[Federal Register Volume 78, Number 126 (Monday, July 1, 2013)]
[Notices]
[Pages 39429-39432]
[FR Doc No: 2013-15623]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69845; File No. SR-Phlx-2013-46]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Granting Approval To Proposed Rule Change, as Modified by Amendment No.
1, Regarding Complex Order PIXL

June 25, 2013.

I. Introduction

    On April 30, 2013, NASDAQ OMX PHLX LLC (the ``Exchange'' or
``Phlx'') filed with the Securities and Exchange Commission
(``Commission'') pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend Phlx Rule 1080 to accommodate Complex
Orders in Phlx's price-improving electronic auction (``PIXL,'' ``PIXL
Auction,'' or ``Auction''). On May 8, 2013, the Exchange filed
Amendment No. 1 to the proposed rule change. The proposed rule change,
as amended, was published for comment in the Federal Register on May
15, 2013.\3\ The Commission received no comments on the proposal. This
order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 69550 (May 9, 2013),
78 FR 28654 (May 15, 2013) (``Notice'').
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II. Description of the Proposal

    Phlx proposes to amend Rule 1080 to accommodate Complex Orders in
PIXL. Specifically, current Phlx Rule 1080(n) provides that a Phlx
member (an ``Initiating Member'') may electronically submit for
execution an order it represents as agent on behalf of a public
customer, broker-dealer, or any other entity (a ``PIXL Order'') against
principal interest or against any other order it represents as agent
(an ``Initiating Order'').\4\ The submitted orders are then stopped at
a price and entered into a PIXL Auction seeking price improvement. Phlx
Rule 1080(n) currently does not permit Complex Orders to be entered
into the PIXL. This proposed rule change would permit Phlx members to
send Complex Orders to the PIXL.\5\
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    \4\ See Phlx Rule 1080(n); see also Securities Exchange Act
Release No. 63027 (October 1, 2010), 75 FR 62160 (October 7, 2010)
(approving rules establishing the PIXL Auction for simple orders).
    \5\ A Complex Order is defined as ``an order involving the
simultaneous purchase and/or sale of two or more different options
series in the same underlying security, priced as a net debit or
credit based on the relative prices of the individual components,
for the same account, for the purpose of executing a particular
investment strategy.'' See Phlx Rule 1080 Commentary .08(a)(i).
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A. Auction Eligibility and Auction Process

    In order for a Complex Order to initiate a PIXL Auction, the
Complex Order must be of a conforming ratio \6\ and must be stopped at
a price that is better than the best net price (debit or credit) that
is (1) available on the Complex Order book regardless of the Complex
Order book size; and (2) achievable from the best Phlx bids and offers
for the individual options (an ``improved net price''), provided in
either case that such price is equal to or better than the PIXL Order's
limit price.\7\ The Exchange notes that requiring a Complex Order to be
stopped at a net debit/credit price that improves upon the stated
markets present for the individual components of the Complex Order
ensures that at least one option leg will be executed at a better price
than the established bid or offer for such leg.\8\
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    \6\ Conforming ratios for Complex Orders are defined in
Commentary .08(a)(i) and (a)(ix) to Phlx Rule 1080. Complex Orders
consisting of a ratio other than a conforming ratio will not be
accepted. See Notice, 78 FR at 28657.
    \7\ See proposed Phlx Rule 1080(n)(i)(C); see also Notice, 78 FR
at 28657 for an example of an eligible Complex Order on PIXL. This
provision, as applied to Complex Orders whose smallest leg is less
than 50 contracts, is effective for a pilot period scheduled to
expire on July 18, 2013.
    \8\ See Notice, 78 FR at 28657.
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    In order to initiate a PIXL Auction for a Complex Order (``Complex
Order PIXL Auction''), the Initiating Member must mark the Complex PIXL
Order for Auction processing, and specify either: (1) a single price at
which it seeks to execute the PIXL Order (a ``stop price''); or (2)
that it is willing to either: (a) stop the entire order at a single
stop price and auto-match responses to the Complex Order PIXL Auction
(``PAN responses'' or ``Complex Order PAN responses'') and trading
interest at a price or prices that improve the stop price to a
specified price (a ``Not Worse Than'' or ``NWT'' price); or (b) stop
the entire order at a single stop price and auto-match all PAN
responses and trading interest at or better than the stop

