Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to AIM, SAM, FLEX AIM, FLEX SAM and FLEX Electronic RFQs, 60496-60500 [2012-24289]

Download as PDF 60496 Federal Register / Vol. 77, No. 192 / Wednesday, October 3, 2012 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative prior to 30 days from the date on which it was filed, or such shorter time as the Commission may designate, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 33 and Rule 19b–4(f)(6) thereunder.34 A proposed rule change filed pursuant to Rule 19b–4(f)(6) under the Act 35 normally does not become operative for 30 days after the date of its filing. However, Rule 19b–4(f)(6) 36 permits the Commission to 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, noting that doing so will allow the Exchange to remain competitive with other options exchanges, avoid potential regulatory inconsistencies for Participants that are also members of NYSE Amex and seamlessly continue to offer traders and the investing public the ability to use SPY options as an effective hedging and trading vehicle. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. Therefore, the Commission designates the proposal operative as of September 27, 2012.37 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 33 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 35 17 CFR 240.19b–4(f)(6). 36 17 CFR 240.19b–4(f)(6). 37 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). erowe on DSK2VPTVN1PROD with 34 17 VerDate Mar<15>2010 15:03 Oct 02, 2012 Jkt 229001 public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 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: For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.38 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–24287 Filed 10–2–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Electronic Comments [Release No. 34–67938; File No. SR–CBOE– 2012–093] • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–BOX–2012–013 on the subject line. Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to AIM, SAM, FLEX AIM, FLEX SAM and FLEX Electronic RFQs Paper Comments September 27, 2012. • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–BOX–2012–013. 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–BOX–2012–013 and should be submitted on or before October 24, 2012. PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 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 September 21, 2012, Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. The Exchange has designated the proposal as a ‘‘noncontroversial’’ proposed rule change pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is proposing to make certain amendments to its rules for trading FLEX Options 5 and Non-FLEX 38 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(6). 5 FLEX Options provide investors with the ability to customize basic option features including size, expiration date, exercise style, and certain exercise prices. FLEX Options can be FLEX Index Options or FLEX Equity Options. In addition, other products are permitted to be traded pursuant to the FLEX trading procedures. For example, credit options are eligible for trading as FLEX Options pursuant to the FLEX rules in Chapters XXIVA and XXIVB. See CBOE Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1), 24B.1(f) and (g), 24B.4(b)(1) and (c)(1), and 28.17. The rules governing the trading of FLEX Options on the FLEX Request for Quote (‘‘RFQ’’) System platform (which is limited to open outcry trading only) are contained in Chapter XXIVA. The rules governing the trading of FLEX Options on the FLEX 1 15 E:\FR\FM\03OCN1.SGM 03OCN1 Federal Register / Vol. 77, No. 192 / Wednesday, October 3, 2012 / Notices Options. The text of the proposed rule change is available on the Exchange’s Web site (www.cboe.org/Legal), at the Exchange’s Office of the Secretary, and at the Commission. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change erowe on DSK2VPTVN1PROD with 1. Purpose The Exchange recently received approval of a rule change filing, SR– CBOE–2011–123, which adopted certain rules pertaining to the electronic auction trading of FLEX Options on the Exchange’s FLEX Hybrid Trading System platform.6 In particular, the Exchange adopted rules to make modified versions of the Automated Improvement Mechanism (‘‘AIM’’) and the Solicitation Auction Mechanism (‘‘SAM’’)—which were already available for Non-FLEX Options under Rules 6.74A and 6.74B, respectively— available for FLEX Options under new Rules 24B.5A and 24B.5B, respectively. Under the FLEX AIM auction, a FLEX Trader that represents agency orders may electronically execute an order it represents as agency (an ‘‘Agency Order’’) against principal interest and/or against solicited orders provided it submits the Agency Order for execution into the AIM auction process. Under the FLEX SAM auction, a FLEX Trader that represents agency orders may electronically execute an Agency Order against solicited orders provided it submits the Agency Order for electronic execution into the SAM auction process, under which both the Agency Order and the solicited order will be designated in the FLEX Hybrid Trading System as allHybrid Trading System platform (which combines both open outcry and electronic trading) are contained in Chapter XXIVB. The Exchange notes that, currently, all FLEX Options are traded on the FLEX Hybrid Trading System platform. 6 Securities Exchange Act No. 66702 (March 30, 2012), 77 FR 20675 (April 5, 2012) (SR–CBOE– 2011–123 Approval Order). VerDate Mar<15>2010 15:03 Oct 02, 2012 Jkt 229001 or-none. Prior to launching the new FLEX AIM and FLEX SAM auctions, the Exchange is proposing to make certain changes detailed below to the FLEX auction trading rules, as well as corresponding changes to the Non-FLEX auction trading rules. The Exchange is also proposing certain other corresponding changes to various FLEX rules. First, the existing FLEX AIM provisions in Rule 24B.5A(b)(1) provide in relevant part that auction responses cannot cross the Exchange’s best bid or offer (‘‘BBO’’) on the opposite side of the market. The Exchange is proposing to amend these provisions to describe what the system does in the event a response does cross the market. In particular, the text will be amended to provide that a FLEX AIM auction response that crosses the BBO on the opposite side of the market will be capped at the BBO price. (For example, if the BBO is $1.00–$1.20 and a response is entered to sell at a price of $0.99, the response will be capped at a price of $1.00.) The existing FLEX SAM provisions in Rule 24B.5B(b)(1) are silent on what happens if an auction response crosses the BBO on the opposite side of the market; however, the FLEX SAM auction also operates in a fashion that is similar to the FLEX AIM auction. Therefore, the Exchange is proposing to amend these provisions to provide that a FLEX SAM auction response cannot cross the BBO on the opposite side of the market and a response that does cross the BBO on the opposite side of the market will be capped at the BBO price. Second, currently the AIM, SAM, FLEX AIM, and FLEX SAM auctions each in relevant part provide that auction responses may be modified or canceled during the auction response period. The only way to modify a response would be for a Trading Permit Holder to cancel a prior response then submit a new response. As a result, the Exchange believes that the references to modifying responses in the rule text are unnecessary. Therefore, the Exchange is proposing to delete references to modifying responses in Rules 6.74A(b)(1), 6.74B(b)(1), 24B.5A(b)(1), and 24B.5B(b)(1), respectively. (The Exchange is also taking this opportunity to correct