Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a Proposed Rule Change To Establish Rules Governing the Give Up of a Clearing Member by a Member Organization on Exchange Transactions, 5526-5528 [2019-02895]

Download as PDF 5526 Federal Register / Vol. 84, No. 35 / Thursday, February 21, 2019 / Notices Act 19 normally does not become operative for 30 days after the date of its filing. However, Rule 19b–4(f)(6)(iii) 20 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. The Exchange believes that waiver of the operative delay is consistent with the protection of investors and the public interest because it would ensure that the Exchange will have a provision immediately available for handling obvious errors in option series being used to calculate the final settlement price of a volatility index on the final settlement day. For this reason, the Commission believes that waiver of the 30-day operative delay is consistent with the protection of investors and the public interest. Therefore, the Commission hereby waives the operative delay and designates the proposal as operative upon filing.21 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 change 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– MIAX–2019–02 on the subject line. Commission, 100 F Street NE, Washington, DC 20549–1090. SECURITIES AND EXCHANGE COMMISSION All submissions should refer to File Number SR–MIAX–2019–02. 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 (https://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–MIAX–2019–02 and should be submitted on or before March 14, 2019. [Release No. 34–85136; File No. SR–Phlx– 2018–72] For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.22 Eduardo A. Aleman, Deputy Secretary. [FR Doc. 2019–02897 Filed 2–20–19; 8:45 am] BILLING CODE 8011–01–P amozie on DSK3GDR082PROD with NOTICES1 Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange 19 17 CFR 240.19b–4(f)(6). CFR 240.19b–4(f)(6)(iii). 21 For purposes only of waiving the 30-day operative delay, the Commission also has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 20 17 VerDate Sep<11>2014 17:08 Feb 20, 2019 Jkt 247001 22 17 PO 00000 CFR 200.30–3(a)(12). Frm 00123 Fmt 4703 Sfmt 4703 Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a Proposed Rule Change To Establish Rules Governing the Give Up of a Clearing Member by a Member Organization on Exchange Transactions February 14, 2019. I. Introduction On November 6, 2018, Nasdaq PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to establish rules governing the ‘‘give up’’ process by which an Exchange member organization, in connection with executing a trade on the Exchange, indicates to the Exchange (i.e., ‘‘gives up’’) the name of a Clearing Member 3 that will be responsible for the clearance of that transaction. The proposed rule change was published for comment in the Federal Register on November 26, 2018.4 On January 9, 2019, pursuant to Section 19(b)(2) of the Act,5 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.6 The Commission received three comment letters on the proposed rule change, each in support of the proposal.7 This order approves the proposed rule change. 1 15 U.S.C.78s(b)(1). CFR 240.19b–4. 3 See Phlx Rule 1000(b)(3) (defining ‘‘Clearing Member’’ as a member organization that has been admitted to membership in the Options Clearing Corporation (‘‘OCC’’) pursuant to the provisions of the rules of the Options Clearing Corporation). 4 See Securities Exchange Act Release No. 84624 (Nov. 19, 2018), 83 FR 60547 (‘‘Notice’’). 5 15 U.S.C. 78s(b)(2). 6 See Securities Exchange Act Release No. 84981, 83 FR 837 (Jan. 31, 2019) (designating February 24, 2019 as the date by which the Commission shall approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change). 7 See Letters to Brent J. Fields, Secretary, Commission, from: (1) Matthew R. Scott, President, Merrill Lynch Professional Clearing Corp, dated December 7, 2018 (‘‘Scott Letter’’); (2) Ellen Greene, Managing Director, SIFMA, dated December 17, 2018 (‘‘SIFMA Letter’’); and (3) John P. Davidson, President and Chief Operating Officer, OCC, dated December 19, 2018 (‘‘Davidson Letter’’). The comment letters are available at https:// www.sec.gov/comments/sr-phlx-2018-72/srphlx 201872.htm. 2 17 E:\FR\FM\21FEN1.SGM 21FEN1 Federal Register / Vol. 84, No. 35 / Thursday, February 21, 2019 / Notices II. Description of the Proposed Rule Change Exchange rules currently require that, in order to enter transactions on the Exchange, a member organization either must be a Clearing Member or have a Clearing Member agree to accept financial responsibility for the member organization’s transactions via a clearing arrangement.8 Further, Phlx Rule 1052 provides generally that Clearing Members are responsible for the clearing their own Exchange transactions as well as Exchange transactions of each member organization that gives up the Clearing Member’s name provided that the Clearing Member has authorized such member organization to give up its name on Exchange transactions. Exchange rules do not, however, establish a framework for the give up authorization process. To address this, Phlx proposes to adopt Rule 1037 and amend Rule 1052 to establish requirements for the give up process, including specific procedures, in greater detail. Specifically, proposed Rule 1037 will allow Clearing Members to ‘‘opt in’’ and request that the Exchange systematically restrict use of one or more of its OCC clearing numbers (each a ‘‘Restricted OCC Number’’). Once restricted, Exchange member organizations will not be able to give up the Restricted OCC Number to clear an Exchange transaction unless the Clearing Member previously has submitted to the Exchange written authorization permitting that member organization