Document ID: SEC-2021-0742-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2021-05-19T04:00Z

[Federal Register Volume 86, Number 95 (Wednesday, May 19, 2021)]
[Notices]
[Pages 27138-27141]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10497]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91887; File No. SR-Phlx-2021-30]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Options 6, 
Section 7

May 13, 2021.
    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 6, 2021, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II, 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 Options 6, Section 7 to permit in-
kind transfers of positions off of the Exchange in connection with unit 
investment trusts (``UITs'').
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, 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 Options 6, Section 7, which permits 
off-Exchange, in-kind transfers of options positions in connection with 
exchange-traded funds (``ETFs'') organized as open-ended management 
investments companies under the Investment Company Act of 1940 (the 
``1940 Act''), to also permit in-kind transfers of options positions in 
connection with entities registered as UITs under the 1940 Act. This is 
a competitive filing that is substantially similar to rules in place on 
Cboe Exchange, Inc. (``Cboe'') and its affiliates.\3\
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    \3\ See Cboe Rule 6.9 (the ``Cboe Rule''); see also Securities 
Exchange Act Release No. 88786 (April 30, 2020), 85 FR 26998 (May 6, 
2020) (SR-CBOE-2020-042). See also Cboe C2 Exchange (``C2'') Rule 
6.63; Securities Exchange Act Release No. 89056 (June 12, 2020), 85 
FR 36888 (June 18, 2020) (SR-C2-2020-006). See also Cboe BZX 
Exchange (``BZX'') Rule 20.12; Securities Exchange Act Release No. 
89313 (July 14, 2020), 85 FR 43907 (July 20, 2020) (SR-CboeBZX-2020-
054). See also Cboe EDGX Exchange (``EDGX'') Rule 20.12; Securities 
Exchange Act Release No. 89312 (July 14, 2020), 85 FR 43887 (July 
20, 2020) (SR-CboeEDGX-2020-031).
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    Today, the Exchange allows members and member organizations to 
transfer their options positions off of the Exchange in limited, 
specified circumstances.\4\ For instance, Options 6, Section 7 permits 
positions in options listed on the Exchange to be transferred off the 
Exchange by a member or member organization in connection with 
transactions to purchase or redeem creation units of ETF shares between 
an authorized participant \5\ and the issuer of such ETF shares.\6\ 
Such transfers pursuant to Section 7 occur between two different 
parties, off the Exchange, and are considered position transfers from 
an account with one clearing firm to the account of another clearing 
firm.\7\ Each of these transfers occurs at the price used to calculate 
the net asset value (``NAV'') of such ETF shares. The ability to effect 
in-kind transfers is a key component of the operational structure of an 
ETF and Options 6, Section 7 allows options-based ETFs to be more tax-
efficient investment vehicles, to the benefit of their shareholders, 
and potentially resulting in transaction cost savings, which may be 
passed along to investors.
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    \4\ See Options 6, Section 5(a) (Transfer of Positions), Section 
6 (Off-Exchange RWA Transfers), and Section 7 (In-Kind Exchange of 
Options Positions and ETF Shares).
    \5\ An ``authorized participant'' is an entity that has a 
written agreement with the issuer of ETF shares or one of its 
service providers, which allows the authorized participant to place 
orders for the purchase and redemption of creation units (i.e., 
specified numbers of ETF shares. See Options 6, Section 7(a).
    \6\ An ``issuer of ETF shares'' is an entity registered with the 
Commission as an open-ended management investment company under the 
Investment Company Act of 1940. See Options 6, Section 7(b).
    \7\ These back-office transfers of options positions are in 
accordance with the rules of The Options Clearing Corporation 
(``OCC''), as the transferred positions are held in an account of an 
OCC member. Accordingly, all transfers pursuant to proposed Options 
6, Section 7 would be required to comply with OCC rules. See Options 
1, Section 1(b)(10) and Options 6, Section 8 (which, taken together, 
effectively requires all members and member organizations that are 
OCC members to comply with OCC's rules).
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    The Exchange now proposes to expand Options 6, Section 7 to mirror 
the Cboe Rule, which would permit in-kind transfers in connection with 
the creation or redemption of units issued by a UIT, another type of 
investment company registered under the 1940 Act. Although UITs operate 
differently than ETFs in certain respects, as described below, the 
anticipated potential benefits to UIT investors (i.e., greater tax 
efficiencies and transaction cost savings) from the proposed changes 
would be similar as discussed below. Furthermore, allowing the Exchange 
to permit such in-kind transfers would

