80 FR 16072 - Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Surveillance Agreements
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 80, Issue 58 (March 26, 2015)
Federal Register Volume 80, Issue 58 (March 26, 2015)
| Page Range | 16072-16077 | |
| FR Document | 2015-06887 |
[Federal Register Volume 80, Number 58 (Thursday, March 26, 2015)] [Notices] [Pages 16072-16077] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-06887] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-74553; File No. SR-Phlx-2015-27] Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Surveillance Agreements March 20, 2015. 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 March 16, 2015, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') \3\ 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. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ The Exchange, The NASDAQ Stock Market LLC (``NASDAQ''), and NASDAQ OMX BX, Inc. (``BX'') are self-regulatory organizations (``SROs'') that are wholly owned subsidiaries of The NASDAQ OMX Group, Inc. (the ``Group''). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rule 1009 (Criteria for Underlying Securities) to allow the listing of options overlying Exchange-Traded Fund Shares (``ETFs'') that are listed pursuant to generic listing standards on equities exchanges for series of portfolio depositary receipts (``PDRs'') and index fund shares (``IFSs'') based on international or global indexes, pursuant to which a comprehensive surveillance agreement \4\ is not required. --------------------------------------------------------------------------- \4\ Surveillance agreements are also referred to in Exchange rules as ``surveillance sharing agreements'' or ``comprehensive surveillance sharing agreements'' (``CSSA''). See, e.g., Rules 1009 and 803. --------------------------------------------------------------------------- The text of the proposed rule change is available on the Exchange's Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 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 Commentary .06 to Rule 1009 to allow the listing of options overlying ETFs \5\ that are listed pursuant to generic listing standards on equities exchanges for series of PDRs and IFSs based on international or global indexes under which a CSSA is not required.\6\ Adding proposed new Commentary .06(b)(i) to Rule 1009 will enable the Exchange to list and trade options on ETFs without a CSSA provided that the underlying ETF is listed on an equities exchange pursuant to the generic listings standards that do not require a CSSA pursuant to Rule 19b-4(e) of the Exchange Act.\7\ --------------------------------------------------------------------------- \5\ ETFs are also referred to in Exchange rules as ``Fund Shares.'' See, e.g., Rules 1009 and 1009A [sic]. \6\ NASDAQ is the principal exchange within the Group for listing ETFs. NASDAQ has generic listing standards for PDRs and IFSs. See NASDAQ Rule 5705(b)(3)(A)(ii) regarding IFSs and 5705(a)(3)(A)(ii) regarding PDRs (IFSs and PDRs are together known as ETFs in NASDAQ Rule 5705). See also NYSE MKT Rule 1000 Commentary .03(a)(B); NYSE Arca Equities Rule 5.2(j)(3) Commentary .01(a)(B); and BATS Rule 14.11(b)(3)(A)(ii). \7\ 17 CFR 240.19b-4(e). --------------------------------------------------------------------------- Rule 19b-4(e) provides that the listing and trading of a new derivative securities product by an SRO shall not be deemed a proposed rule change, pursuant to paragraph (c)(l) of Rule 19b-4 \8\ if the Commission has approved, pursuant to Section 19(b) of the Act,\9\ the SRO's trading rules, procedures and listing standards for the product class that would include the new derivatives securities product, and the SRO has a surveillance program for the product class.\10\ This proposal allows the Exchange to list and trade options on ETFs based on international or global indexes that meet the generic listing standards.\11\ --------------------------------------------------------------------------- \8\ 17 CFR 240.19b-4(c)(1). \9\ 15 U.S.C. 78s(b). \10\ When relying on Rule 19b-4(e), the SRO must submit Form 19b-4(e) to the Commission within five business days after the SRO begins trading the new derivative securities products. See Securities Exchange Act Release No. 40761 (December 8, 1998), 63 FR 70952 (December 22, 1998). \11\ See NASDAQ Rule 5705(a)(3)(A)(ii) and (b)(3)(A)(ii); NYSE MKT Rule 1000, Commentary .03(a)(B); NYSE Arca Equities Rule 5.20)(3) [sic], Commentary .01(a)(B); and BATS Rule 14.11(b)(3)(A)(ii). --------------------------------------------------------------------------- [[Page 16073]] The Surveillance Agreement Requirement for Options on Exchange-Traded Funds The surveillance agreement requirement (also known as the ``requirement'' or ``regime'') was initially put into effect for options on ETFs well over a decade ago but has proven to have anti- competitive effects that are detrimental to investors.\12\ Specifically, the requirement limits the investing public's ability to hedge risk or engage in options strategies that may be afforded to other investors in domestic securities.\13\ --------------------------------------------------------------------------- \12\ See Securities Exchange Act Release No. 43921 (February 2, 2001), 66 FR 9739 (February 9, 2001) (SR-Phlx-2000-107) (notice of filing and approval order regarding trading of options on ETFs with surveillance agreements) (the ``ETF approval order''). At about the same time, the Exchange instituted surveillance agreement requirements for options on Trust Issued Receipts (``TIRs''), and thereafter other products. See Securities Exchange Act Release No. 44709 (August 16, 2001), 66 FR 44194 (August 22, 2001) (SR-Phlx- 2001-71) (notice of filing and approval order regarding trading of options on TIRs with surveillance agreements). Other exchanges have similar requirements. The changes proposed herein relate only to surveillance agreements for options on global or international ETFs. \13\ Moreover, as noted below the surveillance agreement requirement is present for the derivative options on ETFs but not for the underlying ETFs. --------------------------------------------------------------------------- The Exchange allows for the listing and trading of options on ETFs. Commentary .06 to Rule 1009 provides the listings standards for options on ETFs, which includes [sic] ETFs with non-U.S. component securities, such as ETFs based on international or global indexes. Currently, Commentary .06 to Rule 1009 regarding options on ETFs has a three-level surveillance agreement requirement (reproduced in relevant part): (i) Whether any non-U.S. component stocks on which the Fund Shares are based that are not subject to comprehensive surveillance agreements do not in the aggregate represent more than 50% of the weight of the index or portfolio; (ii) stocks for which the primary market is in any one country that is not subject to a comprehensive surveillance agreement do not represent 20% or more of the weight of the index; and (iii) stocks for which the primary market is in any two countries that are not subject to comprehensive surveillance agreements do not represent 33% or more of the weight of the index.\14\ --------------------------------------------------------------------------- \14\ See Commentary .06(b)(i)-(iii) to Rule 1009, which is re- numbered as Commentary .06(b)(ii)(A)-(C) to Rule 1009. --------------------------------------------------------------------------- The Exchange proposes to modify the surveillance agreement requirement for options on ETFs that are listed pursuant to generic listing standards for series of PDRs and IFSs, based on international or global indexes--for which case a comprehensive surveillance agreement is not required. The surveillance agreement requirement was instituted in 2001 when ETFs were, comparatively speaking, in a developmental state.\15\ The first ETF introduced in 1993 was a broad-based domestic equity fund tracking the S&P 500 index. The development of ETF products was very limited during the first decade of their existence, such that at the end of 2001, there was a total of only 102 ETFs listed on U.S. markets. Since 2001, however, the ETF market has matured tremendously and grown exponentially, such that at the end of 2012 there were a total of 1,194 listed ETFs.\16\ Many of these are very well known, highly traded and liquid products, such as, for example, SPDR S&P 500 Trust ETF (SPY), iShares MSCI Emerging Markets ETF (EEM), and PowerShares QQQ Trust, Series 1 ETF (QQQQ) [sic], that market participants from institutional to retail and public investors have been using for trading, hedging, and investing purposes with varying timelines.\17\ The ETF market is one of the most highly-developed, sophisticated markets that provide traders and investors the opportunity to access practically all industries and enterprises. In 2012 investor demand for ETFs in all asset classes increased substantially. And in 2011 the demand for global and international equity ETFs, to which the requirement applies, more than doubled.