Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a New Rule 1059, 70605-70610 [2019-27585]

Download as PDF Federal Register / Vol. 84, No. 246 / Monday, December 23, 2019 / Notices 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 such filing also will be available for inspection and copying at the principal office of OCC and on OCC’s website at https://www.theocc.com/about/ publications/bylaws.jsp. 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–OCC–2019–011 and should be submitted on or before January 13, 2020. 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. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 J. Matthew DeLesDernier, Assistant Secretary. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change [FR Doc. 2019–27589 Filed 12–20–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87768; File No. SR–Phlx– 2019–53] Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a New Rule 1059 lotter on DSKBCFDHB2PROD with NOTICES December 17, 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 December 4, 2019, Nasdaq PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II 20 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 19:32 Dec 20, 2019 Jkt 250001 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to adopt a new Rule 1059 titled ‘‘In-Kind Exchange of Options Positions and ETF Shares.’’ The text of the proposed rule change is available on the Exchange’s website at https://nasdaqphlx.cchwallstreet.com/, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. 1. Purpose The Exchange proposes to adopt a new Rule 1059 titled ‘‘In-Kind Exchange of Options Positions and ETF Shares,’’ based on recent changes proposed by Cboe Exchange, Inc. (‘‘Cboe’’) and approved by the Commission.3 Background As discussed further below, the ability to effect ‘‘in kind’’ transfers is a key component of the operational structure of an exchange-traded fund (‘‘ETF’’). Currently, in general, ETFs can effect in-kind transfers with respect to equity securities and fixed-income securities. The in-kind process is a major benefit to ETF shareholders and, in general, the means by which assets may be added to or removed from ETFs. In-kind transfers protect ETF shareholders from the undesirable tax 3 See Cboe Rule 6.9. See also Securities Exchange Act Release No. 87340 (October 17, 2019) (SR– CBOE–2019–048) (Order Approving on an Accelerated Basis a Proposed Rule Change, as Modified by Amendment Nos. 2 and 3, to Adopt Rule 6.9 (In-Kind Exchange of Options Positions and ETF Shares)). PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 70605 effects of frequent ‘‘creations and redemptions’’ (described below) and improve the overall tax efficiency of the products. However, currently, the Exchange Rules do not provide for ETFs to effect in-kind transfers of options off of the Exchange, resulting in tax inefficiencies for ETFs that hold them. As a result, the use of options by ETFs is substantially limited. Currently, Rule 1058(a) permits members or member organizations to transfer their positions off of the Exchange in specified, limited circumstances. The circumstances currently listed include: (1) The dissolution of a joint account in which the remaining member or member organization assumes the positions of the joint account; (2) the dissolution of a corporation or partnership in which a former nominee of that corporation or partnership assumes the positions; (3) positions transferred as part of a member or member organization’s capital contribution to a new joint account, partnership, or corporation; (4) the donation of positions to a not-forprofit corporation; (5) the transfer of positions to a minor under the Uniform Gifts to Minors Act; (6) a merger or acquisition resulting in a continuity of ownership or management; and (7) consolidation of accounts within a member or member organization.4 At present, the list of limited circumstances in Rule 1058(a) that allows members to transfer their options positions off the Exchange does not include an exception for in-kind transfers. The Exchange proposes to add a new circumstance under which off-Exchange transfers of options positions would be permitted to occur. Specifically, under proposed Rule 1059, positions in options listed on the Exchange would be permitted 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 4 The Exchange notes that other options exchanges have adopted rules that provide for offExchange transfers under similar circumstances. See, e.g., Cboe Rule 6.7(a); and NYSE Arca, Inc. Rule 6.78–O(d)(1). 5 The Exchange is proposing that, for purposes of proposed Rule 1059, the term ‘‘authorized participant’’ would be defined as 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). While an authorized participant may be a member or member organization and directly effect transactions in options on the Exchange, an authorized participant that is not a member or member organization may E:\FR\FM\23DEN1.SGM Continued 23DEN1 70606 Federal Register / Vol. 84, No. 246 / Monday, December 23, 2019 / Notices lotter on DSKBCFDHB2PROD with NOTICES issuer 6 of such ETF shares,7 which transfers would occur at the price used to calculate the net asset value (‘‘NAV’’) of such ETF shares. The NAV for ETF shares is represented by the traded price for ETFs holding options positions on days of creation or redemption, and an options pricing model on days in which creations and redemptions do not occur. This proposed new exception, although limited in scope, would have a significant impact in that it would help protect ETF shareholders from undesirable tax consequences and facilitate tax-efficient operations. The frequency with which ETFs and authorized participants would rely on the proposed exception would depend upon such factors as the number of ETFs holding options positions traded on the Exchange, the market demand for the shares of such ETFs, the redemption activity of authorized participants, and the investment strategies employed by such ETFs. As described in further detail below, while ETFs do not sell and redeem individual shares to and from investors, they do sell large blocks of their shares to, and redeem them from, authorized participants in conjunction with what is known as the ETF creation and redemption process. Under the proposed exception, ETFs that hold options listed on the Exchange would be permitted to effect creation and redemption transactions with authorized participants on an ‘‘in-kind’’ basis, which is the process that may generally be utilized by ETFs for other asset types. This ability would allow such ETFs to function as more taxefficient investment vehicles to be benefit of investors that hold ETF shares. In addition, it may also result in transaction cost savings for the ETFs, which may be passed along to investors. While the Exchange recognizes that, in general, the execution of options transactions on exchanges provides certain benefits, such as price discovery and transparency, based on the circumstances under which proposed Rule 1059 would apply, the Exchange does not believe that such benefits would be compromised. In this regard, effect transactions in options on the Exchange through a member or member organization on its behalf. 6 The Exchange is proposing that, for purposes of proposed Rule 1059, any issuer of ETF shares would be registered with the Commission as an open-end management investment company under the Investment Company Act of 1940 (the ‘‘1940 Act’’). 7 An ETF share is a share or other security traded on a national securities exchange and defined as an NMS stock, which includes interest in open-end management investment companies. See Commentary .06 to Rule 1009. VerDate Sep<11>2014 19:32 Dec 20, 2019 Jkt 250001 as discussed more fully below, the Exchange notes that in conjunction with the creation and redemption process, positions would be transferred at a price(s) used to calculate the NAV of such ETF shares. In addition, although options positions would be transferred off of the Exchange, they would not be closed or ‘‘traded.’’ Rather, they would reside in a different clearing account until closed in a trade on the Exchange or until they expire. Further, as discussed below, proposed Rule 1059 would be clearly delineated and limited in scope, given that the proposed exception would only apply to transfers of options effected in connection with the creation and redemption process. The ETF Creation and Redemption Process 8 Due to their ability to effect in-kind transfers with authorized participants in conjunction with the creation and redemption process described below, ETFs have the potential to be significantly more tax-efficient than other pooled investment products, such as mutual funds. ETFs issue shares that may be purchased or sold during the day in the secondary market at marketdetermined prices. Similar to other types of investment companies, ETFs invest their assets in accordance with their investment objectives and investment strategies, and ETF shares represent interests in an ETF’s underlying assets. ETFs are, in certain respects, similar to mutual funds in that they continuously offer their shares for sale. In contrast to mutual funds, however, ETFs do not sell or redeem individual shares. Rather, through the creation and redemption process referenced above, authorized participants have contractual arrangements with an ETF and/or its service provider (e.g., its distributor) purchase and redeem shares directly from that ETF in large aggregations known as ‘‘creation units.’’ In general terms, to purchase a creation unit of ETF shares from an ETF, in return for depositing a ‘‘basket’’ of securities and/ or other assets identified by the ETF on a particular day, the authorized participant will receive a creation unit 8 The following summary of the ETF creation and redemption process is based largely on portions of the discussion set forth in Investment Company Act Release No. 33140 (June 28, 2018), 83 FR 37332 (July 31, 2018) (the ‘‘Proposed ETF Rule Release’’) in which the Commission proposed a new rule under the 1940 Act that would permit ETFs registered as open-end management investment companies that satisfy certain conditions to operate without the need to obtain an exemptive order. The proposed rule was adopted on September 25, 2019. See Investment Company Act Release No. 33646 (September 25, 2019). PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 of ETF shares. The basket deposited by the authorized participant is generally expected to be representative of the ETF’s portfolio 9 and, when combined with a cash balancing amount (i.e., generally an amount of cash intended to account for any difference between the value of the basket and the NAV of a creation unit), if any, will be equal in value to the aggregate NAV of the shares of the ETF comprising the creation unit. After purchasing a creation unit, an authorized participant may then hold individual shares of the ETF and/or sell them in the secondary market. In connection with effecting redemptions, the creation process described above is reversed. More specifically, the authorized participant will redeem a creation unit of ETF shares to the ETF in return for a basket of securities and/ or other assets (along with any cash balancing account). The ETF creation and redemption process, coupled with the secondary market trading of ETF shares, facilitates arbitrage opportunities that are intended to help keep the market price of ETF shares at or close to the NAV per share of the ETF. Authorized participants play an important role because of their ability, in general terms, to add ETF shares to, or remove them from, the market. In this regard, if shares of an ETF are trading at a discount (i.e., below NAV per share), an authorized participant may purchase ETF shares in the secondary market, accumulate enough shares for a creation unit and then redeem them from the ETF in exchange for the ETF’s more valuable redemption basket. Accordingly, the authorized participant will profit because it paid less for the ETF shares than it received for the underlying assets. The reduction in the supply of ETF shares available on the secondary market, together with the sale of the ETF’s basket assets, may cause the price of ETF shares to increase, the price of the basket assets to decrease, or both, thereby causing the market price of the ETF shares and the value of the ETF’s holdings to move closer together. In contrast, if the ETF shares are trading at a premium (i.e., above NAV per share), the transactions are reversed (and the authorized participant would deliver the creation basket in exchange for ETF shares), resulting in an increase in the supply of ETF shares which may also 9 Under certain circumstances, however, and subject to the provisions of its exemptive relief from various provisions of the 1940 Act obtained from the Commission, an ETF may substitute cash and/ or other instruments in lieu of some or all of the ETF’s portfolio holdings. For example, today, positions in options traded on the Exchange would be generally substituted with cash. E:\FR\FM\23DEN1.SGM 23DEN1 Federal Register / Vol. 84, No. 246 / Monday, December 23, 2019 / Notices help to keep the price of the shares of an ETF close to the value of its holdings. In comparison to other pooled investment vehicles, one of the significant benefits associated with an ETF’s in-kind redemption feature is tax efficiency. In this regard, by effecting redemptions on an in-kind basis (i.e., delivering certain assets from the ETF’s portfolio instead of cash), there is no need for the ETF to sell assets and potentially realize capital gains that would be distributed to shareholders. As indicated above, however, because Exchange Rules currently do not allow ETFs to effect in-kind transfers of options off of the Exchange, ETFs that invest in options traded on the Exchange are generally required to substitute cash in lieu of such options when effecting redemption transactions with authorized participants. Because they must sell the options to obtain the requisite cash, such ETFs (and therefore, investors that hold shares of those ETFs) are not able to benefit from the tax efficiencies afforded by in-kind transactions. An additional benefit associated with the in-kind feature is the potential for transaction cost savings. In this regard, by transacting on an in-kind basis, ETFs may avoid certain transaction costs they would otherwise incur in connection with purchases and sales of securities and other assets. Again, however, this benefit is not available today to ETFs with respect to their options holdings. lotter on DSKBCFDHB2PROD with NOTICES Proposal The Exchange notes that the Commission approved Rule 1058 in 2011 because the Exchange recognized, and the Commission agreed, that under certain circumstances, off-Exchange transfers were justified.10 The Exchange believes that it is appropriate to permit off-Exchange transfers of options positions in connection with the creation and redemption process and recognizes that the prevalence and popularity of ETFs have increased greatly since the adoption of Rule 1058. Currently, ETFs serve both as popular investment vehicles and trading tools 11 and, as discussed above, the creation and redemption process, along with the 10 See Securities Exchange Act Release No. 66023 (December 21, 2011), 76 FR 81553 (December 28, 2011) (SR-Phlx–2011–118). 11 As noted in the Proposed ETF Rule Release, during the first quarter of 2018, trading in U.S.listed ETFs comprised approximately 18.75% of U.S. equity trading by share volume and 28.2% of U.S. equity trading by dollar volume (based on trade and quote data from the New York Stock Exchange and Trade Reporting Facility data from the Financial Industry Regulatory Authority, Inc. (FINRA)). See Proposed ETF Rule Release at 83 FR 37334. VerDate Sep<11>2014 19:32 Dec 20, 2019 Jkt 250001 arbitrage opportunities that accompany it, are key ETF features. Accordingly, the Exchange believes that providing for an additional, narrow circumstance to make it possible for ETFs that invest in options to effect creations and redemptions on an in-kind basis is justified. The Exchange submits that its proposal is clearly delineated and limited in scope and not intended to facilitate ‘‘trading’’ options off of the Exchange. In this regard, the proposed circumstance would be available solely in the context of transfers of options positions effected in connection with transactions to purchase or redeem creation units of ETF shares between ETFs and authorized participants.12 As a result of this process, such transfers would occur at the price(s) used to calculate the NAV of such ETF shares (as discussed above), which removes the need for price discovery on an Exchange for pricing these transfers. Moreover, as described above, ETFs and authorized participants are not seeking to effect the opening or closing of new options positions in connection with the creation and redemption process. Rather, the options positions would reside in a different clearing account until closed in a trade on the Exchange or until they expire. The proposed transfers, while occurring between two different parties, will occur off the Exchange and will not be considered transactions (as is the case for current off-Exchange transfers permitted by Rule 1058(a)). While the prices of options transactions effected on the Exchange are disseminated to OPRA, back-office transfers of options positions in clearing accounts held at The Options Clearing Corporation (‘‘OCC’’) (in accordance with OCC Rules) 13 are not disseminated to OPRA or otherwise publicly available, as they are considered position transfers, rather 12 See supra note 5. The term ‘‘authorized participant’’ is specific and narrowly defined. As noted in the Proposed ETF Rule Release, the requirement that only authorized participants of an ETF may purchase creation units from (or sell creation units to) an ETF ‘‘is designed to preserve an orderly creation unit issuance and redemption process between ETFs and authorized participants.’’ Furthermore, an ‘‘orderly creation unit issuance and redemption process is of central importance to the arbitrage mechanism.’’ See Proposed ETF Rule Release at 83 FR 37348. 13 OCC has informed the Exchange that it has the operational capabilities to effect the proposed position transfers. All transfers pursuant to proposed Rule 1059 would be required to comply with OCC rules. See Rules 1000(b)(3) and 1046 (which, taken together, requires all members and member organizations that are OCC members to comply with OCC’s rules). PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 70607 than executions.14 The Exchange believes that price transparency is important in the options markets. However, the Exchange expects any transfers pursuant to the proposed rule will constitute a minimal percentage of the total average daily volume of the combined standardized and FLEX options 15 with the same underlying security or index.16 Today, the trading of ETFs that invest in options is substantially limited on the Exchange, primarily because the current rules do not permit ETFs to effect in-kind transfers of options off the Exchange. The Exchange continues to expect that any impact this proposal could have on price transparency in the options market is minimal because the proposed rule change is limited in scope, and is intended to provide market participants with an efficient and effective means to transfer options positions under clearly delineated, specified circumstances. Additionally, as noted above, the NAV for transfers will generally be based on the disseminated closing price for an options series on the day of a creation or redemption, and thus the price (although not the time or quantity of the transfer) at which these transfers will generally be effected will be publicly available.17 Further, the Exchange generally expects creations or redemptions to include corresponding transactions by the authorized participant that will occur on an exchange and be reported to OPRA.18 Therefore, the Exchange expects that any impact the proposed rule change 14 For example, any transfers effected pursuant to the current limited circumstances specified in Rule 1058(a) are not disseminated to OPRA. 15 See Options 8, Section 34 for FLEX options provisions. 