[Federal Register Volume 83, Number 39 (Tuesday, February 27, 2018)]
[Notices]
[Pages 8538-8554]
[FR Doc No: 2018-03894]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82756; File No. SR-PEARL-2018-02]

Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
of a Proposed Rule Change To Adopt Rules Relating to Trading in Index
Options

February 21, 2018.
    Pursuant to the provisions of 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 February 8, 2018, MIAX PEARL, LLC (``MIAX
PEARL'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') a 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to adopt rules relating to trading in index
options.
    The text of the proposed rule change is available on the Exchange's
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX
PEARL's principal office, and at the Commission's Public Reference
Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to adopt new rules and amend existing
rules to allow the Exchange to list and trade options on indices. The
proposed rules include listing and maintenance criteria for options on
underlying indices, rules on dissemination of index values, position
and exercise limits for index options, exemptions from the limits, and
terms of index options contracts. All of the proposed rules and changes
to existing Exchange rules are based on existing rules of other options
exchanges.\3\ The proposed rules are intended to expand the Exchange's
capability to introduce and trade both existing and new and innovative
index products on the MIAX PEARL System.\4\
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    \3\ See Miami International Securities Exchange, LLC (``MIAX
Options'') Rules, Chapter XVIII, Index Options; Nasdaq ISE,
(``Nasdaq ISE'') Rules, Chapter 20, Index Rules; Nasdaq PHLX
(``Phlx'') Rules 1000A-1108A; and Cboe Options Exchange (``Cboe'')
Rules, Chapter XXIV, Index Options.
    \4\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
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    Because the rules related to trading options on indices are product
specific in many areas, the Exchange will need to file additional
proposed rule changes with the Securities and Exchange Commission
(``SEC'' or ``Commission'') when the Exchange identifies specific
products.\5\ For purposes of this proposed rule change, certain rules
indicate that they apply to ``Specified'' indices. Proposed MIAX PEARL
Rules 1800, 1801(n), 1804(a), 1807(a), 1809, and 1811 all contain
provisions that are dependent upon the Exchange identifying specific
index products in the rule. Accordingly, MIAX PEARL Rule 1800 states
that where the rules in Chapter XVIII indicate that particular indices
or requirements with respect to particular indices will be
``Specified,'' MIAX PEARL's rules will be amended when MIAX Options \6\
files a proposed rule change with the Commission pursuant to Section 19
of the Act \7\ and Rule 19b-4 \8\ thereunder to specify such indices or
requirements.
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    \5\ The Exchange proposes to separately file a request for an
exemption from the rule filing requirements of Section 19(b) of the
Act for changes to MIAX PEARL Chapter XVIII to the extent such rules
are effected solely by virtue of a change to MIAX Options Chapter
XVIII, including when MIAX Options identifies specific new products
to list.
    \6\ See id.
    \7\ 15 U.S.C. 78s.
    \8\ 17 CFR 240.19b-4.
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    MIAX PEARL proposes to adopt new Chapter XVIII to the Exchange's
rules, which incorporate by reference Chapter XVIII of rules of the
Exchange's affiliate, MIAX Options.\9\ In addition, MIAX PEARL proposes
to amend Exchange Rule 504, Trading Halts. The Exchange notes that MIAX
Options filed a substantially similar proposed rule change to adopt
rules relating to trading index options (the ``MIAX Options Rule
Filing''), which was approved by the Commission on September 27,
2017.\10\ The Exchange also notes that the MIAX Options Rule Filing
proposed rule amendments to MIAX Options Rule 308, Exemptions from
Position Limits; MIAX Options Rule 313, Other Restrictions on Options
Transactions and Exercises; and MIAX Options Rule 700, Exercise of
Option Contracts, all of which have already been incorporated by
reference into MIAX PEARL's rules, and thus are already applicable to
MIAX PEARL members.\11\ Each of the proposed rules to be incorporated
by reference are discussed in detail below, but the text of the
proposed rule change as set forth in Exhibit 5 of this rule filing
specifies that the rules contained in MIAX Options Chapter XVIII are
hereby incorporated by reference into these MIAX PEARL Rules, and are
thus MIAX PEARL Rules and thereby applicable to MIAX PEARL Members.
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    \9\ The Exchange notes that it is not amending MIAX PEARL Rule
503, Openings on the Exchange, because unlike MIAX Options Rule 503,
MIAX PEARL Rule 503 does not distinguish between equity and index
options. In addition, the Exchange notes that it is not amending
MIAX PEARL Rule 603, Obligations of Market Makers, because unlike
MIAX Options, MIAX PEARL does not use bid/ask differentials on the
Exchange. Additionally, the Exchange is not amending MIAX PEARL Rule
527, Exchange Liability, because the amendment to the corresponding
MIAX Options Rule was duplicative and the Exchange anticipates
deleting the duplicative rule text in the future.
    \10\ See Securities Exchange Act Release No. 81739 (September
27, 2017), 82 FR 46111 (October 3, 2017) (SR-MIAX-2017-39)
(``Approval Order'').
    \11\ Id.
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    Specifically, the rule provides: ``[t]he rules contained in MIAX
Options Exchange Chapter XVIII, as such rules may be in effect from
time to time (the ``Chapter XVIII Rules''), are hereby incorporated by
reference into this MIAX PEARL Chapter XVIII, and are thus MIAX PEARL
Rules and thereby applicable to MIAX PEARL Members. MIAX PEARL Members
shall comply with the Chapter XVIII Rules as though such rules were
fully-set forth herein. All defined terms, including any variations
thereof, contained in Chapter XVIII Rules shall be read to refer to the
MIAX PEARL related meaning of such term. Solely by way of example, and
not in limitation or in exhaustion: The defined term ``Exchange'' in
Chapter XVIII Rules shall be read to refer to MIAX PEARL; the defined
term ``Rule'' in the Chapter XVIII Rules shall be read to refer to the
MIAX PEARL Rule; and the defined term ``Member'' in the Chapter XVIII
Rules shall be read to refer to the MIAX PEARL Member. Any reference to
MIAX Options Rule 506(d) will be construed to reference corresponding
MIAX PEARL Rule 506(e).''
Proposed Index Rules
    The Exchange is proposing to adopt Chapter XVIII, Index Options, in
the MIAX PEARL Rules. Proposed Rule 1800, Application of Index Rules,
states that the Rules in proposed Chapter XVIII are applicable only to
index options (options on indices of securities as defined below). The
Rules in current Chapters I through XVII are also applicable to the
options provided for in proposed Chapter XVIII, unless such current
Rules are specifically replaced or are supplemented by Rules in Chapter
XVIII. Where the Rules in Chapter XVIII indicate that particular
indices or requirements with respect to particular indices will be
``Specified,'' the Exchange shall file a proposed rule change with the
Commission to specify such indices or requirements.\12\
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    \12\ See supra note 5.
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Definitions
    Proposed MIAX PEARL Rule 1801, Definitions, contains the necessary
definitions for index options trading.\13\ Specifically, the following
definitions will apply to index options on MIAX PEARL:
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    \13\ The proposed Rule is based on Nasdaq ISE Rule 2001.
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    (a) The term ``aggregate exercise price'' means the exercise price
of the options contract times the index multiplier.
    (b) The term ``American-style index option'' means an option on an
industry or market index that can be exercised on any business day
prior to expiration, including the business day of expiration in the
case of an option contract expiring on a business day.
    (c) The term ``A.M.-settled index option'' means an index options
contract for which the current index value at expiration shall be
determined as provided in Rule 1809(a)(5).\14\
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    \14\ The last day of trading for A.M.-settled index options
shall be the business day preceding the business day of expiration,
or, in the case of an option contract expiring on a day that is not
a business day, the business day preceding the last day of trading
in the underlying securities prior to the expiration date. The
current index value at the expiration of an A.M.-settled index
option shall be determined, for all purposes under these Rules and
the Rules of the Clearing Corporation, on the last day of trading in
the underlying securities prior to expiration, by reference to the
reported level of such index as derived from first reported sale
(opening) prices of the underlying securities on such day, except
that: (i) In the event that the primary market for an underlying
security does not open for trading on that day, the price of that
security shall be determined, for the purposes of calculating the
current index value at expiration, as set forth in Rule 1808(g),
unless the current index value at expiration is fixed in accordance
with the Rules and By-Laws of the Clearing Corporation; and (ii) in
the event that the primary market for an underlying security is open
for trading on that day, but that particular security does not open
for trading on that day, the price of that security, for the
purposes of calculating the current index value at expiration, shall
be the last reported sale price of the security. See proposed Rule
1809(a)(5).

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    (d) The term ``call'' means an options contract under which the
holder of the option has the right, in accordance with the terms of the
option, to purchase from the Clearing Corporation the current index
value times the index multiplier.
    (e) The term ``current index value'' with respect to a particular
index options contract means the level of the underlying index reported
by the reporting authority for the index, or any multiple or fraction
of such reported level specified by the Exchange. The current index
value with respect to a reduced-value long term options contract is
one-tenth of the current index value of the related index option. The
``closing index value'' shall be the last index value reported on a
business day.
    (f) The term ``exercise price'' means the specified price per unit
at which the current index value may be purchased or sold upon the
exercise of the option.
    (g) The term ``European-style index option'' means an option on an
industry or market index that can be exercised only on the business day
of expiration, or, in the case of an option contract expiring on a day
that is not a business day, the last business day prior to the day it
expires.
    (h) The term ``Foreign Currency Index'' means an index designed to
track the performance of a basket of currencies, as provided in the
table in Rule 1805A.
    (i) The term ``index multiplier'' means the amount specified in the
contract by which the current index value is to be multiplied to arrive
at the value required to be delivered to the holder of a call or by the
holder of a put upon valid exercise of the contract.
    (j) The terms ``industry index'' and ``narrow-based index'' mean an
index designed to be representative of a particular industry or a group
of related industries or an index whose constituents are all
headquartered within a single country.
    (k) The term ``market index'' and ``broad-based index'' mean an
index designed to be representative of a stock market as a whole or of
a range of companies in unrelated industries.
    (l) The term ``put'' means an options contract under which the
holder of the option has the right, in accordance with the terms and
provisions of the option, to sell to the Clearing Corporation the
current index value times the index multiplier.
    (m) The term ``Quarterly Options Series'' means, for the purposes
of Chapter XVIII, a series in an index options class that is approved
for listing and trading on the Exchange in which the series is opened
for trading on any business day and that expires at the close of
business on the last business day of a calendar quarter.
    (n) The term ``reporting authority'' with respect to a particular
index means the institution or reporting service designated by the
Exchange as the official source for (1) calculating the level of the
index from the reported prices of the underlying securities that are
the basis of the index and (2) reporting such level. The reporting
authority for each index approved for options trading on the Exchange
shall be Specified (as provided in Rule 1800) in a table in
Interpretations and Policies .01 to Rule 1801.
    (o) The term ``Short Term Option Series'' means, for the purposes
of Chapter XVIII, a series in an index option class that is approved
for listing and trading on the Exchange in which the series is opened
for trading on any Thursday or Friday that is a business day and that
expires on the Friday of the following business week that is a business
day. If a Friday is not a business day, the series may be opened (or
shall expire) on the first business day immediately prior to that
Friday.
    (p) The term ``underlying security'' or ``underlying securities''
with respect to an index options contract means any of the securities
that are the basis for the calculation of the index.
Listing Standards
    Proposed Rule 1802, Designation of an Index, contains the general
listing standards for index options. Proposed Rule 1802(a) provides
that the component securities of an index underlying an index option
contract need not meet the requirements of Rule 402.\15\ Except as set
forth in subparagraph (b) and (d) (as described below), the listing of
a class of index options requires the filing of a proposed rule change
to be approved by the Commission.
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    \15\ Exchange Rule 402, Criteria for Underlying Securities, sets
forth the criteria that must be met by underlying equity securities
with respect to which put or call option contracts are approved for
listing and trading on the Exchange.
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    Proposed Rule 1802(b) describes the initial listing standards for a
narrow-based index to be traded on the Exchange. The term ``narrow
based index'' means an index designed to be representative of a
particular industry or a group of related industries or an index whose
constituents are all headquartered within a single country. Pursuant to
proposed Rule 1802(b), the Exchange may trade options on a narrow-based
index pursuant to Rule 19b-4(e) of the Act,\16\ if each of the
following conditions is satisfied:
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    \16\ 17 CFR 242.19b-4(e).
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    (1) The options are designated as A.M.-settled index options;
    (2) The index is capitalization-weighted, price-weighted, equal
dollar-weighted, or modified capitalization-weighted, and consists of
10 or more component securities;
    (3) Each component security has a market capitalization of at least
$75 million, except that for each of the lowest weighted component
securities in the index that in the aggregate account for no more than
ten percent (10%) of the weight of the index, the market capitalization
is at least $50 million;
    (4) Trading volume of each component security has been at least
1,000,000 shares for each of the last six months, except that for each
of the lowest weighted component securities in the index that in the
aggregate account for no more than ten percent (10%) of the weight of
the index, trading volume has been at least 500,000 shares for each of
the last six months;
    (5) In a capitalization-weighted index or a modified
capitalization-weighted index, the lesser of the five highest weighted
component securities in the index or the highest weighted component
securities in the index that in the aggregate represent at least thirty
percent (30%) of the total number of component securities in the index
each have had an average monthly trading volume of at least 2,000,000
shares over the past six months;
    (6) No single component security represents more than thirty
percent (30%) of the weight of the index, and the five highest weighted
component securities in the index do not in the aggregate account for
more than fifty percent (50%) (sixty five percent (65%) for an index
consisting of fewer than