to give up that Restricted OCC Number. If a Clearing Member does not ‘‘opt in’’ to this process for a particular OCC number (a ‘‘Non-Restricted OCC Number’’), that number would be available to be given up by any Exchange member organization. Give Up Process for Restricted OCC Numbers A Clearing Member that requests the Exchange to restrict use of one or more of its OCC clearing numbers would ‘‘opt in’’ by sending to the Exchange a completed ‘‘Clearing Member Restriction Form’’ 9 that identifies the requested Restricted OCC Numbers.10 8 See Phlx Rule 1046 (Clearing Arrangements). Exchange represented in its filing that it will maintain this form and a list of the Restricted OCC Numbers on its website, which it will update on a regular basis, along with the Clearing Member’s contact information to assist member organizations with requesting authorization for a Restricted OCC Number. See Notice, supra note 4 at n.7. 10 See Proposed Phlx Rule 1037(b)(i). The restriction would remain in effect until terminated by the Clearing Member. See id. The Exchange also amozie on DSK3GDR082PROD with NOTICES1 9 The VerDate Sep<11>2014 17:08 Feb 20, 2019 Jkt 247001 At the same time, the Clearing Member would list on the form the Exchange member organizations that it authorizes to give up that Restricted OCC Number (each an ‘‘Authorized Member Organization’’).11 For newly Restricted OCC Numbers, the Exchange will require 90 days before the restriction becomes effective within the Exchange’s system.12 Thereafter, a member organization may only give up a Restricted OCC Number if the member organization has previously been identified and processed by the Exchange as an Authorized Member Organization, except that a member organization may give up the Restricted OCC Number of its guarantor with whom it has a letter of guarantee without being identified as an Authorized Member Organization.13 Once a Restricted OCC Number is effective, a Clearing Member will be able to submit a new Clearing Member Restriction Form to authorize, or remove from authorization, a member organization from its list of Authorized Member Organizations approved to give up its Restricted OCC Number(s), as well as amend its list of Restricted OCC Numbers.14 The Exchange will promptly notify member organizations if they are no longer authorized to give up a Clearing Member’s Restricted OCC Number.15 The Exchange will ensure the authorized use of Restricted OCC Numbers through its systems and will not allow an unauthorized member organization to give up a Restricted OCC Number. Specifically, for orders that are executed on the trading floor in open outcry using the Options Floor Based Management System (‘‘FBMS’’), the Exchange will reject the clearing portion of the trade if an unauthorized member organization enters a Restricted OCC Number.16 The member organization will receive notification of the rejected clearing information, and will be required to modify the clearing information by contacting the Exchange.17 For all other orders (i.e., proposes to amend Rule 1052 regarding financial responsibility of Exchange options transactions cleared through Clearing Members to clarify that Rule 1052 applies to all Clearing Members regardless of whether they ‘‘opt in’’ pursuant to Phlx Rule 1037. 11 See id. 12 See id. 13 See Proposed Phlx Rule 1037(d). 14 See Proposed Phlx Rule 1037(b)(iii). Such changes will be effective on the next business day under regular circumstances, but could be effective intra-day in unusual circumstances. See id. 15 See id. 16 See Proposed Phlx Rule 1037(c). 17 See id. According to the Exchange, the FBMS order will be executed, provided the terms of the PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 5527 orders that are submitted directly to the exchange’s system), the Exchange will not allow an unauthorized member organization to give up a Restricted OCC Number at the firm mnemonic level at the point of order entry.18 Misuse of the Rule Finally, Phlx Rule 1037(e) provides that an intentional misuse of the Rule by any party is impermissible and may be treated as a violation of Rule 707 (‘‘Conduct Inconsistent with Just and Equitable Principles of Trade’’) or Rule 708 (‘‘Acts Detrimental to the Interest or Welfare of the Exchange’’).19 III. Discussion and Commission Findings After careful consideration of the proposal, the Commission finds that the Exchange’s proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange.20 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,21 which requires, among other things, that the rules of a national securities exchange be designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities and, in general, to protect investors and the public interest, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. trade comply with the relevant Exchange rules, and the execution reported to the consolidated tape. The System will, however, reject the clearing portion, and the member organization will have to amend the clearing information by contacting the Exchange. See Notice, supra note 4 at n. 11. 18 See Proposed Phlx Rule 1037(c). Specifically, the Exchange states that its system will block the entry of the order from the outset. See Notice, supra note 4 at n. 13. The Exchange notes that 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 as proposed in the case of a Restricted OCC Number, the member organization must be an Authorized Member Organization for that Restricted OCC Number. See id. As proposed, the system also will now restrict any post-trade allocation changes if the member organization is not authorized to use a Restricted OCC Number. See id. 19 See Proposed Phlx Rule 1037(e). See also Notice, supra note 4 at 60549 (providing one example of intentional misuse where a member organization sends orders to a Restricted OCC Number without authorization to do so). 