Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Notice of Proposed Rule Change To Address Authority To Cancel Orders When a Technical or Systems Issue Occurs and To Describe the Operation of Routing Service Error Accounts, 70496-70500 [2012-28592]

Download as PDF 70496 Federal Register / Vol. 77, No. 227 / Monday, November 26, 2012 / Notices Information Officer, Securities and Exchange Commission, c/o Remi PavlikSimon, 6432 General Green Way, Alexandria, Virginia 22312; or send an email to: PRA_Mailbox@sec.gov. SECURITIES AND EXCHANGE COMMISSION of the most significant parts of such statements. [Release No. 34–68260; File No. SR–C2– 2012–038] Dated: November 19, 2012. Kevin M. O’Neill, Deputy Secretary. Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Notice of Proposed Rule Change To Address Authority To Cancel Orders When a Technical or Systems Issue Occurs and To Describe the Operation of Routing Service Error Accounts A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change [FR Doc. 2012–28526 Filed 11–23–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION November 19, 2012. mstockstill on DSK4VPTVN1PROD with NOTICES Sunshine Act Meeting Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Public Law 94–409, that the Securities and Exchange Commission will hold a Closed Meeting on Tuesday, November 29, 2012 at 2:00 p.m. Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the Closed Meeting. Certain staff members who have an interest in the matters also may be present. The General Counsel of the Commission, or his designee, has certified that, in his opinion, one or more of the exemptions set forth in 5 U.S.C. 552b(c)(3), (5), (7), 9(B) and (10) and 17 CFR 200.402(a)(3), (5), (7), 9(ii) and (10), permit consideration of the scheduled matters at the Closed Meeting. Commissioner Paredes as duty officer, voted to consider the items listed for the Closed Meeting in a closed session. The subject matter of the Closed Meeting will be: a litigiation matter; institution and settlement of injunctive actions; institution and settlement of administrative proceedings; and other matters relating to enforcement proceedings. At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551–5400. Dated: November 20, 2012. Elizabeth M. Murphy, Secretary. [FR Doc. 2012–28685 Filed 11–21–12; 11:15 am] BILLING CODE 8011–01–P VerDate Mar<15>2010 16:24 Nov 23, 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 November 8, 2012, the C2 Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘C2’’) 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 The Exchange is proposing to amend its rules to (i) address the authority of the Exchange to cancel orders (or release routing-related orders) when a technical or systems issue occurs; and (ii) describe the operation of an Exchange error account(s) and routing broker error account(s), which may be used to liquidate unmatched executions that may occur in the provision of the Exchange’s routing service. The text of the rule proposal is available on the Exchange’s Web site (https://www. c2exchange.com/Legal/Rule Filings.aspx), 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 self-regulatory organization included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, 1 15 U.S.C.78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 1. Purpose The purpose of the proposed rule change is to adopt new Rule 6.47 to address the authority of the Exchange to cancel orders (or release routing-related orders) when a technical or systems issue occurs and to adopt new Rule 6.37 4 to describe the operation of an Exchange error account(s) (‘‘Exchange Error Account(s)’’) and routing broker error account(s), which may be used to liquidate unmatched executions that may occur in the provision of the Exchange’s routing service. By way of background, C2 operates a system of trading that allows automatic executions to occur electronically. As part of this infrastructure, C2 also automatically routes orders to other exchanges under certain circumstances. These routing services are provided in conjunction with one or more routing brokers that are not affiliated with the Exchange.5 Mechanically, when the Exchange receives an order from a Trading Permit Holder (‘‘TPH’’) that is held in the Exchange system and determines to route an order to another exchange, the Exchange provides the routing broker with a corresponding order and instructions to route the order to another exchange(s). The routing broker then sends the corresponding order to the other exchange.6 4 In conjunction with adopting new Rule 6.37, the Exchange is proposing to renumber existing Rule 6.37, Reporting of Trade Information, to Rule 6.38. 5 See, e.g., Rule 6.36, Order Routing to Other Exchanges. 6 Generally, the routing brokers route the orders directly to other exchanges. However, it is possible that a routing broker may route orders to another exchange through a third-party broker-dealer. In those cases, the third-party broker-dealer would route the orders to the other exchange in its name, and any executions would be submitted for clearance and settlement in the name of the routing broker so that any resulting positions are delivered to the routing broker upon settlement. As described above, normally the routing broker would then coordinate with the Exchange to arrange for any resulting securities positions to be delivered to the TPH that submitted the corresponding order to the Exchange. If error positions (as defined in proposed Rule 6.37) result in connection with the routing broker’s use of a third-party broker-dealer for outbound routing, and those positions are delivered to the routing broker through the clearance and settlement process, those positions would be permitted to be resolved in accordance with proposed Rule 6.37. If the third-party broker-dealer received error positions and the positions were not delivered to the routing broker through the clearance and settlement process, then the thirdparty