Document ID: SEC-2021-0371-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2021-03-17T04:00Z

[Federal Register Volume 86, Number 50 (Wednesday, March 17, 2021)]
[Notices]
[Pages 14661-14664]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-05448]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91299; File No. SR-Phlx-2021-03]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1, To Modify Phlx 
Options 8, Section 26, ``Trading Halts, Business Continuity and 
Disaster Recovery''

March 11, 2021.

I. Introduction

    On January 7, 2021, 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 
modify Phlx Options 8, Section 26 (Trading Halts, Business Continuity 
and Disaster Recovery) to make available an audio and video 
communication program to serve as a ``virtual trading crowd'' in the 
event the physical trading floor becomes unavailable, the back-up 
trading floor becomes inoperable or the Exchange otherwise determines 
not to operate its back-up trading floor. The proposed rule change was 
published in the Federal Register on January 14, 2021.\3\ On February 
26, 2021, pursuant to Section 19(b(2) of the Act,\4\ the Commission 
designated a longer period within which to either approve the proposed 
rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ On March 2, 2021, the Exchange filed Amendment No. 1 to the 
proposed rule change, which replaced and superseded the proposed rule 
change.\6\ This order approves the proposed rule change, as modified by 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 90880 (January 8, 
2021), 86 FR 3217 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 91220, 86 FR 12733 
(March 4, 2021). The Commission designated April 14, 2021, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \6\ In Amendment No. 1, the Exchange made technical corrections 
and revisions to the proposed rule text for readability and 
consistency. Amendment No. 1 is available on the Commission's 
website at: https://www.sec.gov/comments/sr-phlx-2021-03/srphlx202103-8436948-229661.pdf.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    Options 8, Section 26(g)(1) currently provides that if the physical 
location designated as the ``Trading Floor'' becomes unavailable, Phlx 
will enact its Business Continuity Plan (``BCP'') and designate the 
Philadelphia Navy Yard as its ``Back-Up Trading Floor.'' Further, in 
the event that the Back-Up Trading Floor becomes inoperable, the 
Exchange will only operate its electronic market and will not operate a 
Trading Floor.\7\ The Exchange will operate only its electronic market 
until the Exchange's Trading Floor facility is operational.\8\ Open 
outcry trading will not be available in the interim.\9\
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    \7\ See Phlx Options 8, Section 26(g)(2).
    \8\ Id.
    \9\ Id.
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    On March 17, 2019, Phlx closed the Trading Floor as a result of 
precautions taken with respect to COVID-19 and operated in an all-
electronic configuration during that time.\10\ Due to the uncertainty 
related to the ongoing pandemic, which includes the possibility of 
having to close the Trading Floor again, the Exchange now has proposed 
to adopt Options 8, Section 26(g)(3) to permit open outcry trading to 
take place in an audio and video communication program to serve as a 
``virtual trading crowd'' if the Trading Floor becomes unavailable, the 
Back-Up Trading Floor becomes inoperable or the Exchange otherwise 
determines not to operate its Back-Up Trading Floor.\11\ The Exchange 
represents that if it were to determine to use the virtual trading 
crowd in a more permanent manner for reasons other than business 
continuity purposes, the Exchange would submit a separate rule filing 
to the Commission.\12\
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    \10\ See Notice, supra note 3, 86 FR at 3218.
    \11\ Phlx also proposes to update Options 8, Section 26(g)(1) 
and (2) to specify the availability of the virtual trading crowd in 
the event the Trading Floor and/or Back-Up Trading floor is 
unavailable, or the Exchange otherwise determines not to operate its 
Back-Up Trading Floor. See proposed Options 8, Section 26(g)(1) and 
(2).
    \12\ See Notice, supra note 3, 86 FR at 3218, n.8.
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    In the program, the Exchange would create virtual trading crowds, 
in each of which the Exchange would determine which options class(es) 
will be available for trading.\13\ Phlx members would access a virtual 
trading crowds via ``zones.'' \14\ Similar to the Trading Floor,

