82 FR 8452 - Self-Regulatory Organizations; ISE Mercury LLC; Order Granting Approval of Proposed Rule Change To Amend ISE Mercury Rule 723 and To Make Pilot Program Permanent
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 15 (January 25, 2017)
Federal Register Volume 82, Issue 15 (January 25, 2017)
| Page Range | 8452-8455 | |
| FR Document | 2017-01619 |
[Federal Register Volume 82, Number 15 (Wednesday, January 25, 2017)] [Notices] [Pages 8452-8455] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-01619] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-79841; File No. SR-ISEMercury-2016-25] Self-Regulatory Organizations; ISE Mercury LLC; Order Granting Approval of Proposed Rule Change To Amend ISE Mercury Rule 723 and To Make Pilot Program Permanent January 18, 2017. I. Introduction On December 12, 2016, ISE Mercury, LLC (the ``Exchange'' or ``ISE Mercury'') filed with the Securities and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\, and Rule 19b-4 thereunder,\2\ a proposed rule change to amend the eligibility requirements for its Price Improvement Mechanism (``PIM'' or ``Auction'') and make permanent those aspects of the PIM that are currently operating on a pilot basis. The proposed rule change was published for comment in the Federal Register on December 19, 2016.\3\ The Commission received no comments regarding the proposal. This order approves the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ See Securities Exchange Act Release No. 79539 (December 13, 2016), 81 FR 91982 (``Notice''). --------------------------------------------------------------------------- II. Description of the Proposal The Exchange adopted PIM as part of its application to be registered as a national securities exchange.\4\ Pursuant to ISE Mercury Rule 723, an Electronic Access Member (``EAM'') may electronically submit for execution an order it represents as agent (``Agency Order'') against principal interest or against a solicited order for the full size of the Agency Order, provided it submits the Agency Order for electronic execution into the PIM (a ``Crossing Transaction''). Parts of the PIM are currently operating on a pilot basis (``Pilot''),\5\ which is set to expire on January 18, 2017.\6\ The Exchange proposes to make the Pilot permanent, and also proposes to amend the Auction eligibility requirements for certain [[Page 8453]] Agency Orders of less than 50 option contracts. --------------------------------------------------------------------------- \4\ See Securities Exchange Act Release No. 76998 (January 29, 2016), 81 FR 6066 (February 4, 2016) (File No. 10-221) (``Exchange Approval Order''). \5\ Two components of PIM were approved by the Commission on a pilot basis: (1) The early conclusion of the PIM; and (2) no minimum size requirement of orders. \6\ See Securities Exchange Act Release No. 78342 (July 15, 2016), 81 FR 47481 (July 21, 2016) (SR-ISEMercury-2016-13) (``PIM July 2016 Extension''). --------------------------------------------------------------------------- A. PIM Eligibility Requirements for Agency Orders of Fewer Than 50 Contracts Currently, the PIM may be initiated if certain conditions are met. The Crossing Transaction must be entered only at a price that is equal to or better than the National Best Bid/Offer (``NBBO'') on the opposite side of the market from the Agency Order, and better than the limit order or quote on the ISE Mercury order book on the same side of the Agency Order.\7\ --------------------------------------------------------------------------- \7\ See ISE Mercury Rule 723(b)(1). --------------------------------------------------------------------------- ISE Mercury proposes to amend ISE Mercury Rule 723(b) to require EAMs to provide at least $0.01 price improvement for an Agency Order if that order is for less than 50 option contracts and if the difference between the NBBO is $0.01. For the period beginning January 19, 2017 until a date specified by the Exchange in a Regulatory Information Circular, which date shall be no later than September 15, 2017, ISE Mercury will adopt a member conduct standard to implement this requirement.\8\ Under this provision, ISE Mercury is proposing to amend the Auction Eligibility Requirements to require that, if the Agency Order is for less than 50 option contracts, and if the difference between the NBBO is $0.01, an EAM shall not enter a Crossing Transaction unless such Crossing Transaction is entered at a price that is one minimum price improvement increment better than the NBBO on the opposite side of the market from the Agency Order, and better than any limit order on the limit order book on the same side of the market as the Agency Order. This requirement will apply regardless of whether the Agency Order is for the account of a public customer, or where the Agency Order is for the account of a broker dealer or any other person or entity that is not a Public Customer. --------------------------------------------------------------------------- \8\ The Exchange notes that its indirect parent company, U.S. Exchange