\18\ The Exchange believes that the surveillance agreement requirement no longer serves a necessary (or indispensable) function in today's highly developed ETF market,\19\ and actually creates a dynamic that negatively impacts the number of markets that can competitively trade ETF option products, to the detriment of market participants. --------------------------------------------------------------------------- \15\ See Securities Exchange Act Release No. 43921 (February 2, 2001), 66 FR 9739 (February 9, 2001) (SR-Phlx-2000-107) (ETF approval order). \16\ http://www.icifactbook.org/fb_ch3.html. \17\ These can be from intraday exposure (e.g., using Daily S&P 500 Bear 3x Shares (SPXS)) to long-term 401(k) or retirement fund exposure (e.g., using SPY). \18\ http://www.icifactbook.org/fb_ch3.html. \19\ ETFs and ETPs listed in the United States gathered $24.6 billion USD in net new assets in June 2014 which, when combined with positive market performance, pushed the ETF/ETP industry in the United States to a new record high of $1.86 trillion USD invested in 1,613 ETFs/ETPs, from 58 providers listed on 3 exchanges. And according to ETFGI, an independent ETF/ETP research and consultancy firm in the U.K., ETFs and ETPs listed globally reached $2.64 trillion USD in assets, a new record high, at the end of Q2 2014. http://www.mondovisione.com/media-and-resources/news/according-to-etfgi-etfs-and-etps-listed-globally-reached-us264-trillion-in-as/. --------------------------------------------------------------------------- The current surveillance requirement has, at times, resulted in the investing public having to forego the opportunity to hedge risk or engage in other listed options strategies in a competitive environment. ETFs may lack active options contracts that would be more likely to develop if multiple exchanges could compete to offer and promote them. For example, an investor in the iShare [sic] MSCI Indonesia ETF (EIDO) is not permitted to sell call options or purchase protective puts simply because the Exchange cannot obtain a surveillance agreement with Bursa Efek Indonesia. However, an investor in iShare [sic] MSCI Emerging Markets Fund (EEM) is afforded the right to engage in listed options trading to hedge risk or execute other beneficial options strategies. Both underlying exchange-traded funds, EIDO and EEM, are listed for trading in the U.S., subject to constant regulatory scrutiny, and permitted to be purchased and sold via registered broker/ dealers, yet, options can now be offered only on EEM. The Exchange believes this disparate treatment between investors of foreign-based instruments, especially between those that buy and sell options contracts on ETFs, which currently require surveillance agreements, as opposed to those that buy and sell shares of the underlying ETFs, which currently do not have the same onerous surveillance agreement requirement that ETF options have,\20\ is not in the best interest. The Exchange therefore proposes to establish that options on generically- listed global [[Page 16074]] or international ETFs would not require surveillance agreements for listing. --------------------------------------------------------------------------- \20\ While the surveillance agreement requirement for options on ETFs found in Commentary .06 to Rule 1009 (see note 14 and related text) has resulted in significant negative implications for market participants, there is no such surveillance agreement requirement for the underlying ETFs. In particular, when looking to the rules of NASDAQ, the primary ETF listing venue in the Group, NASDAQ Rules 5705 regarding ETFs and 5735 regarding Managed Fund Shares (``MFSs'') have no explicit requirements concerning surveillance agreements for regularly listed (non-generic) ETFs and MFSs, and simply state that FINRA will implement written surveillance procedures. Section 19(b)(2) filings regarding ETFs and MFSs typically indicate that the Exchange may obtain information regarding trading in the shares from FINRA and markets and other entities that are members of the Intermarket Surveillance Group (``ISG''), which includes securities and futures exchanges, or with which the Exchange has in place a surveillance agreement (which is not required by rule). Regarding ETFs and MFSs listed pursuant to generic (19b-4(e)) standards and reviewed and approved for trading under Section 19(b)(2) of the Act, Rules 5705 and 5735 [sic] simply note that the Commission's approval order may reference surveillance sharing agreements with respect to non-U.S. component stocks. --------------------------------------------------------------------------- The current surveillance agreement requirements, as well as all other requirements to list options on ETFs,\21\ are not affected by this proposal and will continue to remain in place for options on ETFs that do not meet generic listing standards on equities exchanges for ETFs based on international and global indexes. --------------------------------------------------------------------------- \21\ For purposes of brevity, these other requirements are not set forth, but can be found in Commentary .06 to Rule 1009. --------------------------------------------------------------------------- Generic Listing Standards for Exchange-Traded Funds The Exchange notes that the Commission has previously approved generic listing standards pursuant to Rule 19b-4(e) of the Exchange Act \22\ for ETFs based on indexes that consist of stocks listed on U.S. exchanges including NASDAQ, the ETF listing exchange within the Group.\23\ In general, the criteria for the underlying component securities in the international and global indexes are similar to those for the domestic indexes, but with modifications as appropriate for the issues and risks associated with non-U.S. securities. --------------------------------------------------------------------------- \22\ 17 CFR 240.19b-4(e). \23\ See Securities Exchange Act Release No. 54739 (November 9, 2006), 71 FR 66993 (November 17, 2006) (SR-Amex-2006-78) (initial order relating to generic listing standards for ETFs based on international or global indexes). See also NASDAQ Rule 5705(a)(3)(A)(ii) and (b)(3)(A)(ii). --------------------------------------------------------------------------- In addition, the Commission has previously approved proposals for the listing and trading of options on ETFs based on international indexes as well as global indexes (e.g., based on non-U.S. and U.S. component stocks).\24\ In approving ETFs for equities exchange trading, the Commission thoroughly considered the structure of the ETFs, their usefulness to investors and to the markets, and SRO rules that govern their trading. The Exchange believes that allowing the listing of options overlying ETFs that are listed pursuant to the generic listing standards on equities exchanges for ETFs based on international and global indexes and applying Rule 19b-4(e) \25\ should fulfill the intended objective of that rule by allowing options on those ETFs that have satisfied the generic listing standards to commence trading, without the need for the public comment period and Commission approval. The proposed rule has the potential to reduce the time frame for bringing options on ETFs to market, thereby reducing the burdens on issuers and other market participants. The failure of a particular ETF to comply with the generic listing standards under Rule 19b-4(e) \26\ would not, however, preclude the Exchange from submitting a separate filing pursuant to Section 19(b)(2),\27\ requesting Commission approval to list and trade options on a particular ETF. Moreover, the Exchange notes that the generic standards such as those in proposed Commentary .06(b)(i) to Rule 1009 are not new in the options world, and have been used extensively for listing options on narrow-based and broad-based indexes.\28\ --------------------------------------------------------------------------- \24\ See, e.g., Securities Exchange Act Release Nos. 57013 (December 20, 2007), 72 FR 73923 (December 28, 2007) (SR-CBOE-2007- 140) (approval order to list and trade options on iShares MSCI Mexico Index Fund, when CBOE did not have in place a surveillance agreement with the Bolsa Mexicana de Valores (the ``Bolsa'')); 57014 (December 20, 2007), 72 FR 73934 (December 28, 2007) (SR-ISE-2007- 111) (approval order to list and trade options on iShares MSCI Mexico Index Fund, when ISE did not have in place a surveillance agreement with the Bolsa); 56778 (November 9, 2007), 72 FR 65113 (November 19, 2007) (SR-AMEX-2007-100) (approval order to list and trade options on iShares MSCI Mexico Index Fund, when AMEX did not have in place a surveillance agreement with the Bolsa); and 55648 (April 19, 2007), 72 FR 20902 (April 26, 2007) (SR-AMEX-2007-09) (approval order to list and trade options on Vanguard Emerging Markets ETF, when AMEX did not have in place a surveillance agreement with the Bolsa). See also Securities Exchange Act Release Nos. 50189 (August 12, 2004), 69 FR 51723 (August 20, 2004) (SR- AMEX-2001-05) [sic] (approving the listing and trading of certain Vanguard International Equity Index Funds); and 44700 (August 14, 2001), 66 FR 43927 (August 21, 2001) (SR-2001-34) [sic] (approving the listing and trading of series of the iShares Trust based on