a numbering error in the text of Rule 24B.5A(b)(1) (changing a paragraph number from ‘‘(ix)’’ to ‘‘(viii)’’).) Third, normally an auction would conclude after 1 second in the case of AIM and SAM, or after 3 seconds (or whatever longer period of time the Exchange may designate) in the case of FLEX AIM and FLEX SAM. In addition, PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 60497 respective AIM, SAM, FLEX AIM and FLEX SAM auction provisions set out various circumstances during which an auction would conclude early. Currently, the provisions are silent on what would happen in the event the option series is subject to a trading halt while an auction is ongoing. In such an event, the relevant auction would conclude early and the Agency Order would execute (or not execute) in accordance with the allocation provisions set out in the relevant rules. Therefore, the Exchange is proposing to amend Rules 6.74A(b)(2), 6.74B(b)(2), 24B.5A(b)(2) and 24B.5B(b)(2), respectively, to indicate that an auction would conclude early in the event of a trading halt in the series on the Exchange and the Agency Order would execute (or not execute) in accordance with the allocation provisions set out in the relevant rules.7 Fourth, the Exchange is proposing to make some clarifications regarding the application of certain provisions in the FLEX AIM and FLEX SAM auction rules to complex orders. The Exchange is also proposing to make similar clarifications to the FLEX electronic Request for Quote (‘‘RFQ’’) auction rules. By way of background, the existing FLEX AIM and FLEX SAM auctions each respectively provide in relevant part, for simple orders, that only one auction may be ongoing at any given time in a series and auctions in the same series may not queue or overlap in any manner. Further, unrelated FLEX Orders may not be submitted to the electronic book for the duration of an auction. For complex orders, the same conditions apply. In addition, certain other conditions also apply.8 For instance, the complex order processing provisions currently provide that, in the event there are bids (offers) in any of the individual component series legs represented in the electronic book when an Agency Order is submitted to the auction, the auction will not commence. The complex order processing provisions also currently provide that, in the event an unrelated FLEX Order in any of the individual series legs is received during the 7 The Exchange notes that NASDAQ OMX PHLX LLC (‘‘Phlx’’) has a similar provision within its electronic auction rules related to the early conclusion of an auction due to a trading halt. See Phlx Rule 1080(n). 8 Complex orders are only eligible to trade with other complex orders through the FLEX AIM and FLEX SAM auctions. (As a result, to the extent the Exchange determines to make an electronic book available for resting FLEX Orders, there is no ‘‘legging’’ of complex orders with FLEX Orders that may be represented in the individual series legs represented in the electronic book.) Order allocation is the same as would be applicable for simple orders. See Rules 24B.5A.05 and 24B.5B.01. E:\FR\FM\03OCN1.SGM 03OCN1 60498 Federal Register / Vol. 77, No. 192 / Wednesday, October 3, 2012 / Notices erowe on DSK2VPTVN1PROD with duration of the auction response period, such FLEX Order will not be considered in the auction allocation. The Exchange believes this later provision is unnecessary and potentially confusing, since the rules also include a condition that unrelated FLEX Orders may not be submitted to the electronic book for the duration of an auction. In order to provide more clarity on the application of these various provisions to complex orders, the Exchange is proposing to revise the FLEX AIM and FLEX SAM rules to further describe how these ‘‘unrelated auction/order’’ provisions apply to complex orders. In particular, the proposed revisions will make clear that only one FLEX AIM auction (or FLEX SAM auction, as applicable) may be ongoing at any given time for a given complex order strategy and FLEX AIM auctions (or FLEX SAM auctions, as applicable) involving any of the same individual series legs of the strategy may not queue or overlap in any manner. In the event there are bids (offers) in any of the individual component series legs represented in the electronic book when an Agency Order is submitted to the auction, the auction will not commence. In addition, unrelated FLEX Orders in any of the individual series legs may not be submitted to the electronic book for the duration of auction response period.9 The Exchange is also taking this opportunity to propose similar clarifications to the FLEX electronic RFQ process. In particular, the Exchange is proposing to amend the electronic RFQ provisions for simple orders to provide that only one electronic RFQ may be ongoing at any given time in a series and electronic RFQs in the same series may not queue or overlap in any manner. (The electronic RFQ provisions for simple orders are currently silent on the topic 9 In discussing the FLEX AIM and FLEX SAM auctions, the Exchange had previously indicated that the individual series legs of a complex order would not trade through equivalent bids (offers) in the individual series legs represented in the electronic book and at least one leg must better the corresponding bid (offer) of public customers and non-Trading Permit Holder broker-dealers in the electronic book. See Securities Exchange Act Release No. 66052 (December 23, 2011), 77 FR 306 (January 4, 2012) (SR–CBOE–2011–123 Proposal Notice). The Exchange notes that these scenarios would not occur when a complex order is traded via the FLEX AIM or FLEX SAM auction. Because the FLEX AIM and FLEX SAM auctions each include a condition that the auction is not permitted to commence when there is a FLEX Order resting in the electronic book in any individual component series legs and a condition that unrelated orders are not accepted for the duration of the auction, there would be no scenario where there would be a complex order traded in a FLEX AIM or FLEX SAM auction when there are corresponding bids (offers) in the electronic book. VerDate Mar<15>2010 15:03 Oct 02, 2012 Jkt 229001 of multiple RFQs involving the same series.) The Exchange is also proposing to amend the electronic RFQ provisions for complex orders to make clear that only one electronic RFQ may be ongoing at any given time for a given complex order strategy and electronic RFQs involving any of the same individual series legs of the strategy may not queue or overlap in any manner. In the event there are bids (offers) in any of the individual component series legs represented in the electronic book when an electronic RFQ is submitted, the electronic RFQ will not commence. In addition, unrelated FLEX Orders in any of the individual series legs may not be submitted to the electronic book for the duration of electronic RFQ response period. (The Exchange is also taking this opportunity to correct a typographical error in the text (changing the phrase ‘‘automated cancelled’’ to ‘‘automatically cancelled’’).) Fifth, the Exchange is proposing to make some changes to further describe the process for trading FLEX Options that have special exercise prices and premium terms based on a method for fixing such a number or based a percentage.10 The Exchange is proposing to amend the FLEX Index Options provisions in Rules 24A.4(b)(2) and 24B.4(b)(2) to provide that exercise prices may be specified in terms of a percentage of the price of the underlying security at the time of the trade. This description of one particular method for fixing exercise prices for FLEX Index Options is parallel to an existing