twenty five (25) component securities) of the weight of the index;
    (7) Component securities that account for at least ninety percent
(90%) of the weight of the index and at least eighty percent (80%) of
the total number of component securities in the index satisfy the
requirements of Rule 402 applicable to individual underlying
securities;
    (8) Each component security must be an ``NMS stock'' as defined in
Rule 600 of Regulation NMS under the Act; \17\
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    \17\ 17 CFR 242.11Aa3-1.
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    (9) Non-U.S. component securities (stocks or ADRs) that are not
subject to comprehensive surveillance agreements do not in the
aggregate represent more than twenty percent (20%) of the weight of the
index;
    (10) The current index value is widely disseminated at least once
every fifteen (15) seconds by the Options Price Reporting Authority
(``OPRA''), the Consolidated Tape Association (``CTA''), the Nasdaq
Index Dissemination Service (``NIDS''), or one or more major market
data vendors during the time options on the index are traded on the
Exchange;
    (11) An equal dollar-weighted index will be rebalanced at least
once every calendar quarter; and
    (12) If an underlying index is maintained by a broker-dealer, the
index is calculated by a third party who is not a broker-dealer, and
the broker-dealer has erected an information barrier around its
personnel who have access to information concerning changes in and
adjustments to the index.
    The above initial listing standards are the same as the initial
listing standards currently in place on other exchanges.\18\
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    \18\ See, e.g., Miami International Securities Exchange (``MIAX
Options'') Rule 1802(b); Nasdaq ISE, (``Nasdaq ISE'') Rule 2002(b);
Nasdaq PHLX (``Phlx'') Rule 1009A(b); and Cboe Options Exchange,
Inc. (``Cboe'') Rule 24.2(b).
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    In addition to the initial listing standards, certain maintenance
listing standards, listed below, apply to each class of index options
originally listed pursuant to proposed Rule 1802(b).
    Specifically, proposed Rule 1802(c) provides that the requirements
stated in proposed Rules 1802(b)(1), (3), (6), (7), (8), (9), (10),
(11) and (12) (set forth above) must continue to be satisfied, provided
that the requirements stated in proposed Rule 1802(b)(6) below
(relating to broad-based indices) must be satisfied only as of the
first day of January and July in each year.
    In addition to maintaining the initial criteria in the proposed
sub-paragraphs listed above, proposed Rule1802(c) states that, in order
for an index to remain listed on the Exchange:
    (1) The total number of component securities in the index may not
increase or decrease by more than 33 \1/3\ percent from the number of
component securities in the index at the time of its initial listing,
and in no event may be less than nine component securities;
    (2) Trading volume of each component security in the index must be
at least 500,000 shares for each of the last six months, except that
for each of the lowest weighted component securities in the index that
in the aggregate account for no more than ten percent (10%) of the
weight of the index, trading volume must be at least 400,000 shares for
each of the last six (6) months; and
    (3) In a capitalization-weighted index or a modified
capitalization-weighted index, the lesser of the five highest weighted
component securities in the index or the highest weighted component
securities in the index that in the aggregate represent at least thirty
percent (30%) of the total number of stocks in the index each have had
an average monthly trading volume of at least 1,000,000 shares over the
past six months. In the event a class of index options listed on the
Exchange fails to satisfy the maintenance listing standards set forth
herein, the Exchange shall not open for trading any additional series
of options of that class unless such failure is determined by the
Exchange not to be significant and the SEC concurs in that
determination, or unless the continued listing of that class of index
options has been approved by the SEC under Section 19(b) (2) of the
Act.\19\
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    \19\ 15 U.S.C. 78s(b)(2).
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    These maintenance listing standards are the same as the maintenance
standards currently in place on other exchanges.\20\
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    \20\ See, e.g., MIAX Options Rule 1802(c); Nasdaq ISE Rule
2002(c); Nasdaq Phlx Rule 1009A(c); and Cboe Rule 24.2(c).
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    Proposed Rule 1802(d) states that the Exchange may trade options on
a broad-based index \21\ if each of the following conditions is
satisfied:
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    \21\ The term ``market index'' and ``broad-based index'' mean an
index designed to be representative of a stock market as a whole or
of a range of companies in unrelated industries. See proposed Rule
1801(k).
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    (1) The index is broad-based, as defined in Rule 1801(k);
    (2) Options on the index are designated as A.M.-settled;
    (3) The index is capitalization-weighted, modified capitalization-
weighted, price-weighted, or equal dollar-weighted;
    (4) The index consists of 50 or more component securities;
    (5) Component securities that account for at least ninety-five
percent (95%) of the weight of the index have a market capitalization
of at least $75 million, except that component securities that account
for at least sixty-five percent (65%) of the weight of the index have a
market capitalization of at least $100 million;
    (6) Component securities that account for at least eighty percent
(80%) of the weight of the index satisfy the requirements of Rule 402
applicable to individual underlying securities;
    (7) Each component security that accounts for at least one percent
(1%) of the weight of the index has an average daily trading volume of
at least 90,000 shares during the last six month period;
    (8) No single component security accounts for more than ten percent
(10%) of the weight of the index, and the five highest weighted
component securities in the index do not, in the aggregate, account for
more than thirty-three percent (33%) of the weight of the index;
    (9) Each component security must be an ``NMS stock'' as defined in
Rule 600 of Regulation NMS under the Act; \22\
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    \22\ 17 CFR 242.600.
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    (10) Non-U.S. component securities (stocks or ADRs) that are not
subject to comprehensive surveillance agreements do not, in the
aggregate, represent more than twenty percent (20%) of the weight of
the index;
    (11) The current index value is widely disseminated at least once
every fifteen (15) seconds by the Options Price Reporting Authority
(``OPRA''), the Consolidated Tape Association (``CTA''), the Nasdaq
Index Dissemination Service (``NIDS''), or one or more major market
data vendors during the time options on the index are traded on the
Exchange;
    (12) The Exchange reasonably believes it has adequate system
capacity to support the trading of options on the index, based on a
calculation of the Exchange's current ISCA allocation and the number of
new messages per second expected to be generated by options on such
index;
    (13) An equal dollar-weighted index is rebalanced at least once
every calendar quarter;
    (14) If an index is maintained by a broker-dealer, the index is
calculated by a third-party who is not a broker-dealer, and the broker-
dealer has erected an informational barrier around its personnel who
have access to information concerning changes in, and adjustments to,
the index; and
    (15) The Exchange has written surveillance procedures in place with

respect to surveillance of trading of options on the index.
    These initial listing standards are the same as the initial listing
standards for broad-based indices currently in place on other
exchanges.\23\
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    \23\ See, e.g., MIAX Options Rule 1802(d); Nasdaq ISE Rule
2002(d); Nasdaq Phlx Rule 1009A(d); and Cboe Rule 24.2(f).
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    Proposed Rule 1802(e) sets forth the maintenance listing standards
for broad-based indices. Specifically, the following maintenance
listing standards shall apply to each class of index options originally
listed pursuant to proposed Rule 1802(d).
    First, the requirements set forth in the proposed initial listing
standards set forth in proposed Rules 1802(d)(1)-(d)(3), and proposed
Rules 1802(d)(9)-(d)(15) must continue to be satisfied. The
requirements set forth in proposed Rules 1802(d)(5)-(d)(8) must be
satisfied only as of the first day of January and July in each year.
    Additionally, for broad-based indices, the total number of
component securities in the index may not increase or decrease by more
than ten percent (10%) from the number of component securities in the
index at the time of its initial listing.
    Finally, proposed Rule 1802(e) states that, in the event a class of
index options listed on the Exchange fails to satisfy the maintenance
listing standards set forth in the proposed Rule, the Exchange shall
not open for trading any additional series of options of that class
unless the continued listing of that class of index options has been
approved by the Commission under Section 19(b)(2) of the Act.\24\
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    \24\ 15 U.S.C 78s(b)(2).
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    These maintenance listing standards are the same as the maintenance
standards for broad-based indices that are currently in place on other
exchanges.\25\
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    \25\ See, e.g., MIAX Options Rule 1802(e); Nasdaq ISE Rule
2002(e); Nasdaq Phlx Rule 1009A(e); and Cboe Rule 24.2(g).
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    The Exchange believes that the requirements in the proposed listing
standards regarding, among other things, the minimum market
capitalization, trading volume, and relative weightings of an
underlying index's component stocks are designed to ensure that the
markets for the index's component stocks are adequately capitalized and
sufficiently liquid, and that no one stock dominates the index. The
Exchange believes that these requirements minimize the potential for
manipulating the underlying index.
    The Exchange further believes that the requirement in proposed Rule
1802(b)(10) (with respect to narrow-based index options) that the
current underlying index value will be reported at least once every
fifteen (15) seconds during the time the index options are traded on
the Exchange, and the requirement in proposed Rule 1802(d)(11) (with
respect to broad-based index options) that the current index value be
widely disseminated at least once every fifteen (15) seconds by the
OPRA, CTA/CQ, NIDS or by one or more major market data vendors during
the time an index option trades on MIAX PEARL should provide
transparency with respect to current index values and contribute to the
transparency of the market for index options. In addition, the Exchange
believes that the requirement in proposed Rule 1802(d)(2) that an index
option be A.M.-settled, rather than on closing prices, should help to
reduce the potential impact of expiring index options on the market for
the index's component securities.
    Proposed Rule 1803, Dissemination of Information, requires the
dissemination of index values as a condition to the trading of options
on an index. The proposed rule includes the requirement that the
Exchange disseminate, or assure that the current index value is
disseminated, after the close of business and from time-to-time on days
on which transactions in index options are made on the Exchange. The
proposed rule also requires the Exchange to maintain, in files
available to the public, information identifying the components whose
prices are the basis for calculation of the index and the method used
to determine the current index value.\26\
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    \26\ This proposed Rule is substantially similar to Nasdaq ISE
Rule 2003 and Cboe Rule 24.3.
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    The Exchange is proposing to adopt Rules 1804 through 1807 relating
to position limits, exemptions from position limits, and exercise
limits in index options. These proposed rules contain the standard
position limit and exercise limits for Broad-Based, Industry (narrow-
based) and Foreign Currency index options, as well as exemption
standards and the procedures for requesting exemptions from those
proposed rules.\27\
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    \27\ These proposed Rules are based on Nasdaq ISE Rule 2006.
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    Proposed Rule 1804, Position Limits for Broad-Based Index Options,
states that Exchange Rule 307 generally shall govern position limits
for broad-based index options, as modified by proposed Rule 1804.
Specifically, the proposed rule states that there may be no position
limit for certain Specified (as provided in Rule 1800) \28\ broad-based
index options contracts. Except as otherwise indicated below, the
position limit for a broad-based index option shall be 25,000 contracts
on the same side of the market. Reduced-value options \29\ on broad-
based security indexes for which full-value options have no position
and exercise limits will similarly have no position and exercise
limits. All other broad-based index options contracts shall be subject
to a contract limitation fixed by the Exchange, which shall not be
larger than the limits provided in the chart below.
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    \28\ See supra note 5.
    \29\ See proposed Rule 1809(b)(2).

