81 FR 78219 - Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Commentary .05 to Rule 980NY

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 215 (November 7, 2016)

Page Range		78219-78224
FR Document		2016-26795
Federal Register, Volume 81 Issue 215 (Monday, November 7, 2016)
[Federal Register Volume 81, Number 215 (Monday, November 7, 2016)]
[Notices]
[Pages 78219-78224]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-26795]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79213; File No. SR-NYSEMKT-2016-98]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Amending Commentary .05 
to Rule 980NY

November 1, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on October 25, 2016, NYSE MKT LLC (the ``Exchange'' or 
``NYSE MKT'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
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\ 15 U.S.C. 78a.
    \3\ 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 Exchange proposes to amend Commentary .05 to Rule 
980NY(Electronic Complex Order Trading) to enhance the price protection 
filters applicable to electronically entered Complex Orders. The 
proposed rule change is available on the Exchange's Web site at 
www.nyse.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 self-regulatory organization 
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to amend Commentary .05 to Rule 980NY to 
enhance the Exchange's price protection filters applicable to 
electronically entered Complex Orders,\4\ including by clarifying how 
the functionality operates and expanding its application, as described 
below.
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    \4\ Rule 900.3NY(e) defines a Complex Order as any order 
involving the simultaneous purchase and/or sale of two or more 
different option series in the same underlying security, for the 
same account, in a ratio that is equal to or greater than one-to-
three (.333) and less than or equal to three-to-one (3.00) and for 
the purpose of executing particular investment strategy.
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Clarifying the Description of the Filter
    Commentary .05 to Rule 980NY currently sets forth the Price 
Protection Filter (the ``Filter'') applicable to each incoming 
``Electronic Complex Order'' (or ``ECO'').\5\ The Filter automatically 
rejects incoming ECOs with a price that deviates from the current 
market by the Specified Amount,\6\ which varies depending on the 
smallest MPV of any leg in the ECO.\7\
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    \5\ Per Rule 980NY, an ECO is a Complex Order that has been 
entered into the NYSE Amex Options System (``System'') and routed to 
the Complex Matching Engine (``CME'') for possible execution. The 
CME is the mechanism in which ECOs are executed against each other 
or against individual quotes and orders in the Consolidated Book. 
ECOs that are not immediately executed by the CME are ranked in the 
Consolidated Book. See Rule 980NY(a).
    \6\ The Specified Amount is defined as: (i) .10 for orders where 
the smallest Minimum Price Variation (``MPV'') of any leg of the 
Electronic Complex Order is .01; (ii) .15 for orders where the 
smallest MPV of any leg of the Electronic Complex Order is .05; 
and.30 for orders where the smallest MPV of any leg of the 
Electronic Complex Order is .10. See Commentary .05 to Rule 980NY.
    \7\ See Commentary .05 to Rule 980NY(a). The Exchange notes that 
each ECO is entered into the System at a net debit (credit) price 
for the entire strategy and does not include specified prices for 
any single series component (``leg'') of the ECO. See also 
Securities and Exchange Act Release No. 70674 (October 11, 2013), 78 
FR 62917 (October 22, 2013) (SR-NYSEMKT-2013-80) (Notice of filing, 
which describes the operation of the Filter) (herein referred to as 
the ``Original Release'').
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    First, the Exchange proposes to modify its description of how the 
Filter operates to make it easier for market participants to 
understand. Commentary .05 to Rule 980NY currently describes the Filter 
as rejecting an ECO if ``the net debit/credit limit price of the order 
is greater (less) than the derived net debit/credit NBBO for the 
contra-side of that same strategy by an amount specified by the 
Exchange (`Specified Amount').'' The Exchange proposes to replace 
references to the ``derived contra-side net debit/credit NBBO'' with 
the ``contra-side Complex NBBO,'' as the Exchange has defined Complex 
NBBO since implementing the Filter.\8\ This proposed modification would 
not affect the operation of the rule. Rather, the Exchange believes 
this change would reduce redundancy and add internal consistency to 
Exchange rules. Further, regarding the description of how the Filter 
operates, the Exchange proposes to provide that the Filter would reject 
an ECO back to the submitting ATP Holder if the sum of the following 
would be less than zero ($0.00):
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    \8\ See Rule 900.2NY(41)(b) (defining Complex NBBO as ``the NBBO 
for a given complex order strategy as derived from the national best 
bid and national best offer for each individual component series of 
a Complex Order''). See also Securities and Exchange Act Release No. 
73284 (October 1, 2014), 79 FR 60560 (October 7, 2014) (SR-NYSEMKT-
2014-84) (Notice of filing and immediate effectiveness of proposed 
rule change to codify the term Complex NBBO).
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    (i) The net debit (credit) limit price of the order,
    (ii) the contra-side Complex NBBO for that same Complex Order, and
    (iii) the Specified Amount.\9\
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    \9\ See proposed Commentary .05(a) to Rule 980NY.
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    The proposed modification does not alter how the Filter is applied. 
The Filter would continue to help prevent the execution of 
aggressively-priced ECOs (i.e., priced so far away from the prevailing 
contra-side NBBO market for the same strategy) that could cause 
significant price dislocation in the market. The Exchange would 
continue to apply the Filter to help ensure that market participants do 
not receive an execution at a price significantly inferior to the 
contra-side NBBO. However, the proposed modification would add 
specificity and more clearly convey the operation of the Filter. The 
Exchange believes this proposed change would add clarity and 
transparency to the rule text and enable market participants to better 
understand the operation of the Filter, and the calculation that the 
Exchange applies to incoming ECOs without altering the operation of the 
Filter.
    Second, the Exchange proposes to modify its explanation of how the 
Specified Amount may be adjusted based on the characteristics of the 
ECO. Currently, paragraphs (b)-(d) of Commentary .05 describe how the 
Filter ``will be applied by'' the Specified Amount, which Specified 
Amount is multiplied by the component of the leg ratio that the leg of 
the order

