5.32-O(f)(3)(ii), and that if more than 50 underlying ETFs
satisfy the notional value and trading volume requirements, the
Exchange would select the top 50 ETFs that have the highest average
daily volume.\11\
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\10\ See proposed Rule 5.32-O(f)(3)(ii)(A). The Exchange plans
to conduct the bi-annual review on January 1 and July 1 of each
year. The results of the bi-annual review will be announced via
Trader Update 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.
\11\ See proposed Rule 5.32-O(f)(3)(ii)(A). The Exchange notes
that, according to Rule 5.32-O(f)(1), it will not authorize for
trading a FLEX Equity Option class (either cash-settled or
physically-settled) on the iShares Bitcoin Trust (IBIT), the
Grayscale Bitcoin Trust (GBTC), the Grayscale Bitcoin Mini Trust
(BTC), and the Bitwise Bitcoin ETF (BITB). If the Exchange
determines to allow FLEX trading on such options at a later date, it
will do so by submitting a 19b-4 rule filing with the Commission.
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Proposed new sub-paragraph (B) to Rule 5.32-O(f)(3)(ii) would
further provide that if the Exchange determines pursuant to the bi-
annual review that an underlying ETF ceases to satisfy the requirements
under Rule 5.32-O(f)(3)(ii), any new positions 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.\12\
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\12\ See proposed Rule 5.32-O(f)(3)(ii)(B). An OTP Holder or OTP
Firm that is acting as a Market Maker may enter into an opening
transaction in order to facilitate closing transactions of another
market participant in option series that are restricted to closing-
only transactions. See https://www.nyse.com/publicdocs/nyse/markets/arca-options/rule-interpretations/2017/NYSE%20Arca%20Options%20RB%2017-01.pdf. Consistent with a Market
Maker's duty to maintain fair and orderly markets under Rule 6.32-O,
the Exchange will provide guidance to reflect that an OTP Holder or
OTP Firm acting as a Market Maker in cash-settled FLEX ETF Options
can enter into an opening transaction to facilitate closing only
transactions of another market participant in cash-settled FLEX ETF
Option series that are restricted to closing-only transactions.
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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
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 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, 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.
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 January 1, 2025 through June
30, 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
[[Page 4147]]
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 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, as of August 1, 2025, the Exchange would be able to
provide cash settlement as a contract term for FLEX ETF Options on 50
underlying ETFs, as each of these securities currently meets 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 50 ETFs that, as of February 2, 2026, would be eligible to have
cash settlement as a contract term.
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Average daily Average daily
notional value volume (in
Symbol Security name (in dollars) (7/1/ shares) (7/1/25-
25-12/31/25) 12/31/25)
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AGG............ iShares Core U.S. 851,736,628 8,537,106
Aggregate Bond
ETF.
ARKK........... ARK Innovation 790,660,256 10,002,331
ETF.
BIL............ State Street SPDR 811,729,500 8,864,004
Bloomberg 1-3
Month T-Bill ETF.
BND............ Vanguard Total 525,248,363 7,091,622
Bond Market.
EEM............ iShares MSCI 1,314,535,887 25,104,296
Emerging Markets
ETF.
EFA............ iShares MSCI EAFE 1,400,802,545 15,047,336
ETF.
EMB............ iShares J.P. 645,590,199 6,808,789
Morgan USD
Emerging Markets
Bond ETF.
EWZ............ iShares MSCI 832,406,524 27,539,581
Brazil ETF.
FXI............ iShares China 1,162,022,779 29,637,240
Large-Cap ETF.
GDX............ VanEck Gold 1,650,929,132 23,308,008
Miners ETF.
GLD............ SPDR Gold Trust, 4,679,648,415 13,106,089
SPDR Gold Shares.
HYG............ iShares iBoxx $ 3,009,053,280 37,348,764
High Yield
Corporate Bond
ETF.
IAU............ iShares Gold 663,013,049 9,038,878
Trust.
IBIT........... iShares Bitcoin 3,302,762,948 54,804,815
Trust ETF.
IEF............ iShares 7-10 Year 776,595,411 8,065,323
Treasury Bond
ETF.
IEFA........... iShares Core MSCI 944,372,956 10,887,444
EAFE ETF.
IEMG........... iShares Core MSCI 707,399,002 10,864,418
Emerging Markets
ETF.
IJH............ iShares Core S&P 557,473,063 8,591,757
Mid-Cap ETF.
IVV............ iShares Core S&P 4,916,301,448 7,366,354
500 ETF.
IWM............ iShares Russell 9,107,195,726 38,334,860
2000 ETF.
KRE............ State Street SPDR 1,010,867,367 16,149,904
S&P Regional
Banking ETF.
KWEB........... KraneShares CSI 758,561,614 19,787,877
China Internet
ETF.