[[Page 27139]]

enable the Exchange to compete more effectively with other options 
exchanges that already allow such transfers.\8\
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    \8\ See supra note 3.
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    Under the 1940 Act,\9\ a UIT is an investment company organized 
under a trust indenture or similar instrument that issues redeemable 
securities, each of which represents an undivided interest in a unit of 
specified securities.\10\ A UIT's investment portfolio is relatively 
fixed and, unlike an ETF, a UIT has a fixed life (a termination date 
for the trust is established when the trust is created). Similar to 
other types of investment companies (including ETFs), UITs invest their 
assets in accordance with their investment objectives and investment 
strategies, and UIT units represent interests in a UIT's underlying 
assets. Like ETFs, UITs do not sell or redeem individual shares, but 
instead, through the creation and redemption process, a UIT's sponsor 
(a broker-dealer) may purchase and redeem shares directly from the 
UIT's trustee in aggregations known as ``units.'' A broker-dealer 
purchases a unit of UIT shares from the UIT trustee by depositing a 
basket of securities and/or other assets identified by the UIT. These 
transactions are largely effected by ``in-kind'' transfers, or the 
exchange of securities, non-cash assets, and/or other non-cash 
positions. The basket deposited by the broker-dealer is generally 
expected to be representative of the UIT's units and will be equal in 
value to the aggregate NAV of the shares of the UIT comprising a 
unit.\11\ The UIT then issues units that are publicly offered and sold. 
Unlike ETFs, UITs typically do not continuously offer their shares for 
sale, but rather, make a one-time or limited public offering of only a 
specific, fixed number of units like a closed-end fund (i.e., the 
primary period, which may range from a single day to a few months). 
Similar to the process for ETFs, UITs allow investor-owners of units to 
redeem their units back to the UIT's trustee on a daily basis and, upon 
redemption, such investor-owners are entitled to receive the redemption 
price at the UIT's NAV. While UITs provide for daily redemptions 
directly with the UIT's trustee, UIT sponsors frequently maintain a 
secondary market for units, also like that of ETFs, and will buy back 
units at the applicable redemption price per unit. To satisfy 
redemptions, a UIT typically sells securities and/or other assets, 
which results in negative tax implications and an incurrence of trading 
costs borne by remaining unit holders.
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    \9\ 15 U.S.C. 80a-4(2).
    \10\ The Exchange also notes that although a majority of ETFs 
are structured as open-ended funds (i.e., those ETFs covered by 
Options 6, Section 7), some ETFs are structured as UITs, and 
currently represent a significant amount of assets within the ETF 
industry. These include, for example, SPDR S&P 500 ETF Trust 
(``SPY'') and PowerShares QQQ Trust, Series 1 (``QQQ'').
    \11\ The NAV is an investment company's total assets minus its 
total liabilities. UITs must calculate their NAV at least once every 
business day, typically after market close. See Sec.  270.2a-4(c), 
which provides that any interim determination of current net asset 
value between calculations made as of the close of the New York 
Stock Exchange on the preceding business day and the current 
business day may be estimated so as to reflect any change in current 
net asset value since the closing calculation on the preceding 
business day. This, however, is notwithstanding the requirements of 
Sec.  270.2a-4(a), which provides for other events that would 
trigger computation of a UIT's NAV.
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    Although ETFs and UITs operate differently in certain respects, the 