------------------------------------------------------------------------
                                Standard limit (on the
 Broad-based underlying index      same side of the       Restrictions
                                        market)
------------------------------------------------------------------------
To be Specified...............  To be Specified.......  To be Specified.
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    Proposed Rules 1804(b) through (d) describe situations in which
index option contracts will, or will not, be aggregated for purposes of
establishing the number of contracts in a position. Specifically,
proposed Rule 1804(b) states that that index options contracts shall
not be aggregated with options contracts on any stocks whose prices are
the basis for calculation of the index. Proposed Rule 1804(c) states
that positions in reduced-value index options shall be aggregated with
positions in full-value indices. For such purposes, ten reduced-value
contracts shall equal one contract. Finally, proposed Rule 1804(d)
states that positions in Short Term Option Series and Quarterly Options
Series shall be aggregated with positions in options contracts on the
same index.\30\
---------------------------------------------------------------------------

    \30\ This is substantially similar to Nasdaq ISE Rule 2004 and
Cboe Rule 24.4.
---------------------------------------------------------------------------

    Proposed Rule 1805, Position Limits for Industry Index Options,
states that Rule 307 generally shall govern position

limits for industry index \31\ options, as modified by proposed Rule
1805.
---------------------------------------------------------------------------

    \31\ For purposes of this proposed rule change and these
proposed rules, the term ``industry index'' has the same meaning as
the term ``narrow-based index.''
---------------------------------------------------------------------------

    Proposed Rule 1805(a) sets forth position limits for industry index
options. These position limits, once established by the Exchange, must
be reviewed and determined on a semi-annual basis, as described below.
    The specific position limits applicable to an industry index are:
    (i) 18,000 contracts if the Exchange determines, at the time of a
review conducted as described below, that any single underlying stock
accounted, on average, for thirty percent (30%) or more of the index
value during the thirty (30)-day period immediately preceding the
review; or
    (ii) 24,000 contracts if the Exchange determines, at the time of a
review conducted as set forth below, that any single underlying stock
accounted, on average, for twenty percent (20%) or more of the index
value or that any five (5) underlying stocks together accounted, on
average, for more than fifty percent (50%) of the index value, but that
no single stock in the group accounted, on average, for thirty percent
(30%) or more of the index value, during the thirty (30)-day period
immediately preceding the review; or
    (iii) 31,500 contracts if the Exchange determines that the
conditions specified above which would require the establishment of a
lower limit have not occurred.
    Proposed Rule 1805(a)(2) requires the Exchange make the
determinations of these specific position limits described above with
respect to options on each industry index, first at the commencement of
trading of such options on the Exchange and thereafter review the
determination semi-annually on January 1 and July 1.
    Proposed Rule 1805(a)(3) describes the procedures to be taken by
the Exchange at the time of each semi-annual review. Specifically, if
the Exchange determines, at the time of the semi-annual review, that
the position limit in effect with respect to options on a particular
industry index is lower than the maximum position limit permitted by
the criteria set forth in Rule 1805(a)(1), the Exchange may effect an
appropriate position limit increase immediately.\32\
---------------------------------------------------------------------------

    \32\ For example, if the conditions specified in proposed Rule
1805(a)(ii) are determined to exist which would allow a position
limit of 24,000 contracts and the current position limit for the
option, based upon the previous review, has been established as
18,000 contracts, the Exchange may effect a position limit increase
to 24,000 contracts immediately.
---------------------------------------------------------------------------

    Conversely, if the Exchange determines, at the time of a semi-
annual review, that the position limit in effect with respect to
options on a particular industry index exceeds the maximum position
limit permitted by the criteria set forth in proposed Rule 1805(a)(1),
the Exchange shall reduce the position limit applicable to such options
to a level consistent with such criteria. Such a reduction would not
become effective until after the expiration date of the most distantly
expiring options series relating to the industry index that is open for
trading on the date of the review, and such a reduction shall not
become effective if the Exchange determines, at the next semi-annual
review, that the existing position limit applicable to such options is
consistent with the criteria set forth in proposed Rule 1805(a)(1).\33\
The purpose of this provision is to protect investors with open
positions as of the date of the review from inadvertently violating the
new, reduced position limit. Additionally, an Exchange determination
(prior to the effectiveness of the new, lower position limit due to
remaining unexpired series) that the criteria permitting the higher
position limit again exist obviates the need for the lower position
limit and the lower position limit will not take effect.
---------------------------------------------------------------------------

    \33\ The proposed Rule is virtually identical to Cboe Rule
24.4A.
---------------------------------------------------------------------------

    Proposed Rules 1805(b)-(d) describe situations in which industry
index option contracts will, or will not, be aggregated for purposes of
establishing the number of contracts in a position. Just as with broad-
based index options,\34\ proposed Rules 1805(b)-(d) state that index
options contracts shall not be aggregated with options contracts on any
stocks whose prices are the basis for calculation of the index.
Positions in reduced-value index options shall be aggregated with
positions in full-value index options. For such purposes, ten (10)
reduced-value options shall equal one (1) full-value contract.
Positions in Short Term Option Series and Quarterly Options Series
shall be aggregated with positions in options contracts on the same
index.
---------------------------------------------------------------------------

    \34\ See proposed Rules 1804(b)-(d).
---------------------------------------------------------------------------

    Proposed Rule 1805A, Position Limits for Foreign Currency Index
Options, includes a table to be completed by the Exchange upon the
Exchange's determination to list and trade options overlying a Foreign
Currency Index (subject to the Commission's approval of a proposed rule
change). Under the proposed rule, option contracts on a Foreign
Currency Index shall be subject to the position limits described in the
table below.

------------------------------------------------------------------------
                                Standard limit (on the
    Foreign currency index         same side of the       Restrictions
                                        market)
------------------------------------------------------------------------
To be Specified...............  To be Specified.......  To be Specified.
------------------------------------------------------------------------

    Proposed Rule 1806, Exemptions from Position Limits, describes the
broad-based index hedge exemption, the industry index hedge exemption,
the application on the Exchange of exemptions granted by other options
exchanges, and the delta-based index hedge exemption.
    Proposed Rule 1806(a) describes the broad-based index hedge
exemption. The broad-based index hedge exemption is in addition to the
other exemptions available under Exchange Rules, Interpretations and
Policies.\35\ The proposed rule sets forth the procedures and criteria
which must be satisfied to qualify for a broad-based index hedge
exemption.
---------------------------------------------------------------------------

    \35\ See, e.g., Exchange Rule 308.
---------------------------------------------------------------------------

    First, proposed Rule 1806(a)(1) states that the account in which
the exempt options positions are held (``hedge exemption account'')
must have received prior Exchange approval for the hedge exemption
specifying the maximum number of contracts that may be exempt under the
proposed Rule. The hedge exemption account must have provided all
information required on Exchange-approved forms and must have kept such
information current. Exchange approval may be granted on the basis of
verbal representations, in which event the hedge exemption account
shall within two business days, or such other time period designated by
the Exchange, furnish the Exchange with appropriate forms and
documentation substantiating the basis for the exemption. The hedge
exemption account may apply from time to time for an increase in the
maximum number of

contracts exempt from the position limits.
    Proposed Rule 1806(a)(2) states that a hedge exemption account that
is not carried by a Member must be carried by a member of a self-
regulatory organization participating in the Intermarket Surveillance
Group (``ISG''), which is comprised of an international group of
exchanges, market centers, and market regulators.\36\
---------------------------------------------------------------------------

    \36\ The purpose of the ISG is to provide a framework for the
sharing of information and the coordination of regulatory efforts
among exchanges trading securities and related products to address
potential intermarket manipulations and trading abuses. The ISG
plays a crucial role in information sharing among markets that trade
securities, options on securities, security futures products, and
futures and options on broad-based security indexes. A list
identifying the current ISG members is available at https://www.isgportal.org/isgPortal/public/members.htm.
---------------------------------------------------------------------------

    Proposed Rule 1806(a)(3) requires that the hedge exemption account
maintain a qualified portfolio, or will effect transactions necessary
to obtain a qualified portfolio concurrent with or at or about the same
time as the execution of the exempt options positions, of:
    (i) A net long or short position in common stocks in at least four
industry groups and contains at least twenty (20) stocks, none of which
accounts for more than fifteen percent (15%) of the value of the
portfolio or in securities readily convertible, and additionally in the
case of convertible bonds economically convertible, into common stocks
which would comprise a portfolio; or
    (ii) a net long or short position in index futures contracts or in
options on index futures contracts, or long or short positions in index
options or index warrants, for which the underlying index is included
in the same margin or cross-margin product group cleared at the
Clearing Corporation as the index options class to which the hedge
exemption applies.
    To remain qualified, a portfolio must at all times meet these
standards notwithstanding trading activity.
    Proposed Rule 1806(a)(4) contains the requirement that, in order to
qualify for the broad-based exemption, the exemption must apply to
positions in broad-based index options dealt in on the Exchange and is
applicable to the unhedged value of the qualified portfolio. The
unhedged value will be determined as follows:
    (i) The values of the net long or short positions of all qualifying
products in the portfolio are totaled;
    (ii) for positions in excess of the standard limit, the underlying
market value (A) of any economically equivalent opposite side of the
market calls and puts in broad-based index options, and (B) of any
opposite side of the market positions in stock index futures, options
on stock index futures, and any economically equivalent opposite side
of the market positions, assuming no other hedges for these contracts
exist, is subtracted from the qualified portfolio; and
    (iii) the market value of the resulting unhedged portfolio is
equated to the appropriate number of exempt contracts as follows: The
unhedged qualified portfolio is divided by the correspondent closing
index value and the quotient is then divided by the index multiplier or
100.
    Proposed Rule 1806(a)(5) states that positions in broad-based index
options that are traded on the Exchange are exempt from the standard
limits to the extent specified in the table below.