20 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 21 15 U.S.C. 78f(b)(5). E:\FR\FM\21FEN1.SGM 21FEN1 amozie on DSK3GDR082PROD with NOTICES1 5528 Federal Register / Vol. 84, No. 35 / Thursday, February 21, 2019 / Notices The Commission received three comment letters on the proposed rule change, each supporting it.22 One commenter argues that the proposal ‘‘is a critical first step to reduce risk in listed-options clearing,’’ and will facilitate the ability of Clearing Members ‘‘to properly assess and enforce credit limits for authorized executing brokers and their clients.’’ 23 Another commenter notes that the Exchange’s proposal is the culmination of efforts among industry participants to address and ultimately reduce clearing member risks.24 Further, one commenter believes that the proposal ‘‘strikes the right balance across all participants.’’ 25 The Commission believes that the proposal is designed to foster cooperation and coordination among the parties engaged in facilitating transactions in securities by setting forth a basic framework within which a Clearing Member can exercise greater control over the use of its clearing services by customers using the services of third party executing brokers in a manner that is not intended to allow for or impose a burden on competition that is not necessary or appropriate in furtherance of the Act. In particular, the Exchange’s proposal will implement a defined and standardized process through which a Clearing Member can ‘‘opt in’’ to limit the use of one or more of its OCC clearing numbers to member organizations that it pre-authorizes in writing, which the Exchange will then enforce through its systems. These provisions are designed to help assure the orderly clearance and settlement of Exchange trades and should, for example, reduce the chance for keypunch errors and may assist Clearing Members in enforcing the provisions of their clearing arrangements with customers. As an integral and important part of this process, the Exchange will provide notice to affected member organizations, including by providing a 90-day delayed effectiveness on newly restricted OCC numbers, by providing notice to affected member organizations whose authorized status changes, and by providing publicly available information on all Restricted OCC Numbers and the corresponding Clearing Member contact information. In so doing, the proposed rule is designed to promote transparency and provide an orderly process by which third party executing 22 See supra note 7. 23 SIFMA Letter, supra note 7, at 2. 24 Davidson Letter, supra note 7, at 2. 25 Scott Letter, supra note 7, at 1. See also SIFMA Letter, supra note 7, at 2. VerDate Sep<11>2014 17:08 Feb 20, 2019 Jkt 247001 brokers can make arrangements for clearing services to facilitate transactions on the Exchange. Further, requiring Clearing Members to use standardized forms to designate all Restricted OCC Numbers and Authorized Member Organizations, and to make amendments to those items, should enhance Phlx’s ability to monitor and enforce compliance with its proposed rule relating to the give up process. Use of standardized forms also may make it easier for Clearing Members and member organizations to comply with the proposed rule, and should benefit all members by providing written confirmation of a member organization’s authorized status with respect to a specific Restricted OCC Number for a particular Clearing Member. The Commission believes that the proposal seeks to address the needs of different parties involved in facilitating transactions in securities and does so in a balanced manner that provides a reasonable framework for the authorization process. Moreover, the proposal recognizes the need for a member organization to be able to give up its guarantor, and minimizes burdens on the member organization and Clearing Member by allowing such give ups to occur without the need to obtain any further authorization through use of the Clearing Member Restriction Form. In this manner, the proposed rule change recognizes that there will always be a Clearing Member that will be financially responsible for a trade, which should foster operational certainty and facilitate cooperation and coordination with persons engaged in clearing transactions. For the foregoing reason, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act 26 and the rules and regulations thereunder applicable to national securities exchanges. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,27 that the proposed rule change (SR– Phlx–2018–72) be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.28 Eduardo A. Aleman, Deputy Secretary. [FR Doc. 2019–02895 Filed 2–20–19; 8:45 am] BILLING CODE 8011–01–P U.S.C. 78f(b)(5). U.S.C. 78s(b)(2). 28 17 CFR 200.30–3(a)(12). SECURITIES AND EXCHANGE COMMISSION [Release No. 34–85132; File No. SR– NASDAQ–2019–003] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Exchange’s Provisions for Excluding a Day From Its Volume Calculations for Purposes of Determining Tiered Pricing February 14, 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 January 31, 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 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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend the Exchange’s provisions for excluding a day from its volume calculations for purposes of determining tiered pricing. The text of the proposed rule change is available on the Exchange’s website at https://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. 26 15 27 15 PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 1 15 2 17 E:\FR\FM\21FEN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 21FEN1

