[Federal Register Volume 84, Number 59 (Wednesday, March 27, 2019)]
[Notices]
[Pages 11622-11625]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05814]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85386; File No. SR-EMERALD-2019-04]
Self-Regulatory Organizations; MIAX EMERALD, LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Exchange Rule 507, Must Give Up Clearing Member, and Rule 513,
Submission of Orders and Clearance of Transactions
March 21, 2019.
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 March 11, 2019, MIAX Emerald, LLC (``MIAX
Emerald'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change as described in
Items I and II 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 is filing a proposal to amend Exchange Rule 507, Must
Give Up Clearing Member, and Rule 513, Submission of Orders and
Clearance of Transactions, in order to codify the requirement that for
each transaction in which a Member \3\ participates, the Member may
indicate the name of any Clearing Member \4\ through which the
transaction will be cleared (``Give Up''), and to establish a new ``Opt
In'' process by which a Clearing Member can restrict one or more of its
OCC numbers and thereafter designate certain Members as authorized to
Give Up a restricted clearing number.
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\3\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\4\ The term ``Clearing Member'' means a Member that has been
admitted to membership in the Clearing Corporation pursuant to the
provisions of the rules of the Clearing Corporation. See Exchange
Rule 100.
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The text of the proposed rule change is available on the Exchange's
website at http://www.miaxoptions.com/rule-filings/emerald, at MIAX
Emerald'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 proposes to amend its requirements in MIAX Emerald
Rule 507 and Rule 513, related to the give up of a Clearing Member by a
Member on Exchange transactions. By way of background, to enter
transactions on the Exchange, a Member must either be a Clearing Member
or must have a Clearing Member agree to accept financial responsibility
for all of its transactions. Additionally, Rule 507 currently provides
that when a Member executes a transaction on the Exchange, it must give
up the name of a Clearing Member (the ``Give Up'') through which the
transaction will be cleared (i.e., ``give up''). The Exchange believes
that this proposal would result in the fair and reasonable use of
resources by both the Exchange and the Member. In addition, the
proposed change would align the Exchange with competing options
exchanges that have proposed rules consistent with this proposal.\5\
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\5\ See Securities Exchange Act Release No. 84624 (November 19,
2018), 83 FR 60547 (November 26, 2018) (SR-Phlx-2018-72) (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). See also Securities Exchange Act Release No. 84981
(January 9, 2019), 84 FR 837 (January 31, 2019) (SR-Phlx-2018-72)
(Notice of Designation of a Longer Period for Commission Action on a
Proposed Rule Change To Establish Rules Governing the Give Up of a
Clearing Member by a Member Organization on Exchange Transactions).
See also Securities Exchange Act Release No. 85136 (February 14,
2019) (SR-Phlx-2018-72) (Order Approving a Proposed Rule Change to
Establish Rules Governing the Give Up of a Clearing Member by a
Member Organization on Exchange Transactions).
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[[Page 11623]]
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 the 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.\6\
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\6\ See id.
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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 Members are
authorized to give up that OCC clearing number. As proposed, Rule 507
will be amended to provide that for each transaction in which a Member
participates, the Member may indicate the name of any Clearing Member
through which the 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 restricted one or more of its
OCC number(s) (``Restricted OCC Number'').\7\ A Member may Give Up a
Restricted OCC Number provided the Member has written authorization as
described in paragraph (b)(2) (``Authorized Member'').
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\7\ 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 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 10 below.
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Proposed Rule 507(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)(1) of Rule 507. If a Clearing
Member Opts In, the Exchange will require written authorization from
the Clearing Member permitting a Member 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 (3).
If a Clearing Member does not Opt In, that Clearing Member's OCC number
may be subject to Give Up by any Member.
Proposed Rule 507(b)(1) 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 Members.\8\ A copy of the
proposed form is attached in Exhibit 3. 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 Members 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 the ninety day period (i.e., until the
number becomes restricted within the System).
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\8\ 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 Members (to
the extent they are not already Authorized Members) 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.
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Proposed Rule 507(b)(2) will set forth the process for Members to
Give Up a Clearing Member's Restricted OCC Number. Specifically, a
Member desiring to Give Up a Restricted OCC Number must become an
Authorized Member.\9\ The Clearing Member will be required to authorize
a Member as described in subparagraph (1) or (3) of Rule 507(b) (i.e.,
through an Clearing Member Restriction Form), unless the Restricted OCC
Number is already subject to a Letter of Guarantee that the Member is a
party to, as set forth in Rule 507(d).
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\9\ The Exchange will develop procedures for notifying Members
that they are authorized or unauthorized by Clearing Members.
