81 FR 47469 - Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Proposed Rule Change To Amend Certain Rules Related to Flexible Exchange Options
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 140 (July 21, 2016)
Federal Register Volume 81, Issue 140 (July 21, 2016)
| Page Range | 47469-47475 | |
| FR Document | 2016-17201 |
[Federal Register Volume 81, Number 140 (Thursday, July 21, 2016)] [Notices] [Pages 47469-47475] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-17201] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-78348; File No. SR-NYSEMKT-2016-48] Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Proposed Rule Change To Amend Certain Rules Related to Flexible Exchange Options July 15, 2016. 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 July 1, 2016, NYSE MKT LLC (``NYSE MKT'' or the ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II, and III 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. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend certain rules related to Flexible Exchange (``FLEX'') Options. The proposed change is available on the Exchange's Web site at www.nyse.com, 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 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 purpose of this filing is to amend certain rules related to FLEX Options, as described below. FLEX Options are customized equity or index contracts that allow investors to tailor contract terms for exchange-listed equity and index options.\3\ The Exchange is proposing to modify rules related to FLEX Options to offer new alternative terms for FLEX Options and to update rule text to more accurately reflect trading in FLEX Options on the Exchange. --------------------------------------------------------------------------- \3\ See generally Section 15, Flexible Exchange Options, Rules 900G-909G. --------------------------------------------------------------------------- FLEX Options for Binary Return Derivatives Contracts (``ByRDs'') The Exchange proposes to modify its rules to enable market participants to trade customized--or FLEX--options contracts in ByRDs.\4\ Specifically, the [[Page 47470]] Exchange proposes to add a new definition of ``FLEX ByRDs,'' which would be a ``Binary Return Derivatives contract on any ByRDs-eligible underlying security that is subject to the rules in this Section.'' \5\ The Exchange also proposes to revise Rule 900G(b)(16) to include FLEX ByRDs in the definition of ``Series of FLEX Options.'' \6\ The Exchange believes that FLEX ByRDs would enable market participants to negotiate terms that differ from standardized ByRDs, which would, in turn, provide greater opportunities for investors to manage risk through the use of FLEX Options.\7\ --------------------------------------------------------------------------- \4\ ByRDs are European-style option contracts on individual stocks, exchange-traded funds (``ETFs'') and Section 107 that have a fixed return in cash based on a set strike price; satisfy specified listing criteria; and may only be exercised at expiration pursuant to the Rules of the Options Clearing Corporation (the ``OCC''). See Rules 900ByRDs(b), 915ByRDs. \5\ See proposed Rule 900G(b)(17). \6\ See proposed Rule 900G(b)(16) (proposing to add that a ``Series of FLEX Options'' would include, in the case of FLEX ByRDs, all such option contracts of the same class having the same expiration date, strike price, and exercise settlement amount). \7\ The Exchange also proposes to modify Rule 903G(c)(3)(iii) to provide that FLEX ByRDs must be settled the same as non-FLEX ByRDs. See proposed Rule 903G(c)(3)(iii) (discussed herein under ``Additional Updates to Reflect Trading in FLEX Options''); see also Rule 910ByRDs (Determination of the Settlement Price of ByRDs). As ByRDs are settled based on the Volume-Weighted Average Price of the underlying security (see id.), the Exchange proposes to add new paragraphs (b)(20) of Rule 900G and (c)(5) of Rule 903G to permit parties to a FLEX Option to designate a VWAP Settlement (discussed below under ``Additional Settlement Styles for FLEX Options: Asian, Cliquet and VWAP Style''). --------------------------------------------------------------------------- Additional Settlement Styles for FLEX Options: Asian, Cliquet and VWAP Style In addition, the Exchange proposes to permit parties to designate additional settlement styles for FLEX Options.\8\ Specifically, the Exchange proposes to permit parties to FLEX Index Options to designate Asian style settlement and Cliquet style settlement, both of which are currently offered on another options exchange.\9\ --------------------------------------------------------------------------- \8\ Unless otherwise specified herein, the proposed settlement styles would be subject to the same rules as FLEX Options, including for hours of trading and margin requirements. \9\ See e.g., Chicago Board Options Exchange, Inc. (``CBOE'') Rules 24A.1 (Definitions), 24A.4 (Terms of FLEX Options), 24B.1 (Definitions) and 24B.4 (Terms of FLEX Options). FLEX ByRDs could not be settled using Asian or Cliquet settlement. See, e.g., supra n. 8. --------------------------------------------------------------------------- As proposed in new paragraph (b)(4) of Rule 903G and new paragraph (b)(18) of Rule 900G, FLEX Index Options with Asian style settlement would be cash-settled call \10\ option contracts for which the final payout would be based on an arithmetic average of specified closing prices of an underlying broad-based index taken on twelve predetermined monthly observation dates, including the expiration date (``Asian option''). The monthly observation dates would be determined by working backwards from the farthest out observation date prior to the expiration date. When the scheduled observation date for an Asian option occurs on a holiday or a weekend, the observation would occur on the immediately preceding business day. The exercise settlement amount for Asian options would be calculated similarly to other options (i.e., the difference between the strike price and the averaged settlement value would determine the value, or ``moneyness'' of the contract at expiration). Asian options would have a term of approximately one year and would expire anytime from 350 to 371 days (i.e., approximately 50 to 53 calendar weeks) from the date of initial listing. The contract multiplier (or Index Multiplier) for an Asian option that settles in U.S. dollars, for example, would be $100.\11\ Finally, because settlement value is determined by observations taken over a 12-month period, Asian style settlement requires European-style exercise. --------------------------------------------------------------------------- \10\ Puts would not be permitted. \11\ See Rule 900G(b)(12) providing that Index Multiplier means the monetary amount, stated in terms of the settlement currency specified in the contract, by which the current index settlement value is to be multiplied to arrive at the value required to be delivered to the holder of a call or the holder of a put upon valid exercise of the option and setting forth the established Index Multipliers for FLEX Index Options on domestic indices). --------------------------------------------------------------------------- An example of an Asian FLEX call option expiring in-the-money follows. On January 21, 2015, an investor hedging the value of XYZ Index over a year purchases a call option expiring on January 22, 2016 with a strike price of 2000 and a contract multiplier of $100. The option has monthly observation dates occurring on the 23rd of each month. ------------------------------------------------------------------------ XYZ Index Monthly observation date closing value ------------------------------------------------------------------------ 23-Feb-15............................................... 2025.36 23-Mar-15............................................... 2049.34 23-Apr-15............................................... 2019.77 22-May-15 *............................................. 1989.65 23-Jun-15............................................... 2005.64 23-Jul-15............................................... 2035.10 21-Aug-15 *............................................. 2032.15 23-Sep-15............................................... 2076.18 23-Oct-15............................................... 2099.01 23-Nov-15............................................... 2109.32 23-Dec-15............................................... 2085.42 22-Jan-16............................................... 2084.81 Exercise (Averaged) Settlement Value.................... 24,611.75/12 = 2050.98 ------------------------------------------------------------------------ * Because Asian FLEX options use the ``preceding business day convention,'' the dates of May 23, 2015 and August 23, 2015, were not used in the above example because those dates will fall on a weekend or a holiday. Instead the business days immediately preceding those dates were used as the monthly observation date. If, in the above example, the strike price for the Asian FLEX call option was 2060, that contract would have expired out-of-the-money. This is because the exercise settlement value for this 2060 call option is equal to 2050.98 (when rounded). Since the strike price of 2060 is more than the 2050.98 exercise settlement value, this option would not be exercised and would expire worthless. As proposed in new paragraph (b)(5) of Rule 903G and new paragraph (b)(19) of Rule 900G, FLEX Index Options with Cliquet style settlement would be cash-settled call option contracts for which the final payout would be based on the sum of monthly returns (i.e., percent changes in the closing value of the underlying broad-based index from one month to the next), subject to a monthly return ``cap'' (e.g., 3%), applied over twelve monthly observation dates (``Cliquet option''). Cliquet options would have a term of approximately one year and would expire anytime from 350 to 371 days (which is approximately 50 to 53 calendar weeks) from the date of initial listing. The contract multiplier for a Cliquet option that settles in U.S. dollars, for example, would be $100.