price.\9\ As with the simple order PIXL Auction, once the Initiating
Member has submitted a Complex Order into PIXL, such order may not be
modified or cancelled.\10\ However, the stop price or NWT price may be
improved to the benefit of the PIXL Order during the Complex Order PIXL
Auction.\11\
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    \9\ See proposed Phlx Rule 1080(n)(ii)(A)(2); see also Notice,
78 FR at 28657 for a description of how the initiation of PIXL
Complex Order Auction differs from a PIXL Auction for orders that
are not complex.
    \10\ See proposed Phlx Rule 1080(n)(ii)(A)(2).
    \11\ See id.
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    Like PIXL Auctions for simple orders, Complex Order PIXL Auctions
will last for one second, unless the Complex Order PIXL Auction
terminates early.\12\ Complex Order PAN responses may be submitted by
any member.\13\ The minimum price increment for PAN responses and an
Initiating Member's stop price and/or NWT price for a Complex Order
PIXL Auction will be $0.01.\14\ A Complex Order PAN response must be
equal to or better than the cPBBO \15\ at the time of receipt of the
Complex Order PAN response.\16\
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    \12\ See proposed Phlx Rule 1080(n)(ii)(A)(4). For a description
of the circumstances in which the Complex Order PIXL Auction
terminates early, see text accompanying notes 17 to 19, infra.
    \13\ See proposed Phlx Rule 1080(n)(ii)(A)(5). PAN responses,
among other things, must be properly marked specifying price, size
and side of the market; will not be visible to PIXL Auction
participants; will not be disseminated to the Options Price
Reporting Authority (``OPRA''); and may not exceed the size of the
PIXL Order at any given price point. See proposed Phlx Rule
1080(n)(ii)(A)(5)-(7).
    \14\ See proposed Phlx Rule 1080(n)(ii)(A)(7)(b). For a simple
order PIXL Auction, the minimum price increment for a PAN response
and for an Initiating Member's stop and/or NWT price is the minimum
price increment established in Phlx Rule 1080(n)(ii)(A)(1). See Phlx
Rule 1080(n)(ii)(A)(6), renumbered as proposed Phlx Rule
1080(n)(ii)(A)(7)(a).
    \15\ See proposed Phlx Rule 1080(n)(ii)(A)(9). The term
``cPBBO'' means the best net debit or credit price for a Complex
Order Strategy based on the PBBO for the individual options
components of such Complex Order Strategy, and, where the underlying
security is a component of the Complex Order, the National Best Bid
and/or Offer for the underlying security. See Phlx Rule 1080
Commentary .08(a)(iv).
    \16\ See proposed Phlx Rule 1080(n)(ii)(A)(9). A Complex Order
PAN response submitted with a price that is outside the cPBBO will
be rejected as will a PAN response submitted with a price inferior
to the stop price of the PIXL Order. See id.
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    As with a simple order PIXL Auction, a Complex Order PIXL Auction
will conclude at the earlier of the end of the Auction period \17\ or
any time there is a trading halt on the Exchange in the affected
series.\18\ In addition, a Complex Order PIXL Auction will conclude any
time the cPBBO or the Complex Order book cross the Complex PIXL Order
stop price on the same side of the market as the Complex PIXL
Order.\19\
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    \17\ See Phlx Rule 1080(n)(ii)(B)(1).
    \18\ See proposed Phlx Rule 1080(n)(ii)(B)(4). This provision is
effective for a pilot period set to expire July 18, 2013. See
proposed Phlx Rule 1080(n)(ii)(B)(5). Additionally, Phlx proposes
that an unrelated market or marketable limit Complex Order on the
opposite side of the market from the Complex PIXL Order as well as
orders for the individual components of the Complex Order received
during the Auction will not cause the Auction to end early and will
execute against interest outside of the Auction. If contracts remain
from such unrelated order at the time the Complex Order PIXL Auction
ends, they will be considered for participation in the order
allocation process described in Section II.B infra, and in proposed
Phlx Rule 1080(n)(ii)(E). See proposed Phlx Rule 1080(n)(ii)(D).
    \19\ See proposed Phlx Rule 1080(n)(ii)(B)(3). This provision is
effective for a pilot period set to expire July 18, 2013. See
proposed Phlx Rule 1080(n)(ii)(B)(5). See also infra notes 29-30 and
accompanying text.
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    The Exchange also proposes to modify its existing rules to provide
that all PIXL Orders submitted during the final two seconds of the
trading session will not be eligible to initiate an Auction and will be
rejected.\20\
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    \20\ See proposed Phlx Rule 1080(n)(i)(F).
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B. Complex PIXL Order Execution and Allocation