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Pursuant to proposed Rule 507(b)(3), a Clearing Member may amend
the list of its Authorized Members 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 507(b)(1), the Exchange may permit the Clearing Member
to authorize, or remove from authorization for, a Member 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 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 may Give Up that OCC clearing
number once the removal has become effective on or before the next
business day.
Proposed Rule 507(c) will provide that the System will not allow an
unauthorized Member to Give Up a Restricted OCC Number. Specifically,
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.\10\
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\10\ 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 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 becoming an Authorized Member. The System will
also restrict any post-trade allocation changes if the Member is not
authorized to use a Restricted OCC Number.
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Furthermore, the Exchange proposes to adopt paragraph (d) to Rule
507 to 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 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.
The Exchange also proposes to adopt paragraph (e) to Rule 507 to
provide that an intentional misuse of this Rule is impermissible, and
may be treated as a violation of Rule 301, titled ``Just and Equitable
Principles of Trade.'' 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 such behavior would be a violation of Exchange rules.
Furthermore, the Exchange proposes to adopt paragraph (f) to Rule
507 to codify that notwithstanding anything to the contrary in the
proposed rule, if a Clearing Member that a Member has indicated as the
Give Up rejects a trade,
[[Page 11624]]
the Clearing Member that has issued a Letter of Guarantee pursuant to
Rule 209, for such executing Member, shall be responsible for the
clearance of the subject trade.
Finally, the Exchange proposes to amend Rule 513, 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 507. Specifically, the Exchange proposes to
add that Rule 513 will apply to all Clearing Members who either (i)
have Restricted OCC Numbers with Authorized Members pursuant to Rule
507, or (ii) have non-Restricted OCC Numbers.
2. Statutory Basis
MIAX Emerald believes that its proposed rule change is consistent
with Section 6(b) of the Act \11\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \12\ 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 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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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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Particularly, as discussed above, several clearing firms affiliated
with SIFMA have recently expressed concerns relating to the current
give up process, which permits Members 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 507 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 may Give Up those
Restricted OCC Numbers. As described above, all other Members 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 Members 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 Members
(other than Authorized Members) to seek authorization from Clearing
Members in order to have the ability to give them up, each Member 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 is party to that arrangement. The Exchange
also notes that to the extent that the executing Member has a clearing
arrangement with a Clearing Member (i.e., through a Letter of
Guarantee), a trade can be assigned to the executing Members
guarantor.\13\ 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. Additionally, the Exchange believes
that adopting paragraph (e) of Rule 507 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 to disciplinary action. For these reasons, the Exchange
believes that its proposed changes to Rule 507 and Rule 513, is
consistent with Section 6(b) of the Act in general, and furthers the
objectives of Section 6(b)(5) of the Act 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 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, by codifying the requirement
that for each transaction in a which a Member participates, the Member
may indicate the name of any Clearing Member through which the
transaction will be cleared, provided the Clearing Member has not
elected to Opt In.
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\13\ See Rule 209 (providing that each Member shall provide a
letter of guarantee for the Member's trading activities on the
Exchange from a Clearing Member in a form and manner prescribed by
the Exchange). See also proposed Rule 507(f).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed rule change will impose an unnecessary burden
on intra-market competition because it will apply equally to all
similarly situated Members. The Exchange also notes that, should the
proposed changes make MIAX Emerald more attractive for trading, market
participants trading on other exchanges can always elect to become
Members on MIAX Emerald 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 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 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.
[[Page 11625]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor 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 after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to 19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6) \15\
thereunder.
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 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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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of the filing. However,
Rule 19b-4(f)(6)(iii)\16\ permits the Commission to designate a shorter
time if such action is consistent with the protection of investors and
the public interest. In its filing, MIAX Emerald requested that the
Commission waive the 30-day operative delay. The Exchange represented
that the proposal establishes a rule regarding the give up of a
Clearing Member in order to help clearing firms manage risk while
continuing to allow market participants choice in broker execution
services. The Commission notes that it recently approved a
substantially similar proposed rule change by Nasdaq Phlx LLC.\17\ The
Commission believes that waiver of the 30-day operative delay is
consistent with the protection of investors and the public interest, as
such waiver will provide transparency and operational certainty
including through the use of a standardized give up process and would
align the give up process with other option exchanges. Accordingly, the
Commission waives the 30-day operative delay and designates the
proposed rule change operative upon filing.\18\
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\16\ 17 CFR 240.19b-4(f)(6)(iii).
\17\ See supra note 5.
\18\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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 necessary or
appropriate in the public interest, for the protection of investors, or
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-EMERALD-2019-04 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-EMERALD-2019-04. 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 website (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-EMERALD-2019-04 and should be submitted
on or before April 17, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05814 Filed 3-26-19; 8:45 am]
BILLING CODE 8011-01-P