Document ID: SEC-2016-1563-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX, LLC
Posted Date: 2016-09-02T04:00Z

[Federal Register Volume 81, Number 171 (Friday, September 2, 2016)]
[Notices]
[Pages 60756-60758]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21131]

[[Page 60756]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78714; File No. SR-Phlx-2016-84]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 
1042A, Exercise of Options Contracts and Options Floor Procedure Advice 
G-1, Index Option Exercise Advice Forms

August 29, 2016.
    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 August 22, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``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 Rule 1042A, Exercise of Options 
Contracts and Options Floor Procedure Advice G-1, Index Option Exercise 
Advice Forms
    The text of the proposed rule change is available on the Exchange's 
Web site 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 is amending Rule 1042A to provide additional clarity 
to member organizations and add additional requirements regarding the 
procedures to be followed in order to exercise American style index 
option contracts. Currently, Rule 1042A states that ``[a] memorandum to 
exercise any American style stock index option contract, issued or to 
be issued in a customer, market maker or firm account at the Options 
Clearing Corporation must be received or prepared by the member 
organization no later than five minutes after the close of trading on 
that day and must be time-stamped at the time it is received or 
prepared.'' \3\ Commentary .01 further states that ``[a]ll memoranda of 
exercise instructions prepared pursuant to this Rule 1042A are subject 
to Securities and Exchange Commission rules 17a-3(a)(6) and 17a-4(b).'' 
However, the rule does not state what a ``memorandum of exercise'' is. 
Nor does it state from whom the member organization may ``receive'' it.
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    \3\ See existing Rule 1042A(i).
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    Rule 1042A also requires a member or member organization to that 
intends to submit an ``exercise notice'' for any American style option 
contract(s) on behalf of a customer, specialist, Registered Options 
Trader, or firm account to deliver an ``Exercise Advice'' on a form 
prescribed by the Exchange, to a place designated by the Exchange, no 
later than five minutes after the close of trading.\4\ However, the 
rule does not state what an ``Exercise Advice'' or an ``exercise 
notice'' is, or whether they may be the same thing or a different 
thing, or how they relate to the ``memorandum to exercise'' (though 
both the memorandum to exercise and the exercise advice are due no 
later than five minutes after the close of trading). The Exchange 
believes therefore that the current rule is susceptible to 
misinterpretation and confusion on the part of the reader.
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    \4\ See existing Rule 1042A(ii).
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    The Exchange has consequently determined to provide additional 
clarity to member organizations regarding procedures to be followed in 
order to exercise an American-style index option contract. It proposes 
to delete all rule text currently found in section (a) of Rule 1042A 
with the exception of the first part of the first sentence, which reads 
simply and clearly that ``[w]ith respect to index option contracts, 
clearing members are required to follow the procedures of the Options 
Clearing Corporation for tendering exercise notices''. In place of the 
deleted text, the Exchange proposes to adopt several new provisions 
that clearly articulate the procedures to be followed.
    The new language specifies that Clearing Members must follow the 
procedures of the Options Clearing Corporation (``OCC'') when 
exercising American-style cash-settled index options contracts issued 
or to be issued in any account at OCC. Member organizations must also 
observe certain procedures with respect to American-style cash-settled 
index options. Specifically, for all contracts exercised by the member 
organization or by any customer of the member organization, an 
``exercise advice'' must be delivered by the member organization in 
such form or manner prescribed by the Exchange no later than five (5) 
minutes after the close of trading on that day.\5\ Subsequent to the 
delivery of an ``exercise advice,'' should the member organization or a 
customer of the member organization determine not to exercise all or 
part of the advised contracts, the member organization must also 
deliver an ``advice cancel'' in such form or manner prescribed by the 
Exchange no later than five (5) minutes after the close of trading on 
that day.\6\ These procedures would not apply on the business day prior 
to expiration in a series expiring on a day other than a business day, 
or on the expiration day in series expiring on a business day.\7\
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    \5\ See proposed Rule 1042A(i). An exercise advice is a 
notification to the Exchange of a member's intention to exercise one 
or more options contracts.
    \6\ See proposed Rule 1042A(ii).
    \7\ See proposed Rule 1042A(vii). Existing Rule 1042A(b) is 
being deleted as redundant.
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    The new rule language also adds some new provisions not covered by 
the existing rule text. It provides that the Exchange may determine to 
extend the applicable deadline for the delivery of ``exercise advice'' 
and ``advice cancel'' notifications pursuant to this paragraph if 
unusual circumstances are present.\8\ It prohibits member organizations 
from time stamping or submitting an ``exercise advice'' prior to the 
purchase of the contracts to be exercised if the member organization 
knew or had reason to know that the contracts had not yet been 
purchased.\9\ The new language adds a provision specifying that the 
failure of any member organization to follow the procedures in the rule 
could result in the assessment of a fine, which may include but is not 
limited to disgorgement of potential