------------------------------------------------------------------------
                                                           Broad-based
                                                           index hedge
             Broad-based index option type                exemption (in
                                                           addition to
                                                         standard limit)
------------------------------------------------------------------------
Broad-based indexes other than for those that do not             75,000
 have any position limits..............................
------------------------------------------------------------------------

    Proposed Rule 1806(a)(6) lists the types of transactions that are
available for hedging. Specifically, only the following qualified
hedging transactions and positions are eligible for purposes of hedging
a qualified portfolio (i.e. stocks, futures, options and warrants)
pursuant to the proposed Rule:
    (i) Long put(s) used to hedge the holdings of a qualified
portfolio;
    (ii) Long call(s) used to hedge a short position in a qualified
portfolio;
    (iii) Short call(s) used to hedge the holdings of a qualified
portfolio; and
    (iv) Short put(s) used to hedge a short position in a qualified
portfolio.
    Proposed Rule 1806(a)(6) then identifies the following strategies,
which may be effected only in conjunction with a qualified stock
portfolio for non-P.M. settled, European style index options only:
    (v) A short call position accompanied by long put(s), where the
short call(s) expires with the long put(s), and the strike price of the
short call(s) equals or exceeds the strike price of the long put(s) (a
``collar''). Neither side of the collar transaction can be in-the-money
at the time the position is established. For purposes of determining
compliance with Rule 306 and proposed Rule 1806, a collar position will
be treated as one contract;
    (vi) A long put position coupled with a short put position
overlying the same broad-based index and having an equivalent
underlying aggregate index value, where the short put(s) expires with
the long put(s), and the strike price of the long put(s) exceeds the
strike price of the short put(s)(a ``debit put spread position''); and
    (vii) A short call position accompanied by a debit put spread
position, where the short call(s) expires with the puts and the strike
price of the short call(s) equals or exceeds the strike price of the
long put(s). Neither side of the short call, long put transaction can
be in-the-money at the time the position is established. For purposes
of determining compliance with Rule 307 and this Rule 1806, the short
call and long put positions will be treated as one contract.
    Proposed Rule 1806(a)(7) describes certain permitted and prohibited
activities for hedge exemption accounts. Specifically, the proposed
Rule states that the hedge exemption account shall:
    (i) Liquidate and establish options, stock positions, their
equivalent or other qualified portfolio products in an orderly fashion;
not initiate or liquidate positions in a manner calculated to cause
unreasonable price fluctuations or unwarranted price changes; and not
initiate or liquidate a stock position or its equivalent with an
equivalent index options position with a view toward taking advantage
of any differential in price between a group of securities and an
overlying stock index option;
    (ii) liquidate any options prior to or contemporaneously with a
decrease in the hedged value of the qualified portfolio which options
would thereby be rendered excessive; and
    (iii) promptly notify the Exchange of any material change in the
qualified portfolio which materially affects the unhedged value of the
qualified portfolio.
    Proposed Rules 1806(a)(8)-(12) contain several regulatory
requirements for hedge exemption accounts. Specifically, the proposed
Rules state that if an exemption is granted, it will be effective at
the time the decision is communicated. Retroactive exemptions will not
be granted. The proposed rules also require that the hedge exemption
account shall promptly provide to the Exchange any information
requested concerning the qualified portfolio. Positions included in a
qualified portfolio that serve to secure an index hedge exemption may
not also be used to secure any other position limit exemption granted
by the Exchange or any other self- regulatory organization or futures
contract market. Any Member that maintains a broad-based index options
position in such Member's own account or in a customer account, and has
reason to believe that such position

is in excess of the applicable limit, shall promptly take the action
necessary to bring the position into compliance. Failure to abide by
this provision shall be deemed to be a violation of Rules 307 and Rule
1806 by the Member. Finally, violation of any of the provisions of the
proposed rule, absent reasonable justification or excuse, shall result
in withdrawal of the index hedge exemption and may form the basis for
subsequent denial of an application for an index hedge exemption.
    Proposed Rule 1806(b) describes the Industry Index Hedge Exemption.
The industry (narrow-based) index hedge exemption is in addition to the
other exemptions available under Exchange Rules, Interpretations and
Policies, and may not exceed twice the standard limit established under
Rule 1805. Industry index options positions may be exempt from
established position limits for each options contract ``hedged'' by an
equivalent dollar amount of the underlying component securities or
securities convertible into such components; provided that, in applying
such hedge, each options position to be exempted is hedged by a
position in at least seventy-five percent (75%) of the number of
component securities underlying the index. In addition, the underlying
value of the options position may not exceed the value of the
underlying portfolio. The value of the underlying portfolio is: (1) The
total market value of the net stock position; and (2) for positions in
excess of the standard limit, subtract the underlying market value of:
(i) Any offsetting calls and puts in the respective index option; (ii)
any offsetting positions in related stock index futures or options; and
(iii) any economically equivalent positions (assuming no other hedges
for these contracts exist). The following procedures and criteria must
be satisfied to qualify for an industry index hedge exemption:
    (1) The hedge exemption account must have received prior Exchange
approval for the hedge exemption specifying the maximum number of
contracts that may be exempt under this Interpretation. The hedge
exemption account must have provided all information required on
Exchange-approved forms and must have kept such information current.
Exchange approval may be granted on the basis of verbal
representations, in which event the hedge exemption account shall
within two business days, or such other time period designated by the
Exchange, furnish the Exchange with appropriate forms and documentation
substantiating the basis for the exemption. The hedge exemption account
may apply from time to time for an increase in the maximum number of
contracts exempt from the position limits.
    (2) A hedge exemption account that is not carried by a Member must
be carried by a member of a self-regulatory organization participating
in the Intermarket Surveillance Group.
    (3) The hedge exemption account shall liquidate and establish
options, stock positions, or economically equivalent positions in an
orderly fashion; shall not initiate or liquidate positions in a manner
calculated to cause unreasonable price fluctuations or unwarranted
price changes; and shall not initiate or liquidate a stock position or
its equivalent with an equivalent index options position with a view
toward taking advantage of any differential in price between a group of
securities and an overlying stock index option. The hedge exemption
account shall liquidate any options prior to or contemporaneously with
a decrease in the hedged value of the portfolio which options would
thereby be rendered excessive. The hedge exemption account shall
promptly notify the Exchange of any change in the portfolio which
materially affects the unhedged value of the portfolio.
    (4) If an exemption is granted, it will be effective at the time
the decision is communicated. Retroactive exemptions will not be
granted.
    (5) The hedge exemption account shall promptly provide to the
Exchange any information requested concerning the portfolio.
    (6) Positions included in a portfolio that serve to secure an index
hedge exemption may not also be used to secure any other position limit
exemption granted by the Exchange or any other self-regulatory
organization or futures contract market.
    (7) Any Member that maintains an industry index options position in
such Member's own account or in a customer account, and has reason to
believe that such position is in excess of the applicable limit, shall
promptly take the action necessary to bring the position into
compliance. Failure to abide by this provision shall be deemed to be a
violation of Rule 307 and proposed Rule 1806 by the Member.
    (8) Violation of any of the provisions of proposed Rule 1806,
absent reasonable justification or excuse, shall result in withdrawal
of the index hedge exemption and may form the basis for subsequent
denial of an application for an index hedge exemption hereunder.
    Proposed Rule 1806(c), Exemptions Granted by Other Options
Exchanges, states that a Member may rely upon any available exemptions
from applicable position limits granted from time to time by another
options exchange for any options contract traded on the Exchange
provided that such Member:
    (1) Provides the Exchange with a copy of any written exemption
issued by another options exchange or a written description of any
exemption issued by another options exchange other than in writing
containing sufficient detail for Exchange regulatory staff to verify
the validity of that exemption with the issuing options exchange, and
    (2) fulfills all conditions precedent for such exemption and
complies at all times with the requirements of such exemption with
respect to the Member's trading on the Exchange.
    Proposed Rule 1806(d), Delta-Based Index Hedge Exemption, describes
the Delta-Based Index Hedge Exemption as in addition to the standard
limit and other exemptions available under Exchange rules. The proposed
rule states that an index option position of a Member or non-Member
affiliate of a Member that is delta neutral shall be exempt from
established position limits as prescribed under Rules 1804 and 1805,
subject to the following:
    (1) The term ``delta neutral'' refers to an index option position
that is hedged, in accordance with a permitted pricing model, by a
position in one or more correlated instruments, for the purpose of
offsetting the risk that the value of the option position will change
with incremental changes in the value of the underlying index. The term
``correlated instruments'' means securities and/or other instruments
that track the performance of or are based on the same underlying index
as the index underlying the option position (but not including baskets
of securities).
    (2) An index option position that is not delta neutral shall be
subject to position limits in accordance with proposed Rules 1804 and
1805 (subject to the availability of other position limit exemptions).
Only the options contract equivalent of the net delta of such position
shall be subject to the appropriate position limit. The ``options
contract equivalent of the net delta'' is the net delta divided by
units of trade that equate to one option contract on a delta basis. The
term ``net delta'' means, at any time, the number of shares and/or
other units of trade (either long or short) required to offset the risk
that the value of an index option position will change with incremental
changes in the value of the underlying index, as determined in
accordance with a permitted pricing model.

    (3) A ``permitted pricing model'' shall have the meaning as defined
in Rule 308(a)(7)(iii).\37\
---------------------------------------------------------------------------

    \37\ A ``permitted pricing model'' means: (A) A pricing model
maintained and operated by the Clearing Corporation (``OCC Model'');
(B) A pricing model maintained and used by a Member subject to
consolidated supervision by the SEC pursuant to Appendix E of SEC
Rule 15c3-1, or by an affiliate that is part of such Member's
consolidated supervised holding company group, in accordance with
its internal risk management control system and consistent with the
requirements of Appendices E or G, as applicable, to SEC Rule 15c3-1
and SEC Rule 15c3-4 under the Exchange Act, as amended from time to
time, in connection with the calculation of risk-based deductions
from capital or capital allowances for market risk thereunder,
provided that the Member or affiliate of a Member relying on this
exemption in connection with the use of such model is an entity that
is part of such Member's consolidated supervised holding company
group; (C) A pricing model maintained and used by a financial
holding company or a company treated as a financial holding company
under the Bank Holding Company Act of 1956, or by an affiliate that
is part of either such company's consolidated supervised holding
company group, in accordance with its internal risk management
control system and consistent with: 1. the requirements of the Board
of Governors of the Federal Reserve System, as amended from time to
time, in connection with the calculation of risk based adjustments
to capital for market risk under capital requirements of the Board
of Governors of the Federal Reserve System, provided that the Member
or affiliate of a Member relying on this exemption in connection
with the use of such model is an entity that is part of such
company's consolidated supervised holding company group; or 2. the
standards published by the Basel Committee on Banking Supervision,
as amended from time to time and as implemented by such company's
principal regulator, in connection with the calculation of risk-
based deductions or adjustments to or allowances for the market risk
capital requirements of such principal regulator applicable to such
company--where ``principal regulator'' means a member of the Basel
Committee on Banking Supervision that is the home country
consolidated supervisor of such company--provided that the Member or
affiliate of a Member relying on this exemption in connection with
the use of such model is an entity that is part of such company's
consolidated supervised holding company group. (D) A pricing model
maintained and used by an OTC derivatives dealer registered with the
SEC pursuant to SEC Rule 15c3-1(a)(5) in accordance with its
internal risk management control system and consistent with the
requirements of Appendix F to SEC Rule 15c3-1 and SEC Rule 15c3-4
under the Exchange Act, as amended from time to time, in connection
with the calculation of risk-based deductions from capital for
market risk thereunder, provided that only such OTC derivatives
dealer and no other affiliated entity (including a Member) may rely
on this subparagraph (D); or (E) A pricing model used by a national
bank under the National Bank Act maintained and used in accordance
with its internal risk management control system and consistent with
the requirements of the Office of the Comptroller of the Currency,
as amended from time to time, in connection with the calculation of
risk based adjustments to capital for market risk under capital
requirements of the Office of the Comptroller of the Currency,
provided that only such national bank and no other affiliated entity
(including a Member) may rely on this subparagraph (E).
---------------------------------------------------------------------------