\12\ --------------------------------------------------------------------------- \12\ See id. --------------------------------------------------------------------------- The parties to a Cliquet option would designate a set of monthly observation dates for each contract and an expiration date for each contract. The monthly observation date would be the date each month on which the price of the underlying broad-based index would be observed for the purpose of calculating the exercise settlement value for Cliquet FLEX Options. Each Cliquet FLEX Option would have 12 consecutive monthly observation dates (which includes an observation on the expiration date) and each observation would be based on the closing price of the underlying broad-based index. The specific monthly observation dates would be determined by working backwards from the farthest out observation date prior to the expiration date. When the scheduled observation date for a Cliquet option occurs on a holiday or a weekend, the observation [[Page 47471]] would occur on the immediately preceding business day. The parties may not designate a subsequent business day convention for Cliquet options. The parties to a Cliquet option would designate a capped monthly return (percent change in the closing values of the underlying broad- based index from one month to the next month) for the contract, which would be the maximum monthly return that would be included in the calculation of the exercise settlement value for the contract. On each monthly observation date, the Exchange would determine the actual monthly return (the percent change of the underlying broad-based index) using the closing value of the broad-based index on the current monthly observation date and the closing value of the broad-based index on the previous monthly observation date. The Exchange would then compare the actual monthly return to the capped monthly return. The value to be included as the monthly return for a Cliquet option would be the lesser of the actual monthly return or the capped monthly return. For example, if the actual monthly return of the underlying broad- based index was 1.75% and the designated capped monthly return for a Cliquet option was 2%, the 1.75% value would be included (and not the 2%) as the value for the observation date to determine the exercise settlement value. Using this same example, if the actual monthly return of the underlying broad-based index was 3.30%, the 2% value would be included (and not the 3.30%) as the value of the observation date to determine the exercise settlement value. This latter example illustrates that Cliquet options have a capped upside. Cliquet options do not, however, have a capped downside for the monthly return that would be included in determining the exercise settlement value. Drawing on this same example, if the actual monthly return of the underlying broad-based index was -4.07%, the -4.07% value would be included as the value for the observation date to determine the exercise settlement value. There would be, however, be a global floor for Cliquet options so that if the sum of the monthly returns is negative, a Cliquet option would expire worthless. Unlike other options, Cliquet options would not have a traditional exercise (strike) price. Rather, the exercise (strike) price field for a Cliquet option would represent the designated capped monthly return for the contract and would be expressed in dollars and cents. For example, a capped monthly return of 2.25% would be represented by the dollar amount of $2.25. The ``strike'' price for a Cliquet option may only be expressed in a dollar and cents amount and the ``strike'' price for a Cliquet option may only span a range between $0.05 and $25.95. In addition, the ``strike'' price for a Cliquet option may only be designated in $0.05 increments, e.g., $1.75, $2.50, $4.15. Increments of $0.01 in the ``strike'' price field (representing the capped monthly return) would not be permitted. The first ``monthly'' return for a Cliquet option would be based on the initial reference value, which would be the closing value of the underlying broad-based index on the date a new Cliquet option is listed. The time period measured for the first ``monthly'' return would be between the initial listing date and the first monthly observation date. For example, if a Cliquet option was opened on January 1 and the parties designated the 31st of each month as the monthly observation date, the measurement period for the first monthly return would span the time period from January 1 to January 31. The time period measured for the second monthly return, and all subsequent monthly returns, would run from the 31st of one month to the 31st of the next month (or the last Exchange business day of each month depending on the actual number of calendar days in each month covered by the contract). Cliquet options would have European-style exercise and may not be exercised prior to the expiration date. The exercise settlement value for Cliquet options would be equal to the initial reference price of the underlying broad-based index multiplied by the sum of the monthly returns (with the cap applied) on the 12 consecutive monthly observation dates, which include the expiration date of the option, provided that the sum is greater than 0. If the sum of the monthly returns (with the applied cap) is 0 or a less, the option would expire worthless. An example of a Cliquet option follows. On January 21, 2015, an investor hedging the value of XYZ Index over a year purchases a Cliquet FLEX call option expiring on January 22, 2016 with a capped monthly return of 2% and a contract multiplier of $100. The initial reference price of XYZ Index (closing value) on January 21, 2015 is 2000. The option has monthly observation dates occurring on the 23rd of each month. ---------------------------------------------------------------------------------------------------------------- Sum of XYZ Index Actual monthly Capped monthly monthly Monthly observation date closing value return return (CMRi) returns (Si) (percent) (percent) (percent) ---------------------------------------------------------------------------------------------------------------- 23-Feb-15....................................... 2025.36 1.27 1.27 1.27 23-Mar-15....................................... 2049.34 1.18 1.18 2.45 23-Apr-15....................................... 2019.77 -1.44 -1.44 1.01 22-May-15 *..................................... 1989.65 -1.49 -1.49 -0.48 23-Jun-15....................................... 2005.64 0.80 0.80 0.32 23-Jul-15....................................... 2035.10 1.47 1.47 1.79 21-Aug-15 *..................................... 2032.15 -0.14 -0.14 1.65 23-Sep-15....................................... 2076.18 2.17 ** 2.00 3.65 23-Oct-15....................................... 2099.01 1.10 1.10 4.75 23-Nov-15....................................... 2109.32 0.49 0.49 5.24 23-Dec-15....................................... 2085.42 -1.13 -1.13 4.11 22-Jan-16....................................... 2084.81 -0.03 -0.03 4.08 --------------------------------------------------------------- Exercise Settlement Value....................... [(4.08% * 2000.00)] + 2 = 83.60 ---------------------------------------------------------------------------------------------------------------- * Because Cliquet FLEX options use the ``preceding business day convention,'' the dates of May 23, 2015, and August 23, 2015, were not used in the above example because those dates fall on a weekend or a holiday. Instead the business days immediately preceding those dates were used as the monthly observation dates. ** Monthly capped return applied. [[Page 47472]] The ``strike price'' for a Cliquet option is determined by the agreed upon capped monthly return, which in this example is 2%. The Exercise Settlement Value (``ESV'') is the greater of zero (0) or [(Closing price of index on trade date * sum of capped returns) + Strike Price]. However, as with standard options, the Total Return, or payout, at expiration is based on how much the ESV exceeds the Strike Price (i.e., the ESV minus the Strike Price). Thus, in this example, the ESV for this January 22, 2016 Cliquet option is 83.60, which exceeds the Strike Price by 81.60. The contract multiplier ($100) is then applied (81.60 * $100) resulting in $8,160 as the cash settlement between the writer of the contract and the buyer of the contract. If the sum of the monthly capped returns had been negative, this option would have expired worthless. Finally, the Exchange proposes to permit parties to a FLEX Equity Option or a FLEX ByRD to designate a ``VWAP Settlement,'' wherein the settlement value of a FLEX Option would be determined by the Volume- Weighted Average Price (or VWAP) of the underlying on the expiration day of the contract. Specifically, as proposed in new paragraphs (b)(20) of Rule 900G and (c)(5) of Rule 903G, parties to FLEX Options may designate VWAP settlement with call or put options and the settlement price would be calculated as the amount in which the VWAP of all reported transactions in the underlying security (rounded to $0.01) on the expiration date exceed the agreed upon ``exercise (strike) price'' of the option. Because the settlement value is not determined until the date of expiration, FLEX Options with a VWAP Settlement have European-style exercise. The Exchange notes that VWAP transactions are becoming increasingly popular in the equities (and options) markets as a means to reduce risks associated with the timing of entering an order during a volatile period, especially with orders for large positions that would disrupt trading if exposed all at once.\13\ A VWAP Settlement may also reduce or offset risk at expiration because of volatility on the expiration day. The Exchange believes that by using a VWAP a trader may ``smooth'' the average price paid or realized for a large position. Thus, as proposed, VWAP Settlement for FLEX Options would provide market participants with a method to offset risk for a large position, regardless of whether the position in the underlying security was established using a VWAP methodology.