Holdings, Inc. has been acquired by Nasdaq, Inc. See Securities Exchange Act Release No. 78119 (June 21, 2016), 81 FR 41611 (June 27, 2016) (SR-ISEMercury-2016-10). Pursuant to this acquisition, ISE Mercury platforms are migrating to Nasdaq platforms, including the platform that operates PIM. ISE Mercury intends to retain the proposed member conduct standard requiring price improvement for options orders of under 50 contracts where the difference between the NBBO is $0.01 until the ISE Mercury platforms and the corresponding symbols are migrated to the platforms operated by Nasdaq, Inc. See Notice, supra note 3, at 91984 n.7. --------------------------------------------------------------------------- Failure to provide such price improvement will subject members to the fines set forth in ISE Rule 1614(d)(4).\9\ The Exchange stated that it will conduct electronic surveillance of the PIM to ensure that members comply with the proposed price improvement requirements for option orders of less than 50 contracts.\10\ --------------------------------------------------------------------------- \9\ In a separate proposed rule change, ISE is proposing to adopt similar price improvement requirements for orders of fewer than 50 contracts for its PIM. As part of that rule change, ISE is proposing to amend ISE Rule 1614 (Imposition of Fines for Minor Rule Violations) to add Rule 1614(d)(4), which will provide that, beginning January 19, 2017, any member who enters an order into PIM for fewer than 50 contracts, while the National Best Bid or Offer spread is $0.01, must provide price improvement of at least one minimum price improvement increment better than the NBBO on the opposite side of the market from the Agency Order, which increment may not be smaller than $0.01. Failure to provide such price improvement will result in members being subject to the following fines: $500 for the second offense, $1,000 for the third offense, and $2,500 for the fourth offense. Subsequent offenses will subject the member to formal disciplinary action. ISE will review violations on a monthly cycle to assess these violations. The Commission notes that the ISE proposal was approved in conjunction with this proposal. See Securities Exchange Act Release No. 34-79829 (January 18, 2017) (SR-ISE-2016-29). \10\ See Notice, supra note 3, at 91984. --------------------------------------------------------------------------- The Exchange is also proposing a systems-based mechanism to implement this price improvement requirement, which shall be effective following the migration of a symbol to INET, the platform operated by Nasdaq, Inc. that will also operate the PIM.\11\ Under this provision, if the Agency Order is for less than 50 option contracts, and if the difference between the NBBO is $0.01, the Crossing Transaction must be entered at one minimum price improvement increment better than the NBBO on the opposite side of the market from the Agency Order and better than the limit order or quote on the ISE Mercury order book on the same side of the Agency Order. --------------------------------------------------------------------------- \11\ See id. See also proposed ISE Mercury Rule 723(b). --------------------------------------------------------------------------- The Exchange will retain the current requirements for PIM eligibility in all other instances. Accordingly, if the Agency Order is for 50 option contracts or more or if the difference between the NBBO is greater than $0.01, the Crossing Transaction must be entered only at a price that is equal to or better than the NBBO and better than the limit order or quote on the ISE Mercury order book on the same side as the Agency Order. The Exchange believes that these changes to PIM may provide additional opportunities for Agency Orders of fewer than 50 option contracts to receive price improvement over the NBBO where the difference in the NBBO is $0.01 and therefore encourage the increased submission of orders of under 50 option contracts.\12\ The Exchange notes that the statistics for the current pilot, which include, among other things, price improvement for orders of fewer than 50 option contracts under the current Auction eligibility requirements, show relatively small amounts of price improvement for such orders.\13\ ISE Mercury believes that the proposed requirements will therefore increase the price improvement that orders of fewer than 50 option contracts may receive in PIM.\14\ --------------------------------------------------------------------------- \12\ See Notice, supra note 3, at 91985. \13\ See id. \14\ See id. --------------------------------------------------------------------------- B. Pilot Program Two components of the PIM were approved by the Commission on a pilot basis: (1) The early conclusion of the PIM; \15\ and (2) no minimum size requirement of orders. The provisions were approved for a pilot period that currently expires on January 18, 2017.