    Proposed Rule 1806(d)(4), Effect on Aggregation of Accounts, states
that (i) Members and non-Member affiliates who rely on this exemption
must ensure that the permitted pricing model is applied to all
positions in correlated instruments that are owned or controlled by
such Member or non-Member affiliate.
    Notwithstanding subparagraph (i), above, the net delta of an option
position held by an entity entitled to rely on this exemption, or by a
separate and distinct trading unit of such entity, may be calculated
without regard to positions in correlated instruments held by an
affiliated entity or by another trading unit within the same entity,
provided that:
    (A) The entity demonstrates to the Exchange's satisfaction that no
control relationship, as defined in Rule 307(f), exists between such
affiliates or trading units; and
    (B) the entity has provided (by the Member carrying the account as
applicable) the Exchange written notice in advance that it intends to
be considered separate and distinct from any affiliate or, as
applicable, which trading units within the entity are to be considered
separate and distinct from each other for purposes of this exemption.
    Proposed Rule 1806(d)(4)(iii) states that, notwithstanding
subparagraphs (i) and (ii) of proposed Rule 1806(d)(4), a Member or
non-Member affiliate who relies on this exemption shall designate, by
prior written notice to the Exchange (to be obtained and provided by
the Member carrying the account as applicable), each trading unit or
entity whose option positions are required under Exchange Rules to be
aggregated with the option positions of such Member or non-Member
affiliate that is relying on this exemption for purposes of compliance
with Exchange position limits or exercise limits. In any such case: (A)
The permitted pricing model shall be applied, for purposes of
calculating such Member's or affiliate's net delta, only to the
positions in correlated instruments owned and controlled by those
entities and trading units who are relying on this exemption; and (B)
the net delta of the positions owned or controlled by the entities and
trading units who are relying on this exemption shall be aggregated
with the non-exempt option positions of all other entities and trading
units whose options positions are required under Exchange Rules to be
aggregated with the option positions of such Member or affiliate.
    Proposed Rule 1806(d)(5) describes the obligations of Members
seeking the Delta Hedge Exemption. First, a Member that relies on this
exemption for a proprietary index options position: (A) Must provide a
written certification to the Exchange that it is using a permitted
pricing model as defined above, and (B) by such reliance authorizes any
other person carrying for such Member an account including, or with
whom such Member has entered into, a position in a correlated
instrument to provide to the Exchange or the Clearing Corporation such
information regarding such account or position as the Exchange or
Clearing Corporation may request as part of the Exchange's confirmation
or verification of the accuracy of any net delta calculation under this
exemption. The index option positions of a non-Member relying on this
exemption must be carried by a Member with which it is affiliated.
    Proposed Rule 1806(d)(5)(iii) requires that a Member carrying an
account that includes an index option position for a non-Member
affiliate that intends to rely on the Delta-Based Hedge Exemption must
obtain from such non-Member affiliate and must provide to the Exchange:
(A) A written certification to the Exchange that the non-Member
affiliate is using a permitted pricing model as described above; and
(B) a written statement confirming that such non-Member affiliate: (1)
Is relying on this exemption; (2) will use only a permitted pricing
model for purposes of calculating the net delta of its option positions
for purposes of this exemption; (3) will promptly notify the Member if
it ceases to rely on this exemption; (4) authorizes the Member to
provide to the Exchange or the Clearing Corporation such information
regarding positions of the non-Member affiliate as the Exchange or
Clearing Corporation may request as part of the Exchange's confirmation
or verification of the accuracy of any net delta calculation under this
exemption; and (5) if the non-Member affiliate is using the Clearing
Corporation Model, has duly executed and delivered to the Member such
documents as the Exchange may require to be executed and delivered to
the Exchange as a condition to reliance on the exemption.
    Proposed Rule 1806(d)(6) requires each Member (other than an
Exchange market maker using the Clearing Corporation Model) that holds
or carries an account that relies on the Delta-Based Hedge Exemption
shall report, in accordance with Exchange Rule 310,\38\

all index option positions (including those that are delta neutral)
that are reportable thereunder. Each such Member on its own behalf or
on behalf of a designated aggregation unit pursuant to Rule 1806(d)(4)
shall also report, in accordance with Exchange Rule 310 for each such
account that holds an index option position subject to the Delta-Based
Hedge Exemption in excess of the levels specified in Rules 1804 and
1805, the net delta and the options contract equivalent of the net
delta of such position.
---------------------------------------------------------------------------

    \38\ Each Member is required under Exchange Rule 310, Reports
Related to Position Limits, to file with the Exchange the name,
address and social security or tax identification number of any
customer, as well as any Member, any general or special partner of
the Member, any officer or director of the Member or any
participant, as such, in any joint, group or syndicate account with
the Member or with any partner, officer or director thereof, who, on
the previous business day held aggregate long or short positions of
200 or more option contracts of any single class of options traded
on the Exchange. The report shall indicate for each such class of
option contracts the number of option contracts comprising each such
position and, in case of short positions, whether covered or
uncovered. (b) Electronic Exchange Members that maintain an end of
day position in excess of 10,000 non-FLEX equity option contracts on
the same side of the market on behalf of its own account or for the
account of a customer, shall report whether such position is hedged
and provide documentation as to how such position is hedged. This
report is required at the time the subject account exceeds the
10,000 contract threshold and thereafter, for customer accounts,
when the position increases by 2,500 contracts and for proprietary
accounts when the position increases by 5,000 contracts. (c) In
addition to the reports required by paragraph (a) and (b) of this
Rule, each Member shall report promptly to the Exchange any instance
in which the Member has reason to believe that a person included in
paragraph (a), acting alone or in concert with others, has exceeded
or is attempting to exceed the position limits established pursuant
to Rule 307. Interpretations and Policies: .01 For purposes of
calculating the aggregate long or short position under paragraph (a)
above, Members shall combine (i) long positions in put options with
short positions in call options, and (ii) short positions in put
options with long positions in call options. See Exchange Rule 310.
---------------------------------------------------------------------------

    Finally, proposed Rule 1806(d)(7) requires that each Member relying
on the Delta-Based Hedge Exemption shall: (i) Retain, and undertake
reasonable efforts to ensure that any non-Member affiliate of the
Member relying on this exemption retains, a list of the options,
securities and other instruments underlying each option position net
delta calculation reported to the Exchange hereunder, and (ii) produce
such information to the Exchange upon request.
    The proposed Rules relating to position limits and exemptions from
position limits are based on, and substantially similar to, rules that
are currently in place on other exchanges.\39\
---------------------------------------------------------------------------

    \39\ See, e.g., Nasdaq ISE Rule 2006; Cboe Rule 24.4,
Interpretations and Policies .01, .05, and Rule 24.4A; and Nasdaq
Phlx Rule 1001A and Interpretations and Policies .01-.04 thereto.
---------------------------------------------------------------------------

    Proposed Rule 1808, Trading Sessions, provides that index options
will trade between the hours of 9:30 a.m. and 4:15 p.m. Eastern time,
the same as on other exchanges. The proposed rule also contains
procedures for trading rotations, as well as trading halts and
suspensions.
    Specifically, proposed Rule 1808(a) states that, except as
otherwise provided in this Rule or under unusual conditions as may be
determined by the Exchange, (i) transactions in index options may be
effected on the Exchange between the hours of 9:30 a.m. and 4:15 p.m.
Eastern time, and (ii) transactions in options on a Foreign Currency
Index may be effected on the Exchange between the hours of 7:30 a.m.
and 4:15 p.m. Eastern time. With respect to options on foreign indexes,
the Exchange shall determine the days and hours of business. The
proposed Rule and the various enumerated times are consistent with
rules in place on other exchanges.\40\
---------------------------------------------------------------------------

    \40\ See MIAX Options Rule 1808; Nasdaq ISE Rule 2008; Cboe Rule
24.6, and Nasdaq Phlx Rule 101.
---------------------------------------------------------------------------

    Proposed Rule 1808(b), Trading Rotations, states that, except as
otherwise provided in the proposed Rule, the opening process for index
options shall be governed by Rule 503.\41\ The opening rotation for
index options shall be held at or as soon as practicable after 9:30
a.m. Eastern time. The Exchange may delay the commencement of the
opening rotation in an index option whenever in the judgment of the
Exchange such action is appropriate in the interests of a fair and
orderly market. Among the factors that may be considered in making
these determinations are: (1) Unusual conditions or circumstances in
other markets; (2) an influx of orders that has adversely affected the
ability of the Market Maker to provide and to maintain fair and orderly
markets; (3) activation of opening price limits in stock index futures
on one or more futures exchanges; (4) activation of daily price limits
in stock index futures on one or more futures exchanges; (5) the extent
to which either there has been a delay in opening or trading is not
occurring in stocks underlying the index; and (6) circumstances such as
those which would result in the declaration of a fast market under Rule
506(d).\42\
---------------------------------------------------------------------------

    \41\ See Exchange Rule 503. Openings on the Exchange, governs
the opening of trading on the Exchange with respect to, among other
things, determining the opening price and matching orders and quotes
in the system. These and other provisions will apply to openings in
index options.
    \42\ This reference to MIAX Options Rule 506(d) will be
construed to reference corresponding MIAX PEARL Rule 506(e).
---------------------------------------------------------------------------

    Proposed Rule 1808(c) describes circumstances and procedures
relating to halts and suspensions in index options. Specifically,
trading on the Exchange in any index option shall be halted or
suspended whenever trading in underlying securities whose weighted
value represents more than twenty percent (20%), in the case of a broad
based index, and ten percent (10%) for all other indices, of the index
value is halted or suspended. The Exchange also may halt trading in an
index option, including in options on a Foreign Currency Index, when,
in its judgment, such action is appropriate in the interests of a fair
and orderly market and to protect investors. Among the facts that may
be considered are the following:
    (1) Whether all trading has been halted or suspended in the market
that is the primary market for a plurality of the underlying stocks, or
in the case of a Foreign Currency Index, in the underlying foreign
currency market;
    (2) whether the current calculation of the index derived from the
current market prices of the stocks is not available, or in the case of
the a Foreign Currency Index, the current prices of the underlying
foreign currency is not available;
    (3) the extent to which the rotation has been completed or other
factors regarding the status of the rotation; and
    (4) other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present, including, but
not limited to, the activation of price limits on futures exchanges.
    Proposed Rule 1808(d) describes the resumption of trading following
a halt or suspension in an index option. Trading in options of a class
or series that has been the subject of a halt or suspension by the
Exchange may resume if the Exchange determines that the interests of a
fair and orderly market are served by a resumption of trading. Among
the factors to be considered in making this determination are whether
the conditions that led to the halt or suspension are no longer
present, and the extent to which trading is occurring in stocks or
currencies underlying an index. Upon reopening, a rotation shall be
held in each class of index options unless the Exchange concludes that
a different method of reopening is appropriate under the circumstances,
including but not limited to, no rotation, an abbreviated rotation or
any other variation in the manner of the rotation.
    Proposed Rule 1808(e) states that Rule 504, Interpretations and
Policies .03 applies to index options trading with respect to the
initiation of a market wide trading halt commonly known as a ``circuit
breaker.'' \43\
---------------------------------------------------------------------------

    \43\ The Exchange shall halt trading in all securities whenever
a market-wide trading halt commonly known as a circuit breaker is
initiated on the New York Stock Exchange in response to
extraordinary market conditions. See Exchange Rule 504,
Interpretations and Policies .03. Rule 530(e) provides that the
Exchange shall halt trading in all options whenever the equities
markets initiate a market-wide trading halt commonly known as a
circuit breaker in response to extraordinary market conditions.