[[Page 78220]]

represents.\10\ The result is that the Specified Amount may change 
depending on the product of multiplying it by the component of the ECO 
ratio that the leg of the order represents, although the rule text does 
not explicitly state this fact.\11\ The Exchange proposes to modify the 
rule text to make clear that the Specified Amount may be adjusted, 
which, in turn may affect how the Filter ``will be applied.'' As with 
the proposed modification to the description of how the Filter 
operates, this modification further clarifies (but does not alter) the 
operation of the Filter. The Filter would continue to prevent the 
execution of aggressively-priced ECOs that may cause significant price 
dislocation in the market. Specifically, the Exchange proposes to add 
new paragraph (b) to Commentary .05 to provide that ``[t]he Specified 
Amount may be adjusted based on the ratios and the MPVs of the legs of 
the [ECO].'' \12\ The Exchange then proposes to renumber current 
paragraphs (b)-(d) of Commentary .05 to be sub-points (i)-(iii) to new 
paragraph (b) and to clarify in each sub-point how the Specified Amount 
will be adjusted.\13\
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    \10\ See Commentary .05(b)-(d) to Rule 980NY.
    \11\ See id. See also supra note 7, Original Release 78 FR at 
62919 (providing examples of how the Filter operates depending upon 
the leg ratio of the ECO).
    \12\ See proposed Commentary .05(b) to Rule 980NY.
    \13\ Consistent with this proposed change, the Exchange also 
proposes to redesignate paragraphs (e) and (f) of Commentary .05 to 
be paragraphs (c) and (d), respectively.
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    Current paragraph (b) to Commentary .05 provides that for ECOs 
``that are entered on a 1x1 ratio, the Price Protection Filter will be 
applied by the Specified Amount (.10, .15, or .30),'' which, as noted 
above, means the Filter would be multiplied by the Specified Amount. In 
ECOs with a 1x1 ratio, the product of this multiplication would always 
result in .10, .15, or .30. Thus, the Exchange proposes to clarify this 
paragraph to provide that for ECOs ``that are entered on a 1x1 ratio, 
the Specified Amount is not adjusted (.10, .15, or .30).'' \14\ The 
Exchange believes this proposed modification makes clear that the 
Specified Amount remains unadjusted for ECOs entered on a 1x1 ratio, 
which is consistent with the current rule text, but not explicitly 
stated.
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    \14\ See proposed Commentary .05(b)(i) to Rule 980NY.
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    In addition, current paragraph (c) to Commentary .05 provides that 
for ECOs ``that are entered on an uneven ratio (2x3 for example) where 
the MPV on all legs is the same, the Price Protection Filter will be 
applied by the Specified Amount multiplied by the smallest contract 
size leg of the ratio (.20, .30, or .60 on a 2x3 for example)''.\15\ 
Rather than state that ``the Filter will be applied by the Specified 
Amount multiplied by the smallest contract size leg of the ratio,'' the 
Exchange proposes to clarify how the Specified Amount is adjusted, 
which is a more straightforward construction that the Exchange believes 
is easier to comprehend. Specifically, the Exchange proposes to clarify 
that for ECOs that are entered on an uneven ratio (2x3 for example) 
where the MPV on all legs is the same, ``the Specified Amount is 
adjusted by multiplying the component of the ratio represented by the 
smallest leg of the order by the Specified Amount (i.e., .20 is the 
adjusted Specified Amount for a 2x3 Electronic Complex Order with an 
MPV of .01 on both legs because .20 (2 x .10) is less than .30 (3 x 
.10) for example).'' \16\
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    \15\ See Commentary .05(c) to Rule 980NY.
    \16\ See proposed Commentary .05(b)(ii) to Rule 980NY.
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    Further, current paragraph (d) to Commentary .05 provides that for 
ECOs ``that are entered on an uneven ratio where the MPV of the legs 
are not the same (2x3 ratio with a .10 MPV and .05 MPV for example), 
the Price Protection Filter will be applied by taking the lesser of; 
the Specified Amount applicable to the smallest size leg of the 
Electronic Complex Order multiplied by the contract size of that leg 
(.60 in this example), or the Specified Amount of the largest size leg 
of the Electronic Complex Order multiplied by the contract size of that 
leg (.45 in this example).'' \17\ Utilizing the same calculation set 
forth in proposed paragraph (b)(ii) to Commentary .05, the Exchange 
likewise proposes to clarify how the Specified Amount is adjusted for 
ECOs that are entered on an uneven ratio where the MPV of the legs is 
not the same (a two-legged order with a 2x3 ratio where the first leg 
has a .10 MPV and the second leg has a .05 MPV for example). As 
proposed, ``the Specified Amount is equal to the smallest amount 
calculated by multiplying, for each leg of the order, the Specified 
Amount for the leg of the order by the component of the ratio 
represented by that leg of the order (i.e., .45 is the adjusted 
Specified Amount in this example because .45 (3 x .15) is less than .60 
(2 x .30).'' \18\
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    \17\ See Commentary .05(c) to Rule 980NY.
    \18\ See proposed paragraph (b)(iii) of Commentary .05 to Rule 
980NY.
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    The Exchange believes that proposed paragraph (b) and sub-
paragraphs (i)-(iii) clarify that the Specified Amount is adjusted 
based on the characteristics of the ECO, which is consistent with the 
current rule text but not stated explicitly. The Exchange believes this 
change, in turn, further clarifies (but does not alter) the operation 
of the Filter making it easier for market participants to understand.
    To illustrate that the proposed modifications do not alter the 
operation of the Filter, the Exchange has applied the description of 
the Filter to the examples that the Exchange relied upon when the [sic] 
it introduced the Filter in 2013.\19\
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    \19\ See supra note 7, Original Release, 78 FR at 62918-19 
(setting froth [sic] five examples to illustrate the operation of 
the Filter).
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Example #1: Proposed Rule 980NY(a),(b)
Jan 20 calls--NBBO 2.00-2.10
Jan 25 calls--NBBO 1.05-1.20
    The Exchange receives an incoming ECO to buy Jan 20 calls and sell 
Jan 25 calls on a 1x1 ratio, with a net debit price of 1.25. All legs 
have an MPV of .05. In this case the contra-side Complex NBBO is 
offered at a net credit of 1.05 (this price is established by selling 
one Jan 20 for 2.10 and buying one Jan 25 for 1.05).
    The ECO would be automatically rejected if the sum of the following 
is less than zero ($0.00):
    (i) The net debit limit price of the order, in this case -1.25;
    (ii) the contra-side Complex NBBO for that same Complex Order, in 
this case a net credit of 1.05;
    (iii) and Specified Amount, in this case .15, as all legs have an 
MPV of .05.
    The Filter would reject the ECO in this example back to the 
entering ATP holder because the sum is less than zero (-1.25 + 1.05 + 
.15 = -.05).\20\
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    \20\ Per the Original Release, the ECO in this example was 
rejected by the Filter because the ``contra-side [Complex] NBBO of 
1.05 is better than the limit price of the [ECO] by .20, which 
exceeds the Filter setting of .15.'' See supra, note 7, Original 
Release, 78 FR at 62918.
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Example #2: Proposed Rule 980NY(a),(b)(i)
Jan 20 calls--NBBO 5.00-5.30
Jan 25 calls--NBBO 2.10-2.20
    The Exchange receives an incoming ECO to buy Jan 20 calls and sell 
Jan 25 calls on a 1x1 ratio, with a net debit price of 3.60. The leg 
markets have different MPVs--.05. and .10. In this case, the contra-
side Complex NBBO is offered at a net credit of 3.20 (this price is 
established by selling one Jan 20 for 5.30 and buying one Jan 25 for 
2.10).
    The ECO would be automatically rejected if the sum of the following 
is less than zero ($0.00):