LQD............ iShares iBoxx $ 3,250,822,405 29,383,282
Investment Grade
Corporate Bond
ETF.
NVDL........... GraniteShares ETF 1,108,697,601 12,675,065
Trust
GraniteShares 2x
Long NVDA Daily
ETF.
QQQ............ Invesco QQQ 30,818,923,154 51,850,964
Trust, Series 1.
RSP............ Invesco S&P 500 2,762,810,864 14,703,142
Equal Weight ETF.
SGOV........... iShares 0-3 Month 1,388,081,321 13,809,327
Treasury Bond
ETF.
SLV............ iShares Silver 1,678,176,062 35,288,580
Trust.
SMH............ VanEck 2,469,068,633 7,678,563
Semiconductor
ETF.
SOXL........... Direxion Daily 3,006,888,191 87,729,942
Semiconductor
Bull 3X Shares.
SOXS........... Direxion Daily 1,190,447,220 242,272,959
Semiconductor
Bear 3X Shares.
SPY............ SPDR S&P 500 ETF 49,479,496,319 75,099,335
Trust.
SPYM........... State Street SPDR 832,289,521 10,428,634
Portfolio S&P
500 ETF.
SQQQ........... ProShares 2,097,799,624 101,252,728
UltraPro Short
QQQ.
TLT............ iShares 20+ Year 3,020,168,090 34,177,787
Treasury Bond
ETF.
TNA............ Direxion Daily 550,895,018 13,028,336
Small Cap Bull
3x Shares.
TQQQ........... ProShares 5,470,244,126 64,643,171
UltraPro QQQ.
TSLL........... Direxion Shares 2,097,868,817 128,729,316
ETF Trust
Direxion Daily
TSLA Bull 2X
Shares.
VCIT........... Vanguard 908,984,288 10,872,165
Intermediate-
Term Corporate
Bond ETF.
VEA............ Vanguard FTSE 757,435,926 12,639,446
Developed
Markets ETF.
VOO............ Vanguard S&P 500 4,849,283,165 7,967,852
ETF.
XBI............ State Street SPDR 1,018,437,196 9,948,285
S&P Biotech ETF.
XLB............ State Street 575,590,829 7,068,027
Materials Select
Sector SPDR ETF.
XLE............ State Street 1,323,649,507 16,857,476
Energy Select
Sector SPDR ETF.
XLF............ State Street 2,039,032,835 38,456,638
Financial Select
Sector SPDR ETF.
XLI............ State Street 1,600,951,720 10,508,948
Industrial
Select Sector
SPDR ETF.
XLK............ State Street 2,227,341,881 8,716,285
Technology
Select Sector
SPDR ETF.
XLP............ State Street 1,157,734,148 14,561,414
Consumer Staples
Select Sector
SPDR ETF.
XLU............ State Street 927,003,728 11,908,503
Utilities Select
Sector SPDR ETF.
XLV............ State Street 1,840,490,851 12,949,393
Health Care
Select Sector
SPDR ETF.
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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 investors that use FLEX Options to manage their trading and
investment risk, including investors that currently trade in the over-
the-counter (``OTC'') market for customized options, where settlement
restrictions do not apply.
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.
[[Page 4148]]
Physical settlement possesses 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.
The Exchange notes that the SEC has previously approved or noticed
for immediate effectiveness rule filings of other exchanges that
allowed for the trading of cash-settled options,\13\ and specifically,
cash-settled FLEX ETF Options.\14\
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\13\ See e.g. PHLX FX Options traded on Nasdaq PHLX and S&P
500[supreg] Index Options traded on Cboe Options Exchange. The SEC
noticed for immediate effectiveness, 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 and RealDayTM Options on the SPDR S&P 500
Trust never traded on 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 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).
\14\ See Securities Exchange Act Release Nos. 102839 (April 11,
2025), 90 FR 16410 (April 17, 2025) (SR-BOX-2025-07) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Rule 5055 To Allow for Cash Settlement of Certain FLEX Equity
Options); 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); and 101720 (November 22, 2024), 89 FR
94986 (November 29, 2024) (SR-ISE-2024-12) (Notice 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). See also 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); and 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).