Agencies

[Federal Register Volume 84, Number 35 (Thursday, February 21, 2019)]
[Notices]
[Pages 5526-5528]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-02895]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85136; File No. SR-Phlx-2018-72]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a 
Proposed Rule Change To Establish Rules Governing the Give Up of a 
Clearing Member by a Member Organization on Exchange Transactions

February 14, 2019.

I. Introduction

    On November 6, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
establish rules governing the ``give up'' process by which an Exchange 
member organization, in connection with executing a trade on the 
Exchange, indicates to the Exchange (i.e., ``gives up'') the name of a 
Clearing Member \3\ that will be responsible for the clearance of that 
transaction. The proposed rule change was published for comment in the 
Federal Register on November 26, 2018.\4\ On January 9, 2019, pursuant 
to Section 19(b)(2) of the Act,\5\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\6\ The Commission received three 
comment letters on the proposed rule change, each in support of the 
proposal.\7\ This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C.78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Phlx Rule 1000(b)(3) (defining ``Clearing Member'' as a 
member organization that has been admitted to membership in the 
Options Clearing Corporation (``OCC'') pursuant to the provisions of 
the rules of the Options Clearing Corporation).
    \4\ See Securities Exchange Act Release No. 84624 (Nov. 19, 
2018), 83 FR 60547 (``Notice'').
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 84981, 83 FR 837 
(Jan. 31, 2019) (designating February 24, 2019 as the date by which 
the Commission shall approve or disapprove, or institute proceedings 
to determine whether to disapprove, the proposed rule change).
    \7\ See Letters to Brent J. Fields, Secretary, Commission, from: 
(1) Matthew R. Scott, President, Merrill Lynch Professional Clearing 
Corp, dated December 7, 2018 (``Scott Letter''); (2) Ellen Greene, 
Managing Director, SIFMA, dated December 17, 2018 (``SIFMA 
Letter''); and (3) John P. Davidson, President and Chief Operating 
Officer, OCC, dated December 19, 2018 (``Davidson Letter''). The 
comment letters are available at https://www.sec.gov/comments/sr-phlx-2018-72/srphlx201872.htm.

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[[Page 5527]]

II. Description of the Proposed Rule Change

    Exchange rules currently require that, in order to enter 
transactions on the Exchange, a member organization either must be a 
Clearing Member or have a Clearing Member agree to accept financial 
responsibility for the member organization's transactions via a 
clearing arrangement.\8\ Further, Phlx Rule 1052 provides generally 
that Clearing Members are responsible for the clearing their own 
Exchange transactions as well as Exchange transactions of each member 
organization that gives up the Clearing Member's name provided that the 
Clearing Member has authorized such member organization to give up its 
name on Exchange transactions. Exchange rules do not, however, 
establish a framework for the give up authorization process. To address 
this, Phlx proposes to adopt Rule 1037 and amend Rule 1052 to establish 
requirements for the give up process, including specific procedures, in 
greater detail.
---------------------------------------------------------------------------

    \8\ See Phlx Rule 1046 (Clearing Arrangements).
---------------------------------------------------------------------------