16 The Exchange notes that the price discovery process in standardized options contracts in a particular class of options generally provides meaningful guideposts for pricing FLEX options with the same underlying security or index. 17 If there is no disseminated closing price, the ETF would price according to a pricing model or procedure as described in the fund’s prospectus. 18 The Exchange notes that for in-kind creations, an authorized participant will acquire the necessary options positions in an on-exchange transaction that will be reported to OPRA. For in-kind redemptions, the Exchange generally expects that an authorized participant will acquire both the shares necessary to effect the redemption and an options position to offset the position that it will receive as proceeds for the redemption. Such an options position would likely be acquired in an onexchange transaction that would be reported to OPRA. Such transactions are generally identical to the way that creations and redemptions work for equities and fixed income transactions—while the transfer between the authorized participant and the fund is not necessarily reported, there are generally corresponding transactions that would be reported, providing transparency into the transactions. E:\FR\FM\23DEN1.SGM 23DEN1 70608 Federal Register / Vol. 84, No. 246 / Monday, December 23, 2019 / Notices could have on price transparency in the options market would be de minimis. Other than the transfers covered by the proposed rule, transactions involving options, whether held by an ETF or an authorized participant, would be fully subject to all applicable trading Rules.19 Accordingly, the Exchange does not believe that the proposed new exception would compromise price discovery or transparency. Further, the Exchange believes that providing an additional exception to make it possible for ETFs that invest in options to effect creations and redemptions on an in-kind basis is justified because, while the proposed exception would be limited in scope, the benefits that may flow to ETFs that hold options and their investors may be significant. Specifically, the Exchange expects such ETFs and their investors would benefit from increased tax efficiencies and potential transaction cost savings. By making such ETFs more attractive to both current and prospective investors, the proposed rule change would enable them to compete more effectively with other ETFs that, due to their particular portfolio holdings, may effect in-kind creations and redemptions without restriction. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act,20 in general, and furthers the objectives of Section 6(b)(5) of the Act,21 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. The Exchange believes that permitting off-Exchange transfers in connection with the in-kind ETF creation and 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 ETFs that invest in options traded on the Exchange to utilize the in-kind creation and redemption process that is available for ETFs that invest in equities and fixedincome securities. This process represents a significant feature of the ETF structure generally, with advantages that distinguish ETFs from other types of pooled investment vehicles. In light of the associated tax efficiencies and potential transaction cost savings, the Exchange believes the ability to utilize an in-kind process would make such ETFs more attractive to both current and prospective investors and enable them to compete more effectively with other ETFs that, based on their portfolio holdings, may effect in-kind creations and redemptions without restriction. In addition, the Exchange believes that because it would permit ETFs that invest in options traded on the Exchange to benefit from tax efficiencies and potential transaction cost savings afforded by the in-kind creation and redemption process, which benefits the Exchange expects would generally be passed along to investors that hold ETF shares, the proposed rule change would protect investors and the public interest. Moreover, the Exchange submits that the proposed exception is clearly delineated and limited in scope and not intended to facilitate ‘‘trading’’ options off the Exchange. Other than the transfers covered by the proposed exception, transactions involving options, whether held by an ETF or an authorized participant, would be fully subject to the applicable trading Rules. Additionally, the transfers covered by the proposed exception would occur at a price(s) used to calculate the NAV of the applicable ETF shares, which removes the need for price discovery on the Exchange. Accordingly, the Exchange does not believe that the proposed rule change would compromise price discovery or transparency. When Congress charged the Commission with supervising the development of a ‘‘national market system’’ for securities, Congress stated its intent that the ‘‘national market system evolve through the interplay of competitive forces as unnecessary regulatory restrictions are removed.’’ 22 Consistent with this purpose, Congress and the Commission have repeatedly stated their preference for competition, rather than regulatory intervention to determine products and services in the securities markets.23 This consistent lotter on DSKBCFDHB2PROD with NOTICES 22 See 19 As indicated above, the operation of the arbitrage mechanism accompanying the creation and redemption process generally contemplates ongoing interactions between authorized participants and the market in transactions involving both ETF shares and the assets comprising an ETF’s creation/redemption basket. 20 15 U.S.C. 78f(b). 21 15 U.S.C. 78f(b)(5). VerDate Sep<11>2014 19:32 Dec 20, 2019 Jkt 250001 H.R. Rep. 94–229, at 92 (1975) (Conf. Rep.). S. Rep. No. 94–75, 94th Cong., 1st Sess. 8 (1975) (‘‘The objective [in enacting the 1975 amendments to the Exchange Act] would be to enhance competition and to allow economic forces, interacting within a fair regulatory field, to arrive at appropriate variations in practices and services.’’); Order Approving Proposed Rule Change Relating to NYSE Arca Data, Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 23 See PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 and considered judgment of Congress and the Commission is correct, particularly in light of evidence of robust competition among exchanges. The fact that an exchange proposed something new is a reason to be receptive, not skeptical—innovation is the life-blood of a vibrant competitive market—and that is particularly so given the continued internalization of the securities markets, as exchanges continue to implement new products and services to compete not only in the United States but throughout the world. Exchanges continuously adopt new and different products and trading services in response to industry demands in order to attract order flow and liquidity to increase their trading volume. This competition has led to a growth in investment choices, which ultimately benefits the marketplace and the public. Currently, the Exchange Rules do not allow ETFs to effect in-kind transfers of options off of the Exchange, resulting in tax inefficiencies for ETFs that hold them. As a result, the use of options by ETFs is substantially limited. While the proposed exception would be limited in scope, the Exchange believes the benefits that may flow to ETFs that hold options and their investors may be significant. Specifically, the Exchange expects that such ETFs and their investors could benefit from increased tax efficiencies and potential transaction cost savings. By making such ETFs more attractive to both current and prospective investors, the proposed rule change would enable them to compete more effectively with other ETFs that, due to their particular portfolio holdings, may effect in-kind creations and redemptions without restriction. This may lead to further development of ETFs that invest in options, thereby fostering competition and resulting in additional choices for investors, which ultimately benefits the marketplace and the public. 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 74770 (December 9, 2008) (‘‘The Exchange Act and its legislative history strongly support the Commission’s reliance on competition, whenever possible, in meeting its regulatory responsibilities for overseeing the [self-regulatory organizations] and the national market system. Indeed, competition among multiple markets and market participants trading the same products is the hallmark of the national market system.’’); and Regulation NMS, 70 FR at 37499 (observing that NMS regulation ‘‘has been remarkably successful in promoting market competition in [the] forms that are most important to investors and listed companies’’). E:\FR\FM\23DEN1.SGM 23DEN1 Federal Register / Vol. 84, No. 246 / Monday, December 23, 2019 / Notices 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 exception would be voluntary. As an alternative to the normal auction process, the proposed rule change would provide market participants with an efficient and effective means to transfer positions under the specified circumstances. The proposed exception would enable all ETFs that hold options to enjoy the benefits of in-kind creations and redemptions already available to other ETFs (and to pass these benefits along to investors). The proposed rule change would apply in the same manner to all entities that meet the definition of ‘‘authorized participant.’’ 