---------------------------------------------------------------------------

    Proposed Rule 1808(f) addresses the hours for trading foreign
currency options. Specifically, when the hours of trading of the
underlying primary securities market for an index option do not overlap
or coincide with those of the Exchange, all of the provisions as
described in paragraphs (c), (d) and (e) above shall not apply except
for (c)(4).
    Proposed Rule 1808(g) governs the situation where the primary
market for a security underlying the current index value of an index
option does not open does not open for trading on a given day. In such
a circumstance, the price of that security shall be determined, for the
purposes of calculating the current index value at expiration, based on
the opening price of that security on the next day that its primary
market is open for trading. This procedure shall not be used if the
current index value at expiration is fixed in accordance with the Rules
and By-Laws of the Clearing Corporation.
    The proposed rules governing trading sessions, including trading
rotations, halts and suspensions, resumption of trading following a
halt or suspension, circuit breakers, special provisions for foreign
indices, and pricing when the primary market does not open are based
on, and substantially similar to, the rules in place on other
exchanges.\44\
---------------------------------------------------------------------------

    \44\ See, e.g., MIAX Options Rule 1808; Nasdaq ISE Rule 2008;
Cboe Rule 24.7; and Nasdaq Phlx Rule 1047A.
---------------------------------------------------------------------------

    Proposed Rule 1809, Terms of Index Options Contracts, outlines the
terms of index options contracts in terms of the meaning of premium
bids and offers; exercise prices; expiration months and the trading of
European Style Index options. The proposed Rule also applies to A.M.
Settled Index Options, and Long-Term Option Series (including Reduced-
Value Long Term Options Series), which would also require a filing with
the Commission for the specific index option(s) to which the proposed
rule is applicable.\45\
---------------------------------------------------------------------------

    \45\ See supra note 5.
---------------------------------------------------------------------------

    Proposed Rule 1809(a) contains general provisions applicable to the
trading of index options on the Exchange. Specifically, the proposed
Rule states generally that bids and offers shall be expressed in terms
of dollars and cents per unit of the index. The Exchange shall
determine fixed-point intervals of exercise prices for call and put
options. With respect to expirations, proposed Rule 1809(a)(3) states
that index options contracts, including option contracts on a Foreign
Currency Index, may expire at three (3)-month intervals or in
consecutive months. The Exchange may list up to six (6) expiration
months at any one time, but will not list index options that expire
more than twelve (12) months out. Notwithstanding the preceding
restriction, the Exchange may list up to seven expiration months at any
one time for any broad-based security index option contracts on which
any exchange calculates a constant three (3)-month volatility index.
    Proposed Rule 1809(a)(4) permits the Exchange to list and trade
certain European-style index options to be Specified by the Exchange,
some of which may be A.M.-settled as provided in paragraph (a)(5). The
Exchange will file a proposed rule change and any such listing and
trading is subject to the approval of the Commission.\46\
---------------------------------------------------------------------------

    \46\ Id.
---------------------------------------------------------------------------

    Proposed Rule 1809(a)(5) governs A.M.-Settled Index Options. The
last day of trading for A.M.-settled index options shall be the
business day preceding the business day of expiration, or, in the case
of an option contract expiring on a day that is not a business day, the
business day preceding the last day of trading in the underlying
securities prior to the expiration date. The current index value at the
expiration of an A.M.-settled index option shall be determined, for all
purposes under these proposed Rules and the Rules of the Clearing
Corporation, on the last day of trading in the underlying securities
prior to expiration, by reference to the reported level of such index
as derived from first reported sale (opening) prices of the underlying
securities on such day, except that:
    (i) In the event that the primary market for an underlying security
does not open for trading on that day, the price of that security shall
be determined, for the purposes of calculating the current index value
at expiration, as set forth in Rule 1808(g), unless the current index
value at expiration is fixed in accordance with the Rules and By-Laws
of the Clearing Corporation; and
    (ii) In the event that the primary market for an underlying
security is open for trading on that day, but that particular security
does not open for trading on that day, the price of that security, for
the purposes of calculating the current index value at expiration,
shall be the last reported sale price of the security.
    Proposed Rule 1809(a)(5)(ii) permits the Exchange to list specific
A.M.-settled index options that are approved for trading on the
Exchange, subject to the filing of a proposed rule change and the
approval of the Commission.
    Proposed Rule 1809(b)(1) permits the Exchange, notwithstanding the
permitted expiration months set forth in proposed Rule 1809(a)(3) (as
described above), to list long-term index options series that expire
from twelve (12) to sixty (60) months from the date of issuance. Under
the proposal, long term index options series may be based on either the
full or reduced value of the underlying index. There may be up to ten
(10) expiration months, none further out than sixty (60) months. Strike
price interval, bid/ask differential and continuity Rules shall not
apply to such options series until the time to expiration is less than
twelve (12) months. When a new long term index options series is
listed, such series will be opened for trading either when there is
buying or selling interest, or forty (40) minutes prior to the close,
whichever occurs first. No quotations will be posted for such options
until they are opened for trading.
    Proposed Rule 1809(b)(2) governs the trading of reduced-value long
term options series.\47\ Proposed Rule 1809(b)(2)(i) permits the
Exchange to list the specific reduced-Value long term options series
traded on the Exchange (subject to an Exchange filing and Commission
approval).\48\ Reduced-value long term options series may expire at
six-month intervals. When a new expiration month is listed, series may
be near or bracketing the current index value. Additional series may be
added when the value of the underlying index increases or decreases by
ten (10) to fifteen percent (15%).
---------------------------------------------------------------------------

    \47\ A reduced-value options series is an option series
overlying an index that trades in units based upon a percentage of
the value of the underlying index, for example, ten percent (10%) of
the value of the index.
    \48\ See supra note 5.
---------------------------------------------------------------------------

    Proposed Rule 1809(c) sets forth the procedures for adding and
deleting strike prices. The procedures for adding and deleting strike
prices for index options are provided in Exchange Rule 404, as amended
by the following:
    (1) The interval between strike prices will be no less than $5.00;
provided that in the case of certain classes of index options, the
interval between strike prices will be no less than $2.50 and such must
be listed specifically in the Rule.

    (2) New series of index options contracts may be added up to, but
not on or after, the fourth business day prior to expiration for an
option contract expiring on a business day, or, in the case of an
option contract expiring on a day that is not a business day, the fifth
business day prior to expiration.
    (3) When new series of index options with a new expiration date are
opened for trading, or when additional series of index options in an
existing expiration date are opened for trading as the current value of
the underlying index to which such series relate moves substantially
from the exercise prices of series already opened, the exercise prices
of such new or additional series shall be reasonably related to the
current value of the underlying index at the time such series are first
opened for trading. In the case of all classes of index options, the
term ``reasonably related to the current value of the underlying
index'' shall have the meaning set forth in proposed Rule 1809(c)(4),
described below.
    (4) Notwithstanding any other provision of this paragraph (c), the
Exchange may open for trading additional series of the same class of
index options as the current index value of the underlying index moves
substantially from the exercise price of those index options that
already have been opened for trading on the Exchange. The exercise
price of each series of index options opened for trading on the
Exchange shall be reasonably related to the current index value of the
underlying index to which such series relates at or about the time such
series of options is first opened for trading on the Exchange. The term
``reasonably related to the current index value of the underlying
index'' means that the exercise price is within thirty percent (30%) of
the current index value.
    The Exchange may also open for trading additional series of index
options that are more than thirty percent (30%) away from the current
index value, provided that demonstrated customer interest exists for
such series, as expressed by institutional, corporate, or individual
customers or their brokers. Market Makers trading for their own account
shall not be considered when determining customer interest under this
provision.
    Proposed Rule 1809(d) states that the reported level of the
underlying index that is calculated by the reporting authority on the
business day of expiration, or, in the case of an option contract
expiring on a day that is not a business day, the last day of trading
in the underlying securities prior to the expiration date for purposes
of determining the current index value at the expiration of an A.M.-
settled index option, may differ from the level of the index that is
separately calculated and reported by the reporting authority and that
reflects trading activity subsequent to the opening of trading in any
of the underlying securities.
    Proposed Rule 1809(e) provides that the Rules of the Clearing
Corporation specify that, unless the Rules of the Exchange provide
otherwise, the current index value used to settle the exercise of an
index options contract shall be the closing index value for the day on
which the index options contract is exercised in accordance with the
Rules of the Clearing Corporation or, if such day is not a business
day, for the most recent business day. The closing settlement value for
options on a Foreign Currency Index shall be specified by the Exchange.
    Proposed Rule 1809, Interpretations and Policies .01, Short Term
Option Series Program, specifies that, notwithstanding the restriction
in Rule 1809(a)(3), after an option class has been approved for listing
and trading on the Exchange, the Exchange may open for trading on any
Thursday or Friday that is a business day (``Short Term Option Opening
Date'') series of options on that class that expire at the close of
business on each of the next five Fridays that are business days and
are not Fridays in which monthly options series or Quarterly Options
Series expire (``Short Term Option Expiration Dates''). The Exchange
may have no more than a total of five Short Term Option Expiration
Dates. If the Exchange is not open for business on the respective
Thursday or Friday, the Short Term Option Opening Date will be the
first business day immediately prior to that respective Thursday or
Friday. Similarly, if the Exchange is not open for business on a
Friday, the Short Term Option Expiration Date will be the first
business day immediately prior to that Friday.
    Proposed Interpretations and Policies .01(a) to Rule 1809 permits
the Exchange to select up to thirty (30) currently listed option
classes on which Short Term Option Series may be opened on any Short
Term Option Opening Date. In addition to the thirty (30) option class
restriction, the Exchange may also list Short Term Option Series on any
option classes that are selected by other securities exchanges that
employ a similar program under their respective rules. For each index
option class eligible for participation in the Short Term Option Series
Program, the Exchange may open up to thirty (30) Short Term Option
Series on index options for each expiration date in that class. The
Exchange may also open Short Term Option Series that are opened by
other securities exchanges in option classes selected by such exchanges
under their respective short term option rules.
    Proposed Interpretations and Policies .01(b) to proposed Rule 1809
states that no Short Term Option Series on an index option class may
expire in the same week during which any monthly option series on the
same index class expires or, in the case of Quarterly Options Series,
on an expiration that coincides with an expiration of Quarterly Options
Series on the same index class.
    Proposed Interpretations and Policies .01(c) to Rule 1809 governs
the listing and trading of initial series in short-term options. The
Exchange may open up to twenty (20) initial series for each option
class that participates in the Short Term Option Series Program. The
strike price of each Short Term Option Series will be fixed at a price
per share, with approximately the same number of strike prices above
and below the calculated index value of the underlying index at about
the time that Short Term Option Series are initially opened for trading
on the Exchange (e.g., if seven series are initially opened, there will
be at least three strike prices above and three strike prices below the
calculated index value). Any strike prices listed by the Exchange shall
be within thirty percent (30%) above or below the current value of the
underlying index.
    Proposed Interpretations and Policies .01(d) to Rule 1809,
Additional Series, states that the Exchange may open up to ten (10)
additional series for each option class that participates in the Short
Term Option Series Program when the Exchange deems it necessary to
maintain an orderly market, to meet customer demand or when the current
value of the underlying index moves substantially from the exercise
price or prices of the series already opened. Any additional strike
prices listed by the Exchange shall be within thirty percent (30%)
above or below the current value of the underlying index. The Exchange
may also open additional strike prices on Short Term Option Series that
are more than thirty percent (30%) above or below the current value of
the underlying index provided that demonstrated customer interest
exists for such series, as expressed by institutional, corporate or
individual customers or their brokers. Market Makers trading for their
own account shall not be considered when determining customer interest
under this provision. In the event that the

