[Federal Register Volume 81, Number 171 (Friday, September 2, 2016)]
[Notices]
[Pages 60756-60758]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21131]
[[Page 60756]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78714; File No. SR-Phlx-2016-84]
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Rule
1042A, Exercise of Options Contracts and Options Floor Procedure Advice
G-1, Index Option Exercise Advice Forms
August 29, 2016.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 22, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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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 amend Rule 1042A, Exercise of Options
Contracts and Options Floor Procedure Advice G-1, Index Option Exercise
Advice Forms
The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaqphlx.cchwallstreet.com/, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the 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 amending Rule 1042A to provide additional clarity
to member organizations and add additional requirements regarding the
procedures to be followed in order to exercise American style index
option contracts. Currently, Rule 1042A states that ``[a] memorandum to
exercise any American style stock index option contract, issued or to
be issued in a customer, market maker or firm account at the Options
Clearing Corporation must be received or prepared by the member
organization no later than five minutes after the close of trading on
that day and must be time-stamped at the time it is received or
prepared.'' \3\ Commentary .01 further states that ``[a]ll memoranda of
exercise instructions prepared pursuant to this Rule 1042A are subject
to Securities and Exchange Commission rules 17a-3(a)(6) and 17a-4(b).''
However, the rule does not state what a ``memorandum of exercise'' is.
Nor does it state from whom the member organization may ``receive'' it.
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\3\ See existing Rule 1042A(i).
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Rule 1042A also requires a member or member organization to that
intends to submit an ``exercise notice'' for any American style option
contract(s) on behalf of a customer, specialist, Registered Options
Trader, or firm account to deliver an ``Exercise Advice'' on a form
prescribed by the Exchange, to a place designated by the Exchange, no
later than five minutes after the close of trading.\4\ However, the
rule does not state what an ``Exercise Advice'' or an ``exercise
notice'' is, or whether they may be the same thing or a different
thing, or how they relate to the ``memorandum to exercise'' (though
both the memorandum to exercise and the exercise advice are due no
later than five minutes after the close of trading). The Exchange
believes therefore that the current rule is susceptible to
misinterpretation and confusion on the part of the reader.
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\4\ See existing Rule 1042A(ii).
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The Exchange has consequently determined to provide additional
clarity to member organizations regarding procedures to be followed in
order to exercise an American-style index option contract. It proposes
to delete all rule text currently found in section (a) of Rule 1042A
with the exception of the first part of the first sentence, which reads
simply and clearly that ``[w]ith respect to index option contracts,
clearing members are required to follow the procedures of the Options
Clearing Corporation for tendering exercise notices''. In place of the
deleted text, the Exchange proposes to adopt several new provisions
that clearly articulate the procedures to be followed.
The new language specifies that Clearing Members must follow the
procedures of the Options Clearing Corporation (``OCC'') when
exercising American-style cash-settled index options contracts issued
or to be issued in any account at OCC. Member organizations must also
observe certain procedures with respect to American-style cash-settled
index options. Specifically, for all contracts exercised by the member
organization or by any customer of the member organization, an
``exercise advice'' must be delivered by the member organization in
such form or manner prescribed by the Exchange no later than five (5)
minutes after the close of trading on that day.\5\ Subsequent to the
delivery of an ``exercise advice,'' should the member organization or a
customer of the member organization determine not to exercise all or
part of the advised contracts, the member organization must also
deliver an ``advice cancel'' in such form or manner prescribed by the
Exchange no later than five (5) minutes after the close of trading on
that day.\6\ These procedures would not apply on the business day prior
to expiration in a series expiring on a day other than a business day,
or on the expiration day in series expiring on a business day.\7\
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\5\ See proposed Rule 1042A(i). An exercise advice is a
notification to the Exchange of a member's intention to exercise one
or more options contracts.
\6\ See proposed Rule 1042A(ii).
\7\ See proposed Rule 1042A(vii). Existing Rule 1042A(b) is
being deleted as redundant.
