Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Adopting a Principles-Based Approach To Prohibit the Misuse of Material, Non-Public Information by Market Makers by Deleting Rule 810, 53601-53606 [2015-21958]
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Federal Register / Vol. 80, No. 172 / Friday, September 4, 2015 / Notices
as described below in the Exchange’s
statement regarding the burden on
competition.
For the foregoing reasons, the
Exchange believes that the proposal is
consistent with the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
In accordance with Section 6(b)(8) of
the Act,8 the Exchange believes that the
proposed rule change would not impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Rather, the
increase in the fee cap for member
organizations that are particularly active
in CS II would not burden competition
because it would apply to all member
organizations.
Finally, the Exchange notes that it
operates in a highly competitive market
in which market participants can
readily favor competing venues if they
deem fee levels at a particular venue to
be excessive or rebate opportunities
available at other venues to be more
favorable. In such an environment, the
Exchange must continually adjust its
fees and rebates to remain competitive
with other exchanges and with
alternative trading systems that have
been exempted from compliance with
the statutory standards applicable to
exchanges. Because competitors are free
to modify their own fees and credits in
response, and because market
participants may readily adjust their
order routing practices, the Exchange
believes that the degree to which fee
changes in this market may impose any
burden on competition is extremely
limited. As a result of all of these
considerations, the Exchange does not
believe that the proposed changes will
impair the ability of member
organizations or competing order
execution venues to maintain their
competitive standing in the financial
markets.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
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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 foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 9 of the Act and
subparagraph (f)(2) of Rule 19b–4 10
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
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) 11 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSE–2015–37 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSE–2015–37. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://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–NYSE–
2015–37, and should be submitted on or
before September 25, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–21957 Filed 9–3–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–75792; File No. SR–ISE–
2015–26]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change Adopting a Principles-Based
Approach To Prohibit the Misuse of
Material, Non-Public Information by
Market Makers by Deleting Rule 810
August 31, 2015.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
28, 2015, the International Securities
Exchange, LLC (the ‘‘Exchange’’ or the
‘‘ISE’’) filed with the Securities and
Exchange Commission the proposed
rule change as described in Items I and
II below, which Items have been
prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
ISE proposes to adopt a principlesbased approach to prohibit the misuse
of material, non-public information by
market makers by deleting Rule 810.
The text of the proposed rule change is
available on the Exchange’s Web site at
www.ise.com, at the principal office of
12 17
8 15
U.S.C. 78f(b)(8).
9 15 U.S.C. 78s(b)(3)(A).
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10 17
CFR 240.19b–4(f)(2).
11 15 U.S.C. 78s(b)(2)(B).
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53601
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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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 these statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
(a) Purpose—
The Exchange proposes to adopt a
principles-based approach to prohibit
the misuse of material, non-public
information by market makers by
deleting Rule 810. In so doing, the
Exchange would harmonize its rules
amongst its Members 3 relating to
protecting against the misuse of
material, non-public information. The
Exchange believes that Rule 810 is no
longer necessary because all Members,
including market makers, are subject to
the Exchange’s general principles-based
requirements governing the protection
against the misuse of material, nonpublic information, pursuant to
Exchange Rules, Chapter 4—Business
Conduct, Rule 408 (Prevention of the
Misuse of Material Nonpublic
Information), section (a) (‘‘Rule 408(a)’’),
which obviates the need for separatelyprescribed requirements for a subset of
market participants on the Exchange.
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Background
The Exchange has two classes of
registered market makers. Pursuant to
Rule 800, a market maker is a Member
with Designated Trading
Representatives that is registered with
the Exchange for the purpose of making
transactions as a dealer-specialist. As
the rule further provides, a market
maker can be either a CMM or a PMM.
All market makers are subject to the
requirements of Rules 803 and 804,
which set forth the obligations of market
makers, particularly relating to quoting.
3 The term ‘‘Member’’ means an organization that
has been approved to exercise trading rights
associated with Exchange Rights. See Rule
100(a)(23).
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Rule 803 specifies the obligations of
market makers, which include making
markets that, absent changed market
conditions, will be honored for the
number of contracts entered into the
Exchange’s System in all series of
options classes to which the market
maker is appointed. The quoting
obligations of market makers are set
forth in Rule 804. That rule sets forth
the main difference between PMMs and
CMMs, namely that PMMs have a
heightened quoting obligation as
compared to CMMs.4 In addition to a
heightened quoting obligation pursuant
to Rule 804, an Electronic Access
Member may designate a Preferred
Market Maker 5 on orders it enters into
the System (‘‘Preferenced Orders’’).
These Preferred Market Makers, quoting
at the NBBO at the time the Preferenced
Order is received, are eligible to receive
a greater allocation of participation
rights.6
Importantly, all market makers have
access to the same information in the
order book that is available to all other
market participants. Moreover, none of
the Exchange’s market makers have
agency obligations to the Exchange’s
order book. As such, the distinctions
between PMMs and CMMs are the
quoting requirements set forth in Rule
804.
Notwithstanding that market makers
have access to the same Exchange
trading information as all other market
participants on the Exchange, the
Exchange has specific rules governing
how market makers may operate. Rule
810 allows market makers to engage in
Other Business Activities 7 and to be
4 Compare Rule 804(e)(1) (‘‘Primary Market
Makers. Primary Market Makers must enter
continuous quotations and enter into any resulting
transactions in all of the series listed on the
Exchange of the options classes to which it is
appointed on a daily basis.’’) with 804(e)(2)
(‘‘Competitive Market Makers. (i) On any given day,
a Competitive Market Maker is not required to enter
quotations in the options classes to which it is
appointed. (ii) A Competitive Market Maker may
initiate quoting in options classes to which it is
appointed intraday. (iii) Whenever a Competitive
Market Maker enters a quote in an options class to
which it is appointed, it must maintain continuous
quotations in that class for 60% of the time the class
is open for trading on the Exchange; provided,
however, that a Competitive Market Maker shall be
required to maintain continuous quotations for 90%
of the time the class is open for trading on the
Exchange in any options class in which it receives
Preferenced Orders . . . .’’).
5 A Preferred Market Maker may be the PMM
appointed to the options class or any CMM
appointed to the options class.
6 .03 of Supplementary Material to Rule 713.
