81 FR 7609 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Adopting a Principles-Based Approach To Prohibit the Misuse of Material Nonpublic Information by Designated Primary Market-Makers (“DPMs”) and Lead Market-Makers (“LMMs”)
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 29 (February 12, 2016)
Federal Register Volume 81, Issue 29 (February 12, 2016)
| Page Range | 7609-7613 | |
| FR Document | 2016-02841 |
[Federal Register Volume 81, Number 29 (Friday, February 12, 2016)] [Notices] [Pages 7609-7613] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-02841] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-77081; File No. SR-CBOE-2016-007] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating To Adopting a Principles-Based Approach To Prohibit the Misuse of Material Nonpublic Information by Designated Primary Market-Makers (``DPMs'') and Lead Market-Makers (``LMMs'') February 8, 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 February 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 Exchange filed the proposal as a ``non-controversial'' proposed rule change pursuant to section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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)(iii). \4\ 17 CFR 240.19b-4(f)(6). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The text of the proposed rule change is available on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the Secretary, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to adopt a principles-based approach to prohibit the misuse of material, nonpublic information by DPMs and LMMs by deleting Rule 8.91, sub-paragraph (b)(5) of Rule 8.15 and paragraph(b)(vii) of Rule 8.15A. In so doing, the Exchange would harmonize its rules related to the preventing the misuse of material, nonpublic information for every Trading Permit Holder (``TPH''). The Exchange believes that Rule 8.91, Rule 8.15(b)(5) and Rule 8.15A(b)(vii) are no longer necessary because all TPH, including DPMs and LMMs are subject to the Exchange's general principles-based requirements governing the protection against misuse of material, nonpublic information, pursuant to Rule 4.18 (Prevention of the Misuse of Material, Nonpublic Information), which obviates the need for separately prescribed requirements for a subset of market participants on the Exchange. Background The Exchange has three classes of registered Market-Makers. Pursuant to Rule 8.1, a Market-Maker is an individual TPH or TPH organization that is registered with the Exchange for the purpose of making transactions as a dealer-specialist on the Exchange. All Market- Makers are subject to the requirements of Rule 8.7, which set forth the obligations of Market-Makers, including quoting activity. Rule 8.85 outlines the obligations of DPM's, which, in addition to the Market-Maker obligations of Rule 8.7, must fulfill a number of increased obligations including providing continuous electronic quotes, assuring that each of the displayed market quotations is honored, and complying heightened with bid/ask differential requirements.\5\ --------------------------------------------------------------------------- \5\ Compare Rule 8.85(a)(i) (``[Each DPM shall] provide continuous electronic quotes . . . in at least 99% of the non- adjusted options series or 100% of the non-adjusted option series minus one call-put pair . . .'') with Rule 8.7(d)(ii)(B) (``A Market-Maker will be required to maintain continuous electronic quotes . . . in 60% of the non-adjusted option series of the Market- Maker's appointed classes that have a time to expiration of less than nine months.''). --------------------------------------------------------------------------- Rule 8.15 states that the Exchange may appoint, in an option class for which a DPM has not been appointed, one or more Market-Makers in good standing as LMMs and Supplemental Market-Makers (``SMMs'') to participate in opening rotation procedures for Hybrid 3.0 classes and/ or to determine a formula for generating updated market quotations during the trading day. LMM's in Hybrid 3.0 classes are obligated to quote a firm two-sided market of sufficient size to accommodate a relatively active opening within the bid/ask differential requirements determined by the Exchange. Rule 8.15A states the Exchange may appoint one or more Market- Makers in good standing with an appointment in a Hybrid-Trading system option class for which a DPM has not been appointed as LMMs. Much like DPMs LMMs in Hybrid Classes are subject to increased obligations that include providing continuous electronic quotes that comply with the bid/ask differential requirements determined by the Exchange. Pursuant to Rules 8.15B and 8.87, the exchange may establish participation entitlements for LMM's and DPMs appointed pursuant to the aforementioned Rules. DPM's and LMM's must meet specific obligations prior to being awarded a participation entitlements [sic]. Whether operating on the CBOE Trading Floor or from a remote location, all Market-Makers, including DPMs and LMMs, have access to the same information in the Consolidated Book that is available to all other market participants. Moreover, none of the Exchange's Market- Makers have agency obligations to the Exchange's Order Book. As such, the primary distinctions between Market-Makers and DPMs and LMMs are the increased quoting requirements and allocation entitlements. Despite the fact that Market-Makers, DPMs and LMMs have access to the same trading information as all other market participants on the Exchange, the Exchange has distinct rules governing how DPMs and LMMs may operate. Rule 8.91(a) specifies that a DPM shall maintain information barriers that are reasonably designed to prevent the misuse of material, nonpublic information with any affiliates that may conduct a brokerage business in option classes allocated to the DPM or act as a [[Page 7610]] specialist or market-maker in any security underlying options allocated to the DPM. Rule 8.91 also requires a DPM provide its information barriers to the Exchange and obtain prior written approval. Rule 8.15(b)(5) requires LMMs in Hybrid 3.0 classes maintain information barriers that are reasonably designed to prevent the misuse of material, nonpublic information with any affiliates that may conduct a brokerage business in option classes allocated to the LMM or act as specialist or Market-Maker in any security underlying options allocated to the LMM. Rule 8.15A(b)(vii) similarly requires LMMs in Hybrid classes maintain information barriers that are reasonably designed to prevent the misuse of material, nonpublic information with any affiliates that may conduct a brokerage business in option classes allocated to the LMM or act as specialist or Market-Maker in any security underlying options allocated to