81 FR 18907 - Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Delete From the Exchange's Rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 63 (April 1, 2016)
Federal Register Volume 81, Issue 63 (April 1, 2016)
| Page Range | 18907-18911 | |
| FR Document | 2016-07336 |
[Federal Register Volume 81, Number 63 (Friday, April 1, 2016)] [Notices] [Pages 18907-18911] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-07336] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-77461; File No. SR-BX-2016-018) Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Delete From the Exchange's Rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants March 28, 2016. 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 March 18, 2016, NASDAQ BX, Inc. (``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 Exchange has designated this proposal as a ``non-controversial'' proposed rule change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6)(iii) thereunder,\4\ which renders it effective upon filing with the Commission. 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. \3\ 15 U.S.C. 78s(b)(3)(A). \4\ 17 CFR 240.19b-4(f)(6)(iii). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to delete from the Exchange's rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants. The text of the proposed rule change is available on the Exchange's Web site at http://nasdaqomxbx.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 adopt a principles-based approach to prohibit the misuse of material nonpublic information by BX Options Market Makers (``Market Makers'') by deleting from the Exchange's rulebook Section 10, Limitations on Dealings, of Chapter VII, Market Participants (the ``Market Maker Restrictions''). In doing so, the Exchange would harmonize its rules governing Exchange Options Participants \5\ generally and Exchange Market Makers in particular relating to protecting against the misuse of material, non-public information. The Exchange believes that the Market Maker Restrictions are no longer necessary because all Market Makers are subject to the Exchange's general principles-based requirements governing the protection against the misuse of material, non-public information, pursuant to Chapter III, Business Conduct, Section 4, Prevention of the Misuse of Material Nonpublic Information, discussed below, which obviates the need for separately-prescribed requirements for a subset of market participants on the Exchange. Additionally, there is no separate regulatory purpose served by having separate rules for Market Makers. The Exchange notes that this proposed rule change will not decrease the protections against the misuse of material, non-public information; instead, it is designed to provide more flexibility to market participants. This is a competitive filing that is based on a proposal recently submitted by NYSE MKT LLC (``NYSE MKT'') and approved by the Commission.\6\ --------------------------------------------------------------------------- \5\ The term ``Options Participant'' or ``Participant'' means a firm, or organization that is registered with the Exchange pursuant to Chapter II of the BX rules for purposes of participating in options trading on BX Options as a ``BX Options Order Entry Firm'' or ``BX Options Market Maker.'' \6\ See Securities Exchange Act Release No. 75432 (July 13, 2015), 80 FR 42597 (July 17, 2015) (Order Approving SR-NYSEMKT-2015- 23). See also Securities Exchange Act Release Nos. 75792 (August 31, 2015), 80 FR 53606 (September 4, 2015) (SR-ISE-2015-26) and 76687 (December 18, 2015), 80 FR 80403 (December 24, 2015) (SR-PHLX-2015- 85). --------------------------------------------------------------------------- A Market Maker is an Options Participant registered with the Exchange for the purpose of making markets in options contracts traded on the Exchange and that is vested with the rights and responsibilities specified in Chapter VII of the BX rules.\7\ Importantly, all Market Makers have access to the same information in the Exchange's order book. Moreover, Market Makers have no agency obligations on the Exchange's order book. Notwithstanding that Market Makers have access to the same Exchange trading information as all other market participants on the Exchange, the Exchange has specific rules governing how Market Makers may operate. --------------------------------------------------------------------------- \7\ See Chapter I, General Provisions, Section 1, Definitions, subsection (a)(9). --------------------------------------------------------------------------- Proposed Rule Change The Exchange believes that the Market Maker Restrictions are no longer necessary and proposes to delete them. The Exchange believes that Chapter III, Section 4 governing the misuse of material, non- public information, provides for an appropriate, principles-based approach to prevent the market abuses the Market Maker Restrictions are designed to address. Specifically, Chapter III, Section 4 provides that every Options Participant shall establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of the Participant's business, to prevent the misuse of material nonpublic information by such Participant or persons associated with such Participant in violation of the federal securities laws or the Rules thereunder, and the Rules of the Exchange. Chapter III, Section 4 provides that misuse of material nonpublic information includes, but is not limited to: (i) Trading in any securities issued by a corporation, or in any related securities or related options or other derivative securities, while in possession of material nonpublic information concerning that corporation; (ii) trading in an underlying security or related options or other derivative securities, while in possession of material nonpublic information concerning imminent transactions in the underlying security or related securities; and (iii) disclosing to another person any material nonpublic information involving a corporation whose shares are publicly traded or disclosing an imminent [[Page 18908]] transaction in an underlying security or related securities for the purpose of facilitating the possible misuse of such material nonpublic information. Subsection (c) of Chapter III, Section 4, requires each Options Participant to establish, maintain and enforce certain policies and procedures as appropriate for the nature of each Participant's business.