[[Page 78221]]

    (i) The net debit limit price of the order, in this case -3.60;
    (ii) the contra-side Complex NBBO for that same Complex Order, in 
this case a net credit of 3.20;
    (iii) and Specified Amount, in this case .15 (i.e., because the 
smallest MPV of any leg of the 1x1 ECO is .05; the other leg of the ECO 
has a larger MPV of .10).
    The Exchange notes that, in this example, where the ECO is on a 1x1 
ratio and the first leg has a .05 MPV and the second leg has a .10 MPV, 
the Specified Amount would be determined by the smallest MPV of any leg 
of the ECO. Thus, because the smallest MPV of this ECO is .05, the 
Specified Amount is .15 (as opposed to a Specified Amount of .30, which 
would be the Specified Amount if the smallest MPV of any leg of an ECO 
is .10). The Filter would reject the ECO in this example back to the 
entering ATP holder because the sum is less than zero (-3.60 + 3.20 + 
.15 = -.25).\21\
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    \21\ Per the Original Release, the ECO in this example was 
rejected by the Filter because the ``contra-side [Complex] NBBO of 
1.05 is better than the limit price of the [ECO] by .40, which 
exceeds the Filter setting of .15.'' See supra, note 7, Original 
Release, 78 FR at 62918.
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Example #3: Proposed Rule 980NY(a),(b)(i)
Jan 20 calls--NBBO 2.03-2.08
Jan 25 calls--NBBO 1.00-1.01
    The Exchange receives an incoming Electronic Complex Order to sell 
Jan 20 calls and buy Jan 25 calls on a 1x1 ratio, with a net credit 
price of .90. All legs have the same MPV of .01: In this case the 
contra-side Complex NBBO market is priced at a net debit of 1.02 (this 
price is established by buying one Jan 20 for 2.03 and selling one Jan 
25 for 1.01).
    The ECO would be automatically rejected if the sum of the following 
is less than zero ($0.00):
    (i) The net credit limit price of the order, in this case .90;
    (ii) the contra-side Complex NBBO for that same Complex Order, in 
this case a net debit of -1.02;
    (iii) and Specified Amount, in this case .10, because all legs have 
an MPV of .01.
    The Filter would reject the ECO in this example back to the 
entering ATP holder because the sum is less than zero (.90 + (-1.02) + 
.10 = -.02).\22\
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    \22\ Per the Original Release, the ECO in this example was 
rejected by the Filter because the ``contra-side [Complex] NBBO of 
1.02 is better than the limit price of the [ECO] by .12, which 
exceeds the Filter setting of .10.'' See supra, note 7, Original 
Release, 78 FR at 62919.
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Example #4: Proposed Rule 980NY(a),(b)(ii)
Jan 20 calls--NBBO 2.03-2.08
Jan 25 calls--NBBO 1.00-1.02
    The Exchange receives an incoming ECO to sell Jan 20 calls and buy 
Jan 25 calls, on a 2x3 ratio, with a net credit price of .75. All legs 
have the same MPV of .01. In this case the contra-side Complex NBBO 
market is priced at a net debit of 1.00 (this price is established by 
buying two Jan 20s for 2.03 each and selling three Jan 25s for 1.02 
each (4.06-3.06 = 1.00)).
    The ECO would be automatically rejected if the sum of the following 
is less than zero ($0.00):
    (i) The net credit limit price of the order, in this case .75;
    (ii) the contra-side Complex NBBO for that same Complex Order, in 
this case a net debit of -1.00;
    (iii) and Specified Amount, in this case .20 (i.e., .10 (as the MPV 
of both legs is .01) x 2 (the component of the ratio represented by the 
smallest leg of the order) = .20).
    The Exchange notes that, in this example, where the ECO is on a 2x3 
ratio and the MPVs on all legs is the same, the Specified Amount is 
adjusted by multiplying the component of the ratio represented by the 
smallest leg of the order by the Specified Amount (i.e., .20 in this 
example where the MPV on both legs is .01 because .20 (2 x .10) is less 
than .30 (3 x .10).
    The Filter would reject the ECO in this example back to the 
entering ATP holder because the sum is less than zero (.75 + (-1.00) + 
.20 = -.05).\23\
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    \23\ Per the Original Release, the ECO in this example was 
rejected by the Filter because the ``contra-side [Complex] NBBO of 
1.00 is better than the limit price of the [ECO] by .25, which 
exceeds the Filter setting of .20.'' See supra, note 7, Original 
Release, 78 FR at 62919.
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Example #5: Proposed Rule 980NY(a),(b)(iii)
Jan 20 calls--NBBO 4.10-4.20
Jan 25 calls--NBBO 1.90-2.00
    The Exchange receives an incoming ECO to sell Jan 20 calls and buy 
Jan 25 calls, on a 2x3 ratio, with a net credit price of 1.50. The leg 
markets have different MPVs--.05. and .10, respectively. In this case 
the contra-side Complex NBBO market is priced at a net debit of 2.20 
(this price is established by buying two Jan 20s for 4.10 each and 
selling three Jan 25s for 2.00 each (8.20-6.00 = 2.20)).
    The ECO would be automatically rejected if the sum of the following 
is less than zero ($0.00):
    (i) The net credit limit price of the order, in this case 1.50;
    (ii) the contra-side Complex NBBO for that same Complex Order, in 
this case a net debit of -2.20;
    (iii) and Specified Amount, in this case .45 (i.e.,.45 is equal to 
the smallest amount calculated by multiplying, for each leg of the 
order, the Specified Amount for the leg of the order by the component 
of the ratio represented by that leg of the order, which yields either 
.60 (2 x .30 = .60) or .45 (3 x .15 = .45)).
    The Exchange notes that, in this example, where the ECO is on a 2x3 
ratio and the MPV of the legs is not the same, the Specified Amount is 
equal to the smallest amount calculated by multiplying, for each leg of 
the order, the Specified Amount for the leg of the order by the 
component of the ratio represented by that leg of the order (i.e., .45 
is the adjusted Specified Amount in this example because .45 (3 x .15) 
is less than .60 (2 x .30)).
    The Filer would reject this order back to the entering ATP holder 
because the sum is less than zero (1.50 + (-2.20 + .45 = -.25).\24\
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    \24\ Per the Original Release, the ECO in this example was 
rejected by the Filter because the ``contra-side [Complex] NBBO of 
2.20 is better than the limit price of the [ECO] by .70, which 
exceeds the Filter setting of .45.'' See supra, note 7, Original 
Release, 78 FR at 62919.
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Example #6: Proposed 980NY(a),(b) \25\
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    \25\ The Exchange notes that Example #6 is new to this filing 
and was not included in the Original Release, as the Original 
Release did not include an example of an ECO that was not rejected 
by the Filter.
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Jan 20 calls--NBBO 2.00-2.10
Jan 25 calls--NBBO 1.05-1.20
    The Exchange receives an incoming ECO to buy Jan 20 calls and sell 
Jan 25 calls on a 1x1 ratio, with a net debit price of 1.19. All legs 
have an MPV of .05. In this case the contra-side Complex NBBO is 
offered at a net credit of 1.05 (this price is established by selling 
one Jan 20 for 2.10 and buying one Jan 25 for 1.05).
    The ECO would be automatically rejected if the sum of the following 
is less than zero ($0.00):
    (i) the net debit limit price of the order, in this case -1.19;
    (ii) the contra-side Complex NBBO for that same Complex Order, in 
this case a net credit of 1.05;
    (iii) and Specified Amount, in this case .15, as all legs have an 
MPV of .05.
    The Filter would not reject the ECO in this example because the sum 
is zero or greater (-1.19 + 1.05 + .15 = .01).\26\ The ECO would be 
sent to the CME for processing and potential execution.\27\
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    \26\ Per the Original Release, the ECO in this example was 
rejected by the Filter because the ``contra-side [Complex] NBBO of 
1.05 is better than the limit price of the [ECO] by .20, which 
exceeds the Filter setting of .15.'' See supra, note 7, Original 
Release, 78 FR at 62923.
    \27\ See supra, note 5 (citing Rule 980NY(a) regarding 
processing of incoming ECOs).

