Self-Regulatory Organizations; The Options Clearing Corporation; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Related to the Adoption of an Options Exchange Risk Control Standards Policy, 39732-39736 [2016-14315]
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Federal Register / Vol. 81, No. 117 / Friday, June 17, 2016 / Notices
pursuant to Rule 19b–4(f)(6)(iii),12 the
Commission may designate a shorter
time if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposal may
become operative immediately upon
filing. The Commission believes that
waiving the 30-day operative delay is
consistent with the protection of
investors and the public interest
because doing so will allow the Pilot
Program to continue without
interruption in a manner that is
consistent with the Commission’s prior
approval of the extension and expansion
of the Pilot Program and will allow the
Exchange and the Commission
additional time to analyze the impact of
the Pilot Program.13 Accordingly, the
Commission designates the proposed
rule change as operative upon filing
with the Commission.14
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 15 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:
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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–
BatsEDGX–2016–22 on the subject line.
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission. The
Exchange has satisfied this pre-filing requirement.
12 17 CFR 240.19b–4(f)(6)(iii).
13 See Securities Exchange Act Release No. 61061
(November 24, 2009), 74 FR 62857 (December 1,
2009) (SR–NYSEArca–2009–44). See also supra
note 5.
14 For purposes only of waiving the operative
delay for this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
15 15 U.S.C. 78s(b)(2)(B).
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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–BatsEDGX–2016–22. 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–
BatsEDGX–2016–22 and should be
submitted on or before July 8, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–14319 Filed 6–16–16; 8:45 am]
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78056; File No. SR–OCC–
2016–004]
Self-Regulatory Organizations; The
Options Clearing Corporation; Order
Instituting Proceedings To Determine
Whether To Approve or Disapprove a
Proposed Rule Change Related to the
Adoption of an Options Exchange Risk
Control Standards Policy
June 13, 2016.
I. Introduction
On March 4, 2016, The Options
Clearing Corporation (‘‘OCC’’) 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 adopt a new Options
Exchange Risk Control Standards Policy
and revise its Schedule of Fees to
impose on clearing members a fee of
two cents per cleared options contract
(per side) executed on an options
exchange that did not demonstrate
sufficient risk controls designed to meet
the proposed set of principles-based risk
control standards. The proposed rule
change was published for comment in
the Federal Register on March 18,
2016.3 The Commission received six
comment letters on the proposed rule
change.4 On April 27, 2016, the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to approve or
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 34–
77358 (March 14, 2016), 81 FR 14921 (March 18,
2016) (File No. SR–OCC–2016–004) (‘‘Notice’’).
4 See Letters from Mark Dehnert, Managing
Director, Goldman Sachs & Co., and Kyle Czepiel,
Co-Chief Executive Officer, Goldman Sachs
Execution & Clearing, L.P. (collectively, ‘‘Goldman
Sachs’’), dated March 28, 2016, to Secretary,
Commission (‘‘Goldman Sachs Letter’’); Lisa J. Fall,
President, BOX Options Exchange (‘‘BOX’’), dated
April 6, 2016, to Brent J. Fields, Secretary,
Commission (‘‘BOX Letter’’); James G. Lundy,
Associate General Counsel, ABN AMRO Clearing
Chicago LLC (‘‘AACC’’), dated April 8, 2016, to
Brent J. Fields, Secretary, Commission (‘‘AACC
Letter’’); Ellen Greene, Managing Director,
Securities Industry and Financial Markets
Association (‘‘SIFMA’’), dated April 12, 2016, to
Robert W. Errett, Deputy Secretary, Commission
(‘‘SIFMA Letter’’); Michael J. Simon, Secretary and
General Counsel, International Securities Exchange,
LLC (‘‘ISE’’), dated April 20, 2016, to Brent J. Fields,
Secretary, Commission(‘‘ISE Letter’’); and Edward
T. Tilly, Chief Executive Officer, Chicago Board
Options Exchange, Inc. (‘‘CBOE’’), dated April 20,
2016, to Brent J. Fields, Secretary, Commission
(‘‘CBOE Letter’’).
2 17
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Federal Register / Vol. 81, No. 117 / Friday, June 17, 2016 / Notices
disapprove the proposed rule change.5
This order institutes proceedings under
Section 19(b)(2)(B) of the Act 6 to
determine whether to approve or
disapprove the proposed rule change.
II. Description of the Proposed Rule
Change
OCC proposes to adopt a new Options
Exchange Risk Control Standards Policy
(‘‘Policy’’) for addressing the potential
risks arising from erroneous trades
executed on an options exchange that
has not demonstrated the existence of
certain risk controls that are consistent
with a set of principles-based risk
control standards developed by OCC.
Among other things, the proposed rule
change would establish risk control
standards and require each options
exchange to submit an annual
certification, attesting that it has
sufficient risk controls consistent with
OCC’s Policy.
The proposed rule change also would
revise OCC’s Schedule of Fees, in
accordance with the proposed Policy, to
charge and collect from clearing
members a fee of two cents per cleared
options contract (per side) (‘‘Fee’’)
executed on an options exchange that
has not demonstrated to OCC that it has
implemented sufficient controls
designed to meet OCC’s proposed
Policy. The proposed rule change would
require that any funds collected from
the Fee be retained as earnings and, as
such, be eligible for use for clearing
member defaults under Article VIII,
Section 5(d) of OCC’s By-Laws,7 but
would prohibit such funds from being
used for any other purpose. These funds
would be available for use by OCC,
subject to the unanimous approval from
its Class A and B common stock
shareholders, in accordance with Article
VIII, Section 5(d) of OCC’s By-Laws.8
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Risk Control Standards
The proposed Policy includes the risk
control standards to which an options
exchange must attest in order to avoid
the Fee charged on trades executed on
its own platform. According to OCC, the
proposed risk control standards were
developed by OCC in consultation with
the options exchanges and are designed
to provide flexibility for each options
exchange to develop specific risk
5 See Securities Exchange Act Release No. 77720
(April 27, 2016), 81 FR 26609 (May 3, 2016).
6 15 U.S.C. 78s(b)(2)(B).
7 Under Article VIII, Section 5(d) of OCC’s ByLaws, usage of current or retained earnings may be
considered after the defaulting clearing member’s
margin has been exhausted, and it may be used to
reduce in whole or in part the pro rata contribution
otherwise made from the Clearing Fund to cover the
loss.
8 See Article VIII, Section 5(d).
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controls that best suit its own
marketplace while still guarding against
risks related to erroneous transactions.
