[Federal Register Volume 83, Number 227 (Monday, November 26, 2018)]
[Notices]
[Pages 60547-60550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-25601]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84624; File No. SR-Phlx-2018-72]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
of Proposed Rule Change To Establish Rules Governing the Give Up of a
Clearing Member by a Member Organization on Exchange Transactions
November 19, 2018.
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 November 6, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III, below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to establish rules governing the give up of a
Clearing Member \3\ by a member organization on Exchange transactions.
---------------------------------------------------------------------------
\3\ Clearing Member means a member organization which has been
admitted to membership in the Options Clearing Corporation pursuant
to the provisions of the rules of the Options Clearing Corporation.
See Rule 1000(b)(3).
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
website 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 proposes to amend Phlx Rule 1037, which is currently
reserved, to establish requirements related to the give up of a
Clearing Member by a member organization on Exchange transactions.
By way of background, to enter transactions on the Exchange, a
member organization must either be a Clearing Member or have a clearing
arrangement with a Clearing Member.\4\ Rule 1052 currently provides
that every Clearing Member shall be responsible for the clearance of
the Exchange options transactions of such Clearing Member and of each
member organization who gives up the name of such Clearing Member in an
Exchange options transaction, provided the Clearing Member has
authorized such member organization to give up its name with respect to
Exchange options transactions.
---------------------------------------------------------------------------
\4\ See Rule 1046.
---------------------------------------------------------------------------
Recently, certain Clearing Members, in conjunction with the
Securities Industry and Financial Markets Association (``SIFMA''),
expressed concerns related to the process by which executing brokers on
U.S. options exchanges (``Exchanges'') are allowed to designate or
`give up' a clearing firm for purposes of clearing particular
transactions. The SIFMA-affiliated Clearing Members have recently
identified the current give up process as a significant source of risk
for clearing firms, and subsequently requested that the Exchanges
alleviate this risk by amending Exchange rules governing the give up
process.\5\
---------------------------------------------------------------------------
\5\ NYSE Arca Inc. (``Arca'') recently filed to amend its give
up procedures. Arca's proposal would allow a Designated Give Up to
opt out of acting as the give up for certain OTP Holders and OTP
Firms. See Securities Exchange Act Release No. 84284 (September 25,
2018), 83 FR 49434 (October 1, 2018) (SR-NYSEArca-2018-68). The
Exchange's proposal leads to the same result of providing its
Clearing Members the ability to control risk, but it differs in
process from Arca's proposal.
---------------------------------------------------------------------------
[[Page 60548]]
Proposed Rule Change
Based on the above, the Exchange now seeks to amend its rules
regarding the current give up process in order to allow a Clearing
Member to opt in, at The Options Clearing Corporation (``OCC'')
clearing number level, to a feature that, if enabled by the Clearing
Member, will allow the Clearing Member to specify which member
organizations are authorized to give up that OCC clearing number. As
proposed, Rule 1037, which is currently reserved, will be titled as
``Authorization to Give Up'' and will provide that for each transaction
in which a member organization participates, the member organization
may indicate, at the time of the trade, with respect to floor trading
only, or through post trade allocation, any OCC number of a Clearing
Member through which a transaction will be cleared (``Give Up''),
provided the Clearing Member has not elected to ``Opt In,'' as defined
in paragraph (b) of the proposed Rule, and restrict one or more of its
OCC number(s) (``Restricted OCC Number'').\6\ A member organization may
Give Up a Restricted OCC Number provided the member organization has
written authorization as described in paragraph (b)(ii) (``Authorized
Member Organization'').
---------------------------------------------------------------------------
\6\ Today, electronic trades need a valid mnemonic, which is
only set up if there is a clearing arrangement already in place
through a Letter of Guarantee. As such, electronic trades
automatically clear through the guarantor associated with the
mnemonic at the time of the trade, so a member organization may only
amend its Give Up post-trade. As proposed, the Exchange will also
restrict the post-trade allocation portion of an electronic trade
systematically. See note 13 below.