    Order execution and allocation in a Complex PIXL Auction is similar
to order execution and allocation in a simple order PIXL Auction.\21\
If the Initiating Member selected the single stop price option of the
Complex Order PIXL Auction, the Complex PIXL Order will be executed at
prices that improve the stop price and then at the stop price, with up
to 40% of the remaining contracts after public customer complex
interest is satisfied being allocated to the Initiating Member at the
stop price.\22\ If only one other participant matches the stop price,
then the Initiating Member may be allocated up to 50% of the contracts
remaining after public customer complex interest is satisfied at such
price.\23\ Complex Orders on the PHLX Complex Order Book, PAN
responses, and quotes and orders which comprise the cPBBO at the end of
the Auction will be considered for allocation against the Complex PIXL
Order at a given price point in the following order: (1) Public
customer Complex Orders and PAN responses in time priority; (2) SQT,
RSQT, and non-SQT ROT Complex Orders and PAN responses on a size pro-
rata basis; (3) non-market maker off-floor broker-dealer Complex Orders
and PAN responses on a size pro-rata basis, and (4) quotes and orders
which comprise the cPBBO at the end of the PIXL Auction, with public
customer interest at that price being satisfied first in time priority,
followed by SQT, RSQT, and non-SQT ROT interest satisfied on a size
pro-rata basis, and then non-market maker off-floor broker-dealers on a
size pro-rata basis (collectively (1)-(4), the ``Allocation
Algorithm'').\24\ Thereafter, any remaining contracts, if any, will be
allocated to the Initiating Member, after public customer Complex
Orders and PAN responses have been satisfied.\25\
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    \21\ See 1080(n)(ii)(E)(2)(a)-(c) for a detailed description of
order allocation for a simple PIXL Auction.
    \22\ See proposed Phlx Rule 1080(n)(ii)(E)(2)(d). See also
Notice, 78 FR at 28658-59 for examples illustrating the execution
and allocation of a Complex PIXL Order where the Initiating Member
selected the single stop price option.
    \23\ See proposed Phlx Rule 1080(n)(ii)(E)(2)(d).
    \24\ See id.
    \25\ See id.
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    If the Initiating Member selected the ``stop and NWT'' price option
of the Complex Order PIXL Auction, the Complex PIXL Order will be
executed in the following order: (i) First to Complex Orders and PAN
responses at prices better than the NWT price, as well as to quotes and
orders which comprise the cPBBO if such cPBBO is better than the NWT
price, pursuant to the Allocation Algorithm and (ii) next, to Complex
Orders and PAN responses, as well as to quotes and orders which
comprise the cPBBO at the end of the Auction, at the Initiating
Member's NWT price and at prices better than or equal to the Initiating
Member's stop price, beginning with the NWT price.\26\ The Initiating
Member will be allocated an equal number of contracts as the aggregate
size of all other interest at each price point, except that the
Initiating Member shall be entitled to receive up to 40% (or 50% if
matching only one other participant) of the contracts remaining at the
final price point (including situations where the final price is the
stop price), after public customer Complex Orders and PAN responses
have been satisfied.\27\ If there is other interest at the final price
point the contracts will be allocated to such interest pursuant to the
Allocation Algorithm, and any remaining contracts shall be allocated to
the Initiating Member.\28\
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    \26\ See proposed Phlx Rule 1080(n)(ii)(E)(2)(e)(i). See also
Notice, 78 FR at 28660 for an example illustrating the execution and
allocation of a Complex PIXL Order where the Initiating Member
selected the ``stop and NWT'' option.
    \27\ See proposed Phlx Rule 1080(n)(ii)(E)(2)(e)(ii). In the
case of an Initiating Order with a NWT price at the market, the
Initiating Member shall be allocated an equal number of contracts as
the aggregate size of all other interest at all price points, except
that the Initiating Member shall be entitled to receive up to 40%
(or 50% if matching only one other participant) of the contracts
remaining at the final price point (including situations where the
final price is the stop price), after public customer Complex Orders
and PAN responses have been satisfied. See id.
    \28\ See proposed Phlx Rule 1080(n)(ii)(E)(2)(e)(ii).

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    If a Complex Order PIXL Auction concludes due to the cPBBO or the
Complex Order book crossing the Complex PIXL Order stop price,\29\ the
entire Complex PIXL Order will be executed at the stop price against
executable PAN responses and executable Complex Orders pursuant to the
Allocation Algorithm.\30\ In addition if Complex Order PAN responses
cross the then-existing cPBBO at the time of the conclusion of the
Auction, such PAN responses will be executed, if possible, at their
limit prices.\31\
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    \29\ See, supra note 19 and accompanying text.
    \30\ See proposed Phlx Rule 1080(n)(ii)(C), and supra note 24
and accompanying text. See also Notice, 78 FR at 28658 for an
example of Complex PIXL Order execution and allocation when the
cPBBO or the Complex Order book crosses the Complex Order PIXL stop
price on the same side as the Complex PIXL Order.
    \31\ See proposed Phlx Rule 1080(n)(ii)(F).
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    Finally, the proposed rule change provides for the execution of a
Complex PIXL Order when the Complex Order PIXL Auction price matches a
Complex Order book price on the same side of the market as the Complex
PIXL Order. Specifically, the proposal provides that if the Complex
Order PIXL Auction price is the same as that of a Complex Order on the
Complex Order Book on the same side of the market as the Complex PIXL
Order, the PIXL Order may only be executed at a price that is at least
one minimum price improvement increment better than the resting order's
limit price; or if such resting order's limit price is equal to or
crosses the stop price, then the entire PIXL Order will trade at the
stop price with all better priced interest being considered for
execution at the stop price.\32\
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    \32\ See proposed Phlx Rule 1080(n)(ii)(H). See also Notice, 78
FR at 28658 for an example of Complex PIXL Order execution pursuant
to this provision. This rule is similar to existing Phlx Rule
1080(n)(ii)(G), which includes a parallel provision for simple order
PIXL Auctions. Phlx also proposes modifying Phlx Rule 1080(n)(ii)(G)
such that, if there is an order on the limit order book, on the same
side of the market as the PIXL Order, which is ``equal to or
crosses'' the stop price, then the entire PIXL Order will trade at
the stop price with all better priced interest being considered for
execution at the stop price. Currently, this rule provides that the
entire PIXL Order will trade at the stop price with all better
priced interest being considered for execution at the stop price
only if there is an order on the limit order book on the same side
of the market as the PIXL Order which crosses the stop price. See
Phlx Rule 1080(n)(ii)(G).
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    The Exchange believes that that the proposed execution and
allocation of Complex PIXL Orders ensures and maintains the priority of
established interest as Complex PIXL Orders must be stopped at a price
which improves upon all interest in the Phlx XL system at the time of
receipt.\33\ The Exchange also notes that the proposed allocation
system for Complex Order PIXL Auctions ensures that public customer
Complex Order interest will maintain priority over non-public customer
Complex Order interest, and public customer interest comprising the
cPBBO will be afforded priority over non-public customer interest
comprising the cPBBO.\34\ However, public customer interest comprising
the cPBBO will not have priority over Complex Order or PAN response
interest.\35\ The Exchange believes that because all participant types,
including public customers, may respond to an Auction notification,
public customer interest comprising the cPBBO that choose not to avail
themselves of the opportunity to participate in the Auction should not
be afforded priority over participants offering contra-side interest to
a Complex PIXL Order for all of its components at the same price point
in the Complex Order PIXL Auction.\36\
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    \33\ See Notice, 78 FR at 28659. The Exchange notes that, in the
event that the individual components of the Complex PIXL Order
independently improve during the Auction and new interest is
received during the Auction, Complex Orders and PAN responses will
be afforded priority over individual component interest comprising
the cPBBO at a given price point just as Auction responses and
Complex Orders are afforded priority over individual components of a
Complex Order that independently improve during a Complex Order Live
Auction (``COLA''). See id.
    \34\ See Notice, 78 FR at 28659.
    \35\ See id.
    \36\ See id.
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C. Complex PIXL Orders With Stock/ETF Components

