Document ID: SEC-2018-0453-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2018-03-19T04:00Z

[Federal Register Volume 83, Number 53 (Monday, March 19, 2018)]
[Notices]
[Pages 12058-12060]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05451]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82866; File No. SR-Phlx-2018-20]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Proposed Rule Change to a Proposal To Amend Rule 1079, FLEX Index, 
Equity and Currency Options and Rule 1059, Accommodation Transactions

March 13, 2018.
    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 February 28, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule

[[Page 12059]]

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 Rule 1079, FLEX Index, 
Equity and Currency Options and Rule 1059, Accommodation Transactions.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqphlx.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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 1079 governing FLEX option 
transactions in order to permit open FLEX option positions to be closed 
pursuant to Rule 1059, Accommodation Transactions, which provides for 
cabinet trading \3\ and which is sometimes referred to as the ``cabinet 
rule''. Conforming changes are proposed to be made to Rule 1059 itself.
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    \3\ Currently cabinet or accommodation trading of option 
contracts is intended to accommodate persons wishing to effect 
closing transactions in those series of options dealt in on the 
Exchange for which there is no auction market. An accommodation or 
cabinet trade refers to trades in listed options on the Exchange 
that are worthless or not actively traded, often times conducted to 
establish tax losses. Cabinet or accommodation trading of option 
contracts is currently intended to accommodate persons wishing to 
effect closing transactions in those series of options dealt in on 
the Exchange for which there is no auction market. A cabinet trade 
is a transaction in which the per-contract value of the cabinet 
trade is less than the per-contract value of a trade at the 
specified minimum increment for the option contract. The current 
proposal would extend the availability of cabinet trading to FLEX 
options in certain circumstances.
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    FLEX options are currently traded on the Exchange pursuant to the 
procedures set forth in Rule 1079 which permit market participants to 
customize equity options to fit specific investment strategies and 
goals. Rule 1079 allows investors to specify characteristics such as 
the expiration date, strike price, and exercise-style of FLEX option 
contracts. Rule 1079(a)(4) governs the quote format of FLEX trades, 
requiring bids and offers to be made pursuant to Rule 1034 which 
specifies minimum increments.\4\
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    \4\ Rule 1034(a) provides for quote formats ``(A) in the case of 
FLEX index options and equity options, a bid and/or offer in the 
form of a decimal price (e.g., .10 or .25), pursuant to Rule 1034, a 
specific dollar amount, or a percentage of the underlying equivalent 
value, in the case of FLEX index options, or security, in the case 
of FLEX equity options, rounded to the nearest minimum increment; or 
(B) in the case of FLEX currency options, in the form of dollars per 
unit of underlying foreign currency in the minimum increments set 
forth for U.S. dollar settled foreign currency options in Rule 
1034(a).''
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    An ``accommodation'' or ``cabinet'' trade refers to trades in 
listed options on the Exchange that are of minimal value or are not 
actively traded. Cabinet trading is generally conducted in accordance 
with Exchange Rules except as provided in Rule 1059 which sets forth 
specific procedures for cabinet trades. Rule 1059(a) provides that a 
cabinet order is a closing limit order at a price of $1 per option 
contract for the account of a customer, firm, specialist or ROT.\5\ The 
rule provides that an opening order is not a cabinet order, but may in 
certain cases be matched with a cabinet order.
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    \5\ Commentary .02 to Rule 1059 provides that limit orders with 
a price of at least $0 but less than $1 per option contract may also 
trade under the terms and conditions in Rule 1059, subject to 
certain limitations.
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    Phlx now proposes new Rule 1079(g), which would provide that open 
FLEX option positions are eligible to be closed in cabinet trades under 
Rule 1059. The proposed new rule would specify that the FLEX option 
cabinet order may be executed against contraside interest to close a 
FLEX option position or, to the extent permitted under Rule 
1059(a)(iii), against contraside interest which opens a FLEX option 
position. Under the new rule Sections (a) and (b) of Rule 1079 would 
not apply to FLEX option transactions executed pursuant to Rule 1079(g) 
and Rule 1059, while Sections (c)-(g) of Rule 1079 would continue to 
apply to any FLEX option position opened pursuant to Rule 1059.\6\
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    \6\ Rule 1079(a), Characteristics, sets forth the potential 
characteristics (including, for example, underlying interest, type, 
exercise price, quote format, exercise style, and expiration date) 
of FLEX options and is inapplicable to and unnecessary for cabinet 
trade closing of FLEX option positions whose characteristics are 
already known. Other provisions of Rule 1079(a) which define certain 
aspects of the FLEX request for quote (RFQ) process as well as Rule 
1079(b), Procedure for Quoting and Trading FLEX Options, are 
likewise inapplicable, given that trading FLEX Options in the 
cabinet would instead be governed by the Rule 1059 cabinet trading 
rules. Rule 1079 Section (c), Who May Trade FLEX Options, would 
continue to apply and would restrict participation in FLEX cabinet 
trades to the entities meeting the requirements of that section. 
Rule 1079 Sections (d), Position Limits, (e), Exercise Limits, and 
(f), relating to the exercise-by-exception procedure of Rule 805 of 
the Options Clearing Corporation, would continue to apply to any 
open FLEX position resulting from a FLEX option transaction 
conducted under Rule 1059.
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    New, conforming Commentary language would also be added to Rule 
1059. Proposed new Rule 1059 Commentary .03 would specify that, 
pursuant to Rule 1079(g), open FLEX option positions are eligible to be 
closed in accordance with Rule 1059 at the minimum increments specified 
therein. The Commentary would state that a FLEX option cabinet order 
could be executed against contraside interest which itself closes a 
FLEX option position or, to the extent permitted under Rule 
1059(a)(iii), against contraside interest which opens a FLEX option 
position. Thus, as proposed, the new language would require the 
initiating side of each FLEX cabinet trade to be a closing transaction, 
and would permit cabinet trading which opens FLEX positions to occur 
only as and when already permitted under Rule 1059's existing priority 
rules for non-FLEX cabinet trades. Language would be added to Rule 1059 
Commentary .03 paralleling the last two sentences of proposed Rule 
1079(g) which detail the provisions of Rule 1079 that shall not apply 
to FLEX option transactions executed pursuant to Rule 1079(g) and Rule 
1059, as well as the provisions of Rule 1079 that shall apply to FLEX 
option positions opened pursuant to Rule 1059.
    Proposed new Rule 1079(g) would permit an open FLEX option position 
to be closed through the use of a cabinet order, which would be 
represented by a floor broker on the floor as specified in Rule 
1059(a).\7\ In the past, the Exchange did not provide for the closing 
of FLEX trades under the cabinet rule due to lack of interest. More 
recently, market