---------------------------------------------------------------------------
Proposed Rule 1037(b) provides that Clearing Members may request
the Exchange restrict one or more of their OCC clearing numbers (``Opt
In'') as described in subparagraph (b)(i) of Rule 1037. If a Clearing
Member Opts In, the Exchange will require written authorization from
the Clearing Member permitting a member organization to Give Up a
Clearing Member's Restricted OCC Number. An Opt In would remain in
effect until the Clearing Member terminates the Opt In as described in
subparagraph (iii). If a Clearing Member does not Opt In, that Clearing
Member's OCC number may be subject to Give Up by any member
organization.
Proposed Rule 1037(b)(i) will set forth the process by which a
Clearing Member may Opt In. Specifically, a Clearing Member may Opt In
by sending a completed ``Clearing Member Restriction Form'' listing all
Restricted OCC Numbers and Authorized Member Organizations.\7\ A copy
of the proposed form is attached in Exhibit 3 to the filing. A Clearing
Member may elect to restrict one or more OCC clearing numbers that are
registered in its name at OCC. The Clearing Member would be required to
submit the Clearing Member Restriction Form to the Exchange's
Membership Department as described on the form. Once submitted, the
Exchange requires ninety days before a Restricted OCC Number is
effective within the System. This time period is to provide adequate
time for the member users of that Restricted OCC Number who are not
initially specified by the Clearing Member as Authorized Member
Organizations to obtain the required written authorization from the
Clearing Member for that Restricted OCC Number. Such member users would
still be able to Give Up that Restricted OCC Number during this ninety
day period (i.e., until the number becomes restricted within the
System).
---------------------------------------------------------------------------
\7\ This form will be available on the Exchange's website. The
Exchange will also maintain, on its website, a list of the
Restricted OCC Numbers, which will be updated on a regular basis,
and the Clearing Member's contact information to assist member
organizations (to the extent they are not already Authorized Member
Organizations) with requesting authorization for a Restricted OCC
Number. The Exchange may utilize additional means to inform its
members of such updates on a periodic basis.
---------------------------------------------------------------------------
Proposed Rule 1037(b)(ii) will set forth the process for member
organizations to Give Up a Clearing Member's Restricted OCC Number.
Specifically, a member organization desiring to Give Up a Restricted
OCC Number must become an Authorized Member Organization.\8\ The
Clearing Member will be required to authorize a member organization as
described in subparagraph (i) or (iii) of Rule 1037(b) (i.e., through a
Clearing Member Restriction Form), unless the Restricted OCC Number is
already subject to a Letter of Guarantee that the member organization
is a party to, as set forth in Rule 1037(d).
---------------------------------------------------------------------------
\8\ The Exchange will develop procedures for notifying member
organizations that they are authorized or unauthorized by Clearing
Members.
---------------------------------------------------------------------------
Pursuant to proposed Rule 1037(b)(iii), a Clearing Member may amend
the list of its Authorized Member Organizations or Restricted OCC
Numbers by submitting a new Clearing Member Restriction Form to the
Exchange's Membership Department indicating the amendment as described
on the form. Once a Restricted OCC Number is effective within the
System pursuant to Rule 1037(b)(i), the Exchange may permit the
Clearing Member to authorize, or remove authorization for, a member
organization to Give Up the Restricted OCC Number intra-day only in
unusual circumstances, and on the next business day in all regular
circumstances. The Exchange will promptly notify the member
organizations if they are no longer authorized to Give Up a Clearing
Member's Restricted OCC Number. If a Clearing Member removes a
Restricted OCC Number, any member organization may Give Up that OCC
clearing number once the removal has become effective on or before the
next business day.
Proposed Rule 1037(c) will provide that the System will not allow
an unauthorized member organization to Give Up a Restricted OCC
Number.\9\ Specifically:
---------------------------------------------------------------------------
\9\ As described below, the Exchange's proposed process closely
follows the current process.