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[[Page 78222]]

Extending the Operation of the Filter
    The Exchange also proposes to modify paragraph (a) of Commentary 
.05 to Rule 980NY to expand the application of the Filter to ECOs 
received prior to the opening of trading or during a trading halt. The 
current Filter is applied only to those ECOs entered during Core 
Trading Hours.\28\ As proposed, for each ECO received pre-open or 
during a trading halt, the Exchange would apply the Filter at the time 
all the individual component option series open or reopen, provided 
there is an NBBO market disseminated by OPRA for all individual 
component option series of the ECO. In this regard, the Exchange 
proposes to modify paragraph (e) of Commentary .05 of the Rule to 
remove reference to ``incoming'' and ``at the time the order is 
received by the Exchange,'' to signify that the Filter is being applied 
to ECOs received outside of Core Trading Hours.\29\ Further, because 
ECOs received pre-open or during a halt cannot immediately execute, 
these ECOs would be placed in the Consolidated Book until the series 
opens or resumes trading, at which time the Filter would be applied 
before the ECO is eligible to trade.\30\ Any ECOs that deviate from the 
current market by too great an amount, as set forth in the rule, would 
be canceled, as opposed to being immediately rejected upon receipt (as 
are ECOs received during Core Trading Hours).\31\ The reason such ECOs 
would be cancelled (and not rejected) is because the CME would accept 
these orders and, once accepted but not immediately executed, they 
would be placed on the Consolidated Book until the individual component 
option series open or reopen.\32\ The CME would not reject an ECO that 
it had previously accepted, and therefore such ECOs would be cancelled 
instead. The order sender would be notified of the cancellation. The 
proposed enhancement to the Filter is designed to provide the same 
level of protection to market participants who enter ECOs before the 
open or during a trading halt as is currently provided to ECOs received 
during Core Trading Hours. As proposed, the enhanced Filter would 
further assist the Exchange in preventing the execution of ECOs priced 
so far away from the prevailing contra-side NBBO market for the same 
strategy that the execution of such order could cause significant price 
dislocation in the market.
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    \28\ Rule 900.3NY(15) defines Core Trading Hours as the regular 
trading hours for business set forth in the rules of the primary 
markets underlying those option classes listed on the Exchange. An 
order received prior to the opening of trading would be outside of 
Core Trading Hours. Rule 953NY describes halts and suspensions of 
trading, which may occur during Core Trading Hours.
    \29\ See also proposed Commentary .05(e) to Rule 980NY. For 
internal consistency, the Exchange also proposes to refer to 
``individual component option series'' in the proposed paragraph. 
See id.
    \30\ See, e.g., Rule 980NY(a) (``[ECOs] that are not immediately 
executed by the CME are routed to the Consolidated Book'').
    \31\ See proposed Commentary .05(a) to Rule 980NY.
    \32\ See supra note 30.
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Additional Conforming Changes
    Finally, the Exchange proposes to make several conforming changes 
to Rule 980NY(c)(i)(B) (Execution of Complex Orders at the Open), which 
are consistent with the proposal to incorporate the defined term 
Complex NBBO in proposed Commentary .05(a). First, the Exchange 
proposes to delete as duplicative the definition of the Complex NBBO 
that appears in Rule 980NY(c)(i)(B), as the term is now a defined in 
Rule 900.2NY(41)(b).\33\ The Exchange also proposes to delete as 
extraneous the word ``derived,'' which precedes references to ``Complex 
NBBO.'' \34\ The Exchange notes that Rule 980NY(c)(i)(B) was updated to 
include the concept of the Complex NBBO before the Exchange codified 
this definition and the proposed changes would therefore streamline the 
rule text and remove redundancy from Exchange rules.\35\
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    \33\ Specifically, the Exchange proposes to delete the following 
text from Rule 980NY(c)(i)(B): ``The derived Complex NBBO is 
calculated by using best prices for the individual leg markets 
comprising the Electronic Complex Order as disseminated by OPRA that 
when aggregated create a derived Complex NBBO for that same strategy 
The Exchange believes these changes would add clarity, transparency 
and internal consistency to Exchange rules.''
    \34\ See proposed Rule 980NY(c)(i)(B).
    \35\ See Securities and Exchange Act Release No. 72084 (May 2, 
2014) 79 FR 26470(May 8, 2014) (SR-NYSEMKT-2014-42) (Notice of 
filing and immediate effectiveness of proposed rule change to adopt 
rules governing an opening auction process for ECOs, including 
reference to the ``Complex NBBO'').
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Implementation
    The Exchange will announce by Trader Update the implementation date 
of the proposed rule change to expand the application of the Filter to 
ECOs received prior to the opening of trading or during a trading halt.