    Specifically, proposed Rule 1037 will allow Clearing Members to 
``opt in'' and request that the Exchange systematically restrict use of 
one or more of its OCC clearing numbers (each a ``Restricted OCC 
Number''). Once restricted, Exchange member organizations will not be 
able to give up the Restricted OCC Number to clear an Exchange 
transaction unless the Clearing Member previously has submitted to the 
Exchange written authorization permitting that member organization to 
give up that Restricted OCC Number. If a Clearing Member does not ``opt 
in'' to this process for a particular OCC number (a ``Non-Restricted 
OCC Number''), that number would be available to be given up by any 
Exchange member organization.
Give Up Process for Restricted OCC Numbers
    A Clearing Member that requests the Exchange to restrict use of one 
or more of its OCC clearing numbers would ``opt in'' by sending to the 
Exchange a completed ``Clearing Member Restriction Form'' \9\ that 
identifies the requested Restricted OCC Numbers.\10\ At the same time, 
the Clearing Member would list on the form the Exchange member 
organizations that it authorizes to give up that Restricted OCC Number 
(each an ``Authorized Member Organization'').\11\ For newly Restricted 
OCC Numbers, the Exchange will require 90 days before the restriction 
becomes effective within the Exchange's system.\12\
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    \9\ The Exchange represented in its filing that it will maintain 
this form and a list of the Restricted OCC Numbers on its website, 
which it will update on a regular basis, along with the Clearing 
Member's contact information to assist member organizations with 
requesting authorization for a Restricted OCC Number. See Notice, 
supra note 4 at n.7.
    \10\ See Proposed Phlx Rule 1037(b)(i). The restriction would 
remain in effect until terminated by the Clearing Member. See id. 
The Exchange also proposes to amend Rule 1052 regarding financial 
responsibility of Exchange options transactions cleared through 
Clearing Members to clarify that Rule 1052 applies to all Clearing 
Members regardless of whether they ``opt in'' pursuant to Phlx Rule 
1037.
    \11\ See id.
    \12\ See id.
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    Thereafter, a member organization may only give up a Restricted OCC 
Number if the member organization has previously been identified and 
processed by the Exchange as an Authorized Member Organization, except 
that a member organization may give up the Restricted OCC Number of its 
guarantor with whom it has a letter of guarantee without being 
identified as an Authorized Member Organization.\13\
---------------------------------------------------------------------------

    \13\ See Proposed Phlx Rule 1037(d).
---------------------------------------------------------------------------

    Once a Restricted OCC Number is effective, a Clearing Member will 
be able to submit a new Clearing Member Restriction Form to authorize, 
or remove from authorization, a member organization from its list of 
Authorized Member Organizations approved to give up its Restricted OCC 
Number(s), as well as amend its list of Restricted OCC Numbers.\14\ The 
Exchange will promptly notify member organizations if they are no 
longer authorized to give up a Clearing Member's Restricted OCC 
Number.\15\
---------------------------------------------------------------------------

    \14\ See Proposed Phlx Rule 1037(b)(iii). Such changes will be 
effective on the next business day under regular circumstances, but 
could be effective intra-day in unusual circumstances. See id.
    \15\ See id.
---------------------------------------------------------------------------

    The Exchange will ensure the authorized use of Restricted OCC 
Numbers through its systems and will not allow an unauthorized member 
organization to give up a Restricted OCC Number. Specifically, for 
orders that are executed on the trading floor in open outcry using the 
Options Floor Based Management System (``FBMS''), the Exchange will 
reject the clearing portion of the trade if an unauthorized member 
organization enters a Restricted OCC Number.\16\ The member 
organization will receive notification of the rejected clearing 
information, and will be required to modify the clearing information by 
contacting the Exchange.\17\ For all other orders (i.e., orders that 
are submitted directly to the exchange's system), the Exchange will not 
allow an unauthorized member organization to give up a Restricted OCC 
Number at the firm mnemonic level at the point of order entry.\18\
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    \16\ See Proposed Phlx Rule 1037(c).
    \17\ See id. According to the Exchange, the FBMS order will be 
executed, provided the terms of the trade comply with the relevant 
Exchange rules, and the execution reported to the consolidated tape. 
The System will, however, reject the clearing portion, and the 
member organization will have to amend the clearing information by 
contacting the Exchange. See Notice, supra note 4 at n. 11.
    \18\ See Proposed Phlx Rule 1037(c). Specifically, the Exchange 
states that its system will block the entry of the order from the 
outset. See Notice, supra note 4 at n. 13. The Exchange notes that 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 as proposed in the case of a Restricted OCC Number, 
the member organization must be an Authorized Member Organization 
for that Restricted OCC Number. See id. As proposed, the system also 
will now restrict any post-trade allocation changes if the member 
organization is not authorized to use a Restricted OCC Number. See 
id.
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Misuse of the Rule
    Finally, Phlx Rule 1037(e) provides that an intentional misuse of 
the Rule by any party is impermissible and may be treated as a 
violation of Rule 707 (``Conduct Inconsistent with Just and Equitable 
Principles of Trade'') or Rule 708 (``Acts Detrimental to the Interest 
or Welfare of the Exchange'').\19\
---------------------------------------------------------------------------