\16\ The Exchange proposes to have the Pilot approved on a permanent basis. --------------------------------------------------------------------------- \15\ See ISE Mercury Rule 723(c)(5) and (d)(4). \16\ See PIM July 2016 Extension, supra note 6. --------------------------------------------------------------------------- During the Pilot period, the Exchange submitted certain data periodically as required by the Commission, to provide supporting evidence that, among other things, there is meaningful competition for all size orders, there is significant price improvement available through the PIM, and that there is an active and liquid market functioning on the Exchange outside of the Auction mechanism.\17\ --------------------------------------------------------------------------- \17\ See Supplementary Material .03 to ISE Mercury Rule 723. --------------------------------------------------------------------------- 1. No Minimum Size Requirement Supplemental Material .03 to Rule 723 provides that, as part of the current Pilot, there will be no minimum size requirement for orders to be eligible for the Auction. The Exchange believes that the data gathered since the approval of the Pilot, which it discussed in the Notice, establishes that there is liquidity and competition both within the PIM and outside of the PIM, and that there are opportunities for significant price improvement within the PIM.\18\ --------------------------------------------------------------------------- \18\ See Notice, supra note 3, at 91985-86. See also Exhibit 3 to SR-ISEMercury-2016-25. --------------------------------------------------------------------------- The Exchange compiled price improvement data in orders from February through June 2016. For March 2016, where the order was on behalf of a Public Customer, the order was for 50 contracts or less, and ISE Mercury was at the NBBO, the most contracts traded (2,525) occurred when the spread was $0.03, with an average number of two participants.\19\ All of these contracts [[Page 8454]] received $0.01 price improvement. When the spread was $0.01 for this same category, a total of 734 contracts traded, with none of those contracts receiving price improvement.\20\ --------------------------------------------------------------------------- \19\ According to the Exchange, this discussion of March 2016 data is illustrative of data that was gathered between February 2016 and July 2016. See Notice, supra note 3, at 91985 n.13. The complete underlying data for February 2016 through June 2016 was attached as Exhibit 3 to the Notice. \20\ See Notice, supra note 3, at 91985. --------------------------------------------------------------------------- In comparison, where the order was on behalf of a Public Customer, the order was for greater than 50 contracts, and ISE Mercury was at the NBBO, the most contracts traded (934) occurred when the spread was $0.10 to $0.20. The greatest number of these contracts (429) received $0.05-$0.10 price improvement.\21\ --------------------------------------------------------------------------- \21\ See id. --------------------------------------------------------------------------- In March 2016, where the order was on behalf of a Public Customer, the order was for 50 contracts or less, and ISE Mercury was not at the NBBO, the most contracts traded (3,772) occurred when the spread was $0.01. Of this category, the greatest number of contracts (3,722) received no price improvement, and 50 contracts received $0.01 price improvement.\22\ --------------------------------------------------------------------------- \22\ See id. --------------------------------------------------------------------------- In comparison, in March 2016, where the order was on behalf of a Public Customer, the order was for greater than 50 contracts, and ISE Mercury was not at the NBBO, the most contracts traded (1,431) occurred when the spread was $0.02. Of these contracts, the greatest number of contracts (758) received no price improvement.\23\ --------------------------------------------------------------------------- \23\ See id. --------------------------------------------------------------------------- ISE Mercury believes that the data gathered during the Pilot period indicates that there is meaningful competition in PIM auctions for all size orders, there is an active and liquid market functioning on the Exchange outside of the auction mechanism, and that there are opportunities for significant price improvement for orders executed through PIM.