foreign stock indexes). \25\ 17 CFR 240.19b-4(e). \26\ Id. \27\ 15 U.S.C. 78s(b)(2). \28\ Rule 1009A has, for example, weighting, capitalization, trading volume, and minimum number of components standards for listing options on narrow-based and broad-based indexes. For a definition of broad-based index (market index) and narrow-based index (industry index), see Rule 1000A(b)(11) and (12), respectively. --------------------------------------------------------------------------- Requirements for Listing and Trading Options Overlying ETFs Based on International and Global Indexes Options on ETFs listed pursuant to these generic standards for international and global indexes would be traded, in all other respects, under the Exchange's existing trading rules and procedures that apply to options on ETFs and would be covered under the Exchange's surveillance program for options on ETFs. Pursuant to proposed Commentary .06(b)(i) to Rule 1009, the Exchange may list and trade options on an ETF without a CSSA provided that the ETF is listed pursuant to generic listing standards for series of PDRs and IFSs based on international or global indexes, in which case a comprehensive surveillance agreement is not required. As noted, one such rule, which discusses things such as weighting, capitalization, trading volume, minimum number of components, and where components are listed, is NASDAQ Rule 5705(b)(3)(A)(ii) regarding ETFs (IFSs and PDRs).\29\ The Exchange believes that these generic listing standards are intended to ensure that securities with substantial market capitalization and trading volume account for a substantial portion of the weight of an index or portfolio. --------------------------------------------------------------------------- \29\ NASDAQ Rule 5705(b)(3)(A)(ii) regarding IFSs, for example, has the following requirements (reproduced in relevant part): a. Component stocks (excluding Derivative Securities Products) that in the aggregate account for at least 90% of the weight of the index or portfolio (excluding Derivative Securities Products) each shall have a minimum market value of at least $100 million; b. component stocks (excluding Derivative Securities Products) that in the aggregate account for at least 70% of the weight of the index or portfolio (excluding Derivative Securities Products) each shall have a minimum worldwide monthly trading volume of at least 250,000 shares, or minimum global notional volume traded per month of $25,000,000, averaged over the last six months; c. the most heavily weighted component stock (excluding Derivative Securities Products) shall not exceed 25% of the weight of the index or portfolio, and, to the extent applicable, the five most heavily weighted component stocks (excluding Derivative Securities Products) shall not exceed 60% of the weight of the index or portfolio; d. the index or portfolio shall include a minimum of 20 component stocks; provided, however, that there shall be no minimum number of component stocks if either one or more series of Index Fund Shares or Portfolio Depositary Receipts constitute, at least in part, components underlying a series of Index Fund Shares, or one or more series of Derivative Securities Products account for 100% of the weight of the index or portfolio; and e. each U.S. Component Stock shall be listed on a national securities exchange and shall be an NMS Stock as defined in Rule 600 of Regulation NMS under the Act, and each Non-U.S. Component Stock shall be listed and traded on an exchange that has last-sale reporting. NASDAQ Rule 5705(a)(3)(A)(ii) has similar standards, but tailored for PDRs. --------------------------------------------------------------------------- The Exchange believes that this proposed listing standard for options on ETFs is reasonable for international and global indexes, and, when applied in conjunction with the other listing requirements, will result in options overlying ETFs that are sufficiently broad in scope and not readily susceptible to manipulation. The Exchange also believes that allowing the Exchange to list options overlying ETFs that are listed on equities exchanges pursuant to generic standards for series of PDRs and IFSs based on international or global indexes under which a CSSA is not required, will result in options overlying ETFs that are adequately diversified in weighting for any single security or small group of securities to significantly reduce concerns that trading in options overlying ETFs based on international or global indexes could [[Page 16075]] become a surrogate for trading in unregistered securities.\30\ --------------------------------------------------------------------------- \30\ The Exchange also notes that not affording retail investors the ability to trade on a regulated exchange can be detrimental. While products can be traded off exchange in the over the counter (``OTC'') market, which has increased settlement, clearing, and market risk as opposed to exchanges, the relatively unregulated OTC market is usually not a viable option for retail and public investors. --------------------------------------------------------------------------- The Exchange believes that ETFs based on international and global indexes that have been listed pursuant to the generic standards are sufficiently defined so as to make options overlying such ETFs not susceptible instruments for manipulation. The Exchange believes that the threat of manipulation is, as discussed below, sufficiently mitigated for underlying ETFs that have been listed on equities exchanges pursuant to generic listing standards for series of PDRs and IFSs based on international or global indexes under which a comprehensive surveillance agreement is not required and for the overlying options; the Exchange does not see the need for a CSSA to be in place before listing and trading options on such ETFs. The Exchange notes that its proposal does not replace the need for a CSSA as provided in current Commentary .06(b) to Rule 1009. The provisions of Commentary .06(b), including the need for a CSSA, remain materially unchanged and will continue to apply to options on ETFs that are not listed on an equities exchange pursuant to generic listing standards for series of PDRs and IFSs based on international or global indexes. Instead, proposed Commentary .06(b)(i) adds an additional listing mechanism for certain qualifying options on ETFs to be listed on the Exchange. Finally, to account for proposed Commentary .06(b) to Rule 1009 and make Commentary .06 easier to follow, the Exchange proposes technical changes to the formatting of this section of the rule. The Exchange proposes re-numbering Commentary .06(b)(i), (ii) and (iii) as Commentary .06(b)(ii)(A), (B), and (C), respectively; and re-numbering Commentary .06(b)(iv) and (v) as Commentary .06(b)(iii) and (iv), respectively. This is merely re-numbering and there are no changes to the language of these sections of Commentary .06. No Economic Risk The proposal does not raise a concern regarding economic risk or manipulation. The proposal does not increase the risk of manipulation of the ETF itself, as the ETF trades in the U.S. and trading is subject to the U.S. surveillance requirement and follows Exchange rules. One might try to argue that the proposal raises a concern about a theoretical manipulation risk of the underlying international components of the ETF trading in the U.S. If such manipulation were successful, the argument would go, then the ETF could be fairly priced relative to its components but the price of the components potentially may not reflect fair market value. The Exchange firmly believes that the proposal does not raise any such theoretical concern. For manipulation to be successful the expected cost of the contemplated manipulation must be less than the expected gain. In other words, manipulation will not be attempted if the prospective profit from the attempt is zero or less, even ignoring the quite real costs associated with regulatory risk. In approving the rules for narrow based indices, it was thought that the costs of manipulating such an index based on component securities with the same parameters as those proposed ETFs would be prohibitive relative to any prospective gains. The Exchange's proposal does not suggest a different paradigm. Moreover, the Commission reviewed and approved the ability to list ETFs without surveillance agreements if they meet the generic listing standards for ETFs based on international or global indices. The Exchange believes that the argument and economic conclusion that allowing the listing of options on these same underlying ETFs with components outside the U.S. that are sufficiently large, transparent, diversified, and liquid to make manipulation unprofitable is valid. A second theoretical source of manipulation risk may be seen to be the creation/redemption process for ETFs. If the creation/redemption process could be manipulated then the market price of the ETF could materially differ from the fair value of the ETF derived from a fair market value of the components. Again, the Exchange does not agree that this is a significant manipulation risk for ETFs, let alone options on ETF. As noted, ETFs are a much more mature asset class today than in 2001 when the current rules were adopted. The development of ETFs as an established asset class and the listing and trading of ETFs, including the creation/redemption process, has developed immensely since the introduction of ETFs, and options on them. Since manipulation of the creation/redemption process would create economic profits for the manipulator, but such manipulation has not been manifest during the significant expansion of ETFs as an international asset class, this offers convincing evidence that manipulation risk in the creation/ redemption process is, indeed, theoretical and not an increased risk with this proposal regarding the listing of ETF options. The Exchange believes that its proposal will not lead to increased economic risk. The Exchange requests approval of its proposal to allow the listing of options overlying ETFs (PDRs and IFSs) based on international or global indexes, without a comprehensive surveillance agreement. The proposal will, as discussed, be beneficial to investors and is in conformity with the Act. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act \31\ in general, and furthers the objectives of Section 6(b)(5) of the Act \32\ in particular, in that it is designed 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. In particular, the proposed rule change has the potential to reduce the time frame for bringing options on ETFs to market, thereby reducing the burdens on issuers and other market participants. The Exchange also believes that enabling the listing and trading of options on ETFs pursuant to this proposed new listing standard will benefit investors by providing them with valuable risk management tools. The Exchange notes that its proposal does not replace the need for a CSSA as provided in Commentary .06 to Rule 1009. The provisions of current Commentary .06, including the need for a CSSA, remain materially unchanged and will continue to apply to options on ETFs that are not listed on an equities exchange pursuant to generic listing standards for series of PDRs and IFSs based on international or global indexes under which a comprehensive surveillance agreement is not required. Instead, proposed Commentary .06(b)(i) to Rule 1009 adds an additional listing mechanism for certain qualifying options on ETFs to be listed on the Exchange in a manner that is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanisms of a free and open market and a national market system and, in [[Page 16076]] general, to protect investors and the public interest. --------------------------------------------------------------------------- \31\ 15 U.S.C. 78f(b). \32\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The proposal would promote just and equitable principles of trade. The surveillance agreement requirement was instituted in 2001 when ETFs were, comparatively speaking, in a developmental state.\33\ The first ETF introduced in 1993 was a broad-based domestic equity fund tracking the S&P 500 index. After the introduction of the first ETF in 1993, the development of ETF products was very limited during the first decade of their existence. Since the end of 2001, when there was a total of only 102 ETFs listed on U.S. markets, however, the ETF market has matured tremendously and grown exponentially. With a total of 1,194 listed ETFs at the end of 2012, the ETF market is now one of the most highly- developed, sophisticated markets with many very well known, highly traded and liquid products that provide traders and investors the opportunity to access practically all industries and enterprises. While investor demand for ETFs in all asset classes increased substantially, in 2011 the demand for global and international equity ETFs, to which the requirement applies, more than doubled.\34\ The Exchange believes that the current surveillance requirement no longer serves a necessary function in today's highly developed market, and, as discussed, actually creates a dynamic that negatively impacts the number of markets that can competitively trade ETF option products. This hurts market participants. The Exchange therefore proposes to establish that pursuant to proposed Commentary .06(b)(i) to Rule 1009 options may be listed on certain ETFs that are based on global and international funds and meet generic listing standards. --------------------------------------------------------------------------- \33\ See Securities Exchange Act Release No. 43921 (February 2, 2001), 66 FR 9739 (February 9, 2001) (SR-Phlx-2000-107) (ETF approval order). \34\ http://www.icifactbook.org/fb_ch3.html. --------------------------------------------------------------------------- The proposal would in general protect investors and the public interest. The Exchange believes that modifying the surveillance agreement requirement for ETFs would not hinder the Exchange from performing surveillance duties designed to protect investors and the public interest. There are various data consolidators, vendors, and outlets that can be used to access data and information regarding ETFs and the underlying securities (e.g., Bloomberg, Dow Jones, FTEN). In addition, firms that list ETFs on an exchange receive vast amounts of data relevant to their products that could be made available to listing exchanges as needed. The Exchange has access to the activity of the direct underlying instrument and the ETF, and through the Intermarket Surveillance Group (``ISG'') the Exchange can obtain such information related to the underlying security as needed.\35\ Moreover, other than the surveillance agreement requirement there are, as discussed, numerous requirements in Rule 1009 that must be met to list options on ETFs on the Exchange. --------------------------------------------------------------------------- \35\ See https://www.isgportal.org/home.html. Another global organization similar to ISG is The International Organization of Securities Commissions (``IOSCO''). --------------------------------------------------------------------------- The proposal would remove impediments to and perfect the mechanism of a free and open market and a national market system. Multiple listing of ETFs, options, and other securities and competition are some of the central features of the current national market system. The Exchange believes that the surveillance agreement requirement has led to clearly anti-competitive results in a market that is based on competition. As such, the Exchange believes that the surveillance agreement requirement for options on certain ETFs is no longer necessary and proposes new Commentary .06(b)(i) to Rule 1009. The proposed rule change will significantly benefit market participants. As discussed at length, the proposed rule will negate the negative anti- competitive effect of the current surveillance agreement requirement that has resulted in de facto regulatory monopolies where only solitary exchanges, or only a few exchanges, are able to list certain ETF options products. The Exchange believes this is inconsistent with Commission policies and the developing national market system, as well as the competitive nature of the market, and therefore proposes amendment.\36\ The Exchange believes that the proposal would encourage a more open market and national market system based on competition and multiple listing. The generic listing standards for ETFs based on global or international indexes have specific requirements regarding relative weighting, minimum capitalization, minimum trading volume, and minimum number of components that have been approved by the Commission years ago for foreign ETFs.\37\ Moreover, such listing standards have been in continuous use for listing options on narrow-based and broad- based indexes on the Exchange.\38\ Allowing the listing of options on underlying ETFs based on global and international indexes that meet generic listing standards would encourage a free and open market and national market system to the benefit of market participants. --------------------------------------------------------------------------- \36\ As discussed, the Exchange is decidedly not proposing that the surveillance agreement requirement be deleted entirely, but rather that only those options on ETFs that do not meet very specific generic listing standards need to have surveillance agreements in order to list on the Exchange. \37\ See Securities Exchange Act Release No. 54739 (November 9, 2006), 71 FR 66993 (November 17, 2006) (SR-Amex-2006-78) (initial order relating to generic listing standards for ETFs based on international or global indexes). See also NASDAQ Rule 5705(a)(3)(A)(ii) and (b)(3)(A)(ii). \38\ See Rule 1009A(b) and (d). --------------------------------------------------------------------------- Finally, the Exchange's proposal for limiting the necessity of surveillance agreements to list options on ETFs does not, as discussed above, raise a concern regarding manipulation. The Exchange believes that its proposal is not indicative of increased economic risk. For the above reasons, the Exchange believes the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. 