[[Page 14662]]

multiple classes may trade in a single virtual trading crowd, available 
for trading in a single zone.\15\ The Exchange may designate one or 
more zones.\16\ The Exchange will assign each Floor Market Maker to a 
zone and Floor Brokers may determine in which zone(s) they will be 
present.\17\ The Exchange believes that the proposed configuration of 
the virtual trading crowd is a practical replication of the structure 
of the Trading Floor that will allow market participants to interact in 
nearly the same manner as they do on the Trading Floor.\18\
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    \13\ The Exchange states that this is similar to the Exchange's 
authority with respect to open outcry trading on the Trading Floor. 
See id., 86 FR at 3218.
    \14\ See proposed Options 8, Section 26(g)(3)(B)(3). A ``zone'' 
is a virtual room representing a virtual trading crowd. See Notice, 
supra note 3, 86 FR at 3218, n.11.
    \15\ See proposed Options 8, Section 26(g)(3)(B)(3).
    \16\ Id.
    \17\ Id. The Exchange states that this arrangement is similar to 
the arrangement of the Trading Floor. See Notice, supra note 3, 86 
FR at 3218, n.11.
    \18\ See id., 86 FR at 3223.
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    All Options 8 Rules will apply to open outcry trading in the 
virtual trading crowd in the same manner as they apply to open outcry 
trading on the Trading Floor, except as otherwise provided for in 
proposed Options 8, Section 26(g)(3)(F), described below. Proposed 
Options 8, Section 26(g)(3)(A) lists certain terms in the Rules related 
to open outcry trading on the Trading Floor that will be deemed to 
refer to corresponding terms related to open outcry trading in the 
virtual trading crowd. Specifically:
     References in the Rules to the ``floor,'' ``trading 
floor,'' and ``Exchange floor'' (and any other terms with the same 
meaning) will be deemed to refer to the virtual trading crowd; and
     References in the Rules to ``physical presence'' or ``on-
floor'' or ``floor'' (and any other terms with the same meaning) will 
be deemed to refer to ``presence'' in a virtual trading crowd.
    The Exchange represents that access to the virtual trading crowd 
will be substantially similar to access to the Trading Floor.\19\ 
Access to the virtual trading crowd will be limited to members and 
member organizations, clerks, Exchange employees, and any other persons 
the Exchange authorizes admission to the virtual trading crowd.\20\ The 
Exchange will provide access to the virtual trading crowd to members 
the Exchange has approved to perform a Trading Floor function 
(including Floor Brokers and Floor Market Makers).\21\ Every member and 
the member's employees in the virtual trading crowd must consent to 
video and audio recording in order to participate in the virtual 
trading crowd.\22\
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    \19\ See Notice, supra note 3, 86 FR at 3219. The Exchange 
states that, currently, admission to the Trading Floor is limited to 
members and member organizations, Exchange employees, clerks 
employed by members and member organizations, inactive nominees, and 
Exchange visitors that receive authorized admission to the Trading 
Floor pursuant to Exchange policy, and any other persons that the 
Exchange authorizes admission to the Trading Floor. See id.
    \20\ See proposed Options 8, Section 26(g)(3)(B). The Exchange 
states that it is not proposing to amend its membership requirements 
with respect to the virtual trading crowd. See Notice, supra note 3, 
86 FR at 3219. Persons and entities may apply to become a Phlx 
member by complying with the membership requirements described 
within Phlx General 3 (Membership and Access). Id.
    \21\ See Notice, supra note 3, 86 FR at 3219.
    \22\ See proposed Options 8, Section 26(g)(3)(B)(1).
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    Members will be required to join the virtual trading crowd via a 
computer and either computer audio, cell phone, or hard-wired phone, as 
determined by the Exchange.\23\ Every member must be identified within 
the chat by name in place of a badge requirement.\24\ Any unidentified 
attendee will be removed from the virtual trading crowd.\25\ Every 
member in the virtual trading crowd must provide Market Operations with 
a contact number where Market Operations will be able to reach them 
during the trading day.\26\ The contact number may not be the same 
number that is being used to connect to the virtual trading crowd.\27\ 
Floor members will be responsible for maintaining updated contact 
information.\28\
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    \23\ See proposed Options 8, Section 26(g)(3)(B)(2). Phlx states 
that it will send a password-protected invitation to each floor 
participant permitted access to the virtual trading crowd. See 
Notice, supra note 3, 86 FR at 3220.
    \24\ See proposed Options 8, Section 26(g)(3)(B). The Exchange 