2. Statutory Basis

    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\36\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act,\37\ 
in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78f(b).
    \37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that this proposed rule change would allow 
the Filter to continue to assist with the maintenance of fair and 
orderly market by helping to mitigate the risks associated with the 
execution of ECOs priced away from the current market by the Specified 
Amount, which protects investors from receiving potentially erroneous 
executions. In addition, the proposed modifications would add 
specificity and more clearly convey the operation of the Filter, which 
added clarity and transparency would enable market participants to 
better understand the operation of the Filter. Specifically, the 
proposal to modify existing rule text to more clearly state how the 
Filter is applied and to consistently incorporate the defined term 
``Complex NBBO'' would remove impediments to and perfect the mechanism 
of a free and open market and protect investors and the public interest 
because such changes would reduce redundancy and add clarity, 
transparency and internal consistency to Exchange rules.
    Further, the Exchange believes the proposal to make explicit that 
the Specified Amount is adjusted based on the characteristics of the 
ECO, which is consistent with the current rule text, would further 
clarify (without altering) the operation of the Filter making it easier 
for market participants to understand, which would protect investors 
and the public interest.
    The proposal to extend the application of the Filter beyond ECOs 
entered during Core Trading Hours is designed to help maintain a fair 
and orderly market by providing market participants entering ECOs with 
additional protection from anomalous executions. Because the proposed 
Filter would apply to all ECOs, not just those entered during Core 
Trading Hours (absent a trading halt), the proposal would enhance the 
protection offered by the Filter and aid in mitigating the potential 
risks associated with the execution of any ECOs that are priced a 
Specified Amount away from the prevailing contra-side market. The 
proposed rule change would therefore remove impediments to and perfect 
the mechanism of a free and open market and national market system by 
ensuring that an existing price protection would be applicable to all 
ECOs, regardless of when they are entered.

[[Page 78223]]

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

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
    The Exchange is proposing to enhance an existing price protection 
Filter to provide greater protections from potentially erroneous 
executions and potentially reduce the attendant risks of such 
executions to market participants. Therefore, the Exchange believes 
that the proposal should provide an incentive for market participants 
to enter executable interest in the CME that can help foster price 
discovery and transparency thereby benefiting all market participants. 
The proposal is structured to offer the same enhancement to all market 
participants, regardless of account type, and will not impose a 
competitive burden on any participant.
    The Exchange does not believe that the proposed enhancement would 
impose a burden on competing options exchanges. Rather, the 
availability of this enhanced Filter may foster more competition. 
Specifically, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues. When an exchange offers enhanced functionality that 
distinguishes it from the competition and participants find it useful, 
it has been the Exchange's experience that competing exchanges will 
move to adopt similar functionality. Thus, the Exchange believes that 
this type of competition amongst exchanges is beneficial to the market 
place as a whole as it can result in enhanced processes, functionality, 
and technologies.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \38\ and Rule 19b-4(f)(6) thereunder.\39\ 
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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 
19b&4(f)(6)(iii) thereunder.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78s(b)(3)(A).
    \39\ 17 CFR 240.19b-4(f)(6). 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.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \40\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\41\ the Commission 
may 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. The Exchange believes 
that waiver of the operative delay would be consistent with the 
protection of investors and the public interest because it would enable 
the Exchange to enhance an existing price protection Filter. Although 
the Exchange would cancel, as opposed to reject, an ECO received pre-
open or during a halt that was deemed too aggressively priced by the 
Filter, the Exchange does not believe this operational distinction 
would prevent waiver of the operative delay. Rather, the Exchange 
believes that the proposed change would allow for the expansion of the 
Filter so that it would apply to ECOs submitted prior to the open of 
trading or during a trading halt when the individual component option 
series open or reopen. Thus, the Exchange believes that waiver of the 
operative delay would protect investors by enabling the Exchange to 
provide greater protections from potentially erroneous executions and 
potentially reduce the attendant risks of such executions to market 
participants. In addition, the Exchange could implement, without delay, 
the proposed clarifications to add transparency regarding how the 
Filter operates, including how the Specified Amount may be adjusted 
based on the characteristics of the ECO.
---------------------------------------------------------------------------

    \40\ 17 CFR 240.19b-4(f)(6).
    \41\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
The Commission notes that the proposal will extend the existing price 
protection Filter, which currently applies only to ECOs received during 
Core Trading Hours, to ECOs received during the pre-open or during a 
trading halt. As noted above, the Filter is designed to protect 
investors from receiving anomalous or potentially erroneous executions. 
The proposal also provides for consistent use of defined terms in the 
Exchange's rules and clarifies the operation of the Filter, including 
the calculation of the Specified Amount, without altering the operation 
of the Filter. Accordingly, the Commission finds that waiving the 30-
day operative delay is consistent with investors and the public 
interest and designates the proposal operative upon filing.\42\
---------------------------------------------------------------------------

    \42\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such 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 under 
Section 19(b)(2)(B) \43\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-NYSEMKT-2016-98 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-NYSEMKT-2016-98. This 
file number should be included on the subject line if email is used. To 
help the

[[Page 78224]]

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-NYSEMKT-2016-98 and should 
be submitted on or before November 28, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
---------------------------------------------------------------------------

    \44\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2016-26795 Filed 11-4-16; 8:45 am]
 BILLING CODE 8011-01-P
Federal Register / Vol. 81, No. 215 / Monday, November 7, 2016 / Notices 78219

