Document ID: SEC-2019-0843-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq GEMX, LLC
Posted Date: 2019-06-13T04:00Z

[Federal Register Volume 84, Number 114 (Thursday, June 13, 2019)]
[Notices]
[Pages 27672-27675]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12448]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86063; File No. SR-GEMX-2019-06]

Self-Regulatory Organizations; Nasdaq GEMX, 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 GEMX, LLC (``GEMX'' 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 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://nasdaqgemx.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.

[[Page 27673]]

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, GEMX 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 GEMX will 
automatically default to the Member's guarantor. See proposed GEMX 
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 MRX, 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 2013-02. 
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 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

[[Page 27674]]

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\ GEMX 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 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 GEMX more attractive for trading, market participants 
trading on other exchanges can always elect to become Members on GEMX 
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

[[Page 27675]]

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 rule-comments@sec.gov. Please include 
File Number SR-GEMX-2019-06 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-GEMX-2019-06. 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-GEMX-2019-06 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. 2019-12448 Filed 6-12-19; 8:45 am]
 BILLING CODE 8011-01-P