states that members would be required to join the virtual trading 
crowd in a manner that clearly identifies the member or member's 
employee. See Notice, supra note 3, 86 FR at 3219.
    \25\ Id. The Exchange represents that it will have an audit 
trail of the telephone numbers that have joined each remote 
conferencing session in order to ensure that only members join the 
remote conferencing feature. See id., 86 FR at 3220.
    \26\ See proposed Options 8, Section 26(g)(3)(B)(2).
    \27\ See id.
    \28\ See id.
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    Members and member organizations may use any equipment to access 
the virtual trading crowd and do not need to register devices they use 
while in the virtual trading crowd.\29\ Notwithstanding Options 8, 
Section 28(g) and Options 8, Section 30(e), members and member 
organizations would be permitted remote access to the Options Floor 
Based Management System (``FBMS'') when the virtual trading floor is 
enacted for purposes of executing transactions which require exposure 
in open outcry.\30\
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    \29\ See proposed Options 8, Section 26(g)(3)(C). The Exchange 
represents that Options 8, Section 38 (Communications and Equipment) 
will otherwise apply in the same manner to the virtual trading crowd 
as it does to the Trading Floor (to the extent the context 
requires). See Notice, supra note 3, 86 FR at 3220.
    \30\ See proposed Options 8, Section 26(g)(3)(C). The Exchange 
states that floor members must use Exchange-provided FBMS, to the 
extent applicable, while transacting in the virtual trading crowd. 
See Notice, supra note 3, 86 FR at 3220. The Exchange also 
represents that all FBMS order and transaction data, as well as 
compliance checks, available on the Trading Floor will continue to 
be available in the virtual trading crowd. See id., 86 FR at 3219.
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    The Exchange may determine to require any Floor Market Maker or 
Floor Broker in a virtual trading crowd that attempts trades against an 
order represented for execution to express its bid or offer in a chat 
available in the remote conferencing feature.\31\ Chats will be visible 
to all participants in a zone and will not be permitted directly 
between individual participants.\32\ The Exchange states that it will 
require members to utilize the chat function if Surveillance determines 
that increased volume or activity in the virtual trading crowd warrant 
mandatory use of the chat feature for members to maintain a fair and 
orderly market.\33\
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    \31\ See proposed Options 8, Section 26(g)(3)(D).
    \32\ See proposed Options 8, Section 26(g)(3)(D). The Exchange 
will retain records of the chats, consents, and any other records 
related to the virtual trading crowd that are subject to the 
Exchange's record retention obligations under the Act. See proposed 
Options 8, Section 26(g)(3)(E).
    \33\ See Notice, supra note 3, 86 FR at 3221. The Exchange 
believes that the chat tool will benefit virtual trading crowd 
participants due to the limitations of communication software (such 
as limitations on how many people may be heard at the same time in a 
virtual trading crowd or potential buffering or echoing). See id., 
86 FR at 3220-21.
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    Furthermore, the Exchange proposes to set forth the following open 
outcry requirements in the virtual trading crowd: \34\
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    \34\ See proposed Options 8, Section 26(g)(3)(F)(1)a.-g.
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     Prior to speaking on remote conferencing, each member must 
announce themselves each time.
     If a member experiences a technical issue accessing the 
remote conferencing, the Exchange will not be responsible for 
unexecuted trades.
     Floor Market Maker quotes will be considered firm in the 
event the Floor Market Maker is disconnected from the virtual trading 
crowd and the parties have a Meeting of the Minds with respect to the 
terms of the transaction. A ``Meeting of the Minds'' means the contra-
side(s) verbally confirmed participation in the trade. In the event 
that a Floor Market Maker is disconnected from the virtual trading 
crowd, a Floor Market Maker quote would not be considered firm if the 
quote were provided and the parties did not have a Meeting of the Minds 
with respect to the terms of the transaction.\35\
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    \35\ Floor Market Maker quotes on the Trading Floor are 
considered firm when announced in open outcry and once accepted the 
transaction may be effectuated within FBMS. See Notice, supra note 
3, 86 FR at 3221. Additionally, a Floor Market Maker that 
experiences issues with internet connection, makes an error or 
otherwise is unaware of recent news in a particular option, would be 
held to a quote verbalized in open outcry. See id.

