Document ID: SEC-2012-1953-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2012-11-27T05:00Z

[Federal Register Volume 77, Number 228 (Tuesday, November 27, 2012)]
[Notices]
[Pages 70866-70868]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28679]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68267; File No. SR-Phlx-2012-133]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change, as Modified 
by Amendment No. 1, To Amend Rule 3218

November 20, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 15, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by Phlx. On November 15, 2012, 
Phlx filed Amendment No. 1 to the proposed rule change.\3\ Phlx filed 
the proposal pursuant to Section 19(b)(3)(A) \4\ and Rule 19b-4(f)(6) 
\5\ thereunder so that the proposal was effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, Phlx deleted ``October ----, 2012'' and 
inserted ``November 1, 2012'' on page 9 of 19 of the original 
filing, concerning when Phlx provided the Commission with written 
notice of the proposed rule change.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Phlx is filing this proposed rule change to amend Rule 3218. The 
text of the proposed rule change is below. Proposed new language is 
italicized; proposed deletions are in brackets.

3218. Clearance and Settlement

    (a) All transactions through the facilities of PSX shall be 
cleared and settled through a registered clearing agency using a 
continuous net settlement system. This requirement may be satisfied 
by direct participation, use of direct clearing services, [or] by 
entry into a correspondent clearing arrangement with another member 
organization that clears trades through such a[n]clearing agency[.], 
or by use of the services of CDS Clearing and Depository Services, 
Inc. in its capacity as a member of such a clearing agency.
    (b) No change.

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
    Phlx proposes to modify Rule 3218 to clarify that the use of a 
long-standing arrangement between National Securities Clearing 
Corporation (``NSCC'') and CDS Clearing and Depository Services, Inc. 
(``CDS'') \6\ for clearing transactions in US securities provides an 
acceptable method for clearing transactions executed on Phlx's NASDAQ 
OMX PSX trading system (``PSX''). Among other things, CDS operates 
Canada's national clearance and settlement operations for cash equities 
trading, performing a role analogous to NSCC in the US. CDS is 
regulated by the Ontario and Quebec securities commissions and the Bank 
of Canada, with working and reporting relationships with the Canadian 
Securities Administrators (CSA), other Canadian provincial securities 
commissions, and the Canadian Office of the Superintendent of Financial 
Institutions. CDS is also a full service member of NSCC and a 
participant in the Depository Trust Company (``DTC'').
---------------------------------------------------------------------------

    \6\ CDS was formerly known as The Canadian Depository for 
Securities Limited.
---------------------------------------------------------------------------

    Currently, a Canadian broker-dealer seeking to buy or sell US 
securities may do so through a US registered broker-dealer with which 
it establishes a relationship for that purpose. In such a relationship, 
the US broker-dealer manages the clearance and settlement of the 
resulting trades, either through direct membership at NSCC or 
indirectly through a clearing broker with which it has established a 
relationship. Under the proposed change, a Canadian broker-dealer that 
is a member of CDS may make use of CDS, and its direct membership in 
NSCC, to clear and settle the resulting trades. Specifically, the 
clearing report for the trade will ``lock in'' CDS, with reference to 
the CDS membership of the Canadian broker-dealer, as a party to the 
trade.\7\ NSCC then looks to CDS for satisfaction of clearance and 
settlement obligations of the Canadian broker-dealer. NSCC requires CDS 
to commit collateral to the NSCC clearing fund like any other NSCC 
member, the amount of which is based on a risk-based margining 
methodology. In a similar manner, CDS requires its participants to 
commit collateral to CDS. The sole risk incurred by Phlx and then by 
NSCC in the arrangement is the highly remote risk that CDS itself might 
default on its obligations to clear and settle on behalf of the 
Canadian broker-dealer. This risk is conceptually indistinguishable 
from the risk of a clearing broker default; moreover, because the value 
of Canadian trades cleared through the mechanism is likely to be small 
in comparison to the values cleared through many large US clearing 
brokers, the magnitude of this risk is correspondingly smaller.
---------------------------------------------------------------------------

    \7\ As an NSCC member, CDS is responsible for the settling and 
clearing of its participants' trades conducted with US broker-
dealers. For purposes of ``locking-in'' parties, certain CDS 
participants have discrete NSCC participant codes that identify the 
Canadian broker-dealer and its participation in the NSCC/CDS 
clearing arrangement. On midnight of T+1, NSCC takes on the buyer's 
credit risk and the seller's delivery risk.
---------------------------------------------------------------------------

    The relationship between NSCC and CDS was established more than two 
decades ago, and various aspects of the relationship have been 
recognized through several prior filings \8\ and no-