The proposed Policy would include the
following categories of risk controls:
‘‘Price Reasonability Checks,’’ 9 ‘‘DrillThrough Protections,’’ 10 ‘‘ActivityBased Protections,’’ 11 and ‘‘Kill-Switch
Protections.’’ 12
Certification Process
Under the proposed rule change, each
options exchange would certify to OCC
that it has implemented risk controls
consistent with OCC’s Policy using a
designed form, which must be signed by
an executive officer. OCC would then
evaluate each options exchange’s risk
controls for compliance with OCC’s
Policy by reviewing each options
exchange’s certification and supporting
materials, including, but not be limited
to, its proposed rule changes filed with
the Commission, approved rules,
information circulars, and written
procedures.
If OCC 13 is unable to determine that
an options exchange has risk controls
sufficient to meet the Policy, OCC
would furnish the options exchange
with a concise written statement of the
reasons as soon as reasonably
practicable and the options exchange
9 According to OCC, Mandatory Price
Reasonability Checks would prevent limit orders,
complex orders, and market maker quotes from
being entered and displayed on an options
exchange if the price on such order or quote is
outside a defined threshold set in relation to the
current market price or National Best Bid or Offer
(‘‘NBBO’’).
10 OCC states that Drill-Through Protections are
closely related to Price Reasonability Checks and
would require all orders, including market orders,
limit orders, and complex orders, to be executed
within pre-determined price increments of the
NBBO.
11 OCC explains that Activity-Based Protections
would extend an options exchange’s Risk Controls
to factors beyond price and are most commonly
designed to address risks associated with a high
frequency of trades in a short period of time. OCC
notes that Activity-Based Protections may address
the maximum number of contracts that may be
entered as one order, the maximum number of
contacts that may be entered or executed by one
firm over a certain period of time, and the
maximum number of messages that may be entered
over a certain period of time.
12 According to OCC, Kill-Switch Protections
would provide options exchanges, and their market
participants, with the ability to cancel existing
orders and quotes and/or block new orders and
quotes on an exchange-wide or more tailored basis
(e.g., symbol specific, by Clearing Member, etc.)
with a single message to the options exchange after
established trigger events are detected. According to
OCC, a trigger event may include a situation where
a market participant is disconnected from an
options exchange due to an abnormally large order
or manual errors in the system by a market
participant causing multiple erroneous trades to
occur.
13 OCC does not specify in the proposed rule
change which part of OCC would be responsible for
evaluating certifications.
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39733
would have 30 calendar days following
receipt of the concise written statement
to present further evidence of its
sufficient risk controls to OCC. After
submission of any further evidence by
the options exchange, OCC would have
30 days to conduct a second review and
make a recommendation to OCC’s Risk
Committee 14 regarding whether the
options exchange has sufficient risk
controls. Within 30 days of receiving the
recommendation, OCC’s Risk
Committee would review the
recommendation and the options
exchange’s supporting materials, as
appropriate, to determine whether the
options exchange has risk controls
sufficient to meet the Policy. OCC
would furnish the options exchange
with a concise written statement of the
Risk Committee’s determination and the
reasons for such determination as soon
as reasonably practicable following the
Risk Committee’s review.
On June 30 of each year (following the
effective date of the proposed rule
change), OCC would post a notice to its
Web site to which clearing members
(but not the general public) have access,
with respect to each options exchange,
whether: (1) The options exchange has
implemented sufficient risk controls to
meet the Policy (‘‘Compliant Options
Exchange’’); (2) OCC was unable to
determine the options exchange has
sufficient risk controls that meet the
Policy (‘‘Non-Compliant Options
Exchange’’); or (3) a certification has not
been submitted by the options
exchange.
Collection of Proposed Fee
Beginning on the first business day
that is at least 60 days after OCC posts
such notice, OCC would charge and
collect the Fee for trades executed on a
Non-Compliant Options Exchange. The
Fee would continue to be charged to
and collected from clearing members,
and the notice would remain posted on
OCC’s Web site to which clearing
members (but not the general public)
have access, until the options exchange
is able to demonstrate that its risk
controls satisfy the Policy.
Under the proposed rule change, any
funds collected from the Fee would be
retained as earnings and, as such, be
eligible for use for clearing member
defaults under Article VIII, Section 5(d)
14 OCC’s Risk Committee is chaired by a public
Director and it does not currently have an options
exchange representative. In the event OCC’s Risk
Committee has an exchange representative at some
time in the future, such exchange representative
would be recused from a decision on the appeal of
a determination of an options exchange’s
compliance with the Policy.
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Federal Register / Vol. 81, No. 117 / Friday, June 17, 2016 / Notices
of OCC’s By-Laws,15 but such funds
would be prohibited from being used for
any other purpose. These funds would
be available for use by OCC, subject to
the unanimous approval from its Class
A and B common storck shareholders,
in accordance with Article VIII, Section
5(d) of OCC’s By-Laws.16
Exception and Escalation Processes
The proposed Policy also provides
that, on rare occasions, OCC may grant
exceptions to the Policy to appropriately
address immediate business issues and
provides for an escalation process to
report breaches of the Policy.17
III. Summary of Comment Letters
The Commission received six
comment letters in response to the
proposed rule change.18 Five comment
letters were written in support of the
proposed rule change and one comment
letter from BOX, objecting to the
proposed rule change. The supporting
comment letter from ISE also responded
to BOX’s objections.
A. Supporting Comments
Five commenters, Goldman Sachs,
AACC, SIFMA, CBOE and ISE,
submitted comment letters in support of
the proposed rule change. All of these
commenters express concern regarding
the risk that erroneous trades may pose
to the listed-options market and its
participants. Each of these commenters
support effective risk management
controls by an options exchange to
minimize the risk of erroneous trades
and the attendant consequences.
Recognizing the role OCC plays in the
listed-options market, these commenters
state that OCC’s proposed rule change
would minimize the likelihood of
erroneous trades occurring and reduce
risk 19 by incentivizing options
exchanges to create risk controls.20 One
15 See
Article VIII, Section 5(d).
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16 Id.
17 OCC does not provide additional information
in the proposed rule change regarding its process
for granting exceptions and which part of OCC
would be responsible for granting such exceptions,
aside from identifying who must approve
exceptions and be notified exceptions to the Policy.
18 See supra note 4.
19 See CBOE Letter, supra note 4, at 1; SIFMA
Letter, supra note 4, at 2.