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[[Page 14663]]

     FLEX Trade tickets must be sent by email to the Phlx 
Correction Post.
     A break-out room may be utilized to declare a dispute or 
otherwise notify an Options Floor Official of any required 
notifications.\36\
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    \36\ The Exchanges states that it would establish a break-out 
room within the remote conferencing for each dispute. See id.
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     A member may not permit any other unauthorized person to 
gain audio or video access to the virtual trading crowd. A member shall 
not record any trading sessions.
Technical Amendments
    The Exchange proposes to amend Options 8, Section 22 (Execution of 
Options Transactions on the Trading Floor) to correct two incorrect 
citations to Options 8, Section 35 in Options 8, Sections 22(b) and 
(c).

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act,\37\ and the rules and regulations thereunder 
applicable to a national securities exchange.\38\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with Section 6(b)(5) of the Act,\39\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \37\ 15 U.S.C. 78f.
    \38\ 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).
    \39\ 15 U.S.C. 78f(b)(5).
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    As discussed above, Phlx proposes to adopt rules to enable a 
virtual trading crowd for open outcry trading when the Trading Floor 
and Back-Up Trading Floor are unavailable. This would allow trading on 
the Exchange to occur more similarly to physical floor trading than the 
current rules for all-electronic trading in situations when the floor 
becomes inoperable. Among other things, the Exchange believes that the 
proposed enhancement to its BCP through the implementation of a virtual 
trading crowd environment would ameliorate some of the features in open 
outcry trading that are difficult to replicate in an all-electronic 
environment, particularly the segment of trading strategies that 
benefit from human interactions to negotiate pricing and to facilitate 
executions of large orders and high-risk and complicated trading 
strategies.\40\ The Exchange believes that the proposed rule change may 
facilitate continued trading of these orders if and when the Trading 
Floor and Back-Up Trading Floor are unavailable. As a result, the 
Exchange believes that providing continuous access to open outcry 
trading in these circumstances will remove impediments to a free and 
open market and will ultimately benefit investors, particularly those 
executing high-risk and complex trading strategies.
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    \40\ See Notice, supra note 3, 86 FR at 3222.
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    The Commission finds that the proposed implementation of the 
virtual trading crowd for BCP purposes is consistent with the Act. The 
Commission believes that the proposed virtual trading crowd will allow 
the Exchange to provide a trading environment to floor members that is 
reasonably designed to facilitate open outcry trading when 
circumstances restrict physical human interaction on the Trading Floor 
and Back-Up Trading Floor. The Commission notes that the Exchange has 
conducted several town halls with floor members on the virtual trading 
crowd and made the functionality available for testing so that the 
Exchange will be ready to implement it if necessary. The Exchange 
states that it has received positive feedback from floor members 
regarding the tool and will continue to make updates as necessary and 
appropriate in response to member feedback.\41\ As a result, the 
Commission finds that the virtual trading crowd is reasonably designed 
to allow continuous access to open outcry trading, which will remove 
impediments to a free and open market and may ultimately benefit 
investors, particularly those facilitating executions of large orders 
and complex trading strategies.
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    \41\ See id., 86 FR at 3222.
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    Additionally, the design of the virtual trading zones to closely 
replicate the arrangement of the physical trading floor will facilitate 
the rollout of the virtual trading crowd to floor members and help 
remove impediments to a free and open market when the Trading Floor and 
Back-Up Trading Floor become unavailable. Virtual trading zones will 
