[Federal Register Volume 84, Number 114 (Thursday, June 13, 2019)]
[Notices]
[Pages 27678-27681]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12449]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86064; File No. SR-MRX-2019-10]
Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend Its
Rules Governing the Give Up of a Clearing Member by a Member on
Exchange Transactions
June 7, 2019.
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 May 24, 2019, Nasdaq MRX, LLC (``MRX'' 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.
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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 a proposal to amend its rules governing
the give up of a Clearing Member \3\ by a Member on Exchange
transactions.
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\3\ The term ``Clearing Member'' means a Member that is self-
clearing or an Electronic Access Member that clears Exchange
Transactions for other Members of the Exchange. See Rule 100(a)(11).
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The text of the proposed rule change is available on the Exchange's
website at http://nasdaqmrx.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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend its requirements in Rule 707 related
to the give up of a Clearing Member by a Member on Exchange
transactions. This proposed rule change is substantially similar \4\ to
a recently-approved rule change by the Exchange's affiliate, Nasdaq
PHLX LLC (``Phlx''),\5\ and serves to align the rules of Phlx and the
Exchange.\6\
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\4\ Specifically, MRX is not adopting sections (c)(i) and
(c)(ii) of Phlx Rule 1037, which relate to how the Phlx trading
system will enforce unauthorized Give Ups for floor trades and
electronic trades, respectively. With respect to electronic trades,
Phlx will block the order from the outset whereas MRX will
automatically default to the Member's guarantor. See proposed MRX
Rule 707(c).
\5\ See Securities Exchange Act Release No. 85136 (February 14,
2019) (SR-Phlx-2018-72) (Approval Order).
\6\ The other Nasdaq, Inc.-owned options markets, Nasdaq BX,
Nasdaq ISE, Nasdaq GEMX, and The Nasdaq Options Market
(collectively, ``Nasdaq HoldCo Exchanges''), will file similar rule
change proposals based on the Phlx filing.
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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.
In particular, Rule 707 currently provides that a Member must give up
the name of the Clearing Member through whom the transaction will be
cleared. Rule 712(b) provides, in relevant part, that every Clearing
Member shall be responsible for the clearance of Exchange transactions
of such Clearing Member and of each Member who gives up such Clearing
Member's name pursuant to a letter of authorization, letter of
guarantee or other authorization given by such Clearing Member to such
Member, which authorization must be submitted to the Exchange.
Additionally Rule 808(a) provides that no Market Maker (i.e., Primary
Market Makers and Competitive Market Makers) shall make any
transactions on the Exchange unless a Letter of Guarantee has been
issued for such Member by a Clearing Member and filed with the
Exchange.\7\
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\7\ Furthermore, the Exchange previously issued guidance on
designating Give Ups in Regulatory Information Circular 2016-001.
This rule change supersedes the Exchange's previous interpretation.
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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.\8\
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\8\ See note 5 above.
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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. Accordingly, Rule 707
will be retitled as ``Authorization to Give Up,'' and the current rule
text will be replaced by new language. Specifically, proposed Rule 707
will provide that for each transaction in which a Member participates,
the Member may indicate, at the time of the trade 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''). A Member may Give Up a Restricted
[[Page 27679]]
OCC Number provided the Member has written authorization as described
in paragraph (b)(ii) (``Authorized Member'').
Proposed Rule 707(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 707. 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
(iii). 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 707(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 Members.\9\ A copy of the
proposed form is attached in Exhibit 3[sic]. 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 this ninety day period (i.e., until the
number becomes restricted within the System).
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\9\ 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 707(b)(ii) 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.\10\ The Clearing Member will be required to
authorize a Member as described in subparagraph (i) or (iii) of Rule
707(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 is a party to, as set forth in Rule 707(d).
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\10\ 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 707(b)(iii), 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 707(b)(i), the Exchange may permit the Clearing Member
to authorize, or remove 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 Members 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 707(c) will provide that the System will not allow an
unauthorized Member to Give Up a Restricted OCC Number. Specifically,
if an unauthorized Give Up with a Restricted OCC Number is submitted to
the System, the System will process that transaction using the Member's
default OCC clearing number.
Furthermore, the Exchange proposes to adopt paragraph (d) to Rule
707 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 707 to
provide that an intentional misuse of this Rule is impermissible, and
may be treated as a violation of Rule 400, titled ``Just and Equitable
Principles of Trade,'' or Rule 401, titled ``Adherence to Law.'' 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.
In light of the foregoing proposal, the Exchange also proposes to
amend Rule 712(b), which addresses the Clearing Member's financial
responsibility for the Exchange transactions of Members who give up the
name of such Clearing Member pursuant to, for example, a letter of
guarantee. In particular, the Exchange proposes to add that every
Clearing Member shall be responsible for the clearance of the Exchange
transactions of each Member who gives up such Clearing Member's name
pursuant to a written authorization to become an Authorized Member
under Rule 707. Lastly, the Exchange proposes the following technical
changes in the same provision: (1) To capitalize Letter of Guarantee
for consistency throughout its Rulebook, (2) to delete obsolete
references to the letter of clearing authorization,\11\ and (3) to
replace the phrase ``letter of clearing authorization or letter of
guarantee'' with ``authorization'' to track the foregoing changes.
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\11\ MRX recently updated its forms to combine the Electronic
Access Member letter of clearing authorization and Market Maker
guarantee into one Letter of Guarantee applicable to all Members.
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Implementation
The Exchange proposes to implement the proposed rule change no
later than by the end of Q3 2019. The Exchange will announce the
implementation date to its Members in an Options Trader Alert.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\12\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\13\ 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.
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\12\ 15 U.S.C. 78f(b).
\13\ 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
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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 707 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 Members 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 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 Member's
guarantor. 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 707 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.
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 MRX more attractive for trading, market participants
trading on other exchanges can always elect to become Members on MRX 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 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
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 \14\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\15\
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\14\ 15 U.S.C. 78s(b)(3)(A)(iii).
\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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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-MRX-2019-10 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-MRX-2019-10. 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/
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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-MRX-2019-10 and should be
submitted on or before July 5, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-12449 Filed 6-12-19; 8:45 am]
BILLING CODE 8011-01-P