\8\ Under the rule, Participants that are required to file Form X-17A-5 under the Exchange Act or Rules thereunder, with the Exchange on an annual basis only, shall, contemporaneously with those submissions, file attestations signed by such Participants stating that the procedures mandated by this Section have been established, enforced and maintained. The rule requires any Options Participant or associated person who becomes aware of any possible misuse of material nonpublic information to promptly notify BX Regulation. --------------------------------------------------------------------------- \8\ In particular, the rule requires that (i) all associated persons must be advised in writing of the prohibition against the misuse of material nonpublic information; (ii) signed attestations from the Participant and all associated persons affirming their awareness of, and agreement to abide by, the aforementioned prohibitions must be maintained for at least three (3) years, the first two (2) years in an easily accessible place; (iii) records of all brokerage accounts maintained by the Participant and all associated persons must be acquired and maintained for at least three (3) years, the first two (2) years in an easily accessible place, and such brokerage accounts must be reviewed periodically by the Participant for the purpose of detecting the possible misuse of material nonpublic information; and (iv) any business dealings the Participant may have with any corporation whose securities are publicly traded, or any other circumstances that may result in the Participant receiving, in the ordinary course of business, material nonpublic information concerning any such corporation, must be identified and documented. --------------------------------------------------------------------------- Finally, subsection (f) of Chapter III, Section 4 specifies that it may be considered conduct inconsistent with just and equitable principles of trade for any Participant or person associated with a Participant who has knowledge of all material terms and conditions of (i) an order and a solicited order, (ii) an order being facilitated or submitted to BX Options for price improvement, or (iii) orders being crossed; the execution of which are imminent, to enter, based on such knowledge, an order to buy or sell an option for the same underlying security as any option that is the subject of the order, or an order to buy or sell the security underlying such class, or an order to buy or sell any related instrument until (a) the terms and conditions of the order and any changes in the terms and conditions of the order of which the Participant or person associated with the Participant has knowledge are disclosed, or (b) the trade can no longer reasonably be considered imminent in view of the passage of time since the order was received. It states that the terms of an order are ``disclosed'' to BX Options Participants when the order is entered into the BX Options Book. For purposes of subsection (f), an order to buy or sell a ``related instrument'' means, in reference to an index option, an order to buy or sell securities comprising 10% or more of the component securities in the index or an order to buy or sell a futures contract on an economically equivalent index. Because Options Participants are already subject to the requirements of Chapter III, Section 4 as described above, the Exchange does not believe it necessary to separately require specific limitations on Market Makers. Deleting the Market Maker Restrictions including its requirements for specific procedures would provide Market Makers flexibility to adapt their policies and procedures as appropriate to reflect changes to their business model, business activities, or the securities market in a manner similar to how Options Participants on the Exchange currently operate and consistent with Chapter III, Section 4. Options Participants registered as Market Makers have certain rights and bear certain responsibilities beyond those of other Options Participants.\9\ Market Makers are distinguished under Exchange rules from other Options Participants in that Market Makers have quoting obligations.\10\ However, none of these heightened obligations or different entitlements provides different or greater access to nonpublic information than any other Options Participant on the Exchange. Accordingly, because Market Makers do not have any trading advantages at the Exchange due to their market role, the Exchange believes they should be subject to the same rules as other Options Participants regarding the protection against the misuse of material non-public information, which in this case is existing Chapter III, Section 4.\11\ --------------------------------------------------------------------------- \9\ Chapter VII, Section 5, Obligations of Market Makers, of the BX provides that in registering as a Market Maker, an Options Participant commits himself to various obligations and that transactions of a Market Maker in its market making capacity must constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market. The rule states that Market Makers should not make bids or offers or enter into transactions that are inconsistent with such course of dealings and that ordinarily, Market Makers are expected to (i) during trading hours, maintain a two-sided market, pursuant to Section 6(d)(i) of Chapter VII, in those options in which the Market Maker is registered to trade, in a manner that enhances the depth, liquidity and competitiveness of the market, (ii) [Reserved], (iii) engage, to a reasonable degree under the existing circumstances, in dealings for their own accounts when there exists, or it is reasonably anticipated that there will exist, a lack of price continuity, a temporary disparity between the supply of (or demand for) a particular option contract, or a temporary distortion of the price relationships between option contracts of the same class, (iv) compete with other Market Makers in all options in which the Market Maker is registered to trade, (v) make markets that will be honored for the number of contracts entered into BX Options' System in all options in which the Market Maker is registered to trade (vi) update quotations in response to changed market conditions in all options in which the Market Maker is registered to trade (vii) maintain active markets in all options in which the Market Maker is registered (viii) honor all orders that the Trading System routes to away markets pursuant to Chapter XII of the BX rules. Section 5 further provides that Market Makers should not effect purchases or sales on BX Options except in a reasonable and orderly manner. If BX Regulation finds any substantial or continued failure by a Market Maker to engage in a course of dealings as specified in paragraph (a) of Section 5, such Market Maker will be subject to disciplinary action or suspension or revocation of registration in one or more of the securities in which the Market Maker is registered. \10\ Section 6, Market Maker Quotations, of Chapter VII, Market Participants, details specific Market Maker quoting obligations. \11\ The Exchange notes that by deleting the Market Maker Restrictions, the Exchange would no longer require specific information barriers for Market Makers or require pre-approval of any information barriers that a Market Maker would erect for purposes of protecting against the misuse of material non-public information. However, the policies and procedures of Market Makers, including those relating to information barriers, would be subject to review by FINRA, on behalf of the Exchange, pursuant to a Regulatory Services Agreement. --------------------------------------------------------------------------- The Exchange is not proposing to change what is considered to be material, nonpublic information that an affiliated brokerage business of a Market Maker could share with such Market Maker. In that regard, the proposed rule change will not permit affiliates of a Market Maker to have access to any non-public order or quote information of the Market Maker, including hidden or undisplayed size or price information of such orders or quotes. Affiliates of Market Makers would only have access to orders and quotes that are publicly available to all market participants. Members do not expect to receive any additional order or quote information as a result of this proposed rule change. The Exchange does not believe that there will be any material change to member information barriers as a result of the removal of the Exchange pre-approval requirement. The Exchange has rules prohibiting Options Participants from disadvantaging their customers or other market participants by improperly capitalizing on the Options Participant's access to or receipt of material, non-public information.