the LMM. Neither Rule 8.15 nor 8.15A require the prior Exchange approval of information barriers outlined in Rule 8.91. Proposed Rule Change The Exchange believes the particularized guidelines in Rules, 8.91, 8.15(b)(5) and 8.15A(b)(vii) for DPMs, LMMs in Hybrid 3.0 classes, and LMMs in Hybrid classes, respectively, are no longer necessary and proposes to delete them. Rather, the Exchange believes that Rule 4.18, governing the misuse of material, nonpublic information provides for an appropriate, principles-based approach to prevent the type of market abuses Rules 8.91, 8.15(b)(5) and 8.15A(b)(vii) are designed to address. Specifically, Rule 4.18 requires every TPH shall establish, maintain and enforce written policies and procedures reasonably designed, taking into consideration the nature of such TPH's business, to prevent the misuse, in violation of the Exchange Act and Exchange Rules, of material, nonpublic information by such TPH or persons associated with such TPH. For the purposes of this Rule, conduct constituting the misuse of material, nonpublic information in violation of the Exchange Act and Exchange Rules includes, but is not limited to, the following: (a) Trading in any securities issued by a corporation, partnership, Trust Issued Receipts or Units (as defined in Exchange Rules) or a trust or similar entities, or in any related securities or related options or other derivative securities, or in any related non-U.S. currency options, futures or options on futures on such currency, or any other derivatives based on such currency, or in any related commodity, related commodity futures or options on commodity futures or in any related commodity derivatives, while in possession of material, nonpublic information concerning that corporation, partnership, Trust Issued Receipts, or those Units, or that trust or similar entities; (b) Trading in an underlying security or related options or other derivative securities, or in any related non-U.S. currency, non-U.S. currency options, futures or options on futures on such currency, or in any related commodity, related commodity futures or options on commodity futures or any other related commodities derivatives, or any other derivatives based on such currency while in possession of material nonpublic information concerning imminent transactions in the above; and (c) Disclosing to another person or entity any material, nonpublic information involving a corporation, partnership, Trust Issued Receipts, or Units or a trust or similar entities whose shares are publicly traded or an imminent transactions in an underlying security or related securities or in the underlying non-U.S. currency of any related non-U.S. currency options, futures or options on futures on such currency, or any other derivatives based on such currency, or in any related commodity, related commodity futures or options on commodity futures or any other related commodity derivatives, for the purpose of facilitating the possible misuse of such material, nonpublic information. Because DPMs and LMMs are already subject to the requirements of Rule 4.18, the Exchange does not believe that it is necessary to separately require specific limitations on dealings between DPMs and LMMs and affiliates. Deleting Rules 8.91, 8.15(b)(5) and 8.15A(b)(vii) would provide DPMs and LMMs with the 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 Market-Makers on the Exchange currently operate consistent with Rule 4.18. As noted above, DPMs and LMMs are distinguished under Exchange Rules from other types of Market-Makers only to the extent that they have certain heightened obligations and potential allocation entitlements. However, none of these heightened obligations provides different or greater access to nonpublic information than any other market participant on the Exchange. Specifically, whether on the CBOE Trading Floor or remotely, neither DPMs nor LMMs on the Exchange have access to trading information provided by the Exchange, either at, or prior to, the point of execution, that is not made available to all other market participants on the Exchange in a similar manner. Further, as noted above, DPMs and LMMs on the Exchange do not have any agency responsibilities for orders in the Order Book. Accordingly, because DPMs and LMMs do not have any trading advantages at the Exchange due to their market role, the Exchange believes that they should be subject to the same rules regarding the prevention of the misuse of material, nonpublic information, specifically Rule 4.18.\6\ --------------------------------------------------------------------------- \6\ The Exchange notes that by deleting Rule 8.91, the Exchange would no longer require specific information barriers for DPMs or require pre-approval of any information barriers that a DPM would erect for purposes of protecting against the misuse of material nonpublic information. However, as is the case today with Market- Makers, information barriers of new entrants, including new DPMs, would be subject to review as part of a new firm application. Moreover, the policies and procedures of DPMs and LMMs, 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 notes that its proposed approach to use a principles- based approach to protecting against the misuse of material nonpublic information for all of its registered Market-Makers is consistent with recently filed rule changes for NYSE MKT, LLC on behalf of NYSE Amex Options, International Securities Exchange, LLC (``ISE'') and BOX Options Exchange, LLC (``BOX'').\7\ The proposed approach is also consistent with approved rule changes for NYSE Arca Equities Inc. (``NYSE Arca''), BATS Exchange Inc. (``BATS'') and New York Stock Exchange, LLC (``NYSE'') rules governing cash equity Market-Makers on those respective exchanges.\8\ Except for [[Page 7611]] prescribed rules relating to floor-based designated Market-Makers on the NYSE, who have access to specified nonpublic trading information, each of these exchanges have moved to a principles-based approach to protecting against the misuse of material, nonpublic information. In connection with approving those rule changes, the Commission found that eliminating redundant information barrier requirements should not reduce the effectiveness of exchange rules requiring its members or participants to establish and maintain systems to supervise the activities of its members, including written procedures reasonably designed to ensure compliance with applicable federal securities law and regulations, and with the rules of the applicable exchange.\9\ --------------------------------------------------------------------------- \7\ See Securities Exchange Act Release Nos. 