81 FR 11305 - Self-Regulatory Organizations; International Securities Exchange, LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend Rule 804(g)

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 42 (March 3, 2016)

[Federal Register Volume 81, Number 42 (Thursday, March 3, 2016)]
[Notices]
[Pages 11305-11307]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-04637]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77246; File No. SR-ISE-2015-30]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Amend Rule 804(g)

February 26, 2016.

I. Introduction

    On November 10, 2015, the International Securities Exchange, LLC 
(``ISE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to require Clearing Member \3\ 
approval for a market maker to resume trading after the activation of a 
market-wide speed bump under ISE Rule 804(g). The proposed rule change 
was published for comment in the Federal Register on November 30, 
2015.\4\ On January 13, 2016, the Commission extended the time period 
within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change to February 28, 2016.\5\ The 
Commission did not receive any comments on the proposed rule change. 
This order institutes proceedings under Section 19(b)(2)(B) of the Act 
\6\ to determine whether to approve or disapprove the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ A ``Clearing Member'' is a Member that is self-clearing or 
an Electronic Access Member that clears transactions executed on or 
through the facilities of the Exchange for other Members of the 
Exchange. See ISE Rule 100(a)(8). An ``Electronic Access Member'' is 
an Exchange Member that is approved to exercise trading privileges 
associated with EAM Rights. See Article XIII, Section 13.1(l) of the 
Second Amended and Restated Constitution of ISE.
    \4\ See Securities Exchange Act Release No. 76506 (November 23, 
2015), 80 FR 74829 (November 30, 2015) (``Notice'').
    \5\ See Securities Exchange Act Release No. 76893 (January 13, 
2016), 81 FR 3217 (January 20, 2016).
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

    Pursuant to ISE Rule 804(g)(1), the Exchange requires market makers 
\7\ to provide parameters according to which the Exchange will 
automatically remove a market maker's quotations in all series of an 
options class. Additionally, the Exchange requires market makers to 
provide a market-wide parameter according to which the Exchange will 
automatically remove a market maker's quotes in all classes when, 
during a time period established by the market maker, the total number 
of quote removal events (or ``curtailment events'') specified in Rule 
804(g)(1) and in Supplementary Material .04 to Rule 722 exceed such 
specified market-wide parameter.\8\ The latter market-wide risk 
management functionality is known as a ``market-wide speed bump'' and 
is available for quotes only on ISE or across both ISE and ISE's 
affiliated exchange, ISE Gemini, LLC.\9\
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    \7\ ISE has two categories of market makers: Primary Market 
Makers (``PMMs'') and Competitive Market Makers (``CMMs''). A PMM is 
appointed to each options class traded on the Exchange but a CMM may 
or may not be appointed to each such options class. See ISE Rule 
802.
    \8\ See ISE Rule 804(g)(2).
    \9\ Id.
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    Currently, if ISE's trading system removes all of a market maker's 
quotes because a market-wide speed bump is triggered, the market maker 
may re-enter the market and resume trading upon notification to the 
Exchange's Market Operations.\10\ The Exchange now proposes to amend 
ISE Rule 804(g)(2) to require Clearing Member approval

[[Page 11306]]