provision for FLEX Equity Options. The Exchange is proposing to amend the FLEX Index Options provisions to provide that premiums may be specified in terms of (i) a dollar amount, (ii) a method for fixing such a number at the time a FLEX Request for Quote or FLEX Order is traded, or (iii) a percentage of the index value calculated at the time of the trade or as of the close of trading on the Exchange on the trade date. This description of premium terms for FLEX Index Options is parallel to the existing terms for FLEX Equity Options. In addition, the Exchange notes that, currently for FLEX Options, exercise 10 For FLEX Index Options, exercise prices shall be specified in terms of (i) a specific index value number, (ii) a method for fixing such a number at the time a FLEX Request for Quote or FLEX Order is traded, or (iii) a percentage of index value calculated as of the close of trading on the Exchange on the trade date. For FLEX Equity Options, exercise prices and premiums may be stated in (i) a dollar amount, (ii) a method for fixing such a number at the time a FLEX Request for Quote or FLEX Order is traded, or (iii) a percentage of the price of the underlying security at the time of the trade or as of the close of trading on the Exchange on the trade date. See existing Rules 24A.4(b)(2) and (c)(2) and 24B.4(b)(2) and (c)(2). PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 prices and premiums that are stated using a percentage-based methodology (e.g., an exercise price based on the percentage of the close of the underlying stock or a method for fixing the number based on the gross-weighted average of the underlying stock) may be stated in a percentage increment that is no smaller than 0.01%. The existing rules do not currently provide this level of detail, so the Exchange is proposing to include a description within the rules. In particular, the Exchange is proposing to amend the descriptions in Rules 24A.4(b)(2) and (c)(2) and 24B.4(b)(2) and (c)(2) to provide that exercise prices and premiums stated using a percentage-based methodology may be stated in a percentage increment determined by the Exchange on a classby-class basis that may not be smaller than 0.01% and that the percentage increments will be rounded as provided within the rules. Corresponding changes are also being proposed to Rules 24A.5(f) and 24B.5(e), which pertain to incremental changes to bids and offers for FLEX Options trading via the electronic and open outcry RFQs, and to Rules 24B.5A(b)(1) and 24B.5B(a)(3), which pertain to incremental changes to bids and offers for FLEX Options trading via FLEX AIM and FLEX SAM. The Exchange notes that the existing rules provide for FLEX Equity Options that exercise prices may be rounded to the nearest minimum tick or other decimal increment determined by the Exchange on a class-by-class basis that may not be smaller than $0.01, and that premiums will be rounded to the nearest minimum tick.11 The existing rules are silent with respect to rounding for FLEX Index Option exercise prices. Therefore, as with FLEX Equity Options, the Exchange is proposing to provide that FLEX Index Option exercise prices may be rounded to the nearest minimum tick or other decimal increment determined by the Exchange on a class-by-class basis that may not be smaller than $0.01. The Exchange is also proposing to adopt new Interpretation and Policy .02 to Rule 24B.5, which will provide that there is no electronic book for FLEX Options with exercise prices and premiums that are based on a methodology for fixing such a number or based on a percentage as provided in Rules 24B.2(b)(2) and 24B.2(c)(2). Similar to FLEX Option complex orders, these types of FLEX Options may only trade in open outcry or electronically 11 In this regard, the Exchange notes that exercise price and premium values equal to or higher than 0.005 will be rounded up and less than 0.005 will be rounded down. E:\FR\FM\03OCN1.SGM 03OCN1 erowe on DSK2VPTVN1PROD with Federal Register / Vol. 77, No. 192 / Wednesday, October 3, 2012 / Notices via one of the three electronic auction mechanisms, i.e., the electronic RFQ process, FLEX AIM or FLEX SAM. Sixth, the Exchange is also proposing to adopt new Interpretation and Policy .03 to Rule 24B.5 (pertaining to electronic RFQs), new Interpretation and Policy .06 to Rule 24B.5A (pertaining to FLEX AIM), and new Interpretation and Policy .02 to Rule 24B.5B (pertaining to FLEX SAM). These Interpretations and Policies will describe the post-trade verification procedures that apply to electronic RFQ, FLEX AIM and FLEX SAM transactions involving multi-part complex order strategies or exercise prices and premiums that are based on a methodology for fixing such a number or based on a percentage. By way of example, when a FLEX Option complex order is traded, the transaction execution is based on an overall net price and then, post-trade, the individual component series legs are reported at prices that equal the overall net price. As another example, when an exercise price is based on a percentage of the price of the underlying security as of the close of trading on the Exchange on the trade date, the transaction execution is based on the percentage formula and then, post-trade, the values are updated to reflect the actual exercise price after the closing price is available. The rules currently do not describe the post-trade verification process for electronic trading, and the Exchange believes the additional detail may be helpful to market participants. The Exchange notes that the process for post-trade verification for electronic trades generally takes the manual process that has existed for open outcry transactions and adapts it to an electronic environment. The proposed Interpretations and Policies describe that the party that initiated the transaction shall input the applicable complex order leg price, exercise price and/or premium information into the FLEX Hybrid Trading System. Once the information is inputted into the System, the contra-party(ies) to the transaction shall then have a designated period of time to notify FLEX Officials of any inaccuracies in the content of a transaction and of the corrections to any inaccurate information, which designated period of time will be determined by the Exchange and will not be less than 5 minutes or more than 30 minutes from the time the initiating party inputs the information into the System. (Currently, the Exchange has set this period in the System at 10 minutes.) Finally, seventh, the Exchange is proposing non-substantive changes to VerDate Mar<15>2010 15:03 Oct 02, 2012 Jkt 229001 reorganize certain text within Rules 24B.5A and 24B.5B to be consistent with the format of other rules. Specifically, the Exchange is proposing to amend Rule 24B.5A to relocate the sentence ‘‘This rule supersedes Exchange Rule 6.74A.’’ to a location above Rule 24B.5A’s Interpretations and Policies, and to amend Rule 24B.5B to relocate the sentence ‘‘This rule supersedes Exchange Rule 6.74B.’’ to a location above Rule 24B.5B’s Interpretations and Policies. Again, these changes are not substantive. They are merely being made so the rules are formatted consistently with other rules contained in Chapter XXIVB. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with Section 6(b) of the Act 12 in general and furthers the objectives of Section 6(b)(5) of the Act 13 in particular in that it should promote just and equitable principles of trade, serve to remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest. In particular, the Exchange believes that the use of FLEX Options provides CBOE Trading Permit Holders and investors with additional tools to trade customized options in an exchange environment 14 and greater opportunities to manage risk. The Exchange believes that the FLEX AIM and FLEX SAM auctions adopted under rule change filing SR–CBOE–2011–123 should serve to further those objectives and encourage use of FLEX Options by making auctions mechanisms available for FLEX Options trading that are similar to auction mechanisms already available for Non-FLEX Options trading, which the Exchange believes should make the FLEX Hybrid Trading System more efficient and effective and easier for users to understand. The Exchange believes that the further refinements 12 15 U.S.C. 78f(b). U.S.C. 78f(b)(5). 14 FLEX Options provide Trading Permit Holders and investors with an improved but comparable alternative to the over-the-counter (‘‘OTC’’) market in customized options, which can take on contract characteristics similar to FLEX Options but are not subject to the same restrictions. The Exchange believes that making these changes will make the FLEX Hybrid Trading System an even more attractive alternative when market participants consider whether to execute their customized options in an exchange environment or in the OTC market. CBOE believes market participants benefit from being able to trade customized options in an exchange environment in several ways, including, but not limited to the following: (i) enhanced efficiency in initiating and closing out positions; (ii) increased market transparency; and (iii) heightened contra-party creditworthiness due to the role of The Options Clearing Corporation as issuer and guarantor of FLEX Options. 13 15 PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 60499 being proposed in this instant rule change filing, and corresponding changes to the AIM and SAM auctions for Non-FLEX Options, as well as similar changes to the FLEX electronic RFQ process, should also serve to further those objectives by more clearly and fully describing certain aspects of the operation of the FLEX Hybrid Trading System and of the aforementioned auction processes. B. Self-Regulatory Organization’s Statement on Burden on Competition CBOE does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposal. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing rule 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 from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, provided that the selfregulatory organization has given the Commission written notice of its intent to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change or such shorter time as designated by the Commission, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 15 and Rule 19b–4(f)(6) thereunder.16 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. 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. 15 15 16 17 E:\FR\FM\03OCN1.SGM U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). 03OCN1 60500 Federal Register / Vol. 77, No. 192 / Wednesday, October 3, 2012 / Notices Comments may be submitted by any of the following methods: SECURITIES AND EXCHANGE COMMISSION 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– CBOE–2012–093 on the subject line. [Release No. 34–67941; File No. SR–EDGA– 2012–43] Self-Regulatory Organizations; EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Amendment to Rule 2.11 September 27, 2012. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. erowe on DSK2VPTVN1PROD with All submissions should refer to File Number SR–CBOE–2012–093. 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–CBOE– 2012–093 and should be submitted on or before October 24, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–24289 Filed 10–2–12; 8:45 am] BILLING CODE 8011–01–P 17 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 15:03 Oct 02, 2012 Jkt 229001 Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that on September 25, 2012, EDGA Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGA’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the 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 EDGA Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGA’’) proposes to amend Rule 2.11(a)(7) to describe the circumstances under which the Exchange’s routing broker-dealer, Direct Edge ECN LLC d/ b/a DE Route (‘‘DE Route’’),4 would be authorized to liquidate an error position resulting from one or more erroneous executions on the Exchange attributable to a systems, technical or operational issue (referred to herein as a ‘‘Systems Issue’’) experienced by the Exchange. The text of the proposed rule change is available on the Exchange’s Web site at www.directedge.com, at the Exchange’s principal office and at the Public Reference Room of the Commission. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these 1 15 U.S.C.78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 4 DE Route is a facility of the Exchange. Accordingly, under Exchange Rule 2.11(a)(1), the Exchange is responsible for filing with the Securities and Exchange Commission (the ‘‘Commission’’) rule changes and fees relating to DE Route’s outbound router function, and its authorized functions are limited to those enumerated in Rule 2.11(a)(4). 2 15 PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in Sections A, B and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background DE Route is the approved Outbound Router 5 of EDGA, subject to the conditions contained in Rule 2.11. EDGA relies on DE Route to provide outbound routing services from EDGA to external market centers (each, a ‘‘Trading Center’’ 6). The Exchange has also been approved to receive inbound routes of equities orders by DE Route from EDGX Exchange, Inc. for a pilot period ending on June 30, 2013.7 In addition to the foregoing, DE Route, as well as the Exchange, is authorized under Rule 2.11(a)(6) to cancel orders when a Systems Issue occurs, and is authorized under Rule 2.11(a)(7), in connection with its role as an Outbound Router of EDGA, to maintain an error account for the purpose of liquidating an error position acquired as a result of a Systems Issue experienced either by DE Route, the Exchange or a Trading Center to which DE Route directed an outbound order.8 In this regard, DE Route may only assume such a position in the error account under documented circumstances when such position could not fairly and practicably be assigned to one or more Members in its entirety.9 5 As defined in EDGA Rule 2.11(a). See also Securities Exchange Act Release No. 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010) (order approving the registration of EDGA as a national securities exchange). 6 As defined in EDGA Rule 2.11(a) and Rule 600(b)(78) of Regulation NMS under the Securities Exchange Act of 1934 (the ‘‘Act’’), 17 CFR 242.600(b)(78). 7 See Securities Exchange Act Release No. 66643 (March 22, 2012), 77 FR 18876 (March 28, 2012) (SR–EDGA–2012–10) (extending the pilot period of the Inbound Router as described in EDGA Rule 2.12(b) through June 30, 2013). See also Securities Exchange Act Release No. 64362 (April 28, 2011), 76 FR 25386 (May 4, 2011) (SR–EDGA–2011–13) (extending the pilot period through June 30, 2012). 8 See Securities Exchange Act Release No. 67011 (May 17, 2012), 77 FR 30562 (May 23, 2012) (SR– EDGA–2012–09) (order approving amendments to Rule 2.11 that establish the Exchange’s and DE Route’s authority to cancel orders and describe the operation of an error account). 9 See EDGA Rule 2.11(a)(7). See also, supra note 8 for a description of the requirements applicable to DE Route relating, among other things, to: (i) Determining whether an error position can be fairly and practicably assigned to one or more Members in its entirety; and (ii) the manner in which an error E:\FR\FM\03OCN1.SGM 03OCN1