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); 75792 (August 31, 2015), 80 FR 53606 (September 4, 2015) (SR-ISE-2015-26) (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); 75916 (September 14, 2015), 80 FR 56503 (September 18, 2015) (SR-BOX-2015- 31) (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). \8\ See 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, non-public information, and noting that the proposed change is consistent with the approaches of NYSE Arca and Nasdaq) (``BATS Approval Order''); and 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''). \9\ See, e.g., BATS Approval Order, supra note 4 at 9458. --------------------------------------------------------------------------- The Exchange notes that even with this proposed rule change, pursuant to Rule 4.18, a DPM or LMM 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 prevent the misuse of material, nonpublic information. While information barriers would not specifically be required under the proposal, Rule 4.18 already requires that a TPH consider the nature of the TPH's business 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. The Exchange is not proposing to change what is considered to be material, non-public information and, thus does not expect there to be any changes to the types of 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 the brokerage unit of a TPH firm to have access to any non-public order or quote information of affiliated market maker, including hidden or undisplayed orders and quotes on the Exchange. TPHs do not expect to receive any additional order or quote information as a result of this proposed rule change. Further, the Exchange does not believe that there will be any material change to TPH information barriers as a result of removal of the Exchange's pre-approval requirements for DPMs. In fact, the Exchange anticipates that eliminating the pre-approval requirement should facilitate implementation of changes to TPH 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 DPMs do not have agency responsibilities to the book. However, as is the case today with market makers, information barriers of new entrants would be subject to review as part of a new firm application. Moreover, 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 further notes that under Rule 4.18, a TPH would be able [sic] would be able to structure its firm to provide for its options DPMs or LMMs, as applicable, to be structured with its equities and customer-facing businesses, provided that any such structuring would be done in a manner reasonably designed to protect against the misuse of material, nonpublic information. For example, pursuant to Rule 4.18, a DPM on the Exchange could be in the same independent trading unit, a defined in Rule 200(f) of Regulation SHO,\10\ as an equities Market-Maker and other trading desks within the firm, including options trading desks, so that the firm could share post- trade information to better manage its risk across related securities. The Exchange believes it is appropriate, and consistent with Rule 4.18 and section 15(g) of the Act \11\ for a firm to share options position and related hedging position information (e.g., equities, futures, and foreign currency) within a firm to better manage risk on a firm-wide basis. The Exchange notes, however, that if so structured, a firm would need to have appropriate policies and procedures, including information barriers as applicable, to protect against the misuse of material non- public information, and specifically customer information consistent with Rule 4.18. The Exchange further notes that Federal rules supersede Exchange rules in the event of any conflicts regarding the misuse of material non-public information. --------------------------------------------------------------------------- \10\ 17 CFR part 242.200(f). \11\ 15 U.S.C. 78o(g). --------------------------------------------------------------------------- The Exchange believes that the proposed reliance on the principles- based Rule 4.18 would ensure that a TPH that operates a DPM or LMM would be required to protect against the misuse of any material nonpublic information. As noted above, Rule 4.18 already requires that firms refrain from trading while in possession of material nonpublic information concerning imminent transactions in a security or related product. The Exchange believes that moving to a principles-based approach rather than prescribing how and when to wall off a DPM or LMM from the rest of the firm would provide TPH operating DPMs or LMMs with appropriate tools to better manage risk across a firm, including integrating options positions with other positions of the firm or, as applicable, by the respective independent trading unit. Specifically, the Exchange believes that it is appropriate for risk management purposes for a TPH operating a DPM or LMM to be able to consider both DPM/LMM traded-positions for the purposes of calculating net positions consistent with Rule 200 of Regulation SHO,\12\ calculating intra-day net capital positions, and managing risk both generally as well as in compliance with Rule 15c3-5 under the Act (the ``Market Access Rule'').\13\ The Exchange notes that any risk management operations would need to operate consistent with the requirement to protect against the misuse of material non-public information. --------------------------------------------------------------------------- \12\ 17 CFR part 242.200. \13\ 17 CFR part 240.15c3-5. --------------------------------------------------------------------------- The Exchange further notes that if DPMs or LMMs are integrated with other Market-Making operations, they would be subject to existing rules that prohibit TPH from disadvantaging their customers or other market participants by improperly capitalizing of a TPH organization's access to the receipt of material nonpublic information. As such, a TPH organization that integrates its DPM or LMM operations together with equity Market-Making, would need to protect customer information consistent with existing obligations to protect such information. The Exchange has rules prohibiting TPHs from disadvantaging their customers or other market participants by improperly capitalizing on the TPH's access to or receipt of material nonpublic information. For example, Rule 4.24(e) requires Each TPH shall establish, maintain, and enforce written [[Page 7612]] supervisory procedures reasonably designed to prevent and detect violations of applicable securities laws and regulations, and applicable Exchange rules. Additionally Rule 6.9(e) prevents a TPH or person associated with a TPH, who has knowledge of all material terms and conditions of an original order and a solicited order, including a facilitation order, to enter, based on such knowledge, an order to buy or sell an option of the same class as an option that is the subject of the original order, or an order to buy or sell the security underlying such class, or an order to buy or sell any related instrument unless certain circumstances are met. 