\12\ --------------------------------------------------------------------------- \12\ For example, Chapter XI, Doing Business with the Public, Section 8, Supervision of Accounts, provides in part that each member that conducts a public customer options business shall ensure that its written supervisory system policies and procedures pursuant to NASD Rules 3010, 3012, and 3013 adequately address the member's public customer options business. The Exchange has separately filed a proposed rule change to replace references to these NASD rules with FINRA rules which have replaced them. See SR-BX-2016-017 filed March 14, 2016. --------------------------------------------------------------------------- [[Page 18909]] Further, the Exchange does not believe there will be any material change to Market Maker information barriers as a result of removal of the Exchange's pre-approval requirements. In fact, the Exchange anticipates that eliminating the pre-approval requirement should facilitate implementation of changes to Market Maker information barriers as necessary to protect against the misuse of material, non- public information. The Exchange also suggests that the pre-approval requirement is unnecessary because Market Makers do not have agency responsibilities to orders in the book, or time and place information advantages because of their market role. The Exchange notes that its proposed principles-based approach to protecting against the misuse of material non-public information for all its Options Participants is consistent with recently filed and approved rule changes for NYSE MKT, NYSE Arca Equities, Inc. (``NYSE Arca''), BATS Exchange, Inc. (``BATS''), and New York Stock Exchange LLC (``NYSE'') governing cash equity market makers on those respective exchanges.\13\ Except for prescribed rules relating to floor-based designated market makers on the NYSE, who have access to specified non- public trading information, each of these exchanges have moved to a principles-based approach to protecting against the misuse of material non-public information. In connection with approving those rule changes, the Commission found that, with adequate oversight by the exchanges of their members, eliminating prescriptive information barrier requirements should not reduce the effectiveness of exchange rules requiring members to establish and maintain systems to supervise the activities of members, including written procedures reasonably designed to ensure compliance with applicable federal securities law and regulations, and with the rules of the applicable exchange. --------------------------------------------------------------------------- \13\ See Securities Exchange Act Release No. 75432 (July 13, 2015), 80 FR 42597 (July 17, 2015) (Order Approving Adopting a Principles-Based Approach to Prohibit the Misuse of Material Nonpublic Information by Specialists and e-Specialists by Deleting Rule 927.3NY and Section (f) of Rule 927.5NY). See also Securities Exchange Act Release Nos. 60604 (Sept. 2, 2009), 76 FR 46272 (Sept. 8, 2009) (SR-NYSEArca-2009-78) (Order approving elimination of NYSE Arca rule that required market makers to establish and maintain specifically prescribed information barriers, including discussion of NYSE Arca and Nasdaq rules) (``Arca Approval Order''); 61574 (Feb. 23, 2010), 75 FR 9455 (Mar. 2, 2010) (SR-BATS-2010-003) (Order approving amendments to BATS Rule 5.5 to move to a principles-based approach to protecting against the misuse of material, nonpublic information, and noting that the proposed change is consistent with the approaches of NYSE Arca and Nasdaq) (``BATS Approval Order''); 72534 (July 3, 2014), 79 FR 39440 (July 10, 2014), SR-NYSE-2014-12) (Order approving amendments to NYSE Rule 98 governing designated market makers to move to a principles-based approach to prohibit the misuse of material non-public information) (``NYSE Approval Order''); and 76687 (December 18, 2015), 80 FR 80403 (December 24, 2015) (SR-PHLX-2015-85). --------------------------------------------------------------------------- The Exchange believes that a principles based rule applicable to members of options markets would be equally effective in protecting against the misuse of material non-public information.\14\ Indeed, Chapter III, Section 4 is currently applicable to Market Makers and already requires policies and procedures reasonably designed to protect against the misuse of material nonpublic information, which is similar to the respective NYSE MKT, NYSE Arca Equities, BATS and NYSE rules governing cash equity market makers. The Exchange believes Chapter III, Section 4 provides appropriate protection against the misuse of material nonpublic information by Market Makers such that there is no further need for prescriptive information barrier requirements as set forth in the Market Maker Restrictions. --------------------------------------------------------------------------- \14\ International Securities Exchange, Inc. (``ISE'') and BOX Options Exchange LLC (``BOX'') have recently taken a similar approach. See Notice of Filing and Immediate Effectiveness of Proposed Rule Change Adopting a Principles-Based Approach to Prohibit the Misuse of Material, Non-public Information by Market Makers by Deleting Rule 810, Securities Exchange Act Release No. 75792 (August 31, 2015), 80 FR 53606 (September 4, 2015) (SR-ISE- 2015-26). See also Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Adopt a Principles-based Approach to Prohibit the Misuse of Material Nonpublic Information by Market Makers, Securities Exchange Act Release No. 75916 (September 14, 2015), 80 FR 56503 (September 18, 2015) (SR-BOX-2015-31). --------------------------------------------------------------------------- The Exchange notes that even with this proposed rule change, pursuant to Chapter III, Section 4, a Market Maker would still be obligated to ensure that its policies and procedures reflect the current state of its business and continue to be reasonably designed to achieve compliance with applicable federal securities law and regulations, including without limitation, Regulation SHO \15\ under the Act and Section 15(g) of the Act ,\16\ and with applicable Exchange rules, including being reasonably designed to protect against the misuse of material, non-public information. While information barriers would not specifically be required under the proposal, Chapter III, Section 4 already requires that an Options Participant consider its business model or