For the Commission, by the Division of set forth in sections A, B, and C below, same strategy by an amount specified by
Trading and Markets, pursuant to delegated of the most significant parts of such the Exchange (‘Specified Amount’).’’
authority.13 statements. The Exchange proposes to replace
Brent J. Fields, references to the ‘‘derived contra-side
A. Self-Regulatory Organization’s
Secretary. net debit/credit NBBO’’ with the
Statement of the Purpose of, and the
[FR Doc. 2016–26788 Filed 11–4–16; 8:45 am] ‘‘contra-side Complex NBBO,’’ as the
Statutory Basis for, the Proposed Rule
BILLING CODE 8011–01–P Exchange has defined Complex NBBO
Change
since implementing the Filter.8 This
1. Purpose proposed modification would not affect
SECURITIES AND EXCHANGE The Exchange is proposing to amend the operation of the rule. Rather, the
COMMISSION Commentary .05 to Rule 980NY to Exchange believes this change would
enhance the Exchange’s price protection reduce redundancy and add internal
[Release No. 34–79213; File No. SR–
NYSEMKT–2016–98] filters applicable to electronically consistency to Exchange rules. Further,
entered Complex Orders,4 including by regarding the description of how the
Self-Regulatory Organizations; NYSE clarifying how the functionality Filter operates, the Exchange proposes
MKT LLC; Notice of Filing and operates and expanding its application, to provide that the Filter would reject an
Immediate Effectiveness of Proposed as described below. ECO back to the submitting ATP Holder
Rule Change Amending Commentary if the sum of the following would be
.05 to Rule 980NY Clarifying the Description of the Filter less than zero ($0.00):
Commentary .05 to Rule 980NY (i) The net debit (credit) limit price of
November 1, 2016. currently sets forth the Price Protection the order,
Pursuant to Section 19(b)(1) 1 of the Filter (the ‘‘Filter’’) applicable to each (ii) the contra-side Complex NBBO for
Securities Exchange Act of 1934 (the incoming ‘‘Electronic Complex Order’’ that same Complex Order, and
‘‘Act’’) 2 and Rule 19b–4 thereunder,3 (iii) the Specified Amount.9
(or ‘‘ECO’’).5 The Filter automatically
notice is hereby given that on October The proposed modification does not
rejects incoming ECOs with a price that alter how the Filter is applied. The
25, 2016, NYSE MKT LLC (the deviates from the current market by the
‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with Filter would continue to help prevent
Specified Amount,6 which varies the execution of aggressively-priced
the Securities and Exchange depending on the smallest MPV of any
Commission (the ‘‘Commission’’) the ECOs (i.e., priced so far away from the
leg in the ECO.7 prevailing contra-side NBBO market for
proposed rule change as described in First, the Exchange proposes to
Items I and II below, which Items have the same strategy) that could cause
modify its description of how the Filter
been prepared by the Exchange. The significant price dislocation in the
operates to make it easier for market
Commission is publishing this notice to market. The Exchange would continue
participants to understand. Commentary
solicit comments on the proposed rule to apply the Filter to help ensure that
.05 to Rule 980NY currently describes
change from interested persons. market participants do not receive an
the Filter as rejecting an ECO if ‘‘the net
execution at a price significantly
I. Self-Regulatory Organization’s debit/credit limit price of the order is
inferior to the contra-side NBBO.
Statement of the Terms of Substance of greater (less) than the derived net debit/
However, the proposed modification
the Proposed Rule Change credit NBBO for the contra-side of that
would add specificity and more clearly
The Exchange proposes to amend 4 Rule 900.3NY(e) defines a Complex Order as
convey the operation of the Filter. The
Commentary .05 to Rule any order involving the simultaneous purchase Exchange believes this proposed change
980NY(Electronic Complex Order and/or sale of two or more different option series would add clarity and transparency to
Trading) to enhance the price protection in the same underlying security, for the same the rule text and enable market
account, in a ratio that is equal to or greater than participants to better understand the
filters applicable to electronically one-to-three (.333) and less than or equal to three-
entered Complex Orders. The proposed to-one (3.00) and for the purpose of executing operation of the Filter, and the
rule change is available on the particular investment strategy. calculation that the Exchange applies to
Exchange’s Web site at www.nyse.com, 5 Per Rule 980NY, an ECO is a Complex Order incoming ECOs without altering the
that has been entered into the NYSE Amex Options operation of the Filter.
at the principal office of the Exchange, System (‘‘System’’) and routed to the Complex
and at the Commission’s Public Matching Engine (‘‘CME’’) for possible execution.
Second, the Exchange proposes to
Reference Room. The CME is the mechanism in which ECOs are modify its explanation of how the
executed against each other or against individual Specified Amount may be adjusted
II. Self-Regulatory Organization’s quotes and orders in the Consolidated Book. ECOs based on the characteristics of the ECO.
Statement of the Purpose of, and that are not immediately executed by the CME are
ranked in the Consolidated Book. See Rule
Currently, paragraphs (b)–(d) of
Statutory Basis for, the Proposed Rule 980NY(a). Commentary .05 describe how the Filter
Change 6 The Specified Amount is defined as: (i) .10 for ‘‘will be applied by’’ the Specified
In its filing with the Commission, the orders where the smallest Minimum Price Variation Amount, which Specified Amount is
(‘‘MPV’’) of any leg of the Electronic Complex Order multiplied by the component of the leg
self-regulatory organization included is .01; (ii) .15 for orders where the smallest MPV
statements concerning the purpose of, of any leg of the Electronic Complex Order is .05; ratio that the leg of the order
and basis for, the proposed rule change and.30 for orders where the smallest MPV of any
and discussed any comments it received leg of the Electronic Complex Order is .10. See 8 See Rule 900.2NY(41)(b) (defining Complex

Commentary .05 to Rule 980NY. NBBO as ‘‘the NBBO for a given complex order
on the proposed rule change. The text 7 See Commentary .05 to Rule 980NY(a). The strategy as derived from the national best bid and
sradovich on DSK3GMQ082PROD with NOTICES

of those statements may be examined at Exchange notes that each ECO is entered into the national best offer for each individual component
the places specified in Item IV below. System at a net debit (credit) price for the entire series of a Complex Order’’). See also Securities and
The Exchange has prepared summaries, strategy and does not include specified prices for Exchange Act Release No. 73284 (October 1, 2014),
any single series component (‘‘leg’’) of the ECO. See 79 FR 60560 (October 7, 2014) (SR–NYSEMKT–
also Securities and Exchange Act Release No. 70674 2014–84) (Notice of filing and immediate
13 17 CFR 200.30–3(a)(12). (October 11, 2013), 78 FR 62917 (October 22, 2013) effectiveness of proposed rule change to codify the
1 15 U.S.C. 78s(b)(1). (SR–NYSEMKT–2013–80) (Notice of filing, which term Complex NBBO).
2 15 U.S.C. 78a.
describes the operation of the Filter) (herein 9 See proposed Commentary .05(a) to Rule
3 17 CFR 240.19b–4. referred to as the ‘‘Original Release’’). 980NY.