\24\ The Exchange therefore has requested that the Commission approve the no-minimum size requirement on a permanent basis. --------------------------------------------------------------------------- \24\ See id. at 91986. --------------------------------------------------------------------------- 2. Early Conclusion of the PIM Supplemental Material .05 to Rule 723 provides that Rule 723(c)(5) and Rule 723(d)(4), which relate to the termination of the exposure period by unrelated orders shall be part of the current Pilot. Rule 723(c)(5) provides that the exposure period will automatically terminate (i) at the end of the 500 millisecond period,\25\ (ii) upon the receipt of a market or marketable limit order on the Exchange in the same series, or (iii) upon the receipt of a nonmarketable limit order in the same series on the same side of the market as the Agency Order that would cause the price of the Crossing Transaction to be outside of the best bid or offer on the Exchange. Rule 723(d)(4) provides that, when a market order or marketable limit order on the opposite side of the market from the Agency Order ends the exposure period, it will participate in the execution of the Agency Order at the price that is mid-way between the best counter-side interest and the NBBO, so that both the market or marketable limit order and the Agency Order receive price improvement. Transactions will be rounded, when necessary, to the $0.01 increment that favors the Agency Order. --------------------------------------------------------------------------- \25\ The Commission notes that, at the time of the filing of this proposal, the duration of the exposure period was 500 milliseconds. The Exchange recently received approval to modify the exposure period to a time period designated by the Exchange of no less than 100 milliseconds and no more than one second. See Securities Exchange Act Release No. 79731 (January 4, 2017), 82 FR 3058 (January 10, 2017) (SR-ISEMercury-2016-21). --------------------------------------------------------------------------- As with the no minimum size requirement, the Exchange has gathered data on these three conditions to assess the effect of early PIM conclusions on the Pilot. For the period from January 2016 through June 2016, there were a total of 77 early terminated Auctions. The number of orders in early terminated PIM auctions constituted 0.35% of total PIM orders.\26\ There were a total of 1,581 contracts that traded through early terminated Auctions. The number of contracts in early terminated PIM auctions represented 0.26% of total PIM contracts.\27\ --------------------------------------------------------------------------- \26\ See Notice, supra note 3, at 91986. \27\ See id. --------------------------------------------------------------------------- Based on the data gathered during the Pilot, the Exchange does not anticipate that any of these conditions will occur with significant frequency, or will otherwise significantly affect the functioning of the PIM.\28\ The Exchange therefore has requested that the Commission approve this aspect of the Pilot on a permanent basis. --------------------------------------------------------------------------- \28\ See id. --------------------------------------------------------------------------- III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange and, in particular, with Section 6(b) of the Act.\29\ In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,\30\ which requires, among other things, that the rules of a national securities 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 customers, issuers, brokers and dealers. --------------------------------------------------------------------------- \29\ 15 U.S.C. 78f(b). In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). \30\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- As part of its proposal, the Exchange provided summary data on Exhibit 3 of its filing for the period January through June 2016, which the Exchange and Commission both publicly posted on their respective Web sites. Among other things, this data is useful in assessing the level of price improvement in the Auction, in particular for orders of fewer than 50 contracts; the degree of competition for order flow in such Auctions; and a comparison of liquidity in the Auctions with liquidity on the Exchange generally.\31\ Based on the data provided by the Exchange, the Commission believes that the Exchange's price improvement auction generally delivers a meaningful opportunity for price improvement to orders, including orders for fewer than 50 contracts, when the spread in the option is $0.02 or more. At the same time, as the Exchange has recognized, the data do not demonstrate that such orders have realized significant price improvement when the NBBO has a bid/ask differential of $0.01.\32\ Recognizing this, the Exchange has proposed to amend the Auction eligibility requirements to require the Initiating Participant to guarantee at least $0.01 of price improvement for Agency Orders of fewer than 50 contracts where the NBBO has a bid/ask differential of $0.01, whether or not the Exchange BBO is the same as the NBBO. --------------------------------------------------------------------------- \31\ See Exhibit 3 to SR-ISEMercury-2016-25. \32\ See Notice, supra note 3, at 91985. --------------------------------------------------------------------------- The Exchange's proposal to modify the Auction eligibility requirements for orders of fewer than 50 contracts and seek permanent approval of the Pilot, as amended with the new provision, will, in the Commission's view, promote opportunities for price improvement for such orders when the NBBO is $0.01 wide, while continuing to provide opportunities for price improvement when spreads are wider than $0.01. In addition, the Commission has carefully evaluated the Pilot data and [[Page 8455]] has determined that it would be beneficial to customers and to the options market as a whole to approve on a permanent basis the provisions concerning early conclusion of the PIM. The Commission notes that there have been few instances of early termination of the PIM. The Commission believes that, particularly for Auctions for fewer than 50 contracts when the bid/ask differential is wider than $0.01, the data provided by the Exchange support its proposal to make the Pilot permanent. The data demonstrate that the Auction generally provides price improvement opportunities to orders, including orders of retail customers and particularly when the bid/ask differential is wider than $0.01; that there is meaningful competition for orders on the Exchange; and that there exists an active and liquid market functioning on the Exchange outside of the Auction.\33\ The Commission further believes that the proposed revisions to the eligibility requirements for orders of fewer than 50 contracts with respect to circumstances when the NBBO is no more than $0.01 wide should help to enhance the operation of the Auction by providing meaningful opportunities for price improvement in such circumstances, and should benefit investors and others in a manner that is consistent with the Act. --------------------------------------------------------------------------- \33\ See Exhibit 3 to SR-ISEMercury-2016-25. --------------------------------------------------------------------------- The Commission further notes that, as discussed more fully above, ISE Mercury is initially proposing to implement is price improvement requirement for Agency Orders of fewer than 50 option contracts where the difference in the NBBO is $0.01 with a member conduct standard.\34\ As described in greater detail above, ISE Mercury proposes to enforce this requirement under ISE Rule 1614(d)(4). The Commission believes that ISE Mercury's proposed member conduct standard and ISE Rule 1614(d)(4) are reasonable means to implement the price improvement requirement until implementation of its proposed systems-based mechanism for this requirement, which will become effective following the migration of a symbol to INET, the platform operated by Nasdaq, Inc. that will also operate the PIM. The Commission further notes that the Exchange has represented that its proposed member conduct standard will be effective until the migration of all symbols to the INET platform, which shall be no later than September 15, 2017.\35\ --------------------------------------------------------------------------- \34\ The Exchange stated that it will conduct electronic surveillance of the PIM to ensure that members comply with the proposed price improvement requirements for option orders of fewer than 50 contracts. See Notice, supra note 3, at 91284. \35\ See Notice, supra note 3, at 91284 & n.7. --------------------------------------------------------------------------- Thus, the Commission has determined to approve the Exchange's proposed revisions to ISE Mercury Rule 723(b) and Supplementary Material .03 and .05 to ISE Mercury Rule 723, and to approve the Pilot, as proposed to be modified, on a permanent basis. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\36\ that the proposed rule change (SR-ISEMercury-2016-25), be and hereby is approved. --------------------------------------------------------------------------- \36\ 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\37\ --------------------------------------------------------------------------- \37\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-01619 Filed 1-24-17; 8:45 am] BILLING CODE 8011-01-P
![8452 Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices
competition for orders on the Exchange; was published for comment in the SECURITIES AND EXCHANGE
and that there exists an active and Federal Register on December 7, 2016.3 COMMISSION
liquid market functioning on the The Commission has received one
Exchange outside of the auction.28 The comment letter on the proposed rule [Release No. 34–79841; File No. SR–
Commission further believes that the change.4 ISEMercury–2016–25]
proposed revisions to the eligibility
Section 19(b)(2) of the Act 5 provides
requirements for simple PIP Orders with Self-Regulatory Organizations; ISE
respect to circumstances when the that, within 45 days of the publication
Mercury LLC; Order Granting Approval
NBBO is $0.01 wide should help to of notice of the filing of a proposed rule
of Proposed Rule Change To Amend
enhance the operation of the auction by change, or within such longer period up
ISE Mercury Rule 723 and To Make
limiting its use to circumstances when to 90 days as the Commission may
Pilot Program Permanent
there are more meaningful opportunities designate if it finds such longer period
for price improvement, and should to be appropriate and publishes its January 18, 2017.