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With respect to position and exercise limits, cash-settled FLEX ETF
Options would be subject to the position limits set forth in Rule 5.35-
O. Accordingly, the Exchange proposes new Rule 5.35-O(b)(ii), which
would provide that a position in FLEX Equity Options where the
underlying security is an ETF and that is settled in cash pursuant to
Rule 5.32-O(f)(3)(ii) would be subject to the position limits set forth
in Rule 6.8-O, and subject to the exercise limits set forth in Rule
6.9-O. The proposed rule further states that positions in such cash-
settled FLEX Equity Options shall be aggregated with positions in
physically-settled options on the same underlying ETF for the purpose
of calculating the position limits set forth in Rule 6.8-O, and the
exercise limits set forth in Rule 6.8-O.\15\ Given that each of the
underlying ETFs that would currently be eligible to have cash-
settlement as a contract term have established position and exercise
limits applicable to physically-settled options, the Exchange believes
it is appropriate for the same position and exercise limits to also
apply to cash-settled options. Accordingly, of the 50 underlying
securities that would currently be eligible to have cash settlement as
a contract term, 34 would have a position limit of 250,000 contracts
pursuant to Rule 6.9-O, Commentary .06(e).\16\ Further, pursuant to
Rule 6.8-O, Commentary .06(f), 10 would have a position limit of
500,000 contracts; four (EEM, EFA, FIX and IWM) 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 contracts.\17\
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\15\ See proposed Rule 5.35-O(b)(ii). The aggregation of
position and exercise limits would include all positions on
physically settled FLEX Equity Options and Non-FLEX Equity Options
on the same underlying ETFs. The Exchange also proposes a non-
substantive amendment to Rule 5.35-O to renumber current Rule 5.35-
O(b)(ii) as new Rule 5.35-O(b)(iii).
\16\ Rule 6.8-O, Commentary .06(e) provides that the position
limit shall be 250,000 contracts for options: (i) on an underlying
security that had trading volume of at least 100,000,000 shares
during the most recent six-month trading period; or (ii) on an
underlying security that had trading volume of at least 75,000,000
shares during the most recent six-month trading period and has at
least 300,000,000 shares currently outstanding. All fifty (50)
underlying ETFs currently meet the requirements under Commentary
.06(e).
\17\ These were based on position limits as of June 30, 2025.
Position limits are available at OCC--Position Limits (theocc.com).
Position limits for ETFs are determined in accordance with the
Exchange's Rules regarding position limits.
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The Exchange understands that cash-settled FLEX 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.\18\
These options are not fungible with the exchange listed options. The
Exchange believes some of these market participants would prefer to
trade these 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 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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\18\ As noted above, other options exchange currently list and
trade certain cash-settled FLEX ETF Options. See supra notes 4 and
14.
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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 another exchange recently
listed the same options.\19\
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\19\ Id.
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The Exchange notes that OCC has received approval from the SEC for
rule changes that will accommodate the clearance and settlement of
cash-settled ETF Options.\20\ The Exchange has also
[[Page 4149]]
analyzed its capacity and the capacity of The Options Price Reporting
Authority (OPRA) and represents that it and OPRA have the necessary
systems capacity to handle the additional traffic associated with the
listing of cash-settled FLEX ETF Options. The Exchange believes any
additional traffic that would be generated from the introduction of
cash-settled FLEX ETF Options would be manageable. The Exchange
represents that OTP Holders and OTP Firms 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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\20\ See Securities Exchange Act Release No. 94910 (May 13,
2022), 87 FR 30531 (May 19, 2022) (SR-OCC-2022-003).
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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 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 for cash-settled FLEX ETF Options and intends to apply
the same program procedures that it applies to the Exchange's other
options products.
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. 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.
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 NYSE Regulation \21\
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, quoting/routing, and Reg SHO
violations, that may occur on the Exchange and other markets. 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 its existing trading
surveillances are adequate to monitor the trading in the underlying
ETFs and subsequent trading of options on those securities on the
Exchange, including cash-settled FLEX ETF Options.\22\
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\21\ The Exchange maintains regulatory services agreements with
Financial Industry Regulatory Authority, Inc. (``FINRA'') whereby
FINRA provides certain regulatory services to the exchanges,
including cross-market surveillance, investigation, and enforcement
services.
\22\ 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 NYSE Regulation'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'').\23\ 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 Exchange will monitor and adjust its surveillance
procedures as needed for the cash settlement of FLEX ETF Options.
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\23\ ISG is an industry organization formed in 1983 to
coordinate intermarket surveillance among the SROs by cooperatively
sharing regulatory information pursuant to a written agreement
between the parties. The goal of the ISG's information sharing is to
coordinate regulatory efforts to address potential intermarket
trading abuses and manipulations.
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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
[[Page 4150]]
believes that introducing cash-settled FLEX ETF Options would further
broaden the base of investors that use FLEX 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.\24\
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\24\ See supra note 14.
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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 SEC 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.
The Exchange notes that it will issue a notice to OTP Holders via a
Trader Update announcing the implementation date of the proposal.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\25\ in
general, and furthers the objectives of Section 6(b)(5) of the Act,\26\
in particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest. Specifically,
the Exchange believes that introducing cash-settled FLEX ETF Options
will increase order flow to the Exchange, increase the variety of
options products available for trading, and provide a valuable tool for
investors to manage risk.
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\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
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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 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 that 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.\27\
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\27\ See supra, note 14.