\14\ --------------------------------------------------------------------------- \13\ The Exchange notes that the settlement price of ByRDs are based on the VWAP, which for a given underlying security means the sum of the dollar value of trades reported to the Consolidated Tape (price multiplied by number of shares traded) divided by the total number of shares traded during the entire last day of trading on the business day of their expiration, or, in the case of an option contract expiring on a day that is not a business day, on the business day prior to expiration. See Rule 910ByRDs (Determination of the Settlement Price of ByRDs). \14\ While VWAP Settlement would be available for FLEX Equity Options, as noted herein, FLEX ByRDs would be required to be settled using VWAP Settlement. See, e.g., supra n. 8 and proposed Rule 903G(c)(3)(iii). --------------------------------------------------------------------------- Regarding the proposed settlement styles, the Exchange would use the same surveillance procedures currently utilized for the Exchange's other FLEX Options, including FLEX Index Options. The Exchange further represents that these surveillance procedures will be adequate to monitor trading in these option products. For surveillance purposes, the Exchange would have access to information regarding trading activity in the pertinent underlying securities. FLEX Exercise Prices and Premiums The Exchange also proposes to modify how exercise prices and premiums for FLEX Options may be expressed, which would reflect recent changes in the marketplace. The Exchange notes that when it adopted rules for FLEX Options, strike prices were designated in one-eighth of a dollar, and options were priced in fractions of a dollar. Now that decimalization has been applied to options trading, including trading in FLEX Options, certain exchange rules have been revised to reflect the decimal equivalent of a previously approved fractional term. Thus, the Exchange proposes to modify current Rule 903G(b)(1) and (c)(2). First, in the case of FLEX Equity Options, the Exchange proposes to modify Rule 903G(c)(2) to clarify that exercise prices and premiums may be stated in: (i) A dollar amount; (ii) a method for fixing such a number at the time a FLEX Request for Quote or FLEX Order is traded; or (iii) a percentage of the price of the underlying security at the time of the trade or as of the close of trading on the Exchange on the trade date.\15\ --------------------------------------------------------------------------- \15\ Current rule 903G(c)(2) provides that ``[e]xercise prices and premiums may be stated in dollar amount or percentage of the price of the underlying security, rounded to the nearest minimum price variation (as set forth in Rule 960NY)''. The Exchange notes that this change would align with the Exchange's treatment of FLEX Index Options as well as the rules of other exchanges.\16\ In addition, the Exchange proposes to modify Rule 903G(b)(1) and (c)(2) to provide that: --------------------------------------------------------------------------- \16\ See, e.g., Rule 903G(b)(1); CBOE Rule 24A.4(b)(2) and (c)(2). --------------------------------------------------------------------------- Exercise prices may be rounded to the nearest minimum tick or other decimal increment determined by the Exchange on a class-by-class basis that may not be smaller than $0.01. Premiums will be rounded to the nearest minimum tick. For exercise prices and premiums stated using a percentage-based methodology, such values may be stated in a percentage increment determined by the Exchange on a class-by-class basis that may not be smaller than 0.01% and will be rounded as provided above.\17\ --------------------------------------------------------------------------- \17\ See proposed Rule 903G(b)(1) and (c)(2). --------------------------------------------------------------------------- The Exchange notes that this proposed change is consistent with the rules of another options exchange.\18\ In this regard, the Exchange also proposed to modify Rule 903G(a)(3)(i) to eliminate reference to fractional pricing.\19\ The Exchange believes this change would provide greater flexibility in terms of describing an option contract tailored to the needs of the investor. --------------------------------------------------------------------------- \18\ See, e.g., CBOE Rule 24A.4(b)(2) and (c)(2). \19\ The Exchange also proposes to make a non-substantive changes to paragraphs (a)(3)(ii) and (b)(2) and (3) of Rule 903G to re-locate the semi-colon and to replace a semi-colon with a period, respectively. --------------------------------------------------------------------------- Additional Updates To Reflect Trading in FLEX Options The Exchange is also proposing the following modifications to streamline and update FLEX Options Rules:``FLEX'' Options. The Exchange proposes to define ``FLEX'' as shorthand for Flexible Options in the title of Section 15.\20\ --------------------------------------------------------------------------- \20\ See proposed Section 15 (Flexible Exchange (``FLEX'') Options). The Exchange also proposes to delete an extraneous ``t'' from the word the in Rule 900G(a). --------------------------------------------------------------------------- Floor Market Makers. The Exchange proposes to replace reference in the FLEX rules to ``Registered Options Traders'' (``ROT'') with ``Floor Market Makers,'' \21\ which is consistent with an approval order by the SEC, which provided, that, among other changes, ROTs would be referred to in Exchange rules as Floor Marker Makers.\22\ --------------------------------------------------------------------------- \21\ See proposed Rules 900G(b)(4), 906G(a)(iv) and (b), 908G, 909G (updating title of rule) and 909G(b). \22\ See Securities and Exchange Act Release No. 59472 (February 27, 2009) 74 FR 9843, 9843, n. 11. (March 6, 2009) (SR-NYSEALTR- 2008-14) (in filing for this rule change, the Exchange noted that certain terms in then, NYSE Alternext Rules 900G-909G would ``become outdated upon approval of the rules proposed herein'' and that the Exchange would file subsequent filings to address these outmoded references). In approving this proposal, the Commission noted that the general term Market Maker in the proposed rules includes, among others, Specialists and Floor Market Makers. --------------------------------------------------------------------------- Flex Official. The Exchange proposes to add the concept of a ``FLEX Official'' to Rule 900G(b)(21) and new [[Page 47473]] Rule 910G, which position is consistent with another options exchange that trade FLEX Options.\23\ In short, a FLEX Official has the regulatory responsibility for reviewing the conformity of FLEX trades to the terms and specifications contained in FLEX rules.\24\ Proposed Rule 900G(b)(21) would define a FLEX Official as being an Exchange employee that carries out the duties set forth in proposed Rule 910G, FLEX Official. Pursuant to proposed Rule 910G(a), the Exchange may at any time designate an Exchange employee to act as a FLEX Official in one or more classes of FLEX Options and may also designate other qualified employees to assist the FLEX Official as the need arises. Further, a FLEX Official would have the regulatory responsibility for reviewing the conformity of FLEX trades to the terms and specifications contained in Rule 903G (Terms of FLEX Options), including posting FLEX Requests for Quotes for dissemination; determining the BBO; ensuring that FLEX contracts are executed in conformance with the priority principles set forth in Rule 904G (FLEX Trading Procedures and Principles); and calling upon Specialists to make FLEX Quotes in specific classes of FLEX Equity Options, per Rule 927NY(c), which sets forth the obligations of Specialists.\25\ In this regard, the Exchange likewise proposes to modify Rule 904G(a)(i)-(ii) (FLEX Trading Procedures and Principles) to clarify the FLEX Officials, not FLEX Specialists, would handle Requests for Quotes from OTP Holders and OTP Firms. The Exchange notes that these responsibilities were previously handled by Specialists but are currently handled by FLEX Officials.\26\ The Exchange also proposes to modify reference to ``FLEX Post Official'' in Rule 927NY to ``FLEX Official,'' which would add clarity and transparency to Exchange rules. --------------------------------------------------------------------------- \23\ See NYSE Arca Rules 5.30(b)(7) and 5.38. \24\ See id. \25\ See proposed Rule 910G(b)(1)-(5). \26\ See proposed Rule 904G(a)(i)-(ii). --------------------------------------------------------------------------- Second, consistent with the foregoing changes, the Exchange proposes to modify Rule 904G(a)(ii) and (c)(i)-(iii) to more accurately reflect the handling of FLEX Quotes and requests for such quotes. When the Exchange introduced FLEX Options, the Exchange displayed FLEX Request for Quotes and FLEX Quotes at physical FLEX posts. However, as trading in FLEX Options gained popularity, it became apparent that liquidity for FLEX Options was more readily available at trading posts where the standard options in the underlying security traded rather than at a specific FLEX post. And, over time, Floor Participants would ask Floor Brokers to communicate the existence of trading interest in particular FLEX Options through various means to their customers and correspondents. Thus, the Exchange proposes to revise the rules to reflect that the FLEX Request for Quotes or the FLEX Quotes are ``disseminated'' (rather than displayed), which would add clarity and transparency to Exchange rules.\27\ Similarly, because there are no longer specific physical FLEX post on the Trading Floor, the Exchange proposes to remove the FLEX modifier from Rule 904G(b)(i), such that the revised rule text refers only to a ``post,'' which the Exchange believes would add clarity and consistency to Exchange rules. The Exchange also proposes to make a non-substantive change to Rule 904G(c)(ii) to replace a colon with a semi-colon. The Exchange believes these changes would add clarity, transparency and internal consistency to Exchange rules. --------------------------------------------------------------------------- \27\ See proposed Rule 904G(a)(ii) and (c)(i)-(iii). --------------------------------------------------------------------------- Obsolete Foreign Currencies. The Exchange proposes to modify rule text relating to FLEX Options to remove obsolete references to foreign currencies that are no longer in circulation, which would add clarity and transparency to Exchange rules. Specifically, the Exchange proposes to remove references in the FLEX rules to Deutsche Marks and French Francs.\28\ --------------------------------------------------------------------------- \28\ See proposed 900G(b)(12), 903G(b)(3), 904G(g). The Exchange also proposes to modify Rule 900G(b)(12) relating to the reference to ``British Pound'' to both remove errant brackets and pluralize ``Pounds.'' See proposed 900G(b)(12), 904G(g). --------------------------------------------------------------------------- Terms of FLEX Options. The Exchange proposes to modify several aspects of Rule 903G (Terms of FLEX Options). First, the Exchange proposes to clarify that each FLEX Request for Quote and FLEX contract must contain the underlying security in the case of FLEX Equity Options or (as opposed to ``and'') the underlying index, in the case of FLEX Index Options.