underlying security has moved such that there are no series that are at
least ten percent (10%) above or below the current price of the
underlying security, the Exchange will delist any series with no open
interest in both the call and the put series having a: (i) Strike
higher than the highest strike price with open interest in the put and/
or call series for a given expiration month; and (ii) strike lower than
the lowest strike price with open interest in the put and/or the call
series for a given expiration month, so as to list series that are at
least ten percent (10%) but not more than thirty percent (30%) above or
below the current price of the underlying security. In the event that
the underlying security has moved such that there are no series that
are at least ten percent (10%) above or below the current price of the
underlying security and all existing series have open interest, the
Exchange may list additional series, in excess of the thirty (30)
allowed under this Interpretations and Policies .01. The opening of the
new Short Term Option Series shall not affect the series of options of
the same class previously opened. Notwithstanding any other provisions
in proposed Rule 1809, Short Term Option Series may be added up to, and
including on, the Short Term Option Expiration Date for that options
series.
    Proposed Interpretations and Policies .01(e) to Rule 1809 governs
strike price intervals for short term index option series. The interval
between strike prices on Short Term Option Series shall be the same as
the strike prices for series in that same index option class that
expire in accordance with the normal monthly expiration cycle. During
the month prior to expiration of an index option class that is selected
for the Short Term Option Series Program pursuant to this rule (``Short
Term Option''), the strike price intervals for the related index non-
Short Term Option (``Related non-Short Term Option'') shall be the same
as the strike price intervals for the index Short Term Option.
    Proposed Interpretations and Policies .02 to Rule 1809 governs the
Quarterly Options Series Program. Notwithstanding the restriction in
proposed Rule 1809(a)(3) (described above), the Exchange may list and
trade options series that expire at the close of business on the last
business day of a calendar quarter (``Quarterly Options Series''). The
Exchange may list Quarterly Options Series for up to five (5) currently
listed options classes that are either index options or options on
exchange traded funds (``ETFs''). In addition, the Exchange may also
list Quarterly Options Series on any options classes that are selected
by other securities exchanges that employ a similar pilot program under
their respective rules. The Exchange may list series that expire at the
end of the next consecutive four (4) calendar quarters, as well as the
fourth quarter of the next calendar year. The Exchange will not list a
Short Term Option Series on an options class whose expiration coincides
with that of a Quarterly Options Series on that same options class.
Quarterly Options Series shall be P.M. settled.
    Proposed Interpretations and Policies .02(d) to Rule 1809, Initial
Series, states that the strike price of each Quarterly Options Series
will be fixed at a price per share, with at least two, but no more than
five, strike prices above and at least two, but no more than five,
strike prices below the value of the underlying index at about the time
that a Quarterly Options Series is opened for trading on the Exchange.
The Exchange shall list strike prices for Quarterly Options Series that
are reasonably related to the current index value of the underlying
index to which such series relates at about the time such series of
options is first opened for trading on the Exchange. The term
``reasonably related to the current index value of the underlying
index'' means that the exercise price is within thirty percent (30%) of
the current index value.
    Proposed Interpretations and Policies .02(e) to Rule 1809,
Additional Series, permits the Exchange to open for trading additional
Quarterly Options Series of the same class when the Exchange deems it
necessary to maintain an orderly market, to meet customer demand or
when the market price of the underlying security moves substantially
from the initial exercise price or prices. The Exchange may also open
for trading additional Quarterly Options Series that are more than
thirty percent (30%) away from the current index value, provided that
demonstrated customer interest exists for such series, as expressed by
institutional, corporate, or individual customers or their brokers.
Market-makers trading for their own account shall not be considered
when determining customer interest under this provision. The Exchange
may open additional strike prices of a Quarterly Options Series that
are above the value of the underlying index provided that the total
number of strike prices above the value of the underlying is no greater
than five. The Exchange may open additional strike prices of a
Quarterly Options Series that are below the value of the underlying
index provided that the total number of strike prices below the value
of the underlying index is no greater than five. The opening of any new
Quarterly Options Series shall not affect the series of options of the
same class previously opened.
    Proposed Interpretations and Policies .02(f) to Rule 1809, Strike
Interval, states that the interval between strike prices on Quarterly
Options Series shall be the same as the interval for strike prices for
series in that same options class that expire in accordance with the
normal monthly expiration cycle.
    Proposed Interpretations and Policies .03 to Rule 1809 states that,
notwithstanding the requirements set forth in proposed Rule 1809, the
Exchange may list additional series of index options classes if such
series are listed on at least one other national securities exchange in
accordance with the applicable rules of such exchange for the listing
of index options.\49\ Proposed Interpretations and Policies .04 to Rule
1809 states that, notwithstanding the requirements set forth in
proposed Rule 1809 and any Interpretations and Policies thereto, the
Exchange may list additional expiration months on options classes
opened for trading on the Exchange if such expiration months are opened
for trading on at least one other registered national securities
exchange.
---------------------------------------------------------------------------

    \49\ See supra note 3.
---------------------------------------------------------------------------

    Proposed Interpretations and Policies .05 to Rule 1809 states that,
notwithstanding the requirements set forth in this Rule 1809 and any
Interpretations and Policies thereto, the Exchange may open for trading
Short Term Option Series on the Short Term Option Opening Date that
expire on the Short Term Option Expiration Date at strike price
intervals of (i) $0.50 or greater where the strike price is less than
$75, and $1 or greater where the strike price is between $75 and $150
for all index option classes that participate in the Short Term Options
Series Program; or (ii) $0.50 for index option classes that trade in
one dollar increments and are in the Short Term Option Series Program.
    The proposed rules concerning the terms of options contracts are
based on, and substantially similar to, rules that are currently
operative on other exchanges.\50\
---------------------------------------------------------------------------

    \50\ See, e.g., MIAX Options Rule 1809; Nasdaq ISE Rule 2009;
Cboe Rule 24.9; and Nasdaq Phlx Rule 1101A.
---------------------------------------------------------------------------

    Proposed Rule 1810 applies to debit put spreads. Debit put spread
positions in European-style, broad-based index options traded on the
Exchange (hereinafter ``debit put spreads'') may be

maintained in a cash account as defined by Federal Reserve Board
Regulation T Section 220.8 \51\ by a Public Customer, provided that the
following procedures and criteria are met:
---------------------------------------------------------------------------

    \51\ 12 CFR 220.8.
---------------------------------------------------------------------------

    (a) Approval to maintain debit put spreads in a cash account
carried by an Exchange Member. A customer so approved is hereinafter
referred to as a ``spread exemption customer.''
    (b) The spread exemption customer has provided all information
required on Exchange-approved forms and has kept such information
current.
    (c) The customer holds a net long position in each of the stocks of
a portfolio that has been previously established or in securities
readily convertible, and additionally in the case of convertible bonds
economically convertible, into common stocks which would comprise a
portfolio. The debit put spread position must be carried in an account
with a member of a self-regulatory organization participating in the
ISG.
    (d) The stock portfolio or its equivalent is composed of net long
positions in common stocks in at least four industry groups and
contains at least twenty (20) stocks, none of which accounts for more
than fifteen percent (15%) of the value of the portfolio (hereinafter
``qualified portfolio''). To remain qualified, a portfolio must at all
times meet these standards notwithstanding trading activity in the
stocks.
    (e) The exemption applies to European-style broad-based index
options dealt in on the Exchange to the extent the underlying value of
such options position does not exceed the unhedged value of the
qualified portfolio. The unhedged value would be determined as follows:
(1) The values of the net long or short positions of all qualifying
products in the portfolio are totaled; (2) for positions in excess of
the standard limit, the underlying market value (A) of any economically
equivalent opposite side of the market calls and puts in broad-based
index options, and (B) of any opposite side of the market positions in
stock index futures, options on stock index futures, and any
economically equivalent opposite side of the market positions, assuming
no other hedges for these contracts exist, is subtracted from the
qualified portfolio; and (3) the market value of the resulting unhedged
portfolio is equated to the appropriate number of exempt contracts as
follows--the unhedged qualified portfolio is divided by the
correspondent closing index value and the quotient is then divided by
the index multiplier or 100.
    (f) A debit put spread in Exchange-traded broad-based index options
with European-style exercises is defined as a long put position coupled
with a short put position overlying the same broad-based index and
having an equivalent underlying aggregate index value, where the short
put(s) expires with the long put(s), and the strike price of the long
put(s) exceeds the strike price of the short put(s). A debit put spread
will be permitted in the cash account as long as it is continuously
associated with a qualified portfolio of securities with a current
market value at least equal to the underlying aggregate index value of
the long side of the debit put spread.
    (g) The qualified portfolio must be maintained with either a
Member, another broker-dealer, a bank, or securities depository.
    (h) The spread exemption customer shall agree promptly to provide
the Exchange any information requested concerning the dollar value and
composition of the customer's stock portfolio, and the current debit
put spread positions.
    (1) The spread exemption customer shall agree to and any Member
carrying an account for the customer shall:
    (i) Comply with all Exchange Rules and regulations;
    (ii) liquidate any debit put spreads prior to or contemporaneously
with a decrease in the market value of the qualified portfolio, which
debit put spreads would thereby be rendered excessive; and
    (iii) promptly notify the Exchange of any change in the qualified
portfolio or the debit put spread position which causes the debit put
spreads maintained in the cash account to be rendered excessive.
    (i) If any Member carrying a cash account for a spread exemption
customer with a debit put spread position dealt in on the Exchange has
a reason to believe that as a result of an opening options transaction
the customer would violate this spread exemption, and such opening
transaction occurs, then the Member has violated Rule 1810.
    (j) Violation of any of these provisions, absent reasonable
justification or excuse, shall result in withdrawal of the spread
exemption and may form the basis for subsequent denial of an
application for a spread exemption hereunder.
    Proposed Rule 1811, Disclaimers, disclaims liability for index
reporting authorities. The Disclaimer shall apply to the reporting
authorities \52\ identified in the Interpretations and Policies to
proposed Rule 1801.\53\
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    \52\ The term ``reporting authority'' with respect to a
particular index means the institution or reporting service
designated by the Exchange as the official source for (1)
calculating the level of the index from the reported prices of the
underlying securities that are the basis of the index and (2)
reporting such level. The reporting authority for each index
approved for options trading on the Exchange shall be Specified (as
provided in Rule 1800) in the Interpretations and Policies to Rule
1801. See proposed Rule 1801(n). See also supra note 5.
    \53\ The reporting authorities designated by the Exchange in
respect of each index underlying an index options contract traded on
the Exchange are as provided in a chart in proposed Rule 1801,
Interpretations and Policies .01.
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    Proposed Rule 1811(b), Disclaimer, provides that no reporting
authority, and no affiliate of a reporting authority (each such
reporting authority, its affiliates, and any other entity identified in
this Rule are referred to collectively as a ``Reporting Authority''),
makes any warranty, express or implied, as to the results to be
obtained by any person or entity from the use of an index it publishes,
any opening, intra-day or closing value therefor, or any data included
therein or relating thereto, in connection with the trading of any
options contract based thereon or for any other purpose. The Reporting
Authority shall obtain information for inclusion in, or for use in the
calculation of, such index from sources it believes to be reliable, but
the Reporting Authority does not guarantee the accuracy or completeness
of such index, any opening, intra-day or closing value therefor, or any
date included therein or related thereto. The Reporting Authority
hereby disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to such index, any opening,
intra-day, or closing value therefor, any data included therein or
relating thereto, or any options contract based thereon. The Reporting
Authority shall have no liability for any damages, claims, losses
(including any indirect or consequential losses), expenses, or delays,
whether direct or indirect, foreseen or unforeseen, suffered by any
person arising out of any circumstance or occurrence relating to the
person's use of such index, any opening, intra-day or closing value
therefor, any data included therein or relating thereto, or any options
contract based thereon, or arising out of any errors or delays in
calculating or disseminating such index.
    Proposed Rule 1811 concerning Disclaimers is based on, and
substantially similar to, rules that are