[[Page 60757]]

economic gain obtained or loss avoided by the subject exercise, as 
determined by the Exchange.\10\ The new language also states that 
preparing or submitting an ``exercise advice'' or ``advice cancel'' 
after the applicable deadline on the basis of material information 
released after such deadline, in addition to constituting a violation 
of the Rule, is activity inconsistent with just and equitable 
principles of trade.\11\
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    \8\ See proposed Rule 1042A(iii).
    \9\ See proposed Rule 1042A(iv).
    \10\ See proposed Rule 1042A(v). Exchange Rule 960.1 provides 
that any member alleged to have violated rules of the Exchange shall 
be subject to the disciplinary jurisdiction of the Exchange, and 
after notice and opportunity for a hearing may be appropriately 
disciplined by expulsion, suspension, fine, censure, limitation or 
termination as to activities, functions, operations, or association 
with a member or member organization, or any other fitting sanction 
in accordance with the provisions of the Exchange's disciplinary 
rules.
    \11\ See proposed Rule 1042A(vi).
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    The new language requires each member organization to prepare a 
memorandum of every exercise instruction received showing by time stamp 
the time when such instruction was so received. It provides that such 
memoranda shall be subject to the requirements of Commission Rule 17a-
4(b).\12\ Finally, the new language requires each member organization 
to establish fixed procedures to ensure secure time stamps in 
connection with their electronic systems employed for the recording of 
submissions to exercise or not exercise expiring options.\13\
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    \12\ See proposed Rule 1042A(viii). The Exchange is deleting 
existing Commentary .01 of Rule 1042A as redundant. The Exchange 
believes that including the requirement in the text of the rule 
rather than as a ``Commentary'' is a preferable approach in terms of 
organization and presentation of the rule. Although the proposed 
language does not contain the requirement that memoranda of exercise 
instructions are subject to Commission Rule 17a-3(a)(6), the 
Exchange notes that the rule upon which its proposal is based, NOM 
Rulebook chapter VIII, Exercises and Deliveries, section 1, Exercise 
of Options Contracts, Supplementary Material .02, does not contain 
this requirement. The Exchange seeks to conform its Rule 1042A to 
the counterpart NOM rule in this respect.
    \13\ See proposed Rule 1042A(ix).
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    The Exchange also proposes to amend Options Floor Procedure Advice 
(``OFPA'') G-1 by conforming it to the requirements of updated Rule 
1042A. References to a specific ``Exercise Advice Form'' are replaced 
with general references to exercise advices to eliminate any suggestion 
that a specified form must be used in order to comply with Rule 1042A. 
The Exchange intends that any written evidence reflecting that Rule 
1042A's requirements have been met will be sufficient to constitute an 
exercise advice.\14\ The amendments also eliminate an outdated 
reference to C/MACS, which is no longer in use at OCC,\15\ and modify 
the OFPA to reflect that expiration now typically occurs on a business 
day rather than on a Saturday.
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    \14\ The Exchange currently does not require the use of a 
specific form of exercise advice. Nonetheless, certain floor-based 
members currently use a ``Phlx Index Option Exercise Advice Form.'' 
The Exchange has attached as Exhibit 3 a revised version of the 
form, updated to conform to this proposed rule change. These updates 
include (1) the addition of a statement that the rule does not apply 
in series expiring on a day other than a business day or on the 
expiration day in series expiring on a business day, (2) the 
deletion of capitalization of the terms memorandum of exercise and 
exercise advice, as these are not defined terms in the rule, (3) the 
addition of a reference to memorandum of exercise instructions, 
which is a term used in the rule, (4) the deletion of a statement 
that the form must be time stamped ``contemporaneously with its 
submission'' and addition of new language that conforms to the rule, 
(5) the adjustment of a cross reference to the rule, in order for 
the form to refer to the correct rule section required by the 
context, and (6) the updating of the name of the Exchange from 
Philadelphia Stock Exchange to NASDAQ OMX PHLX. Members may continue 
to use the form, updated as reflected in Exhibit 3, if they choose 
to do so. Members will also able to continue to fill the Rule 1042A 
