82 FR 52959 - Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Index Options Rules To Be More Clear and Conformed More Closely to Those of the Options Clearing Corporation (“OCC”) and Other Exchanges

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 219 (November 15, 2017)

[Federal Register Volume 82, Number 219 (Wednesday, November 15, 2017)]
[Notices]
[Pages 52959-52962]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-24656]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82035; File No. SR-Phlx-2017-89]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Its Index 
Options Rules To Be More Clear and Conformed More Closely to Those of 
the Options Clearing Corporation (``OCC'') and Other Exchanges

November 8, 2017.
    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 November 1, 2017, 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, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its index options rules to be more 
clear and conformed more closely to those of the Options Clearing 
Corporation (``OCC'') and other exchanges.
    The text of the proposed rule change is available on the Exchange's 
Web site 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 is proposing to amend its index options rules in a 
number of respects to be more clear and reflective of current market 
practice, and to be conformed more closely to OCC rules and those of 
other exchanges in order to minimize the potential for confusion, in 
addition to other index option rule changes as discussed below.
Definition and Use of the Term ``Closing Index Value''
    The Exchange currently assigns the term ``closing index value'' a 
meaning which differs from that term's meaning on other exchanges, 
which presents the potential for needless confusion. Rule 1000A(b)(8) 
currently provides that the closing index value in respect of a 
particular index means (a) with respect to P.M.-settled options, the 
current index value calculated at the close of business on the day of 
exercise, or, if the day of exercise is not a trading day, on the last 
trading day before exercise, or (b) with respect to A.M.-settled 
options, the opening price of each component issue on the primary 
market on the day of exercise, or, if the day of exercise is not a 
trading day, on the last trading day before exercise. This definition 
is proposed to be deleted. The Exchange now proposes to define the term 
``closing index value'' to mean simply the last index value reported on 
a business day. The new definition tracks the definition of ``closing 
index value'' on CBOE, ISE and NOM.\3\
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    \3\ CBOE Rule 24.1, ISE Rule 2001(e) and NOM Chapter XIV, 
Section 2(e), for example, all define ``closing index value'' as the 
last index value reported on a business day.
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    The substantive provisions of the index rules that currently refer 
to ``closing index value'' are proposed to be amended as well as 
discussed below, in light of this amendment to the definition of that 
term. The use of more consistent terminology across exchanges, both in 
the definition itself and in substantive provisions using the defined 
term, should minimize potential for confusion, especially in the 
context of multiply listed index options. It is in the public interest 
to avoid use of different terminology across different exchanges to 
describe the same concept.
Substitute the Term ``Current Index Value'' for the term ``Closing 
Index Value''
    The term ``current index value'' is defined in Rule 1000A(b)(7) in 
respect of a particular index as ``the level of the index that is 
derived from the reported prices of the underlying securities that are 
the basis of the index, as reported by the reporting authority for the 
index.'' Other options exchanges define ``current index value'' in a 
similar fashion.\4\
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    \4\ CBOE Rule 24.1(g), ISE Rule 2001(e) and NOM Chapter XIV, 
Section 2(e), for example, all define the term ``current index 
value'' with respect to a particular index options contract in 
relevant part as the level of the underlying index reported by the 
reporting authority for the index, or any multiple or fraction of 
such reported level specified by the exchange.
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    However, the Exchange currently uses the term ``closing index 
value'' in provisions where other exchanges use the term ``current 
index value.'' In order to use more consistent terminology across 
exchanges, the Exchange proposes to replace the term ``closing index 
value'' with the term ``current

[[Page 52960]]