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.\14\ Specifically, the Exchange believes the proposed rule change is consistent with the section 6(b)(5) \15\ 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) \16\ requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. --------------------------------------------------------------------------- \14\ 15 U.S.C. 78f(b). \15\ 15 U.S.C. 78f(b)(5). \16\ Id. --------------------------------------------------------------------------- In particular, the Exchange believes that the proposed rule change would remove impediments to and perfect the mechanism of a free and open market by adopting a principles-based approach to permit a TPH operating a DPM or LMM to maintain and enforce policies and procedures to, among other things, prohibit the misuse of material nonpublic information. The proposed rule change would further eliminate restrictions on how a TPH structures its DPM and LMM operations. The Exchange notes that the proposed rule change is based on an approved rule of the Exchange to which DPMs and LMMs are already subject-Rule 4.18-and harmonizes the rules governing DPMs, LMMs and Market-Makers. Moreover, TPH operating DPMs and LMMs would continue to be subject to federal and Exchange requirements for protecting material nonpublic order information.\17\ 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 DPMs and LMMs to redundant requirements. The Exchange does not believe that the existing requirements applicable to DPMs and LMMs are narrowly tailored to their respective roles because neither market participant has access to Exchange trading information in a manner different from any other market participant on the Exchange and they do not have agency responsibilities to the Order Book. --------------------------------------------------------------------------- \17\ See 15 U.S.C. 78o(g) and Rule 4.18. --------------------------------------------------------------------------- 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 all TPH the type of conduct that is prohibited by the Exchange. While the proposal eliminates certain requirements relating to the misuse of material nonpublic information, DPMs, LMMs and all other TPH 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. The Exchange notes that the proposed rule change would still require that a TPH operating DPMs and LMMs maintain and enforce policies and procedures designed to ensure compliance with applicable federal securities laws and regulations and with Exchange rules. Even thought there would no longer be pre-approval of DPM information barriers, and DPM or LMM written policies and procedures would continue to be subject to oversight by the Exchange and therefore the elimination of specific restrictions should not reduce the effectiveness of the Exchange rules to protect against the misuse of material nonpublic information. Rather, TPH 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, a TPH'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 DPM's and LMM's, 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 nonpublic information. 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 that the proposal will enhance competition by allowing DPMs and LMMs 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 DPMs and LMMs. Moreover, the Exchange believes that the proposed rule change would eliminate a burden on competition for TPH which currently exists as a result of disparate rule treatment between the options and equities markets regarding how to protect against the misuse of material, nonpublic information. For those TPH that are also members of equities exchanges their respective equity Market-Maker operations are now subject to a principles-based approach to protecting against the misuse of material nonpublic information. The Exchange believes it would remove a burden on competition to enable TPH to similarly apply a principles-based approach to protecting against the misuse of material nonpublic information in the options space. To this end, the Exchange notes that Rule 4.18 still requires a TPH that operates as a Market- Maker on the Exchange, [[Page 7613]] including a DPM or LMM, to evaluate its business to assure that its policies and procedures are reasonably designed to protect against the misuse of material, non-public information. However, with this proposed rule change, a TPH 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 risks across multiple security classes, while at the same time protecting against the misuse of material nonpublic information. 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 Because the foregoing proposed rule change does not: A. Significantly affect the protection of investors or the public interest; B. impose any significant burden on competition; and C. become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to section 19(b)(3)(A) of the Act \18\ and Rule 19b-4(f)(6) \19\ 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. --------------------------------------------------------------------------- \18\ 15 U.S.C. 78s(b)(3)(A). \19\ 17 CFR 240.19b-4(f)(6). --------------------------------------------------------------------------- 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-CBOE-2016-007 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-2016-007. 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-CBOE-2016-007 and should be submitted on or before March 4, 2016. --------------------------------------------------------------------------- \20\ 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\20\ Robert W. Errett, Deputy Secretary. [FR Doc. 2016-02841 Filed 2-11-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 29 / Friday, February 12, 2016 / Notices 7609
For the Commission, by the Division of concerning the purpose of and basis for Rule 8.15 states that the Exchange
Trading and Markets, pursuant to delegated the proposed rule change and discussed may appoint, in an option class for
authority.43 any comments it received on the which a DPM has not been appointed,
Robert W. Errett, proposed rule change. The text of these one or more Market-Makers in good
Deputy Secretary. statements may be examined at the standing as LMMs and Supplemental
[FR Doc. 2016–02838 Filed 2–11–16; 8:45 am] places specified in Item IV below. The Market-Makers (‘‘SMMs’’) to participate
BILLING CODE 8011–01–P Exchange has prepared summaries, set in opening rotation procedures for
forth in sections A, B, and C below, of Hybrid 3.0 classes and/or to determine
the most significant aspects of such a formula for generating updated market
SECURITIES AND EXCHANGE statements. quotations during the trading day.