broker-dealer would resolve the position itself, and those positions would not be permitted to be resolved as set forth in proposed Rule 6.37. E:\FR\FM\26NON1.SGM 26NON1 Federal Register / Vol. 77, No. 227 / Monday, November 26, 2012 / Notices In the normal course, the routing broker reports an execution or cancellation of the routed order back to the Exchange. Routed orders that are executed at another exchange are submitted for clearance and settlement in the name of the routing broker. The routing broker then coordinates with the Exchange to arrange for any resulting securities positions to be delivered to the TPH that submitted the original order to the Exchange (i.e., upon receipt of a filled execution report for the routed order, the Exchange system pairs the execution against the TPH’s original order being held in the Exchange system and reports the pairing for clearance and settlement purposes by submitting a non-tape, clearing only transaction). From time to time, the Exchange encounters situations in which it becomes necessary to cancel orders (or release routing-related orders) and resolve error positions that result from errors of the Exchange, routing brokers, or another exchange.7 mstockstill on DSK4VPTVN1PROD with NOTICES Proposed Rule 6.47 (Order Cancellation/Release) The Exchange proposes to adopt new C2 Rule 6.47 to address the authority of the Exchange to cancel orders when a technical or systems issue occurs. Specifically, paragraph (a) of the proposed rule would expressly authorize the Exchange to cancel orders as it deems to be necessary to maintain fair and orderly markets if a technical or systems issue occurs at the Exchange,8 the routing broker, or another exchange to which an Exchange order has been routed. Paragraph (a) would also provide that a routing broker may only cancel orders being routed to another exchange based on the Exchange’s standing or specific instructions or as otherwise provided in the Exchange 7 The examples described in this filing are not intended to be exclusive. Proposed Rule 6.47 would provide general authority for the Exchange to cancel orders (or release routing-related orders) in order to maintain fair and orderly markets when technical or systems issues are occurring, and proposed Rule 6.37 also would set forth the manner in which error positions (which may occur in the provision of the Exchange’s routing service) may be handled by the Exchange. The proposed rule change is not limited to addressing order cancellation (release) or error positions resulting only from the specific examples described in this filing. 8 To confirm, the authority to cancel orders to maintain fair and orderly markets under proposed Rule 6.47 would apply to any technical or systems issue at the Exchange and would include any orders at the Exchange (i.e., the authority to cancel orders would apply to any orders that are subject to the Exchange’s routing service and any orders that are not subject to the Exchange’s routing service). By comparison, the routing service error account provisions under proposed Rule 6.37 (discussed below) would apply only to original and corresponding orders that are subject to the Exchange routing service. VerDate Mar<15>2010 16:24 Nov 23, 2012 Jkt 229001 Rules.9 Paragraph (a) would also provide that the Exchange shall provide notice of the cancellation to affected Trading Permit Holders as soon as practicable. Paragraph (b) of the proposed rule provides that the Exchange may also determine to release orders being held on the Exchange awaiting an away exchange execution as it deems to be necessary to maintain fair and orderly markets if a technical or systems issues occurs at the Exchange, a routing broker, or another exchange to which an order has been routed (the process for ‘‘releasing’’ orders is illustrated in more detail below). Paragraph (c) of the proposed rule would provide that, for purposes of Rule 6.47, technical or system issues would include, without limitation, instances where the Exchange has not received confirmation of an execution (or cancellation) on another exchange from a routing broker within a response time interval designated by the Exchange, which interval may not be less than three (3) seconds.10 The examples set forth below describe some of the circumstances in which the Exchange may decide to cancel (or release) orders. Example 1: If a routing broker or another exchange experiences a technical or systems issue that results in the Exchange or routing broker not receiving responses to immediate9 As discussed above, the Exchange uses nonaffiliated routing brokers to provide the routing services. These routing brokers are also not facilities of the Exchange. For all routing services, the Exchange determines the logic that provides when, how and where orders are routed away to other exchanges. The routing broker receives the routing instructions from the Exchange to route orders to other exchanges and to report executions back to the Exchange. The routing broker cannot change the terms of an order or the routing instructions, nor does the routing broker have any discretion about where to route an order. See Rule 6.36(c), (e) and (f). Under paragraph (a) to proposed Rule 6.47, the decision to take action with respect to orders affected by a technical or systems issue shall be made by the Exchange. Depending on where those orders are located, a routing broker would be permitted to initiate a cancellation of an order(s) pursuant to the Exchange’s standing or specific instructions or as otherwise provided in the Exchange Rules (e.g., the Exchange’s standing instructions might provide, among other things, that the routing broker could initiate the cancellation of orders if the routing broker is experiencing technical or systems issues routing orders to an away exchange). 