ability to effect in-kind transfers is significant to both types of 
investment vehicles. Currently, in-kind transfers of options pursuant 
to Options 6, Section 7 protect ETF shareholders from certain 
undesirable tax consequences and improve the overall tax efficiency of 
the products. Indeed, by effecting redemptions on an in-kind basis, as 
permitted by Options 6, Section 7, there is no need for an ETF to sell 
assets and potentially realize capital gains that would be distributed 
to shareholders. Additionally, by transacting on an in-kind basis, ETFs 
may currently avoid certain transaction costs they would otherwise 
incur in connection with the purchase and sale of securities and other 
assets (including options). Options 6, Section 7 does not currently 
permit these in-kind transfers for UITs as they are still generally 
required to sell options on an exchange to obtain the requisite cash 
when effecting redemption transactions with broker-dealers.
    In light of the foregoing, the Exchange proposes to extend Options 
6, Section 7 to UITs. As amended, Options 6, Section 7 will provide 
that positions in options listed on the Exchange may be transferred off 
the Exchange by a member or member organization in connection with 
transactions (1) to purchase or redeem creation units of ETF shares 
between an authorized participant and the issuer of such ETF shares or 
(2) to create or redeem units of a unit investment trust (``UIT'') 
between a broker-dealer and the issuer of such UIT units, which 
transfers would occur at the price(s) used to calculate the net asset 
value of such ETF shares or UIT units, respectively. An ``issuer of UIT 
units'' will be defined in new paragraph (c) of the Rule as a trust 
registered with the Commission as a unit investment trust under the 
Investment Company Act of 1940.
    As described above, UITs and ETFs are situated in substantially the 
same manner; the key differences being a UIT's fixed duration, and that 
a UIT generally makes a one-time public offering of only a specific, 
fixed number of units. Negative tax implications and trading costs for 
remaining unit holders would be mitigated by allowing a UIT sponsor or 
another broker-dealer to receive an in-kind distribution of options 
upon redemption. Accordingly, permitting off-Exchange in-kind transfers 
for UITs would benefit investors by potentially providing tax 
efficiencies and transaction cost savings similar to those that 
investors in ETFs may enjoy today.
    The Exchange does not believe that the proposed extension of 
Options 6, Section 7 will compromise price discovery or transparency. 
To note, this Rule is already applicable to options in connection with 
ETF creations and redemptions. Although options positions in connection 
with ETF and UIT (as proposed) creations and redemptions are 
transferred off the Exchange, they are not closed or ``traded,'' and 
instead, merely reside in a different clearing account until closed in 
a trade on the Exchange or until they expire. The Exchange also notes 
that just like the Cboe Rule, amended Options 6, Section 7 will 
continue to be clearly delineated and limited in scope, given that the 
Rule will continue to apply only to transfers of options effected in 
connection with the creation and redemption process, and for certain 
investment companies registered under the 1940 Act. Other than the 
transfers covered by the amended Rule, options transactions, whether 
held by an ETF or an authorized participant, or a UIT or a broker-
dealer, would be fully subject to all applicable trading Rules on the 
Exchange.
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 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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    The Exchange believes that permitting off-Exchange transfers in 
connection with the in-kind UIT creation and

