Document ID: SEC-2016-0268-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX LLC
Posted Date: 2016-02-18T05:00Z

[Federal Register Volume 81, Number 32 (Thursday, February 18, 2016)]
[Notices]
[Pages 8308-8310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-03274]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77121; File No. SR-Phlx-2016-22]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Regarding Rule 505 
and Rule 506

February 11, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on February 5, 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 the 
Substance of the Proposed Rule Change

    The Exchange is filing with the Commission a proposal to delete 
Rule 505 (Allocation, Reallocation and Transfer of Issues) and update 
Rule 506 (Allocation Application).\3\
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    \3\ References to rules are to Phlx rules unless otherwise 
noted.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.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 update its rules to delete Rule 505 
(Allocation, Reallocation and Transfer of Issues) and update Rule 506 
(Allocation Application).
    Rules 505 and 506 were approved more than three decades ago,\4\ at 
which time Exchange options trading was strictly on-floor open outcry 
through specialists. Exchange options trading developed into a robust 
hybrid system that is currently largely electronic and off-floor \5\ 
but continues to have on-floor specialists \6\ and open outcry trading. 
The Exchange is now consolidating its Rules 505 and 506.\7\ Having 
found that some of the concepts in Rule 505 are obsolete and that 
others belong in Rule 506, the Exchange is deleting Rule 505. 
Simultaneously, the Exchange is updating Rule 506 to make it more 
easily readable and to transfer certain concepts from Rule 505 to Rule 
506. These changes are described below.
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    \4\ See, e.g., Securities Exchange Act Release No. 37019 (August 
17, 1982), 47 FR 37019 (August 24, 1982) (SR-Phlx-81-1) (approval 
order).
    \5\ Electronic traders include market makers that are streaming 
quote traders (``SQTs''), remote streaming quote traders 
(``RSQTs''), and off-floor specialists (``Remote Specialists''). See 
Rules 1014(b)(ii)(A), 1014(b)(ii)(B), and 1020.
    \6\ Remote Specialists do not have a physical presence on the 
floor of the Exchange. Rule 1020.
    \7\ While the vast majority of options rules are found in Rule 
1000 and higher of the Exchange's rule book, some older options-
related rules, such as Rules 505 and 506, are in the Exchange's rule 
book below Rule 1000.
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Deletion of Rule 505
    The Exchange has concluded that with the placement of certain 
concepts from Rule 505 into Rule 506, Rule 505 is no longer needed. The 
Exchange believes that it is desirable to discuss the process of 
allocation or reallocation application, allocation, reallocation, and 
transfer in one rule, namely Rule 506. Moreover, ``leasing'' is not 
practiced on the Exchange and obsolete language in Rule 505 in respect 
of leasing is no longer needed.\8\ The Exchange proposes to therefore 
delete Rule 505, and to update and clarify Rule 506 to be more 
descriptive and to add several concepts from deleted Rule 505.
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    \8\ ``Leasing'' is the now-obsolete practice or one specialist 
leasing, or renting, an allocated issue to another specialist.
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Updating of Rule 506
    First, Rule 506 is updated to make it clear to the reader that the 
rule applies to the process of allocation application

[[Page 8309]]