business activities in structuring its policies and procedures, which may dictate that an information barrier or a functional separation be part of the appropriate set of policies and procedures that would be reasonably designed to achieve compliance with applicable securities law and regulations, and with applicable Exchange rules. --------------------------------------------------------------------------- \15\ The Commission adopted a narrow exception to Regulation SHO's ``locate'' requirement only for market makers engaged in bona fide market making in the security at the time they effect the short sale. See 17 CFR 242.203(b)(2)(iii). See also Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008, 48015 (Aug. 6, 2004); Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR 61690, 61698-9 (Oct. 17, 2008). Broker-dealers would not be able to rely on the Exchange's or any self-regulatory organization's designation of market marking for eligibility for the bona-fide market making exception to the ``locate'' requirement, as such designations are distinct and independent from Regulation SHO. Eligibility for the bona-fide market making exception depends on the facts and circumstances and a determination of bona-fide market making is based on the Commission's factors outlined in the aforementioned Regulation SHO releases. It should also be noted that a determination of bona-fide market making is relevant for the purposes of close-out obligations under Rule 204 of Regulation SHO. See 17 CFR 242.204(a)(3). \16\ 15 U.S.C. 78o(g). --------------------------------------------------------------------------- The Exchange believes that the proposed reliance on principles- based Chapter III, Section 4 would ensure that a Market Maker would be required to protect against the misuse of any material non-public information. Chapter III, Section 4 already requires that firms refrain from trading while in possession of material non-public information concerning imminent transactions in the security or related product. The Exchange believes that moving to a principles-based approach rather than prescribing how and when to wall off a Market Maker from the rest of the firm would provide Market Makers with flexibility when managing risk across a firm, including integrating options positions with other positions of the firm or, as applicable, by the respective independent trading unit. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act \17\ in general, and furthers the objectives of Section 6(b)(5) of the Act \18\ 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. The Exchange believes that the proposed rule change would remove impediments [[Page 18910]] to and perfect the mechanism of a free and open market by adopting a principles based approach to permit a member or member organization to maintain and enforce policies and procedures to, among other things, prohibit the misuse of material non-public information and provide flexibility on how a Market Maker structures its operations. --------------------------------------------------------------------------- \17\ 15 U.S.C. 78f(b). \18\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The Exchange notes that the proposed rule change is based on an approved rule of the Exchange to which members and member organizations are subject--Section 4, Prevention of the Misuse of Material Nonpublic Information, of Chapter III, Business Conduct--and harmonizes the rules governing Options Participants. Moreover, Market Makers would continue to be subject to federal and Exchange requirements for protecting material non-public order information.\19\ The Exchange believes that the proposed rule change would remove impediments to and perfect the mechanism of a free and open market because it would harmonize the Exchange's approach to protecting against the misuse of material nonpublic information and no longer subject Market Makers to prescriptive requirements. The Exchange does not believe that the existing prescriptive requirements applicable to Market Makers are narrowly tailored to their roles because Market Makers do not have access to Exchange trading information in a manner different from any other market participant on the Exchange. --------------------------------------------------------------------------- \19\ See 15 U.S.C. 78o(g) and Chapter III, Section 4 of the Exchange's rulebook. --------------------------------------------------------------------------- The Exchange further believes the proposal is designed to prevent fraudulent and manipulative acts and practices and to promote just and equitable principles of trade because existing rules make clear to members and member organizations the type of conduct that is prohibited by the Exchange. While the proposal eliminates prescriptive requirements relating to the misuse of material non-public information, Market Makers would remain subject to existing Exchange rules requiring them to establish and maintain systems to supervise their activities, and to create, implement, and maintain written procedures that are reasonably designed to comply with applicable securities laws and Exchange rules, including the prohibition on the misuse of material, nonpublic information. Additionally, the policies and procedures of Market Makers, including those relating to information barriers, would be subject to review by FINRA, on behalf of the Exchange. The Exchange notes that the proposed rule change would still require that Market Makers maintain and enforce policies and procedures reasonably designed to ensure compliance with applicable federal securities laws and regulations and with Exchange rules. Even though there would no longer be pre-approval of Market Maker information barriers, any Market Maker written policies and procedures would continue to be subject to oversight by the Exchange and therefore the elimination of prescribed restrictions should not reduce the effectiveness of the Exchange rules to protect against the misuse of material non-public information. Rather, Options Participants will be able to utilize a flexible, principles-based approach to modify their policies and procedures as appropriate to reflect changes to their business model, business activities, or to the securities market itself. Moreover, while specified information barriers may no longer be required, an Options Participant's business model or business activities may dictate that an information barrier or functional separation be part of the appropriate set of policies and procedures that would be reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable Exchange rules. The Exchange therefore believes that the proposed rule change will maintain the existing protection of investors and the public interest that is currently applicable to Market Makers, while at the same time removing impediments to and perfecting a free and open market by moving to a principles-based approach to protect against the misuse of material non-public information. 