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. As indicated above, it is intended to provide an additional clearly delineated and limited circumstance in which options positions can be transferred off an exchange. Further, the Exchange believes the proposed rule change will eliminate a significant competitive disadvantage for ETFs that invest in options. Furthermore, as indicated above, in light of the significant benefits provided (e.g., tax efficiencies and potential transaction cost savings), the proposed exception may lead to further development of ETFs 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 on a recent Cboe rule change approved by the Commission.24 As such, the Exchange believes that its proposal enhances fair competition between markets by providing for additional listing venues for ETFs that hold options to utilize the in-kind transfers proposed herein. lotter on DSKBCFDHB2PROD with NOTICES 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. 25 15 supra note 3. VerDate Sep<11>2014 19:32 Dec 20, 2019 Jkt 250001 U.S.C. 78s(b)(3)(A)(iii). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6) requires the Exchange to give the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of 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. 27 17 CFR 240.19b–4(f)(6). 28 17 CFR 240.19b–4(f)(6)(iii). 29 See supra note 13. 26 17 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 24 See 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 25 and subparagraph (f)(6) of Rule 19b–4 thereunder.26 A proposed rule change filed under Rule 19b–4(f)(6) 27 normally does not become operative prior to 30 days after the date of the filing. However, pursuant to Rule 19b–4(f)(6)(iii),28 the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange requests that the Commission waive the 30-day operative delay so that the proposal may become operative immediately upon filing. The Exchange believes that waiver of the operative delay is consistent with the protection of investors and the public interest because it would increase competition by allowing the Exchange to adopt a transfer rule similar to Cboe Rule 6.9. The Exchange asserts that adoption of this rule may lead to further development of ETFs that invest in options. The Exchange represents that OCC has informed the Exchange that it has the operational capabilities to effect the proposed position transfers. All transfers pursuant to proposed Rule 1059 would be required to comply with OCC rules.29 The Commission believes that proposed Phlx Rule 1059 is designed to protect investors and the public interest because it should facilitate in-kind creations and redemptions by optionsbased ETFs, which should lower taxable gains of shareholders of such ETFs. The Commission further believes that, by facilitating in-kind creations and redemptions by options-based ETFs, the proposed rule may also lower such funds’ transaction costs. The Commission notes that the proposed rule change does not raise any new or novel issues not previously considered by the Commission. For the reasons above, the Commission believes that waiving the 30-day operative delay is consistent with the protection of PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 70609 investors and the public interest. Accordingly, the Commission waives the 30-day operative delay and designates the proposed rule change operative upon filing.30 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 (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– Phlx–2019–53 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–2019–53. 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 30 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). E:\FR\FM\23DEN1.SGM 23DEN1 70610 Federal Register / Vol. 84, No. 246 / Monday, December 23, 2019 / Notices 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–2019–53 and should be submitted on or before January 13, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.31 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2019–27585 Filed 12–20–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–87776; File No. SR– NASDAQ–2019–090] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Designation of a Longer Period for Commission Action on a Proposed Rule Change To Adopt Nasdaq Rule 5704 and Other Related Amendments On November 8, 2019, The Nasdaq Stock Market LLC (‘‘Nasdaq’’) 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, among other things, adopt new Nasdaq Rule 5704 to list and trade Exchange Traded Fund Shares. The proposed rule change was published for comment in the Federal Register on November 22, 2019.3 The Commission has received no comment letters on the proposed rule change. Section 19(b)(2) of the Act 4 provides that within 45 days of the publication of notice of the filing of a proposed rule lotter on DSKBCFDHB2PROD with NOTICES 31 17 CFR 200.30–3(a)(12). U.S.C.78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 87559 (Nov. 18, 2019), 84 FR 64574. 4 15 U.S.C. 78s(b)(2). 1 15 19:32 Dec 20, 2019 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.6 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2019–27591 Filed 12–20–19; 8:45 am] BILLING CODE 8011–01–P SOCIAL SECURITY ADMINISTRATION December 17, 2019. VerDate Sep<11>2014 change, or within such longer period up to 90 days as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding, or as to which the self-regulatory organization consents, the Commission will either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The 45th day after publication of the notice for this proposed rule change is January 6, 2020. The Commission is extending this 45day time period. The Commission finds it appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the proposed rule change. Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act,5 designates February 20, 2020 as the date by which the Commission shall either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change (File No. SR–NASDAQ–2019–090). Jkt 250001 [Docket No: SSA–2019–0055] Agency Information Collection Activities: Proposed Request and Comment Request The Social Security Administration (SSA) publishes a list of information collection packages requiring clearance by the Office of Management and Budget (OMB) in compliance with Public Law 104–13, the Paperwork Reduction Act of 1995, effective October 1, 1995. This notice includes revisions of OMB-approved information collections. SSA is soliciting comments on the accuracy of the agency’s burden estimate; the need for the information; its practical utility; ways to enhance its quality, utility, and clarity; and ways to minimize burden on respondents, PO 00000 CFR 200.30–3(a)(31). Frm 00118 Fmt 4703 (OMB) Office of Management and Budget, Attn: Desk Officer for SSA, Fax: 202–395–6974, Email address: OIRA_ Submission@omb.eop.gov (SSA) Social Security Administration, OLCA, Attn: Reports Clearance Director, 3100 West High Rise, 6401 Security Blvd., Baltimore, MD 21235, Fax: 410–966–2830, Email address: OR.Reports.Clearance@ssa.gov. Or you may submit your comments online through www.regulations.gov, referencing Docket ID Number [SSA– 2019–0055]. I. The information collections below are pending at SSA. SSA will submit them to OMB within 60 days from the date of this notice. To be sure we consider your comments, we must receive them no later than February 21, 2020. Individuals can obtain copies of the collection instruments by writing to the above email address. 1. Continuing Disability Review Report—20 CFR 404.1589 & 416.989— 0960–0072. Sections 221(i), 1614(a)(3)(H)(ii)(I) and 1633(c)(1) of the Social Security Act requires SSA to periodically review the cases of individuals who receive benefits under Title II or Title XVI, based on disability, to determine if disability continues. SSA uses Form SSA–454, Continuing Disability Review Report to complete the review for continued disability. SSA considers adults eligible for payment if they continue to be unable to do substantial gainful activity because of their impairments; and we consider Title XVI children eligible for payment if they have marked and severe functional limitations due to their impairments. SSA also uses Form SSA– 454 to obtain information on sources of medical treatment; participation in vocational rehabilitation programs (if any); attempts to work (if any); and the opinions of individuals regarding whether their conditions have improved. The respondents are Title II or Title XVI disability recipients or their representatives. Type of Request: Revision of an OMBapproved information collection. 5 Id. 6 17 including the use of automated collection techniques or other forms of information technology. Mail, email, or fax your comments and recommendations on the information collection(s) to the OMB Desk Officer and SSA Reports Clearance Officer at the following addresses or fax numbers. Sfmt 4703 E:\FR\FM\23DEN1.SGM 23DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 246 (Monday, December 23, 2019)]
[Notices]
[Pages 70605-70610]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27585]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87768; File No. SR-Phlx-2019-53]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Adopt a New Rule 
1059