provide floor members the ability to interact in a substantially 
similar way as they do on the Trading Floor. Furthermore, the proposed 
chat functionality, which is not otherwise available on the Trading 
Floor, is reasonably designed to create a virtual environment that 
promotes fair and orderly markets by providing floor participants with 
an additional tool to communicate with one another to the extent 
necessary given the potential inherent limitations of communication 
software.
    Finally, the Commission finds that the design of the virtual 
trading crowd will help prevent fraudulent and manipulative acts and 
practices, and promote just and equitable principles of trade by 
requiring that the Rules and regulatory requirements apply in the 
substantially the same manner as open outcry on the Trading Floor. 
Specifically, the Exchange represents that all Rules related to open 
outcry trading, including within Options 8, will apply to open outcry 
trading in a virtual trading crowd, except as otherwise provided for in 
proposed Options 8, Section 26(g)(3)(F).\42\ Floor members 
participating in a virtual trading crowd will be subject to the same 
regulatory requirements on the virtual trading floor as they are on the 
Trading Floor, including those set forth in General 8.\43\ Orders in 
the virtual trading crowd must be systematized and represented, and 
transactions reported, in the same manner as on the Trading Floor.\44\ 
The Exchange also requires that floor members use Exchange-provided 
FBMS, to the extent applicable, while transacting in the virtual 
trading crowd, and represents that all FBMS order and transaction data, 
as well as compliance checks, available on the Trading Floor will 
continue to be available in the virtual trading crowd.\45\ In addition, 
Phlx Surveillance staff will remotely surveil transactions in the 
virtual trading crowd, in real-time, and an Options Floor Official will 
be present in each virtual trading crowd.\46\ Moreover, the Exchange 
represents that it will retain records of the chats, consents, and any 
other records related to the virtual trading consistent with the 
Exchange's record retention obligations under the Act.\47\
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    \42\ See supra notes 21-26; 30-32 and accompanying text.
    \43\ See id., 86 FR at 3223.
    \44\ See id.
    \45\ See id., 86 FR at 3219.
    \46\ See id., 86 FR at 3223. The Exchange also represents that 
the Floor Surveillance Procedures will be updated to account for the 
video conferencing and chat requirements, as well as any changes to 
surveil a virtual trading crowd. See id.
    \47\ See id., 86 FR at 3223.

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[[Page 14664]]

IV. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
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 rule-comments@sec.gov. Please include 
File Number SR-Phlx-2021-03 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 No. SR-Phlx-2021-03. The file 
numbers 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 such 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 publicly available. All submissions 
should refer to File No. SR-Phlx-2021-03 and should be submitted on or 
before April 7, 2021.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause for approving the proposed rule 
change, as amended by Amendment No. 1, prior to the 30th day after the 
date of publication of notice in the Federal Register. In Amendment No. 
1, the Exchange made technical corrections and revisions to the 
proposed rule text for readability and consistency.\48\ The Commission 
notes that Amendment No. 1 does not change the substance of the 
proposed rule change, but merely adds detail and clarification to 
several items of the proposal. Accordingly, the Commission finds good 
cause for approving the proposed rule change, as amended, on an 
accelerated basis, pursuant to Section 19(b)(2) of the Act.\49\
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    \48\ See Amendment No. 1, supra note 6.
    \49\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\50\ that the proposed rule change, as modified by Amendment No. 1 
(SR-Phlx-2021-03), be, and hereby is, approved on an accelerated basis.
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    \50\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
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    \51\ 17 CFR 200.30-3(a)(57) and (58).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-05448 Filed 3-16-21; 8:45 am]
BILLING CODE 8011-01-P