20 See Goldman Letter, at 2 (stating that OCC’s
rule will provide appropriate and necessary
incentives to create necessary risk controls at all
Options Exchanges.); SIFMA Letter, at 2 (stating
that the proposed rule change provides strong
incentives for Options Exchanges to comply with
risk control standards in the Policy since an
exchange’s non-compliance will be ‘‘punitive’’ to
clearing members transacting on that exchange.);
AACC Letter, supra note 4, at 1 (supporting the use
of a fee to incentivize Options Exchanges to adopt
and maintain risk controls that are consistent with
the risk control standards in the Policy and the use
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commenter states that because clearing
members guarantee the clearance and
settlement of trades by their clients, it
is critical for clearing member risk
management purposes that there be
robust and centralized risk controls at
the options exchanges.21
In addition to expressing general
support for the objective of the proposed
rule change, commenters also support
specific aspects of the proposed rule
change. One commenter supports OCC’s
principles-based approach and states
that such approach would allow options
exchanges to develop specific risk
controls in each category best-suited for
their markets.22 Another commenter
describes the Policy’s certification
requirement as ‘‘exceedingly
reasonable’’ and notes that this
requirement is consistent with
certification requirements in other areas
of the financial services industry,
including those instituted by the
Commission and other self-regulatory
organizations, such as Financial
Industry Regulatory Authority.23
According to this commenter, OCC’s
proposed approach for the certification
and review process would provide
reasonable steps for the options
exchanges to communicate and escalate
issues raised by OCC in connection with
the evaluation of an options exchange.24
Two commenters reference the
relationship between the proposed rule
change and the existing regulatory
framework. One commenter claims that
the proposed rule change complements
Rule 15c3–5 (‘‘Market Access Rule’’) 25
under the Act and Regulation Systems
Compliance and Integrity (‘‘Regulation
SCI’’) 26 by providing additional and
‘‘much needed layers of protections’’ at
the options exchange level.27 The other
commenter similarly suggests that the
proposed rule change, in conjunction
with the Market Access Rule, will
‘‘advance a strong, centralized structure
of risk controls.’’ 28
Finally, one commenter provides
several recommendations that it
believes would further improve the
of the fee to provide additional funds for OCC to
manage the increased risk and to cover the potential
losses caused by erroneous or violative
transactions); ISE Letter, supra note 4, at 4 (stating
that the Fee was added to provide ‘‘strong
encouragement to the options exchanges to comply
with the Policy).
21 See Goldman Letter, supra note 4, at 2.
22 See CBOE Letter, supra note 4, at 2.
23 See AACC letter, supra note 4, at 2.
24 Id.
25 See 17 CFR 240.15c3–5.
26 See Securities Exchange Act Release No. 73639
(November 19, 2014), 79 FR 72252 (December 5,
2014) (Regulation SCI Adopting Release).
27 See AACC Letter, supra note 4, at 1.
28 See SIFMA Letter, supra note 4, at 2.
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proposed rule change. In particular, this
commenter suggests that the proposed
rule change be amended to specify that
the options exchanges make their risk
controls visible and transparent to
members, trading permit holders, and
customers.29 For the ‘‘backup
alternative messaging systems’’ that are
a part of the Kill Switch Protections, the
commenter recommends that OCC
clarify in the proposed rule change that
the options exchanges would need to
provide the methodology, access
protocols, controls, and management of
such systems.30 The same commenter
urges that the proposed rule change be
clarified to require options exchanges to
bear the full cost of the Fee to prevent
the options exchanges from passing the
cost along to their member firms,
trading permit holders, and/or
customers.31
B. Objecting Comments
One commenter, BOX, raises several
objections to the proposed rule change.
Authority To Prescribe Risk Control for
Options Exchanges
BOX questions whether OCC has the
authority generally to prescribe risk
controls for options exchanges under
the Act.32 BOX asserts that it is unable
to find a provision in the Act or
otherwise that grants OCC with the
authority to regulate the options
exchanges. Moreover, BOX contends
that because the U.S. Congress gave the
Commission express authority under the
Act to regulate the national securities
exchanges, including options
exchanges, any industry-wide
requirements imposed on the options
exchanges should be mandated by the
Commission, not OCC.
BOX also asserts that it is the
Commission’s role, through the rule
filing process under Section 19(b) of the
Act and the rules and regulations
thereunder, to determine whether the
rules and procedures of the individual
options exchanges meet the
requirements of Section 6 of the Act.
BOX argues that allowing OCC to
require options exchanges to have
certain procedures and rules would give
OCC the authority to determine the
sufficiency of an options exchange’s
rules thus giving OCC the ability to act
as a ‘‘de facto regulator’’ over the
options exchanges and, more broadly,
the options markets.33
29 See
AACC Letter, supra note 4, at 2.
30 Id.
31 Id.
at 3.
BOX Letter, supra note 4, at 2.
33 Id. at 2–3.
32 See
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Burden on Competition
BOX states that the proposed rule
change would impose burdens on
competition that OCC fails to justify.
First, according to BOX, even if OCC
deems an options exchange to be in
compliance with OCC’s Policy, a
substantial burden would be placed on
individual options exchanges,
including, but not limited to, expending
initial resources to ensure that an
exchange has the required risk controls
in place and devoting resources
annually to ensure that the exchange is
continually compliant with OCC’s risk
control standards. BOX contends that
this burden would be especially high for
smaller exchanges.
Second, BOX states that the potential
application of an increased clearing fee
to a single exchange could have
devastating effects on that exchange’s
ability to compete in the ‘‘highly
competitive environment’’ in the
options market where any increase in
fees can make ‘‘a world of difference.’’ 34
BOX attributes this to the ‘‘direct effect
it will have on the total transaction cost
to market participants and the effect it
will have on the exchange’s revenue.’’ 35
BOX asserts that firms would include
the Fee in their determination of where
to route trade orders based upon the
total transaction costs. As a result, BOX
argues that, options exchanges would
have to decrease all fees by two cents to
‘‘maintain the status quo or be at an
economic disadvantage to their
competition.’’ 36
The Proposed Fee is a De Facto Fee on
the Options Exchanges Inconsistent
With Section 17A(b)(3)(D) of the Act
BOX argues that the charging of an
additional fee for transactions occurring
on a specific exchange is essentially the
same as charging a fee on the exchange
directly and is not consistent with
Section 17A(b)(3)(D) of the Act. It also
questions whether OCC is permitted to
charge different fees for clearing
transactions based on the executing
exchange, which departs from treating
all options exchange the same.37
34 Id.
at 3–4.
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35 Id.