    The Exchange proposes that Complex PIXL Orders may consist of a
stock/ETF component, but such Complex PIXL Orders will only execute
against Complex Orders or PAN responses that also include the stock/ETF
component,\37\ and will not execute against interest comprising the
cPBBO at the end of the Auction.\38\ The proposal further specifies
that member organizations may only submit Complex PIXL Orders,
Initiating Orders, Complex Orders, and/or PAN responses with a stock/
ETF component if such orders/responses comply with the Qualified
Contingent Trade Exemption from Rule 611(a) \39\ of Regulation NMS
pursuant to the Act.\40\ The proposal also provides that where one
component of a Complex PIXL Order, Initiating Order, Complex Order, or
PAN response is the underlying security, the Exchange shall
electronically communicate the underlying security component of a
Complex PIXL Order (together with the Initiating Order, Complex Order,
or PAN response, as applicable) to NOS, the Exchange's designated
broker-dealer, for immediate execution.\41\
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    \37\ See id. at 28660.
    \38\ See proposed Phlx Rule 1080(n)(ii)(E)(2)(g).
    \39\ See 17 CFR 242.611(a).
    \40\ See proposed Phlx Rule 1080(n)(ii)(J)(1). The Exchange
further provides that member organizations submitting such orders
with a stock/ETF component represent that such orders comply with
the Qualified Contingent Trade Exemption. See id. Members of FINRA
or the NASDAQ Stock Market (``NASDAQ'') are required to have a
Uniform Service Bureau/Executing Broker Agreement (``AGU'') with
Nasdaq Options Services LLC in order to trade orders containing a
stock/ETF component; firms that are not members of FINRA or NASDAQ
are required to have a Qualified Special Representative (``QSR'')
arrangement with Nasdaq Options Services LLC (``NOS'') in order to
trade orders containing a stock/ETF component. See id.
    \41\ See proposed Phlx Rule 1080(n)(ii)(J)(2).
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    In addition, the Exchange proposes to provide that when the short
sale price test in Rule 201 of Regulation SHO \42\ is triggered for a
covered security,\43\ NOS will not execute a short sale order in the
underlying covered security component of a Complex PIXL Order,
Initiating Order, Complex Order, or PAN response if the price is equal
to or below the current national best bid.\44\ However, NOS will
execute a short sale order in the underlying covered security component
of a Complex PIXL Order, Initiating Order Complex Order, or PAN
response if such order is marked ``short exempt,'' regardless of
whether it is at a price that is equal to or below the current national
best bid.\45\ If NOS cannot execute the underlying covered security
component of a Complex PIXL Order, Initiating Order, Complex Order, or
PAN Response in accordance with Rule 201 of Regulation SHO, the
Exchange will cancel back the Complex PIXL Order, Initiating Order,
Complex Order, or PAN Response to the member organization that
submitted it.\46\
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    \42\ 17 CFR 242.201.
    \43\ For the purposes of the Exchange's proposed rule change,
the term ``covered security'' has the same meaning as in Rule
201(a)(1) of Regulation SHO. See 17 CFR 242.201(a).
    \44\ See proposed Phlx Rule 1080(n)(ii)(J)(3).
    \45\ See id. See also Notice, 78 FR at 28661.
    \46\ See proposed Phlx Rule 1080(n)(ii)(J)(3).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\47\ In particular, the Commission finds that the proposed
rule change is consistent with Section

