[Federal Register Volume 83, Number 53 (Monday, March 19, 2018)]
[Notices]
[Pages 12058-12060]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05451]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82866; File No. SR-Phlx-2018-20]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
of Proposed Rule Change to a Proposal To Amend Rule 1079, FLEX Index,
Equity and Currency Options and Rule 1059, Accommodation Transactions
March 13, 2018.
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 February 28, 2018, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule
[[Page 12059]]
change as described in Items I, II, and III, below, which Items have
been prepared by the Exchange. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to a proposal to amend Rule 1079, FLEX Index,
Equity and Currency Options and Rule 1059, Accommodation Transactions.
The text of the proposed rule change is available on the Exchange's
website at http://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 amend Rule 1079 governing FLEX option
transactions in order to permit open FLEX option positions to be closed
pursuant to Rule 1059, Accommodation Transactions, which provides for
cabinet trading \3\ and which is sometimes referred to as the ``cabinet
rule''. Conforming changes are proposed to be made to Rule 1059 itself.
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\3\ Currently cabinet or accommodation trading of option
contracts is intended to accommodate persons wishing to effect
closing transactions in those series of options dealt in on the
Exchange for which there is no auction market. An accommodation or
cabinet trade refers to trades in listed options on the Exchange
that are worthless or not actively traded, often times conducted to
establish tax losses. Cabinet or accommodation trading of option
contracts is currently intended to accommodate persons wishing to
effect closing transactions in those series of options dealt in on
the Exchange for which there is no auction market. A cabinet trade
is a transaction in which the per-contract value of the cabinet
trade is less than the per-contract value of a trade at the
specified minimum increment for the option contract. The current
proposal would extend the availability of cabinet trading to FLEX
options in certain circumstances.
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FLEX options are currently traded on the Exchange pursuant to the
procedures set forth in Rule 1079 which permit market participants to
customize equity options to fit specific investment strategies and
goals. Rule 1079 allows investors to specify characteristics such as
the expiration date, strike price, and exercise-style of FLEX option
contracts. Rule 1079(a)(4) governs the quote format of FLEX trades,
requiring bids and offers to be made pursuant to Rule 1034 which
specifies minimum increments.\4\
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\4\ Rule 1034(a) provides for quote formats ``(A) in the case of
FLEX index options and equity options, a bid and/or offer in the
form of a decimal price (e.g., .10 or .25), pursuant to Rule 1034, a
specific dollar amount, or a percentage of the underlying equivalent
value, in the case of FLEX index options, or security, in the case
of FLEX equity options, rounded to the nearest minimum increment; or
(B) in the case of FLEX currency options, in the form of dollars per
unit of underlying foreign currency in the minimum increments set
forth for U.S. dollar settled foreign currency options in Rule
1034(a).''
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An ``accommodation'' or ``cabinet'' trade refers to trades in
listed options on the Exchange that are of minimal value or are not
actively traded. Cabinet trading is generally conducted in accordance
with Exchange Rules except as provided in Rule 1059 which sets forth
specific procedures for cabinet trades. Rule 1059(a) provides that a
cabinet order is a closing limit order at a price of $1 per option
contract for the account of a customer, firm, specialist or ROT.\5\ The
rule provides that an opening order is not a cabinet order, but may in
certain cases be matched with a cabinet order.
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\5\ Commentary .02 to Rule 1059 provides that limit orders with
a price of at least $0 but less than $1 per option contract may also
trade under the terms and conditions in Rule 1059, subject to
certain limitations.
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Phlx now proposes new Rule 1079(g), which would provide that open
FLEX option positions are eligible to be closed in cabinet trades under
Rule 1059. The proposed new rule would specify that the FLEX option
cabinet order may be executed against contraside interest to close a
FLEX option position or, to the extent permitted under Rule
1059(a)(iii), against contraside interest which opens a FLEX option
position. Under the new rule Sections (a) and (b) of Rule 1079 would
not apply to FLEX option transactions executed pursuant to Rule 1079(g)
and Rule 1059, while Sections (c)-(g) of Rule 1079 would continue to
apply to any FLEX option position opened pursuant to Rule 1059.\6\
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\6\ Rule 1079(a), Characteristics, sets forth the potential
characteristics (including, for example, underlying interest, type,
exercise price, quote format, exercise style, and expiration date)
of FLEX options and is inapplicable to and unnecessary for cabinet
trade closing of FLEX option positions whose characteristics are
already known. Other provisions of Rule 1079(a) which define certain
aspects of the FLEX request for quote (RFQ) process as well as Rule
1079(b), Procedure for Quoting and Trading FLEX Options, are
likewise inapplicable, given that trading FLEX Options in the
cabinet would instead be governed by the Rule 1059 cabinet trading
rules. Rule 1079 Section (c), Who May Trade FLEX Options, would
continue to apply and would restrict participation in FLEX cabinet
trades to the entities meeting the requirements of that section.