currently operative on other exchanges.\54\
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    \54\ See, e.g., MIAX Options Rule 1811; Nasdaq ISE Rule 2011 and
Cboe Rule 24.14.
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    Proposed Rule 1812, Exercise of American-Style Index Options,
contains standards for exercising American-style index options. The
proposed rule provides that no Member may prepare, time stamp or submit
an exercise instruction for an American-style index options series if
the Member knows or has reason to know that the exercise instruction
calls for the exercise of more contracts than the ``net long position''
of the account for which the exercise instruction is to be tendered.
For purposes of this rule: (i) The term ``net long position'' shall
mean the net position of the account in such option at the opening of
business of the day of such exercise instruction, plus the total number
of such options purchased that day in opening purchase transactions up
to the time of exercise, less the total number of such options sold
that day in closing sale transactions up to the time of exercise; (ii)
the ``account'' shall be the individual account of the particular
customer, market-maker or ``non-customer'' (as that term is defined in
the By-Laws of the Clearing Corporation) who wishes to exercise; and
(iii) every transaction in an options series effected by a market-maker
in a market-maker's account shall be deemed to be a closing transaction
in respect of the market-maker's then positions in such options series.
No Member may adjust the designation of an ``opening transaction'' in
any such option to a ``closing transaction'' except to remedy mistakes
or errors made in good faith.
Trading Halts
    The Exchange proposes to amend Rule 504, Trading Halts,
Interpretations and Policies .04 to address the handling of trade
nullifications in index options due to trading halts. Specifically,
Interpretations and Policies .04 would be amended to state that, with
respect to index options, trades on the Exchange will be nullified if
the trade occurred during a regulatory halt as declared by the primary
market in underlying securities representing more than ten percent
(10%) of the current index value for narrow-based stock index options,
and twenty percent (20%) of the current index value for broad-based
index options. New Interpretations and Policies .05 to Rule 504 states
that trading halts, resumptions, trading pauses and post-halt
notifications involving index options are governed by Rules 1808(c)-(f)
(described above).
Surveillance and Capacity
    The Exchange represents that is has an adequate surveillance
program in place for index options. The Exchange is a member of the
ISG, which ``is comprised of an international group of exchanges,
market centers, and market regulators.'' The purpose of the ISG is to
provide a framework for the sharing of information and the coordination
of regulatory efforts among exchanges trading securities and related
products to address potential intermarket manipulations and trading
abuses. The ISG plays a crucial role in information sharing among
markets that trade securities, options on securities, security futures
products, and futures and options on broad-based security indexes. A
list identifying the current ISG members is available at https://
www.isgportal.org/isgportal/public/members.htm.
    MIAX PEARL has analyzed its capacity and represents that it
believes the Exchange and the Options Price Reporting Authority
(``OPRA'') have the necessary systems capacity to handle the additional
traffic associated with the listing and trading of index options.
    The Exchange will announce the implementation date of the proposed
rule change by Regulatory Circular to be published no later than 90
days following the date the Commission issues an order approving the
proposed rule change. The implementation date will be no later than 90
days following the issuance of the Regulatory Circular.
2. Statutory Basis
    MIAX PEARL believes that its proposed rule change is consistent
with Section 6(b) of the Act \55\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \56\ in particular, in that it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanisms of a free and open market and a national market
system and, in general, to protect investors and the public interest.
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    \55\ 15 U.S.C. 78f(b).
    \56\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change will expand the
Exchange's capability to introduce and trade both existing and new and
innovative index products on the MIAX PEARL System. The added
capability is consistent with the Act in that it should foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, specifically index options.
The Exchange believes that there is unmet market demand on MIAX PEARL
for exchange-listed index options and the listing and trading of index
options on the Exchange is designed to attract both liquidity and order
flow to the Exchange, all to the benefit of the marketplace as a whole.
    The Exchange believes that the requirements in the proposed listing
standards regarding, among other things, the minimum market
capitalization, trading volume, and relative weightings of an
underlying index's component stocks are designed to ensure that the
markets for the index's component stocks are adequately capitalized and
sufficiently liquid, and that no one stock dominates the index. These
requirements are designed to remove impediments to and perfect the
mechanisms of a free and open market and a national market system and,
in general, to protect investors and the public interest, by ensuring
that unusual or extreme volatility in any single component of an index
could not cause the entire index to become so volatile that it puts
investors at undue and unplanned risk. These requirements also minimize
the potential for manipulating the underlying index, which protects
investors and the public interest.
    The Exchange further believes that the requirement in proposed Rule
1802(b)(10) that the current underlying index value will be reported at
least once every fifteen (15) seconds during the time the index options
are traded on the Exchange, and the requirement in proposed Rule
1802(d)(11) (with respect to broad-based index options) that the
current index value be widely disseminated at least once every fifteen
(15) seconds by OPRA, the CTA, NIDS or one or more major market data
vendors during the time the index options are traded on the Exchange
removes impediments to and perfects the mechanisms of a free and open
market and a national market system by providing transparency with
respect to current index values and by contributing to the overall
transparency of the market for index options. In addition, the Exchange
believes that the requirement in proposed Rule 1802(d)(2) that an index
option be A.M.-settled, rather than based on closing prices, should
help to reduce the potential impact of expiring index

options on the market for an index's component securities.
    The Exchange believes that the requirement in proposed Rule 1803 to
disseminate index values as a condition to the trading of options on an
index fosters cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in, securities by requiring absolute
transparency regarding the dissemination of index values. The
requirement that the Exchange disseminate, or assure that the current
index value is disseminated, and the requirement that the Exchange
maintain, in files available to the public, information identifying the
components whose prices are the basis for calculation of the index and
the method used to determine the current index value, protects
investors and the public interest by ensuring that the current index
value is disseminated regularly and consistently.
    The Exchange's proposal to adopt Rules 1804 through 1807 relating
to position limits, exemptions from position limits, exercise limits in
index options, and regular maintenance reviews are designed to remove
impediments to and perfect the mechanisms of a free and open market and
a national market system and, in general, to protect investors and the
public interest, by limiting investors' levels of concentration in a
single index position. Not only would an investor be at undue risk by
assuming such a position, but the market for the affected index option
could be disproportionately affected by the trading activities of that
single investor with an unusually large long or short position. The
Exchange is proposing to mitigate this risk by establishing the same
position and exercise limits, and hedging rules, that already exist on
other exchanges, all designed for the protection of investors and the
public interest.
    Proposed Rule 1808, Trading Sessions, is designed to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in, securities, by establishing the same,
uniform trading hours for index options as other exchanges. The
Exchange's proposal to establish rules and procedures for openings,
halts and reopenings, together with the designation by the Board of an
Exchange official authorized to halt trading when, in his or her
judgment, such action is appropriate in the interests of a fair and
orderly market is designed to protect investors and the public interest
by ensuring that there are multiple safeguards available during times
of unusual or particularly volatile market activity.
    Proposed Rule 1809, Terms of Index Options Contracts, outlines the
terms of index options contracts in terms of the meaning of premium
bids and offers; exercise prices; expiration months; the trading of
European Style Index options. This proposed rule is the same as the
rules concerning terms of index options contracts on other
exchanges.\57\ Proposed Rule 1809 is a generic rule concerning the
manner of trading of index option contracts. The Exchange's proposal to
adopt existing uniform rules governing terms of index option contracts
is designed to perfect the mechanisms of a free and open market and a
national market system and, in general, to protect investors and the
public interest by adopting standards and rules for index option
contracts that are consistent with other exchanges' standards and
rules. The Exchange believes that this benefits investors and the
marketplace as a whole because investors who determine to trade index
options on MIAX PEARL will not need to rely on an unfamiliar set of
rules and contract terms when they begin trading index options here.
---------------------------------------------------------------------------

    \57\ See MIAX Options Rule 1809; Nasdaq ISE Rule 2009; Cboe Rule
24.9; and Nasdaq Phlx Rule 1101A.
---------------------------------------------------------------------------

    The Exchange believes that its proposal to include index options in
the Short Term Options Series Program removes impediments to, and
perfects the mechanisms of, a free and open market and a national
market system, and will benefit market participants by giving them more
flexibility to closely tailor their investment and hedging decisions in
a greater number of securities. The Exchange also believes that
expanding the Short Term Options Series Program to include index
options will provide the investing public and other market participants
with additional opportunities to hedge their investment, thus allowing
these investors to better manage their acceptable risk tolerance
levels, all to the benefit of the investing public and the marketplace
as a whole.
    The Exchange's proposal to adopt Rule 1810 relating to debit put
spreads fosters cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitates transactions in, securities, by maintaining uniformity
in its rules governing this strategy with the same specificity as the
rules on other exchanges.
    Proposed Rule 1811 concerning Disclaimers is based on, and
substantially similar to, rules that are currently operative on other
exchanges.\58\ The proposed rule promotes just and equitable principles
of trade by stating that a Reporting Authority shall have no liability
for any damages, claims, losses (including any indirect or
consequential losses), expenses, or delays, whether direct or indirect,
foreseen or unforeseen, suffered by any person arising out of any
circumstance or occurrence relating to the person's use of an index,
any opening, intra-day or closing value therefor, any data included
therein or relating thereto, or any options contract based thereon, or
arising out of any errors or delays in calculating or disseminating
such index.
---------------------------------------------------------------------------

    \58\ See, e.g., MIAX Options Rule 1811; Nasdaq ISE Rule 2011 and
Cboe Rule 24.14.
---------------------------------------------------------------------------

    Proposed Rule 1812, Exercise of American-Style Index Options, is
designed to prevent fraudulent and manipulative acts and practices and
to promote just and equitable principles of trade by providing that no
Member may prepare, time stamp or submit an exercise instruction for an
American-style index options series if the Member knows or has reason
to know that the exercise instruction calls for the exercise of more
contracts than the then ``net long position'' of the account for which
the exercise instruction is to be tendered. The proposed rule contains
standards for exercising American-style index options that are in
effect on other exchanges.\59\
---------------------------------------------------------------------------

    \59\ See, e.g., MIAX Options Rule 1812; Nasdaq ISE Rule 2012;
Cboe Rule 24.18; and Nasdaq Phlx Rule 1042A.
---------------------------------------------------------------------------

    The Exchange believes that its proposed surveillance program and
available capacity with respect to the listing and trading of index
options perfects the mechanisms of a free and open market and a
national market system through, among other things, its membership in
ISG and its current available capacity. As discussed above, the
Exchange represents that has an adequate surveillance program in place
for index options. The Exchange is a member of the ISG, which ``is
comprised of an international group of exchanges, market centers, and
market regulators.'' The purpose of the ISG is to provide a framework
for the sharing of information and the coordination of regulatory
efforts among exchanges trading securities and related products to
address potential intermarket manipulations and trading abuses. The ISG
plays a crucial role in information sharing among markets that trade

securities, options on securities, security futures products, and
futures and options on broad-based security indexes. A list identifying
the current ISG members is available at https://www.isgportal.org/
isgportal/public/members.htm. MIAX PEARL has analyzed its capacity and
represents that it believes the Exchange and the Options Price
Reporting Authority (``OPRA'') have the necessary systems capacity to
handle the additional traffic associated with the listing and trading
of index options.

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. On the contrary, the
Exchange believes that the proposed rule change will enable the
Exchange to compete for order flow in index options products with other
exchanges that currently have rules and functionality in place to list
and trade index options.
    The Exchange further believes that the proposed rule change will
enhance intra-market competition, as more varied index products become
available for trading on the Exchange, which should encourage a greater
number of Market Makers to trade index options, resulting in greater
liquidity and more competitive quoting on the Exchange.

C. Self-Regulatory Organization's Statement on Comments on the Proposed