6(b)(5) of the Act,\48\ which requires, among other things, that the
rules of a national securities exchange be 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 regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest; and not be designed to
permit unfair discrimination between customers, issuers, brokers or
dealers.
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    \47\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
    \48\ 15 U.S.C. 78f(b)(5).
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    By allowing Phlx members to enter complex orders into the PIXL
Auction, the Commission believes that the proposal could provide
opportunities for complex orders to receive price improvement. Under
the proposal, a complex order entered into the PIXL Auction must be of
a conforming ratio and must be stopped at a price that is better than
the best net price (debit or credit) (1) available on Phlx's Complex
Order book regardless of the Complex Order book size; and (2)
achievable from the best Phlx bids and offers for the individual
options (an ``improved net price''), provided in either case that such
price is equal to or better than the PIXL Order's limit price.\49\ As
noted above, an Initiating Members enters a PIXL Order in the Complex
Order PIXL Auction with an Initiating Order for the full size of the
PIXL Order.\50\ At the conclusion of the PIXL Auction, the PIXL Order
is executed in full at the best prices available, taking into
consideration orders and quotes in the Phlx market, PAN responses, and
the Initiating Order. Thus, a complex order entered into a Complex
Order PIXL Auction would receive an execution at the best price
available at the conclusion of the Auction and, at a minimum, would be
executed in full at the improved net price. In addition, if an improved
net price for a complex order entered in a Complex Order PIXL Auction
could be achieved from bids and offers for the individual legs of the
complex order in the Phlx's market, the complex order would be executed
at the better net price.
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    \49\ See proposed Phlx Rule 1080(n)(i)(C); see also Notice, 78
FR at 28657 for an example of an eligible Complex Order on PIXL.
    \50\ Phlx Rule 1080(n)(i) and 1080(n)(ii)(A).
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    The Commission notes that the complex order spread priority rules
contained in Phlx Rule 1080, Commentary .08(c)(iii), will continue to
apply to Complex PIXL Orders.\51\ By requiring that a Complex PIXL
Order be stopped at a net debit/credit price which improves upon the
stated markets present for the individual components of the Complex
PIXL Order, the Exchange ensures that at least one option leg will be
executed at a better price than the established bid or offer for such
leg.
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    \51\ See Notice, 78 FR at 28657.
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    As described more fully above, the Exchange's proposal provides
specific rules for Complex PIXL Orders which have a stock or ETF
component.\52\ The Commission believes that proposed Phlx Rule
1080(n)(ii)(J) is similar to the rules related to complex orders with
stock/ETF components previously adopted by the Exchange in connection
with Phlx's COLA.\53\ The Commission notes that proposed Phlx Rule
1080(n)(ii)(J)(3) is designed to ensure compliance with Rule 201 of
Regulation SHO, in particular with respect to the obligations of
trading centers, such as the Exchange and NOS, under Regulation
SHO.\54\
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    \52\ See generally Section II.C.
    \53\ See e.g., Phlx Rule 1080.08(h) and proposed Phlx Rule
1080(n)(ii)(J)(3). See also Securities Exchange Act Release No.
63777 (January 26, 2011), 76 FR 5630 (February 1, 2011) (approving
complex orders with stock/ETF components for trading on Phlx's
COLA).
    \54\ See supra notes 39-46.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\55\ that the proposed rule change (SR-Phlx-2013-46), as amended,
be, and hereby is, approved.
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    \55\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\56\
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    \56\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15623 Filed 6-28-13; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 82, Number 156 (Tuesday, August 15, 2017)]
[Proposed Rules]
[Pages 38618-38621]
[FR Doc No: 2017-16569]

=======================================================================
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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA-2017-0716; Product Identifier 2016-NM-165-AD]
RIN 2120-AA64

Airworthiness Directives; Airbus Airplanes

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Notice of proposed rulemaking (NPRM).

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SUMMARY: We propose to supersede Airworthiness Directive (AD) 2016-02-

01, which applies to certain Airbus Model A320-211, -212, and -231
airplanes. AD 2016-02-01 requires repetitive inspections to detect
cracks of the pressurized floor fittings at a certain frame, and
renewal of the zone protective finish or replacement of fittings with
new fittings if necessary. AD 2016-02-01 also provides an optional
modification that is terminating action for the repetitive inspections.
Since we issued AD 2016-02-01, the manufacturer conducted an additional
fatigue analysis of cracking of the pressurized floor fittings and
determined that the optional modification should be a required action.
This proposed AD would retain the requirements of AD 2016-02-01, and
would require accomplishment of the modification. This proposed AD is
intended to complete certain mandated programs intended to support the
airplane reaching its limit of validity (LOV) of the engineering data
that support the established structural maintenance program. We are
proposing this AD to address the unsafe condition on these products.

DATES: We must receive comments on this proposed AD by September 29,
2017.

ADDRESSES: You may send comments, using the procedures found in 14 CFR
11.43 and 11.45, by any of the following methods:
     Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the instructions for submitting comments.
     Fax:<PHONE_NUMBER>.
     Mail: U.S. Department of Transportation, Docket
Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New
Jersey Avenue SE., Washington, DC 20590.
     Hand Delivery: Deliver to Mail address above between 9
a.m. and 5 p.m., Monday through Friday, except Federal holidays.
    For service information identified in this NPRM, contact Airbus,
Airworthiness Office--EIAS, 1 Rond Point Maurice Bellonte, 31707
Blagnac Cedex, France; telephone +33 5 61 93 36 96; fax +33 5 61 93 44
51; email<EMAIL_ADDRESS>Internet http://www.airbus.com. You may view this referenced service information at the
FAA, Transport Standards Branch, 1601 Lind Avenue SW., Renton, WA. For
information on the availability of this material at the FAA, call 425-
227-1221.