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. As indicated above, the rule change is being proposed as a competitive response to a filing submitted by NYSE MKT that was recently approved by the Commission. The Exchange believes that the proposal will enhance competition by allowing Market Makers to comply with applicable Exchange rules in a manner best suited to their business models, business activities, and the securities markets, thus reducing regulatory burdens while still ensuring compliance with applicable securities laws and regulations and Exchange rules. The Exchange believes that the proposal will foster a fair and orderly marketplace without being overly burdensome upon Market Makers. Moreover, the Exchange believes that the proposed rule change would eliminate a burden on competition for Options Participants which currently exists as a result of disparate rule treatment between options and equities markets regarding how to protect against the misuse of material non-public information. For those members and member organizations that are also members of equity exchanges, their respective equity market maker operations are now subject to a principles-based approach to protecting against the misuse of material non-public information. The Exchange believes it would remove a burden on competition to enable members and member organizations to similarly apply a principles-based approach to protecting against the misuse of material nonpublic information in the options space as ISE has recently done. To this end, the Exchange notes that Chapter III, Section 4 still requires a Market Maker to evaluate its business to assure that its policies and procedures are reasonably designed to protect against the misuse of material nonpublic information. However, with this proposed rule change, an Options Participant that trades equities and options could look at its firm more holistically to structure its operations in a manner that provides it with better tools to manage its risks across multiple security classes, while at the same time protecting against the misuse of material non-public information. 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 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, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder.\20\ --------------------------------------------------------------------------- \20\ In addition, Rule 19b-4(f)(6)(iii) requires the Exchange to give the Commission written notice of the Exchange's 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. --------------------------------------------------------------------------- [[Page 18911]] A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act normally does not become operative for 30 days after the date of its filing. However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative immediately upon filing. Waiver of the 30-day operative delay would help facilitate the harmonization of information barrier rules across options exchanges. The Exchange represents that Exchange rules still require a Market Maker to evaluate its business to assure that its policies and procedures are reasonably designed to protect against the misuse of material nonpublic information. Further, the Exchange represents that the proposed rule change will not decrease the protections against the misuse of material, non-public information; instead, it is designed to provide more flexibility to market participants. Based on the foregoing, the Commission believes the waiver of the operative delay is consistent with the protection of investors and the public interest.\21\ The Commission hereby grants the waiver and designates the proposal operative upon filing. --------------------------------------------------------------------------- \21\ For purposes only of waiving the 30-day operative delay, the Commission has also 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 CommentsUse 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-BX-2016-018 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-BX-2016-018. 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-BX-2016-018 and should be submitted on or before April 22, 2016. --------------------------------------------------------------------------- \22\ 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\22\ Robert W. Errett, Deputy Secretary. [FR Doc. 2016-07336 Filed 3-31-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 63 / Friday, April 1, 2016 / Notices 18907
For the Commission, by the Division of concerning the purpose of and basis for A Market Maker is an Options
Trading and Markets, pursuant to delegated the proposed rule change and discussed Participant registered with the Exchange
authority.22 any comments it received on the for the purpose of making markets in
Robert W. Errett, proposed rule change. The text of these options contracts traded on the
Deputy Secretary. statements may be examined at the Exchange and that is vested with the
[FR Doc. 2016–07337 Filed 3–31–16; 8:45 am] places specified in Item IV below. The rights and responsibilities specified in
BILLING CODE 8011–01–P Exchange has prepared summaries, set Chapter VII of the BX rules.7
forth in sections A, B, and C below, of Importantly, all Market Makers have
the most significant aspects of such access to the same information in the
SECURITIES AND EXCHANGE statements. Exchange’s order book. Moreover,
COMMISSION Market Makers have no agency
A. Self-Regulatory Organization’s
[Release No. 34–77461; File No. SR–BX– Statement of the Purpose of, and obligations on the Exchange’s order
2016–018) Statutory Basis for, the Proposed Rule book. Notwithstanding that Market
Change Makers have access to the same
Self-Regulatory Organizations; Exchange trading information as all
NASDAQ BX, Inc.; Notice of Filing and 1. Purpose other market participants on the
Immediate Effectiveness of Proposed The Exchange is proposing to adopt a Exchange, the Exchange has specific
Rule Change To Delete From the principles-based approach to prohibit rules governing how Market Makers
Exchange’s Rulebook Section 10, the misuse of material nonpublic may operate.
Limitations on Dealings, of Chapter VII, information by BX Options Market
Market Participants Proposed Rule Change
Makers (‘‘Market Makers’’) by deleting
from the Exchange’s rulebook Section The Exchange believes that the
March 28, 2016.
10, Limitations on Dealings, of Chapter Market Maker Restrictions are no longer
Pursuant to Section 19(b)(1) of the
VII, Market Participants (the ‘‘Market necessary and proposes to delete them.
Securities Exchange Act of 1934
Maker Restrictions’’). In doing so, the The Exchange believes that Chapter III,
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
Exchange would harmonize its rules Section 4 governing the misuse of
notice is hereby given that on March 18,
governing Exchange Options material, non-public information,
2016, NASDAQ BX, Inc. (‘‘Exchange’’)
Participants 5 generally and Exchange provides for an appropriate, principles-
filed with the Securities and Exchange
Market Makers in particular relating to based approach to prevent the market
Commission (‘‘SEC’’ or ‘‘Commission’’)
protecting against the misuse of abuses the Market Maker Restrictions
the proposed rule change as described
material, non-public information. The are designed to address. Specifically,
in Items I and II below, which Items
Exchange believes that the Market Chapter III, Section 4 provides that
have been prepared by the Exchange.