Rule 1079 Sections (d), Position Limits, (e), Exercise Limits, and
(f), relating to the exercise-by-exception procedure of Rule 805 of
the Options Clearing Corporation, would continue to apply to any
open FLEX position resulting from a FLEX option transaction
conducted under Rule 1059.
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New, conforming Commentary language would also be added to Rule
1059. Proposed new Rule 1059 Commentary .03 would specify that,
pursuant to Rule 1079(g), open FLEX option positions are eligible to be
closed in accordance with Rule 1059 at the minimum increments specified
therein. The Commentary would state that a FLEX option cabinet order
could be executed against contraside interest which itself closes a
FLEX option position or, to the extent permitted under Rule
1059(a)(iii), against contraside interest which opens a FLEX option
position. Thus, as proposed, the new language would require the
initiating side of each FLEX cabinet trade to be a closing transaction,
and would permit cabinet trading which opens FLEX positions to occur
only as and when already permitted under Rule 1059's existing priority
rules for non-FLEX cabinet trades. Language would be added to Rule 1059
Commentary .03 paralleling the last two sentences of proposed Rule
1079(g) which detail the provisions of Rule 1079 that shall not apply
to FLEX option transactions executed pursuant to Rule 1079(g) and Rule
1059, as well as the provisions of Rule 1079 that shall apply to FLEX
option positions opened pursuant to Rule 1059.
Proposed new Rule 1079(g) would permit an open FLEX option position
to be closed through the use of a cabinet order, which would be
represented by a floor broker on the floor as specified in Rule
1059(a).\7\ In the past, the Exchange did not provide for the closing
of FLEX trades under the cabinet rule due to lack of interest. More
recently, market
[[Page 12060]]
participants have expressed a desire to close FLEX option positions
under the cabinet rule and this proposed rule change will permit them
to do so. The rule would provide that notwithstanding Rule 1079(a)(4)
regarding FLEX Index, Equity and Currency Options minimum increments,
open FLEX option positions are eligible to be closed in accordance with
Rule 1059, Accommodation Transactions, at the minimum increments
specified therein. The Exchange believes that permitting FLEX option
positions to be closed pursuant to the cabinet rule will provide FLEX
option investors additional flexibility in the maintenance or closing
out of their FLEX option positions.
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\7\ Rule 1059(a)(iii) sets forth the manner in which a cabinet
order may be either crossed or matched in three different scenarios:
First, when the floor broker holds the cabinet order only, second,
when the floor broker holds the cabinet order and also a contra-side
cabinet order, and third, when the floor broker holds a cabinet
order and also a contra-side opening order. Once the cabinet order
has been either crossed or matched, the floor broker is required by
Rule 1059(a)(iv) to submit the designated cabinet form to the Nasdaq
Market Operations staff for clearance and reporting at the close of
the business day.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\8\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\9\ 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,
by permitting investors who desire to close FLEX options positions the
flexibility to do so in a cabinet transaction. The Exchange believes
that cabinet trades promote competition and afford market participants
greater opportunities to close out their options positions. By
providing FLEX options holders the additional flexibility of proposed
Rule 1079(g) and Rule 1059 Commentary .03, the Exchange should be able
to attract additional FLEX option transactions to the Exchange. The
proposed amendments should perfect the mechanism of a free and open
market and improve market quality by permitting holders of FLEX
positions to trade out of those positions more easily and efficiently.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
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The proposed amendments should perfect the mechanism of a free and
open market by stating clearly that Rule 1079(a), Characteristics, and
Rule 1079(b), Procedure for Quoting and Trading FLEX Options, will not
apply, given that trading FLEX Options in the cabinet would instead be
governed by the Rule 1059 cabinet trading rules. Rule 1079 Section (c),
Who May Trade FLEX Options, would continue to apply and would restrict
participation in FLEX cabinet trades to the entities meeting the
requirements of that section. Rule 1079 Sections (d), Position Limits,
(e), Exercise Limits, and (f), relating to the exercise-by-exception
procedure of Rule 805 of the Options Clearing Corporation, would
continue to apply to any open FLEX position resulting from a FLEX
option transaction conducted under Rule 1059. Additionally, the
proposed language will protect investors and the public interest
because Sections (c)-(g) of Rule 1079 shall continue to apply to any
FLEX option position opened pursuant to Rule 1059, just as they apply
today to FLEX positions opened pursuant to Rule 1079.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change would
allow all market participants holding FLEX option positions the
flexibility to close them using the same procedures currently set forth
in the cabinet rule for non-FLEX option positions. Permitting FLEX
option positions to be closed pursuant to the cabinet rule will provide
FLEX option investors additional opportunities to close out their FLEX
option positions.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-Phlx-2018-20 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-2018-20. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-Phlx-2018-20 and should be submitted on
or before April 9, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-05451 Filed 3-16-18; 8:45 am]
BILLING CODE 8011-01-P