7 Other Business Activities means ‘‘(1) conducting
an investment or banking or public securities
business; (2) making markets in the stocks
underlying the options in which it makes markets;
or (3) handling listed options orders as agent on
behalf of Public Customers or broker-dealers; (4)
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affiliated with a broker-dealer that
engages in Other Business Activities
only if there is an Information Barrier
between the marking making activities
and the Other Business Activities. The
Rule further provides that market
makers must implement detailed
Exchange-approved procedures to
restrict the flow of material, non-public
information. Rule 810(b) outlines the
organizational structure of the
Information Barrier, which a market
maker must implement to meet the
requirements of Rule 810(a). The
Information Barrier is meant to ensure
that a market maker will not have access
to material, non-public information
while engaging in Other Business
Activities and that a market maker will
not misuse material, non-public
information obtained from an affiliated
broker-dealer engaged in the Other
Business Activities.
Proposed Rule Change
The Exchange believes that the
guidelines in Rule 810, for market
makers, are no longer necessary and
proposes to delete it. Rather, the
Exchange believes that Rule 408(a)
governing the misuse of material, nonpublic information provides for an
appropriate, principles-based approach
to prevent the market abuses Rule 810
is designed to address. Specifically Rule
408(a) requires every Exchange Member
to establish, maintain and enforce
written policies and procedures
reasonably designed, taking into
consideration the nature of the
Member’s business, to prevent the
misuse of material, non-public
information by such Member or
associated person. For purposes of this
requirement, the misuse of material,
non-public information includes, but is
not limited to, the following:
(a) Trading in any securities issued by
a corporation, partnership, or Funds, as
defined in Rule 502(h), or a trust or
similar entities, or in any related
securities or related options or other
derivative securities, or in any related
non-U.S. currency, non-U.S. currency
options, futures or options on futures on
such currency, or any other derivatives
based on such currency, or in any
related commodity, related commodity
futures or options on commodity futures
or any other related commodity
derivatives, while in possession of
material nonpublic information
concerning that corporation or those
Funds or that trust or similar entities;
(b) trading in an underlying security
or related options or other derivative
conducting non-market making proprietary listed
options trading activities.’’
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securities, or in any related non-U.S.
currency, non-U.S. currency options,
futures or options on futures on such
currency, or in any related commodity,
related commodity futures or options on
commodity futures or any other related
commodity derivatives, or any other
derivatives based on such currency
while in possession of material
nonpublic information concerning
imminent transactions in the above; and
(c) disclosing to another person any
material nonpublic information
involving a corporation, partnership, or
Funds or a trust or similar entities
whose shares are publicly traded or an
imminent transaction in an underlying
security or related securities or in the
underlying non-U.S. currency or any
related non-U.S. currency options,
futures or options on futures on such
currency, or in any related commodity,
related commodity futures or options on
commodity futures or any other related
commodity derivatives, or any other
derivatives based on such currency for
the purpose of facilitating the possible
misuse of such material nonpublic
information.
Because market makers are already
subject to the requirements of Rule
408(a) and because market makers do
not have any trading or information
advantage over other Members, the
Exchange does not believe that it is
necessary to separately require specific
limitations on dealings between market
makers and their affiliates. Deleting
Rule 810 would provide market makers
and Members with the flexibility to
adapt their policies and procedures as
reasonably designed to reflect changes
to their business model, business
activities, or the securities market in a
manner similar to how Members on the
Exchange currently operate and
consistent with Rule 408(a). However,
the Exchange notes that deleting Rule
810 does not obviate the need for
reasonably designed information
barriers in certain situations.
As noted above, PMMs and CMMs are
distinguished under Exchange rules
only to the extent that PMMs have
heightened obligations and allocation
guarantees. However, none of these
heightened obligations provides
different or greater access to non-public
information than any other market
participant on the Exchange.8
Specifically, market makers on the
Exchange do not have access to trading
information provided by the Exchange,
either at, or prior to, the point of
execution, that is not made available to
all other market participants on the
Exchange in a similar manner. Further,
8 See
Rules 802(e) and 803.
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as noted above, market makers on the
Exchange do not have any agency
responsibilities for orders on the order
book. Accordingly, because market
makers do not have any trading
advantages at the Exchange due to their
market role, the Exchange believes that
they should be subject to the same rules
as Members regarding the protection
against the misuse of material, nonpublic information, which in this case,
is existing Rule 408(a).
The Exchange notes that even with
this proposed rule change, pursuant to
Rule 408(a), a market maker would still
be obligated to ensure that its policies
and procedures reflect the current state
of its business and continue to be
reasonably designed to achieve
compliance with applicable federal
securities law and regulations, and with
applicable Exchange rules, including
being reasonably designed to protect
against the misuse of material, nonpublic information. While information
barriers would not specifically be
required under the proposal, Rule 408(a)
already requires that a Member consider
its business model or business activities
in structuring its policies and
procedures, which may dictate that an
information barrier or a functional
separation be part of the set of policies
and procedures that would be
reasonably designed to achieve
compliance with applicable securities
law and regulations, and with
applicable Exchange rules.
The Exchange is not proposing to
change what is considered to be
material, non-public information and,
thus does not expect there to be any
changes to the types of information that
an affiliated brokerage business of a
market maker could share with such
market maker. In that regard, the
proposed rule change will not permit
the EAM unit of a member to have
access to any non-public order or quote
information of the affiliated market
maker, including hidden or undisplayed
size or price information of such orders
and quotes. Market makers are not
allowed to post hidden or undisplayed
orders and quotes on the Exchange.
Members do not expect to receive any
additional order or quote information as
a result of this proposed rule change.
Further, the Exchange does not
believe that there will be any material
change to member information barriers
as a result of removal of the Exchange’s
pre-approval requirements. In fact, the
Exchange anticipates that eliminating
the pre-approval requirement should
facilitate implementation of changes to
member information barriers as
necessary to protect against the misuse
of material, non-public information. The
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53603
Exchange also suggests that the preapproval requirement is unnecessary
because market makers do not have
agency responsibilities to the book, or
time and place information advantages
because of their market role. However,
as is the case today with market makers,
information barriers of new entrants
would be subject to review as part of a
new firm application. Moreover, the
policies and procedures of market
makers, including those relating to
information barriers, would be subject
to review by FINRA, on behalf of the
Exchange, pursuant to a Regulatory
Services Agreement.