[[Page 70867]]

action letters,\9\ as well as a recent similar filing by The NASDAQ 
Stock Market LLC.\10\ A recent description of the parameters of the 
relationship may be found in NSCC's Assessment of Compliance with the 
CPSS/IOSCO Recommendations for Central Counterparties.\11\ The most 
prominent use of the relationship arises under FINRA Rule 7220A, which 
allows over-the-counter trades executed on behalf of CDS members to be 
reported through the FINRA/NASDAQ Trade Reporting Facility and cleared 
through the CDS/NSCC relationship.
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 36918 (March 4, 
1996), 61 FR 9739 (March 11, 1996) (SR-NASD-95-49) (approving access 
to Automated Confirmation Transaction Service for CDS members); 
Securities Exchange Act Release No. 40523 (October 6, 1998), 63 FR 
54739 (October 13, 1998) (approving establishment of a CDS omnibus 
account at DTC to facilitate cross-border clearing).
    \9\ See Letter from Dan W. Schneider, Deputy Associate Director, 
Commission, to Karen L. Saperstein, Assistant General Counsel, NSCC 
(November 26, 1984) (available at 1984 WL 47355) (taking no-action 
position with respect to use of CDS and NSCC with respect to 
clearing of trades executed on behalf of Canadian broker-dealers on 
the Boston Stock Exchange); Letter from Dan W. Schneider, Deputy 
Associate Director, Commission, to Karen L. Saperstein, Assistant 
General Counsel, NSCC (October 24, 1984) (available at 1984 WL 
47356) (taking no-action position with respect to CDS becoming a 
member of NSCC).
    \10\ Securities Exchange Act Release No. 66310 (February 2, 
2012), 77 FR 6610 (February 8, 2012) (SR-NASDAQ-2012-015).
    \11\ ``Assessment of Compliance with the CPSS/IOSCO 
Recommendations for Central Counterparties,'' NSCC (November 14, 
2011) (available at http://www.dtcc.com/legal/compliance/NSCC_Self_Assessment.pdf).
---------------------------------------------------------------------------

    In order to clearly establish that use of the CDS/NSCC relationship 
is a permissible method of clearing transactions executed on PSX, Phlx 
is proposing to amend Rule 3218. Currently, the rule provides that 
trades must be cleared through a registered clearing agency using a 
continuous net settlement (``CNS'') system, and that this requirement 
may be satisfied by direct participation, use of direct clearing 
services, or by entry into a correspondent clearing arrangement with 
another member organization that clears trades through such an 
agency.\12\ NSCC is currently the only registered clearing agency using 
a CNS system for trades executed on PSX. While it is possible that the 
term ``direct clearing services'' could be construed to cover CDS's 
participation in NSCC on behalf of its members--because CDS is a direct 
member of NSCC for the purpose of providing clearing services to its 
members--the term has not previously been construed by Phlx in that 
manner. Accordingly, Phlx believes that the clarity of the rule would 
be enhanced by directly recognizing the CDS/NSCC relationship in the 
rule text. Phlx proposes amending the rule to provide that the rule may 
be satisfied through ``use of the services of CDS Clearing and 
Depository Services, Inc. in its capacity as a member of such a 
clearing agency.'' Whenever a clearing arrangement making use of CDS's 
membership in NSCC is established, NSCC will require the Phlx member 
organization, the Canadian broker on whose behalf it is acting, CDS, 
and Phlx to sign a short agreement, to be addressed to NSCC, in which 
the parties acknowledge their use of the CDS/NSCC arrangement.
---------------------------------------------------------------------------

    \12\ Phlx is also clarifying Rule 3218 by replacing the term 
``member'' with the term ``member organization,'' which refers more 
precisely to a registered broker-dealer authorized to trade on PSX.
---------------------------------------------------------------------------

2. Statutory Basis
    Phlx believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\13\ in general, and with Section 
6(b)(5) of the Act,\14\ in particular, in that the proposal 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 regulating, clearing, settling, 
processing information with respect to, and 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. Specifically, by allowing 
Canadian broker-dealers whose trades are executed on PSX to make use of 
the long-standing arrangement between NSCC and CDS for clearing 
transactions, Phlx believes that the proposed rule change will directly 
foster cooperation and coordination with the two primary North American 
cash equities clearinghouses and their respective members, thereby 
promoting a free and open market. Because the arrangement between NSCC 
and CDS--which has been in place, in varying forms, for over two 
decades--includes mechanisms to provide for the collateralization of 
the obligations arising thereunder, Phlx believes that the proposed 
change is fully consistent with the protection of investors and the 
public interest.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

(B) Self-Regulatory Organization's Statement on Burden on Competition

    Phlx does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. The proposed change 
will ensure that Canadian broker-dealers whose trades are executed on 
PSX are able to make use of an additional available option for clearing 
such transactions, thereby promoting competition with respect to the 
availability of clearing services.

(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

    The foregoing rule change has become effective upon filing pursuant 
to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) thereunder 
\16\ 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. 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.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2012-133 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-Phlx-2012-133. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the

[[Page 70868]]

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 Web site 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 filings will also be available for inspection 
and copying at the principal office of Phlx and on Phlx's Web site: 
http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/pdf/phlx-filings/2012/SR-Phlx-2012-133.pdf.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-Phlx-2012-133 
and should be submitted on or before December 18, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-28679 Filed 11-26-12; 8:45 am]
BILLING CODE 8011-01-P