81 FR 54870 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to COPS

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 159 (August 17, 2016)

[Federal Register Volume 81, Number 159 (Wednesday, August 17, 2016)]
[Notices]
[Pages 54870-54873]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-19584]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78554; File No. SR-CBOE-2016-059]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to COPS

August 11, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 1, 2016, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed rule change is to re-implement the 
contributor compensation structure of the Exchange's Customized Option 
Pricing Service (``COPS''),\3\ specifically,

[[Page 54871]]

the COPS data revenue-sharing plan. The Exchange is not proposing to 
change the fees for COPS data.
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    \3\ See Securities Exchange Act Release Nos. 34-67813 (September 
10, 2012), 77 FR 56903 (September 14, 2012) (SR-CBOE-2012-083); 34-
67928 (September 26, 2012), 77 FR 60161 (October 2, 2012) (SR-CBOE-
2012-090); 34-70705 (October 17, 2013), 78 FR 63265 (October 23, 
2013) (SR-CBOE-2013-097); 34-70845 (November 12, 2013), 78 FR 69168 
(November 18, 2013) (SR-CBOE-2013-104); 34-72621 (July 16, 2014), 79 
FR 42616 (July 22, 2014) (SR-CBOE-2014-057); 34-74159 (January 28, 
2015), 80 FR 5863 (February 23, 2015) (SR-CBOE-2015-007); 34-74937 
(May 12, 2015), 80 FR 28319 (May 18, 2015) (SR-CBOE-2015-046); and 
34-76888 (January 13, 2016), 81 FR 12 (January 20, 2016) (SR-CBOE-
2015-122).
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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 purpose of the proposed rule change is to re-implement the 
contributor compensation structure of the Exchange's COPS,\4\ 
specifically, the COPS data revenue-sharing plan. The Exchange is not 
proposing to change the fees for COPS data.
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    \4\ See Securities Exchange Act Release Nos. 34-67813 (September 
10, 2012), 77 FR 56903 (September 14, 2012) (SR-CBOE-2012-083); 34-
67928 (September 26, 2012), 77 FR 60161 (October 2, 2012) (SR-CBOE-
2012-090); 34-70705 (October 17, 2013), 78 FR 63265 (October 23, 
2013) (SR-CBOE-2013-097); 34-70845 (November 12, 2013), 78 FR 69168 
(November 18, 2013) (SR-CBOE-2013-104); 34-72621 (July 16, 2014), 79 
FR 42616 (July 22, 2014) (SR-CBOE-2014-057); 34-74159 (January 28, 
2015), 80 FR 5863 (February 23, 2015) (SR-CBOE-2015-007); 34-74937 
(May 12, 2015), 80 FR 28319 (May 18, 2015) (SR-CBOE-2015-046); and 
34-76888 (January 13, 2016), 81 FR 12 (January 20, 2016) (SR-CBOE-
2015-122).
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Background
    COPS provides market participants with an ``end-of-day'' \5\ file 
and ``historical'' \6\ files of valuations for Flexible Exchange 
(``FLEX'') \7\ options and certain over-the-counter (``OTC'') options 
(collectively, ``COPS Data''). Market Data Express, LLC (``MDX''), an 
affiliate of CBOE, offers COPS Data for sale to all market 
participants. COPS Data is available to ``Subscribers'' for internal 
use and internal distribution only, and to ``Customers'' who, pursuant 
to a written vendor agreement between MDX and a Customer, may 
distribute the COPS Data externally (i.e., act as a vendor) and/or use 
and distribute the COPS Data internally.
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    \5\ ``End of day'' refers to data that is distributed prior to 
the opening of the next trading day.
    \6\ ``Historical'' COPS data consists of COPS data that is over 
one month old (i.e., copies of the ``end-of-day'' COPS file that are 
over one month old).
    \7\ FLEX options are exchange traded options that provide 
investors with the ability to customize basic option features 
including size, expiration date, exercise style, and certain 
exercise prices.
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    COPS Data consists of indicative \8\ values for four categories of 
``customized'' options. The first category of options is all open 
series of FLEX options listed on any exchange that offers FLEX options 
for trading.\9\ The second category is OTC options that have the same 
degree of customization as FLEX options. The third category includes 
options with strike prices expressed in percentage terms. Values for 
such options are expressed in percentage terms and are theoretical 
values.\10\ The fourth category includes ``exotic'' options.\11\
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    \8\ ``Indicative'' values are indications of potential market 
prices only and as such are neither firm nor the basis for a 
transaction.
    \9\ Current FLEX options open interest spans over 2,000 series 
on over 300 different underlying securities.
    \10\ These values are theoretical in that they are indications 
of potential market prices for options that have not traded (i.e., 
do not yet exist). Market participants sometimes express option 
values in percentage terms rather than in dollar terms because they 
find it is easier to assess the change, or lack of change, in the 
marketplace from one day to the next when values are expressed in 
percentage terms.
    \11\ Exotic options are options which are generally traded OTC 
and are more complex than standard options, usually relating to 
determination of payoff. An exotic option may also include a non-
standard underlying instrument, developed for a particular client or 
for a particular market.
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    The Exchange uses values produced by CBOE Trading Permit Holders 
(``TPHs'') to produce COPS Data. Participating CBOE TPHs submit values 
to MDX on options series specified by MDX on a daily basis. These 
values are generated by the TPHs' internal pricing models. The 
valuations that MDX ultimately publishes are an average of multiple 
contributions of values from participating CBOE TPHs. For each value 
provided by MDX through COPS, MDX includes a corresponding indication 
of the number of TPH contributors that factored into that value.
    CBOE TPHs that meet the following objective qualification criteria 
are allowed to contribute values to MDX for purposes of producing COPS 
Data. Interested CBOE TPHs must be approved by the Exchange, have the 
ability to provide valuations to MDX in a timely manner each day after 
the close of trading, and sign a services agreement with CBOE. 
Interested CBOE TPHs must also have the ability to provide both 
indicative and implied volatility valuations on several different types 
of options, including (i) options on all open FLEX series traded on any 
exchange that offers FLEX options for trading, (ii) options on any 
potential new FLEX options series, (iii) OTC options that have the same 
degree of customization as FLEX options, (iv) customized options where 
the strike price is expressed in percentage terms (the valuations 
provided to MDX must also be expressed in percentage terms), and (v) 
exotic options. In addition, interested CBOE TPHs must participate in a 
testing phase with MDX. The values submitted by a TPH during the 
testing phase and in live production must meet MDX's quality control 
standards designed to ensure the integrity and accuracy of COPS Data. 
MDX has implemented procedures including monthly performance reviews to 
help ensure the integrity and accuracy of COPS Data.
    To help ensure that MDX receives numerous values from multiple TPHs 
on a consistent basis, MDX shares revenue from the sale of COPS Data 
with participating CBOE TPHs.\12\ The amount of revenue that MDX shares 
with participating TPHs is a percentage of the total revenue received 
by MDX from the sale of COPS Data. The revenue sharing is based on the 
following table:
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    \12\ The fees that MDX charges for COPS Data are set forth on 
the Price List on the MDX Web site (www.marketdataexpress.com). MDX 
currently charges a fee per option per day for ``end-of-day'' COPS 
data. The amount of the fee is reduced based on the number of 
options valuations purchased.