\29\ The Exchange also proposes to make a non-substantive change to Rule 903G(c)(4) to clarify the reference to Rule 805 of the Options Clearing Corporation.\30\ The Exchange believes these changes would add clarity, transparency and internal consistency to Exchange rules. --------------------------------------------------------------------------- \29\ See proposed Rule 903G(a)(2)(i). \30\ See proposed 903G (c)(4). --------------------------------------------------------------------------- Financial Requirements for Specialist. The Exchange also proposes to modify Rule 909G(c) to update the cross-reference regarding the financial requirements of Specialists to Rule 927NY(c)(10), and to remove the obsolete rule references to Rule 171 and Rule 950(h).\31\ --------------------------------------------------------------------------- \31\ See Securities and Exchange Act Release No. 59454 (February 25, 2009), 74 FR 9461 (March 4, 2009) (SR-NYSEALTR-2009-17) (approving proposal to replace certain then-existing Alternext Rules, including Rules 171 and 950 regarding the financial requirements of Specialists, with Rule Section 900NY, including Rule 927NY (Specialists)). --------------------------------------------------------------------------- Second, the Exchange proposes to modify Rule 903G(a)(2)(vii) to make clear that the minimum size of one contract for FLEX Options applies to both transactions (per current rule text) ``and quotations'' (per proposed rule text). This proposed change corresponds to the Commission's approval, in 2014, of the Exchange's proposal to adopt on a permanent basis its pilot program regarding minimum value sizes for opening transactions in new series of FLEX Options and FLEX Quotes.\32\ The Exchange believes this change would add clarity and transparency to Exchange rules. --------------------------------------------------------------------------- \32\ See Securities and Exchange Act Release No. 72536 (July 3, 2014) 79 FR 39425 (July 10, 2014) (SR-NYSEMKT-2014-21). --------------------------------------------------------------------------- The Exchange is proposing to modify Rule 903G(c)(3) to address exercise settlement of FLEX Options that are cash-settled, as the current rule only addresses exercise settlement by physical delivery.\33\ Specifically, the Exchange proposes to designate the current description of exercise settlement by physical delivery as paragraph (3)(i) and to add a description of cash-settlement in paragraph (3)(ii). Finally, the Exchange proposes paragraph (3)(iii) to state that exercise settlement of FLEX ByRDs would the same as non-FLEX ByRDs, pursuant to Rule 910ByRDs.\34\ --------------------------------------------------------------------------- \33\ Rule 903G(c)(3) currently provides that ``[e]xercise settlement shall be by physical delivery of the underlying security.'' \34\ See proposed Rule 903G(c)(3)(i)-(iii). --------------------------------------------------------------------------- The Exchange also proposes to modify Commentary .01 to Rule 903G, to provide that FLEX Options may be permitted in puts and calls that do not have identical terms, including, as proposed, ``the same settlement style.'' Commentary .01 to Rule 903G is designed to prevent the trading of a FLEX Option that has the exact same terms (underlying security, exercise style, expiration date, exercise price and, as proposed, settlement style) as a Standard or (non-FLEX) Option. In other words, as long as just one term of the FLEX Option is different from an existing ``regular'' or ``non-FLEX'' option it may be traded as a FLEX Option. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) [[Page 47474]] of the Securities Exchange Act of 1934 (the ``Act''),\35\ in general, and furthers the objectives of Section 6(b)(5) of the Act,\36\ 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. --------------------------------------------------------------------------- \35\ 15 U.S.C. 78f(b). \36\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The Exchange believes that the proposal to add FLEX ByRDs would remove impediments to and perfect the mechanism of a free and open market as FLEX ByRDs would enable market participants to negotiate terms that differ from standardized ByRDs, which would, in turn provide greater opportunities for investors to manage risk through the use of FLEX Options to the benefit of investors and the public interest. The Exchange believes that the proposal to permit additional settlement types--Asian, Cliquet and VWAP--would remove impediments to and perfect the mechanism of a free and open market because the proposed rule change would provide OTP Holders with enhanced methods to manage risk by more finely tailoring a FLEX Option, within specified limits, to the underlying security or index through a variety of settlement calculations and styles. In addition, this proposal would promote just and equitable principles of trade and protect investors and the general public because the additional settlement styles for FLEX Options would provide investors with additional trading and hedging tools. Further, the Exchange notes that its proposal to offer Asian and Cliquet-style settlement for FLEX Index Options is consistent with the rules of another options exchange and therefore raise no novel issues for the Commission.\37\ --------------------------------------------------------------------------- \37\ See supra n. 10. --------------------------------------------------------------------------- The Exchange notes that permitting VWAP Settlement, which would be available for FLEX Equity Options and FLEX ByRDs, would remove impediments to and perfect the mechanism of a free and open market because the proposed rule change would provide market participants with a method to offset risk for a large position, regardless of whether the position in the underlying was established using a VWAP methodology. The Exchange believes the proposed changes to FLEX Exercise Prices and Premiums would remove impediments to and perfect the mechanism of a free and open market as this change would provide greater flexibility in terms of describing an option contract tailored to the needs of the investor. In addition, the proposed changes would promote internal consistency in our own rules and would align our rules with that of another options exchange and therefore raise no novel issues for the Commission.\38\ --------------------------------------------------------------------------- \38\ See supra nn. 16, 18. --------------------------------------------------------------------------- Regarding the proposed settlement styles, the Exchange would use the same surveillance procedures currently utilized for the Exchange's other FLEX Options, including FLEX Index Options. The Exchange further represents that these surveillance procedures shall be adequate to monitor trading in options on these option products. For surveillance purposes, the Exchange would have complete access to information regarding trading activity in the pertinent underlying securities. Finally, the remaining proposed changes to FLEX Options would remove impediments to and perfect the mechanism of a free and open market as the changes correct inaccuracies in rule text and update the rules to better reflect the Exchange's current practices with respect to FLEX Options, which have evolved over time. The Exchange believes the proposed changes would provide transparency and internal consistency within Exchange rules and operate to protect investors and the investing public by making the Exchange rules easier to navigate and comprehend. 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 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 effect FLEX Option orders with the opportunity for different methods of settling option contracts at expiration. The proposed changes are also designed to update Exchange rules regarding FLEX Options, including by removing obsolete references, which should likewise improve the competitiveness of the Exchange by making it a more attractive venue for trading. 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 also believes the proposed rule change promotes competition because it would enable the Exchange to provide market participants with FLEX Options transaction possibilities that are similar to that of other options exchanges. The Exchange believes the proposed rules encourage competition amongst market participants to provide tailored FLEX Options contracts. 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 Within 45 days of the date of publication of this notice in the Federal Register or up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-NYSEMKT-2016-48 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSEMKT-2016-48. 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 [[Page 47475]] 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 such 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-NYSEMKT-2016-48, and should be submitted on or before August 11, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\39\ --------------------------------------------------------------------------- \39\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Robert W. Errett, Deputy Secretary. [FR Doc. 2016-17201 Filed 7-20-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 140 / Thursday, July 21, 2016 / Notices 47469
FICC employs reasonable methods to subject line if email is used. To help the Securities and Exchange Commission
calculate and impose an individualized Commission process and review your (‘‘Commission’’) the proposed rule
charge in an amount designed to comments more efficiently, please use change as described in Items I, II, and
maintain each impacted GCF Repo only one method. The Commission will III below, which Items have been
Participant’s future backtesting coverage post all comments on the Commission’s prepared by the Exchange. The
above the 99 percent coverage Internet Web site (http://www.sec.gov/ Commission is publishing this notice to
threshold, including a reasonable buffer. rules/sro.shtml). Copies of the solicit comments on the proposed rule
Additionally, prior to imposing the submission, all subsequent change from interested persons.