Examining the AD Docket

    You may examine the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2017-
0716; or in person at the Docket Management Facility between 9 a.m. and
5 p.m., Monday through Friday, except Federal holidays. The AD docket
contains this proposed AD, the regulatory evaluation, any comments
received, and other information. The street address for the Docket
Operations office (telephone<PHONE_NUMBER>) is in the ADDRESSES section.
Comments will be available in the AD docket shortly after receipt.

FOR FURTHER INFORMATION CONTACT: Sanjay Ralhan, Aerospace Engineer,
International Section, Transport Standards Branch, FAA, 1601 Lind
Avenue SW., Renton, WA 98057-3356; telephone<PHONE_NUMBER>; fax 425-227-
1149.

SUPPLEMENTARY INFORMATION:

Comments Invited

    We invite you to send any written relevant data, views, or
arguments about this proposal. Send your comments to an address listed
under the ADDRESSES section. Include ``Docket No. FAA-2017-0716;
Product Identifier 2016-NM-165-AD'' at the beginning of your comments.
We specifically invite comments on the overall regulatory, economic,
environmental, and energy aspects of this proposed AD. We will consider
all comments received by the closing date and may amend this proposed
AD based on those comments.
    We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We
will also post a report summarizing each substantive verbal contact we
receive about this proposed AD.

Discussion

    As described in FAA Advisory Circular 120-104 (http://www.faa.gov/documentLibrary/media/Advisory_Circular/120-104.pdf), several programs
have been developed to support initiatives that will ensure the
continued airworthiness of aging airplane structure. The last element
of those initiatives is the requirement to establish a LOV of the
engineering data that support the structural maintenance program under
14 CFR 26.21. This proposed AD is the result of an assessment of the
previously established programs by the design approval holder (DAH)
during the process of establishing the LOV for the affected airplanes.
The actions specified in this proposed AD are necessary to complete
certain programs to ensure the continued airworthiness of aging
airplane structure and to support an airplane reaching its LOV.
    On January 9, 2016, we issued AD 2016-02-01, Amendment 39-18380 (81
FR 4878, January 28, 2016) (``AD 2016-02-01''), for certain Airbus
Model A320-211, -212, and -231 airplanes. AD 2016-02-01 was prompted by
an extended service goal analysis by the manufacturer, which revealed
that the compliance times and repetitive inspection intervals to detect
and correct fatigue cracking in the pressurized floor fittings at frame
(FR) 36 should be reduced to meet the original design service goal. AD
2016-02-01 requires repetitive visual inspections to detect cracks of
the pressurized floor fittings at FR 36, and renewal of the zone
protective finish or replacement of fittings with new fittings if
necessary. AD 2016-02-01 also provides an optional terminating action
for the repetitive inspections. We issued AD 2016-02-01 to detect and
correct fatigue cracking in the pressurized floor fittings at FR 36,
which could result in failure of a floor fitting and subsequent
depressurization of the fuselage.
    Since we issued AD 2016-02-01, the manufacturer conducted an
additional fatigue analysis to extend the service goal of the airplane
and to meet the limit of validity requirements of the widespread
fatigue damage (WFD) regulations. Also, the European Aviation Safety
Agency (EASA), which is the Technical Agent for the Member States of
the European Union, has issued EASA Airworthiness Directive 2016-0181,
dated September 13, 2016 (referred to after this as the Mandatory
Continuing Airworthiness Information, or ``the MCAI''), to correct an
unsafe condition for certain Airbus Model A320-211, -212, and -231
airplanes. The MCAI states:

    During centre fuselage certification full scale fatigue testing,
damage was found on the pressurized floor fittings at Frame (FR) 36,
below the lower surface panel. This condition, if not detected and
corrected, could affect the structural integrity of the aeroplane.
    To prevent such damage, Airbus developed modification 21282,
which was introduced in production from MSN [manufacturer serial
number] 0105, to reinforce the pressurized floor fitting lower
surface by changing material. For affected in-service aeroplanes,
Airbus issued Service Bulletin (SB) A320-57-1028, introducing
repetitive inspections, and SB A320-57-1029, which provides
modification instructions.
    DGAC [Direction G[eacute]n[eacute]rale de l'Aviation Civile]
France issued AD 95-099-067 to require these repetitive inspections
and, depending on findings, corrective action(s), while the
modification was specified in that [French] AD as optional
terminating action for these inspections.
    Following new analysis in the frame of Extended Service Goal
exercise, the

inspection thresholds and intervals were revised to meet the
original Design Service Goal. Consequently, EASA issued AD 2013-0226
[which corresponds to FAA AD 2016-02-01 (81 FR 4878, January 28,
2016)] to retain the requirements of DGAC France AD 95-099-067,
which was superseded, but required those actions within reduced
compliance times.
    Since that [EASA] AD was issued, in the frame of Widespread
Fatigue Damages analysis, the situation has been reassessed and it
has been decided to reclassify the modification, still stated as
`optional' terminating action in EASA AD 2013-0226, to the status
`mandatory'.
    For the reasons described above, this [EASA] AD retains the
requirements of EASA AD 2013-0226, which is superseded, but requires
embodiment of the modification as specified in Airbus SB A320-57-
1029.