December 17, 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 December 4, 2019, Nasdaq PHLX LLC (``Phlx'' 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.
---------------------------------------------------------------------------

    \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 adopt a new Rule 1059 titled ``In-Kind 
Exchange of Options Positions and ETF Shares.''
    The text of the proposed rule change is available on the Exchange's 
website at https://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt a new Rule 1059 titled ``In-Kind 
Exchange of Options Positions and ETF Shares,'' based on recent changes 
proposed by Cboe Exchange, Inc. (``Cboe'') and approved by the 
Commission.\3\
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    \3\ See Cboe Rule 6.9. See also Securities Exchange Act Release 
No. 87340 (October 17, 2019) (SR-CBOE-2019-048) (Order Approving on 
an Accelerated Basis a Proposed Rule Change, as Modified by 
Amendment Nos. 2 and 3, to Adopt Rule 6.9 (In-Kind Exchange of 
Options Positions and ETF Shares)).
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Background
    As discussed further below, the ability to effect ``in kind'' 
transfers is a key component of the operational structure of an 
exchange-traded fund (``ETF''). Currently, in general, ETFs can effect 
in-kind transfers with respect to equity securities and fixed-income 
securities. The in-kind process is a major benefit to ETF shareholders 
and, in general, the means by which assets may be added to or removed 
from ETFs. In-kind transfers protect ETF shareholders from the 
undesirable tax effects of frequent ``creations and redemptions'' 
(described below) and improve the overall tax efficiency of the 
products. However, currently, the Exchange Rules do not provide for 
ETFs to effect in-kind transfers of options off of the Exchange, 
resulting in tax inefficiencies for ETFs that hold them. As a result, 
the use of options by ETFs is substantially limited.
    Currently, Rule 1058(a) permits members or member organizations to 
transfer their positions off of the Exchange in specified, limited 
circumstances. The circumstances currently listed include: (1) The 
dissolution of a joint account in which the remaining member or member 
organization assumes the positions of the joint account; (2) the 
dissolution of a corporation or partnership in which a former nominee 
of that corporation or partnership assumes the positions; (3) positions 
transferred as part of a member or member organization's capital 
contribution to a new joint account, partnership, or corporation; (4) 
the donation of positions to a not-for-profit corporation; (5) the 
transfer of positions to a minor under the Uniform Gifts to Minors Act; 
(6) a merger or acquisition resulting in a continuity of ownership or 
management; and (7) consolidation of accounts within a member or member 
organization.\4\ At present, the list of limited circumstances in Rule 
1058(a) that allows members to transfer their options positions off the 
Exchange does not include an exception for in-kind transfers.
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    \4\ The Exchange notes that other options exchanges have adopted 
rules that provide for off-Exchange transfers under similar 
circumstances. See, e.g., Cboe Rule 6.7(a); and NYSE Arca, Inc. Rule 
6.78-O(d)(1).
---------------------------------------------------------------------------