---------------------------------------------------------------------------
For orders that are executed on the trading floor in open
outcry using the Options Floor Based Management System (``FBMS''),\10\
the System will reject the clearing portion of the trade if an
unauthorized Give Up with a Restricted OCC Number was entered. The
member organization will receive notification of the rejected clearing
information, and will be required to modify the clearing information by
contacting the Exchange.\11\
---------------------------------------------------------------------------
\10\ See Phlx Rules 1063(e) and 1080(a)(i)(C).
\11\ In this case, the FBMS order will be executed, provided the
terms of the trade comply with the relevant Exchange rules, and the
execution reported to the consolidated tape. The System will,
however, reject the clearing portion, and the member organization
will have to amend the clearing information by contacting the Nasdaq
Correction Post once it receives the reject notification. The
Exchange will then promptly process the requested change. This is
how such orders are processed today if, for instance, a member
organization enters an erroneous OCC clearing number (i.e.,
`keypunch errors').
---------------------------------------------------------------------------
For all other orders (i.e., orders that are submitted
directly to the System through the Exchange's various protocols),\12\
the System will not allow an unauthorized Give Up with a Restricted OCC
Number to be submitted at the firm mnemonic level at the point of order
entry.\13\
---------------------------------------------------------------------------
\12\ See Phlx Rule 1080(a)(i).
\13\ Specifically, the System will block the entry of the order
from the outset. This is because a valid mnemonic will be required
for any order to be submitted directly to the System, and a mnemonic
will only be set up for a member organization if there is already a
clearing arrangement in place for that firm either through a Letter
of Guarantee (as is the case today) or in the case of a Restricted
OCC Number, the member organization becoming an Authorized Member
Organization. The System will also restrict any post-trade
allocation changes if the member organization is not authorized to
use a Restricted OCC Number.
---------------------------------------------------------------------------
Furthermore, the Exchange proposes to adopt paragraph (d) to Rule
1037 to
[[Page 60549]]
provide, as is the case today, that a clearing arrangement subject to a
Letter of Guarantee would immediately permit the Give Up of a
Restricted OCC Number by the member organization that is party to the
arrangement. Since there is an OCC clearing arrangement already
established in this case, no further action is needed on the part of
the Clearing Member or the member organization.
The Exchange also proposes to adopt paragraph (e) to Rule 1037 to
provide that an intentional misuse of this Rule is impermissible, and
may be treated as a violation of Rule 707, titled ``Conduct
Inconsistent with Just and Equitable Principles of Trade,'' or Rule
708, titled ``Acts Detrimental to the Interest or Welfare of the
Exchange.'' This language will make clear that the Exchange will
regulate an intentional misuse of this Rule (e.g., sending orders to a
Clearing Member's OCC account without the Clearing Member's consent),
and that such behavior would be a violation of Exchange rules.
Finally, the Exchange proposes to amend Rule 1052, which addresses
the financial responsibility of Exchange options transactions clearing
through Clearing Members, to clarify that this Rule will apply to all
Clearing Members, regardless of whether or not they elect to Opt In
pursuant to proposed Rule 1037. Specifically, the Exchange proposes to
add that Rule 1052 will apply to all Clearing Members who either (i)
have Restricted OCC Numbers with Authorized Member Organizations
pursuant to Rule 1037, or (ii) have non-Restricted OCC Numbers.
Implementation
The Exchange proposes to implement the proposed rule change no
later than by the end of Q1 2019. The Exchange will announce the
implementation date to its member organizations in an Options Trader
Alert.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\14\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\15\ in particular, in that it is designed to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general to
protect investors and the public interest.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Particularly, as discussed above, several clearing firms affiliated
with SIFMA have recently expressed concerns relating to the current
give up process, which permits member organizations to identify any
Clearing Member as a designated give up for purposes of clearing
particular transactions, and have identified the current give up
process (i.e., a process that lacks authorization) as a significant
source of risk for clearing firms.