index value'' in Rules 1000A(b)(1), (2) and (6). Thus the term ``put'' 
will be defined in Rule 1000A(b)(1) as an option contract under which 
the holder of the option has the right, in accordance with the terms 
and provisions of the option, to sell to the Options Clearing 
Corporation the current index value times the index multiplier. Rule 
1000A(b)(2) would be revised to define the term ``call'' as an option 
contract under which the holder of the option has the right, in 
accordance with the terms of the option, to purchase from OCC the 
current index value times the index multiplier. Similarly, the term 
``index multiplier'' would be defined to mean the amount specified in 
the contract by which the current index value is to be multiplied to 
arrive at the value required to be delivered to the holder of a call or 
by the holder of a put upon valid exercise of the contract. In all 
three of the revised definitions, the only change proposed is the 
substitution of the term ``current index value'' for the existing term 
``closing index value'' which itself is proposed to be revised as 
discussed below to be consistent with the definition of that term on 
other exchanges.\5\
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    \5\ Upon implementation of the proposed amendments, the Exchange 
will be using terminology that is consistent with definitions of 
``put'', ``call'' and ``index multiplier'' on CBOE, ISE and NOM. See 
CBOE Rules 24.1(a), 24.1(b), and 24.1(f); ISE Rules 2001(c), 2001(i) 
and 2001(l); and NOM Chapter XIV, Sections 2(d), 2(i) and 2(m). The 
amendments will also give the terms ``put'', ``call'' and ``index 
multiplier'' definitions that are consistent with the existing Phlx 
definition of ``exercise price'' which is the specific price per 
unit at which the current index value may be purchased in the case 
of a call or sold in the case of a put upon the exercise of an 
option. Unlike the current Phlx definitions of ``put'', ``call'' and 
``index multiplier'', the current Phlx definition of ``exercise 
price'' is consistent with the definition of ``exercise price'' on 
other exchanges. See, e.g., CBOE Rule 24.1(d), ISE Rule 2001(f) and 
NOM Chapter XIV, Section 2(f), all of which define ``exercise 
price'' using the defined term ``current index value''.
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    Current Rule 1000A(b)(8) defining ``closing index value'' already 
points to the current index value. Specifically, it defines ``closing 
index value'' to mean, with respect to P.M.-settled options, the 
current index value calculated at the close of business on the day of 
exercise, or, if the day of exercise is not a trading day, on the last 
trading day before exercise. In view of the amendment to Rule 1101A(d) 
discussed below providing generally that the current index value used 
to settle the exercise of an index options contract is the closing 
index value (proposed to be defined as the last index value reported on 
a business day) for the day, the net effect of these amendments with 
respect to P.M.-settled options is for the most part a change in 
terminology only, to be consistent with terminology used by other 
options exchanges. Currently, with respect to P.M.- settled options the 
relevant value for Rules 1000A(b)(1), (2) and (6) is the ``index value 
calculated at the close of business on the day of exercise''. As 
amended, the relevant value would be ``the last index value reported on 
a business day''. Both formulations express the same concept. These 
definitional changes are not intended to change current practice with 
respect to P.M.-settled options.
New Definition of ``A.M. Settled Index Option''
    The Exchange proposes to add a new definition of A.M. settled index 
option. Consistent with the CBOE, ISE and NOM definitions of this term, 
new Rule 1000A(18) would define ``A.M. settled index option'' as an 
index option for which the current index value at expiration shall be 
determined as provided in Rule 1101A(e).\6\
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    \6\ See the consistent definitions of ``A.M.-settled index 
option'' in CBOE Rule 24.1(r), ISE Rule 2001(c), and NOM Chapter 
XIV, Section 2(c). Like proposed Phlx Rule 1000A(b)(18), each of 
these definitions incorporates by reference a separate rule 
governing the determination of the current settlement value at 
expiration.
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    The Exchange proposes to adopt new Rule 1101A(d), Index Values for 
Settlement, which recites that OCC rules specify that, unless the rules 
of the Exchange provide otherwise, the current index value used to 
settle the exercise of an index options contract is 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. Other options exchanges have similar 
rules. \7\
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    \7\ See, e.g., CBOE Rule 24.9.05 and ISE Rule 2009(e).
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    As an exception to the baseline rule set forth in Rule 1101A(d) 
regarding settlement based on closing index values, the Exchange 
proposes to add new Rule 1101A(e) to provide that the last day of 
trading for A.M.-settled index options shall be the business day 
preceding the business day of expiration, or, in the case of an option 
contract expiring on a day that is not a business day, the business day 
preceding the last day of trading in the underlying securities prior to 
the expiration date. Under the new rule the current index value at the 
expiration of an A.M.-settled index option will be determined 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 the 
primary market on such day.\8\ The current language of Rule 
1000A(b)(8)(b) suggests that exercise settlement values for A.M. 
settled options are always based upon opening prices. In fact, however, 
closing prices are used in the case of an early exercise. This new 
language makes clear that for A.M.-settled index options opening prices 
of the underlying securities determine the current index value used to 
settle an exercise only on the last day of trading prior to expiration, 
consistent with market practice and OCC processes regarding A.M. 
settlement. Exercise of an American style A.M.-settled option prior to 
the day of expiration will result in settlement based upon closing 
prices in the underlying market, consistent with proposed new Rule 
1101A(d) and OCC rules. The new language in 1101A(d) and (e) corrects 
existing Exchange Rule 1000A(b)(8) which does not make this distinction 
and is at variance with existing market practice and OCC settlement 
processes.
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    \8\ See ISE Rule 2009(a)(5) and NOM Chapter XIV, Section 
11(a)(5), which are similar.
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    Proposed Rule 1101A(e) incorporates one exception. 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, will be the last reported sale 
price of the security.\9\
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    \9\ NOM and ISE rules contain similar exceptions. See NOM 
Chapter XIV Section 11(a)(5) and ISE Rule 2009(a)(5).
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    Finally, new language is added to Rule 1101A(e) which specifically 
identifies the six A.M.-settled index options that are currently 
approved for trading on the Exchange.\10\ The listing of these A.M.-
settled index options is consistent with proposed new Rule 1101A(d), 
which recites that the Rules of the Options Clearing Corporation 
specify that, unless the Rules of the Exchange provide otherwise (which 
Rule 1101A(e) is doing by identifying AM-settled index options), the 
current index value used to settle the exercise of an index options 
contract shall be the closing index value for the day on which the 
index options contract is exercised in accordance with the Rules of the 
Options Clearing Corporation or,