Agencies

[Federal Register Volume 77, Number 192 (Wednesday, October 3, 2012)]
[Notices]
[Pages 60496-60500]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-24289]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67938; File No. SR-CBOE-2012-093]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Related to AIM, SAM, FLEX AIM, FLEX SAM and FLEX 
Electronic RFQs

September 27, 2012.
    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 September 21, 2012, Chicago Board Options Exchange, 
Incorporated (the ``Exchange'' or ``CBOE'') filed with the Securities 
and Exchange Commission (the ``Commission'') the proposed rule change 
as described in Items I, II and III below, which Items have been 
prepared by the Exchange. The Exchange has designated the proposal as a 
``non-controversial'' proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to make certain amendments to its rules 
for trading FLEX Options \5\ and Non-FLEX

[[Page 60497]]

Options. The text of the proposed rule change is available on the 
Exchange's Web site (www.cboe.org/Legal), at the Exchange's Office of 
the Secretary, and at the Commission.
---------------------------------------------------------------------------

    \5\ FLEX Options provide investors with the ability to customize 
basic option features including size, expiration date, exercise 
style, and certain exercise prices. FLEX Options can be FLEX Index 
Options or FLEX Equity Options. In addition, other products are 
permitted to be traded pursuant to the FLEX trading procedures. For 
example, credit options are eligible for trading as FLEX Options 
pursuant to the FLEX rules in Chapters XXIVA and XXIVB. See CBOE 
Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1), 24B.1(f) and (g), 
24B.4(b)(1) and (c)(1), and 28.17. The rules governing the trading 
of FLEX Options on the FLEX Request for Quote (``RFQ'') System 
platform (which is limited to open outcry trading only) are 
contained in Chapter XXIVA. The rules governing the trading of FLEX 
Options on the FLEX Hybrid Trading System platform (which combines 
both open outcry and electronic trading) are contained in Chapter 
XXIVB. The Exchange notes that, currently, all FLEX Options are 
traded on the FLEX Hybrid Trading System platform.
---------------------------------------------------------------------------

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of those statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts of such 
statements.

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

1. Purpose
    The Exchange recently received approval of a rule change filing, 
SR-CBOE-2011-123, which adopted certain rules pertaining to the 
electronic auction trading of FLEX Options on the Exchange's FLEX 
Hybrid Trading System platform.\6\ In particular, the Exchange adopted 
rules to make modified versions of the Automated Improvement Mechanism 
(``AIM'') and the Solicitation Auction Mechanism (``SAM'')--which were 
already available for Non-FLEX Options under Rules 6.74A and 6.74B, 
respectively--available for FLEX Options under new Rules 24B.5A and 
24B.5B, respectively. Under the FLEX AIM auction, a FLEX Trader that 
represents agency orders may electronically execute an order it 
represents as agency (an ``Agency Order'') against principal interest 
and/or against solicited orders provided it submits the Agency Order 
for execution into the AIM auction process. Under the FLEX SAM auction, 
a FLEX Trader that represents agency orders may electronically execute 
an Agency Order against solicited orders provided it submits the Agency 
Order for electronic execution into the SAM auction process, under 
which both the Agency Order and the solicited order will be designated 
in the FLEX Hybrid Trading System as all-or-none. Prior to launching 
the new FLEX AIM and FLEX SAM auctions, the Exchange is proposing to 
make certain changes detailed below to the FLEX auction trading rules, 
as well as corresponding changes to the Non-FLEX auction trading rules. 
The Exchange is also proposing certain other corresponding changes to 
various FLEX rules.
---------------------------------------------------------------------------

    \6\ Securities Exchange Act No. 66702 (March 30, 2012), 77 FR 
20675 (April 5, 2012) (SR-CBOE-2011-123 Approval Order).
---------------------------------------------------------------------------

