[Federal Register Volume 83, Number 218 (Friday, November 9, 2018)]
[Notices]
[Pages 56109-56111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24523]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84536; File No. SR-Phlx-2018-63]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 
1101A, Terms of Option Contracts

November 5, 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 October 23, 2018, Nasdaq PHLX LLC (``Phlx'' or the ``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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Exchange Rule 1101A, Terms of Option 
Contracts.
    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 purpose of the proposed rule change is to adopt new Exchange 
Rules 1101A(e)(I), 1101A(f) and 1101A(g). Proposed Rules 1101A(e)(I) 
and 1101A(g) would establish the manner of determining an underlying 
index component security's price for purposes of calculating the 
current index value at expiration of an overlying index option when (i) 
the primary market for that security does not open for trading on a 
given day, and (ii) the Options Clearing Corporation (``OCC'') does not 
exercise its authority to establish the index option settlement 
value.\3\ They also acknowledge OCC's authority under its own rules and 
by-laws to establish settlement prices in certain circumstances. 
Proposed new Rule 1101A(f) clarifies an issue relating to the level of 
indexes underlying A.M.-settled index options at expiration.
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    \3\ Three of the Exchange's affiliated options exchanges, Nasdaq 
ISE, LLC (``ISE''), The Nasdaq Stock Market LLC (``Nasdaq'') and 
Nasdaq BX, Inc. (``BX''), will also be proposing rule changes 
relating to the manner of determining an underlying index component 
security's price for purposes of calculating the current index value 
at expiration of an index option under these circumstances. See SR-
NASDAQ-2018-081, SR-BX-2018-049, and SR-ISE-2018-88. The Exchange 
desires its rules to be aligned with those of the affiliated 
exchanges.
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Proposed Rules 1101A(e)(I) and (g)
    Exchange Rule 1101A(e) currently states that the current index 
value at the expiration of an A.M.-settled index option shall be 
determined, for all purposes under Exchange rules and OCC rules, on the 
last day of trading in the underlying securities prior to expiration, 
by reference to the reported level of such index as derived from first 
reported sale (opening) prices of the underlying securities on such 
day, except that in the event that the primary market for an underlying 
security is open for trading on that day, but that particular security 
does not open for trading on that day, the price of that security, for 
the purposes of calculating the current index value at expiration, 
shall be the last reported sale price of the security. The Exchange now 
proposes to add new Rule 1101A(g) to deal expressly with cases where 
the entire primary market for an underlying component security is not 
open on that day. Rule 1101A(g) would apply to both A.M.-settled and 
P.M.-settled index options.\4\
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    \4\ P.M.-settled options are settled based upon the closing 
index value for the day on which the index options contract is 
exercised in accordance with OCC rules or, if such day is not a 
business day, for the most recent business day. See Phlx Rule 
1101A(d).
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    Proposed Rule 1101A(g) would add an exception and would state that 
when the primary market for a security underlying the current index 
value of an index option does not open for trading on a given day which 
is an expiration day, for the purposes of calculating the settlement 
price at expiration, the last reported sale price of the security from 
the previous trading day shall be used. Proposed new Rule 1101A(g) 
would permit market participants the certainty of knowing the 
settlement value on the day on which the primary market fails to open. 
Additionally, the provision would eliminate the potential difficulties 
that could arise if the reporting authority for the index were 
unwilling or unable to calculate the settlement value using prices for 
the relevant security(ies) on the next day that its primary market is 
open for trading.\5\
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    \5\ The index calculator for the NDX, MNX and BKX indexes, which 
are products traded on Nasdaq affiliated exchanges, uses the 
previous day's closing price if components of the index do not open.
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    The new rule would also state that this procedure shall not be used 
if the current index value at expiration is fixed in accordance with 
OCC rules and by-laws. This language recognizes that OCC is authorized 
under its rules and by-laws to take certain actions relating to 
settlement in the event of the unavailability or inaccuracy of the 
current underlying interest value.\6\ The proposed language makes clear 
that Rule 1101A(g) would not apply in the event that OCC exercises its 
authority to determine settlement prices. Rather, the proposed new 
language would apply only when a primary market does not open and OCC 
elects not to exercise its authority to intervene and take action to 
establish a settlement price. The Exchange would otherwise defer to

[[Page 56110]]