The Exchange further notes that under
Rule 408(a), a Member would be able to
structure its firm to provide for its
options market makers, as applicable, to
be structured with its equities and
customer-facing businesses, provided
that any such structuring would be done
in a manner reasonably designed to
protect against the misuse of material,
non-public information. For example,
pursuant to Rule 408(a) a market maker
on the Exchange could be in the same
independent trading unit, as defined in
Rule 200(f) of Regulation SHO,9 as an
equities market maker and other trading
desks within the firm, including options
trading desks, so that the firm could
share post-trade information to better
manage its risk across related securities.
The Exchange believes it is appropriate
and consistent with Rule 408(a) and
Section 15(g) of the Act 10 for a firm to
share options position and related
hedging position information (e.g.,
equities, futures, and foreign currency)
within a firm to better manage risk on
a firm-wide basis. The Exchange notes,
however, that if so structured, a firm
would need to have policies and
procedures, including information
barriers as applicable, reasonably
designed to protect against the misuse of
material, non-public information, and
specifically customer information,
consistent with Rule 408(a).
The Exchange believes that the
proposed reliance on the principlesbased Rule 408(a) would ensure that a
Member that operates a market maker
would be required to protect against the
misuse of any material, non-public
information. As noted above, Rule
408(a) already requires that firms refrain
from trading while in possession of
material, non-public information
concerning imminent transactions in the
security or related product. The
Exchange believes that moving to a
principles-based approach rather than
prescribing how and when to wall off a
9 17
CFR part 242.200(f).
U.S.C. 78o(g).
10 15
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market maker from the rest of the firm
would provide Members operating as
market makers with appropriate tools to
better manage risk across a firm,
including integrating options positions
with other positions of the firm or, as
applicable, by the respective
independent trading unit. Specifically,
the Exchange believes that it is
appropriate for risk management
purposes for a member operating a
market maker to be able to consider both
options market makers traded positions
for purposes of calculating net positions
consistent with Rule 200 of Regulation
SHO, calculating intra-day net capital
positions, and managing risk both
generally as well as in compliance with
Rule 15c3–5 under the Act (the ‘‘Market
Access Rule’’).11 The Exchange notes
that any risk management operations
would need to operate consistent with
the requirement to protect against the
misuse of material, non-public
information.
The Exchange further notes that if
market makers are integrated with other
market making operations, they would
be subject to existing rules that prohibit
Members from disadvantaging their
customers or other market participants
by improperly capitalizing on a member
organization’s access to the receipt of
material, non-public information. As
such, a member organization that
integrates its market maker operations
together with equity market making
would need to protect customer
information consistent with existing
obligations to protect such information.
The Exchange has rules prohibiting
Members from disadvantaging their
customers or other market participants
by improperly capitalizing on the
Members’ access to or receipt of
material, nonpublic information. For
example, Rule 609 requires members to
establish, maintain, enforce, and keep
current a system of compliance and
supervisory controls, reasonably
designed to achieve compliance with
applicable securities laws and Exchange
rules. Additionally, Rule 400 prevents a
person associated with a Member, who
has knowledge of all material terms and
conditions of (i) an order and a solicited
order, (ii) an order being facilitated, or
(iii) orders being crossed; the execution
of which are imminent, to enter, based
on such knowledge, an order to buy or
sell an option for the same underlying
security as any option that is the subject
of the order, or an order to buy or sell
the security underlying such class, or an
order to buy or sell any related
11 17
CFR part 240.15c3–5.
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instrument unless certain circumstances
are met.12
Additionally, the Exchange proposes
to amend the text of Supplementary
Material .06 to Rule 717 by reverting to
Rule 717’s proposed text as it was
originally adopted in 2011.13 The
Exchange notes that the current rule text
includes explanatory language that was
added in 2014 14 to conform to
amendments made to Rule 810. Now
that the Exchange proposes to delete
Rule 810, these past, conforming
changes are unnecessary. The Exchange
further notes that the changes proposed
in this filing to Rule 717 have no
substantive effect on the rule—Members
may still demonstrate that orders were
entered without knowledge of a preexisting order on the book represented
by the same firm by providing evidence
that effective information barriers
between the persons, business units
and/or systems entering the orders onto
the Exchange were in existence at the
time the orders were entered. The rule
requires that such information barriers
be fully documented and provided to
the Exchange upon request.
(b) Basis—
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 15 in general, and furthers the
objectives of Section 6(b)(5) 16 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.
The Exchange believes that the
proposed rule change would remove
impediments to and perfect the
mechanism of a free and open market by
adopting a principles based approach to
permit a Member operating a market
maker to maintain and enforce policies
and procedures to, among other things,
prohibit the misuse of material, nonpublic information and eliminate
restrictions on how a Member structures
its market making operations. The
Exchange notes that the proposed rule
change is based on an approved rule of
the Exchange to which market makers
are already subject—Rule 408(a)—and
12 .02
of Supplementary Material to Rule 400.
Securities Exchange Act Release No. 65361
(September 20, 2011), 76 FR 59472 (September 26,
2011) (SR–ISE–2011–42).
14 See Securities Exchange Act Release No. 73261
(September 30, 2014), 79 FR 60226 (October 6,
2014) (SR–ISE–2014–43).
15 15 U.S.C. 78f(b).
16 15 U.S.C. 78f(b)(5).
13 See
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harmonizes the rules governing market
makers and Members. Moreover,
Members operating market makers
would continue to be subject to federal
and Exchange requirements for
protecting material, non-public order
information.17 The Exchange believes
that the proposed rule change would
remove impediments to and perfect the
mechanism of a free and open market
because it would harmonize the
Exchange’s approach to protecting
against the misuse of material, nonpublic information and no longer
subject market makers to additional
requirements. The Exchange does not
believe that the existing requirements
applicable to market makers are
narrowly tailored to their respective
roles because neither market participant
has access to Exchange trading
information in a manner different from
any other market participant on the
Exchange and they do not have agency
responsibilities to the order book.
Additionally, concerning Rule 717, the
Exchange believes that appropriate
information barriers can be used to
demonstrate that the execution of two
orders within one second was
inadvertent because the orders were
entered without knowledge of each
other, will clarify the intent and
application of Supplementary Material
.06 to Rule 717.
