Document ID: SEC-2019-0177-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2019-02-21T05:00Z

[Federal Register Volume 84, Number 35 (Thursday, February 21, 2019)]
[Notices]
[Pages 5526-5528]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-02895]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85136; File No. SR-Phlx-2018-72]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a 
Proposed Rule Change To Establish Rules Governing the Give Up of a 
Clearing Member by a Member Organization on Exchange Transactions

February 14, 2019.

I. Introduction

    On November 6, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
establish rules governing the ``give up'' process by which an Exchange 
member organization, in connection with executing a trade on the 
Exchange, indicates to the Exchange (i.e., ``gives up'') the name of a 
Clearing Member \3\ that will be responsible for the clearance of that 
transaction. The proposed rule change was published for comment in the 
Federal Register on November 26, 2018.\4\ On January 9, 2019, pursuant 
to Section 19(b)(2) of the Act,\5\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\6\ The Commission received three 
comment letters on the proposed rule change, each in support of the 
proposal.\7\ This order approves the proposed rule change.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Phlx Rule 1000(b)(3) (defining ``Clearing Member'' as a 
member organization that has been admitted to membership in the 
Options Clearing Corporation (``OCC'') pursuant to the provisions of 
the rules of the Options Clearing Corporation).
    \4\ See Securities Exchange Act Release No. 84624 (Nov. 19, 
2018), 83 FR 60547 (``Notice'').
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 84981, 83 FR 837 
(Jan. 31, 2019) (designating February 24, 2019 as the date by which 
the Commission shall approve or disapprove, or institute proceedings 
to determine whether to disapprove, the proposed rule change).
    \7\ See Letters to Brent J. Fields, Secretary, Commission, from: 
(1) Matthew R. Scott, President, Merrill Lynch Professional Clearing 
Corp, dated December 7, 2018 (``Scott Letter''); (2) Ellen Greene, 
Managing Director, SIFMA, dated December 17, 2018 (``SIFMA 
Letter''); and (3) John P. Davidson, President and Chief Operating 
Officer, OCC, dated December 19, 2018 (``Davidson Letter''). The 
comment letters are available at https://www.sec.gov/comments/sr-phlx-2018-72/srphlx201872.htm.

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[[Page 5527]]