exercise advice requirements by sending an email to the Exchange, or 
by providing the required exercise advice notification in any other 
manner directed by the Exchange. The Exchange accepts the time 
indicated on an email as satisfaction of the time stamp requirement.
    \15\ According to OCC, C/MACS was an on-line, menu-driven system 
that allowed OCC member firms to access or input trade information 
directly from or to OCC's clearing systems. See Securities Exchange 
Act Release No. 35982 (July 18, 1995), 60 FR 38072 (July 25, 1995), 
at footnote 6.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \16\ in general, and furthers the objectives of section 
6(b)(5) of the Act \17\ 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 adding rules providing clear procedures concerning 
exercise of American index options. Rule 1042A is intended to provide 
for the maintenance of a level playing field between holders of long 
and short positions in expiring index options. After trading has ended 
on the final trading day before expiration, persons who are short the 
option have no way to close out their short positions. To put option 
holders on equal footing, the rule minimizes the time period in which a 
holder can exercise an index option after the close of trading on the 
last business day prior to expiration in series expiring on a day other 
than a business day or on the expiration day in series expiring on a 
business day.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the introductory language of Rule 1042A 
as revised, as well as sections (i), (vii) and (viii) largely restate 
the existing rule, but in a much more clear and understandable way. New 
sections (ii) and (iii) provide, respectively, for the delivery of 
``advice cancels'' if made on a timely basis and for the extension of 
applicable deadlines for delivery of exercise advices and advice cancel 
notifications in unusual circumstances. The advice cancel language 
codifies existing practice that is not spelled out in the current rule, 
and the rule providing for extension of deadlines provides the Exchange 
with flexibility to deal with unusual market circumstances in a way 
that is fair to market participants. New subsection (iv) clearly 
prohibits the preparation, time stamping or submitting an ``exercise 
advice'' prior to the purchase of the contracts to be exercised, if the 
member organization knew or had reason to know that the contracts had 
not yet been purchased. New sections (v) and (vi) articulate clearly 
that violation of Rule 1042A may result in consequences including 
disgorgement and that preparing or submitting an exercise advice or 
advice cancel after the applicable deadline on the basis of material 
information released after the deadline violates Rule 1042A and 
constitutes activity inconsistent with just and equitable principles of 
trade. These provisions should discourage lack of compliance with Rule 
1042A. Finally, compliance should be enhanced by the adoption of 
section (ix), a new requirement to establish procedures to ensure 
secure time stamps for the recording of submissions to exercise or not 
exercise expiring options. The proposed amendments to OFPA G-1 are 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest by conforming it to the 
requirements of updated Rule 1042A, eliminating potential confusion 
concerning a requirement that a specified form must be used in order to 
comply with Rule 1042A, eliminating an outdated reference to C/MACS, 
reflecting current practice that exercise advices may be delivered to 
Exchange staff in the trading crowd as well as at the Surveillance Post 
on the Exchange floor, and acknowledging that expiration now typically 
occurs on a business day rather than on a Saturday.

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

[[Page 60758]]

necessary or appropriate in furtherance of the purposes of the Act 
because the rule provides additional detail and requirements relating 
to procedures for exercise of American index options that apply to all 
members equally.

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 \18\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \19\ 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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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-Phlx-2016-84 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-2016-84. 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 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 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; 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-2016-84 and should be 
submitted on or before September 23, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-21131 Filed 9-1-16; 8:45 am]
BILLING CODE 8011-01-P