The Exchange further believes the
proposal is designed to prevent
fraudulent and manipulative acts and
practices and to promote just and
equitable principles of trade because
existing rules make clear to market
makers and Members the type of
conduct that is prohibited by the
Exchange. While the proposal
eliminates requirements relating to the
misuse of material, non-public
information, market makers and
Members would remain subject to
existing Exchange rules requiring them
to establish and maintain systems to
supervise their activities, and to create,
implement, and maintain written
procedures that are reasonably designed
to comply with applicable securities
laws and Exchange rules, including the
prohibition on the misuse of material,
non-public information.
The Exchange notes that the proposed
rule change would still require that
Members operating market makers
maintain and enforce policies and
procedures reasonably designed to
ensure compliance with applicable
federal securities laws and regulations
and with Exchange rules. Even though
there would no longer be pre-approval
of market maker information barriers,
17 See
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15 U.S.C. 78o(g) and Rule 408(a).
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any market maker’s written policies and
procedures would continue to be subject
to oversight by the Exchange and
therefore the elimination of prescribed
restrictions should not reduce the
effectiveness of the Exchange rules to
protect against the misuse of material,
non-public information. Rather,
Members will be able to utilize a
flexible, principles-based approach to
modify their policies and procedures as
appropriate to reflect changes to their
business model, business activities, or
to the securities market itself. Moreover,
while specified information barriers
may no longer be required, a Member’s
business model or business activities
may dictate that an information barrier
or functional separation be part of the
set of policies and procedures that
would be reasonably designed to
achieve compliance with applicable
securities laws and regulations, and
with applicable Exchange rules. The
Exchange therefore believes that the
proposed rule change will maintain the
existing protection of investors and the
public interest that is currently
applicable to market makers, while at
the same time removing impediments to
and perfecting a free and open market
by moving to a principles-based
approach to protect against the misuse
of material non-public information.
Finally, the Exchange believes that
proposed rule change to Rule 717 is
consistent with Section 6(b)(5) of the
Act,18 which requires the rules of an
exchange to prevent fraudulent and
manipulative acts and practices,
promote just and equitable principles of
trade, remove impediments to, and
perfect the mechanism of, a free and
open market and a national market
system, and, in general, protect
investors and the public interest.. [sic]
In particular, by continuing to specify
that the information barriers must be
fully documented, members will be
better prepared to properly respond to
requests for information by the
Exchange in the course of a regulatory
investigation. Moreover, while members
are generally required to provide
information to the Exchange as
requested, continuing to specify that
members must provide written
documentation regarding information
barriers within the context of this rule
will assure that all members adhere to
the existing standard for demonstrating
compliance with the rule.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
18 15
U.S.C. 78f(b)(5).
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16:57 Sep 03, 2015
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any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. To the
contrary, the Exchange believes that the
proposal will enhance competition by
allowing market makers to comply with
applicable Exchange rules in a manner
best suited to their business models,
business activities, and the securities
markets, thus reducing regulatory
burdens while still ensuring compliance
with applicable securities laws and
regulations and Exchange rules. The
Exchange believes that the proposal will
foster a fair and orderly marketplace
without being overly burdensome upon
market makers.
Moreover, the Exchange believes that
the proposed rule change would
eliminate a burden on competition for
Members which currently exists as a
result of disparate rule treatment
between the options and equities
markets regarding how to protect against
the misuse of material, non-public
information. For those Members that are
also members of equity exchanges, their
respective equity market maker
operations are now subject to a
principles-based approach to protecting
against the misuse of material nonpublic information.19 The Exchange
believes it would remove a burden on
competition to enable Members to
similarly apply a principles-based
approach to protecting against the
misuse of material, non-public
information in the options space. To
this end, the Exchange notes that Rule
408(a) still requires a Member that
operates as a market maker on the
Exchange to evaluate its business to
assure that its policies and procedures
are reasonably designed to protect
against the misuse of material, nonpublic information. However, with this
proposed rule change, a Member that
trades equities and options could look at
its firm more holistically to structure its
operations in a manner that provides it
with better tools to manage its risks
across multiple security classes, while
19 See Securities Exchange Act Release Nos.
60604 (Sept. 2, 2009), 76 FR 46272 (Sept. 8, 2009)
(SR–NYSEArca–2009–78) (Order approving
elimination of NYSE Arca rule that required market
makers to establish and maintain specifically
prescribed information barriers, including
discussion of NYSE Arca and Nasdaq rules) (‘‘Arca
Approval Order’’); 61574 (Feb. 23, 2010), 75 FR
9455 (Mar. 2, 2010) (SR–BATS–2010–003) (Order
approving amendments to BATS Rule 5.5 to move
to a principles-based approach to protecting against
the misuse of material, non-public information, and
noting that the proposed change is consistent with
the approaches of NYSE Arca and Nasdaq) (‘‘BATS
Approval Order’’); and 72534 (July 3, 2014), 79 FR
39440 (July 10, 2014), SR–NYSE–2014–12) (Order
approving amendments to NYSE Rule 98 governing
designated market makers to move to a principlesbased approach to prohibit the misuse of material
non-public information) (‘‘NYSE Approval Order’’).
PO 00000
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Fmt 4703
Sfmt 4703
53605
at the same time protecting against the
misuse of material non-public
information.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any written
comments from members or other
interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange believes that the
foregoing proposed rule change may
take effect upon filing with the
Commission pursuant to
Section19(b)(3)(A) 20 of the Act and Rule
19b–4(f)(6) thereunder 21 because the
foregoing proposed rule change does not
(i) significantly affect the protection of
investors or the public interest, (ii)
impose any significant burden on
competition, and (iii) become operative
for 30 days after its filing date, or such
shorter time as the Commission may
designate.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ISE–2015–26 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
20 15
21 17
E:\FR\FM\04SEN1.SGM
U.S.C. 78s(b)(3)(A).
CFR 240.19b-4(f)(6).
04SEN1
53606
Federal Register / Vol. 80, No. 172 / Friday, September 4, 2015 / Notices
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ISE–2015–26. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://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 will also 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–ISE–
2015–26 and should be submitted on or
before September 25,2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–21958 Filed 9–3–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–75794; File No. SR–Phlx–
2015–74]
mstockstill on DSK4VPTVN1PROD with NOTICES
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Regarding
FLEX No Minimum Value Pilot
August 31, 2015.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
22 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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16:57 Sep 03, 2015
Jkt 235001
notice is hereby given that on August
21, 2015, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
minimum value size requirements for
FLEX options.