[[Page 12060]]

participants have expressed a desire to close FLEX option positions 
under the cabinet rule and this proposed rule change will permit them 
to do so. The rule would provide that notwithstanding Rule 1079(a)(4) 
regarding FLEX Index, Equity and Currency Options minimum increments, 
open FLEX option positions are eligible to be closed in accordance with 
Rule 1059, Accommodation Transactions, at the minimum increments 
specified therein. The Exchange believes that permitting FLEX option 
positions to be closed pursuant to the cabinet rule will provide FLEX 
option investors additional flexibility in the maintenance or closing 
out of their FLEX option positions.
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    \7\ Rule 1059(a)(iii) sets forth the manner in which a cabinet 
order may be either crossed or matched in three different scenarios: 
First, when the floor broker holds the cabinet order only, second, 
when the floor broker holds the cabinet order and also a contra-side 
cabinet order, and third, when the floor broker holds a cabinet 
order and also a contra-side opening order. Once the cabinet order 
has been either crossed or matched, the floor broker is required by 
Rule 1059(a)(iv) to submit the designated cabinet form to the Nasdaq 
Market Operations staff for clearance and reporting at the close of 
the business day.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\8\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\9\ in particular, in that it is designed 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, 
by permitting investors who desire to close FLEX options positions the 
flexibility to do so in a cabinet transaction. The Exchange believes 
that cabinet trades promote competition and afford market participants 
greater opportunities to close out their options positions. By 
providing FLEX options holders the additional flexibility of proposed 
Rule 1079(g) and Rule 1059 Commentary .03, the Exchange should be able 
to attract additional FLEX option transactions to the Exchange. The 
proposed amendments should perfect the mechanism of a free and open 
market and improve market quality by permitting holders of FLEX 
positions to trade out of those positions more easily and efficiently.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The proposed amendments should perfect the mechanism of a free and 
open market by stating clearly that Rule 1079(a), Characteristics, and 
Rule 1079(b), Procedure for Quoting and Trading FLEX Options, will not 
apply, given that trading FLEX Options in the cabinet would instead be 
governed by the Rule 1059 cabinet trading rules. Rule 1079 Section (c), 
Who May Trade FLEX Options, would continue to apply and would restrict 
participation in FLEX cabinet trades to the entities meeting the 
requirements of that section. Rule 1079 Sections (d), Position Limits, 
(e), Exercise Limits, and (f), relating to the exercise-by-exception 
procedure of Rule 805 of the Options Clearing Corporation, would 
continue to apply to any open FLEX position resulting from a FLEX 
option transaction conducted under Rule 1059. Additionally, the 
proposed language will protect investors and the public interest 
because Sections (c)-(g) of Rule 1079 shall continue to apply to any 
FLEX option position opened pursuant to Rule 1059, just as they apply 
today to FLEX positions opened pursuant to Rule 1079.

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 proposed rule change would 
allow all market participants holding FLEX option positions the 
flexibility to close them using the same procedures currently set forth 
in the cabinet rule for non-FLEX option positions. Permitting FLEX 
option positions to be closed pursuant to the cabinet rule will provide 
FLEX option investors additional opportunities to close out their FLEX 
option positions.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be 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-Phlx-2018-20 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-Phlx-2018-20. 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-Phlx-2018-20 and should be submitted on 
or before April 9, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-05451 Filed 3-16-18; 8:45 am]
BILLING CODE 8011-01-P