------------------------------------------------------------------------
                                  Total
                                 revenue
 Number of participating TPHs     share        Revenue share per TPH
                                (percent)
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3.............................         21  7%.
4.............................         24  6%.
5 or more.....................         30  30% divided by the number of
                                            participating TPHs.
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    If only three TPHs participate, MDX shares 21% of total revenue 
with each TPH receiving a 7% share. If four TPHs participate, MDX 
shares 24% of total revenue with each TPH receiving a 6% share. If five 
or more TPHs participate, MDX shares 30% of total revenue divided 
equally among the TPHs.
    In July 2014, the Exchange submitted a proposed rule change to, 
among other things, temporarily change the COPS contributor 
compensation structure

[[Page 54872]]

from a revenue sharing plan to a fixed payment structure for a six-
month period (``Fixed Payment Period'').\13\ In May 2015, the Exchange 
submitted a proposed rule change to change the COPS contributor 
compensation structure for the remainder of 2015.\14\ Pursuant to that 
proposed rule change, as of May 1, 2015, all revenue from the sale of 
COPS Data was paid to COPS contributors, with revenue divided equally 
among COPS contributors. In December 2015, (sic) As described in that 
proposed rule change, MDX would transition back to the revenue share 
plan described above on January 1, 2016. In December 2015, the Exchange 
submitted a proposed rule change to extend the temporary suspension 
through June 30, 2016.\15\
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    \13\ See Securities Exchange Act Release No. 34-72621 (July 16, 
2014), 79 FR 42616 (July 22, 2014) (SR-CBOE-2014-057).
    \14\ Securities Exchange Act Release No. 34-74937 (May 12, 
2015), 80 FR 28319 (May 18, 2015) (SR-CBOE-2015-046).
    \15\ Securities Exchange Act Release No. 34-76888 (January 13, 
2016), 81 FR 12 (January 20, 2016) (SR-CBOE-2015-122). The Exchange 
is not proposing to eliminate the revenue share plan, but rather re-
implement the temporary suspension as described in this rule filing.
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Proposal
    The Exchange proposes to re-implement the temporary suspension 
described above through the end of the year. As such, all revenue from 
the sale of COPS Data would be paid to COPS contributors through 
December 31, 2016. As before, the revenue would continue to be divided 
equally among COPS contributors. The Exchange had hoped that at the end 
June 2016, COPS revenue would be at a level such that the COPS 
contributors would receive a revenue share roughly in line with the 
fixed payments they received during the Fixed Payment Period. This has 
not yet occurred. The payments to COPS contributors are intended to, at 
a minimum, help COPS contributors cover their costs of producing 
valuations for COPS while the Exchange continues to grow the COPS 
business.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\16\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \17\ requirements that the rules of an exchange be 
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 regulating, clearing, 
settling, processing information with respect to, and 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. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \18\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ Id.
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    The Exchange believes the proposed rule change is not designed to 
permit unfair discrimination between CBOE TPHs because all COPS data 
revenue would be divided equally among TPH contributors through 
December 31, 2016. The Exchange believes the proposed rule change is 
consistent with the protection of investors and the public interest in 
that it would provide incentive for all of the COPS contributors to 
participate in COPS while the Exchange continues to grow the COPS 
business, thereby helping to maintain the quality of COPS Data.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE 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. To the contrary, the Exchange 
believes the proposal is procompetitive in that it will incentivize 
COPS contributors to continue producing quality valuations to help keep 
COPS competitive with other similar market data products.\19\
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    \19\ Market data vendors including SuperDerivatives, Markit, 
Prism, and Bloomberg's BVAL service produce option value data that 
is similar to COPS Data. The Options Clearing Corporation (``OCC'') 
also produces FLEX option value data that is similar to the FLEX 
option value data that is included in COPS.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \20\ and paragraph (f)(2) of Rule 19b-4 \21\ 
thereunder. 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 will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(2).
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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-CBOE-2016-059 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-CBOE-2016-059. 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

[[Page 54873]]

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-CBOE-2016-059 and should be 
submitted on or before September 7, 2016.
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    \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. 2016-19584 Filed 8-16-16; 8:45 am]
 BILLING CODE 8011-01-P