    The Exchange proposes to add a new circumstance under which off-
Exchange transfers of options positions would be permitted to occur. 
Specifically, under proposed Rule 1059, positions in options listed on 
the Exchange would be permitted 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

[[Page 70606]]

issuer \6\ of such ETF shares,\7\ which transfers would occur at the 
price used to calculate the net asset value (``NAV'') of such ETF 
shares. The NAV for ETF shares is represented by the traded price for 
ETFs holding options positions on days of creation or redemption, and 
an options pricing model on days in which creations and redemptions do 
not occur. This proposed new exception, although limited in scope, 
would have a significant impact in that it would help protect ETF 
shareholders from undesirable tax consequences and facilitate tax-
efficient operations. The frequency with which ETFs and authorized 
participants would rely on the proposed exception would depend upon 
such factors as the number of ETFs holding options positions traded on 
the Exchange, the market demand for the shares of such ETFs, the 
redemption activity of authorized participants, and the investment 
strategies employed by such ETFs.
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    \5\ The Exchange is proposing that, for purposes of proposed 
Rule 1059, the term ``authorized participant'' would be defined as 
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). While an 
authorized participant may be a member or member organization and 
directly effect transactions in options on the Exchange, an 
authorized participant that is not a member or member organization 
may effect transactions in options on the Exchange through a member 
or member organization on its behalf.
    \6\ The Exchange is proposing that, for purposes of proposed 
Rule 1059, any issuer of ETF shares would be registered with the 
Commission as an open-end management investment company under the 
Investment Company Act of 1940 (the ``1940 Act'').
    \7\ An ETF share is a share or other security traded on a 
national securities exchange and defined as an NMS stock, which 
includes interest in open-end management investment companies. See 
Commentary .06 to Rule 1009.
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    As described in further detail below, while ETFs do not sell and 
redeem individual shares to and from investors, they do sell large 
blocks of their shares to, and redeem them from, authorized 
participants in conjunction with what is known as the ETF creation and 
redemption process. Under the proposed exception, ETFs that hold 
options listed on the Exchange would be permitted to effect creation 
and redemption transactions with authorized participants on an ``in-
kind'' basis, which is the process that may generally be utilized by 
ETFs for other asset types. This ability would allow such ETFs to 
function as more tax-efficient investment vehicles to be benefit of 
investors that hold ETF shares. In addition, it may also result in 
transaction cost savings for the ETFs, which may be passed along to 
investors.
    While the Exchange recognizes that, in general, the execution of 
options transactions on exchanges provides certain benefits, such as 
price discovery and transparency, based on the circumstances under 
which proposed Rule 1059 would apply, the Exchange does not believe 
that such benefits would be compromised. In this regard, as discussed 
more fully below, the Exchange notes that in conjunction with the 
creation and redemption process, positions would be transferred at a 
price(s) used to calculate the NAV of such ETF shares. In addition, 
although options positions would be transferred off of the Exchange, 
they would not be closed or ``traded.'' Rather, they would reside in a 
different clearing account until closed in a trade on the Exchange or 
until they expire. Further, as discussed below, proposed Rule 1059 
would be clearly delineated and limited in scope, given that the 
proposed exception would only apply to transfers of options effected in 
connection with the creation and redemption process.
The ETF Creation and Redemption Process \8\
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    \8\ The following summary of the ETF creation and redemption 
process is based largely on portions of the discussion set forth in 
Investment Company Act Release No. 33140 (June 28, 2018), 83 FR 
37332 (July 31, 2018) (the ``Proposed ETF Rule Release'') in which 
the Commission proposed a new rule under the 1940 Act that would 
permit ETFs registered as open-end management investment companies 
that satisfy certain conditions to operate without the need to 
obtain an exemptive order. The proposed rule was adopted on 
September 25, 2019. See Investment Company Act Release No. 33646 
(September 25, 2019).
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    Due to their ability to effect in-kind transfers with authorized 
participants in conjunction with the creation and redemption process 
described below, ETFs have the potential to be significantly more tax-
efficient than other pooled investment products, such as mutual funds. 
ETFs issue shares that may be purchased or sold during the day in the 
secondary market at market-determined prices. Similar to other types of 
investment companies, ETFs invest their assets in accordance with their 
investment objectives and investment strategies, and ETF shares 
represent interests in an ETF's underlying assets. ETFs are, in certain 
respects, similar to mutual funds in that they continuously offer their 
shares for sale. In contrast to mutual funds, however, ETFs do not sell 
or redeem individual shares. Rather, through the creation and 
redemption process referenced above, authorized participants have 
contractual arrangements with an ETF and/or its service provider (e.g., 
its distributor) purchase and redeem shares directly from that ETF in 
large aggregations known as ``creation units.'' In general terms, to 
purchase a creation unit of ETF shares from an ETF, in return for 
depositing a ``basket'' of securities and/or other assets identified by 
the ETF on a particular day, the authorized participant will receive a 
creation unit of ETF shares. The basket deposited by the authorized 
participant is generally expected to be representative of the ETF's 
portfolio \9\ and, when combined with a cash balancing amount (i.e., 
generally an amount of cash intended to account for any difference 
between the value of the basket and the NAV of a creation unit), if 
any, will be equal in value to the aggregate NAV of the shares of the 
ETF comprising the creation unit. After purchasing a creation unit, an 
authorized participant may then hold individual shares of the ETF and/
or sell them in the secondary market. In connection with effecting 
redemptions, the creation process described above is reversed. More 
specifically, the authorized participant will redeem a creation unit of 
ETF shares to the ETF in return for a basket of securities and/or other 
assets (along with any cash balancing account).
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    \9\ Under certain circumstances, however, and subject to the 
provisions of its exemptive relief from various provisions of the 
1940 Act obtained from the Commission, an ETF may substitute cash 
and/or other instruments in lieu of some or all of the ETF's 
portfolio holdings. For example, today, positions in options traded 
on the Exchange would be generally substituted with cash.
---------------------------------------------------------------------------

    The ETF creation and redemption process, coupled with the secondary 
market trading of ETF shares, facilitates arbitrage opportunities that 
are intended to help keep the market price of ETF shares at or close to 
the NAV per share of the ETF. Authorized participants play an important 
role because of their ability, in general terms, to add ETF shares to, 
or remove them from, the market. In this regard, if shares of an ETF 
are trading at a discount (i.e., below NAV per share), an authorized 
participant may purchase ETF shares in the secondary market, accumulate 
enough shares for a creation unit and then redeem them from the ETF in 
exchange for the ETF's more valuable redemption basket. Accordingly, 
the authorized participant will profit because it paid less for the ETF 
shares than it received for the underlying assets. The reduction in the 
supply of ETF shares available on the secondary market, together with 
the sale of the ETF's basket assets, may cause the price of ETF shares 
to increase, the price of the basket assets to decrease, or both, 
thereby causing the market price of the ETF shares and the value of the 
ETF's holdings to move closer together. In contrast, if the ETF shares 
are trading at a premium (i.e., above NAV per share), the transactions 
are reversed (and the authorized participant would deliver the creation 
basket in exchange for ETF shares), resulting in an increase in the 
supply of ETF shares which may also

[[Page 70607]]

help to keep the price of the shares of an ETF close to the value of 
its holdings.
    In comparison to other pooled investment vehicles, one of the 
significant benefits associated with an ETF's in-kind redemption 
feature is tax efficiency. In this regard, by effecting redemptions on 
an in-kind basis (i.e., delivering certain assets from the ETF's 
portfolio instead of cash), there is no need for the ETF to sell assets 
and potentially realize capital gains that would be distributed to 
shareholders. As indicated above, however, because Exchange Rules 
currently do not allow ETFs to effect in-kind transfers of options off 
of the Exchange, ETFs that invest in options traded on the Exchange are 
generally required to substitute cash in lieu of such options when 
effecting redemption transactions with authorized participants. Because 
they must sell the options to obtain the requisite cash, such ETFs (and 
therefore, investors that hold shares of those ETFs) are not able to 
benefit from the tax efficiencies afforded by in-kind transactions.
    An additional benefit associated with the in-kind feature is the 
potential for transaction cost savings. In this regard, by transacting 
on an in-kind basis, ETFs may avoid certain transaction costs they 
would otherwise incur in connection with purchases and sales of 
securities and other assets. Again, however, this benefit is not 
available today to ETFs with respect to their options holdings.
Proposal
    The Exchange notes that the Commission approved Rule 1058 in 2011 
because the Exchange recognized, and the Commission agreed, that under 
certain circumstances, off-Exchange transfers were justified.\10\ The 
Exchange believes that it is appropriate to permit off-Exchange 
transfers of options positions in connection with the creation and 
redemption process and recognizes that the prevalence and popularity of 
ETFs have increased greatly since the adoption of Rule 1058. Currently, 
ETFs serve both as popular investment vehicles and trading tools \11\ 
and, as discussed above, the creation and redemption process, along 
with the arbitrage opportunities that accompany it, are key ETF 
features. Accordingly, the Exchange believes that providing for an 
additional, narrow circumstance to make it possible for ETFs that 
invest in options to effect creations and redemptions on an in-kind 
basis is justified.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 66023 (December 21, 
2011), 76 FR 81553 (December 28, 2011) (SR-Phlx-2011-118).
    \11\ As noted in the Proposed ETF Rule Release, during the first 
quarter of 2018, trading in U.S.-listed ETFs comprised approximately 
18.75% of U.S. equity trading by share volume and 28.2% of U.S. 
equity trading by dollar volume (based on trade and quote data from 
the New York Stock Exchange and Trade Reporting Facility data from 
the Financial Industry Regulatory Authority, Inc. (FINRA)). See 
Proposed ETF Rule Release at 83 FR 37334.
---------------------------------------------------------------------------