*
*
*
*
*
The text of the proposed rule change
is available on the Exchange’s Web site
at https://
nasdaqomxphlx.cchwallstreet.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
The Exchange is filing with the
Commission a proposal to amend Phlx
Rule 1079 (FLEX Index, Equity and
Currency Options) to extend a pilot
program that eliminates minimum value
sizes for opening transactions in new
series of FLEX index options and FLEX
equity options (together known as
‘‘FLEX Options’’).3
The text of the amended Exchange
rule is set forth immediately below.
Additions are in italics and deletions
are [bracketed].
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
Rules of the Exchange
Options Rules
*
*
*
*
*
Rule 1079. FLEX Index, Equity and
Currency Options
A Requesting Member shall obtain
quotes and execute trades in certain
non-listed FLEX options at the specialist
post of the non-FLEX option on the
Exchange. The term ‘‘FLEX option’’
means a FLEX option contract that is
traded subject to this Rule. Although
FLEX options are generally subject to
the Rules in this section, to the extent
that the provisions of this Rule are
inconsistent with other applicable
Exchange Rules, this Rule takes
precedence with respect to FLEX
options.
(a)–(f) No Change.
• • • Commentary: ——————
.01 Notwithstanding subparagraphs
(a)(8)(A)(i) and (a)(8)(A)(ii) above, for a
pilot period ending the earlier of
[August]January 31, [2015]2016, or the
date on which the pilot is approved on
a permanent basis, there shall be no
3 In addition to FLEX Options, FLEX currency
options are also traded on the Exchange. These
flexible index, equity, and currency options provide
investors the ability to customize basic option
features including size, expiration date, exercise
style, and certain exercise prices; and may have
expiration dates within five years. See Rule 1079.
FLEX currency options traded on the Exchange are
also known as FLEX FX Options. The pilot program
discussed herein does not encompass FLEX
currency options.
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this proposed rule
change is to amend Phlx Rule 1079
(FLEX Index, Equity and Currency
Options) to extend a pilot program that
eliminates minimum value sizes for
opening transactions in new series of
FLEX Options (the ‘‘Pilot Program’’ or
‘‘Pilot’’).4
Rule 1079 deals with the process of
listing and trading FLEX equity, index,
and currency options on the Exchange.
Rule 1079(a)(8)(A) currently sets the
minimum opening transaction value
size in the case of a FLEX Option in a
newly established (opening) series if
there is no open interest in the
particular series when a Request-forQuote (‘‘RFQ’’) is submitted (except as
provided in Commentary .01 to Rule
1079): (i) $10 million underlying
equivalent value, respecting FLEX
market index options, and $5 million
underlying equivalent value respecting
FLEX industry index options; 5 (ii) the
lesser of 250 contracts or the number of
contracts overlying $1 million in the
underlying securities, with respect to
4 The Exchange is also filing a separate proposal
to permanently approve the Pilot Program. See
footnote 10.
5 Market index options and industry index
options are broad-based index options and narrowbased index options, respectively. See Rule
1000A(b)(11) and (12).
E:\FR\FM\04SEN1.SGM
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]]>Agencies
[Federal Register Volume 80, Number 172 (Friday, September 4, 2015)]
[Notices]
[Pages 53601-53606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-21958]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75792; File No. SR-ISE-2015-26]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change Adopting a Principles-Based Approach To Prohibit the Misuse of
Material, Non-Public Information by Market Makers by Deleting Rule 810
August 31, 2015.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 28, 2015, the International Securities Exchange, LLC
(the ``Exchange'' or the ``ISE'') filed with the Securities and
Exchange Commission the proposed rule change as described in Items I
and II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
ISE proposes to adopt a principles-based approach to prohibit the
misuse of material, non-public information by market makers by deleting
Rule 810. The text of the proposed rule change is available on the
Exchange's Web site at www.ise.com, at the principal office of
[[Page 53602]]
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 these statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(a) Purpose--
The Exchange proposes to adopt a principles-based approach to
prohibit the misuse of material, non-public information by market
makers by deleting Rule 810. In so doing, the Exchange would harmonize
its rules amongst its Members \3\ relating to protecting against the
misuse of material, non-public information. The Exchange believes that
Rule 810 is no longer necessary because all Members, including market
makers, are subject to the Exchange's general principles-based
requirements governing the protection against the misuse of material,
non-public information, pursuant to Exchange Rules, Chapter 4--Business
Conduct, Rule 408 (Prevention of the Misuse of Material Nonpublic
Information), section (a) (``Rule 408(a)''), which obviates the need
for separately-prescribed requirements for a subset of market
participants on the Exchange.
---------------------------------------------------------------------------
\3\ The term ``Member'' means an organization that has been
approved to exercise trading rights associated with Exchange Rights.
See Rule 100(a)(23).
---------------------------------------------------------------------------
Background
The Exchange has two classes of registered market makers. Pursuant
to Rule 800, a market maker is a Member with Designated Trading
Representatives that is registered with the Exchange for the purpose of
making transactions as a dealer-specialist. As the rule further
provides, a market maker can be either a CMM or a PMM. All market
makers are subject to the requirements of Rules 803 and 804, which set
forth the obligations of market makers, particularly relating to
quoting.
Rule 803 specifies the obligations of market makers, which include
making markets that, absent changed market conditions, will be honored
for the number of contracts entered into the Exchange's System in all
series of options classes to which the market maker is appointed. The
quoting obligations of market makers are set forth in Rule 804. That
rule sets forth the main difference between PMMs and CMMs, namely that
PMMs have a heightened quoting obligation as compared to CMMs.\4\ In
addition to a heightened quoting obligation pursuant to Rule 804, an
Electronic Access Member may designate a Preferred Market Maker \5\ on
orders it enters into the System (``Preferenced Orders''). These
Preferred Market Makers, quoting at the NBBO at the time the
Preferenced Order is received, are eligible to receive a greater
allocation of participation rights.\6\
---------------------------------------------------------------------------
\4\ Compare Rule 804(e)(1) (``Primary Market Makers. Primary
Market Makers must enter continuous quotations and enter into any
resulting transactions in all of the series listed on the Exchange
of the options classes to which it is appointed on a daily basis.'')
with 804(e)(2) (``Competitive Market Makers. (i) On any given day, a
Competitive Market Maker is not required to enter quotations in the
options classes to which it is appointed. (ii) A Competitive Market
Maker may initiate quoting in options classes to which it is
appointed intraday. (iii) Whenever a Competitive Market Maker enters
a quote in an options class to which it is appointed, it must
maintain continuous quotations in that class for 60% of the time the
class is open for trading on the Exchange; provided, however, that a
Competitive Market Maker shall be required to maintain continuous
quotations for 90% of the time the class is open for trading on the
Exchange in any options class in which it receives Preferenced
Orders . . . .'').