II. Description of the Proposed Rule Change

    Exchange rules currently require that, in order to enter 
transactions on the Exchange, a member organization either must be a 
Clearing Member or have a Clearing Member agree to accept financial 
responsibility for the member organization's transactions via a 
clearing arrangement.\8\ Further, Phlx Rule 1052 provides generally 
that Clearing Members are responsible for the clearing their own 
Exchange transactions as well as Exchange transactions of each member 
organization that gives up the Clearing Member's name provided that the 
Clearing Member has authorized such member organization to give up its 
name on Exchange transactions. Exchange rules do not, however, 
establish a framework for the give up authorization process. To address 
this, Phlx proposes to adopt Rule 1037 and amend Rule 1052 to establish 
requirements for the give up process, including specific procedures, in 
greater detail.
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    \8\ See Phlx Rule 1046 (Clearing Arrangements).
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    Specifically, proposed Rule 1037 will allow Clearing Members to 
``opt in'' and request that the Exchange systematically restrict use of 
one or more of its OCC clearing numbers (each a ``Restricted OCC 
Number''). Once restricted, Exchange member organizations will not be 
able to give up the Restricted OCC Number to clear an Exchange 
transaction unless the Clearing Member previously has submitted to the 
Exchange written authorization permitting that member organization to 
give up that Restricted OCC Number. If a Clearing Member does not ``opt 
in'' to this process for a particular OCC number (a ``Non-Restricted 
OCC Number''), that number would be available to be given up by any 
Exchange member organization.
Give Up Process for Restricted OCC Numbers
    A Clearing Member that requests the Exchange to restrict use of one 
or more of its OCC clearing numbers would ``opt in'' by sending to the 
Exchange a completed ``Clearing Member Restriction Form'' \9\ that 
identifies the requested Restricted OCC Numbers.\10\ At the same time, 
the Clearing Member would list on the form the Exchange member 
organizations that it authorizes to give up that Restricted OCC Number 
(each an ``Authorized Member Organization'').\11\ For newly Restricted 
OCC Numbers, the Exchange will require 90 days before the restriction 
becomes effective within the Exchange's system.\12\
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    \9\ The Exchange represented in its filing that it will maintain 
this form and a list of the Restricted OCC Numbers on its website, 
which it will update on a regular basis, along with the Clearing 
Member's contact information to assist member organizations with 
requesting authorization for a Restricted OCC Number. See Notice, 
supra note 4 at n.7.
    \10\ See Proposed Phlx Rule 1037(b)(i). The restriction would 
remain in effect until terminated by the Clearing Member. See id. 
The Exchange also proposes to amend Rule 1052 regarding financial 
responsibility of Exchange options transactions cleared through 
Clearing Members to clarify that Rule 1052 applies to all Clearing 
Members regardless of whether they ``opt in'' pursuant to Phlx Rule 
1037.
    \11\ See id.
    \12\ See id.
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    Thereafter, a member organization may only give up a Restricted OCC 
Number if the member organization has previously been identified and 
processed by the Exchange as an Authorized Member Organization, except 
that a member organization may give up the Restricted OCC Number of its 
guarantor with whom it has a letter of guarantee without being 
identified as an Authorized Member Organization.\13\
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    \13\ See Proposed Phlx Rule 1037(d).
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    Once a Restricted OCC Number is effective, a Clearing Member will 
be able to submit a new Clearing Member Restriction Form to authorize, 
or remove from authorization, a member organization from its list of 
Authorized Member Organizations approved to give up its Restricted OCC 
Number(s), as well as amend its list of Restricted OCC Numbers.\14\ The 
Exchange will promptly notify member organizations if they are no 
longer authorized to give up a Clearing Member's Restricted OCC 
Number.\15\
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    \14\ See Proposed Phlx Rule 1037(b)(iii). Such changes will be 
effective on the next business day under regular circumstances, but 
could be effective intra-day in unusual circumstances. See id.
    \15\ See id.
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    The Exchange will ensure the authorized use of Restricted OCC 
Numbers through its systems and will not allow an unauthorized member 
organization to give up a Restricted OCC Number. Specifically, for 
orders that are executed on the trading floor in open outcry using the 
Options Floor Based Management System (``FBMS''), the Exchange will 
reject the clearing portion of the trade if an unauthorized member 
organization enters a Restricted OCC Number.\16\ The member 
organization will receive notification of the rejected clearing 
information, and will be required to modify the clearing information by 
contacting the Exchange.\17\ For all other orders (i.e., orders that 
are submitted directly to the exchange's system), the Exchange will not 
allow an unauthorized member organization to give up a Restricted OCC 
Number at the firm mnemonic level at the point of order entry.\18\
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    \16\ See Proposed Phlx Rule 1037(c).
    \17\ See id. According to the Exchange, 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 Exchange. See Notice, supra note 4 at n. 11.
    \18\ See Proposed Phlx Rule 1037(c). Specifically, the Exchange 
states that its system will block the entry of the order from the 
outset. See Notice, supra note 4 at n. 13. The Exchange notes that 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 as proposed in the case of a Restricted OCC Number, 
the member organization must be an Authorized Member Organization 
for that Restricted OCC Number. See id. As proposed, the system also 
will now restrict any post-trade allocation changes if the member 
organization is not authorized to use a Restricted OCC Number. See 
id.
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Misuse of the Rule
    Finally, Phlx Rule 1037(e) provides that an intentional misuse of 
the Rule by any party is impermissible and may be treated as a 
violation of Rule 707 (``Conduct Inconsistent with Just and Equitable 
Principles of Trade'') or Rule 708 (``Acts Detrimental to the Interest 
or Welfare of the Exchange'').\19\
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    \19\ See Proposed Phlx Rule 1037(e). See also Notice, supra note 
4 at 60549 (providing one example of intentional misuse where a 
member organization sends orders to a Restricted OCC Number without 
authorization to do so).
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III. Discussion and Commission Findings

    After careful consideration of the proposal, the Commission finds 
that the Exchange's proposed rule change is consistent with the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\20\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\21\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities and, in general, to protect investors and the public 
interest, and not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \20\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).