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B. Self-Regulatory Organization’s proposed rule change does not: (i) investors and the public interest. The
Statement on Burden on Competition Significantly affect the protection of Commission notes that the proposal will
The Exchange does not believe that investors or the public interest; (ii) extend the existing price protection
the proposed rule change would impose impose any significant burden on Filter, which currently applies only to
any burden on competition that is not competition; and (iii) become operative ECOs received during Core Trading
prior to 30 days from the date on which Hours, to ECOs received during the pre-
necessary or appropriate in furtherance
it was filed, or such shorter time as the open or during a trading halt. As noted
of the purposes of the Act.
Commission may designate, if above, the Filter is designed to protect
The Exchange is proposing to enhance
consistent with the protection of investors from receiving anomalous or
an existing price protection Filter to
investors and the public interest, the potentially erroneous executions. The
provide greater protections from
proposed rule change has become proposal also provides for consistent
potentially erroneous executions and
effective pursuant to Section 19(b)(3)(A) use of defined terms in the Exchange’s
potentially reduce the attendant risks of
of the Act and Rule 19b&4(f)(6)(iii) rules and clarifies the operation of the
such executions to market participants.
thereunder. Filter, including the calculation of the
Therefore, the Exchange believes that A proposed rule change filed under Specified Amount, without altering the
the proposal should provide an Rule 19b–4(f)(6) 40 normally does not operation of the Filter. Accordingly, the
incentive for market participants to become operative prior to 30 days after Commission finds that waiving the 30-
enter executable interest in the CME the date of the filing. However, pursuant day operative delay is consistent with
that can help foster price discovery and to Rule 19b–4(f)(6)(iii),41 the investors and the public interest and
transparency thereby benefiting all Commission may designate a shorter designates the proposal operative upon
market participants. The proposal is time if such action is consistent with the filing.42
structured to offer the same protection of investors and the public At any time within 60 days of the
enhancement to all market participants, interest. The Exchange has asked the filing of such proposed rule change, the
regardless of account type, and will not Commission to waive the 30-day Commission summarily may
impose a competitive burden on any operative delay so that the proposal may temporarily suspend such rule change if
participant. become operative immediately upon it appears to the Commission that such
The Exchange does not believe that filing. The Exchange believes that action is necessary or appropriate in the
the proposed enhancement would waiver of the operative delay would be public interest, for the protection of
impose a burden on competing options consistent with the protection of investors, or otherwise in furtherance of
exchanges. Rather, the availability of investors and the public interest the purposes of the Act. If the
this enhanced Filter may foster more because it would enable the Exchange to Commission takes such action, the
competition. Specifically, the Exchange enhance an existing price protection Commission shall institute proceedings
notes that it operates in a highly Filter. Although the Exchange would under Section 19(b)(2)(B) 43 of the Act to
competitive market in which market cancel, as opposed to reject, an ECO determine whether the proposed rule
participants can readily favor competing received pre-open or during a halt that change should be approved or
venues. When an exchange offers was deemed too aggressively priced by disapproved.
enhanced functionality that the Filter, the Exchange does not believe
distinguishes it from the competition IV. Solicitation of Comments
this operational distinction would
and participants find it useful, it has prevent waiver of the operative delay. Interested persons are invited to
been the Exchange’s experience that Rather, the Exchange believes that the submit written data, views, and
competing exchanges will move to proposed change would allow for the arguments concerning the foregoing,
adopt similar functionality. Thus, the expansion of the Filter so that it would including whether the proposed rule
Exchange believes that this type of apply to ECOs submitted prior to the change is consistent with the Act.
competition amongst exchanges is open of trading or during a trading halt Comments may be submitted by any of
beneficial to the market place as a whole when the individual component option the following methods:
as it can result in enhanced processes, series open or reopen. Thus, the Electronic Comments
functionality, and technologies. Exchange believes that waiver of the
operative delay would protect investors • Use the Commission’s Internet
C. Self-Regulatory Organization’s comment form (http://www.sec.gov/
Statement on Comments on the by enabling the Exchange to provide
greater protections from potentially rules/sro.shtml); or
Proposed Rule Change Received From
erroneous executions and potentially • Send an email to rule-
Members, Participants, or Others comments@sec.gov. Please include File
reduce the attendant risks of such
No written comments were solicited executions to market participants. In Number SR–NYSEMKT–2016–98 on the
or received with respect to the proposed addition, the Exchange could subject line.
rule change. implement, without delay, the proposed Paper Comments
III. Date of Effectiveness of the clarifications to add transparency • Send paper comments in triplicate
Proposed Rule Change and Timing for regarding how the Filter operates,
to Brent J. Fields, Secretary, Securities
Commission Action including how the Specified Amount
and Exchange Commission, 100 F Street
may be adjusted based on the
The Exchange has filed the proposed NE., Washington, DC 20549–1090.
characteristics of the ECO.
rule change pursuant to Section The Commission believes that All submissions should refer to File
19(b)(3)(A) of the Act 38 and Rule 19b– Number SR–NYSEMKT–2016–98. This
sradovich on DSK3GMQ082PROD with NOTICES

waiving the 30-day operative delay is
4(f)(6) thereunder.39 Because the consistent with the protection of file number should be included on the
subject line if email is used. To help the
38 15 U.S.C. 78s(b)(3)(A). at least five business days prior to the date of filing
39 17 CFR 240.19b–4(f)(6). In addition, Rule of the proposed rule change, or such shorter time 42 For purposes only of waiving the 30-day

19b&4(f)(6)(iii) requires the Exchange to give the as designated by the Commission. The Exchange operative delay, the Commission has considered the
Commission written notice of the Exchange’s intent has satisfied this requirement. proposed rule’s impact on efficiency, competition,
to file the proposed rule change, along with a brief 40 17 CFR 240.19b–4(f)(6). and capital formation. 15 U.S.C. 78c(f).
description and text of the proposed rule change, 41 17 CFR 240.19b–4(f)(6)(iii). 43 15 U.S.C. 78s(b)(2)(B).