36 Id, at 5. Cf. Another commenter urges that the
proposed rule change be clarified to require the
options exchanges to bear the full cost of the Fee
(or any increased incentive fee) to prevent the
options exchanges from passing this increased cost
along to their member firms, trading permit holders,
and/or customers. See AACC Letter, supra note 4,
at 3.
37 See BOX Letter, supra note 4, at 5.
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C. Comments in Response to BOX
One commenter, ISE, submitted a
comment letter to respond to BOX’s
objections to the proposed rule change.
Authority To Prescribe Risk Control for
Options Exchanges
ISE suggests that BOX’s arguments
regarding whether OCC has the
authority to regulate options exchanges
lack legal reasoning.38 ISE argues that
the relevant legal question for
Commission consideration is whether
the Act gives OCC authority to adopt the
Policy, which, according to ISE it does.
Moreover, ISE contends that, as the sole
registered clearing agency for all listed
options transactions and a systemically
important financial market utility, risks
that arise from erroneous transactions
are exactly the risks that OCC has
authority to address under Section 17A
of the Act.39
Burden on Competition
ISE states that BOX fails to analyze its
burden on competition claim under the
governing law. ISE argues that the
appropriate questions to pose when
evaluating the proposed rule change’s
burden on competition are: (1) Whether
any discriminatory effect on exchanges
that do not adopt the Policy is necessary
or appropriate; and (2) whether there is
a further inappropriate or unnecessary
discriminatory effect on smaller
exchanges. ISE contends that because
OCC has the authority to adopt the
Policy, treating transactions on
Compliant Options Exchanges more
favorably than those on Non-Compliant
Options Exchanges is neither
inappropriate nor unreasonable.
Furthermore, ISE claims that the Act
does not contain provisions that require
less robust regulations or ‘‘special
treatment’’ for smaller exchanges such
as BOX.40
Charging De Facto Fees on the Exchange
ISE asserts that OCC has the authority
to adopt the Fees based on whether an
options exchange meets OCC’s risk
control standards. According to ISE, the
relevant question under the Act is
whether the adoption of the Policy and
imposition of the associated Fee results
in unfair discrimination. Although ISE
concedes that the proposed rule change
‘‘clearly discriminates between
exchanges,’’ it contends that requiring
clearing members that transact on noncompliant options exchanges to pay
higher fees is ‘‘eminently fair
discrimination.’’ ISE argues that the
Policy and Fee are discriminatory only
against those options exchanges that
have not adopted risk protections that
OCC deems necessary for it to discharge
its obligations as a registered clearing
agency and systemically important
financial market utility. ISE also notes
that the risk control standards in the
proposed rule change were developed in
consultation with a working group that
included all the options exchanges,
including BOX.41
ISE contends that BOX’s conclusion
of the Fee being a de facto fee on
options exchanges is grounded in
‘‘faulty logic’’ and ‘‘without merit.’’ ISE
asserts that an options exchange can
avoid having clearing members pay the
Fee by complying with the Policy. ISE
believes that an options exchange that
chooses not to comply with the Policy
is making an ‘‘economic decision’’ that
non-compliance is economically
preferable. Moreover, ISE argues that
because an options exchange establishes
its own fees, an options exchange that
chooses not to incur the cost of
compliance can charge lower fees than
a competitor that is compliant. Thus,
ISE believes that the proposed Fee
levels the playing field and avoids
‘‘economically rewarding exchanges’’
that choose to avoid the costs of
complying with the Policy.42
IV. Proceedings To Determine Whether
To Approve or Disapprove SR–OCC–
2016–004 and Grounds for Disapproval
Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 43 to determine
whether the proposed rule change
should be approved or disapproved.
Institution of proceedings is appropriate
at this time in view of the legal and
policy issues raised by the proposed
rule change. As noted above, institution
of proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, the Commission
seeks and encourages interested persons
to comment on the proposed rule
change, and provide arguments to
support the Commission’s analysis as to
whether to approve or disapprove the
proposed rule change.
Pursuant to Section 19(b)(2)(B) of the
Act,44 the Commission is providing
notice of the grounds for disapproval
under consideration. The Commission is
instituting proceedings to allow for
additional analysis of the proposed rule
41 Id.
38 See
ISE Letter, supra note 4, at 2.
39 Id. at 2.
40 Id. at 3.
PO 00000
Frm 00112
Fmt 4703
Sfmt 4703
39735
at 3–4.
at 4.
43 15 U.S.C. 78s(b)(2)(B).
44 15 U.S.C. 78s(b)(2)(B).
42 Id.
E:\FR\FM\17JNN1.SGM
17JNN1
39736
Federal Register / Vol. 81, No. 117 / Friday, June 17, 2016 / Notices
change’s consistency with the Act and
the rules thereunder. Specifically, the
Commission believes that OCC’s
proposed rule change raises questions as
to whether it is consistent with: (i)
Section 17A(b)(3)(I) of the Act,45 which
provides that clearing agency rules
cannot impose a burden on competition
that is not necessary or appropriate in
furtherance of the purposes of the Act;
(ii) Section 17A(b)(3)(D) of the Act,46
which requires clearing agency rules to
provide for the equitable allocation of
reasonable dues, fees and other charges
among its participants; (iii) Rule 17Ad–
22(d)(1) under the Act,47 which requires
clearing agencies to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide a wellfounded, transparent, and enforceable
legal framework; and (iv) Rule 17Ad–
22(d)(7) under the Act,48 which requires
clearing agencies to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to evaluate the
potential sources of risks that can arise
when a clearing agency establishes links
to clear or settle trades, and ensure that
the risks are managed prudently on an
ongoing basis.
sradovich on DSK3TPTVN1PROD with NOTICES
V. Request for Written Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to issues raised
by the proposed rule change. In
particular, the Commission invites the
written views of interested persons
concerning whether the proposed rule
change is consistent with Sections
17A(b)(3)(I) and 17A(b)(3)(D) of the Act
and Rules 17Ad–22(d)(1) and 17Ad–
22(d)(7) under the Act, or any other
provision of the Act, or the rules and
regulations thereunder.
Interested persons are invited to
submit written data, views, and
arguments on or before July 8, 2016.
Any person who wishes to file a rebuttal
to any other person’s submission must
file that rebuttal on or before July 22,
2016. 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–
OCC–2016–004 on the subject line.
U.S.C. 78q–1(b)(3)(I).
U.S.C. 78q–1(b)(3)(D).
47 17 CFR 240.17Ad–22(d)(1).
48 17 CFR 240.17Ad–22(d)(7).