    First, the existing FLEX AIM provisions in Rule 24B.5A(b)(1) 
provide in relevant part that auction responses cannot cross the 
Exchange's best bid or offer (``BBO'') on the opposite side of the 
market. The Exchange is proposing to amend these provisions to describe 
what the system does in the event a response does cross the market. In 
particular, the text will be amended to provide that a FLEX AIM auction 
response that crosses the BBO on the opposite side of the market will 
be capped at the BBO price. (For example, if the BBO is $1.00-$1.20 and 
a response is entered to sell at a price of $0.99, the response will be 
capped at a price of $1.00.) The existing FLEX SAM provisions in Rule 
24B.5B(b)(1) are silent on what happens if an auction response crosses 
the BBO on the opposite side of the market; however, the FLEX SAM 
auction also operates in a fashion that is similar to the FLEX AIM 
auction. Therefore, the Exchange is proposing to amend these provisions 
to provide that a FLEX SAM auction response cannot cross the BBO on the 
opposite side of the market and a response that does cross the BBO on 
the opposite side of the market will be capped at the BBO price.
    Second, currently the AIM, SAM, FLEX AIM, and FLEX SAM auctions 
each in relevant part provide that auction responses may be modified or 
canceled during the auction response period. The only way to modify a 
response would be for a Trading Permit Holder to cancel a prior 
response then submit a new response. As a result, the Exchange believes 
that the references to modifying responses in the rule text are 
unnecessary. Therefore, the Exchange is proposing to delete references 
to modifying responses in Rules 6.74A(b)(1), 6.74B(b)(1), 24B.5A(b)(1), 
and 24B.5B(b)(1), respectively. (The Exchange is also taking this 
opportunity to correct a numbering error in the text of Rule 
24B.5A(b)(1) (changing a paragraph number from ``(ix)'' to 
``(viii)'').)
    Third, normally an auction would conclude after 1 second in the 
case of AIM and SAM, or after 3 seconds (or whatever longer period of 
time the Exchange may designate) in the case of FLEX AIM and FLEX SAM. 
In addition, respective AIM, SAM, FLEX AIM and FLEX SAM auction 
provisions set out various circumstances during which an auction would 
conclude early. Currently, the provisions are silent on what would 
happen in the event the option series is subject to a trading halt 
while an auction is ongoing. In such an event, the relevant auction 
would conclude early and the Agency Order would execute (or not 
execute) in accordance with the allocation provisions set out in the 
relevant rules. Therefore, the Exchange is proposing to amend Rules 
6.74A(b)(2), 6.74B(b)(2), 24B.5A(b)(2) and 24B.5B(b)(2), respectively, 
to indicate that an auction would conclude early in the event of a 
trading halt in the series on the Exchange and the Agency Order would 
execute (or not execute) in accordance with the allocation provisions 
set out in the relevant rules.\7\
---------------------------------------------------------------------------

    \7\ The Exchange notes that NASDAQ OMX PHLX LLC (``Phlx'') has a 
similar provision within its electronic auction rules related to the 
early conclusion of an auction due to a trading halt. See Phlx Rule 
1080(n).
---------------------------------------------------------------------------

    Fourth, the Exchange is proposing to make some clarifications 
regarding the application of certain provisions in the FLEX AIM and 
FLEX SAM auction rules to complex orders. The Exchange is also 
proposing to make similar clarifications to the FLEX electronic Request 
for Quote (``RFQ'') auction rules. By way of background, the existing 
FLEX AIM and FLEX SAM auctions each respectively provide in relevant 
part, for simple orders, that only one auction may be ongoing at any 
given time in a series and auctions in the same series may not queue or 
overlap in any manner. Further, unrelated FLEX Orders may not be 
submitted to the electronic book for the duration of an auction. For 
complex orders, the same conditions apply. In addition, certain other 
conditions also apply.\8\ For instance, the complex order processing 
provisions currently provide that, in the event there are bids (offers) 
in any of the individual component series legs represented in the 
electronic book when an Agency Order is submitted to the auction, the 
auction will not commence. The complex order processing provisions also 
currently provide that, in the event an unrelated FLEX Order in any of 
the individual series legs is received during the

[[Page 60498]]

duration of the auction response period, such FLEX Order will not be 
considered in the auction allocation. The Exchange believes this later 
provision is unnecessary and potentially confusing, since the rules 
also include a condition that unrelated FLEX Orders may not be 
submitted to the electronic book for the duration of an auction.
---------------------------------------------------------------------------

    \8\ Complex orders are only eligible to trade with other complex 
orders through the FLEX AIM and FLEX SAM auctions. (As a result, to 
the extent the Exchange determines to make an electronic book 
available for resting FLEX Orders, there is no ``legging'' of 
complex orders with FLEX Orders that may be represented in the 
individual series legs represented in the electronic book.) Order 
allocation is the same as would be applicable for simple orders. See 
Rules 24B.5A.05 and 24B.5B.01.
---------------------------------------------------------------------------

    In order to provide more clarity on the application of these 
various provisions to complex orders, the Exchange is proposing to 
revise the FLEX AIM and FLEX SAM rules to further describe how these 
``unrelated auction/order'' provisions apply to complex orders. In 
particular, the proposed revisions will make clear that only one FLEX 
AIM auction (or FLEX SAM auction, as applicable) may be ongoing at any 
given time for a given complex order strategy and FLEX AIM auctions (or 
FLEX SAM auctions, as applicable) involving any of the same individual 
series legs of the strategy may not queue or overlap in any manner. In 
the event there are bids (offers) in any of the individual component 
series legs represented in the electronic book when an Agency Order is 
submitted to the auction, the auction will not commence. In addition, 
unrelated FLEX Orders in any of the individual series legs may not be 
submitted to the electronic book for the duration of auction response 
period.\9\
---------------------------------------------------------------------------