[[Page 52961]]

if such day is not a business day, for the most recent business day. It 
is also consistent with the existing Commentary to Rule 1000A(b)(8) 
which provides that for any series of index options the Exchange may, 
in its discretion, provide that the calculation of the final index 
settlement value of any index on which options are traded at the 
Exchange will be determined by reference to the prices of the 
constituent stocks at a time other than the close of trading on the 
last trading day before expiration.
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    \10\ The change is being made in conformance with Article XVII, 
Section 5 of the OCC By-Laws. Article XVII, Section 5 of the OCC By-
Laws provides that an Exchange may provide by rule that the current 
index value shall be determined by reference to the reported level 
of such index at a time or times other than the close of trading. 
Other options exchanges identify individual AM-settled options in 
their rules. See, e.g., CBOE Rule 24.9(a)(4).
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Deletion of Rule 1044A, Delivery and Payment
    Rule 1044A, Delivery and Payment, currently provides that in 
accordance with the applicable Rules of the Options Clearing 
Corporation, the settlement of index option contracts will be by the 
delivery of the difference between the closing index value on the day 
of exercise and the exercise price times the index multiplier. The 
Exchange proposes to delete this provision, given the proposed 
amendment to the defined term ``closing index value'' as discussed 
above. The Exchange has not found a similar rule on other options 
exchanges and believes it to be unnecessary given the definitions of 
put, call and index multiplier, which imply that settlement will be by 
the delivery of the difference between the closing index value on the 
day of exercise and the exercise price, times the index multiplier. OCC 
Bylaws provide for the calculation of the exercise settlement amount by 
reference the [sic] difference between the aggregate exercise price and 
the aggregate current index value on the day of the exercise.\11\
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    \11\ See also Article XVII of the OCC Bylaws.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\13\ 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 adding clarity to the rules, correcting the description of 
the manner of calculation of the exercise settlement amount in the case 
of early exercise of A.M.-settled options to conform with OCC rules and 
processes, and conforming index option terminology more closely to that 
used by OCC and other exchanges that list index options. In addition to 
correcting the inaccuracy regarding early exercise of A.M.-settled 
index options, the proposed rule change would result in Exchange index 
option rules that are substantially similar to rules that are currently 
in place on other options exchanges as discussed in detail above, 
thereby reducing potential investor confusion. The Exchange believes 
that the proposed changes will provide greater clarity to members and 
the public regarding the Exchange's index option rules.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act, as the added clarity and the increased 
conformity to index rules of other options exchanges and 
acknowledgement of OCC rules will benefit all market participants 
trading Exchange listed index options. The proposed rule change does 
not affect competition in that it conforms the Phlx index rulebook to 
OCC rules and to existing market practice, and will apply equally to 
all market participants transacting in index options on the Exchange.

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 \14\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
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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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2017-89 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2017-89. 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 Web site (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 Web site 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 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

[[Page 52962]]

submissions should refer to File Number SR-Phlx-2017-89, and should be 
submitted on or before December 6, 2017.

    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. 2017-24656 Filed 11-14-17; 8:45 am]
 BILLING CODE 8011-01-P