    The Exchange submits that its proposal is clearly delineated and 
limited in scope and not intended to facilitate ``trading'' options off 
of the Exchange. In this regard, the proposed circumstance would be 
available solely in the context of transfers of options positions 
effected in connection with transactions to purchase or redeem creation 
units of ETF shares between ETFs and authorized participants.\12\ As a 
result of this process, such transfers would occur at the price(s) used 
to calculate the NAV of such ETF shares (as discussed above), which 
removes the need for price discovery on an Exchange for pricing these 
transfers. Moreover, as described above, ETFs and authorized 
participants are not seeking to effect the opening or closing of new 
options positions in connection with the creation and redemption 
process. Rather, the options positions would reside in a different 
clearing account until closed in a trade on the Exchange or until they 
expire.
---------------------------------------------------------------------------

    \12\ See supra note 5. The term ``authorized participant'' is 
specific and narrowly defined. As noted in the Proposed ETF Rule 
Release, the requirement that only authorized participants of an ETF 
may purchase creation units from (or sell creation units to) an ETF 
``is designed to preserve an orderly creation unit issuance and 
redemption process between ETFs and authorized participants.'' 
Furthermore, an ``orderly creation unit issuance and redemption 
process is of central importance to the arbitrage mechanism.'' See 
Proposed ETF Rule Release at 83 FR 37348.
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    The proposed transfers, while occurring between two different 
parties, will occur off the Exchange and will not be considered 
transactions (as is the case for current off-Exchange transfers 
permitted by Rule 1058(a)). While the prices of options transactions 
effected on the Exchange are disseminated to OPRA, back-office 
transfers of options positions in clearing accounts held at The Options 
Clearing Corporation (``OCC'') (in accordance with OCC Rules) \13\ are 
not disseminated to OPRA or otherwise publicly available, as they are 
considered position transfers, rather than executions.\14\ The Exchange 
believes that price transparency is important in the options markets. 
However, the Exchange expects any transfers pursuant to the proposed 
rule will constitute a minimal percentage of the total average daily 
volume of the combined standardized and FLEX options \15\ with the same 
underlying security or index.\16\ Today, the trading of ETFs that 
invest in options is substantially limited on the Exchange, primarily 
because the current rules do not permit ETFs to effect in-kind 
transfers of options off the Exchange. The Exchange continues to expect 
that any impact this proposal could have on price transparency in the 
options market is minimal because the proposed rule change is limited 
in scope, and is intended to provide market participants with an 
efficient and effective means to transfer options positions under 
clearly delineated, specified circumstances. Additionally, as noted 
above, the NAV for transfers will generally be based on the 
disseminated closing price for an options series on the day of a 
creation or redemption, and thus the price (although not the time or 
quantity of the transfer) at which these transfers will generally be 
effected will be publicly available.\17\ Further, the Exchange 
generally expects creations or redemptions to include corresponding 
transactions by the authorized participant that will occur on an 
exchange and be reported to OPRA.\18\ Therefore, the Exchange expects 
that any impact the proposed rule change

[[Page 70608]]

could have on price transparency in the options market would be de 
minimis.
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    \13\ OCC has informed the Exchange that it has the operational 
capabilities to effect the proposed position transfers. All 
transfers pursuant to proposed Rule 1059 would be required to comply 
with OCC rules. See Rules 1000(b)(3) and 1046 (which, taken 
together, requires all members and member organizations that are OCC 
members to comply with OCC's rules).
    \14\ For example, any transfers effected pursuant to the current 
limited circumstances specified in Rule 1058(a) are not disseminated 
to OPRA.
    \15\ See Options 8, Section 34 for FLEX options provisions.
    \16\ The Exchange notes that the price discovery process in 
standardized options contracts in a particular class of options 
generally provides meaningful guideposts for pricing FLEX options 
with the same underlying security or index.
    \17\ If there is no disseminated closing price, the ETF would 
price according to a pricing model or procedure as described in the 
fund's prospectus.
    \18\ The Exchange notes that for in-kind creations, an 
authorized participant will acquire the necessary options positions 
in an on-exchange transaction that will be reported to OPRA. For in-
kind redemptions, the Exchange generally expects that an authorized 
participant will acquire both the shares necessary to effect the 
redemption and an options position to offset the position that it 
will receive as proceeds for the redemption. Such an options 
position would likely be acquired in an on-exchange transaction that 
would be reported to OPRA. Such transactions are generally identical 
to the way that creations and redemptions work for equities and 
fixed income transactions--while the transfer between the authorized 
participant and the fund is not necessarily reported, there are 
generally corresponding transactions that would be reported, 
providing transparency into the transactions.
---------------------------------------------------------------------------

    Other than the transfers covered by the proposed rule, transactions 
involving options, whether held by an ETF or an authorized participant, 
would be fully subject to all applicable trading Rules.\19\ 
Accordingly, the Exchange does not believe that the proposed new 
exception would compromise price discovery or transparency.
---------------------------------------------------------------------------

    \19\ As indicated above, the operation of the arbitrage 
mechanism accompanying the creation and redemption process generally 
contemplates ongoing interactions between authorized participants 
and the market in transactions involving both ETF shares and the 
assets comprising an ETF's creation/redemption basket.
---------------------------------------------------------------------------