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–OCC–2016–004. 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 such
filings also will be available for
inspection and copying at the principal
office of OCC and on OCC’s Web site at
https://www.theocc.com/components/
docs/legal/rules_and_bylaws/sr_occ_16_
004.pdf. 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–OCC–2016–004 and should
be submitted on or before July 8, 2016.
If comments are received, any rebuttal
comments should be submitted on or
before July 22, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.49
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–14315 Filed 6–16–16; 8:45 am]
BILLING CODE 8011–01–P
45 15
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78047; File No. SR–
NASDAQ–2016–077]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Eliminate
Certain Fees Charged to Securities
Listed on Nasdaq Under the Rule 5700
Series
June 13, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 1,
2016, The NASDAQ Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to eliminate
certain fees charged to securities listed
on Nasdaq under the Rule 5700 Series.
The text of the proposed rule change
is detailed below. Proposed new
language is italicized and proposed
deletions are in brackets.
*
*
*
*
5930. Linked Securities, SEEDS, and
Other Securities
(a)–(b) No change.
[(c) Record-Keeping Fee
A Company that makes a change such
as a change to its name, the par value
or title of its security, or its symbol shall
pay a fee of $2,500 to Nasdaq and
submit the appropriate form as
designated by Nasdaq.
(d) Substitution Listing Fee
A Company that implements a
Substitution Listing Event, including
the replacement of, or any significant
modification to, the index, portfolio, or
Reference Asset underlying a security,
shall pay a fee of $5,000 to Nasdaq for
each event or change and submit the
appropriate form as designated by
Nasdaq.]
46 15
VerDate Sep<11>2014
16:48 Jun 16, 2016
1 15
49 17
Jkt 238001
PO 00000
CFR 200.30–3(a)(57).
Frm 00113
Fmt 4703
Sfmt 4703
*
2 17
E:\FR\FM\17JNN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
17JNN1
]]>Agencies
[Federal Register Volume 81, Number 117 (Friday, June 17, 2016)]
[Notices]
[Pages 39732-39736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14315]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78056; File No. SR-OCC-2016-004]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Instituting Proceedings To Determine Whether To Approve or
Disapprove a Proposed Rule Change Related to the Adoption of an Options
Exchange Risk Control Standards Policy
June 13, 2016.
I. Introduction
On March 4, 2016, The Options Clearing Corporation (``OCC'') 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 adopt a new
Options Exchange Risk Control Standards Policy and revise its Schedule
of Fees to impose on clearing members a fee of two cents per cleared
options contract (per side) executed on an options exchange that did
not demonstrate sufficient risk controls designed to meet the proposed
set of principles-based risk control standards. The proposed rule
change was published for comment in the Federal Register on March 18,
2016.\3\ The Commission received six comment letters on the proposed
rule change.\4\ On April 27, 2016, the Commission designated a longer
period within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
approve or
[[Page 39733]]
disapprove the proposed rule change.\5\ This order institutes
proceedings under Section 19(b)(2)(B) of the Act \6\ to determine
whether to approve or disapprove 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. 34-77358 (March 14,
2016), 81 FR 14921 (March 18, 2016) (File No. SR-OCC-2016-004)
(``Notice'').
\4\ See Letters from Mark Dehnert, Managing Director, Goldman
Sachs & Co., and Kyle Czepiel, Co-Chief Executive Officer, Goldman
Sachs Execution & Clearing, L.P. (collectively, ``Goldman Sachs''),
dated March 28, 2016, to Secretary, Commission (``Goldman Sachs
Letter''); Lisa J. Fall, President, BOX Options Exchange (``BOX''),
dated April 6, 2016, to Brent J. Fields, Secretary, Commission
(``BOX Letter''); James G. Lundy, Associate General Counsel, ABN
AMRO Clearing Chicago LLC (``AACC''), dated April 8, 2016, to Brent
J. Fields, Secretary, Commission (``AACC Letter''); Ellen Greene,
Managing Director, Securities Industry and Financial Markets
Association (``SIFMA''), dated April 12, 2016, to Robert W. Errett,
Deputy Secretary, Commission (``SIFMA Letter''); Michael J. Simon,
Secretary and General Counsel, International Securities Exchange,
LLC (``ISE''), dated April 20, 2016, to Brent J. Fields, Secretary,
Commission(``ISE Letter''); and Edward T. Tilly, Chief Executive
Officer, Chicago Board Options Exchange, Inc. (``CBOE''), dated
April 20, 2016, to Brent J. Fields, Secretary, Commission (``CBOE
Letter'').
\5\ See Securities Exchange Act Release No. 77720 (April 27,
2016), 81 FR 26609 (May 3, 2016).
\6\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
OCC proposes to adopt a new Options Exchange Risk Control Standards
Policy (``Policy'') for addressing the potential risks arising from
erroneous trades executed on an options exchange that has not
demonstrated the existence of certain risk controls that are consistent
with a set of principles-based risk control standards developed by OCC.
Among other things, the proposed rule change would establish risk
control standards and require each options exchange to submit an annual
certification, attesting that it has sufficient risk controls
consistent with OCC's Policy.
The proposed rule change also would revise OCC's Schedule of Fees,
in accordance with the proposed Policy, to charge and collect from
clearing members a fee of two cents per cleared options contract (per
side) (``Fee'') executed on an options exchange that has not
demonstrated to OCC that it has implemented sufficient controls
designed to meet OCC's proposed Policy. The proposed rule change would
require that any funds collected from the Fee be retained as earnings
and, as such, be eligible for use for clearing member defaults under
Article VIII, Section 5(d) of OCC's By-Laws,\7\ but would prohibit such
funds from being used for any other purpose. These funds would be
available for use by OCC, subject to the unanimous approval from its
Class A and B common stock shareholders, in accordance with Article
VIII, Section 5(d) of OCC's By-Laws.\8\
---------------------------------------------------------------------------
\7\ Under Article VIII, Section 5(d) of OCC's By-Laws, usage of
current or retained earnings may be considered after the defaulting
clearing member's margin has been exhausted, and it may be used to
reduce in whole or in part the pro rata contribution otherwise made
from the Clearing Fund to cover the loss.
\8\ See Article VIII, Section 5(d).
---------------------------------------------------------------------------
Risk Control Standards
The proposed Policy includes the risk control standards to which an
options exchange must attest in order to avoid the Fee charged on
trades executed on its own platform. According to OCC, the proposed
risk control standards were developed by OCC in consultation with the
options exchanges and are designed to provide flexibility for each
options exchange to develop specific risk controls that best suit its
own marketplace while still guarding against risks related to erroneous
transactions. The proposed Policy would include the following
categories of risk controls: ``Price Reasonability Checks,'' \9\
``Drill-Through Protections,'' \10\ ``Activity-Based Protections,''
\11\ and ``Kill-Switch Protections.'' \12\
---------------------------------------------------------------------------
\9\ According to OCC, Mandatory Price Reasonability Checks would
prevent limit orders, complex orders, and market maker quotes from
being entered and displayed on an options exchange if the price on
such order or quote is outside a defined threshold set in relation
to the current market price or National Best Bid or Offer
(``NBBO'').