The Exchange believes that the proposed changes to Rule 1037 help
alleviate this risk by enabling Clearing Members to `Opt In' to
restrict one or more of its OCC clearing numbers (i.e., Restricted OCC
Numbers), and to specify which Authorized Member Organizations may Give
Up those Restricted OCC Numbers. As described above, all other member
organizations would be required to receive written authorization from
the Clearing Member before they can Give Up that Clearing Member's
Restricted OCC Number. The Exchange believes that this authorization
provides proper safeguards and protections for Clearing Members as it
provides controls for Clearing Members to restrict access to their OCC
clearing numbers, allowing access only to those Authorized Member
Organizations upon their request. The Exchange also believes that its
proposed Clearing Member Restriction Form allows the Exchange to
receive in a uniform fashion, written and transparent authorization
from Clearing Members, which ensures seamless administration of the
Rule.
The Exchange believes that the proposed Opt In process strikes the
right balance between the various views and interests across the
industry. For example, although the proposed rule would require member
organizations (other than Authorized Member Organizations) to seek
authorization from Clearing Members in order to have the ability to
give them up, each member organization will still have the ability to
Give Up a Restricted OCC Number that is subject to a Letter of
Guarantee without obtaining any further authorization if that member
organization is party to that arrangement. The Exchange also notes that
to the extent the executing member organization has a clearing
arrangement with a Clearing Member (i.e., through a Letter of
Guarantee), a trade can be assigned to the executing member
organization's guarantor.\16\ Accordingly, the Exchange believes that
the proposed rule change is reasonable and continues to provide
certainty that a Clearing Member would be responsible for a trade,
which protects investors and the public interest. Finally, the Exchange
believes that adopting paragraph (e) of Rule 1037 will make clear that
an intentional misuse of this Rule (e.g., sending orders to a Clearing
Member's OCC account without the Clearing Member's consent) will be a
violation of the Exchange's rules, and that such behavior would subject
a member organization to disciplinary action.
---------------------------------------------------------------------------
\16\ See Rule 1046 (providing that a member organization
conducting an options business must be a Clearing Member or have a
clearing arrangement with a Clearing Member).
---------------------------------------------------------------------------
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 necessary or appropriate in
furtherance of the purposes of the Act. The Exchange does not believe
that the proposed rule change will impose an unnecessary burden on
intramarket competition because it would apply equally to all similarly
situated Members. The Exchange also notes that, should the proposed
changes make Phlx more attractive for trading, market participants
trading on other exchanges can always elect to become Members on Phlx
to take advantage of the trading opportunities.
Furthermore, the proposed rule change does not address any
competitive issues and ultimately, the target of the Exchange's
proposal is to reduce risk for Clearing Members under the current give
up model. Clearing firms make financial decisions based on risk and
reward, and while it is generally in their beneficial interest to clear
transactions for market participants in order to generate profit, it is
the Exchange's understanding from SIFMA and clearing firms that the
current process can create significant risk when the clearing firm can
be given up on any market participant's transaction, even where there
is no prior customer relationship or authorization for that designated
transaction.
In the absence of a mechanism that governs a market participant's
use of a Clearing Member's services, the Exchange's proposal may
indirectly facilitate the ability of a Clearing Member to manage their
existing customer relationships while continuing to allow market
participant choice in broker execution services. While Clearing Members
may compete with executing brokers for order flow, the Exchange does
not believe this proposal
[[Page 60550]]
imposes an undue burden on competition. Rather, the Exchange believes
that the proposed rule change balances the need for Clearing Members to
manage risks and allows them to address outlier behavior from executing
brokers while still allowing freedom of choice to select an executing
broker.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-Phlx-2018-72 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-2018-72. 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 we 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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-Phlx-2018-72 and should be submitted on
or before December 17, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------
\17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-25601 Filed 11-23-18; 8:45 am]
BILLING CODE 8011-01-P