COMMISSION LMM’s in Hybrid 3.0 classes are
A. Self-Regulatory Organization’s obligated to quote a firm two-sided
[Release No. 34–77081; File No. SR–CBOE– Statement of the Purpose of, and
2016–007] market of sufficient size to
Statutory Basis for, the Proposed Rule accommodate a relatively active
Self-Regulatory Organizations; Change opening within the bid/ask differential
Chicago Board Options Exchange, 1. Purpose requirements determined by the
Incorporated; Notice of Filing and Exchange.
The Exchange proposes to adopt a Rule 8.15A states the Exchange may
Immediate Effectiveness of a Proposed
principles-based approach to prohibit appoint one or more Market-Makers in
Rule Change Relating To Adopting a
the misuse of material, nonpublic good standing with an appointment in
Principles-Based Approach To Prohibit
information by DPMs and LMMs by a Hybrid-Trading system option class
the Misuse of Material Nonpublic
deleting Rule 8.91, sub-paragraph (b)(5) for which a DPM has not been
Information by Designated Primary
of Rule 8.15 and paragraph(b)(vii) of appointed as LMMs. Much like DPMs
Market-Makers (‘‘DPMs’’) and Lead
Rule 8.15A. In so doing, the Exchange LMMs in Hybrid Classes are subject to
Market-Makers (‘‘LMMs’’)
would harmonize its rules related to the increased obligations that include
February 8, 2016. preventing the misuse of material, providing continuous electronic quotes
Pursuant to section 19(b)(1) of the nonpublic information for every Trading that comply with the bid/ask differential
Securities Exchange Act of 1934 (the Permit Holder (‘‘TPH’’). The Exchange requirements determined by the
‘‘Act’’),1 and Rule 19b–4 thereunder,2 believes that Rule 8.91, Rule 8.15(b)(5) Exchange.
notice is hereby given that on February and Rule 8.15A(b)(vii) are no longer Pursuant to Rules 8.15B and 8.87, the
1, 2016, Chicago Board Options necessary because all TPH, including exchange may establish participation
Exchange, Incorporated (the ‘‘Exchange’’ DPMs and LMMs are subject to the entitlements for LMM’s and DPMs
or ‘‘CBOE’’) filed with the Securities Exchange’s general principles-based appointed pursuant to the
and Exchange Commission (the requirements governing the protection aforementioned Rules. DPM’s and
‘‘Commission’’) the proposed rule against misuse of material, nonpublic LMM’s must meet specific obligations
change as described in Items I, II, and information, pursuant to Rule 4.18 prior to being awarded a participation
III below, which Items have been (Prevention of the Misuse of Material, entitlements [sic].
prepared by the Exchange. The Nonpublic Information), which obviates Whether operating on the CBOE
Exchange filed the proposal as a ‘‘non- the need for separately prescribed Trading Floor or from a remote location,
controversial’’ proposed rule change requirements for a subset of market all Market-Makers, including DPMs and
pursuant to section 19(b)(3)(A)(iii) of the participants on the Exchange. LMMs, have access to the same
Act 3 and Rule 19b–4(f)(6) thereunder.4 information in the Consolidated Book
The Commission is publishing this Background
that is available to all other market
notice to solicit comments on the The Exchange has three classes of participants. Moreover, none of the
proposed rule change from interested registered Market-Makers. Pursuant to Exchange’s Market-Makers have agency
persons. Rule 8.1, a Market-Maker is an obligations to the Exchange’s Order
individual TPH or TPH organization Book. As such, the primary distinctions
I. Self-Regulatory Organization’s
that is registered with the Exchange for between Market-Makers and DPMs and
Statement of the Terms of Substance of
the purpose of making transactions as a LMMs are the increased quoting
the Proposed Rule Change
dealer-specialist on the Exchange. All requirements and allocation
The text of the proposed rule change Market-Makers are subject to the entitlements.