as well as allocation, reallocation, and transfer. Specifically, the 
title to Rule 506 is expanded to state ``Allocation Application, 
Allocation, Reallocation, and Transfer''. This will allow the reader to 
more easily understand what Rule 506 is about.
    Second, the Exchange is adding language to indicate that 
applications may be regarding reallocation. Section (b) of Rule 506 is 
expanded to state that an allocation or reallocation application shall 
be submitted to the Exchange's staff in writing. Each allocation or 
reallocation application will continue to include, at a minimum, the 
name and background of the head specialist and assistant specialist(s) 
(except that a Remote Specialist need not include an assistant 
specialist), the unit's experience and capitalization demonstrating an 
ability to trade the particular options class sought, and any other 
reasons why the unit believes it should be assigned or allocated the 
security.\9\
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    \9\ The ability of the Exchange to require that the application 
include other information is continued. Rule 506(b). The Exchange is 
removing from section (b) antiquated language regarding system 
acceptance/execution levels and guarantees, as these are not 
currently used and are therefore obsolete. The language was used 
with allocation and transfers at a time when there was a lack of 
uniformity regarding execution levels, as opposed to standardization 
now (e.g., 1-up, 10-up). Rule 506(b).
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    Third, section (c) of Rule 506 states that allocation decisions and 
automatic allocations \10\ shall be communicated in writing to Exchange 
members. The Exchange proposes to add into section (c) language to 
state that reallocation or transfer decisions, like allocation 
decisions and automatic allocations, shall be communicated in writing 
to Exchange members.
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    \10\ Automatic allocations are discussed in Supplementary 
Material .02 to Rule 506. The Exchange proposes to add ``Automatic'' 
in front of the current title ``Allocation of Options on Related 
Securities'' so that the title is more descriptive. The Exchange 
also proposes to rename ``Supplementary Material'' to ``Commentary'' 
to conform with the general naming convention for rules.
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    Fourth, the Exchange is transferring the ``Registrant'' concept 
from deleted Rule 505 to section (d) of Rule 506 indicating in whose 
names an options class needs to be registered; and indicating that 
Registrant will act as specialist for a period of at least one year 
(known as ``minimum specialist period''). Specifically, the Exchange 
proposes to add to section (d) the following language:
    Upon allocation, reallocation, or transfer of an options class, the 
options class must be registered in either the name of the specialist 
unit, or jointly in the name of the unit and the specialist 
(``Registrant''). Each Registrant must be an Exchange member and an 
approved specialist. The Registrant shall act as specialist for the 
options class for at least one year (``minimum specialist period''); 
unless some other period is defined by the Exchange pursuant to this 
rule. After expiration of the minimum specialist period, the Exchange 
may re-allocate the options class.
    In transferring the ``Registrant'' concept from deleted Rule 505, 
the Exchange does not state that the options class can be registered 
solely in the name of an individual acting as specialist since this is 
not the current practice. Rather, the Exchange proposes to state that 
the options class must be registered in either the name of the 
specialist unit, or jointly in the name of the unit and the specialist. 
Commensurate with other changes and the language of Rule 506, the 
Exchange is also proposing to state in Rule 506(d) that once the 
specialist unit is allocated, reallocated, or transferred an options 
class,\11\ such specialist unit will notify the Exchange in writing 
regarding any material change in the application for any assigned 
options class.\12\
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    \11\ The term ``specialist unit'' is used for uniformity and 
readability in section Rule 506(a) and elsewhere in the rule (e.g., 
sections (d), (e), Commentary .01 (renamed from Supplementary 
Material .01 to better follow the naming convention)). Similarly, 
``issue'' is proposed to be changed to ``options class''.
    \12\ The Exchange proposes to also remove obsolete language 
regarding system acceptance/execution levels from Rule 506(d).
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    Fifth, the Exchange is transferring from Commentary .01 of deleted 
Rule 505 to new Commentary.03 of Rule 506 the concept that the Exchange 
may establish a period of less than one year for Registrant to act as a 
specialist in an options class (known as ``alternate specialist 
period''). This allows the Exchange to establish a period of time that 
is less than one year, which is shorter than the minimum specialist 
period. During the alternate specialist period established by the 
Exchange the Registrant must act as specialist in an allocated options 
class. If the Exchange decides to establish an alternate specialist 
period, it will communicate such period in solicitation applications. 
Also, after the alternate or minimum specialist period the Exchange may 
re-allocate an options class. Specifically, the Exchange proposes to 
state in Commentary .03:
.03 Alternate Specialist Period.
    The Exchange may establish that a Registrant shall act as a 
specialist in an allocated options class for a shorter period defined 
by the Exchange that is less than one year (``alternate specialist 
period''). If the Exchange establishes an alternate specialist period, 
it will communicate such period in solicitation applications (notices) 
pursuant to Rule 506. After expiration of the alternate specialist 
period, the Exchange may re-allocate the options class.
    The Exchange believes that these non-controversial changes to 
consolidate Rules 505 and 506 and to update and modernize Rule 506 as 
discussed will make remaining Rule 506 clearer and easier to use.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \13\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \14\ in particular, in that it is designed to 
promote just and equitable principles of trade and to protect investors 
and the public interest by deleting Rule 505 and updating Rule 506 and 
thereby consolidating the rules as discussed.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the rule change will promote just and 
equitable principles of trade by making the rules clearer and easier to 
use. The Exchange is proposing to get rid of an older rule, 
specifically Rule 505, and to consolidate certain concepts from Rule 
505 into remaining Rule 506. By doing so the Exchange is deleting 
obsolete language in Rule 505 regarding options classes that are 
subject to a lease, as leasing is not practiced on the Exchange. The 
Exchange is clarifying that Rule 506 will deal with allocation, 
reallocation, and transfer and that allocation, reallocation, or 
transfer decisions and automatic allocations will be communicated in 
writing to Exchange members. The Exchange proposes to transfer from 
deleted Rule 505 to Rule 506 the Registrant concept indicating that an 
options class must be registered in either the name of the specialist 
unit, or jointly in the name of the unit and the specialist; and 
indicating that Registrant will act as specialist for a one year 
minimum specialist period. The Exchange proposes to state in Rule 506 
that the Exchange can establish an alternate specialist period that is 
shorter than the minimum specialist period, and that such alternate 
specialist period will be communicated in solicitation applications. 
The Exchange will also update language in Rule 506 for clarity and 
readability (e.g., ``specialist unit'' and ``options class'').
    The Exchange believes that the proposed non-controversial change to 
consolidate Rules 505 and 506 and to

[[Page 8310]]

update and modernize Rule 506 will make Rule 506 clearer and easier to 
use to the benefit of market participants.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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. 
While the Exchange does not believe that the proposed non-controversial 
change is a burden on competition, or is competitive in nature, the 
Exchange believes that clearer, updated rules are always beneficial to 
market participants.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \15\ of the Act and Rule 19b-4(f)(6) thereunder \16\ in 
that it effects a change that: (i) Does not significantly affect the 
protection of investors or the public interest; (ii) does not impose 
any significant burden on competition; and (iii) by its terms, does not 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR Sec.  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-2016-22 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-2016-22. 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 such 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-2016-22, and should be 
submitted on or before March 10, 2016.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-03274 Filed 2-17-16; 8:45 am]
 BILLING CODE 8011-01-P