benefit investors and others in a manner reasons for so finding or as to which the
I. Introduction
that is consistent with the Act. Thus, the self-regulatory organization consents,
Commission has determined to approve the Commission shall either approve the On December 12, 2016, ISE Mercury,
the Exchange’s proposed revisions to proposed rule change, disapprove the LLC (the ‘‘Exchange’’ or ‘‘ISE Mercury’’)
Rule 7150 and to approve the Pilot proposed rule change, or institute filed with the Securities and Exchange
Programs, as proposed to be modified, proceedings to determine whether the Commission (‘‘Commission’’), pursuant
on a permanent basis. proposed rule change should be to Section 19(b)(1) of the Securities
disapproved. The 45th day after Exchange Act of 1934 (‘‘Act’’) 1, and
IV. Conclusion
publication of the notice for this Rule 19b–4 thereunder,2 a proposed rule
It is therefore ordered, pursuant to proposed rule change is January 21, change to amend the eligibility
Section 19(b)(2) of the Act,29 that the 2017. The Commission is extending this requirements for its Price Improvement
proposed rule change (SR–BOX–2016– 45-day time period. Mechanism (‘‘PIM’’ or ‘‘Auction’’) and
58), be and hereby is approved. make permanent those aspects of the
The Commission finds that it is PIM that are currently operating on a
For the Commission, by the Division of
Trading and Markets, pursuant to delegated appropriate to designate a longer period pilot basis. The proposed rule change
authority.30 within which to take action on the was published for comment in the
Eduardo A. Aleman, proposed rule change so that it has Federal Register on December 19,
Assistant Secretary. sufficient time to consider the proposed 2016.3 The Commission received no
[FR Doc. 2017–01610 Filed 1–24–17; 8:45 am] rule change. Accordingly, the comments regarding the proposal. This
BILLING CODE 8011–01–P
Commission, pursuant to Section order approves the proposed rule
19(b)(2) of the Act,6 designates March 7, change.
2017, as the date by which the
Commission shall either approve or II. Description of the Proposal
SECURITIES AND EXCHANGE
COMMISSION disapprove or institute proceedings to The Exchange adopted PIM as part of
[Release No. 34–79839; File No. SR–
determine whether to disapprove the its application to be registered as a
BatsBZX–2016–80] proposed rule change (File Number SR– national securities exchange.4 Pursuant
BatsBZX–2016–80). to ISE Mercury Rule 723, an Electronic
Self-Regulatory Organizations; Bats For the Commission, by the Division of Access Member (‘‘EAM’’) may
BZX Exchange, Inc.; Notice of Trading and Markets, pursuant to delegated electronically submit for execution an
Designation of a Longer Period for authority.7 order it represents as agent (‘‘Agency
Commission Action on Proposed Rule Order’’) against principal interest or
Eduardo A. Aleman,
Changes to BZX Rule 14.11, Other against a solicited order for the full size
Securities, and BZX Rule 14.12, Failure Assistant Secretary.
of the Agency Order, provided it
To Meet Listing Standards [FR Doc. 2017–01617 Filed 1–24–17; 8:45 am]
submits the Agency Order for electronic
January 18, 2017.
BILLING CODE 8011–01–P execution into the PIM (a ‘‘Crossing
Transaction’’). Parts of the PIM are
On November 18, 2016, Bats BZX
currently operating on a pilot basis
Exchange, Inc. (‘‘BZX’’) filed with the
(‘‘Pilot’’),5 which is set to expire on
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section January 18, 2017.6 The Exchange
19(b)(1) of the Securities Exchange Act proposes to make the Pilot permanent,
of 1934 (‘‘Act’’) 1 and Rule 19b–4 and also proposes to amend the Auction
eligibility requirements for certain
thereunder,2 a proposed rule change to,
among other things: (1) Amend the
1 15 U.S.C. 78s(b)(1).