Blackout Period Exposure Charge, FICC amendments, all written statements
with respect to the proposed rule I. Self-Regulatory Organization’s
notifies each impacted GCF Repo
change that are filed with the Statement of the Terms of Substance of
Participant and provides it the
Commission, and all written the Proposed Rule Change
opportunity to adjust its use of MBS
collateral pledges in order to avoid communications relating to the The Exchange proposes to amend
having the charge applied to its proposed rule change between the certain rules related to Flexible
Required Fund Deposit or to reduce the Commission and any person, other than Exchange (‘‘FLEX’’) Options. The
amount of such charge. those that may be withheld from the proposed change is available on the
public in accordance with the Exchange’s Web site at www.nyse.com,
(C) Clearing Agency’s Statement on provisions of 5 U.S.C. 552, will be at the principal office of the Exchange,
Comments on the Proposed Rule available for Web site viewing and and at the Commission’s Public
Change Received From Members, printing in the Commission’s Public Reference Room.
Participants, or Others Reference Room, 100 F Street NE.,
Washington, DC 20549 on official II. Self-Regulatory Organization’s
FICC has not received any written
business days between the hours of Statement of the Purpose of, and
comments relating to this proposal.
10:00 a.m. and 3:00 p.m. Copies of the Statutory Basis for, the Proposed Rule
FICC will notify the Commission of any
filing also will be available for Change
written comments received.
inspection and copying at the principal In its filing with the Commission, the
III. Date of Effectiveness of the office of FICC and on DTCC’s Web site self-regulatory organization included
Proposed Rule Change, and Timing for (http://dtcc.com/legal/sec-rule- statements concerning the purpose of,
Commission Action filings.aspx). and basis for, the proposed rule change
Within 45 days of the date of All comments received will be posted and discussed any comments it received
publication of this notice in the Federal without change; the Commission does on the proposed rule change. The text
Register or within such longer period not edit personal identifying of those statements may be examined at
up to 90 days (i) as the Commission may information from submissions. You the places specified in Item IV below.
designate if it finds such longer period should submit only information that The Exchange has prepared summaries,
to be appropriate and publishes its you wish to make available publicly. set forth in sections A, B, and C below,
reasons for so finding or (ii) as to which All submissions should refer to File of the most significant parts of such
the self-regulatory organization Number SR–FICC–2016–003 and should statements.
consents, the Commission will: be submitted on or before August 11,
(A) By order approve or disapprove 2016. A. Self-Regulatory Organization’s
such proposed rule change, or Statement of the Purpose of, and the
For the Commission, by the Division of
(B) institute proceedings to determine Statutory Basis for, the Proposed Rule
Trading and Markets, pursuant to delegated
whether the proposed rule change authority.15 Change
should be disapproved. Robert W. Errett, 1. Purpose
IV. Solicitation of Comments Deputy Secretary. The purpose of this filing is to amend
[FR Doc. 2016–17200 Filed 7–20–16; 8:45 am] certain rules related to FLEX Options, as
Interested persons are invited to
submit written data, views and
BILLING CODE 8011–01–P described below.
arguments concerning the foregoing, FLEX Options are customized equity
including whether the proposed rule or index contracts that allow investors
SECURITIES AND EXCHANGE to tailor contract terms for exchange-
change is consistent with the Act. COMMISSION
Comments may be submitted by any of listed equity and index options.3 The
the following methods: [Release No. 34–78348; File No. SR– Exchange is proposing to modify rules
NYSEMKT–2016–48] related to FLEX Options to offer new
Electronic Comments alternative terms for FLEX Options and
• Use the Commission’s Internet Self-Regulatory Organizations; NYSE to update rule text to more accurately
comment form (http://www.sec.gov/ MKT LLC; Notice of Filing of Proposed reflect trading in FLEX Options on the
rules/sro.shtml); or Rule Change To Amend Certain Rules Exchange.
• Send an email to rule-comments@ Related to Flexible Exchange Options
FLEX Options for Binary Return
sec.gov. Please include File Number SR– July 15, 2016. Derivatives Contracts (‘‘ByRDs’’)
FICC–2016–003 on the subject line. Pursuant to Section 19(b)(1) of the
The Exchange proposes to modify its
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Paper Comments Securities Exchange Act of 1934
rules to enable market participants to
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
• Send paper comments in triplicate notice is hereby given that on July 1,
trade customized—or FLEX—options
to Brent J. Fields, Secretary, Securities contracts in ByRDs.4 Specifically, the
2016, NYSE MKT LLC (‘‘NYSE MKT’’ or
and Exchange Commission, 100 F Street the ‘‘Exchange’’) filed with the 3 See generally Section 15, Flexible Exchange
NE., Washington, DC 20549.
Options, Rules 900G–909G.
All submissions should refer to File 15 17 CFR 200.30–3(a)(12). 4 ByRDs are European-style option contracts on
Number SR–FICC–2016–003. This file 1 15 U.S.C. 78s(b)(1). individual stocks, exchange-traded funds (‘‘ETFs’’)
number should be included on the 2 17 CFR 240.19b–4. Continued
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![Federal Register / Vol. 81, No. 140 / Thursday, July 21, 2016 / Notices 47471
would occur on the immediately Cliquet options have a capped upside. and the first monthly observation date.
preceding business day. The parties may Cliquet options do not, however, have a For example, if a Cliquet option was
not designate a subsequent business day capped downside for the monthly return opened on January 1 and the parties
convention for Cliquet options. that would be included in determining designated the 31st of each month as the
The parties to a Cliquet option would the exercise settlement value. Drawing monthly observation date, the
designate a capped monthly return on this same example, if the actual measurement period for the first
(percent change in the closing values of monthly return of the underlying broad- monthly return would span the time
the underlying broad-based index from based index was ¥4.07%, the ¥4.07% period from January 1 to January 31.
one month to the next month) for the value would be included as the value The time period measured for the
contract, which would be the maximum for the observation date to determine the second monthly return, and all
monthly return that would be included exercise settlement value. There would subsequent monthly returns, would run
in the calculation of the exercise be, however, be a global floor for Cliquet from the 31st of one month to the 31st
settlement value for the contract. On options so that if the sum of the of the next month (or the last Exchange
each monthly observation date, the monthly returns is negative, a Cliquet business day of each month depending
Exchange would determine the actual option would expire worthless. on the actual number of calendar days
monthly return (the percent change of Unlike other options, Cliquet options in each month covered by the contract).
the underlying broad-based index) using would not have a traditional exercise
the closing value of the broad-based (strike) price. Rather, the exercise Cliquet options would have
index on the current monthly (strike) price field for a Cliquet option European-style exercise and may not be
observation date and the closing value would represent the designated capped exercised prior to the expiration date.
of the broad-based index on the monthly return for the contract and The exercise settlement value for
previous monthly observation date. The would be expressed in dollars and Cliquet options would be equal to the
Exchange would then compare the cents. For example, a capped monthly initial reference price of the underlying
actual monthly return to the capped return of 2.25% would be represented broad-based index multiplied by the
monthly return. The value to be by the dollar amount of $2.25. The sum of the monthly returns (with the
included as the monthly return for a ‘‘strike’’ price for a Cliquet option may cap applied) on the 12 consecutive
Cliquet option would be the lesser of the only be expressed in a dollar and cents monthly observation dates, which
actual monthly return or the capped amount and the ‘‘strike’’ price for a include the expiration date of the
monthly return. Cliquet option may only span a range option, provided that the sum is greater
For example, if the actual monthly between $0.05 and $25.95. In addition, than 0. If the sum of the monthly returns
return of the underlying broad-based the ‘‘strike’’ price for a Cliquet option (with the applied cap) is 0 or a less, the
index was 1.75% and the designated may only be designated in $0.05 option would expire worthless.
capped monthly return for a Cliquet increments, e.g., $1.75, $2.50, $4.15. An example of a Cliquet option
option was 2%, the 1.75% value would Increments of $0.01 in the ‘‘strike’’ price follows. On January 21, 2015, an
be included (and not the 2%) as the field (representing the capped monthly investor hedging the value of XYZ Index
value for the observation date to return) would not be permitted. over a year purchases a Cliquet FLEX
determine the exercise settlement value. The first ‘‘monthly’’ return for a call option expiring on January 22, 2016
Using this same example, if the actual Cliquet option would be based on the with a capped monthly return of 2%
monthly return of the underlying broad- initial reference value, which would be and a contract multiplier of $100. The
based index was 3.30%, the 2% value the closing value of the underlying initial reference price of XYZ Index
would be included (and not the 3.30%) broad-based index on the date a new (closing value) on January 21, 2015 is
as the value of the observation date to Cliquet option is listed. The time period 2000. The option has monthly
determine the exercise settlement value. measured for the first ‘‘monthly’’ return observation dates occurring on the 23rd
This latter example illustrates that would be between the initial listing date of each month.