\5\ A Preferred Market Maker may be the PMM appointed to the
options class or any CMM appointed to the options class.
\6\ .03 of Supplementary Material to Rule 713.
---------------------------------------------------------------------------
Importantly, all market makers have access to the same information
in the order book that is available to all other market participants.
Moreover, none of the Exchange's market makers have agency obligations
to the Exchange's order book. As such, the distinctions between PMMs
and CMMs are the quoting requirements set forth in Rule 804.
Notwithstanding that market makers have access to the same Exchange
trading information as all other market participants on the Exchange,
the Exchange has specific rules governing how market makers may
operate. Rule 810 allows market makers to engage in Other Business
Activities \7\ and to be affiliated with a broker-dealer that engages
in Other Business Activities only if there is an Information Barrier
between the marking making activities and the Other Business
Activities. The Rule further provides that market makers must implement
detailed Exchange-approved procedures to restrict the flow of material,
non-public information. Rule 810(b) outlines the organizational
structure of the Information Barrier, which a market maker must
implement to meet the requirements of Rule 810(a). The Information
Barrier is meant to ensure that a market maker will not have access to
material, non-public information while engaging in Other Business
Activities and that a market maker will not misuse material, non-public
information obtained from an affiliated broker-dealer engaged in the
Other Business Activities.
---------------------------------------------------------------------------
\7\ Other Business Activities means ``(1) conducting an
investment or banking or public securities business; (2) making
markets in the stocks underlying the options in which it makes
markets; or (3) handling listed options orders as agent on behalf of
Public Customers or broker-dealers; (4) conducting non-market making
proprietary listed options trading activities.''
---------------------------------------------------------------------------
Proposed Rule Change
The Exchange believes that the guidelines in Rule 810, for market
makers, are no longer necessary and proposes to delete it. Rather, the
Exchange believes that Rule 408(a) governing the misuse of material,
non-public information provides for an appropriate, principles-based
approach to prevent the market abuses Rule 810 is designed to address.
Specifically Rule 408(a) requires every Exchange Member to establish,
maintain and enforce written policies and procedures reasonably
designed, taking into consideration the nature of the Member's
business, to prevent the misuse of material, non-public information by
such Member or associated person. For purposes of this requirement, the
misuse of material, non-public information includes, but is not limited
to, the following:
(a) Trading in any securities issued by a corporation, partnership,
or Funds, as defined in Rule 502(h), or a trust or similar entities, or
in any related securities or related options or other derivative
securities, or in any related non-U.S. currency, non-U.S. currency
options, futures or options on futures on such currency, or any other
derivatives based on such currency, or in any related commodity,
related commodity futures or options on commodity futures or any other
related commodity derivatives, while in possession of material
nonpublic information concerning that corporation or those Funds or
that trust or similar entities;
(b) trading in an underlying security or related options or other
derivative
[[Page 53603]]
securities, or in any related non-U.S. currency, non-U.S. currency
options, futures or options on futures on such currency, or in any
related commodity, related commodity futures or options on commodity
futures or any other related commodity derivatives, or any other
derivatives based on such currency while in possession of material
nonpublic information concerning imminent transactions in the above;
and
(c) disclosing to another person any material nonpublic information
involving a corporation, partnership, or Funds or a trust or similar
entities whose shares are publicly traded or an imminent transaction in
an underlying security or related securities or in the underlying non-
U.S. currency or any related non-U.S. currency options, futures or
options on futures on such currency, or in any related commodity,
related commodity futures or options on commodity futures or any other
related commodity derivatives, or any other derivatives based on such
currency for the purpose of facilitating the possible misuse of such
material nonpublic information.
Because market makers are already subject to the requirements of
Rule 408(a) and because market makers do not have any trading or
information advantage over other Members, the Exchange does not believe
that it is necessary to separately require specific limitations on
dealings between market makers and their affiliates. Deleting Rule 810
would provide market makers and Members with the flexibility to adapt
their policies and procedures as reasonably designed to reflect changes
to their business model, business activities, or the securities market
in a manner similar to how Members on the Exchange currently operate
and consistent with Rule 408(a). However, the Exchange notes that
deleting Rule 810 does not obviate the need for reasonably designed
information barriers in certain situations.
As noted above, PMMs and CMMs are distinguished under Exchange
rules only to the extent that PMMs have heightened obligations and
allocation guarantees. However, none of these heightened obligations
provides different or greater access to non-public information than any
other market participant on the Exchange.\8\ Specifically, market
makers on the Exchange do not have access to trading information
provided by the Exchange, either at, or prior to, the point of
execution, that is not made available to all other market participants
on the Exchange in a similar manner. Further, as noted above, market
makers on the Exchange do not have any agency responsibilities for
orders on the order book. Accordingly, because market makers do not
have any trading advantages at the Exchange due to their market role,
the Exchange believes that they should be subject to the same rules as
Members regarding the protection against the misuse of material, non-
public information, which in this case, is existing Rule 408(a).
---------------------------------------------------------------------------
\8\ See Rules 802(e) and 803.
---------------------------------------------------------------------------
The Exchange notes that even with this proposed rule change,
pursuant to Rule 408(a), a market maker would still be obligated to
ensure that its policies and procedures reflect the current state of
its business and continue to be reasonably designed to achieve
compliance with applicable federal securities law and regulations, and
with applicable Exchange rules, including being reasonably designed to
protect against the misuse of material, non-public information. While
information barriers would not specifically be required under the
proposal, Rule 408(a) already requires that a Member consider its
business model or business activities in structuring its policies and
procedures, which may dictate that an information barrier or a
functional separation be part of the set of policies and procedures
that would be reasonably designed to achieve compliance with applicable
securities law and regulations, and with applicable Exchange rules.
The Exchange is not proposing to change what is considered to be
material, non-public information and, thus does not expect there to be
any changes to the types of information that an affiliated brokerage
business of a market maker could share with such market maker. In that
regard, the proposed rule change will not permit the EAM unit of a
member to have access to any non-public order or quote information of
the affiliated market maker, including hidden or undisplayed size or
price information of such orders and quotes. Market makers are not
allowed to post hidden or undisplayed orders and quotes on the
Exchange. Members do not expect to receive any additional order or
quote information as a result of this proposed rule change.