is available on the Exchange’s Web site requirements of Rule 8.7, which set Despite the fact that Market-Makers,
(http://www.cboe.com/AboutCBOE/ forth the obligations of Market-Makers, DPMs and LMMs have access to the
CBOELegalRegulatoryHome.aspx), at including quoting activity. same trading information as all other
the Exchange’s Office of the Secretary, Rule 8.85 outlines the obligations of market participants on the Exchange,
and at the Commission’s Public DPM’s, which, in addition to the the Exchange has distinct rules
Reference Room. Market-Maker obligations of Rule 8.7, governing how DPMs and LMMs may
II. Self-Regulatory Organization’s must fulfill a number of increased operate. Rule 8.91(a) specifies that a
Statement of the Purpose of, and obligations including providing DPM shall maintain information barriers
Statutory Basis for, the Proposed Rule continuous electronic quotes, assuring that are reasonably designed to prevent
that each of the displayed market the misuse of material, nonpublic
asabaliauskas on DSK9F6TC42PROD with NOTICES2
Change
quotations is honored, and complying information with any affiliates that may
In its filing with the Commission, the heightened with bid/ask differential conduct a brokerage business in option
Exchange included statements requirements.5 classes allocated to the DPM or act as a
43 17 CFR 200.30–3(a)(12). 5 Compare Rule 8.85(a)(i) (‘‘[Each DPM shall] Market-Maker will be required to maintain
1 15 U.S.C. 78s(b)(1). provide continuous electronic quotes . . . in at continuous electronic quotes . . . in 60% of the
2 17 CFR 240.19b–4.
least 99% of the non-adjusted options series or non-adjusted option series of the Market-Maker’s
3 15 U.S.C. 78s(b)(3)(A)(iii).
100% of the non-adjusted option series minus one appointed classes that have a time to expiration of
4 17 CFR 240.19b–4(f)(6). call-put pair . . .’’) with Rule 8.7(d)(ii)(B) (‘‘A less than nine months.’’).
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![Federal Register / Vol. 81, No. 29 / Friday, February 12, 2016 / Notices 7611
prescribed rules relating to floor-based including hidden or undisplayed orders rules supersede Exchange rules in the
designated Market-Makers on the NYSE, and quotes on the Exchange. TPHs do event of any conflicts regarding the
who have access to specified nonpublic not expect to receive any additional misuse of material non-public
trading information, each of these order or quote information as a result of information.
exchanges have moved to a principles- this proposed rule change. The Exchange believes that the
based approach to protecting against the Further, the Exchange does not proposed reliance on the principles-
misuse of material, nonpublic believe that there will be any material based Rule 4.18 would ensure that a
information. In connection with change to TPH information barriers as a TPH that operates a DPM or LMM
approving those rule changes, the result of removal of the Exchange’s pre- would be required to protect against the
Commission found that eliminating approval requirements for DPMs. In fact, misuse of any material nonpublic
redundant information barrier the Exchange anticipates that information. As noted above, Rule 4.18
requirements should not reduce the eliminating the pre-approval already requires that firms refrain from
effectiveness of exchange rules requiring requirement should facilitate trading while in possession of material
its members or participants to establish implementation of changes to TPH nonpublic information concerning
and maintain systems to supervise the information barriers as necessary to imminent transactions in a security or
activities of its members, including protect against the misuse of material, related product. The Exchange believes
written procedures reasonably designed non-public information. The Exchange that moving to a principles-based
to ensure compliance with applicable also suggests that the pre-approval approach rather than prescribing how
federal securities law and regulations, requirement is unnecessary because and when to wall off a DPM or LMM
and with the rules of the applicable DPMs do not have agency from the rest of the firm would provide
exchange.9 responsibilities to the book. However, as TPH operating DPMs or LMMs with
The Exchange notes that even with is the case today with market makers, appropriate tools to better manage risk
this proposed rule change, pursuant to information barriers of new entrants across a firm, including integrating
Rule 4.18, a DPM or LMM would still would be subject to review as part of a options positions with other positions of
be obligated to ensure that its policies new firm application. Moreover, the the firm or, as applicable, by the
and procedures reflect the current state policies and procedures of market respective independent trading unit.