listing rules relating to exchange-traded 2 17 CFR 240.19b–4.
products in BZX Rule 14.11 to add 3 See Securities Exchange Act Release No. 79539
additional continued listing standards; (December 13, 2016), 81 FR 91982 (‘‘Notice’’).
and (2) incorporate certain changes to 4 See Securities Exchange Act Release No. 76998
mstockstill on DSK3G9T082PROD with NOTICES
BZX Rule 14.12 (Failure to Meet Listing 3 See Securities Exchange Act Release No. 79450 (January 29, 2016), 81 FR 6066 (February 4, 2016)
Standards). The proposed rule change (December 1, 2016), 81 FR 88284. (File No. 10–221) (‘‘Exchange Approval Order’’).
4 See letter from David W. Blass, General Counsel, 5 Two components of PIM were approved by the
28 See Investment Company Institute, to Brent J. Fields, Commission on a pilot basis: (1) The early
Exhibit 3 to SR–BOX–2016–58. conclusion of the PIM; and (2) no minimum size
29 15 U.S.C. 78s(b)(2). Secretary, Commission, dated January 12, 2017.
requirement of orders.
30 17 CFR 200.30–3(a)(12). 5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 78342
1 15 U.S.C. 78s(b)(1). 6 Id.
(July 15, 2016), 81 FR 47481 (July 21, 2016) (SR–
2 17 CFR 240.19b–4. 7 17 CFR 200.30–3(a)(31). ISEMercury–2016–13) (‘‘PIM July 2016 Extension’’).
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![Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices 8455
has determined that it would be symbols to the INET platform, which II. Clearing Agency’s Statement of the
beneficial to customers and to the shall be no later than September 15, Purpose of, and Statutory Basis for, the
options market as a whole to approve on 2017.35 Proposed Rule Change
a permanent basis the provisions Thus, the Commission has
concerning early conclusion of the PIM. determined to approve the Exchange’s In its filing with the Commission,
The Commission notes that there have proposed revisions to ISE Mercury Rule OCC included statements concerning
been few instances of early termination 723(b) and Supplementary Material .03 the purpose of and basis for the
of the PIM. and .05 to ISE Mercury Rule 723, and proposed rule change and discussed any
The Commission believes that, to approve the Pilot, as proposed to be comments it received on the proposed
particularly for Auctions for fewer than modified, on a permanent basis. rule change. The text of these statements
50 contracts when the bid/ask may be examined at the places specified
differential is wider than $0.01, the data IV. Conclusion
in Item IV below. OCC has prepared
provided by the Exchange support its It is therefore ordered, pursuant to summaries, set forth in sections (A), (B),
proposal to make the Pilot permanent. Section 19(b)(2) of the Act,36 that the and (C) below, of the most significant
The data demonstrate that the Auction proposed rule change (SR–ISEMercury– aspects of these statements.
generally provides price improvement 2016–25), be and hereby is approved.
opportunities to orders, including (A) Clearing Agency’s Statement of the
For the Commission, by the Division of
orders of retail customers and Trading and Markets, pursuant to delegated
Purpose of, and Statutory Basis for, the
particularly when the bid/ask authority.37 Proposed Rule Change
differential is wider than $0.01; that Eduardo A. Aleman,
there is meaningful competition for 1. Purpose
Assistant Secretary.