The Exchange has designated this Maker Restrictions are no longer every Options Participant shall
proposal as a ‘‘non-controversial’’ necessary because all Market Makers are establish, maintain and enforce written
proposed rule change pursuant to subject to the Exchange’s general policies and procedures reasonably
Section 19(b)(3)(A) of the Act 3 and Rule principles-based requirements designed, taking into consideration the
19b–4(f)(6)(iii) thereunder,4 which governing the protection against the nature of the Participant’s business, to
renders it effective upon filing with the misuse of material, non-public prevent the misuse of material
Commission. The Commission is information, pursuant to Chapter III, nonpublic information by such
publishing this notice to solicit Business Conduct, Section 4, Prevention Participant or persons associated with
comments on the proposed rule change of the Misuse of Material Nonpublic such Participant in violation of the
from interested persons. Information, discussed below, which federal securities laws or the Rules
obviates the need for separately- thereunder, and the Rules of the
I. Self-Regulatory Organization’s Exchange. Chapter III, Section 4
prescribed requirements for a subset of
Statement of the Terms of Substance of provides that misuse of material
market participants on the Exchange.
the Proposed Rule Change nonpublic information includes, but is
Additionally, there is no separate
The Exchange proposes to delete from regulatory purpose served by having not limited to: (i) Trading in any
the Exchange’s rulebook Section 10, separate rules for Market Makers. The securities issued by a corporation, or in
Limitations on Dealings, of Chapter VII, Exchange notes that this proposed rule any related securities or related options
Market Participants. change will not decrease the protections or other derivative securities, while in
The text of the proposed rule change against the misuse of material, non- possession of material nonpublic
is available on the Exchange’s Web site public information; instead, it is information concerning that
at http://nasdaqomxbx. designed to provide more flexibility to corporation; (ii) trading in an
cchwallstreet.com/, at the principal market participants. This is a underlying security or related options or
office of the Exchange, and at the competitive filing that is based on a other derivative securities, while in
Commission’s Public Reference Room. proposal recently submitted by NYSE possession of material nonpublic
MKT LLC (‘‘NYSE MKT’’) and approved information concerning imminent
II. Self-Regulatory Organization’s
Statement of the Purpose of, and by the Commission.6 transactions in the underlying security
Statutory Basis for, the Proposed Rule or related securities; and (iii) disclosing
5 The term ‘‘Options Participant’’ or ‘‘Participant’’ to another person any material
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Change
means a firm, or organization that is registered with nonpublic information involving a
In its filing with the Commission, the the Exchange pursuant to Chapter II of the BX rules corporation whose shares are publicly
Exchange included statements for purposes of participating in options trading on
BX Options as a ‘‘BX Options Order Entry Firm’’
traded or disclosing an imminent
22 17
or ‘‘BX Options Market Maker.’’
CFR 200.30–3(a)(12). 6 See Securities Exchange Act Release No. 75432 (SR–ISE–2015–26) and 76687 (December 18, 2015),
1 15 U.S.C. 78s(b)(1). (July 13, 2015), 80 FR 42597 (July 17, 2015) (Order 80 FR 80403 (December 24, 2015) (SR–PHLX–2015–
2 17 CFR 240.19b–4.
Approving SR–NYSEMKT–2015–23). See also 85).
3 15 U.S.C. 78s(b)(3)(A).
Securities Exchange Act Release Nos. 75792 7 See Chapter I, General Provisions, Section 1,
4 17 CFR 240.19b–4(f)(6)(iii). (August 31, 2015), 80 FR 53606 (September 4, 2015) Definitions, subsection (a)(9).
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![18908 Federal Register / Vol. 81, No. 63 / Friday, April 1, 2016 / Notices
transaction in an underlying security or can no longer reasonably be considered Market Makers are distinguished under
related securities for the purpose of imminent in view of the passage of time Exchange rules from other Options
facilitating the possible misuse of such since the order was received. It states Participants in that Market Makers have
material nonpublic information. that the terms of an order are quoting obligations.10 However, none of
Subsection (c) of Chapter III, Section 4, ‘‘disclosed’’ to BX Options Participants these heightened obligations or different
requires each Options Participant to when the order is entered into the BX entitlements provides different or
establish, maintain and enforce certain Options Book. For purposes of greater access to nonpublic information
policies and procedures as appropriate subsection (f), an order to buy or sell a than any other Options Participant on
for the nature of each Participant’s ‘‘related instrument’’ means, in the Exchange. Accordingly, because
business.8 Under the rule, Participants reference to an index option, an order to Market Makers do not have any trading
that are required to file Form X–17A–5 buy or sell securities comprising 10% or advantages at the Exchange due to their
under the Exchange Act or Rules more of the component securities in the market role, the Exchange believes they
thereunder, with the Exchange on an index or an order to buy or sell a futures should be subject to the same rules as
annual basis only, shall, contract on an economically equivalent other Options Participants regarding the
contemporaneously with those index. protection against the misuse of material
submissions, file attestations signed by Because Options Participants are non-public information, which in this
such Participants stating that the already subject to the requirements of case is existing Chapter III, Section 4.11
procedures mandated by this Section Chapter III, Section 4 as described The Exchange is not proposing to
have been established, enforced and above, the Exchange does not believe it change what is considered to be
maintained. The rule requires any necessary to separately require specific material, nonpublic information that an
Options Participant or associated person limitations on Market Makers. Deleting affiliated brokerage business of a Market
who becomes aware of any possible the Market Maker Restrictions including Maker could share with such Market
misuse of material nonpublic its requirements for specific procedures Maker. In that regard, the proposed rule
information to promptly notify BX would provide Market Makers flexibility change will not permit affiliates of a
Regulation. to adapt their policies and procedures as Market Maker to have access to any non-
Finally, subsection (f) of Chapter III, appropriate to reflect changes to their public order or quote information of the
Section 4 specifies that it may be business model, business activities, or Market Maker, including hidden or
considered conduct inconsistent with the securities market in a manner undisplayed size or price information of
just and equitable principles of trade for similar to how Options Participants on such orders or quotes. Affiliates of
any Participant or person associated the Exchange currently operate and Market Makers would only have access
with a Participant who has knowledge consistent with Chapter III, Section 4. to orders and quotes that are publicly
of all material terms and conditions of Options Participants registered as available to all market participants.