of its business and continue to be makers, including those relating to Specifically, the Exchange believes that
reasonably designed to prevent the information barriers would be subject to it is appropriate for risk management
misuse of material, nonpublic review by FINRA, on behalf of the purposes for a TPH operating a DPM or
information. While information barriers Exchange, pursuant to a Regulatory LMM to be able to consider both DPM/
would not specifically be required Services Agreement. LMM traded-positions for the purposes
The Exchange further notes that under of calculating net positions consistent
under the proposal, Rule 4.18 already
Rule 4.18, a TPH would be able [sic] with Rule 200 of Regulation SHO,12
requires that a TPH consider the nature
would be able to structure its firm to calculating intra-day net capital
of the TPH’s business in structuring its
provide for its options DPMs or LMMs, positions, and managing risk both
policies and procedures, which may
as applicable, to be structured with its generally as well as in compliance with
dictate that an information barrier or a
equities and customer-facing businesses, Rule 15c3–5 under the Act (the ‘‘Market
functional separation be part of the
provided that any such structuring Access Rule’’).13 The Exchange notes
appropriate set of policies and
would be done in a manner reasonably that any risk management operations
procedures that would be reasonably
designed to protect against the misuse of would need to operate consistent with
designed to achieve compliance with
material, nonpublic information. For the requirement to protect against the
applicable securities law and example, pursuant to Rule 4.18, a DPM misuse of material non-public
regulations, and with applicable on the Exchange could be in the same information.
Exchange rules. independent trading unit, a defined in The Exchange further notes that if
The Exchange is not proposing to Rule 200(f) of Regulation SHO,10 as an DPMs or LMMs are integrated with
change what is considered to be equities Market-Maker and other trading other Market-Making operations, they
material, non-public information and, desks within the firm, including options would be subject to existing rules that
thus does not expect there to be any trading desks, so that the firm could prohibit TPH from disadvantaging their
changes to the types of information that share post-trade information to better customers or other market participants
an affiliated brokerage business of a manage its risk across related securities. by improperly capitalizing of a TPH
market maker could share with such The Exchange believes it is appropriate, organization’s access to the receipt of
market maker. In that regard, the and consistent with Rule 4.18 and material nonpublic information. As
proposed rule change will not permit section 15(g) of the Act 11 for a firm to such, a TPH organization that integrates
the brokerage unit of a TPH firm to have share options position and related its DPM or LMM operations together
access to any non-public order or quote hedging position information (e.g., with equity Market-Making, would need
information of affiliated market maker, equities, futures, and foreign currency) to protect customer information
within a firm to better manage risk on consistent with existing obligations to
61574 (Feb. 23, 2010), 75 FR 9455 (Mar. 2, 2010)
(SR–BATS–2010–003) (Order approving a firm-wide basis. The Exchange notes, protect such information. The Exchange
amendments to BATS Rule 5.5 to move to a however, that if so structured, a firm has rules prohibiting TPHs from
principles-based approach to protecting against the would need to have appropriate policies disadvantaging their customers or other
asabaliauskas on DSK9F6TC42PROD with NOTICES2
misuse of material, non-public information, and and procedures, including information market participants by improperly
noting that the proposed change is consistent with
the approaches of NYSE Arca and Nasdaq) (‘‘BATS barriers as applicable, to protect against capitalizing on the TPH’s access to or
Approval Order’’); and 72534 (July 3, 2014), 79 FR the misuse of material non-public receipt of material nonpublic
39440 (July 10, 2014), SR–NYSE–2014–12) (Order information, and specifically customer information. For example, Rule 4.24(e)
approving amendments to NYSE Rule 98 governing information consistent with Rule 4.18. requires Each TPH shall establish,
designated market makers to move to a principles-
based approach to prohibit the misuse of material The Exchange further notes that Federal maintain, and enforce written
non-public information) (‘‘NYSE Approval Order’’).
9 See, e.g., BATS Approval Order, supra note 4 at 10 17 CFR part 242.200(f). 12 17 CFR part 242.200.
9458. 11 15 U.S.C. 78o(g). 13 17 CFR part 240.15c3–5.
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![Federal Register / Vol. 81, No. 29 / Friday, February 12, 2016 / Notices 7613
including a DPM or LMM, to evaluate • Send an email to rule-comments@ SECURITIES AND EXCHANGE
its business to assure that its policies sec.gov. Please include File Number SR– COMMISSION
and procedures are reasonably designed CBOE–2016–007 on the subject line.
[Release No. 34–77079; File No. SR–ICC–
to protect against the misuse of material, 2016–002]
non-public information. However, with Paper Comments
this proposed rule change, a TPH that • Send paper comments in triplicate Self-Regulatory Organizations; ICE
trades equities and options could look at to Secretary, Securities and Exchange Clear Credit LLC; Notice of Filing, as
its firm more holistically to structure its Modified by Amendment No. 1 Thereto,
Commission, 100 F Street NE.,
operations in a manner that provides it of Proposed Rule Change To Provide
Washington, DC 20549–1090.
with better tools to manage risks across for the Clearance of Certain Asia-
multiple security classes, while at the All submissions should refer to File Pacific Credit Default Swap Contracts
same time protecting against the misuse Number SR–CBOE–2016–007. This file
of material nonpublic information. number should be included on the February 8, 2016.