[[Page 27140]]

redemption process promotes just and equitable principles of trade and 
helps remove impediments to and perfect the mechanism of a free and 
open market and a national market system, as it would permit UITs that 
invest in options traded on the Exchange to utilize the in-kind 
creation and redemption process that is currently available for ETFs 
under Options 6, Section 7. Furthermore, the Exchange believes that 
permitting a comparable investment vehicle, also registered as an 
investment company under the 1940 Act, to be covered by Options 6, 
Section 7 removes impediments to and perfects the mechanism of a free 
and open market and national market system as it would enable UITs to 
compete more effectively with other investment vehicles that, based on 
their portfolio holdings, may effect in-kind creations and redemptions 
without restriction. The Exchange notes that the ability to effect in-
kind transfers is significant to both ETFs and UITs as investment 
vehicles. By permitting UITs that invest in options traded on the 
Exchange to benefit from potential tax efficiencies and transaction 
cost savings similar to those that ETFs may currently enjoy, the 
proposed rule change would protect investors and the public interest by 
passing along such potential benefits to investors that participate in 
UITs. The Exchange does not believe that the proposed rule change 
affects the protection of investors or the maintenance of a fair and 
orderly market because Options 6, Section 7, as amended, would continue 
to be clearly delineated and limited in scope. The Rule already applies 
to ETFs, which operate in a similar manner as UITs, and the proposed 
rule change to extend the Rule to UITs is based on a similar rationale 
and does not raise any new or novel issues. In this regard, as with in-
kind, off-exchange transfers of options in connection with ETFs, those 
transfers in connection with UITs would also occur at a price related 
to the NAV of the applicable UIT units, which removes the need for 
price discovery on an exchange. The Exchange expects that off-exchange 
options transfers in connection with the creation and redemption 
process for UITs will comprise a minimal percentage of average daily 
volume (``ADV''), just as such transfers currently permissible in 
connection with ETFs comprise a minimal percentage of ADV. Further, the 
general price at which UIT-related transfers are effected will be 
publicly available as they are based on the disseminated closing prices 
and are generally expected to include corresponding transactions by a 
broker-dealer that would occur on an exchange and be reported to 
OPRA.\14\
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    \14\ The Exchange notes that in conjunction with depositing 
options with a UIT's trustee and creating units, the necessary 
options positions will be acquired in an on-exchange transaction 
that is reported to OPRA. In conjunction with redemptions, the 
sponsor or other broker-dealer will generally acquire both the units 
redeemed by a redeeming unit holder and an options position to 
offset the position that it will receive as proceeds for the 
redemption. Such an options position is likely acquired in an on-
exchange transaction that would be reported to OPRA. Thus, while the 
transfer of options positions between the sponsor or other broker-
dealer and the UIT would not necessarily be reported, there are 
generally corresponding transactions that would be reported, 
providing transparency into the transactions.
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    Finally, the proposed rule change would align the Exchange's Rule 
with that of other options exchanges, thereby allowing the Exchange to 
compete on equal footing.\15\
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    \15\ See supra note 3.
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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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe the proposed rule change will impose any burden on intramarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. Utilizing the proposed in-kind process under 
Options 6, Section 7 would be voluntary. The proposed rule change would 
provide market participants with an efficient and effective means to 
transfer positions as part of the creation and redemption process for 
UITs under the same specified circumstances currently applicable to the 
ETF creation and redemption process. The proposed expansion of Options 
6, Section 7 to UITs would enable this investment vehicle, which is 
comparable to ETFs, to enjoy the benefits of off-Exchange, in-kind 
creations and redemptions already available to ETFs, and to pass these 
benefits along to investors. The proposed rule change would apply in 
the same manner to all broker-dealers that opt to invoke the proposed 
in-kind process.
    The Exchange does not believe the proposed rule change will impose 
any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act because the 
proposed rule would continue to provide a clearly delineated and 
limited circumstance in which options positions can be transferred off 
an exchange. Furthermore, as indicated above, in light of the 
significant benefits provided (e.g., tax efficiencies and potential 
transaction cost savings), the proposed expansion may lead to further 
development of UITs that invest in options, thereby fostering 
competition and resulting in additional choices for investors, which 
ultimately benefits the marketplace and the public. Lastly, the 
Exchange notes that proposed rule change is based rules already in 
place on other options exchanges.\16\ As such, the Exchange believes 
that its proposal enhances fair competition between markets by 
providing for additional listing venues for UITs that hold options to 
utilize the in-kind transfers proposed herein.
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    \16\ See supra note 3.
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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 \17\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \18\ 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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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days from the date of filing. However, Rule 
19b-4(f)(6)(iii) \19\ permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. The Exchange has asked the Commission to waive the 
30-day operative delay so that it may adopt the proposed transfer rule 
as soon as possible, which, according to the Exchange, may lead to 
further development of UITs that invest in options and foster 
competition. The proposed rule change does not present any unique or 
novel regulatory issues and is substantively similar to the Cboe

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Rule.\20\ Accordingly, the Commission waives the 30-day operative delay 
and designates the proposed rule change operative upon filing.\21\
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    \19\ 17 CFR 240.19b-4(f)(6)(iii).
    \20\ See supra note 3.
    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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-Phlx-2021-30 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-2021-30. 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-2021-30 and should be submitted on 
or before June 9, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
J. Matthew DeLesDernier,
Assistant Secretary.
     
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    \22\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2021-10497 Filed 5-18-21; 8:45 am]
BILLING CODE 8011-01-P