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. To the contrary, the Exchange believes that the proposal is, as discussed, decidedly pro- competitive and is a competitive response to the inability to list products because of the surveillance agreement requirement. The Exchange believes that the proposed rule change will result in additional investment options and opportunities to achieve the investment objectives of market participants seeking efficient trading and hedging vehicles, to the benefit of investors, market participants, and the marketplace in general. Competition is one of the principal features of the national market system. The Exchange believes that this proposal will expand competitive opportunities to list and trade products on the Exchange as noted. 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 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 [[Page 16077]] which it was filed, or such shorter time as the Commission may designate, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act \39\ and Rule 19b-4(f)(6) thereunder.\40\ --------------------------------------------------------------------------- \39\ 15 U.S.C. 78s(b)(3)(A). \40\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b- 4(f)(6)(iii), the Exchange provided the Commission with written notice of its intent to file the proposed rule change, along with a brief description and the text of 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. --------------------------------------------------------------------------- A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act \41\ normally does not become operative for 30 days after the date of its filing. However, Rule 19b-4(f)(6)(iii) \42\ permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. 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 stated that waiver of the operative delay will permit the Exchange to list and trade certain ETF options on the same basis as another options market.\43\ The Commission believes the waiver of the operative delay is consistent with the protection of investors and the public interest. Therefore, the Commission hereby waives the operative delay and designates the proposal operative upon filing.\44\ --------------------------------------------------------------------------- \41\ 17 CFR 240.19b-4(f)(6). \42\ 17 CFR 240.19b-4(f)(6)(iii). \43\ See Securities Exchange Act Release No. 74509 (March 13, 2015), 80 FR 14425 (March 19, 2015) (SR-MIAX-2015-04). \44\ For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). --------------------------------------------------------------------------- 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 CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-Phlx-2015-27 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-2015-27. 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 Web site (http://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 Web site 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 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-Phlx-2015-27 and should be submitted on or before April 16, 2015. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\45\ --------------------------------------------------------------------------- \45\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Brent J. Fields, Secretary. [FR Doc. 2015-06887 Filed 3-25-15; 8:45 am] BILLING CODE 8011-01-P
![16072 Federal Register / Vol. 80, No. 58 / Thursday, March 26, 2015 / Notices
Paper Comments SECURITIES AND EXCHANGE any comments it received on the
COMMISSION proposed rule change. The text of these
• Send paper comments in triplicate statements may be examined at the
to Brent J. Fields, Secretary, Securities [Release No. 34–74553; File No. SR–Phlx–
2015–27]
places specified in Item IV below. The
and Exchange Commission, 100 F Street Exchange has prepared summaries, set
NE., Washington, DC 20549–1090. Self-Regulatory Organizations; forth in sections A, B, and C below, of
All submissions should refer to File NASDAQ OMX PHLX LLC; Notice of the most significant aspects of such
Filing and Immediate Effectiveness of statements.
Number SR–NASDAQ–2015–024. This
file number should be included on the Proposed Rule Change Relating to A. Self-Regulatory Organization’s
subject line if email is used. To help the Surveillance Agreements Statement of the Purpose of, and
Commission process and review your March 20, 2015. Statutory Basis for, the Proposed Rule
comments more efficiently, please use Pursuant to Section 19(b)(1) of the Change
only one method. The Commission will Securities Exchange Act of 1934 1. Purpose
post all comments on the Commission’s (‘‘Act’’),1 and Rule 19b–4 thereunder,2 The Exchange proposes to amend
Internet Web site (http://www.sec.gov/ notice is hereby given that, on March
Commentary .06 to Rule 1009 to allow
rules/sro.shtml). Copies of the 16, 2015, NASDAQ OMX PHLX LLC
the listing of options overlying ETFs 5
submission, all subsequent (‘‘Phlx’’ or ‘‘Exchange’’) 3 filed with the
that are listed pursuant to generic listing
amendments, all written statements Securities and Exchange Commission
standards on equities exchanges for
with respect to the proposed rule (‘‘SEC’’ or ‘‘Commission’’) the proposed
series of PDRs and IFSs based on
change that are filed with the rule change as described in Items I and
international or global indexes under
Commission, and all written II below, which Items have been
which a CSSA is not required.6 Adding
communications relating to the prepared by the Exchange. The
proposed new Commentary .06(b)(i) to
proposed rule change between the Commission is publishing this notice to
Rule 1009 will enable the Exchange to
Commission and any person, other than solicit comments on the proposed rule
list and trade options on ETFs without
change from interested persons.
those that may be withheld from the a CSSA provided that the underlying
public in accordance with the I. Self-Regulatory Organization’s ETF is listed on an equities exchange
provisions of 5 U.S.C. 552, will be Statement of the Terms of Substance of pursuant to the generic listings
available for Web site viewing and the Proposed Rule Change standards that do not require a CSSA
printing in the Commission’s Public The Exchange proposes to amend pursuant to Rule 19b–4(e) of the
Reference Room, 100 F Street NE., Rule 1009 (Criteria for Underlying Exchange Act.7
Washington, DC 20549, on official Securities) to allow the listing of options Rule 19b–4(e) provides that the listing
business days between the hours of overlying Exchange-Traded Fund Shares and trading of a new derivative
10:00 a.m. and 3:00 p.m. Copies of such (‘‘ETFs’’) that are listed pursuant to securities product by an SRO shall not
filing also will be available for generic listing standards on equities be deemed a proposed rule change,
inspection and copying at the principal exchanges for series of portfolio pursuant to paragraph (c)(l) of Rule 19b–
offices of the Exchange. All comments depositary receipts (‘‘PDRs’’) and index 4 8 if the Commission has approved,
fund shares (‘‘IFSs’’) based on pursuant to Section 19(b) of the Act,9
received will be posted without change;
international or global indexes, the SRO’s trading rules, procedures and
the Commission does not edit personal
pursuant to which a comprehensive listing standards for the product class
identifying information from that would include the new derivatives
submissions. You should submit only surveillance agreement 4 is not required.
The text of the proposed rule change securities product, and the SRO has a
information that you wish to make surveillance program for the product
available publicly. All submissions is available on the Exchange’s Web site
at http://www.nasdaqtrader.com/ class.10 This proposal allows the
should refer to File Number SR– Exchange to list and trade options on
micro.aspx?id=PHLXRulefilings, at the
NASDAQ–2015–024, and should be ETFs based on international or global
principal office of the Exchange, and at
submitted on or before April 16, 2015. indexes that meet the generic listing
the Commission’s Public Reference
For the Commission, by the Division of Room. standards.11
Trading and Markets, pursuant to delegated
authority.82 II. Self-Regulatory Organization’s 5 ETFs are also referred to in Exchange rules as
Statement of the Purpose of, and ‘‘Fund Shares.’’ See, e.g., Rules 1009 and 1009A
Brent J. Fields, [sic].
Statutory Basis for, the Proposed Rule
6 NASDAQ is the principal exchange within the
Secretary. Change
Group for listing ETFs. NASDAQ has generic listing
[FR Doc. 2015–06891 Filed 3–25–15; 8:45 am]
In its filing with the Commission, the standards for PDRs and IFSs. See NASDAQ Rule
BILLING CODE 8011–01–P Exchange included statements 5705(b)(3)(A)(ii) regarding IFSs and 5705(a)(3)(A)(ii)
regarding PDRs (IFSs and PDRs are together known
concerning the purpose of and basis for as ETFs in NASDAQ Rule 5705). See also NYSE
the proposed rule change and discussed MKT Rule 1000 Commentary .03(a)(B); NYSE Arca
Equities Rule 5.2(j)(3) Commentary .01(a)(B); and
1 15 U.S.C. 78s(b)(1). BATS Rule 14.11(b)(3)(A)(ii).
2 17 7 17 CFR 240.19b–4(e).
CFR 240.19b–4.
3 The Exchange, The NASDAQ Stock Market LLC 8 17 CFR 240.19b–4(c)(1).
mstockstill on DSK4VPTVN1PROD with NOTICES
9 15 U.S.C. 78s(b).