    \9\ In discussing the FLEX AIM and FLEX SAM auctions, the 
Exchange had previously indicated that the individual series legs of 
a complex order would not trade through equivalent bids (offers) in 
the individual series legs represented in the electronic book and at 
least one leg must better the corresponding bid (offer) of public 
customers and non-Trading Permit Holder broker-dealers in the 
electronic book. See Securities Exchange Act Release No. 66052 
(December 23, 2011), 77 FR 306 (January 4, 2012) (SR-CBOE-2011-123 
Proposal Notice). The Exchange notes that these scenarios would not 
occur when a complex order is traded via the FLEX AIM or FLEX SAM 
auction. Because the FLEX AIM and FLEX SAM auctions each include a 
condition that the auction is not permitted to commence when there 
is a FLEX Order resting in the electronic book in any individual 
component series legs and a condition that unrelated orders are not 
accepted for the duration of the auction, there would be no scenario 
where there would be a complex order traded in a FLEX AIM or FLEX 
SAM auction when there are corresponding bids (offers) in the 
electronic book.
---------------------------------------------------------------------------

    The Exchange is also taking this opportunity to propose similar 
clarifications to the FLEX electronic RFQ process. In particular, the 
Exchange is proposing to amend the electronic RFQ provisions for simple 
orders to provide that only one electronic RFQ may be ongoing at any 
given time in a series and electronic RFQs in the same series may not 
queue or overlap in any manner. (The electronic RFQ provisions for 
simple orders are currently silent on the topic of multiple RFQs 
involving the same series.) The Exchange is also proposing to amend the 
electronic RFQ provisions for complex orders to make clear that only 
one electronic RFQ may be ongoing at any given time for a given complex 
order strategy and electronic RFQs involving any of the same individual 
series legs of the strategy may not queue or overlap in any manner. In 
the event there are bids (offers) in any of the individual component 
series legs represented in the electronic book when an electronic RFQ 
is submitted, the electronic RFQ will not commence. In addition, 
unrelated FLEX Orders in any of the individual series legs may not be 
submitted to the electronic book for the duration of electronic RFQ 
response period. (The Exchange is also taking this opportunity to 
correct a typographical error in the text (changing the phrase 
``automated cancelled'' to ``automatically cancelled'').)
    Fifth, the Exchange is proposing to make some changes to further 
describe the process for trading FLEX Options that have special 
exercise prices and premium terms based on a method for fixing such a 
number or based a percentage.\10\ The Exchange is proposing to amend 
the FLEX Index Options provisions in Rules 24A.4(b)(2) and 24B.4(b)(2) 
to provide that exercise prices may be specified in terms of a 
percentage of the price of the underlying security at the time of the 
trade. This description of one particular method for fixing exercise 
prices for FLEX Index Options is parallel to an existing provision for 
FLEX Equity Options. The Exchange is proposing to amend the FLEX Index 
Options provisions to provide that premiums may be specified in terms 
of (i) a dollar amount, (ii) a method for fixing such a number at the 
time a FLEX Request for Quote or FLEX Order is traded, or (iii) a 
percentage of the index value calculated at the time of the trade or as 
of the close of trading on the Exchange on the trade date. This 
description of premium terms for FLEX Index Options is parallel to the 
existing terms for FLEX Equity Options.
---------------------------------------------------------------------------

    \10\ For FLEX Index Options, exercise prices shall be specified 
in terms of (i) a specific index value number, (ii) a method for 
fixing such a number at the time a FLEX Request for Quote or FLEX 
Order is traded, or (iii) a percentage of index value calculated as 
of the close of trading on the Exchange on the trade date. For FLEX 
Equity Options, exercise prices and premiums may be stated in (i) a 
dollar amount, (ii) a method for fixing such a number at the time a 
FLEX Request for Quote or FLEX Order is traded, or (iii) a 
percentage of the price of the underlying security at the time of 
the trade or as of the close of trading on the Exchange on the trade 
date. See existing Rules 24A.4(b)(2) and (c)(2) and 24B.4(b)(2) and 
(c)(2).
---------------------------------------------------------------------------

    In addition, the Exchange notes that, currently for FLEX Options, 
exercise prices and premiums that are stated using a percentage-based 
methodology (e.g., an exercise price based on the percentage of the 
close of the underlying stock or a method for fixing the number based 
on the gross-weighted average of the underlying stock) may be stated in 
a percentage increment that is no smaller than 0.01%. The existing 
rules do not currently provide this level of detail, so the Exchange is 
proposing to include a description within the rules. In particular, the 
Exchange is proposing to amend the descriptions in Rules 24A.4(b)(2) 
and (c)(2) and 24B.4(b)(2) and (c)(2) to provide that exercise prices 
and premiums stated using a percentage-based methodology may be stated 
in a percentage increment determined by the Exchange on a class-by-
class basis that may not be smaller than 0.01% and that the percentage 
increments will be rounded as provided within the rules. Corresponding 
changes are also being proposed to Rules 24A.5(f) and 24B.5(e), which 
pertain to incremental changes to bids and offers for FLEX Options 
trading via the electronic and open outcry RFQs, and to Rules 
24B.5A(b)(1) and 24B.5B(a)(3), which pertain to incremental changes to 
bids and offers for FLEX Options trading via FLEX AIM and FLEX SAM.
    The Exchange notes that the existing rules provide for FLEX Equity 
Options that exercise prices may be rounded to the nearest minimum tick 
or other decimal increment determined by the Exchange on a class-by-
class basis that may not be smaller than $0.01, and that premiums will 
be rounded to the nearest minimum tick.\11\ The existing rules are 
silent with respect to rounding for FLEX Index Option exercise prices. 
Therefore, as with FLEX Equity Options, the Exchange is proposing to 
provide that FLEX Index Option exercise prices may be rounded to the 
nearest minimum tick or other decimal increment determined by the 
Exchange on a class-by-class basis that may not be smaller than $0.01.
---------------------------------------------------------------------------

    \11\ In this regard, the Exchange notes that exercise price and 
premium values equal to or higher than 0.005 will be rounded up and 
less than 0.005 will be rounded down.
---------------------------------------------------------------------------