Capped Sum of
XYZ Index Actual monthly monthly return monthly
Monthly observation date closing value return (CMRi) returns
(Si) (percent) (percent) (percent)
23–Feb–15 ....................................................................................................... 2025.36 1.27 1.27 1.27
23–Mar–15 ....................................................................................................... 2049.34 1.18 1.18 2.45
23–Apr–15 ....................................................................................................... 2019.77 ¥1.44 ¥1.44 1.01
22–May–15 * .................................................................................................... 1989.65 ¥1.49 ¥1.49 ¥0.48
23–Jun–15 ....................................................................................................... 2005.64 0.80 0.80 0.32
23–Jul–15 ........................................................................................................ 2035.10 1.47 1.47 1.79
21–Aug–15 * ..................................................................................................... 2032.15 –0.14 –0.14 1.65
23–Sep–15 ....................................................................................................... 2076.18 2.17 ** 2.00 3.65
23–Oct–15 ....................................................................................................... 2099.01 1.10 1.10 4.75
23–Nov–15 ....................................................................................................... 2109.32 0.49 0.49 5.24
23–Dec–15 ....................................................................................................... 2085.42 ¥1.13 ¥1.13 4.11
22–Jan–16 ....................................................................................................... 2084.81 ¥0.03 ¥0.03 4.08
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Exercise Settlement Value .............................................................................. [(4.08% * 2000.00)] + 2 = 83.60
* Because Cliquet FLEX options use the ‘‘preceding business day convention,’’ the dates of May 23, 2015, and August 23, 2015, were not
used in the above example because those dates fall on a weekend or a holiday. Instead the business days immediately preceding those dates
were used as the monthly observation dates.
** Monthly capped return applied.
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![47472 Federal Register / Vol. 81, No. 140 / Thursday, July 21, 2016 / Notices
The ‘‘strike price’’ for a Cliquet option average price paid or realized for a large modify Rule 903G(b)(1) and (c)(2) to
is determined by the agreed upon position. Thus, as proposed, VWAP provide that:
capped monthly return, which in this Settlement for FLEX Options would Exercise prices may be rounded to the
example is 2%. The Exercise Settlement provide market participants with a nearest minimum tick or other decimal
Value (‘‘ESV’’) is the greater of zero (0) method to offset risk for a large position, increment determined by the Exchange
or [(Closing price of index on trade date regardless of whether the position in the on a class-by-class basis that may not be
* sum of capped returns) + Strike Price]. underlying security was established smaller than $0.01. Premiums will be
However, as with standard options, the using a VWAP methodology.14 rounded to the nearest minimum tick.
Total Return, or payout, at expiration is Regarding the proposed settlement For exercise prices and premiums stated
based on how much the ESV exceeds styles, the Exchange would use the same using a percentage-based methodology,
the Strike Price (i.e., the ESV minus the surveillance procedures currently such values may be stated in a
Strike Price). Thus, in this example, the utilized for the Exchange’s other FLEX percentage increment determined by the
ESV for this January 22, 2016 Cliquet Options, including FLEX Index Options. Exchange on a class-by-class basis that
option is 83.60, which exceeds the The Exchange further represents that may not be smaller than 0.01% and will
Strike Price by 81.60. The contract these surveillance procedures will be be rounded as provided above.17
multiplier ($100) is then applied (81.60 adequate to monitor trading in these The Exchange notes that this
* $100) resulting in $8,160 as the cash option products. For surveillance proposed change is consistent with the
settlement between the writer of the purposes, the Exchange would have rules of another options exchange.18 In
contract and the buyer of the contract. access to information regarding trading this regard, the Exchange also proposed
If the sum of the monthly capped activity in the pertinent underlying to modify Rule 903G(a)(3)(i) to eliminate
returns had been negative, this option securities. reference to fractional pricing.19 The
would have expired worthless. Exchange believes this change would
Finally, the Exchange proposes to FLEX Exercise Prices and Premiums provide greater flexibility in terms of
permit parties to a FLEX Equity Option The Exchange also proposes to modify describing an option contract tailored to
or a FLEX ByRD to designate a ‘‘VWAP how exercise prices and premiums for the needs of the investor.
Settlement,’’ wherein the settlement FLEX Options may be expressed, which
value of a FLEX Option would be Additional Updates To Reflect Trading
would reflect recent changes in the in FLEX Options
determined by the Volume-Weighted marketplace. The Exchange notes that
Average Price (or VWAP) of the when it adopted rules for FLEX Options, The Exchange is also proposing the
underlying on the expiration day of the strike prices were designated in one- following modifications to streamline
contract. Specifically, as proposed in eighth of a dollar, and options were and update FLEX Options Rules:
new paragraphs (b)(20) of Rule 900G priced in fractions of a dollar. Now that • ‘‘FLEX’’ Options. The Exchange
and (c)(5) of Rule 903G, parties to FLEX decimalization has been applied to proposes to define ‘‘FLEX’’ as shorthand
Options may designate VWAP options trading, including trading in for Flexible Options in the title of
settlement with call or put options and FLEX Options, certain exchange rules Section 15.20
the settlement price would be calculated have been revised to reflect the decimal • Floor Market Makers. The Exchange
as the amount in which the VWAP of all equivalent of a previously approved proposes to replace reference in the
reported transactions in the underlying fractional term. Thus, the Exchange FLEX rules to ‘‘Registered Options
security (rounded to $0.01) on the proposes to modify current Rule Traders’’ (‘‘ROT’’) with ‘‘Floor Market
expiration date exceed the agreed upon Makers,’’ 21 which is consistent with an
903G(b)(1) and (c)(2). First, in the case
‘‘exercise (strike) price’’ of the option. approval order by the SEC, which
of FLEX Equity Options, the Exchange
Because the settlement value is not provided, that, among other changes,
proposes to modify Rule 903G(c)(2) to
determined until the date of expiration, ROTs would be referred to in Exchange
clarify that exercise prices and
FLEX Options with a VWAP Settlement rules as Floor Marker Makers.22
premiums may be stated in:
have European-style exercise. The • Flex Official. The Exchange
Exchange notes that VWAP transactions (i) A dollar amount; (ii) a method for
proposes to add the concept of a ‘‘FLEX
are becoming increasingly popular in fixing such a number at the time a FLEX
Official’’ to Rule 900G(b)(21) and new
the equities (and options) markets as a Request for Quote or FLEX Order is
means to reduce risks associated with traded; or (iii) a percentage of the price 17 See proposed Rule 903G(b)(1) and (c)(2).
the timing of entering an order during of the underlying security at the time of 18 See, e.g., CBOE Rule 24A.4(b)(2) and (c)(2).
a volatile period, especially with orders the trade or as of the close of trading on 19 The Exchange also proposes to make a non-
for large positions that would disrupt the Exchange on the trade date.15 substantive changes to paragraphs (a)(3)(ii) and
(b)(2) and (3) of Rule 903G to re-locate the semi-
trading if exposed all at once.13 A The Exchange notes that this change colon and to replace a semi-colon with a period,
VWAP Settlement may also reduce or would align with the Exchange’s respectively.
offset risk at expiration because of treatment of FLEX Index Options as 20 See proposed Section 15 (Flexible Exchange
volatility on the expiration day. The well as the rules of other exchanges.16 (‘‘FLEX’’) Options). The Exchange also proposes to
In addition, the Exchange proposes to delete an extraneous ‘‘t’’ from the word the in Rule
Exchange believes that by using a 900G(a).
