[Federal Register Volume 83, Number 90 (Wednesday, May 9, 2018)]
[Notices]
[Pages 21319-21320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09838]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83167; File No. SR-Phlx-2018-20]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a 
Proposed Rule Change Amending Rule 1079, FLEX Index, Equity and 
Currency Options, and Rule 1059, Accommodation Transactions, To Allow 
the Closing of Flexible Exchange Options (``FLEX options'') in Cabinet 
Trading

May 3, 2018.

I. Introduction

    On February 28, 2018, Nasdaq PHLX LLC (``Exchange'' or ``Phlx'') 
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 
amending Phlx's Rule 1079, relating to FLEX Options, and Phlx Rule 
1059, relating to accommodation transactions. The proposed rule change 
was published for comment in the Federal Register on March 19, 2018.\3\ 
The Commission received no comment letters on the proposed rule change. 
This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 82866 (Mar. 13, 
2018), 83 FR 12058 (Mar. 19, 2018) (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange has proposed to amend Phlx Rule 1079, governing FLEX 
option transactions, and Phlx Rule 1059, governing accommodation 
transactions (also known as cabinet trades), to permit open FLEX 
positions to be closed pursuant to the cabinet procedures in Phlx Rule 
1059.
    Phlx Rule 1079 permits the trading of FLEX options, which are 
options customized to fit specific investment strategies and goals.\4\ 
Further, Phlx Rule 1079(a)(4) requires that bids or offers in FLEX 
trades be made at the minimum increments specified in Phlx Rule 
1034.\5\ Generally, the minimum increments for stock, index and 
exchange traded fund options are either $.10 or $.05, unless such 
options are subject to a penny pilot set forth in the rule.
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    \4\ See Phlx Rule 1079. See also Notice, supra note 3, at 12059. 
Pursuant to Phlx Rule 1079, investors can specify the 
characteristics for FLEX Option contracts such as the expiration 
date, the strike price, and the exercise-style.
    \5\ Phlx Rule 1034 (a) provides that with certain exceptions, 
``all options on stocks, index options, and Exchange Traded Fund 
Shares quoting in decimals at $3.00 or higher shall have a minimum 
increment of $.10, and all options on stocks and index options 
quoting in decimals under $3.00 shall have a minimum increment of 
$.05.''
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    Phlx Rule 1059 permits trading of cabinet orders, defined as 
closing limit orders at a price of $1 per option contract for the 
account of a customer, firm, specialist or registered options trader 
\6\ (``ROT'').\7\ Thus, cabinet trades are generally effectuated at 
less than the minimum increments required for FLEX options, as 
described above, under the Phlx Rules 1079 and 1034. According to Phlx, 
cabinet trading is intended to accommodate persons wishing to effect 
closing transactions in options for which there is no auction market. 
Cabinet trading, according to the Exchange, allows market participants 
to close listed options on the Exchange that are of minimal value or 
worthless, or not actively traded, often for the purpose of 
establishing tax losses.\8\
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    \6\ See Phlx Rule 1014(b). An ROT is a regular member or a 
foreign currency options participant of the Exchange located on the 
trading floor who has received permission from the Exchange to trade 
in options for his own account. Each ROT electing to engage in 
Exchange options transactions shall be assigned by the Exchange one 
or more classes of options, and Exchange options transactions 
initiated by such ROT on the Floor for any account in which he had 
an interest shall to the extent prescribed by the Exchange be in 
such assigned classes.
    \7\ See Phlx Rule 1059(a). Commentary .02 to Phlx 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 Phlx Rule 1059, subject to certain limitations.
    \8\ See Notice, supra note 3, at 12059 n.3. 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. See id.
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    The Exchange has proposed to add Phlx Rule 1079(g) and Commentary 
.03 to Phlx Rule 1059 to state that open FLEX option positions are 
eligible to be closed in accordance with the minimum increments set 
forth in Phlx Rule 1059 governing cabinet trading.\9\ The Exchange 
further proposed that a FLEX option cabinet order may be executed 
against contra side interest that closes the FLEX option position or, 
to the extent permitted by the cabinet rule (specifically Phlx Rule 
1059(a)(iii)), against contra side interest that opens a FLEX option 
position.\10\
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    \9\ See proposed Phlx Rule 1079(g) and proposed Commentary .03 
to Phlx Rule 1059.
    \10\ See id. Phlx Rule 1059(a)(iii) provides that floor brokers 
would represent the orders in the crowd. See Phlx Rule 1059(a).
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    Under existing Phlx rules all FLEX options are governed by the 
procedures for FLEX options in Phlx Rule 1079. To accommodate FLEX 
options trading as a cabinet order under Phlx Rule 1059, the Exchange 
also proposed in new Section 1079(g) that sections (a) and (b) of Phlx 
Rule 1079 would not apply to FLEX option transactions in the 
cabinet.\11\ According to the Exchange, Phlx Rule 1079(a), which sets 
forth the potential characteristics of FLEX options, such as underlying 
interest and the quote format, would not be applicable for the closing 
of FLEX options in the cabinet because the characteristics of the FLEX 
options in the cabinet would already be known.\12\ Further, Phlx stated 
that because FLEX options trading in the cabinet would be governed by 
the cabinet trading rules set forth in Phlx Rule 1059, except for the 
provisions of Phlx Rule 1079 noted below which will continue to apply, 
Phlx Rule 1079(b), which covers procedures for quoting and trading FLEX 
options, and the provisions of Phlx Rule 1079(a) defining aspects of a 
FLEX request for the RFQ process, are not applicable.\13\
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    \11\ See proposed Phlx Rule 1079(g) and proposed Commentary .03 
to Phlx Rule 1059.
    \12\ See Notice, supra note 3, at 12059 n.6.
    \13\ See id.
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    Under the Phlx's proposal, Phlx Rules 1079(c)-(f) would, however, 
continue to apply to FLEX option cabinet