(i) an order and a solicited order, (ii) an Market Makers have certain rights and Members do not expect to receive any
order being facilitated or submitted to bear certain responsibilities beyond additional order or quote information as
BX Options for price improvement, or those of other Options Participants.9 a result of this proposed rule change.
(iii) orders being crossed; the execution The Exchange does not believe that
9 Chapter VII, Section 5, Obligations of Market
of which are imminent, to enter, based there will be any material change to
Makers, of the BX provides that in registering as a
on such knowledge, an order to buy or Market Maker, an Options Participant commits member information barriers as a result
sell an option for the same underlying himself to various obligations and that transactions of the removal of the Exchange pre-
security as any option that is the subject of a Market Maker in its market making capacity approval requirement. The Exchange
of the order, or an order to buy or sell must constitute a course of dealings reasonably
calculated to contribute to the maintenance of a fair
has rules prohibiting Options
the security underlying such class, or an and orderly market. The rule states that Market Participants from disadvantaging their
order to buy or sell any related Makers should not make bids or offers or enter into customers or other market participants
instrument until (a) the terms and transactions that are inconsistent with such course by improperly capitalizing on the
conditions of the order and any changes of dealings and that ordinarily, Market Makers are
expected to (i) during trading hours, maintain a
Options Participant’s access to or
in the terms and conditions of the order two-sided market, pursuant to Section 6(d)(i) of receipt of material, non-public
of which the Participant or person Chapter VII, in those options in which the Market information.12
associated with the Participant has Maker is registered to trade, in a manner that
knowledge are disclosed, or (b) the trade enhances the depth, liquidity and competitiveness
a course of dealings as specified in paragraph (a) of
of the market, (ii) [Reserved], (iii) engage, to a
Section 5, such Market Maker will be subject to
reasonable degree under the existing circumstances,
8 In particular, the rule requires that (i) all disciplinary action or suspension or revocation of
in dealings for their own accounts when there
associated persons must be advised in writing of the registration in one or more of the securities in
exists, or it is reasonably anticipated that there will
prohibition against the misuse of material which the Market Maker is registered.
exist, a lack of price continuity, a temporary 10 Section 6, Market Maker Quotations, of Chapter
nonpublic information; (ii) signed attestations from disparity between the supply of (or demand for) a
the Participant and all associated persons affirming particular option contract, or a temporary distortion VII, Market Participants, details specific Market
their awareness of, and agreement to abide by, the of the price relationships between option contracts Maker quoting obligations.
11 The Exchange notes that by deleting the Market
aforementioned prohibitions must be maintained of the same class, (iv) compete with other Market
for at least three (3) years, the first two (2) years in Makers in all options in which the Market Maker Maker Restrictions, the Exchange would no longer
an easily accessible place; (iii) records of all is registered to trade, (v) make markets that will be require specific information barriers for Market
brokerage accounts maintained by the Participant honored for the number of contracts entered into Makers or require pre-approval of any information
and all associated persons must be acquired and BX Options’ System in all options in which the barriers that a Market Maker would erect for
maintained for at least three (3) years, the first two Market Maker is registered to trade (vi) update purposes of protecting against the misuse of
material non-public information. However, the
asabaliauskas on DSK3SPTVN1PROD with NOTICES
(2) years in an easily accessible place, and such quotations in response to changed market
brokerage accounts must be reviewed periodically conditions in all options in which the Market policies and procedures of Market Makers,
by the Participant for the purpose of detecting the Maker is registered to trade (vii) maintain active including those relating to information barriers,
possible misuse of material nonpublic information; markets in all options in which the Market Maker would be subject to review by FINRA, on behalf of
and (iv) any business dealings the Participant may is registered (viii) honor all orders that the Trading the Exchange, pursuant to a Regulatory Services
have with any corporation whose securities are System routes to away markets pursuant to Chapter Agreement.