VWAP a trader may ‘‘smooth’’ the 21 See proposed Rules 900G(b)(4), 906G(a)(iv) and
14 While VWAP Settlement would be available for
(b), 908G, 909G (updating title of rule) and 909G(b).
13 The Exchange notes that the settlement price of FLEX Equity Options, as noted herein, FLEX ByRDs 22 See Securities and Exchange Act Release No.
would be required to be settled using VWAP
asabaliauskas on DSK3SPTVN1PROD with NOTICES
ByRDs are based on the VWAP, which for a given 59472 (February 27, 2009) 74 FR 9843, 9843, n. 11.
underlying security means the sum of the dollar Settlement. See, e.g., supra n. 8 and proposed Rule (March 6, 2009) (SR–NYSEALTR–2008–14) (in
value of trades reported to the Consolidated Tape 903G(c)(3)(iii). filing for this rule change, the Exchange noted that
15 Current rule 903G(c)(2) provides that
(price multiplied by number of shares traded) certain terms in then, NYSE Alternext Rules 900G–
divided by the total number of shares traded during ‘‘[e]xercise prices and premiums may be stated in 909G would ‘‘become outdated upon approval of
the entire last day of trading on the business day dollar amount or percentage of the price of the the rules proposed herein’’ and that the Exchange
of their expiration, or, in the case of an option underlying security, rounded to the nearest would file subsequent filings to address these
contract expiring on a day that is not a business minimum price variation (as set forth in Rule outmoded references). In approving this proposal,
day, on the business day prior to expiration. See 960NY)’’. the Commission noted that the general term Market
Rule 910ByRDs (Determination of the Settlement 16 See, e.g., Rule 903G(b)(1); CBOE Rule Maker in the proposed rules includes, among
Price of ByRDs). 24A.4(b)(2) and (c)(2). others, Specialists and Floor Market Makers.
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![Federal Register / Vol. 81, No. 140 / Thursday, July 21, 2016 / Notices 47473
Rule 910G, which position is consistent a specific FLEX post. And, over time, obsolete rule references to Rule 171 and
with another options exchange that Floor Participants would ask Floor Rule 950(h).31
trade FLEX Options.23 In short, a FLEX Brokers to communicate the existence of Second, the Exchange proposes to
Official has the regulatory responsibility trading interest in particular FLEX modify Rule 903G(a)(2)(vii) to make
for reviewing the conformity of FLEX Options through various means to their clear that the minimum size of one
trades to the terms and specifications customers and correspondents. Thus, contract for FLEX Options applies to
contained in FLEX rules.24 Proposed the Exchange proposes to revise the both transactions (per current rule text)
Rule 900G(b)(21) would define a FLEX rules to reflect that the FLEX Request for ‘‘and quotations’’ (per proposed rule
Official as being an Exchange employee Quotes or the FLEX Quotes are text). This proposed change corresponds
that carries out the duties set forth in ‘‘disseminated’’ (rather than displayed), to the Commission’s approval, in 2014,
proposed Rule 910G, FLEX Official. which would add clarity and of the Exchange’s proposal to adopt on
Pursuant to proposed Rule 910G(a), the transparency to Exchange rules.27 a permanent basis its pilot program
Exchange may at any time designate an Similarly, because there are no longer regarding minimum value sizes for
Exchange employee to act as a FLEX specific physical FLEX post on the opening transactions in new series of
Official in one or more classes of FLEX Trading Floor, the Exchange proposes to FLEX Options and FLEX Quotes.32 The
Options and may also designate other remove the FLEX modifier from Rule Exchange believes this change would
qualified employees to assist the FLEX 904G(b)(i), such that the revised rule add clarity and transparency to
Official as the need arises. Further, a text refers only to a ‘‘post,’’ which the Exchange rules.
FLEX Official would have the regulatory Exchange believes would add clarity The Exchange is proposing to modify
responsibility for reviewing the and consistency to Exchange rules. The Rule 903G(c)(3) to address exercise
conformity of FLEX trades to the terms Exchange also proposes to make a non- settlement of FLEX Options that are
and specifications contained in Rule substantive change to Rule 904G(c)(ii) to cash-settled, as the current rule only
903G (Terms of FLEX Options), replace a colon with a semi-colon. The addresses exercise settlement by
including posting FLEX Requests for Exchange believes these changes would physical delivery.33 Specifically, the
Quotes for dissemination; determining add clarity, transparency and internal Exchange proposes to designate the
the BBO; ensuring that FLEX contracts consistency to Exchange rules. current description of exercise
are executed in conformance with the settlement by physical delivery as
• Obsolete Foreign Currencies. The
priority principles set forth in Rule paragraph (3)(i) and to add a description
Exchange proposes to modify rule text of cash-settlement in paragraph (3)(ii).
904G (FLEX Trading Procedures and relating to FLEX Options to remove
Principles); and calling upon Specialists Finally, the Exchange proposes
obsolete references to foreign currencies paragraph (3)(iii) to state that exercise
to make FLEX Quotes in specific classes that are no longer in circulation, which
of FLEX Equity Options, per Rule settlement of FLEX ByRDs would the
would add clarity and transparency to same as non-FLEX ByRDs, pursuant to
927NY(c), which sets forth the
Exchange rules. Specifically, the Rule 910ByRDs.34
obligations of Specialists.25 In this
Exchange proposes to remove references The Exchange also proposes to modify
regard, the Exchange likewise proposes
in the FLEX rules to Deutsche Marks Commentary .01 to Rule 903G, to
to modify Rule 904G(a)(i)–(ii) (FLEX
and French Francs.28 provide that FLEX Options may be
Trading Procedures and Principles) to
clarify the FLEX Officials, not FLEX • Terms of FLEX Options. The permitted in puts and calls that do not
Specialists, would handle Requests for Exchange proposes to modify several have identical terms, including, as
Quotes from OTP Holders and OTP aspects of Rule 903G (Terms of FLEX proposed, ‘‘the same settlement style.’’
Firms. The Exchange notes that these Options). First, the Exchange proposes Commentary .01 to Rule 903G is
responsibilities were previously to clarify that each FLEX Request for designed to prevent the trading of a
handled by Specialists but are currently Quote and FLEX contract must contain FLEX Option that has the exact same
handled by FLEX Officials.26 The the underlying security in the case of terms (underlying security, exercise
Exchange also proposes to modify FLEX Equity Options or (as opposed to style, expiration date, exercise price
reference to ‘‘FLEX Post Official’’ in ‘‘and’’) the underlying index, in the case and, as proposed, settlement style) as a
Rule 927NY to ‘‘FLEX Official,’’ which of FLEX Index Options.29 The Exchange Standard or (non-FLEX) Option. In other
would add clarity and transparency to also proposes to make a non-substantive words, as long as just one term of the
Exchange rules. change to Rule 903G(c)(4) to clarify the FLEX Option is different from an
Second, consistent with the foregoing reference to Rule 805 of the Options existing ‘‘regular’’ or ‘‘non-FLEX’’
changes, the Exchange proposes to Clearing Corporation.30 The Exchange option it may be traded as a FLEX
modify Rule 904G(a)(ii) and (c)(i)–(iii) to believes these changes would add Option.
more accurately reflect the handling of clarity, transparency and internal
2. Statutory Basis
FLEX Quotes and requests for such consistency to Exchange rules.
• Financial Requirements for The Exchange believes that its
quotes. When the Exchange introduced
Specialist. The Exchange also proposes proposal is consistent with Section 6(b)
FLEX Options, the Exchange displayed
FLEX Request for Quotes and FLEX to modify Rule 909G(c) to update the 31 See Securities and Exchange Act Release No.
