Document ID: SEC-2019-1068-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2019-07-29T04:00Z

[Federal Register Volume 84, Number 145 (Monday, July 29, 2019)]
[Notices]
[Pages 36644-36647]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15973]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86437; File No. SR-NASDAQ-2019-053]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Amend Its Rules Governing the Nasdaq Options Market To Modify the 
Give Up of a Clearing Participant by a Participant on NOM Transactions

July 23, 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 July 9, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' 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 Nasdaq 
Options Market (``NOM'') to modify the give up of a Clearing 
Participant \3\ by a Participant \4\ on NOM transactions.
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    \3\ The term ``Clearing Participant'' means a Participant that 
is self-clearing or a Participant that clears NOM Transactions for 
other Participants of NOM. See Chapter I, Section 1(a)(9).
    \4\ The term ``Participant'' means a firm, or organization that 
is registered with the Exchange pursuant to Chapter II of the 
Exchange's rules for purposes of participating in options trading on 
NOM as a ``Nasdaq Options Order Entry Firm'' or ``Nasdaq Options 
Market Maker.'' See Chapter I, Section 1(a)(40).
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    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its requirements in Chapter VI, 
Section 14 related to the give up of a Clearing Participant by a 
Participant on NOM transactions. This proposed rule change is 
substantially similar \5\ to a recently-approved rule change by the 
Exchange's affiliate, Nasdaq PHLX LLC (``Phlx''),\6\ and serves to 
align the rules of Phlx and the Exchange.\7\
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    \5\ Specifically, Nasdaq is not adopting section (c)(i) of Phlx 
Rule 1037, which relates to how the Phlx trading system will enforce 
unauthorized Give Ups for floor trades.
    \6\ See Securities Exchange Act Release No. 85136 (February 14, 
2019) (SR-Phlx-2018-72) (Approval Order).
    \7\ The other Nasdaq, Inc.-owned options markets, Nasdaq BX, 
Nasdaq ISE, Nasdaq GEMX, and Nasdaq MRX (collectively, ``Nasdaq 
HoldCo Exchanges''), have already filed or will file similar rule 
change proposals based on the Phlx filing.
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    By way of background, to enter transactions on NOM, a Participant 
must either be a Clearing Participant or must have a Clearing 
Participant agree to accept financial responsibility for all of its 
transactions. In particular, Chapter VI, Section 14 currently provides 
that a Participant must give up the name of the Clearing Participant 
through which the transaction will be cleared. Chapter VI, Section 
15(a) provides, in relevant part, that every Clearing Participant shall 
be responsible for the clearance of NOM transactions of such Clearing 
Participant and of each Participant that gives up such Clearing 
Participant's name pursuant to a letter of authorization, letter of 
guarantee or other authorization given by such Clearing Participant to 
such Participant, which authorization must be submitted to the 
Exchange. Additionally Chapter VII, Section 8 provides that no 
Participant shall make any transactions on NOM unless a Letter of 
Guarantee has been issued for such Participant by a Clearing 
Participant and filed with the Exchange.
    Recently, certain Clearing Participants, 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 Participants 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 6 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 
Participant to opt in, at The Options Clearing Corporation (``OCC'') 
clearing number level, to a feature that, if enabled by the Clearing 
Participant, will allow the Clearing Participant to specify which 
Participants are authorized to give up that OCC clearing number. 
Accordingly, Section 14 will be retitled as ``Authorization to Give 
Up,'' and the current rule text will be replaced by new language. 
Specifically, proposed

[[Page 36645]]

