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Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Rules of The NASDAQ Options Market Regarding Sharing of Risk Settings

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 adopt new Section 20, Exchange Sharing of Participant-Designated Risk Settings, in Chapter VI, Trading Systems, of the NOM Rules in order to authorize the Exchange to share any Participant-designated risk settings in Exchange’s Trading System with the Clearing Participant that clears transactions on behalf of the Participant. Pursuant to Chapter II, Participation, Section 2, Requirements for Options Participation, of the NOM Rules, Options Participants must be Options Clearing Participants or establish a clearing arrangement with a Clearing Participant. Every Clearing Participant is responsible for the clearance of transactions involving an options contract that is effected on or through NOM or its facilities or systems (“NOM Transactions”) of each Options Participant that gives up such Clearing Participant’s name pursuant to a letter of authorization, letter of guarantee or other authorization (“Letter of Guarantee”) given by such Clearing Participant to such Options Participant, which authorization must be submitted to Nasdaq.
[6]

Further, no Options Participant may make any transactions on NOM unless a Letter of Guarantee providing that the issuing Clearing Participant accepts financial responsibilities for all NOM Transactions made by the guaranteed Participant has been issued for such Participant by a Clearing Participant and filed with Nasdaq Regulation.
[7]

Thus, while not all Participants are Clearing Participants, all Participants require a Clearing Participant’s consent to clear transactions on their behalf in order to conduct business on the Exchange. Each Participant that transacts

through a Clearing Participant on the Exchange executes a Letter of Guarantee which codifies the relationship between the Participant and the Clearing Participant and provides the Exchange with notice of which Clearing Participants have relationships with which Participants. The Clearing Member that guarantees the Participant’s transactions on the Exchange has a financial interest in understanding the risk tolerance of the Participant. The proposal would provide the Exchange with authority to directly provide Clearing Participants with information that may otherwise be available to such Clearing Participants by virtue of their relationship with the respective Participants.
At this time, the risk settings covered by this proposal are set forth in Chapter VI, Trading Systems, Section 19, Risk Monitor Mechanism.
[8]

The Exchange may adopt additional rules providing for Participant-designated risk settings other than those provided in Chapter VI, Section 19 that could be shared with a Participant’s Clearing Participant under the proposal, and the Exchange would announce these additional risk settings by issuing an Options Trader Alert.

2. Statutory Basis
The Exchange believes that its proposal is consistent with Section 6(b) of the Act
[9]

in general, and furthers the objectives of Section 6(b)(5) of the Act
[10]

in particular, in that it is 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 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.

The proposed rule change will allow the Exchange to directly provide a Participant’s designated risk settings to the Clearing Participant that clears trades on behalf of the Participant. Because a Clearing Participant that executes a clearing Letter of Guarantee on behalf of a Participant guarantees all transactions of that Participant, and therefore bears the risk associated with those transactions, it is appropriate for the Clearing Participant to have knowledge of what risk settings the Participant may utilize within the Exchange’s trading system. The proposal will permit Clearing Participants who have a financial interest in the risk settings of Participants with whom the Clearing Participant has entered into a clearing Letter of Guarantee to better monitor and manage the potential risks assumed by Clearing Participants, thereby providing Clearing Participants with greater control and flexibility over setting their own risk tolerance and exposure and aiding Clearing Participants in complying with the Act. To the extent a Clearing Participant might reasonably require a Participant to provide access to its risk setting as a prerequisite to continuing to clear trades on the Participant’s behalf, the Exchange’s proposal to share those risk settings directly reduces the administrative burden on Participants and ensures that Clearing Participants are receiving information that is up to date and conforms to the settings active in the Exchange’s trading system.
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 necessary or appropriate in furtherance of the purposes of the Act. The proposed rule change is not designed to address any competitive issues and does not pose an undue burden on non-Clearing Participants because, unlike Clearing Participants, non-Clearing Participants do not guarantee the execution of a Participant’s transactions on the Exchange. The proposal is structured to offer the same enhancement to all Clearing Participants, regardless of size, and would not impose a competitive burden on any Participant. Any Participant that does not wish to share its designated risk settings with its Clearing Participant could avoid sharing such settings by becoming a Clearing Participant.
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.


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