Further, the Exchange does not believe that there will be any
material change to member information barriers as a result of removal
of the Exchange's pre-approval requirements. In fact, the Exchange
anticipates that eliminating the pre-approval requirement should
facilitate implementation of changes to member information barriers as
necessary to protect against the misuse of material, non-public
information. The Exchange also suggests that the pre-approval
requirement is unnecessary because market makers do not have agency
responsibilities to the book, or time and place information advantages
because of their market role. However, as is the case today with market
makers, information barriers of new entrants would be subject to review
as part of a new firm application. Moreover, the policies and
procedures of market makers, including those relating to information
barriers, would be subject to review by FINRA, on behalf of the
Exchange, pursuant to a Regulatory Services Agreement.
The Exchange further notes that under Rule 408(a), a Member would
be able to structure its firm to provide for its options market makers,
as applicable, to be structured with its equities and customer-facing
businesses, provided that any such structuring would be done in a
manner reasonably designed to protect against the misuse of material,
non-public information. For example, pursuant to Rule 408(a) a market
maker on the Exchange could be in the same independent trading unit, as
defined in Rule 200(f) of Regulation SHO,\9\ as an equities market
maker and other trading desks within the firm, including options
trading desks, so that the firm could share post-trade information to
better manage its risk across related securities. The Exchange believes
it is appropriate and consistent with Rule 408(a) and Section 15(g) of
the Act \10\ for a firm to share options position and related hedging
position information (e.g., equities, futures, and foreign currency)
within a firm to better manage risk on a firm-wide basis. The Exchange
notes, however, that if so structured, a firm would need to have
policies and procedures, including information barriers as applicable,
reasonably designed to protect against the misuse of material, non-
public information, and specifically customer information, consistent
with Rule 408(a).
---------------------------------------------------------------------------
\9\ 17 CFR part 242.200(f).
\10\ 15 U.S.C. 78o(g).
---------------------------------------------------------------------------
The Exchange believes that the proposed reliance on the principles-
based Rule 408(a) would ensure that a Member that operates a market
maker would be required to protect against the misuse of any material,
non-public information. As noted above, Rule 408(a) already requires
that firms refrain from trading while in possession of material, non-
public information concerning imminent transactions in the security or
related product. The Exchange believes that moving to a principles-
based approach rather than prescribing how and when to wall off a
[[Page 53604]]
market maker from the rest of the firm would provide Members operating
as market makers with appropriate tools to better manage risk across a
firm, including integrating options positions with other positions of
the firm or, as applicable, by the respective independent trading unit.
Specifically, the Exchange believes that it is appropriate for risk
management purposes for a member operating a market maker to be able to
consider both options market makers traded positions for purposes of
calculating net positions consistent with Rule 200 of Regulation SHO,
calculating intra-day net capital positions, and managing risk both
generally as well as in compliance with Rule 15c3-5 under the Act (the
``Market Access Rule'').\11\ The Exchange notes that any risk
management operations would need to operate consistent with the
requirement to protect against the misuse of material, non-public
information.
---------------------------------------------------------------------------
\11\ 17 CFR part 240.15c3-5.
---------------------------------------------------------------------------
The Exchange further notes that if market makers are integrated
with other market making operations, they would be subject to existing
rules that prohibit Members from disadvantaging their customers or
other market participants by improperly capitalizing on a member
organization's access to the receipt of material, non-public
information. As such, a member organization that integrates its market
maker operations together with equity market making would need to
protect customer information consistent with existing obligations to
protect such information. The Exchange has rules prohibiting Members
from disadvantaging their customers or other market participants by
improperly capitalizing on the Members' access to or receipt of
material, nonpublic information. For example, Rule 609 requires members
to establish, maintain, enforce, and keep current a system of
compliance and supervisory controls, reasonably designed to achieve
compliance with applicable securities laws and Exchange rules.
Additionally, Rule 400 prevents a person associated with a Member, who
has knowledge of all material terms and conditions of (i) an order and
a solicited order, (ii) an order being facilitated, or (iii) orders
being crossed; the execution of which are imminent, to enter, based on
such knowledge, an order to buy or sell an option for the same
underlying security as any option that is the subject of the order, or
an order to buy or sell the security underlying such class, or an order
to buy or sell any related instrument unless certain circumstances are
met.\12\
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\12\ .02 of Supplementary Material to Rule 400.
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Additionally, the Exchange proposes to amend the text of
Supplementary Material .06 to Rule 717 by reverting to Rule 717's
proposed text as it was originally adopted in 2011.\13\ The Exchange
notes that the current rule text includes explanatory language that was
added in 2014 \14\ to conform to amendments made to Rule 810. Now that
the Exchange proposes to delete Rule 810, these past, conforming
changes are unnecessary. The Exchange further notes that the changes
proposed in this filing to Rule 717 have no substantive effect on the
rule--Members may still demonstrate that orders were entered without
knowledge of a pre-existing order on the book represented by the same
firm by providing evidence that effective information barriers between
the persons, business units and/or systems entering the orders onto the
Exchange were in existence at the time the orders were entered. The
rule requires that such information barriers be fully documented and
provided to the Exchange upon request.
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\13\ See Securities Exchange Act Release No. 65361 (September
20, 2011), 76 FR 59472 (September 26, 2011) (SR-ISE-2011-42).
\14\ See Securities Exchange Act Release No. 73261 (September
30, 2014), 79 FR 60226 (October 6, 2014) (SR-ISE-2014-43).
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(b) Basis--
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \15\ in general, and furthers the objectives of Section
6(b)(5) \16\ 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.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change would remove
impediments to and perfect the mechanism of a free and open market by
adopting a principles based approach to permit a Member operating a
market maker to maintain and enforce policies and procedures to, among
other things, prohibit the misuse of material, non-public information
and eliminate restrictions on how a Member structures its market making
operations. The Exchange notes that the proposed rule change is based
on an approved rule of the Exchange to which market makers are already
subject--Rule 408(a)--and harmonizes the rules governing market makers
and Members. Moreover, Members operating market makers would continue
to be subject to federal and Exchange requirements for protecting
material, non-public order information.\17\ The Exchange believes that
the proposed rule change would remove impediments to and perfect the
mechanism of a free and open market because it would harmonize the
Exchange's approach to protecting against the misuse of material, non-
public information and no longer subject market makers to additional
requirements. The Exchange does not believe that the existing
requirements applicable to market makers are narrowly tailored to their
respective roles because neither market participant has access to
Exchange trading information in a manner different from any other
market participant on the Exchange and they do not have agency
responsibilities to the order book. Additionally, concerning Rule 717,
the Exchange believes that appropriate information barriers can be used
to demonstrate that the execution of two orders within one second was
inadvertent because the orders were entered without knowledge of each
other, will clarify the intent and application of Supplementary
Material .06 to Rule 717.