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The new rule language also adds some new provisions not covered by
the existing rule text. It provides that the Exchange may determine to
extend the applicable deadline for the delivery of ``exercise advice''
and ``advice cancel'' notifications pursuant to this paragraph if
unusual circumstances are present.\8\ It prohibits member organizations
from time stamping or submitting an ``exercise advice'' prior to the
purchase of the contracts to be exercised if the member organization
knew or had reason to know that the contracts had not yet been
purchased.\9\ The new language adds a provision specifying that the
failure of any member organization to follow the procedures in the rule
could result in the assessment of a fine, which may include but is not
limited to disgorgement of potential
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economic gain obtained or loss avoided by the subject exercise, as
determined by the Exchange.\10\ The new language also states that
preparing or submitting an ``exercise advice'' or ``advice cancel''
after the applicable deadline on the basis of material information
released after such deadline, in addition to constituting a violation
of the Rule, is activity inconsistent with just and equitable
principles of trade.\11\
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\8\ See proposed Rule 1042A(iii).
\9\ See proposed Rule 1042A(iv).
\10\ See proposed Rule 1042A(v). Exchange Rule 960.1 provides
that any member alleged to have violated rules of the Exchange shall
be subject to the disciplinary jurisdiction of the Exchange, and
after notice and opportunity for a hearing may be appropriately
disciplined by expulsion, suspension, fine, censure, limitation or
termination as to activities, functions, operations, or association
with a member or member organization, or any other fitting sanction
in accordance with the provisions of the Exchange's disciplinary
rules.
\11\ See proposed Rule 1042A(vi).
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The new language requires each member organization to prepare a
memorandum of every exercise instruction received showing by time stamp
the time when such instruction was so received. It provides that such
memoranda shall be subject to the requirements of Commission Rule 17a-
4(b).\12\ Finally, the new language requires each member organization
to establish fixed procedures to ensure secure time stamps in
connection with their electronic systems employed for the recording of
submissions to exercise or not exercise expiring options.\13\
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\12\ See proposed Rule 1042A(viii). The Exchange is deleting
existing Commentary .01 of Rule 1042A as redundant. The Exchange
believes that including the requirement in the text of the rule
rather than as a ``Commentary'' is a preferable approach in terms of
organization and presentation of the rule. Although the proposed
language does not contain the requirement that memoranda of exercise
instructions are subject to Commission Rule 17a-3(a)(6), the
Exchange notes that the rule upon which its proposal is based, NOM
Rulebook chapter VIII, Exercises and Deliveries, section 1, Exercise
of Options Contracts, Supplementary Material .02, does not contain
this requirement. The Exchange seeks to conform its Rule 1042A to
the counterpart NOM rule in this respect.
\13\ See proposed Rule 1042A(ix).
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The Exchange also proposes to amend Options Floor Procedure Advice
(``OFPA'') G-1 by conforming it to the requirements of updated Rule
1042A. References to a specific ``Exercise Advice Form'' are replaced
with general references to exercise advices to eliminate any suggestion
that a specified form must be used in order to comply with Rule 1042A.
The Exchange intends that any written evidence reflecting that Rule
1042A's requirements have been met will be sufficient to constitute an
exercise advice.\14\ The amendments also eliminate an outdated
reference to C/MACS, which is no longer in use at OCC,\15\ and modify
the OFPA to reflect that expiration now typically occurs on a business
day rather than on a Saturday.
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\14\ The Exchange currently does not require the use of a
specific form of exercise advice. Nonetheless, certain floor-based
members currently use a ``Phlx Index Option Exercise Advice Form.''