(‘‘NASDAQ’’), and NASDAQ OMX BX, Inc. (‘‘BX’’)
are self-regulatory organizations (‘‘SROs’’) that are 10 When relying on Rule 19b–4(e), the SRO must
wholly owned subsidiaries of The NASDAQ OMX submit Form 19b–4(e) to the Commission within
Group, Inc. (the ‘‘Group’’). five business days after the SRO begins trading the
4 Surveillance agreements are also referred to in new derivative securities products. See Securities
Exchange rules as ‘‘surveillance sharing Exchange Act Release No. 40761 (December 8,
agreements’’ or ‘‘comprehensive surveillance 1998), 63 FR 70952 (December 22, 1998).
sharing agreements’’ (‘‘CSSA’’). See, e.g., Rules 1009 11 See NASDAQ Rule 5705(a)(3)(A)(ii) and
82 17 CFR 200.30–3(a)(12). and 803. (b)(3)(A)(ii); NYSE MKT Rule 1000, Commentary
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![Federal Register / Vol. 80, No. 58 / Thursday, March 26, 2015 / Notices 16073
The Surveillance Agreement options on ETFs that are listed pursuant markets that can competitively trade
Requirement for Options on Exchange- to generic listing standards for series of ETF option products, to the detriment of
Traded Funds PDRs and IFSs, based on international market participants.
The surveillance agreement or global indexes—for which case a The current surveillance requirement
requirement (also known as the comprehensive surveillance agreement has, at times, resulted in the investing
‘‘requirement’’ or ‘‘regime’’) was is not required. public having to forego the opportunity
initially put into effect for options on The surveillance agreement
to hedge risk or engage in other listed
ETFs well over a decade ago but has requirement was instituted in 2001
options strategies in a competitive
proven to have anti-competitive effects when ETFs were, comparatively
environment. ETFs may lack active
that are detrimental to investors.12 speaking, in a developmental state.15
The first ETF introduced in 1993 was a options contracts that would be more
Specifically, the requirement limits the likely to develop if multiple exchanges
investing public’s ability to hedge risk broad-based domestic equity fund
tracking the S&P 500 index. The could compete to offer and promote
or engage in options strategies that may them. For example, an investor in the
be afforded to other investors in development of ETF products was very
limited during the first decade of their iShare [sic] MSCI Indonesia ETF (EIDO)
domestic securities.13 is not permitted to sell call options or
The Exchange allows for the listing existence, such that at the end of 2001,
there was a total of only 102 ETFs listed purchase protective puts simply because
and trading of options on ETFs. the Exchange cannot obtain a
Commentary .06 to Rule 1009 provides on U.S. markets. Since 2001, however,
the ETF market has matured surveillance agreement with Bursa Efek
the listings standards for options on Indonesia. However, an investor in
ETFs, which includes [sic] ETFs with tremendously and grown exponentially,
such that at the end of 2012 there were iShare [sic] MSCI Emerging Markets
non-U.S. component securities, such as Fund (EEM) is afforded the right to
ETFs based on international or global a total of 1,194 listed ETFs.16 Many of
these are very well known, highly engage in listed options trading to hedge
indexes. Currently, Commentary .06 to
traded and liquid products, such as, for risk or execute other beneficial options
Rule 1009 regarding options on ETFs
example, SPDR S&P 500 Trust ETF strategies. Both underlying exchange-
has a three-level surveillance agreement
(SPY), iShares MSCI Emerging Markets traded funds, EIDO and EEM, are listed
requirement (reproduced in relevant
part): ETF (EEM), and PowerShares QQQ for trading in the U.S., subject to
(i) Whether any non-U.S. component Trust, Series 1 ETF (QQQQ) [sic], that constant regulatory scrutiny, and
stocks on which the Fund Shares are market participants from institutional to permitted to be purchased and sold via
based that are not subject to retail and public investors have been registered broker/dealers, yet, options
comprehensive surveillance agreements using for trading, hedging, and investing can now be offered only on EEM. The
do not in the aggregate represent more purposes with varying timelines.17 The Exchange believes this disparate
than 50% of the weight of the index or ETF market is one of the most highly- treatment between investors of foreign-
portfolio; developed, sophisticated markets that based instruments, especially between
(ii) stocks for which the primary provide traders and investors the those that buy and sell options contracts
market is in any one country that is not opportunity to access practically all on ETFs, which currently require
subject to a comprehensive surveillance industries and enterprises. In 2012 surveillance agreements, as opposed to
agreement do not represent 20% or investor demand for ETFs in all asset those that buy and sell shares of the
more of the weight of the index; and classes increased substantially. And in underlying ETFs, which currently do
(iii) stocks for which the primary 2011 the demand for global and not have the same onerous surveillance
market is in any two countries that are international equity ETFs, to which the agreement requirement that ETF options
not subject to comprehensive requirement applies, more than have,20 is not in the best interest. The
surveillance agreements do not doubled.18 The Exchange believes that Exchange therefore proposes to establish
represent 33% or more of the weight of the surveillance agreement requirement that options on generically-listed global
the index.14 no longer serves a necessary (or
The Exchange proposes to modify the indispensable) function in today’s 20 While the surveillance agreement requirement
surveillance agreement requirement for highly developed ETF market,19 and for options on ETFs found in Commentary .06 to
actually creates a dynamic that Rule 1009 (see note 14 and related text) has resulted
.03(a)(B); NYSE Arca Equities Rule 5.20)(3) [sic], negatively impacts the number of in significant negative implications for market
Commentary .01(a)(B); and BATS Rule participants, there is no such surveillance
14.11(b)(3)(A)(ii). agreement requirement for the underlying ETFs. In
15 See Securities Exchange Act Release No. 43921
12 See Securities Exchange Act Release No. 43921 particular, when looking to the rules of NASDAQ,
(February 2, 2001), 66 FR 9739 (February 9, 2001) the primary ETF listing venue in the Group,
(February 2, 2001), 66 FR 9739 (February 9, 2001)
(SR–Phlx–2000–107) (ETF approval order). NASDAQ Rules 5705 regarding ETFs and 5735
(SR–Phlx–2000–107) (notice of filing and approval 16 http://www.icifactbook.org/fb_ch3.html.
order regarding trading of options on ETFs with regarding Managed Fund Shares (‘‘MFSs’’) have no
17 These can be from intraday exposure (e.g., explicit requirements concerning surveillance
surveillance agreements) (the ‘‘ETF approval
order’’). At about the same time, the Exchange using Daily S&P 500 Bear 3x Shares (SPXS)) to long- agreements for regularly listed (non-generic) ETFs
instituted surveillance agreement requirements for term 401(k) or retirement fund exposure (e.g., using and MFSs, and simply state that FINRA will
options on Trust Issued Receipts (‘‘TIRs’’), and SPY). implement written surveillance procedures. Section
thereafter other products. See Securities Exchange 18 http://www.icifactbook.org/fb_ch3.html. 19(b)(2) filings regarding ETFs and MFSs typically
Act Release No. 44709 (August 16, 2001), 66 FR 19 ETFs and ETPs listed in the United States indicate that the Exchange may obtain information
44194 (August 22, 2001) (SR–Phlx–2001–71) (notice gathered $24.6 billion USD in net new assets in regarding trading in the shares from FINRA and
of filing and approval order regarding trading of June 2014 which, when combined with positive markets and other entities that are members of the
options on TIRs with surveillance agreements). market performance, pushed the ETF/ETP industry Intermarket Surveillance Group (‘‘ISG’’), which
Other exchanges have similar requirements. The includes securities and futures exchanges, or with
mstockstill on DSK4VPTVN1PROD with NOTICES
in the United States to a new record high of $1.86
changes proposed herein relate only to surveillance trillion USD invested in 1,613 ETFs/ETPs, from 58 which the Exchange has in place a surveillance
agreements for options on global or international providers listed on 3 exchanges. And according to agreement (which is not required by rule).