    \19\ See Proposed Phlx Rule 1037(e). See also Notice, supra note 
4 at 60549 (providing one example of intentional misuse where a 
member organization sends orders to a Restricted OCC Number without 
authorization to do so).
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III. Discussion and Commission Findings

    After careful consideration of the proposal, the Commission finds 
that the Exchange's proposed rule change is consistent with the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\20\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\21\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities and, in general, to protect investors and the public 
interest, and not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \20\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).

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[[Page 5528]]

    The Commission received three comment letters on the proposed rule 
change, each supporting it.\22\ One commenter argues that the proposal 
``is a critical first step to reduce risk in listed-options clearing,'' 
and will facilitate the ability of Clearing Members ``to properly 
assess and enforce credit limits for authorized executing brokers and 
their clients.'' \23\ Another commenter notes that the Exchange's 
proposal is the culmination of efforts among industry participants to 
address and ultimately reduce clearing member risks.\24\ Further, one 
commenter believes that the proposal ``strikes the right balance across 
all participants.'' \25\
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    \22\ See supra note 7.
    \23\ SIFMA Letter, supra note 7, at 2.
    \24\ Davidson Letter, supra note 7, at 2.
    \25\ Scott Letter, supra note 7, at 1. See also SIFMA Letter, 
supra note 7, at 2.
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    The Commission believes that the proposal is designed to foster 
cooperation and coordination among the parties engaged in facilitating 
transactions in securities by setting forth a basic framework within 
which a Clearing Member can exercise greater control over the use of 
its clearing services by customers using the services of third party 
executing brokers in a manner that is not intended to allow for or 
impose a burden on competition that is not necessary or appropriate in 
furtherance of the Act. In particular, the Exchange's proposal will 
implement a defined and standardized process through which a Clearing 
Member can ``opt in'' to limit the use of one or more of its OCC 
clearing numbers to member organizations that it pre-authorizes in 
writing, which the Exchange will then enforce through its systems. 
These provisions are designed to help assure the orderly clearance and 
settlement of Exchange trades and should, for example, reduce the 
chance for keypunch errors and may assist Clearing Members in enforcing 
the provisions of their clearing arrangements with customers.
    As an integral and important part of this process, the Exchange 
will provide notice to affected member organizations, including by 
providing a 90-day delayed effectiveness on newly restricted OCC 
numbers, by providing notice to affected member organizations whose 
authorized status changes, and by providing publicly available 
information on all Restricted OCC Numbers and the corresponding 
Clearing Member contact information. In so doing, the proposed rule is 
designed to promote transparency and provide an orderly process by 
which third party executing brokers can make arrangements for clearing 
services to facilitate transactions on the Exchange.
    Further, requiring Clearing Members to use standardized forms to 
designate all Restricted OCC Numbers and Authorized Member 
Organizations, and to make amendments to those items, should enhance 
Phlx's ability to monitor and enforce compliance with its proposed rule 
relating to the give up process. Use of standardized forms also may 
make it easier for Clearing Members and member organizations to comply 
with the proposed rule, and should benefit all members by providing 
written confirmation of a member organization's authorized status with 
respect to a specific Restricted OCC Number for a particular Clearing 
Member.
    The Commission believes that the proposal seeks to address the 
needs of different parties involved in facilitating transactions in 
securities and does so in a balanced manner that provides a reasonable 
framework for the authorization process. Moreover, the proposal 
recognizes the need for a member organization to be able to give up its 
guarantor, and minimizes burdens on the member organization and 
Clearing Member by allowing such give ups to occur without the need to 
obtain any further authorization through use of the Clearing Member 
Restriction Form. In this manner, the proposed rule change recognizes 
that there will always be a Clearing Member that will be financially 
responsible for a trade, which should foster operational certainty and 
facilitate cooperation and coordination with persons engaged in 
clearing transactions.
    For the foregoing reason, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \26\ and the 
rules and regulations thereunder applicable to national securities 
exchanges.
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    \26\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\27\ that the proposed rule change (SR-Phlx-2018-72) be, 
and it hereby is, approved.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-02895 Filed 2-20-19; 8:45 am]
BILLING CODE 8011-01-P
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