subject line if email is used. To help the Pursuant to Section 19(b)(1) of the
C. Self-Regulatory Organization’s Securities Exchange Act of 1934
Statement on Comments on the Commission process and review your
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
Proposed Rule Change Received From comments more efficiently, please use
notice is hereby given that on January
Members, Participants, or Others only one method. The Commission will 27, 2016, ICE Clear Credit LLC (‘‘ICC’’)
post all comments on the Commission’s filed with the Securities and Exchange
The Exchange neither solicited nor Internet Web site (http://www.sec.gov/
received comments on the proposed Commission (‘‘Commission’’) a
rules/sro.shtml). Copies of the proposed rule change to adopt new
rule change. submission, all subsequent rules that will provide the basis for ICC
III. Date of Effectiveness of the amendments, all written statements to clear certain Asia-Pacific credit
Proposed Rule Change and Timing for with respect to the proposed rule default swap (‘‘CDS’’) contracts, as
Commission Action change that are filed with the described in Items I, II, and III below,
Because the foregoing proposed rule Commission, and all written which Items have been prepared
change does not: communications relating to the primarily by ICC. On January 29, 2016,
proposed rule change between the ICC filed Amendment No. 1 to the
A. Significantly affect the protection
Commission and any person, other than proposal.3 The Commission is
of investors or the public interest;
those that may be withheld from the publishing this notice, as modified by
B. impose any significant burden on Amendment No. 1, to solicit comments
competition; and public in accordance with the
provisions of 5 U.S.C. 552, will be on the proposed rule change, from
C. become operative for 30 days from interested persons.
the date on which it was filed, or such available for Web site viewing and
shorter time as the Commission may printing in the Commission’s Public I. Self-Regulatory Organization’s
designate, it has become effective Reference Room, 100 F Street NE., Statement of the Terms of Substance of
pursuant to section 19(b)(3)(A) of the Washington, DC 20549 on official the Proposed Rule Change
Act 18 and Rule 19b–4(f)(6) 19 business days between the hours of ICC is proposing an amendment to its
thereunder. At any time within 60 days 10:00 a.m. and 3:00 p.m. Copies of the previously submitted proposed rule
of the filing of the proposed rule change, filing also will be available for change to adopt new rules that will
the Commission summarily may inspection and copying at the principal provide the basis for ICC to clear certain
temporarily suspend such rule change if office of the Exchange. All comments Asia-Pacific CDS contracts. Specifically,
it appears to the Commission that such received will be posted without change; ICC proposed to amend Chapter 26 of
action is necessary or appropriate in the the Commission does not edit personal the ICC Rulebook (‘‘ICC Rules’’) to add
public interest, for the protection of identifying information from Subchapters 26J and 26L to provide for
investors, or otherwise in furtherance of submissions. You should submit only the clearance of iTraxx Asia/Pacific CDS
the purposes of the Act. If the information that you wish to make contracts (‘‘iTraxx Asia/Pacific
Commission takes such action, the available publicly. All submissions Contracts’’) and Standard Asia/Pacific
Commission will institute proceedings should refer to File Number SR–CBOE– Sovereign CDS contracts (‘‘SAS
to determine whether the proposed rule 2016–007 and should be submitted on Contracts’’, collectively with iTraxx
change should be approved or or before March 4, 2016. Asia/Pacific Contracts ‘‘Asia-Pacific
disapproved. CDS Contracts’’). Additionally, ICC
For the Commission, by the Division of proposed to amend the ICC End-of-Day
IV. Solicitation of Comments Trading and Markets, pursuant to delegated Price Discovery Policies and Procedures
Interested persons are invited to authority.20 to add two additional pricing windows
submit written data, views, and Robert W. Errett, to accommodate the submission of end-
arguments concerning the foregoing, Deputy Secretary. of-day prices relating to such Asia-
including whether the proposed rule [FR Doc. 2016–02841 Filed 2–11–16; 8:45 am] Pacific CDS Contracts. Finally, ICC
change is consistent with the Act. BILLING CODE 8011–01–P proposed to amend the ICC Risk
Comments may be submitted by any of Management Framework to include the
asabaliauskas on DSK9F6TC42PROD with NOTICES2
the following methods: risk horizon utilized for instruments
traded during Asia-Pacific hours and to
Electronic Comments
• Use the Commission’s Internet 1 15 U.S.C. 78s(b)(1).
comment form (http://www.sec.gov/ 2 17 CFR 240.19b–4.
3 In Amendment No. 1, ICC deleted a factual error
rules/sro.shtml); or
in the originally filed proposal that stated that no
changes would be made to ICC’s Risk Management
18 15 U.S.C. 78s(b)(3)(A). Framework. Amendment No. 1 amends and
19 17 CFR 240.19b–4(f)(6). 20 17 CFR 200.30–3(a)(12). replaces the original filing in its entirety.
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Document Created: 2016-02-12 01:24:21
Document Modified: 2016-02-12 01:24:21
| 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 7609 |
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