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\17\ See 15 U.S.C. 78o(g) and Rule 408(a).
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The Exchange further believes the proposal is designed to prevent
fraudulent and manipulative acts and practices and to promote just and
equitable principles of trade because existing rules make clear to
market makers and Members the type of conduct that is prohibited by the
Exchange. While the proposal eliminates requirements relating to the
misuse of material, non-public information, market makers and Members
would remain subject to existing Exchange rules requiring them to
establish and maintain systems to supervise their activities, and to
create, implement, and maintain written procedures that are reasonably
designed to comply with applicable securities laws and Exchange rules,
including the prohibition on the misuse of material, non-public
information.
The Exchange notes that the proposed rule change would still
require that Members operating market makers maintain and enforce
policies and procedures reasonably designed to ensure compliance with
applicable federal securities laws and regulations and with Exchange
rules. Even though there would no longer be pre-approval of market
maker information barriers,
[[Page 53605]]
any market maker's written policies and procedures would continue to be
subject to oversight by the Exchange and therefore the elimination of
prescribed restrictions should not reduce the effectiveness of the
Exchange rules to protect against the misuse of material, non-public
information. Rather, Members will be able to utilize a flexible,
principles-based approach to modify their policies and procedures as
appropriate to reflect changes to their business model, business
activities, or to the securities market itself. Moreover, while
specified information barriers may no longer be required, a Member's
business model or business activities may dictate that an information
barrier or functional separation be part of the set of policies and
procedures that would be reasonably designed to achieve compliance with
applicable securities laws and regulations, and with applicable
Exchange rules. The Exchange therefore believes that the proposed rule
change will maintain the existing protection of investors and the
public interest that is currently applicable to market makers, while at
the same time removing impediments to and perfecting a free and open
market by moving to a principles-based approach to protect against the
misuse of material non-public information.
Finally, the Exchange believes that proposed rule change to Rule
717 is consistent with Section 6(b)(5) of the Act,\18\ which requires
the rules of an exchange to prevent fraudulent and manipulative acts
and practices, promote just and equitable principles of trade, remove
impediments to, and perfect the mechanism of, a free and open market
and a national market system, and, in general, protect investors and
the public interest.. [sic] In particular, by continuing to specify
that the information barriers must be fully documented, members will be
better prepared to properly respond to requests for information by the
Exchange in the course of a regulatory investigation. Moreover, while
members are generally required to provide information to the Exchange
as requested, continuing to specify that members must provide written
documentation regarding information barriers within the context of this
rule will assure that all members adhere to the existing standard for
demonstrating compliance with the rule.
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\18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. To the contrary, the Exchange
believes that the proposal will enhance competition by allowing market
makers to comply with applicable Exchange rules in a manner best suited
to their business models, business activities, and the securities
markets, thus reducing regulatory burdens while still ensuring
compliance with applicable securities laws and regulations and Exchange
rules. The Exchange believes that the proposal will foster a fair and
orderly marketplace without being overly burdensome upon market makers.
Moreover, the Exchange believes that the proposed rule change would
eliminate a burden on competition for Members which currently exists as
a result of disparate rule treatment between the options and equities
markets regarding how to protect against the misuse of material, non-
public information. For those Members that are also members of equity
exchanges, their respective equity market maker operations are now
subject to a principles-based approach to protecting against the misuse
of material non-public information.\19\ The Exchange believes it would
remove a burden on competition to enable Members to similarly apply a
principles-based approach to protecting against the misuse of material,
non-public information in the options space. To this end, the Exchange
notes that Rule 408(a) still requires a Member that operates as a
market maker on the Exchange to evaluate its business to assure that
its policies and procedures are reasonably designed to protect against
the misuse of material, non-public information. However, with this
proposed rule change, a Member that trades equities and options could
look at its firm more holistically to structure its operations in a
manner that provides it with better tools to manage its risks across
multiple security classes, while at the same time protecting against
the misuse of material non-public information.
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\19\ See Securities Exchange Act Release Nos. 60604 (Sept. 2,
2009), 76 FR 46272 (Sept. 8, 2009) (SR-NYSEArca-2009-78) (Order
approving elimination of NYSE Arca rule that required market makers
to establish and maintain specifically prescribed information
barriers, including discussion of NYSE Arca and Nasdaq rules)
(``Arca Approval Order''); 61574 (Feb. 23, 2010), 75 FR 9455 (Mar.
2, 2010) (SR-BATS-2010-003) (Order approving amendments to BATS Rule
5.5 to move to a principles-based approach to protecting against the
misuse of material, non-public information, and noting that the
proposed change is consistent with the approaches of NYSE Arca and
Nasdaq) (``BATS Approval Order''); and 72534 (July 3, 2014), 79 FR
39440 (July 10, 2014), SR-NYSE-2014-12) (Order approving amendments
to NYSE Rule 98 governing designated market makers to move to a
principles-based approach to prohibit the misuse of material non-
public information) (``NYSE Approval Order'').
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any written comments from members or other interested parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange believes that the foregoing proposed rule change may
take effect upon filing with the Commission pursuant to
Section19(b)(3)(A) \20\ of the Act and Rule 19b-4(f)(6) thereunder \21\
because the foregoing proposed rule change does not (i) significantly
affect the protection of investors or the public interest, (ii) impose
any significant burden on competition, and (iii) become operative for
30 days after its filing date, or such shorter time as the Commission
may designate.
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 17 CFR 240.19b-4(f)(6).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-ISE-2015-26 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities
[[Page 53606]]
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2015-26. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://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 will also 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-ISE-2015-26 and should be
submitted on or before September 25, 2015.
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\22\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-21958 Filed 9-3-15; 8:45 am]
BILLING CODE 8011-01-P
