[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]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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 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 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\
---------------------------------------------------------------------------
\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)).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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'').
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\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 (http://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 (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
[[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).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27585 Filed 12-20-19; 8:45 am]
BILLING CODE 8011-01-P