ETFs. ETFGI, an independent ETF/ETP research and Regarding ETFs and MFSs listed pursuant to
13 Moreover, as noted below the surveillance consultancy firm in the U.K., ETFs and ETPs listed generic (19b-4(e)) standards and reviewed and
agreement requirement is present for the derivative globally reached $2.64 trillion USD in assets, a new approved for trading under Section 19(b)(2) of the
options on ETFs but not for the underlying ETFs. record high, at the end of Q2 2014. http:// Act, Rules 5705 and 5735 [sic] simply note that the
14 See Commentary .06(b)(i)–(iii) to Rule 1009, www.mondovisione.com/media-and-resources/ Commission’s approval order may reference
which is re-numbered as Commentary .06(b)(ii)(A)– news/according-to-etfgi-etfs-and-etps-listed- surveillance sharing agreements with respect to
(C) to Rule 1009. globally-reached-us264-trillion-in-as/. non-U.S. component stocks.
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![16074 Federal Register / Vol. 80, No. 58 / Thursday, March 26, 2015 / Notices
or international ETFs would not require trading, the Commission thoroughly discusses things such as weighting,
surveillance agreements for listing. considered the structure of the ETFs, capitalization, trading volume,
The current surveillance agreement their usefulness to investors and to the minimum number of components, and
requirements, as well as all other markets, and SRO rules that govern their where components are listed, is
requirements to list options on ETFs,21 trading. The Exchange believes that NASDAQ Rule 5705(b)(3)(A)(ii)
are not affected by this proposal and allowing the listing of options overlying regarding ETFs (IFSs and PDRs).29 The
will continue to remain in place for ETFs that are listed pursuant to the Exchange believes that these generic
options on ETFs that do not meet generic listing standards on equities listing standards are intended to ensure
generic listing standards on equities exchanges for ETFs based on that securities with substantial market
exchanges for ETFs based on international and global indexes and capitalization and trading volume
international and global indexes. applying Rule 19b–4(e) 25 should fulfill account for a substantial portion of the
Generic Listing Standards for Exchange- the intended objective of that rule by weight of an index or portfolio.
Traded Funds allowing options on those ETFs that
have satisfied the generic listing The Exchange believes that this
The Exchange notes that the standards to commence trading, without proposed listing standard for options on
Commission has previously approved the need for the public comment period ETFs is reasonable for international and
generic listing standards pursuant to and Commission approval. The global indexes, and, when applied in
Rule 19b–4(e) of the Exchange Act 22 for proposed rule has the potential to conjunction with the other listing
ETFs based on indexes that consist of reduce the time frame for bringing requirements, will result in options
stocks listed on U.S. exchanges options on ETFs to market, thereby overlying ETFs that are sufficiently
including NASDAQ, the ETF listing reducing the burdens on issuers and broad in scope and not readily
exchange within the Group.23 In other market participants. The failure of susceptible to manipulation. The
general, the criteria for the underlying a particular ETF to comply with the Exchange also believes that allowing the
component securities in the generic listing standards under Rule Exchange to list options overlying ETFs
international and global indexes are 19b–4(e) 26 would not, however,
similar to those for the domestic that are listed on equities exchanges
preclude the Exchange from submitting pursuant to generic standards for series
indexes, but with modifications as a separate filing pursuant to Section
appropriate for the issues and risks of PDRs and IFSs based on international
19(b)(2),27 requesting Commission or global indexes under which a CSSA
associated with non-U.S. securities. approval to list and trade options on a
In addition, the Commission has is not required, will result in options
particular ETF. Moreover, the Exchange overlying ETFs that are adequately
previously approved proposals for the
notes that the generic standards such as diversified in weighting for any single
listing and trading of options on ETFs
those in proposed Commentary .06(b)(i)
based on international indexes as well security or small group of securities to
to Rule 1009 are not new in the options
as global indexes (e.g., based on non- significantly reduce concerns that
world, and have been used extensively
U.S. and U.S. component stocks).24 In trading in options overlying ETFs based
for listing options on narrow-based and
approving ETFs for equities exchange broad-based indexes.28 on international or global indexes could
21 For purposes of brevity, these other Requirements for Listing and Trading 29 NASDAQ Rule 5705(b)(3)(A)(ii) regarding IFSs,
requirements are not set forth, but can be found in Options Overlying ETFs Based on for example, has the following requirements
Commentary .06 to Rule 1009. (reproduced in relevant part): a. Component stocks
22 17 CFR 240.19b–4(e).
International and Global Indexes
(excluding Derivative Securities Products) that in
23 See Securities Exchange Act Release No. 54739 Options on ETFs listed pursuant to the aggregate account for at least 90% of the weight
(November 9, 2006), 71 FR 66993 (November 17, these generic standards for international of the index or portfolio (excluding Derivative
2006) (SR–Amex–2006–78) (initial order relating to and global indexes would be traded, in Securities Products) each shall have a minimum
generic listing standards for ETFs based on market value of at least $100 million; b. component
international or global indexes). See also NASDAQ all other respects, under the Exchange’s stocks (excluding Derivative Securities Products)
Rule 5705(a)(3)(A)(ii) and (b)(3)(A)(ii). existing trading rules and procedures that in the aggregate account for at least 70% of the
24 See, e.g., Securities Exchange Act Release Nos. that apply to options on ETFs and weight of the index or portfolio (excluding
57013 (December 20, 2007), 72 FR 73923 (December would be covered under the Exchange’s Derivative Securities Products) each shall have a
28, 2007) (SR–CBOE–2007–140) (approval order to minimum worldwide monthly trading volume of at
list and trade options on iShares MSCI Mexico
surveillance program for options on least 250,000 shares, or minimum global notional
Index Fund, when CBOE did not have in place a ETFs. volume traded per month of $25,000,000, averaged
surveillance agreement with the Bolsa Mexicana de Pursuant to proposed Commentary over the last six months; c. the most heavily
Valores (the ‘‘Bolsa’’)); 57014 (December 20, 2007), .06(b)(i) to Rule 1009, the Exchange may weighted component stock (excluding Derivative
72 FR 73934 (December 28, 2007) (SR–ISE–2007– Securities Products) shall not exceed 25% of the
111) (approval order to list and trade options on
list and trade options on an ETF without weight of the index or portfolio, and, to the extent
iShares MSCI Mexico Index Fund, when ISE did a CSSA provided that the ETF is listed applicable, the five most heavily weighted
not have in place a surveillance agreement with the pursuant to generic listing standards for component stocks (excluding Derivative Securities
Bolsa); 56778 (November 9, 2007), 72 FR 65113 series of PDRs and IFSs based on Products) shall not exceed 60% of the weight of the
(November 19, 2007) (SR–AMEX–2007–100) index or portfolio; d. the index or portfolio shall
(approval order to list and trade options on iShares
international or global indexes, in include a minimum of 20 component stocks;
MSCI Mexico Index Fund, when AMEX did not which case a comprehensive provided, however, that there shall be no minimum
have in place a surveillance agreement with the surveillance agreement is not required. number of component stocks if either one or more
Bolsa); and 55648 (April 19, 2007), 72 FR 20902 As noted, one such rule, which series of Index Fund Shares or Portfolio Depositary
(April 26, 2007) (SR–AMEX–2007–09) (approval Receipts constitute, at least in part, components
order to list and trade options on Vanguard 25 17
underlying a series of Index Fund Shares, or one or
Emerging Markets ETF, when AMEX did not have CFR 240.19b–4(e). more series of Derivative Securities Products
mstockstill on DSK4VPTVN1PROD with NOTICES
26 Id.
in place a surveillance agreement with the Bolsa). account for 100% of the weight of the index or
27 15 U.S.C. 78s(b)(2).