    You may examine the MCAI in the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2017-
0716.

Related Service Information Under 1 CFR Part 51

    Airbus has issued Service Bulletin A320-57-1028, Revision 02, dated
June 3, 2013. The service information describes procedures for an
inspection to detect cracks of the pressurized floor fittings at FR 36,
renewal of the zone protective finish, and replacement of fittings with
new fittings.
    Airbus has also issued Service Bulletin A320-57-1029, Revision 02,
dated June 16, 1999. The service information describes procedures for
modification of the pressurized floor fittings at FR 36.
    This service information is reasonably available because the
interested parties have access to it through their normal course of
business or by the means identified in the ADDRESSES section.

FAA's Determination and Requirements of This Proposed AD

    This product has been approved by the aviation authority of another
country, and is approved for operation in the United States. Pursuant
to our bilateral agreement with the State of Design Authority, we have
been notified of the unsafe condition described in the MCAI and service
information referenced above. We are proposing this AD because we
evaluated all pertinent information and determined an unsafe condition
exists and is likely to exist or develop on other products of the same
type design.

Costs of Compliance

    We estimate that this proposed AD affects 13 airplanes of U.S.
registry. We estimate the following costs to comply with this proposed
AD:

                                                                     Estimated Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
               Action                         Labor cost            Parts cost       Cost per product                 Cost on U.S. operators
--------------------------------------------------------------------------------------------------------------------------------------------------------
Inspection.........................  11 work-hours x $85 per                  $0  $935 per inspection     $12,155 per inspection cycle.
                                      hour = $935 per inspection                   cycle.
                                      cycle.
Modification.......................  85 work-hours x $85 per               5,320  12,545................  163,085.
                                      hour = $7,225.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We have received no definitive data that would enable us to provide
cost estimates for the on-condition actions specified in this proposed
AD.

Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to
issue rules on aviation safety. Subtitle I, section 106, describes the
authority of the FAA Administrator. ``Subtitle VII: Aviation
Programs,'' describes in more detail the scope of the Agency's
authority.
    We are issuing this rulemaking under the authority described in
``Subtitle VII, Part A, Subpart III, Section 44701: General
requirements.'' Under that section, Congress charges the FAA with
promoting safe flight of civil aircraft in air commerce by prescribing
regulations for practices, methods, and procedures the Administrator
finds necessary for safety in air commerce. This regulation is within
the scope of that authority because it addresses an unsafe condition
that is likely to exist or develop on products identified in this
rulemaking action.
    This AD is issued in accordance with authority delegated by the
Executive Director, Aircraft Certification Service, as authorized by
FAA Order 8000.51C. In accordance with that order, issuance of ADs is
normally a function of the Compliance and Airworthiness Division, but
during this transition period, the Executive Director has delegated the
authority to issue ADs applicable to transport category airplanes to
the Director of the System Oversight Division.

Regulatory Findings

    We determined that this proposed AD would not have federalism
implications under Executive Order 13132. This proposed AD would not
have a substantial direct effect on the States, on the relationship
between the national Government and the States, or on the distribution
of power and responsibilities among the various levels of government.
    For the reasons discussed above, I certify this proposed
regulation:
    1. Is not a ``significant regulatory action'' under Executive Order
12866;
    2. Is not a ``significant rule'' under the DOT Regulatory Policies
and Procedures (44 FR 11034, February 26, 1979);
    3. Will not affect intrastate aviation in Alaska; and
    4. Will not have a significant economic impact, positive or
negative, on a substantial number of small entities under the criteria
of the Regulatory Flexibility Act.

List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by
reference, Safety.

The Proposed Amendment

    Accordingly, under the authority delegated to me by the
Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

PART 39--AIRWORTHINESS DIRECTIVES

0
1. The authority citation for part 39 continues to read as follows:

    Authority:  49 U.S.C. 106(g), 40113, 44701.

Sec.  39.13   [Amended]

0
2. The FAA amends Sec.  39.13 by removing Airworthiness Directive (AD)
2016-02-01, Amendment 39-18380 (81 FR 4878, January 28, 2016), and
adding the following new AD:

Airbus: Docket No. FAA-2017-0716; Product Identifier 2016-NM-165-AD.

(a) Comments Due Date

    We must receive comments by September 29, 2017.

(b) Affected ADs

    This AD replaces AD 2016-02-01, Amendment 39-18380 (81 FR 4878,
January 28, 2016) (``AD 2016-02-01'').

(c) Applicability

    This AD applies to Airbus Model A320-211, -212, -214, and -231
airplanes, certificated in any category, manufacturer serial numbers
up through 0104 inclusive.

(d) Subject

    Air Transport Association (ATA) of America Code 57, Wings.