\10\ OCC states that Drill-Through Protections are closely
related to Price Reasonability Checks and would require all orders,
including market orders, limit orders, and complex orders, to be
executed within pre-determined price increments of the NBBO.
\11\ OCC explains that Activity-Based Protections would extend
an options exchange's Risk Controls to factors beyond price and are
most commonly designed to address risks associated with a high
frequency of trades in a short period of time. OCC notes that
Activity-Based Protections may address the maximum number of
contracts that may be entered as one order, the maximum number of
contacts that may be entered or executed by one firm over a certain
period of time, and the maximum number of messages that may be
entered over a certain period of time.
\12\ According to OCC, Kill-Switch Protections would provide
options exchanges, and their market participants, with the ability
to cancel existing orders and quotes and/or block new orders and
quotes on an exchange-wide or more tailored basis (e.g., symbol
specific, by Clearing Member, etc.) with a single message to the
options exchange after established trigger events are detected.
According to OCC, a trigger event may include a situation where a
market participant is disconnected from an options exchange due to
an abnormally large order or manual errors in the system by a market
participant causing multiple erroneous trades to occur.
---------------------------------------------------------------------------
Certification Process
Under the proposed rule change, each options exchange would certify
to OCC that it has implemented risk controls consistent with OCC's
Policy using a designed form, which must be signed by an executive
officer. OCC would then evaluate each options exchange's risk controls
for compliance with OCC's Policy by reviewing each options exchange's
certification and supporting materials, including, but not be limited
to, its proposed rule changes filed with the Commission, approved
rules, information circulars, and written procedures.
If OCC \13\ is unable to determine that an options exchange has
risk controls sufficient to meet the Policy, OCC would furnish the
options exchange with a concise written statement of the reasons as
soon as reasonably practicable and the options exchange would have 30
calendar days following receipt of the concise written statement to
present further evidence of its sufficient risk controls to OCC. After
submission of any further evidence by the options exchange, OCC would
have 30 days to conduct a second review and make a recommendation to
OCC's Risk Committee \14\ regarding whether the options exchange has
sufficient risk controls. Within 30 days of receiving the
recommendation, OCC's Risk Committee would review the recommendation
and the options exchange's supporting materials, as appropriate, to
determine whether the options exchange has risk controls sufficient to
meet the Policy. OCC would furnish the options exchange with a concise
written statement of the Risk Committee's determination and the reasons
for such determination as soon as reasonably practicable following the
Risk Committee's review.
---------------------------------------------------------------------------
\13\ OCC does not specify in the proposed rule change which part
of OCC would be responsible for evaluating certifications.
\14\ OCC's Risk Committee is chaired by a public Director and it
does not currently have an options exchange representative. In the
event OCC's Risk Committee has an exchange representative at some
time in the future, such exchange representative would be recused
from a decision on the appeal of a determination of an options
exchange's compliance with the Policy.
---------------------------------------------------------------------------
On June 30 of each year (following the effective date of the
proposed rule change), OCC would post a notice to its Web site to which
clearing members (but not the general public) have access, with respect
to each options exchange, whether: (1) The options exchange has
implemented sufficient risk controls to meet the Policy (``Compliant
Options Exchange''); (2) OCC was unable to determine the options
exchange has sufficient risk controls that meet the Policy (``Non-
Compliant Options Exchange''); or (3) a certification has not been
submitted by the options exchange.
Collection of Proposed Fee
Beginning on the first business day that is at least 60 days after
OCC posts such notice, OCC would charge and collect the Fee for trades
executed on a Non-Compliant Options Exchange. The Fee would continue to
be charged to and collected from clearing members, and the notice would
remain posted on OCC's Web site to which clearing members (but not the
general public) have access, until the options exchange is able to
demonstrate that its risk controls satisfy the Policy.
Under the proposed rule change, any funds collected from the Fee
would be retained as earnings and, as such, be eligible for use for
clearing member defaults under Article VIII, Section 5(d)
[[Page 39734]]
of OCC's By-Laws,\15\ but such funds would be prohibited from being
used for any other purpose. These funds would be available for use by
OCC, subject to the unanimous approval from its Class A and B common
storck shareholders, in accordance with Article VIII, Section 5(d) of
OCC's By-Laws.\16\
---------------------------------------------------------------------------
\15\ See Article VIII, Section 5(d).
\16\ Id.
---------------------------------------------------------------------------
Exception and Escalation Processes
The proposed Policy also provides that, on rare occasions, OCC may
grant exceptions to the Policy to appropriately address immediate
business issues and provides for an escalation process to report
breaches of the Policy.\17\
---------------------------------------------------------------------------
\17\ OCC does not provide additional information in the proposed
rule change regarding its process for granting exceptions and which
part of OCC would be responsible for granting such exceptions, aside
from identifying who must approve exceptions and be notified
exceptions to the Policy.
---------------------------------------------------------------------------
III. Summary of Comment Letters
The Commission received six comment letters in response to the
proposed rule change.\18\ Five comment letters were written in support
of the proposed rule change and one comment letter from BOX, objecting
to the proposed rule change. The supporting comment letter from ISE
also responded to BOX's objections.
---------------------------------------------------------------------------
\18\ See supra note 4.
---------------------------------------------------------------------------
A. Supporting Comments
Five commenters, Goldman Sachs, AACC, SIFMA, CBOE and ISE,
submitted comment letters in support of the proposed rule change. All
of these commenters express concern regarding the risk that erroneous
trades may pose to the listed-options market and its participants. Each
of these commenters support effective risk management controls by an
options exchange to minimize the risk of erroneous trades and the
attendant consequences. Recognizing the role OCC plays in the listed-
options market, these commenters state that OCC's proposed rule change
would minimize the likelihood of erroneous trades occurring and reduce
risk \19\ by incentivizing options exchanges to create risk
controls.\20\ One commenter states that because clearing members
guarantee the clearance and settlement of trades by their clients, it
is critical for clearing member risk management purposes that there be
robust and centralized risk controls at the options exchanges.\21\
---------------------------------------------------------------------------
\19\ See CBOE Letter, supra note 4, at 1; SIFMA Letter, supra
note 4, at 2.