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[[Page 5528]]

    The Commission received three comment letters on the proposed rule 
change, each supporting it.\22\ One commenter argues that the proposal 
``is a critical first step to reduce risk in listed-options clearing,'' 
and will facilitate the ability of Clearing Members ``to properly 
assess and enforce credit limits for authorized executing brokers and 
their clients.'' \23\ Another commenter notes that the Exchange's 
proposal is the culmination of efforts among industry participants to 
address and ultimately reduce clearing member risks.\24\ Further, one 
commenter believes that the proposal ``strikes the right balance across 
all participants.'' \25\
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    \22\ See supra note 7.
    \23\ SIFMA Letter, supra note 7, at 2.
    \24\ Davidson Letter, supra note 7, at 2.
    \25\ Scott Letter, supra note 7, at 1. See also SIFMA Letter, 
supra note 7, at 2.
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    The Commission believes that the proposal is designed to foster 
cooperation and coordination among the parties engaged in facilitating 
transactions in securities by setting forth a basic framework within 
which a Clearing Member can exercise greater control over the use of 
its clearing services by customers using the services of third party 
executing brokers in a manner that is not intended to allow for or 
impose a burden on competition that is not necessary or appropriate in 
furtherance of the Act. In particular, the Exchange's proposal will 
implement a defined and standardized process through which a Clearing 
Member can ``opt in'' to limit the use of one or more of its OCC 
clearing numbers to member organizations that it pre-authorizes in 
writing, which the Exchange will then enforce through its systems. 
These provisions are designed to help assure the orderly clearance and 
settlement of Exchange trades and should, for example, reduce the 
chance for keypunch errors and may assist Clearing Members in enforcing 
the provisions of their clearing arrangements with customers.
    As an integral and important part of this process, the Exchange 
will provide notice to affected member organizations, including by 
providing a 90-day delayed effectiveness on newly restricted OCC 
numbers, by providing notice to affected member organizations whose 
authorized status changes, and by providing publicly available 
information on all Restricted OCC Numbers and the corresponding 
Clearing Member contact information. In so doing, the proposed rule is 
designed to promote transparency and provide an orderly process by 
which third party executing brokers can make arrangements for clearing 
services to facilitate transactions on the Exchange.
    Further, requiring Clearing Members to use standardized forms to 
designate all Restricted OCC Numbers and Authorized Member 
Organizations, and to make amendments to those items, should enhance 
Phlx's ability to monitor and enforce compliance with its proposed rule 
relating to the give up process. Use of standardized forms also may 
make it easier for Clearing Members and member organizations to comply 
with the proposed rule, and should benefit all members by providing 
written confirmation of a member organization's authorized status with 
respect to a specific Restricted OCC Number for a particular Clearing 
Member.
    The Commission believes that the proposal seeks to address the 
needs of different parties involved in facilitating transactions in 
securities and does so in a balanced manner that provides a reasonable 
framework for the authorization process. Moreover, the proposal 
recognizes the need for a member organization to be able to give up its 
guarantor, and minimizes burdens on the member organization and 
Clearing Member by allowing such give ups to occur without the need to 
obtain any further authorization through use of the Clearing Member 
Restriction Form. In this manner, the proposed rule change recognizes 
that there will always be a Clearing Member that will be financially 
responsible for a trade, which should foster operational certainty and 
facilitate cooperation and coordination with persons engaged in 
clearing transactions.
    For the foregoing reason, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \26\ and the 
rules and regulations thereunder applicable to national securities 
exchanges.
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    \26\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\27\ that the proposed rule change (SR-Phlx-2018-72) be, 
and it hereby is, approved.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-02895 Filed 2-20-19; 8:45 am]
BILLING CODE 8011-01-P