Quotes at physical FLEX posts. cross-reference regarding the financial 59454 (February 25, 2009), 74 FR 9461 (March 4,
However, as trading in FLEX Options requirements of Specialists to Rule 2009) (SR–NYSEALTR–2009–17) (approving
gained popularity, it became apparent 927NY(c)(10), and to remove the proposal to replace certain then-existing Alternext
Rules, including Rules 171 and 950 regarding the
asabaliauskas on DSK3SPTVN1PROD with NOTICES
that liquidity for FLEX Options was financial requirements of Specialists, with Rule
more readily available at trading posts 27 See
proposed Rule 904G(a)(ii) and (c)(i)–(iii). Section 900NY, including Rule 927NY
28 See
proposed 900G(b)(12), 903G(b)(3), 904G(g).
where the standard options in the (Specialists)).
The Exchange also proposes to modify Rule 32 See Securities and Exchange Act Release No.
underlying security traded rather than at 900G(b)(12) relating to the reference to ‘‘British 72536 (July 3, 2014) 79 FR 39425 (July 10, 2014)
Pound’’ to both remove errant brackets and (SR–NYSEMKT–2014–21).
23 See NYSE Arca Rules 5.30(b)(7) and 5.38. pluralize ‘‘Pounds.’’ See proposed 900G(b)(12), 33 Rule 903G(c)(3) currently provides that
24 See id. 904G(g). ‘‘[e]xercise settlement shall be by physical delivery
25 See proposed Rule 910G(b)(1)–(5). 29 See proposed Rule 903G(a)(2)(i). of the underlying security.’’
26 See proposed Rule 904G(a)(i)–(ii). 30 See proposed 903G (c)(4). 34 See proposed Rule 903G(c)(3)(i)–(iii).
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![Federal Register / Vol. 81, No. 140 / Thursday, July 21, 2016 / Notices 47475
amendments, all written statements comments on the proposed rule change Futures Trading Commission (‘‘CFTC’’)
with respect to the proposed rule from interested persons. has recently adopted substantial
change that are filed with the amendments to CFTC Rule 4.5 relating
I. Self-Regulatory Organization’s
Commission, and all written to the permissible exemptions and
Statement of the Terms of Substance of
communications relating to the conditions for reliance on exemptions
the Proposed Rule Change
proposed rule change between the from registration as a commodity pool
Commission and any person, other than The Exchange filed a proposal to list operator. As a result of the instruments
those that may be withheld from the and trade shares of the ProShares Crude that will be held by the Fund, the
public in accordance with the Oil Strategy ETF (the ‘‘Fund’’), a series Adviser has registered as a Commodity
provisions of 5 U.S.C. 552, will be of ProShares Trust (the ‘‘Trust’’), under Pool Operator (‘‘CPO’’) and is also a
available for Web site viewing and Rule 14.11(i) (‘‘Managed Fund Shares’’). member of the National Futures
printing in the Commission’s Public The shares of the Fund are referred to Association (‘‘NFA’’). The Fund and a
Reference Room, 100 F Street NE., herein as the ‘‘Shares.’’ wholly-owned subsidiary of the Fund
Washington, DC 20549 on official The text of the proposed rule change organized under the laws of the Cayman
business days between the hours of is available at the Exchange’s Web site Islands (the ‘‘Subsidiary’’) will be
10:00 a.m. and 3:00 p.m. Copies of such at www.batstrading.com, at the subject to regulation by the CFTC and
filing also will be available for principal office of the Exchange, and at NFA and additional disclosure,
inspection and copying at the principal the Commission’s Public Reference reporting and recordkeeping rules
office of the Exchange. All comments Room. imposed upon commodity pools. The
received will be posted without change; II. Self-Regulatory Organization’s Fund will generally obtain its exposure
the Commission does not edit personal Statement of the Purpose of, and to WTI crude oil markets via
identifying information from Statutory Basis for, the Proposed Rule investments in the Subsidiary. These
submissions. You should submit only Change investments are intended to provide the
information that you wish to make Fund with exposure to WTI crude oil
In its filing with the Commission, the
available publicly. All submissions markets in accordance with applicable
Exchange included statements
should refer to File Number SR– rules and regulations. Henceforth,
concerning the purpose of and basis for
NYSEMKT–2016–48, and should be references to the investments of the
the proposed rule change and discussed
submitted on or before August 11, 2016. Fund include investments of the
any comments it received on the
For the Commission, by the Division of
Subsidiary, to which the Fund gains
proposed rule change. The text of these
Trading and Markets, pursuant to delegated indirect exposure through its
statements may be examined at the
authority.39 investment in the Subsidiary.
places specified in Item IV below. The
Robert W. Errett, Exchange has prepared summaries, set Description of the Shares and the Fund
Deputy Secretary. forth in Sections A, B, and C below, of ProShare Advisors LLC is the
[FR Doc. 2016–17201 Filed 7–20–16; 8:45 am] the most significant parts of such investment adviser (‘‘Adviser’’) to the
BILLING CODE 8011–01–P statements. Fund and the Subsidiary. JPMorgan
A. Self-Regulatory Organization’s Chase Bank, National Association (‘‘JP
Statement of the Purpose of, and the Morgan’’) is the administrator,
SECURITIES AND EXCHANGE custodian, fund account agent, index
Statutory Basis for, the Proposed Rule
COMMISSION receipt agent and transfer agent for the
Change
[Release No. 34–78346; File No. SR– Trust. SEI Investments Distribution Co.
1. Purpose (‘‘Distributor’’) serves as the distributor
BatsBZX–2016–34]
The Exchange proposes to list and for the Trust.
Self-Regulatory Organizations; Bats trade the Shares under Rule 14.11(i), Rule 14.11(i)(7) provides that, if the
BZX Exchange, Inc.; Notice of Filing of which governs the listing and trading of investment adviser to the investment
a Proposed Rule Change to BZX Rule Managed Fund Shares on the company issuing Managed Fund Shares
14.11(i), Managed Fund Shares, To List Exchange.4 The Fund will be an actively is affiliated with a broker-dealer, such
and Trade Shares of the ProShares managed fund that seeks to provide long investment adviser shall erect a ‘‘fire
Crude Oil Strategy ETF, a Series of term capital appreciation, primarily wall’’ between the investment adviser
ProShares through exposure to the West Texas and the broker-dealer with respect to
Intermediate (‘‘WTI’’) crude oil futures access to information concerning the
July 15, 2016. markets. composition and/or changes to such
Pursuant to Section 19(b)(1) 1 of the The Shares will be offered by the investment company portfolio.6 In
Securities Exchange Act of 1934 (the Trust, which was established as a
‘‘Act’’) 2 and Rule 19b–4 thereunder,3 Delaware statutory trust on May 29, herein are based, in part, on information contained
notice is hereby given that, on July 1, 2002. The Trust is registered with the in the Registration Statement. The Commission has
2016, Bats BZX Exchange, Inc. (the issued an order granting certain exemptive relief to
Commission as an open-end investment the Trust under the Investment Company Act of
‘‘Exchange’’ or ‘‘BZX’’) filed with the company and has filed a registration 1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) (the
Securities and Exchange Commission statement on behalf of the Fund on ‘‘Exemptive Order’’). See Investment Company Act
(‘‘Commission’’) the proposed rule Form N–1A (‘‘Registration Statement’’) Release No. 30562 (June 18, 2013) (File No. 812–
14041).
asabaliauskas on DSK3SPTVN1PROD with NOTICES
change as described in Items I and II with the Commission.5 The Commodity 6 An investment adviser to an open-end fund is
below, which Items have been prepared required to be registered under the Investment
by the Exchange. The Commission is 4 The Commission approved BZX Rule 14.11(i) in
Advisers Act of 1940, as amended (the ‘‘Advisers
publishing this notice to solicit Securities Exchange Act Release No. 65225 (August Act’’). As a result, the Adviser and its related
30, 2011), 76 FR 55148 (September 6, 2011) (SR– personnel are subject to the provisions of Rule
BATS–2011–018). 204A–1 under the Advisers Act relating to codes of
39 17 CFR 200.30–3(a)(12). 5 See Registration Statement on Form N–1A for ethics. This Rule requires investment advisers to
1 15 U.S.C. 78s(b)(1). the Trust, filed with the Commission on May 3, adopt a code of ethics that reflects the fiduciary
2 15 U.S.C. 78a.
2016 (File Nos. 333–89822 and 811–21114). The nature of the relationship to clients as well as
3 17 CFR 240.19b–4. descriptions of the Fund and the Shares contained Continued
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Document Created: 2018-02-08 07:58:52
Document Modified: 2018-02-08 07:58:52
| 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 | 81 FR 47469 |
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