\20\ See Goldman Letter, at 2 (stating that OCC's rule will
provide appropriate and necessary incentives to create necessary
risk controls at all Options Exchanges.); SIFMA Letter, at 2
(stating that the proposed rule change provides strong incentives
for Options Exchanges to comply with risk control standards in the
Policy since an exchange's non-compliance will be ``punitive'' to
clearing members transacting on that exchange.); AACC Letter, supra
note 4, at 1 (supporting the use of a fee to incentivize Options
Exchanges to adopt and maintain risk controls that are consistent
with the risk control standards in the Policy and the use of the fee
to provide additional funds for OCC to manage the increased risk and
to cover the potential losses caused by erroneous or violative
transactions); ISE Letter, supra note 4, at 4 (stating that the Fee
was added to provide ``strong encouragement to the options exchanges
to comply with the Policy).
\21\ See Goldman Letter, supra note 4, at 2.
---------------------------------------------------------------------------
In addition to expressing general support for the objective of the
proposed rule change, commenters also support specific aspects of the
proposed rule change. One commenter supports OCC's principles-based
approach and states that such approach would allow options exchanges to
develop specific risk controls in each category best-suited for their
markets.\22\ Another commenter describes the Policy's certification
requirement as ``exceedingly reasonable'' and notes that this
requirement is consistent with certification requirements in other
areas of the financial services industry, including those instituted by
the Commission and other self-regulatory organizations, such as
Financial Industry Regulatory Authority.\23\ According to this
commenter, OCC's proposed approach for the certification and review
process would provide reasonable steps for the options exchanges to
communicate and escalate issues raised by OCC in connection with the
evaluation of an options exchange.\24\
---------------------------------------------------------------------------
\22\ See CBOE Letter, supra note 4, at 2.
\23\ See AACC letter, supra note 4, at 2.
\24\ Id.
---------------------------------------------------------------------------
Two commenters reference the relationship between the proposed rule
change and the existing regulatory framework. One commenter claims that
the proposed rule change complements Rule 15c3-5 (``Market Access
Rule'') \25\ under the Act and Regulation Systems Compliance and
Integrity (``Regulation SCI'') \26\ by providing additional and ``much
needed layers of protections'' at the options exchange level.\27\ The
other commenter similarly suggests that the proposed rule change, in
conjunction with the Market Access Rule, will ``advance a strong,
centralized structure of risk controls.'' \28\
---------------------------------------------------------------------------
\25\ See 17 CFR 240.15c3-5.
\26\ See Securities Exchange Act Release No. 73639 (November 19,
2014), 79 FR 72252 (December 5, 2014) (Regulation SCI Adopting
Release).
\27\ See AACC Letter, supra note 4, at 1.
\28\ See SIFMA Letter, supra note 4, at 2.
---------------------------------------------------------------------------
Finally, one commenter provides several recommendations that it
believes would further improve the proposed rule change. In particular,
this commenter suggests that the proposed rule change be amended to
specify that the options exchanges make their risk controls visible and
transparent to members, trading permit holders, and customers.\29\ For
the ``backup alternative messaging systems'' that are a part of the
Kill Switch Protections, the commenter recommends that OCC clarify in
the proposed rule change that the options exchanges would need to
provide the methodology, access protocols, controls, and management of
such systems.\30\ The same commenter urges that the proposed rule
change be clarified to require options exchanges to bear the full cost
of the Fee to prevent the options exchanges from passing the cost along
to their member firms, trading permit holders, and/or customers.\31\
---------------------------------------------------------------------------
\29\ See AACC Letter, supra note 4, at 2.
\30\ Id.
\31\ Id. at 3.
---------------------------------------------------------------------------
B. Objecting Comments
One commenter, BOX, raises several objections to the proposed rule
change.
Authority To Prescribe Risk Control for Options Exchanges
BOX questions whether OCC has the authority generally to prescribe
risk controls for options exchanges under the Act.\32\ BOX asserts that
it is unable to find a provision in the Act or otherwise that grants
OCC with the authority to regulate the options exchanges. Moreover, BOX
contends that because the U.S. Congress gave the Commission express
authority under the Act to regulate the national securities exchanges,
including options exchanges, any industry-wide requirements imposed on
the options exchanges should be mandated by the Commission, not OCC.
---------------------------------------------------------------------------
\32\ See BOX Letter, supra note 4, at 2.
---------------------------------------------------------------------------
BOX also asserts that it is the Commission's role, through the rule
filing process under Section 19(b) of the Act and the rules and
regulations thereunder, to determine whether the rules and procedures
of the individual options exchanges meet the requirements of Section 6
of the Act. BOX argues that allowing OCC to require options exchanges
to have certain procedures and rules would give OCC the authority to
determine the sufficiency of an options exchange's rules thus giving
OCC the ability to act as a ``de facto regulator'' over the options
exchanges and, more broadly, the options markets.\33\
---------------------------------------------------------------------------
\33\ Id. at 2-3.
---------------------------------------------------------------------------
[[Page 39735]]
Burden on Competition
BOX states that the proposed rule change would impose burdens on
competition that OCC fails to justify. First, according to BOX, even if
OCC deems an options exchange to be in compliance with OCC's Policy, a
substantial burden would be placed on individual options exchanges,
including, but not limited to, expending initial resources to ensure
that an exchange has the required risk controls in place and devoting
resources annually to ensure that the exchange is continually compliant
with OCC's risk control standards. BOX contends that this burden would
be especially high for smaller exchanges.
Second, BOX states that the potential application of an increased
clearing fee to a single exchange could have devastating effects on
that exchange's ability to compete in the ``highly competitive
environment'' in the options market where any increase in fees can make
``a world of difference.'' \34\ BOX attributes this to the ``direct
effect it will have on the total transaction cost to market
participants and the effect it will have on the exchange's revenue.''
\35\ BOX asserts that firms would include the Fee in their
determination of where to route trade orders based upon the total
transaction costs. As a result, BOX argues that, options exchanges
would have to decrease all fees by two cents to ``maintain the status
quo or be at an economic disadvantage to their competition.'' \36\
---------------------------------------------------------------------------
\34\ Id. at 3-4.
\35\ Id.
\36\ Id, at 5. Cf. Another commenter urges that the proposed
rule change be clarified to require the options exchanges to bear
the full cost of the Fee (or any increased incentive fee) to prevent
the options exchanges from passing this increased cost along to
their member firms, trading permit holders, and/or customers. See
AACC Letter, supra note 4, at 3.