[[Page 21320]]

transactions.\14\ Phlx Rule 1079(c) restricts participation in FLEX 
cabinet trades to entities that meet the requirements set forth in this 
subsection,\15\ and Phlx Rules 1079(d) and (e) govern position limits 
and exercise limits.\16\
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    \14\ See proposed Phlx Rule 1079(g) and proposed Commentary .03 
to Phlx Rule 1059.
    \15\ See Phlx Rule 1079(c), which sets forth requirements for 
ROTs and specialists to be assigned to FLEX Options as well as 
financial requirements for floor brokers to trade FLEX Options.
    \16\ See Notice, supra note 3, at 12059 n.6. Phlx Rule 1079(f) 
relates to the exercise-by-exception procedure of Rule 805 of the 
Options Clearing Corporation.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act \17\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.\18\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\19\ which 
requires that the rules of an exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \17\ 15 U.S.C. 78f.
    \18\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that allowing the closing of FLEX options 
positions through cabinet trading is designed to promote just and 
equitable principles of trade and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system by 
allowing market participants to close out their FLEX options positions 
that have little or no value prior to the options' expiration. 
Currently, market participants holding Phlx listed non-FLEX 
standardized options are allowed to close out positions with little or 
no value through an accommodation transaction known as a cabinet trade. 
FLEX option market participants currently do not have the same 
opportunity, despite the fact that there may be tax advantages to 
closing out a FLEX option position at a loss prior to the options 
expiration, and instead must hold the FLEX options until it expires, 
most likely worthless.\20\ The Exchange also noted in its proposal that 
recently market participants have expressed an interest in closing FLEX 
options under the Phlx's cabinet rule.\21\ The proposed rule change, 
will therefore, provide market participants with an opportunity to 
liquidate FLEX option positions that are of minimal or no value prior 
to the FLEX options expiration, similar to that currently permitted by 
other market participants holding standardized options.
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    \20\ As noted above, currently the FLEX rules do not permit Flex 
options to be traded as a cabinet order. Among other issues under 
the FLEX rules, the minimum size increments required under the FLEX 
rules essentially prohibit accommodation transactions in FLEX 
options.
    \21\ See Notice, supra note 3, at 12059-60.
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    The Commission recognizes that the FLEX options market is unique in 
that it allows the customization of certain options terms between buyer 
and seller and that, as result, the FLEX options market does not 
typically have the liquidity and active trading market offered in the 
standardized options market. Despite these unique characteristics, 
however, allowing FLEX market participants to close out their FLEX 
options positions with little or no value in an accommodation 
transaction under cabinet trading procedures, and subject to certain 
FLEX rules continuing to apply, would appear to be helpful to FLEX 
market participants.
    Further, under the proposal, the existing Phlx rules concerning 
enhanced financial requirements and who may trade FLEX under Phlx Rule 
1079 would continue to apply to any FLEX options executed under the 
cabinet trading rules. Any orders, whether a closing order or, as 
permitted, an opening order, executed against a Phlx FLEX option 
cabinet order are still therefore considered FLEX options orders, as 
indicated in the proposed changes to both Phlx Rules 1079 and 1059.
    In addition, the position and exercise limits for FLEX options will 
continue to apply to FLEX options closed in the cabinet. The Commission 
notes, however, that under the FLEX rules equity options do not have 
position limits and positions in FLEX options are generally not 
aggregated with standardized options for position limit purposes, with 
some exceptions.\22\ The Commission expects Phlx to monitor FLEX 
cabinet orders to ensure that the lack of equity option position limits 
and aggregation with standardized positions do not present risks that 
would require the Exchange to impose additional margin as permitted 
under Phlx Rule 1079(d)(2) governing FLEX options. In addition, we 
request Phlx to monitor positions opened to accommodate a FLEX cabinet 
closing limit order to ensure that such open positions do not create 
any additional market risk that would need to be addressed through Phlx 
rules, such as requiring the aggregation of positions in standardized 
options with FLEX opening orders to accommodate a FLEX cabinet order. 
We would also expect Phlx to inform us generally of any other concerns 
that have arisen in allowing FLEX options to be executed under the 
cabinet trading rules.
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    \22\ See Phlx Rule 1079(d)(2)-(4).
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    For the reasons above, the Commission finds that the proposed rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-Phlx-2018-20) be, and hereby 
is, approved.
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    \23\ 15 U.S.C. 78s(b)(2).
    \24\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-09838 Filed 5-8-18; 8:45 am]
 BILLING CODE 8011-01-P