(e) Reason

    This proposed AD is intended to complete certain mandated
programs intended to support the airplane reaching its limit of
validity (LOV) of the engineering data that support the established
structural maintenance program. We are proposing this AD to prevent
fatigue cracking in the pressurized floor fittings at frame 36,
which could result in the reduced structural integrity of the floor
fittings and subsequent depressurization of the fuselage.

(f) Compliance

    Comply with this AD within the compliance times specified,
unless already done.

(g) Inspection

    (1) At the latest of the times specified in paragraphs
(g)(1)(i), (g)(1)(ii), and (g)(1)(iii) of this AD: Do a detailed
inspection of the pressurized floor fittings at FR 36, in accordance
with the Accomplishment Instructions of Airbus Service Bulletin
A320-57-1028, Revision 02, dated June 3, 2013. Repeat the inspection
thereafter at intervals not to exceed 9,300 flight cycles or 18,600
flight hours, whichever occurs first.
    (i) Before exceeding 20,900 flight cycles or 41,800 flight
hours, whichever occurs first since first flight of the airplane.
    (ii) Within 9,300 flight cycles or 18,600 flight cycles since
the most recent inspection accomplished in accordance with the
Accomplishment Instructions of Airbus Service Bulletin A320-57-1028,
Revision 02, dated June 3, 2013.
    (iii) Within 1,250 flight cycles or 2,500 flight hours after
March 3, 2016 (the effective date of AD 2016-02-01), without
exceeding 12,000 flight cycles since the most recent inspection
accomplished in accordance with the Accomplishment Instructions of
Airbus Service Bulletin A320-57-1028, Revision 02, dated June 3,
2013.
    (2) If any crack is found during any inspection required by
paragraph (g)(1) of this AD: Before further flight, repair using a
method approved by the Manager, International Section, Transport
Standards Branch, FAA; or the European Aviation Safety Agency
(EASA); or Airbus's EASA Design Organization Approval (DOA).

(h) Modification

    Before exceeding 48,000 total flight cycles or 96,000 total
flight hours, whichever occurs first since first flight of the
airplane: Modify (replace aluminum fittings with titanium fittings)
the pressurized floor fittings at FR 36, in accordance with the
Accomplishment Instructions of Airbus Service Bulletin A320-57-1029,
Revision 02, dated June 16, 1999. Accomplishment of this
modification is terminating action for the repetitive inspections
required by paragraph (g) of this AD for the modified airplane only.

(i) Credit for Previous Actions

    (1) This paragraph provides credit for the inspection required
by paragraph (g) of this AD, if that inspection was performed before
the effective date of this AD using Airbus Service Bulletin A320-57-
1028, dated August 12, 1991; or Revision 01, dated June 3, 2013.
    (2) This paragraph provides credit for the modification required
by paragraph (h) of this AD, if that modification was performed
before the effective date of this AD using Airbus Service Bulletin
A320-57-1029, dated August 12, 1991; or Revision 01, dated November
10, 1992.

(j) Other FAA AD Provisions

    The following provisions also apply to this AD:
    (1) Alternative Methods of Compliance (AMOCs): The Manager,
International Section, Transport Standards Staff, FAA, has the
authority to approve AMOCs for this AD, if requested using the
procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19,
send your request to your principal inspector or local Flight
Standards District Office, as appropriate. If sending information
directly to the International Section, send it to the attention of
the person identified in paragraph (k)(2) of this AD. Information
may be emailed to<EMAIL_ADDRESS>Before using any
approved AMOC, notify your appropriate principal inspector, or
lacking a principal inspector, the manager of the local flight
standards district office/certificate holding district office.
    (2) Contacting the Manufacturer: As of the effective date of
this AD, for any requirement in this AD to obtain corrective actions
from a manufacturer, the action must be accomplished using a method
approved by the Manager, International Section, Transport Standards
Branch, FAA; or the EASA; or Airbus's DOA. If approved by the DOA,
the approval must include the DOA-authorized signature.

(k) Related Information

    (1) Refer to Mandatory Continuing Airworthiness Information
(MCAI) EASA AD 2016-0181, dated September 13, 2016, for related
information. This MCAI may be found in the AD docket on the Internet
at http://www.regulations.gov by searching for and locating Docket
No. FAA-2017-0716.
    (2) For more information about this AD, contact Sanjay Ralhan,
Aerospace Engineer, International Section, Transport Standards
Branch, FAA, 1601 Lind Avenue SW., Renton, WA 98057-3356; telephone
425-227-1405; fax<PHONE_NUMBER>.
    (3) For service information identified in this AD, contact
Airbus, Airworthiness Office--EIAS, 1 Rond Point Maurice Bellonte,
31707 Blagnac Cedex, France; telephone +33 5 61 93 36 96; fax +33 5
61 93 44 51; email<EMAIL_ADDRESS>Internet http://www.airbus.com. You may view this referenced service information at
the FAA, Transport Standards Branch, 1601 Lind Avenue SW., Renton,
WA. For information on the availability of this material at the FAA,
call<PHONE_NUMBER>.

    Issued in Renton, Washington, on July 28, 2017.
John P. Piccola, Jr.,
Acting Director, System Oversight Division, Aircraft Certification
Service.
[FR Doc. 2017-16569 Filed 8-14-17; 8:45 am]
 BILLING CODE 4910-13-P