Section 14(a) will provide that for each transaction in which a 
Participant participates, the Participant may indicate, through post 
trade allocation, any OCC number of a Clearing Participant through 
which a transaction will be cleared (``Give Up''), provided the 
Clearing Participant 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'').\9\ A Participant may Give Up a 
Restricted OCC Number provided the Participant has written 
authorization as described in paragraph (b)(ii) (``Authorized 
Participant'').
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    \9\ Today, electronic trades need a valid mnemonic, which is 
only set up if there is a clearing arrangement already in place 
through a Letter of Guarantee. As such, electronic trades 
automatically clear through the guarantor associated with the 
mnemonic at the time of the trade, so a member organization may only 
amend its Give Up post-trade. As proposed, the Exchange will also 
restrict the post-trade allocation portion of an electronic trade 
systematically. See note 12 below.
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    Proposed Section 14(b) provides that Clearing Participants may 
request the Exchange restrict one or more of their OCC clearing numbers 
(``Opt In'') as described in subparagraph (i) of Section 14(b). If a 
Clearing Participant Opts In, the Exchange will require written 
authorization from the Clearing Participant permitting a Participant to 
Give Up a Clearing Participant's Restricted OCC Number. An Opt In would 
remain in effect until the Clearing Participant terminates the Opt In 
as described in subparagraph (iii). If a Clearing Participant does not 
Opt In, that Clearing Participant's OCC number may be subject to Give 
Up by any Participant.
    Proposed Section 14(b)(i) will set forth the process by which a 
Clearing Participant may Opt In. Specifically, a Clearing Participant 
may Opt In by sending a completed ``Clearing Member Restriction Form'' 
listing all Restricted OCC Numbers and Authorized Participant.\10\ A 
copy of the proposed form is attached [sic] in Exhibit 3. A Clearing 
Participant may elect to restrict one or more OCC clearing numbers that 
are registered in its name at OCC. The Clearing Participant 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 Participant as Authorized 
Participants to obtain the required written authorization from the 
Clearing Participant 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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    \10\ 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 Participant's contact information to assist 
Participants (to the extent they are not already Authorized 
Participants) 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 Section 14(b)(ii) will set forth the process for 
Participants to Give Up a Clearing Participant's Restricted OCC Number. 
Specifically, a Participant desiring to Give Up a Restricted OCC Number 
must become an Authorized Participant.\11\ The Clearing Participant 
will be required to authorize a Participant as described in 
subparagraph (i) or (iii) of Section 14(b) (i.e., through a Clearing 
Member Restriction Form), unless the Restricted OCC Number is already 
subject to a Letter of Guarantee that the Participant is a party to, as 
set forth in Section 14(d).
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    \11\ The Exchange will develop procedures for notifying 
Participants that they are authorized or unauthorized by Clearing 
Participants.
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    Pursuant to proposed Section 14(b)(iii), a Clearing Participant may 
amend the list of its Authorized Participants 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 Section 14(b)(i), the Exchange may permit the Clearing 
Participant to authorize, or remove authorization for, a Participant 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 Participants if 
they are no longer authorized to Give Up a Clearing Participant's 
Restricted OCC Number. If a Clearing Participant removes a Restricted 
OCC Number, any Participant may Give Up that OCC clearing number once 
the removal has become effective on or before the next business day.
    Proposed Section 14(c) will provide that the System will not allow 
an unauthorized Give Up with a Restricted OCC Number to be submitted at 
the firm mnemonic level at the point of order entry.\12\
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    \12\ Similar to Phlx, the System will block the entry of the 
order from the outset. See Phlx Rule 1037(c)(ii). This is because a 
valid mnemonic will be required for any order to be submitted 
directly to the System, and a mnemonic will only be set up for a 
member organization if there is already a clearing arrangement in 
place for that firm either through a Letter of Guarantee (as is the 
case today) or in the case of a Restricted OCC Number, the member 
organization becoming an Authorized Member Organization. The System 
will also restrict any post-trade allocation changes if the member 
organization is not authorized to use a Restricted OCC Number.
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    Furthermore, the Exchange proposes to adopt paragraph (d) to 
Section 14 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 Participant 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 Participant or the Participant.
    The Exchange also proposes to adopt paragraph (e) to Section 14 to 
provide that an intentional misuse of this rule is impermissible, and 
may be treated as a violation of Nasdaq Rule 2010A, titled ``Standards 
of Commercial Honor and Principles of Trade,'' or Chapter III, Section 
1, 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 Participant's OCC account without the 
Clearing Participant'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 Chapter VI, Section 15(a), which addresses the Clearing 
Participant's financial responsibility for the NOM transactions of 
Participants who give up the name of such Clearing Participant pursuant 
to, for example, a letter of guarantee. In particular, the Exchange 
proposes to add that every Clearing Participant shall be responsible 
for the clearance of NOM transactions of each Participant who gives up 
such Clearing Participant's name pursuant to a written authorization to 
become an Authorized Participant under Chapter VI, Section 14. Lastly, 
the Exchange proposes two technical changes in the same provision: (1) 
To capitalize Letter of Guarantee for consistency throughout its 
Rulebook, and (2) to delete obsolete references to the letter of 
authorization.\13\
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    \13\ The Exchange has since updated its forms to combine the 
letter of authorization and guarantee into one Letter of Guarantee 
applicable to all Participants.
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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

[[Page 36646]]

to its Participants in an Options Trader Alert.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\14\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\15\ 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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    \14\ 15 U.S.C. 78f(b).
    \15\ 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 Participants to identify any Clearing 
Participant 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 Chapter VI, 
Section 14 help alleviate this risk by enabling Clearing Participants 
to `Opt In' to restrict one or more of its OCC clearing numbers (i.e., 
Restricted OCC Numbers), and to specify which Authorized Participants 
may Give Up those Restricted OCC Numbers. As described above, all other 
Participants would be required to receive written authorization from 
the Clearing Participant before they can Give Up that Clearing 
Participant's Restricted OCC Number. The Exchange believes that this 
authorization provides proper safeguards and protections for Clearing 
Participants as it provides controls for Clearing Participants to 
restrict access to their OCC clearing numbers, allowing access only to 
those Authorized Participants 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 Participants, 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 
Participants (other than Authorized Participants) to seek authorization 
from Clearing Participants in order to have the ability to give them 
up, each Participant 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 Participant is party to 
that arrangement. The Exchange also notes that to the extent the 
executing Participant has a clearing arrangement with a Clearing 
Participant (i.e., through a Letter of Guarantee), a trade can be 
assigned to the executing Participant's guarantor. Accordingly, the 
Exchange believes that the proposed rule change is reasonable and 
continues to provide certainty that a Clearing Participant would be 
responsible for a trade, which protects investors and the public 
interest. Finally, the Exchange believes that adopting paragraph (e) of 
Section 14 will make clear that an intentional misuse of this rule 
(e.g., sending orders to a Clearing Participant's OCC account without 
the Clearing Participant's consent) will be a violation of the 
Exchange's rules, and that such behavior would subject a Participant 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 Participants. The Exchange also notes that, should the 
proposed changes make NOM more attractive for trading, market 
participants trading on other exchanges can always elect to become 
Participants on NOM 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 Participants 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 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 Participant's services, the Exchange's proposal may 
indirectly facilitate the ability of a Clearing Participant to manage 
their existing customer relationships while continuing to allow market 
participant choice in broker execution services. While Clearing 
Participants 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 Participants 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 \16\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 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

[[Page 36647]]

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-NASDAQ-2019-053 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-NASDAQ-2019-053. 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-NASDAQ-2019-053 and should be submitted 
on or before August 19, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15973 Filed 7-26-19; 8:45 am]
 BILLING CODE 8011-01-P