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The Exchange believes that the data provided by the Exchange
supports the supposition that permitting cash settlement as a FLEX term
for the 50 underlying ETFs that would currently qualify to have cash
settlement as a contract term would broaden the base of investors that
use FLEX 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
would remove impediments to and perfect the mechanism of a free and
open market because the proposed rule change would provide OTP Holders
and OTP Firms 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 other exchanges have previously
received approval that allow for the trading of cash-settled options
\28\ and, specifically, cash-settled FLEX ETF Options in an identical
manner as the Exchange proposes to list them pursuant to this rule
filing.\29\ The proposed rule change therefore should not raise issues
for the Commission that have not been previously addressed.
---------------------------------------------------------------------------
\28\ See supra, note 13.
\29\ See supra, notes 4 and 14.
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The proposed rule change to permit cash settlement as a contract
term for
[[Page 4151]]
options on the 50 underlying 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 in
the OTC market and are approved to trade on other options exchanges.
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 that would currently 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, the Exchange 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.\30\ The Exchange
further notes the 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.\31\ 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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\30\ Among other things, the Exchange'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, quoting/routing, and Reg SHO
violations, that 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.
\31\ 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 will 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
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as all Floor Brokers and FLEX
Market Makers that are authorized to trade FLEX Equity Options in
accordance with the Exchange's Rules will be able to trade cash-settled
FLEX ETF Options in the same manner. This includes that, for all FLEX
Equity Options, including FLEX ETF Options, at least one of exercise
style, expiration date, and exercise price must differ from options in
the non-FLEX market. Additionally, positions in cash-settled FLEX ETF
Options of all OTP Holders will be subject to the same position limits,
and such positions will be aggregated with positions in physically
settled options on the same underlying in the same manner.
The Exchange does not believe that the proposed rule change will
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as the proposal
is designed to increase competition for order flow on the Exchange in a
manner that is beneficial to investors because it is designed to
provide investors seeking to transact in FLEX ETF Options with the
opportunity for an alternative method of settling their option
contracts at expiration. The
[[Page 4152]]
Exchange believes the proposed rule change will encourage competition,
as it may 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 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 may increase competition as it may
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 and thus
increased price competition.
The Exchange notes that it operates in a highly competitive market
in which market participants can readily direct order flow to competing
venues who offer similar functionality. The Exchange believes the
proposed rule change encourages competition amongst market participants
to provide tailored cash-settled FLEX ETF Option contracts, as other
exchanges have received approval to list these contracts (subject to
the same position and exercise limits as proposed). Therefore, the
Exchange believes the proposed rule change will enhance intermarket
competition by providing investors with a choice of exchange venues on
which to trade cash-settled FLEX ETF Options.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \32\ and Rule 19b-4(f)(6) thereunder.\33\
Because the 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 prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \34\ and Rule 19b-
4(f)(6) \35\ thereunder.
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\32\ 15 U.S.C. 78s(b)(3)(A)(iii).
\33\ 17 CFR 240.19b-4(f)(6).
\34\ 15 U.S.C. 240.19b-4(f)(6).
\35\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of its
intent to file the proposed rule change, along with a brief
description and text of the proposed rule change, at lease 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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A proposed rule change filed under Rule 19b-4(f)(6) \36\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b4(f)(6)(iii),\37\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest.
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\36\ 17 CFR 240.19b-4(f)(6).
\37\ 17 CFR 240.19b-4(f)(6)(iii).
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The Exchange has asked the Commission to waive the 30-day operative
delay so that the proposal may become operative immediately upon
filing. The Exchange believes waiver of the operative delay will
protect investors because another exchange was recently granted waiver
of the operative delay to introduce cash-settled FLEX ETF Options in an
identical manner and subject to the same position limit requirements as
the Exchange proposes pursuant to this rule filing.\38\ According to
the Exchange, as other exchanges already allow such cash-settled FLEX
ETF Option contracts, waiver of the operative delay will protect
investors by providing them with an additional venue where they can
trade cash-settled FLEX ETF Options, and will permit the Exchange to
remain competitive with other exchanges. The Commission believes that
waiving the 30-day operative delay is consistent with the protection of
investors and the public interest because the proposal does not raise
any novel regulatory issues and will allow the Exchange to offer,
without delay, cash-settled FLEX ETF options that are already available
on other exchanges. Accordingly, the Commission hereby waives the
operative delay and designates the proposed rule change to be operative
upon filing.\39\
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\38\ See supra, note 14.
\39\ For the purposes only of waiving the 30-day operative
delay, the Commission also has considered the proposed rule's impact
on efficiency, competion, and capital formation. See 15 U.S.C.
78c(f).
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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.
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-NYSEARCA-2026-04 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-NYSEARCA-2026-04. 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 filing 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-NYSEARCA-2026-04 and should be submitted
on or before February 20, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-01822 Filed 1-29-26; 8:45 am]
BILLING CODE 8011-01-P