orders on the Exchange; and that there OCC’s margin methodology, the
[FR Doc. 2017–01619 Filed 1–24–17; 8:45 am]
exists an active and liquid market System for Theoretical Analysis and
functioning on the Exchange outside of BILLING CODE 8011–01–P
Numerical Simulations (‘‘STANS’’), is
the Auction.33 The Commission further OCC’s proprietary risk management
believes that the proposed revisions to system that calculates Clearing
the eligibility requirements for orders of SECURITIES AND EXCHANGE
COMMISSION Members’ 3 margin requirements.4
fewer than 50 contracts with respect to
STANS utilizes large-scale Monte Carlo
circumstances when the NBBO is no
[Release No. 34–79818; File No. SR–OCC– simulations to forecast price movement
more than $0.01 wide should help to
2017–001] and correlations in determining a
enhance the operation of the Auction by
providing meaningful opportunities for Clearing Member’s margin
Self-Regulatory Organizations; The requirement.5 The STANS margin
price improvement in such Options Clearing Corporation; Notice
circumstances, and should benefit requirement is a portfolio calculation at
of Filing of Proposed Rule Change the level of Clearing Member legal entity
investors and others in a manner that is Concerning The Options Clearing
consistent with the Act. marginable net positions tier account
Corporation’s Margin Coverage During (tiers can be customer, firm, or market
The Commission further notes that, as Times of Increased Volatility
discussed more fully above, ISE marker) and consists of an estimate of
Mercury is initially proposing to January 18, 2017. 99% 2-day expected shortfall and an
implement is price improvement Pursuant to Section 19(b)(1) of the add-on for model risk (the
requirement for Agency Orders of fewer Securities Exchange Act of 1934 concentration/dependence stress test
than 50 option contracts where the (‘‘Act’’),1 and Rule 19b–4 thereunder,2 charge).
difference in the NBBO is $0.01 with a notice is hereby given that on January 4, The majority of risk factors utilized in
member conduct standard.34 As 2017, The Options Clearing Corporation the STANS methodology are total
described in greater detail above, ISE (‘‘OCC’’) filed with the Securities and returns on individual equity securities.
Mercury proposes to enforce this Exchange Commission (‘‘Commission’’) Other risk factors considered include:
requirement under ISE Rule 1614(d)(4). the proposed rule change as described returns on equity indices; changes in the
The Commission believes that ISE in Items I, II and III below, which Items calibrated coefficients of a model
Mercury’s proposed member conduct have been prepared by OCC. The describing the yield curve for U.S.
standard and ISE Rule 1614(d)(4) are Commission is publishing this notice to government securities; ‘‘returns’’ on the
reasonable means to implement the solicit comments on the proposed rule nearest-to-expiration futures contracts of
price improvement requirement until change from interested persons.
implementation of its proposed systems- various kinds; and changes in foreign
based mechanism for this requirement, I. Clearing Agency’s Statement of the exchange rates. For the volatility of each
which will become effective following Terms of Substance of the Proposed risk factor, the Monte Carlo simulations
the migration of a symbol to INET, the Rule Change use the greater of: (i) The short-term
platform operated by Nasdaq, Inc. that volatility level predicted by the model;
This proposed rule change by OCC
will also operate the PIM. The and (ii) an estimate of its longer-run
would modify the current process for
Commission further notes that the level. In between the monthly re-
systematically monitoring market
Exchange has represented that its conditions and performing adjustments estimations of all the models, volatilities
proposed member conduct standard will to its margin coverage when current are automatically re-scaled to the greater
of the short-term or the longer-run levels
mstockstill on DSK3G9T082PROD with NOTICES
be effective until the migration of all market volatility increases beyond
historically observed levels.
33 See 3 See OCC By-Laws Article 1(C)(14).
Exhibit 3 to SR–ISEMercury–2016–25.
34 The 4 See Securities Exchange Act Release No. 53322
Exchange stated that it will conduct 35 See Notice, supra note 3, at 91284 & n.7. (February 15, 2006), 71 FR 9403 (February 23, 2006)
electronic surveillance of the PIM to ensure that 36 15 U.S.C. 78s(b)(2).
members comply with the proposed price (SR–OCC–2004–20). A detailed description of the
37 17 CFR 200.30–3(a)(12).
improvement requirements for option orders of STANS methodology is available at http://
1 15 U.S.C. 78s(b)(1). optionsclearing.com/risk-management/margins/.
fewer than 50 contracts. See Notice, supra note 3,
at 91284. 2 17 CFR 240.19b–4. 5 See OCC Rule 601.
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Document Created: 2017-01-25 00:09:16
Document Modified: 2017-01-25 00:09:16
| 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 | 82 FR 8452 |
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