    Further, the Exchange believes that providing an additional 
exception to make it possible for ETFs that invest in options to effect 
creations and redemptions on an in-kind basis is justified because, 
while the proposed exception would be limited in scope, the benefits 
that may flow to ETFs that hold options and their investors may be 
significant. Specifically, the Exchange expects such ETFs and their 
investors would benefit from increased tax efficiencies and potential 
transaction cost savings. By making such ETFs more attractive to both 
current and prospective investors, the proposed rule change would 
enable them to compete more effectively with other ETFs that, due to 
their particular portfolio holdings, may effect in-kind creations and 
redemptions without restriction.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\20\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\21\ 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.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that permitting off-Exchange transfers in 
connection with the in-kind ETF creation and 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 ETFs that invest in 
options traded on the Exchange to utilize the in-kind creation and 
redemption process that is available for ETFs that invest in equities 
and fixed-income securities. This process represents a significant 
feature of the ETF structure generally, with advantages that 
distinguish ETFs from other types of pooled investment vehicles. In 
light of the associated tax efficiencies and potential transaction cost 
savings, the Exchange believes the ability to utilize an in-kind 
process would make such ETFs more attractive to both current and 
prospective investors and enable them to compete more effectively with 
other ETFs that, based on their portfolio holdings, may effect in-kind 
creations and redemptions without restriction. In addition, the 
Exchange believes that because it would permit ETFs that invest in 
options traded on the Exchange to benefit from tax efficiencies and 
potential transaction cost savings afforded by the in-kind creation and 
redemption process, which benefits the Exchange expects would generally 
be passed along to investors that hold ETF shares, the proposed rule 
change would protect investors and the public interest.
    Moreover, the Exchange submits that the proposed exception is 
clearly delineated and limited in scope and not intended to facilitate 
``trading'' options off the Exchange. Other than the transfers covered 
by the proposed exception, transactions involving options, whether held 
by an ETF or an authorized participant, would be fully subject to the 
applicable trading Rules. Additionally, the transfers covered by the 
proposed exception would occur at a price(s) used to calculate the NAV 
of the applicable ETF shares, which removes the need for price 
discovery on the Exchange. Accordingly, the Exchange does not believe 
that the proposed rule change would compromise price discovery or 
transparency.
    When Congress charged the Commission with supervising the 
development of a ``national market system'' for securities, Congress 
stated its intent that the ``national market system evolve through the 
interplay of competitive forces as unnecessary regulatory restrictions 
are removed.'' \22\ Consistent with this purpose, Congress and the 
Commission have repeatedly stated their preference for competition, 
rather than regulatory intervention to determine products and services 
in the securities markets.\23\ This consistent and considered judgment 
of Congress and the Commission is correct, particularly in light of 
evidence of robust competition among exchanges. The fact that an 
exchange proposed something new is a reason to be receptive, not 
skeptical--innovation is the life-blood of a vibrant competitive 
market--and that is particularly so given the continued internalization 
of the securities markets, as exchanges continue to implement new 
products and services to compete not only in the United States but 
throughout the world. Exchanges continuously adopt new and different 
products and trading services in response to industry demands in order 
to attract order flow and liquidity to increase their trading volume. 
This competition has led to a growth in investment choices, which 
ultimately benefits the marketplace and the public.
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    \22\ See H.R. Rep. 94-229, at 92 (1975) (Conf. Rep.).
    \23\ See S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975) 
(``The objective [in enacting the 1975 amendments to the Exchange 
Act] would be to enhance competition and to allow economic forces, 
interacting within a fair regulatory field, to arrive at appropriate 
variations in practices and services.''); Order Approving Proposed 
Rule Change Relating to NYSE Arca Data, Securities Exchange Act 
Release No. 59039 (December 2, 2008), 73 FR 74770 (December 9, 2008) 
(``The Exchange Act and its legislative history strongly support the 
Commission's reliance on competition, whenever possible, in meeting 
its regulatory responsibilities for overseeing the [self-regulatory 
organizations] and the national market system. Indeed, competition 
among multiple markets and market participants trading the same 
products is the hallmark of the national market system.''); and 
Regulation NMS, 70 FR at 37499 (observing that NMS regulation ``has 
been remarkably successful in promoting market competition in [the] 
forms that are most important to investors and listed companies'').
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    Currently, the Exchange Rules do not allow ETFs to effect in-kind 
transfers of options off of the Exchange, resulting in tax 
inefficiencies for ETFs that hold them. As a result, the use of options 
by ETFs is substantially limited. While the proposed exception would be 
limited in scope, the Exchange believes the benefits that may flow to 
ETFs that hold options and their investors may be significant. 
Specifically, the Exchange expects that such ETFs and their investors 
could benefit from increased tax efficiencies and potential transaction 
cost savings. By making such ETFs more attractive to both current and 
prospective investors, the proposed rule change would enable them to 
compete more effectively with other ETFs that, due to their particular 
portfolio holdings, may effect in-kind creations and redemptions 
without restriction. This may lead to further development of ETFs that 
invest in options, thereby fostering competition and resulting in 
additional choices for investors, which ultimately benefits the 
marketplace and the public.

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

[[Page 70609]]

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 
exception would be voluntary. As an alternative to the normal auction 
process, the proposed rule change would provide market participants 
with an efficient and effective means to transfer positions under the 
specified circumstances. The proposed exception would enable all ETFs 
that hold options to enjoy the benefits of in-kind creations and 
redemptions already available to other ETFs (and to pass these benefits 
along to investors). The proposed rule change would apply in the same 
manner to all entities that meet the definition of ``authorized 
participant.''
    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. As indicated 
above, it is intended to provide an additional clearly delineated and 
limited circumstance in which options positions can be transferred off 
an exchange. Further, the Exchange believes the proposed rule change 
will eliminate a significant competitive disadvantage for ETFs that 
invest in options. Furthermore, as indicated above, in light of the 
significant benefits provided (e.g., tax efficiencies and potential 
transaction cost savings), the proposed exception may lead to further 
development of ETFs 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 on a recent Cboe rule 
change approved by the Commission.\24\ As such, the Exchange believes 
that its proposal enhances fair competition between markets by 
providing for additional listing venues for ETFs that hold options to 
utilize the in-kind transfers proposed herein.
---------------------------------------------------------------------------

    \24\ See supra note 3.
---------------------------------------------------------------------------

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 \25\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\26\
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    \25\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \26\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires the Exchange to give the Commission written notice of its 
intent to file the proposed rule change, along with a brief 
description and text of 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) \27\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\28\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange requests 
that the Commission waive the 30-day operative delay so that the 
proposal may become operative immediately upon filing. The Exchange 
believes that waiver of the operative delay is consistent with the 
protection of investors and the public interest because it would 
increase competition by allowing the Exchange to adopt a transfer rule 
similar to Cboe Rule 6.9. The Exchange asserts that adoption of this 
rule may lead to further development of ETFs that invest in options. 
The Exchange represents that OCC has informed the Exchange that it has 
the operational capabilities to effect the proposed position transfers. 
All transfers pursuant to proposed Rule 1059 would be required to 
comply with OCC rules.\29\
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    \27\ 17 CFR 240.19b-4(f)(6).
    \28\ 17 CFR 240.19b-4(f)(6)(iii).
    \29\ See supra note 13.
---------------------------------------------------------------------------

    The Commission believes that proposed Phlx Rule 1059 is designed to 
protect investors and the public interest because it should facilitate 
in-kind creations and redemptions by options-based ETFs, which should 
lower taxable gains of shareholders of such ETFs. The Commission 
further believes that, by facilitating in-kind creations and 
redemptions by options-based ETFs, the proposed rule may also lower 
such funds' transaction costs. The Commission notes that the proposed 
rule change does not raise any new or novel issues not previously 
considered by the Commission. For the reasons above, the Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. Accordingly, the 
Commission waives the 30-day operative delay and designates the 
proposed rule change operative upon filing.\30\
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    \30\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2019-53 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-2019-53. 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

[[Page 70610]]

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-2019-53 and should be submitted on or before January 13, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27585 Filed 12-20-19; 8:45 am]
 BILLING CODE 8011-01-P

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