OCC. A cross-reference to Rule 1101A(g) would be added to Rule 1101A(e) 
by adding new Rule 1101A(e)(I).
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    \6\ See OCC By-Laws Article XVII, Section 4(a), which provides 
in relevant part that if OCC shall determine that the primary market 
for one or more index components did not open or remain open for 
trading (or that any such components did not open or remain open for 
trading on such market(s)) on a trading day at or before the time 
when the current index value for that trading day would ordinarily 
be determined, or that a current index value or other value or price 
to be used as, or to determine, the exercise settlement amount (a 
``required value'') for a trading day is otherwise unreported, 
inaccurate, unreliable, unavailable or inappropriate for purposes of 
calculating the exercise settlement amount, then, in addition to any 
other actions that OCC may be entitled to take under OCC's bylaws 
and rules, the, OCC is empowered to take any or all of a range of 
permitted actions with respect to any series of options on such 
index, including fixing the exercise settlement amount. Proposed 
Rule 1101A(g) would apply to both A.M.-settled and P.M.-settled 
index options.
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    Proposed Rule 1101A(e)(I) is based upon Chapter XIV, Section 
11(a)(5)(i) of the Nasdaq Rulebook.
Proposed Rule 1101A(f)
    Separately, the Exchange proposes to adopt new Rule 1101A(f), Index 
Level, intended to alert investors to the fact that the exercise 
settlement value of an index option that is derived from opening prices 
of the constituent securities (an ``A.M.-settled index option'') may 
not be reported for several hours following the opening of trading in 
those securities. A number of updated index levels may be reported at 
and after the opening before the exercise settlement value is reported, 
and there could be a substantial divergence between those reported 
index levels and the reported exercise settlement value. The proposed 
new rule would provide that the reported level of the underlying index 
that is calculated by the reporting authority for purposes of 
determining the current index value at the expiration of an A.M.-
settled index option may differ from the level of the index that is 
separately calculated and reported by the reporting authority and that 
reflects trading activity subsequent to the opening of trading in any 
of the underlying securities. Proposed new Rule 1101A(f) is based upon 
Chapter XIV, Section 11(d) of the Nasdaq rulebook.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\7\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\8\ in particular, in that it is designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general to protect investors and the public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    As noted above, proposed Rules 1101A(e)(I) and (g) would establish 
clearly the procedure for determination of an index component 
security's price in the event that the primary market for the security 
fails to open. By adopting the proposed rule, the Exchange would 
provide certainty to the market regarding the procedure it would follow 
in the absence of action by OCC. Additionally, it would provide market 
participants with the certainty of knowing the settlement value on the 
day on which the primary market fails to open.
    It would also acknowledge clearly, however, that OCC may, under its 
rules and by-laws, establish settlement prices for expiring index 
options that may differ from the settlement prices that would otherwise 
be provided for in Exchange rules, thereby protecting investors and the 
public interest by reducing potential for confusion in that regard.
    Likewise, proposed Rule 1101A(f) states clearly that the reported 
level of the underlying index that is calculated by the reporting 
authority for purposes of determining the current index value at the 
expiration of an A.M.-settled index option may differ from the level of 
the index that is separately calculated and reported by the reporting 
authority and that reflects trading activity subsequent to the opening 
of trading in any of the underlying securities, again protecting 
investors and the public interest by reducing potential for confusion 
arising from the fact that the exercise settlement value of an index 
option derived from opening prices of constituent securities may 
diverge from reported index levels.

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. On the contrary, the Exchange 
believes that the proposed amendment will benefit investors, market 
participants, and the marketplace in general by setting forth clearly 
the manner in which index option settlement values will be determined 
if the primary market for a security underlying the current index value 
of an index option does not open for trading, and by stating that the 
Exchange will defer to OCC in the determination of settlement prices 
when and if OCC exercises its authority under its own settlement price 
procedures in accordance with its rules and by-laws. The proposal also 
provides clarity regarding the calculation of the index level, as 
distinct from the exercise settlement value, on the last day of trading 
in the underlying component securities of an A.M.-settled index option.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \9\ and Rule 19b-4(f)(6) thereunder.\10\ Because 
the 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) of the Act and Rule 19b-4(f)(6) thereunder.\11\
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    \9\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ In addition, Rule 19b-4(f)(6)(iii) requires a self-
regulatory organization to give the Commission written notice of its 
intent to file the proposed rule change at least five business days 
prior to the date of filing of the proposed rule change, or such 
shorter time as designated by the Commission. The Exchange has 
satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \12\ normally 
does not become operative for 30 days after the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\13\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. In its filing with the 
Commission, the Exchange has asked the Commission to waive the 30-day 
operative delay so that the proposal may become operative immediately 
upon filing to provide certainty regarding the determination of 
settlement prices for index options when the primary market for a 
security underlying the current index value of an index option does not 
does not open for trading on an expiration day, including in instances 
in which OCC exercises its authority to determine the settlement price. 
The Exchange also noted that the proposed rule change will provide 
clarity by informing the market that the reported level of the 
underlying index that is calculated by the reporting authority for 
purposes of determining the current index value at the expiration of an 
A.M.-settled index option may differ from the level of the index that 
is separately calculated and reported by the reporting authority and 
that reflects trading activity subsequent to the opening of trading in 
the underlying securities. As such, the Commission believes that waiver 
of the 30-day operative delay is consistent with the protection of 
investors and the public

[[Page 56111]]

interest and designates the proposed rule change operative upon 
filing.\14\
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    \12\ 17 CFR 240.19-4(f)(6).
    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ For purposes only of waiving the operative delay, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of such 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 under 
Section 19(b)(2)(B) \15\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \15\ 15 U.S.C. 78s(b)(2)(B).
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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-2018-63 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-2018-63. 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 a.m. and 3 p.m. 
Copies of such 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-2018-63, and should be submitted on or before November 30, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-24523 Filed 11-8-18; 8:45 am]
 BILLING CODE 8011-01-P