---------------------------------------------------------------------------
The Proposed Fee is a De Facto Fee on the Options Exchanges
Inconsistent With Section 17A(b)(3)(D) of the Act
BOX argues that the charging of an additional fee for transactions
occurring on a specific exchange is essentially the same as charging a
fee on the exchange directly and is not consistent with Section
17A(b)(3)(D) of the Act. It also questions whether OCC is permitted to
charge different fees for clearing transactions based on the executing
exchange, which departs from treating all options exchange the
same.\37\
---------------------------------------------------------------------------
\37\ See BOX Letter, supra note 4, at 5.
---------------------------------------------------------------------------
C. Comments in Response to BOX
One commenter, ISE, submitted a comment letter to respond to BOX's
objections to the proposed rule change.
Authority To Prescribe Risk Control for Options Exchanges
ISE suggests that BOX's arguments regarding whether OCC has the
authority to regulate options exchanges lack legal reasoning.\38\ ISE
argues that the relevant legal question for Commission consideration is
whether the Act gives OCC authority to adopt the Policy, which,
according to ISE it does. Moreover, ISE contends that, as the sole
registered clearing agency for all listed options transactions and a
systemically important financial market utility, risks that arise from
erroneous transactions are exactly the risks that OCC has authority to
address under Section 17A of the Act.\39\
---------------------------------------------------------------------------
\38\ See ISE Letter, supra note 4, at 2.
\39\ Id. at 2.
---------------------------------------------------------------------------
Burden on Competition
ISE states that BOX fails to analyze its burden on competition
claim under the governing law. ISE argues that the appropriate
questions to pose when evaluating the proposed rule change's burden on
competition are: (1) Whether any discriminatory effect on exchanges
that do not adopt the Policy is necessary or appropriate; and (2)
whether there is a further inappropriate or unnecessary discriminatory
effect on smaller exchanges. ISE contends that because OCC has the
authority to adopt the Policy, treating transactions on Compliant
Options Exchanges more favorably than those on Non-Compliant Options
Exchanges is neither inappropriate nor unreasonable. Furthermore, ISE
claims that the Act does not contain provisions that require less
robust regulations or ``special treatment'' for smaller exchanges such
as BOX.\40\
---------------------------------------------------------------------------
\40\ Id. at 3.
---------------------------------------------------------------------------
Charging De Facto Fees on the Exchange
ISE asserts that OCC has the authority to adopt the Fees based on
whether an options exchange meets OCC's risk control standards.
According to ISE, the relevant question under the Act is whether the
adoption of the Policy and imposition of the associated Fee results in
unfair discrimination. Although ISE concedes that the proposed rule
change ``clearly discriminates between exchanges,'' it contends that
requiring clearing members that transact on non-compliant options
exchanges to pay higher fees is ``eminently fair discrimination.'' ISE
argues that the Policy and Fee are discriminatory only against those
options exchanges that have not adopted risk protections that OCC deems
necessary for it to discharge its obligations as a registered clearing
agency and systemically important financial market utility. ISE also
notes that the risk control standards in the proposed rule change were
developed in consultation with a working group that included all the
options exchanges, including BOX.\41\
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\41\ Id. at 3-4.
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ISE contends that BOX's conclusion of the Fee being a de facto fee
on options exchanges is grounded in ``faulty logic'' and ``without
merit.'' ISE asserts that an options exchange can avoid having clearing
members pay the Fee by complying with the Policy. ISE believes that an
options exchange that chooses not to comply with the Policy is making
an ``economic decision'' that non-compliance is economically
preferable. Moreover, ISE argues that because an options exchange
establishes its own fees, an options exchange that chooses not to incur
the cost of compliance can charge lower fees than a competitor that is
compliant. Thus, ISE believes that the proposed Fee levels the playing
field and avoids ``economically rewarding exchanges'' that choose to
avoid the costs of complying with the Policy.\42\
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\42\ Id. at 4.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-OCC-
2016-004 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \43\ to determine whether the proposed rule
change should be approved or disapproved. Institution of proceedings is
appropriate at this time in view of the legal and policy issues raised
by the proposed rule change. As noted above, institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to comment on the proposed rule change,
and provide arguments to support the Commission's analysis as to
whether to approve or disapprove the proposed rule change.
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\43\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\44\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule
[[Page 39736]]
change's consistency with the Act and the rules thereunder.
Specifically, the Commission believes that OCC's proposed rule change
raises questions as to whether it is consistent with: (i) Section
17A(b)(3)(I) of the Act,\45\ which provides that clearing agency rules
cannot impose a burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act; (ii) Section
17A(b)(3)(D) of the Act,\46\ which requires clearing agency rules to
provide for the equitable allocation of reasonable dues, fees and other
charges among its participants; (iii) Rule 17Ad-22(d)(1) under the
Act,\47\ which requires clearing agencies to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide a well-founded, transparent, and enforceable legal
framework; and (iv) Rule 17Ad-22(d)(7) under the Act,\48\ which
requires clearing agencies to establish, implement, maintain and
enforce written policies and procedures reasonably designed to evaluate
the potential sources of risks that can arise when a clearing agency
establishes links to clear or settle trades, and ensure that the risks
are managed prudently on an ongoing basis.
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\44\ 15 U.S.C. 78s(b)(2)(B).
\45\ 15 U.S.C. 78q-1(b)(3)(I).
\46\ 15 U.S.C. 78q-1(b)(3)(D).
\47\ 17 CFR 240.17Ad-22(d)(1).
\48\ 17 CFR 240.17Ad-22(d)(7).
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V. Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to issues
raised by the proposed rule change. In particular, the Commission
invites the written views of interested persons concerning whether the
proposed rule change is consistent with Sections 17A(b)(3)(I) and
17A(b)(3)(D) of the Act and Rules 17Ad-22(d)(1) and 17Ad-22(d)(7) under
the Act, or any other provision of the Act, or the rules and
regulations thereunder.
Interested persons are invited to submit written data, views, and
arguments on or before July 8, 2016. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal on or
before July 22, 2016. 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-OCC-2016-004 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-OCC-2016-004. 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 such filings also will be available
for inspection and copying at the principal office of OCC and on OCC's
Web site at https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_16_004.pdf. 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-OCC-2016-004 and
should be submitted on or before July 8, 2016. If comments are
received, any rebuttal comments should be submitted on or before July
22, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\49\
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\49\ 17 CFR 200.30-3(a)(57).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-14315 Filed 6-16-16; 8:45 am]
BILLING CODE 8011-01-P