See also Securities Exchange Act Release Nos. portfolio; and e. each U.S. Component Stock shall
50189 (August 12, 2004), 69 FR 51723 (August 20, 28 Rule 1009A has, for example, weighting, be listed on a national securities exchange and shall
2004) (SR–AMEX–2001–05) [sic] (approving the capitalization, trading volume, and minimum be an NMS Stock as defined in Rule 600 of
listing and trading of certain Vanguard International number of components standards for listing options Regulation NMS under the Act, and each Non-U.S.
Equity Index Funds); and 44700 (August 14, 2001), on narrow-based and broad-based indexes. For a Component Stock shall be listed and traded on an
66 FR 43927 (August 21, 2001) (SR–2001–34) [sic] definition of broad-based index (market index) and exchange that has last-sale reporting. NASDAQ
(approving the listing and trading of series of the narrow-based index (industry index), see Rule Rule 5705(a)(3)(A)(ii) has similar standards, but
iShares Trust based on foreign stock indexes). 1000A(b)(11) and (12), respectively. tailored for PDRs.
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![Federal Register / Vol. 80, No. 58 / Thursday, March 26, 2015 / Notices 16077
which it was filed, or such shorter time Electronic Comments DEPARTMENT OF STATE
as the Commission may designate, the
proposed rule change has become • Use the Commission’s Internet [Public Notice 9070]
effective pursuant to Section 19(b)(3)(A) comment form (http://www.sec.gov/
of the Act 39 and Rule 19b–4(f)(6) rules/sro.shtml); or Advisory Committee on International
Economic Policy; Notice of Open
thereunder.40 • Send an email to rule-comments@
A proposed rule change filed Meeting
sec.gov. Please include File Number SR–
pursuant to Rule 19b–4(f)(6) under the Phlx–2015–27 on the subject line. The Advisory Committee on
Act 41 normally does not become International Economic Policy (ACIEP)
operative for 30 days after the date of its Paper Comments will meet between 2:00 and 5:00 p.m.,
filing. However, Rule 19b–4(f)(6)(iii) 42 on Tuesday, April 14, 2015, in Room
permits the Commission to designate a • Send paper comments in triplicate
to Secretary, Securities and Exchange 4477 of the Harry S Truman Building at
shorter time if such action is consistent the U.S. Department of State, 2201 C
with the protection of investors and the Commission, 100 F Street NE.,
Washington, DC 20549–1090. Street NW., Washington, DC. The
public interest. The Exchange has asked meeting will be hosted by the Assistant
the Commission to waive the 30-day All submissions should refer to File Secretary of State for Economic and
operative delay so that the proposal may Number SR–Phlx–2015–27. This file Business Affairs, Charles H. Rivkin and
become operative immediately upon Committee Chair Paul R. Charron. The
number should be included on the
filing. The Exchange stated that waiver ACIEP serves the U.S. government in a
subject line if email is used. To help the
of the operative delay will permit the
Commission process and review your solely advisory capacity, and provides
Exchange to list and trade certain ETF
comments more efficiently, please use advice concerning topics in
options on the same basis as another
only one method. The Commission will international economic policy. The
options market.43 The Commission
post all comments on the Commission’s meeting will examine ‘‘The President’s
believes the waiver of the operative
Internet Web site (http://www.sec.gov/ Trade Agenda.’’ It is expected that the
delay is consistent with the protection
rules/sro.shtml). Copies of the ACIEP subcommittees will provide
of investors and the public interest.
submission, all subsequent updates on their work.
Therefore, the Commission hereby
amendments, all written statements This meeting is open to public
waives the operative delay and
with respect to the proposed rule participation, though seating is limited.
designates the proposal operative upon
filing.44 Entry to the building is controlled. To
change that are filed with the
At any time within 60 days of the obtain pre-clearance for entry, members
Commission, and all written
filing of the proposed rule change, the of the public planning to attend should
communications relating to the
Commission summarily may no later than Tuesday April 7, provide
proposed rule change between the their full name, professional affiliation,
temporarily suspend such rule change if Commission and any person, other than
it appears to the Commission that such valid government-issued ID number
those that may be withheld from the (i.e., U.S. government ID, U.S. military
action is necessary or appropriate in the public in accordance with the
public interest, for the protection of ID, passport [country], or driver’s
provisions of 5 U.S.C. 552, will be license [state]), date of birth, and
investors, or otherwise in furtherance of available for Web site viewing and
the purposes of the Act. If the citizenship, to Gregory Maggio by email:
printing in the Commission’s Public Maggiogf@state.gov. All persons
Commission takes such action, the
Reference Room, 100 F Street NE., wishing to attend the meeting must use
Commission shall institute proceedings
to determine whether the proposed rule Washington, DC 20549, on official the 21st Street entrance on 21st Street
should be approved or disapproved. business days between the hours of near Virginia Avenue (not the ‘‘jogger’s’’
10:00 a.m. and 3:00 p.m. Copies of the entrance or the C Street entrance) of the
IV. Solicitation of Comments filing also will be available for State Department. Due to escorting
Interested persons are invited to inspection and copying at the principal requirements, non-government
submit written data, views and office of the Exchange. All comments attendees should plan to arrive no later
arguments concerning the foregoing, received will be posted without change; than 15 minutes before the meeting
including whether the proposed rule the Commission does not edit personal begins. Requests for reasonable
change is consistent with the Act. identifying information from accommodation should be made to
Comments may be submitted by any of submissions. You should submit only Gregory Maggio before Tuesday, April 7.
the following methods: information that you wish to make Requests made after that date will be
available publicly. All submissions considered, but might not be possible to
39 15 U.S.C. 78s(b)(3)(A). should refer to File Number SR–Phlx– fulfill.
40 17 CFR 240.19b–4(f)(6). As required under Rule
2015–27 and should be submitted on or Personal data is requested pursuant to
19b–4(f)(6)(iii), the Exchange provided the Public Law 99–399 (Omnibus
Commission with written notice of its intent to file before April 16, 2015.
the proposed rule change, along with a brief
Diplomatic Security and Antiterrorism
description and the text of the proposed rule
For the Commission, by the Division of Act of 1986), as amended; Public Law
change, at least five business days prior to the date Trading and Markets, pursuant to delegated 107–56 (USA PATRIOT Act); and
of filing of the proposed rule change, or such authority.45 Executive Order 13356. The purpose of
shorter time as designated by the Commission.
41 17 CFR 240.19b–4(f)(6).
Brent J. Fields, the collection is to validate the identity
mstockstill on DSK4VPTVN1PROD with NOTICES
42 17 CFR 240.19b–4(f)(6)(iii). Secretary. of individuals who enter Department
43 See Securities Exchange Act Release No. 74509 [FR Doc. 2015–06887 Filed 3–25–15; 8:45 am] facilities. The data will be entered into
(March 13, 2015), 80 FR 14425 (March 19, 2015) BILLING CODE 8011–01–P
the Visitor Access Control System
(SR–MIAX–2015–04). (VACS–D) database. Please see the
44 For purposes only of waiving the 30-day
Security Records System of Records
operative delay, the Commission has also
considered the proposed rule’s impact on
Notice (State-36) at http://www.state.
efficiency, competition, and capital formation. See gov/documents/organization/
15 U.S.C. 78c(f). 45 17 CFR 200.30–3(a)(12). 103419.pdf for additional information.
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Document Created: 2015-12-18 11:46:40
Document Modified: 2015-12-18 11:46:40
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 80 FR 16072 |
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