before a market maker can resume trading.\11\ Specifically, following a 
market-wide speed bump, the proposed rule requires a market maker to 
notify its Clearing Member(s) when it is ready to resume trading and 
requires each applicable Clearing Member to inform the Exchange 
directly when its authorization has been given for the market maker to 
resume trading.\12\ In order to ``facilitate a better response time'' 
from Clearing Members, so that a market maker can re-enter the market, 
the proposal also allows Exchange staff to notify Clearing Member(s) 
when a market maker's quotes have been removed pursuant to the market-
wide speed bump.\13\
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    \10\ See Notice, supra note 4, at 74830.
    \11\ See proposed Rule 804(g)(2).
    \12\ See id.
    \13\ See id.
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    The Exchange believes that it is appropriate to require Clearing 
Member approval before a market maker can re-enter the market after a 
market-wide speed bump because the Clearing Member guarantees the 
market maker's trades and bears the ultimate financial risk associated 
with those transactions. The Exchange notes that, while not all market 
makers are Clearing Members, all market makers require a Clearing 
Member's consent to clear transactions on their behalf in order to 
conduct business on the Exchange.\14\ According to the Exchange, the 
proposed rule change will permit Clearing Members to better monitor and 
manage the potential risks assumed by a market maker and provide 
Clearing Members with greater control and flexibility over their risk 
tolerance and exposure.\15\
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    \14\ Each market maker authorized to trade on the Exchange must 
obtain from a Clearing Member a ``Market Maker Letter of Guarantee'' 
wherein the Clearing Member accepts financial responsibility for all 
Exchange transactions made by the market maker. See ISE Rule 808.
    \15\ See Notice, supra note 4, at 74830. Under ISE's current 
rules, the Exchange may share any Member-designated risk settings in 
the trading system with the Clearing Member that clears transactions 
on behalf of the Member. See ISE Rule 706(a).
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III. Proceedings To Determine Whether To Approve or Disapprove SR-ISE-
2015-30 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \16\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change, as discussed below. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described in greater detail below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change.
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    \16\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
See id. The time for conclusion of the proceedings may be extended 
for up to 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding. See id.
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    Pursuant to Section 19(b)(2)(B) of the Act, the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings because the proposal raises 
important issues that warrant further public comment and Commission 
consideration. Specifically, the Commission is instituting proceedings 
to allow for additional analysis of, and input from commenters with 
respect to, the proposed rule change's consistency with Section 6(b)(5) 
of the Act,\17\ which requires that the rules of a national securities 
exchange be designed, among other things, to prevent fraudulent and 
manipulative acts and practices, 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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    \17\ 15 U.S.C. 78f(b)(5).
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    Under ISE's current rules, a market maker must enter continuous 
quotations for the options classes to which it is appointed.\18\ In 
return, the market maker receives certain benefits, including 
participation entitlements \19\ and an exception from the prohibition 
in Section 11(a) of the Act.\20\ As the Commission has stated in the 
past, a market maker must be subject to sufficient and commensurate 
affirmative obligations, including the obligation to hold itself out as 
willing to buy and sell options for its own account on a regular or 
continuous basis, to justify favorable treatment.\21\ As discussed 
above, however, the Exchange now proposes to amend ISE Rule 804(g) to 
require Clearing Member approval before a market maker can resume 
trading after triggering a market-wide speed bump.
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    \18\ See ISE Rule 804(e).
    \19\ See, e.g., ISE Rule 713.
    \20\ 15 U.S.C. 78k(a).
    \21\ See, e.g., Securities Exchange Act Release No. 68341 
(December 3, 2012), 77 FR 73065, 73076 (December 7, 2012) (approving 
the application of Miami International Securities Exchange, LLC for 
registration as a national securities exchange); Securities Exchange 
Act Release No. 70050 (July 26, 2013), 78 FR 46622 (August 1, 2013) 
(approving the application of Topaz Exchange, LLC for registration 
as a national securities exchange); Securities Exchange Act Release 
No. 76998 (January 29, 2016), 81 FR 6066 (February 4, 2016) 
(approving the application of ISE Mercury, LLC for registration as a 
national securities exchange).
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    The Exchange justifies the change as appropriate because, ``[w]hile 
in some cases this may result in a minimal delay for a market maker 
that wants to reenter the market quickly following a market-wide speed 
bump, the Exchange believes that Clearing Member approval . . . 
ensure[s] that the market maker does not prematurely enter the market 
without adequate safeguards . . .''\22\ The Exchange, however, does not 
provide any basis for its statement that the proposed rule would result 
in only a ``minimal delay'' for a market maker seeking to resume 
quoting. Moreover, the Exchange does not address how the proposal 
impacts the continuous quoting obligations of market makers. The 
Commission accordingly believes the proposed rule change raises 
questions regarding the ability of market makers to meet their quoting 
obligations and, therefore, whether the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act.
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    \22\ See Notice, supra note 4, at 74830.
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposed rule change. In particular, the Commission invites 
the written views of interested persons concerning whether the proposal 
is consistent with Sections 6(b)(5)\23\ or any other provision of the 
Act, or the rules and regulations thereunder. Although there does not 
appear to be any issue relevant to approval or disapproval which would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4 under the Act,\24\ 
any request for an opportunity to make an oral presentation.\25\
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    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 17 CFR 240.19b-4.
    \25\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants to the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the

[[Page 11307]]

proposal should be approved or disapproved by March 24, 2016. Any 
person who wishes to file a rebuttal to any other person's submission 
must file that rebuttal by April 7, 2016. In light of the concerns 
raised by the proposed rule change, as discussed above, the Commission 
invites additional comment on the proposed rule change as the 
Commission continues its analysis of the proposed rule change's 
consistency with Sections 6(b)(5) and 6(b)(8),\26\ or any other 
provision of the Act, or the rules and regulations thereunder. The 
Commission asks that commenters address the sufficiency and merit of 
the Exchange's statements in support of the proposed rule change, in 
addition to any other comments they may wish to submit about the 
proposed rule change.
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    \26\ 15 U.S.C. 78f(b)(5), (b)(8).
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    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-ISE-2015-30 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-ISE-2015-30. 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 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2015-30 and should be 
submitted by March 24, 2016. Rebuttal comments should be submitted by 
April 7, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(57).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-04637 Filed 3-2-16; 8:45 am]
BILLING CODE 8011-01-P