    The Exchange is also proposing to adopt new Interpretation and 
Policy .02 to Rule 24B.5, which will provide that there is no 
electronic book for FLEX Options with exercise prices and premiums that 
are based on a methodology for fixing such a number or based on a 
percentage as provided in Rules 24B.2(b)(2) and 24B.2(c)(2). Similar to 
FLEX Option complex orders, these types of FLEX Options may only trade 
in open outcry or electronically

[[Page 60499]]

via one of the three electronic auction mechanisms, i.e., the 
electronic RFQ process, FLEX AIM or FLEX SAM.
    Sixth, the Exchange is also proposing to adopt new Interpretation 
and Policy .03 to Rule 24B.5 (pertaining to electronic RFQs), new 
Interpretation and Policy .06 to Rule 24B.5A (pertaining to FLEX AIM), 
and new Interpretation and Policy .02 to Rule 24B.5B (pertaining to 
FLEX SAM). These Interpretations and Policies will describe the post-
trade verification procedures that apply to electronic RFQ, FLEX AIM 
and FLEX SAM transactions involving multi-part complex order strategies 
or exercise prices and premiums that are based on a methodology for 
fixing such a number or based on a percentage. By way of example, when 
a FLEX Option complex order is traded, the transaction execution is 
based on an overall net price and then, post-trade, the individual 
component series legs are reported at prices that equal the overall net 
price. As another example, when an exercise price is based on a 
percentage of the price of the underlying security as of the close of 
trading on the Exchange on the trade date, the transaction execution is 
based on the percentage formula and then, post-trade, the values are 
updated to reflect the actual exercise price after the closing price is 
available.
    The rules currently do not describe the post-trade verification 
process for electronic trading, and the Exchange believes the 
additional detail may be helpful to market participants. The Exchange 
notes that the process for post-trade verification for electronic 
trades generally takes the manual process that has existed for open 
outcry transactions and adapts it to an electronic environment. The 
proposed Interpretations and Policies describe that the party that 
initiated the transaction shall input the applicable complex order leg 
price, exercise price and/or premium information into the FLEX Hybrid 
Trading System. Once the information is inputted into the System, the 
contra-party(ies) to the transaction shall then have a designated 
period of time to notify FLEX Officials of any inaccuracies in the 
content of a transaction and of the corrections to any inaccurate 
information, which designated period of time will be determined by the 
Exchange and will not be less than 5 minutes or more than 30 minutes 
from the time the initiating party inputs the information into the 
System. (Currently, the Exchange has set this period in the System at 
10 minutes.)
    Finally, seventh, the Exchange is proposing non-substantive changes 
to reorganize certain text within Rules 24B.5A and 24B.5B to be 
consistent with the format of other rules. Specifically, the Exchange 
is proposing to amend Rule 24B.5A to relocate the sentence ``This rule 
supersedes Exchange Rule 6.74A.'' to a location above Rule 24B.5A's 
Interpretations and Policies, and to amend Rule 24B.5B to relocate the 
sentence ``This rule supersedes Exchange Rule 6.74B.'' to a location 
above Rule 24B.5B's Interpretations and Policies. Again, these changes 
are not substantive. They are merely being made so the rules are 
formatted consistently with other rules contained in Chapter XXIVB.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \12\ in general and furthers the objectives of 
Section 6(b)(5) of the Act \13\ in particular in that it should promote 
just and equitable principles of trade, serve to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and protect investors and the public interest. In 
particular, the Exchange believes that the use of FLEX Options provides 
CBOE Trading Permit Holders and investors with additional tools to 
trade customized options in an exchange environment \14\ and greater 
opportunities to manage risk. The Exchange believes that the FLEX AIM 
and FLEX SAM auctions adopted under rule change filing SR-CBOE-2011-123 
should serve to further those objectives and encourage use of FLEX 
Options by making auctions mechanisms available for FLEX Options 
trading that are similar to auction mechanisms already available for 
Non-FLEX Options trading, which the Exchange believes should make the 
FLEX Hybrid Trading System more efficient and effective and easier for 
users to understand. The Exchange believes that the further refinements 
being proposed in this instant rule change filing, and corresponding 
changes to the AIM and SAM auctions for Non-FLEX Options, as well as 
similar changes to the FLEX electronic RFQ process, should also serve 
to further those objectives by more clearly and fully describing 
certain aspects of the operation of the FLEX Hybrid Trading System and 
of the aforementioned auction processes.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ FLEX Options provide Trading Permit Holders and investors 
with an improved but comparable alternative to the over-the-counter 
(``OTC'') market in customized options, which can take on contract 
characteristics similar to FLEX Options but are not subject to the 
same restrictions. The Exchange believes that making these changes 
will make the FLEX Hybrid Trading System an even more attractive 
alternative when market participants consider whether to execute 
their customized options in an exchange environment or in the OTC 
market. CBOE believes market participants benefit from being able to 
trade customized options in an exchange environment in several ways, 
including, but not limited to the following: (i) enhanced efficiency 
in initiating and closing out positions; (ii) increased market 
transparency; and (iii) heightened contra-party creditworthiness due 
to the role of The Options Clearing Corporation as issuer and 
guarantor of FLEX Options.
---------------------------------------------------------------------------

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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    The Exchange neither solicited nor received comments on the 
proposal.

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

    Because the foregoing rule 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 from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, provided that the self-regulatory organization 
has given the Commission written notice of its intent to file the 
proposed rule change at least five business days prior to the date of 
filing of the proposed rule change or such shorter time as designated 
by the Commission, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) 
thereunder.\16\ 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.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act.

[[Page 60500]]

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-CBOE-2012-093 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2012-093. 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-CBOE-2012-093 and should be 
submitted on or before October 24, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-24289 Filed 10-2-12; 8:45 am]
BILLING CODE 8011-01-P
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