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78224 Federal Register / Vol. 81, No. 215 / Monday, November 7, 2016 / Notices

Commission process and review your (‘‘Commission’’) the proposed rule the calibrated coefficients of a model
comments more efficiently, please use change as described in Items I, II and III describing the yield curve for U.S.
only one method. The Commission will below, which Items have been prepared government securities; ‘‘returns’’ on the
post all comments on the Commission’s by OCC. The Commission is publishing nearest-to-expiration futures contracts of
Internet Web site (http://www.sec.gov/ this notice to solicit comments on the various kinds; and changes in foreign
rules/sro.shtml). Copies of the rule change from interested persons. exchange rates. For the volatility of each
submission, all subsequent risk factor, the Monte Carlo simulations
I. Clearing Agency’s Statement of the
amendments, all written statements use the greater of: (i) The short-term
Terms of Substance of the Proposed
with respect to the proposed rule volatility level predicted by the model;
Rule Change
change that are filed with the and (ii) an estimate of its longer-run
Commission, and all written This proposed rule change by OCC level. In between the monthly re-
communications relating to the would modify the current process for estimations of all the models, volatilities
proposed rule change between the systematically monitoring market are automatically re-scaled to the greater
Commission and any person, other than conditions and performing adjustments of the short-term or the longer-run levels
those that may be withheld from the to its margin coverage when current to mitigate pro-cyclicality 6 in the
public in accordance with the market volatility increases beyond margin levels. (This daily volatility
provisions of 5 U.S.C. 552, will be historically observed levels. measure is called the ‘‘uniform scale
available for Web site viewing and II. Clearing Agency’s Statement of the factor.’’) The uniform scale factor is a
printing in the Commission’s Public Purpose of, and Statutory Basis for, the multiplier used in connection with
Reference Room, 100 F Street NE., Proposed Rule Change STANS calculations to account for,
Washington, DC 20549 on official among other things, the difference
business days between the hours of In its filing with the Commission, between short-term and long-term
10:00 a.m. and 3:00 p.m. Copies of the OCC included statements concerning volatility forecasts for equities. It is
filing also will be available for the purpose of and basis for the specifically defined as the ratio of long-
inspection and copying at the principal proposed rule change and discussed any run volatility (10Y+) over short-run
office of the Exchange. All comments comments it received on the proposed volatility (2Y). It is used to ‘‘scale up’’
received will be posted without change; rule change. The text of these statements the short-run volatility of the securities
the Commission does not edit personal may be examined at the places specified (e.g., IBM) that are subject to monthly
identifying information from in Item IV below. OCC has prepared update, in order to estimate long-run
submissions. You should submit only summaries, set forth in sections (A), (B), volatility. It is also used to capture data
information that you wish to make and (C) below, of the most significant gaps between monthly updates.
available publicly. All submissions aspects of these statements. An approach employed by OCC to
should refer to File Number SR– (A) Clearing Agency’s Statement of the mitigate pro-cyclicality within STANS
NYSEMKT–2016–98 and should be Purpose of, and Statutory Basis for, the is to estimate market volatility based on
submitted on or before November 28, Proposed Rule Change current market conditions (‘‘current
2016. market estimate’’) and compare this
1. Purpose current market estimate to a long-run
For the Commission, by the Division of
Trading and Markets, pursuant to delegated OCC’s margin methodology, the estimate of market volatility (‘‘long-run
authority.44 System for Theoretical Analysis and market estimate’’). This comparison
Brent J. Fields, Numerical Simulations (‘‘STANS’’), is utilizes certain market benchmarks (or
Secretary. OCC’s proprietary risk management factors), which serve as proxies for the
[FR Doc. 2016–26795 Filed 11–4–16; 8:45 am]
system that calculates Clearing overall volatility of an asset class or
Members’ 3 margin requirements.4 group of products. If the long-run
BILLING CODE 8011–01–P
STANS utilizes large-scale Monte Carlo market estimate for a factor is found to
simulations to forecast price movement be greater than the current market
SECURITIES AND EXCHANGE and correlations in determining a estimate, the volatility estimates for all
COMMISSION Clearing Member’s margin products tied to that factor are adjusted
requirement.5 The STANS margin (or scaled) up in a manner proportionate
[Release No. 34–79212; File No. SR–OCC– requirement is a portfolio calculation at
2016–013]
to the relationship between the current
the level of Clearing Member legal entity market volatility and the long-run
marginable net positions tier account market volatility for that factor.
Self-Regulatory Organizations; The
(tiers can be customer, firm, or market Current STANS includes a single
Options Clearing Corporation; Notice
marker) and consists of an estimate of factor (‘‘uniform scale factor’’), which
of Filing of Proposed Rule Change
99% 2-day expected shortfall and an serves as the proxy for the equity asset
Concerning the Options Clearing
add-on for model risk (the class. This uniform scale factor is
Corporation’s Margin Coverage During
concentration/dependence stress test calibrated based on changes in the
Times of Increase Volatility
charge). volatility of the Standard & Poor’s 500®
November 1, 2016. The majority of risk factors utilized in Index (‘‘SPX’’) and applied to all
Pursuant to Section 19(b)(1) of the the STANS methodology are total ‘‘equity-based products’’ in the manner
Securities Exchange Act of 1934 returns on individual equity securities. described above. Currently, the uniform
(‘‘Act’’),1 and Rule 19b–4 thereunder,2 Other risk factors considered include: scale factor is the only scale factor used
sradovich on DSK3GMQ082PROD with NOTICES

notice is hereby given that on October Returns on equity indices; changes in in STANS. The proposed change is
18, 2016, The Options Clearing intended to enhance the STANS margin
3 See OCC By-Laws Article 1(C)(14).
Corporation (‘‘OCC’’) filed with the calculations by providing for the
4 See Securities Exchange Act Release No. 53322
Securities and Exchange Commission capability to increase the number of
(February 15, 2006), 71 FR 9403 (February 23, 2006)
(SR–OCC–2004–20). A detailed description of the
44 17 CFR 200.30–3(a)(12). STANS methodology is available at http:// 6 A quality that is positively correlated with the
1 15 U.S.C. 78s(b)(1). optionsclearing.com/risk-management/margins/. overall state of the economy is deemed to be pro-
2 17 CFR 240.19b–4. 5 See OCC Rule 601. cyclical.

VerDate Sep<11>2014 16:02 Nov 04, 2016 Jkt 241001 PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 E:\FR\FM\07NON1.SGM 07NON1
Document Created: 2018-02-14 08:21:58
Document Modified: 2018-02-14 08:21:58
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 78219