The Exchange has attached as Exhibit 3 a revised version of the
form, updated to conform to this proposed rule change. These updates
include (1) the addition of a statement that the rule does not apply
in series expiring on a day other than a business day or on the
expiration day in series expiring on a business day, (2) the
deletion of capitalization of the terms memorandum of exercise and
exercise advice, as these are not defined terms in the rule, (3) the
addition of a reference to memorandum of exercise instructions,
which is a term used in the rule, (4) the deletion of a statement
that the form must be time stamped ``contemporaneously with its
submission'' and addition of new language that conforms to the rule,
(5) the adjustment of a cross reference to the rule, in order for
the form to refer to the correct rule section required by the
context, and (6) the updating of the name of the Exchange from
Philadelphia Stock Exchange to NASDAQ OMX PHLX. Members may continue
to use the form, updated as reflected in Exhibit 3, if they choose
to do so. Members will also able to continue to fill the Rule 1042A
exercise advice requirements by sending an email to the Exchange, or
by providing the required exercise advice notification in any other
manner directed by the Exchange. The Exchange accepts the time
indicated on an email as satisfaction of the time stamp requirement.
\15\ According to OCC, C/MACS was an on-line, menu-driven system
that allowed OCC member firms to access or input trade information
directly from or to OCC's clearing systems. See Securities Exchange
Act Release No. 35982 (July 18, 1995), 60 FR 38072 (July 25, 1995),
at footnote 6.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with section
6(b) of the Act \16\ in general, and furthers the objectives of section
6(b)(5) of the Act \17\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest, by adding rules providing clear procedures concerning
exercise of American index options. Rule 1042A is intended to provide
for the maintenance of a level playing field between holders of long
and short positions in expiring index options. After trading has ended
on the final trading day before expiration, persons who are short the
option have no way to close out their short positions. To put option
holders on equal footing, the rule minimizes the time period in which a
holder can exercise an index option after the close of trading on the
last business day prior to expiration in series expiring on a day other
than a business day or on the expiration day in series expiring on a
business day.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the introductory language of Rule 1042A
as revised, as well as sections (i), (vii) and (viii) largely restate
the existing rule, but in a much more clear and understandable way. New
sections (ii) and (iii) provide, respectively, for the delivery of
``advice cancels'' if made on a timely basis and for the extension of
applicable deadlines for delivery of exercise advices and advice cancel
notifications in unusual circumstances. The advice cancel language
codifies existing practice that is not spelled out in the current rule,
and the rule providing for extension of deadlines provides the Exchange
with flexibility to deal with unusual market circumstances in a way
that is fair to market participants. New subsection (iv) clearly
prohibits the preparation, time stamping or submitting an ``exercise
advice'' prior to the purchase of the contracts to be exercised, if the
member organization knew or had reason to know that the contracts had
not yet been purchased. New sections (v) and (vi) articulate clearly
that violation of Rule 1042A may result in consequences including
disgorgement and that preparing or submitting an exercise advice or
advice cancel after the applicable deadline on the basis of material
information released after the deadline violates Rule 1042A and
constitutes activity inconsistent with just and equitable principles of
trade. These provisions should discourage lack of compliance with Rule
1042A. Finally, compliance should be enhanced by the adoption of
section (ix), a new requirement to establish procedures to ensure
secure time stamps for the recording of submissions to exercise or not
exercise expiring options. The proposed amendments to OFPA G-1 are
designed to promote just and equitable principles of trade and to
protect investors and the public interest by conforming it to the
requirements of updated Rule 1042A, eliminating potential confusion
concerning a requirement that a specified form must be used in order to
comply with Rule 1042A, eliminating an outdated reference to C/MACS,
reflecting current practice that exercise advices may be delivered to
Exchange staff in the trading crowd as well as at the Surveillance Post
on the Exchange floor, and acknowledging that expiration now typically
occurs on a business day rather than on a Saturday.
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 not
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necessary or appropriate in furtherance of the purposes of the Act
because the rule provides additional detail and requirements relating
to procedures for exercise of American index options that apply to all
members equally.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to section 19(b)(3)(A)(iii) of the Act \18\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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\18\ 15 U.S.C. 78s(b)(3)(a)(iii).
\19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-Phlx-2016-84 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2016-84. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-Phlx-2016-84 and should be
submitted on or before September 23, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-21131 Filed 9-1-16; 8:45 am]
BILLING CODE 8011-01-P