publicly traded, or any other circumstances that XII of the BX rules. Section 5 further provides that 12 For example, Chapter XI, Doing Business with
may result in the Participant receiving, in the Market Makers should not effect purchases or sales the Public, Section 8, Supervision of Accounts,
ordinary course of business, material nonpublic on BX Options except in a reasonable and orderly provides in part that each member that conducts a
information concerning any such corporation, must manner. If BX Regulation finds any substantial or public customer options business shall ensure that
be identified and documented. continued failure by a Market Maker to engage in its written supervisory system policies and
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![Federal Register / Vol. 81, No. 63 / Friday, April 1, 2016 / Notices 18911
A proposed rule change filed Electronic Comments SECURITIES AND EXCHANGE
pursuant to Rule 19b–4(f)(6) under the COMMISSION
Act normally does not become operative • Use the Commission’s Internet
for 30 days after the date of its filing. comment form (http://www.sec.gov/
[Release No. 34–77454; File No. SR–
However, Rule 19b–4(f)(6)(iii) permits rules/sro.shtml); or
NASDAQ–2016–039]
the Commission to designate a shorter • Send an email to rule-comments@
time if such action is consistent with the sec.gov. Please include File Number SR– Self-Regulatory Organizations; The
protection of investors and the public BX–2016–018 on the subject line. NASDAQ Stock Market LLC; Notice of
interest. The Exchange has asked the Filing and Immediate Effectiveness of
Commission to waive the 30-day Paper Comments
Proposed Rule Change To Modify the
operative delay so that the proposal may
• Send paper comments in triplicate Maximum Number of Times an Order
become operative immediately upon on Nasdaq May Be Updated Before The
to Brent J. Fields, Secretary, Securities
filing. Waiver of the 30-day operative
and Exchange Commission, 100 F Street System Cancels The Order
delay would help facilitate the
harmonization of information barrier NE., Washington, DC 20549–1090.
March 28, 2016.
rules across options exchanges. The All submissions should refer to File
Exchange represents that Exchange rules Pursuant to Section 19(b)(1) of the
Number SR–BX–2016–018. This file Securities Exchange Act of 1934
still require a Market Maker to evaluate number should be included on the
its business to assure that its policies (‘‘Act’’),1 and Rule 19b–4 thereunder,2
subject line if email is used. To help the notice is hereby given that on March 16,
and procedures are reasonably designed Commission process and review your
to protect against the misuse of material 2016, The NASDAQ Stock Market LLC
comments more efficiently, please use (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
nonpublic information. Further, the only one method. The Commission will
Exchange represents that the proposed Securities and Exchange Commission
post all comments on the Commission’s (‘‘Commission’’) the proposed rule
rule change will not decrease the
Internet Web site (http://www.sec.gov/ change as described in Items I, II, and
protections against the misuse of
rules/sro.shtml). III, below, which Items have been
material, non-public information;
instead, it is designed to provide more Copies of the submission, all prepared by Nasdaq. The Commission is
flexibility to market participants. Based subsequent amendments, all written publishing this notice to solicit
on the foregoing, the Commission statements with respect to the proposed comments on the proposed rule change
believes the waiver of the operative rule change that are filed with the from interested persons.
delay is consistent with the protection Commission, and all written
of investors and the public interest.21 communications relating to the I. Self-Regulatory Organization’s
The Commission hereby grants the proposed rule change between the Statement of the Terms of Substance of
waiver and designates the proposal Commission and any person, other than the Proposed Rule Change
operative upon filing. those that may be withheld from the Nasdaq proposes to proposal [sic] to
At any time within 60 days of the public in accordance with the modify the maximum number of times
filing of the proposed rule change, the provisions of 5 U.S.C. 552, will be an Order on Nasdaq may be updated
Commission summarily may available for Web site viewing and before the System cancels the Order.
temporarily suspend such rule change if printing in the Commission’s Public
it appears to the Commission that such Reference Room, 100 F Street NE., The text of the proposed rule change
action is necessary or appropriate in the Washington, DC 20549, on official is available on Nasdaq’s Web site at
public interest, for the protection of business days between the hours of http://nasdaq.cchwallstreet.com, at the
investors, or otherwise in furtherance of 10:00 a.m. and 3:00 p.m. Copies of the principal office of Nasdaq, and at the
the purposes of the Act. If the filing also will be available for Commission’s Public Reference Room.
Commission takes such action, the inspection and copying at the principal II. Self-Regulatory Organization’s
Commission shall institute proceedings office of the Exchange. All comments
to determine whether the proposed rule Statement of the Purpose of, and
received will be posted without change; Statutory Basis for, the Proposed Rule
should be approved or disapproved.
the Commission does not edit personal Change
IV. Solicitation of Comments identifying information from
submissions. You should submit only In its filing with the Commission,
Interested persons are invited to Nasdaq included statements concerning
submit written data, views, and information that you wish to make
available publicly. the purpose of and basis for the
arguments concerning the foregoing, proposed rule change and discussed any
including whether the proposed rule All submissions should refer to File
comments it received on the proposed
change is consistent with the Act. Number SR–BX–2016–018 and should
rule change. The text of these statements
Comments may be submitted by any of be submitted on or before April 22,
the following methods: may be examined at the places specified
2016.
in Item IV below. Nasdaq has prepared
For the Commission, by the Division of summaries, set forth in sections A, B,
the Exchange’s intent to file the proposed rule Trading and Markets, pursuant to delegated
change, along with a brief description and text of and C below, of the most significant
asabaliauskas on DSK3SPTVN1PROD with NOTICES
the proposed rule change, at least five business days authority.22 aspects of such statements.
prior to the date of filing of the proposed rule Robert W. Errett,
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this Deputy Secretary.
requirement. [FR Doc. 2016–07336 Filed 3–31–16; 8:45 am]
21 For purposes only of waiving the 30-day
BILLING CODE 8011–01–P
operative delay, the Commission has also
considered the proposed rule’s impact on
1 15 U.S.C. 78s(b)(1).
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f). 22 17 CFR 200.30–3(a)(12). 2 17 CFR 240.19b–4.
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Document Created: 2016-04-06 00:08:27
Document Modified: 2016-04-06 00:08:27
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 18907 |
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