10 A determination by the Exchange to cancel or release orders may not cause the Exchange to declare self-help against the other exchange pursuant Section E of the C2 Rules (which crossreference paragraph (b)(1) of Chicago Board Options Exchange, Incorporated (‘‘CBOE’’) Rule 6.81, Order Protection). If the Exchange determines to cancel or release orders, as applicable, under proposed Rule 6.47 but does not declare self-help against that other exchange, the Exchange would continue to be subject to the trade-through requirements in Rule 6.81 with respect to that exchange. PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 70497 or-cancel (‘‘IOC’’) orders sent to the other exchange, and that issue is not resolved in a timely manner, then the Exchange may seek to cancel the routed orders affected by the issue.11 For instance, if a routing broker experiences a connectivity issue affecting the manner in which it sends and receives order messages to or from another exchange, it may be unable to receive timely execution or cancellation reports from the other exchange, and Exchange may consequently seek to cancel the affected routed orders (e.g., by calling the routing broker and instructing the routing broker to attempt to cancel the orders) or perhaps the routing broker may initiate the cancellation of the affected routed orders pursuant to a standing or specific instruction from the Exchange. In these circumstances, the Exchange would also attempt to release the initial orders submitted by TPHs.12 Example 2: If the Exchange does not receive confirmation of an execution (or cancellation) of an IOC order sent to another exchange from a routing broker within a designated response time interval of three (3) seconds, then an automated system feature will release the initial order being held by the Exchange.13 The Exchange would also 11 In a normal situation (i.e., one in which a technical or systems issue does not exist), the Exchange should receive an immediate response back from the routing broker reporting any executions or cancellations from the other exchange, and would then pass the resulting fill or cancellation onto the TPH. If, after submitting an order for which a corresponding order has been routed to another exchange, a TPH sends an instruction to cancel the original order, the cancellation is held by the Exchange until a response is received from the routing broker on the corresponding order. For instance, if the other exchange executes the corresponding order, the execution would be passed onto the TPH and the cancellation instruction on the TPH’s original order would be disregarded. 12 Once an initial order is released, any cancellation that a TPH submitted to the Exchange on the initial order during such a situation would be honored. If a TPH did not submit a cancellation to the Exchange, however, that initial order would remain ‘‘live’’ and thus be eligible for execution or posting on the Exchange, and the Exchange would not treat any execution of the initial order or any subsequent routed order related to that initial order as an error (unless, of course, the order was itself subject to another technical or systems issue or any away exchange processing exceeded the applicable response time interval). 13 This routing risk management feature would serve as one means for the Exchange to efficiently determine if there is a technical or system issue occurring. The feature, and the system functionality used to operate the feature, is generally modeled after a process that was utilized under the former Options Intermarket Linkage Plan (the ‘‘Old Linkage Plan’’). Under the Old Linkage Plan, an eligible market maker that sent a ‘‘principal acting as agent order’’ (referred to as a ‘‘P/A Order’’) through the linkage and who did not receive a reply from the away exchange within 30 seconds was able to reject any response received thereafter purporting to report a total or partial execution of that order. Over time, the time frame in which an away exchange was required to respond was ultimately reduced to 3 seconds. See, e.g., Securities Exchange Act Release Nos. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000)(order approving Options Intermarket Linkage Plan submitted by the E:\FR\FM\26NON1.SGM Continued 26NON1 70498 Federal Register / Vol. 77, No. 227 / Monday, November 26, 2012 / Notices attempt to cancel the routed order in these circumstances.14 Example 3: If the Exchange experiences a systems issue, the Exchange may take steps to cancel and/or release all outstanding orders affected by the issue (which orders may include orders that may or may not be subject to routing services). The Exchange would also attempt to cancel any routed orders related to the TPHs’ initial orders, if applicable, in these circumstances.15 mstockstill on DSK4VPTVN1PROD with NOTICES Proposed Rule 6.37 (Routing Service Error Accounts) Proposed Rule 6.37 would provide that each routing broker shall maintain, American Stock Exchange LLC, Chicago Board Options Exchange, Inc., and International Securities Exchange LLC) and 57238 (January 30, 2008), 73 FR 6748 (February 5, 2008)(order approving joint amendment no. 25 to the Plan for the Purpose of Creating and Operating an Intermarket Option Linkage Relating to Response Time for Certain Orders Sent Through the Linkage). The Old Linkage Plan was replaced by the Options Order Protection and Locked/Crossed Markets Plan (the ‘‘Distributive Options Linkage Plan’’) in 2009. See Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009)(order approving the National Market System Plan relating to Options Order Protection and Locked/Crossed Markets submitted by the Chicago Board Options Exchange, Incorporated, International Securities Exchange, LLC, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE Arca, Inc.). Although there is no longer a similar provision for P/A Orders and away exchange response times under the Distributive Options Linkage Plan, the Exchange has system functionality that tracks response times for orders routed to away exchanges. The primary distinction between the process under the Old Linkage Plan and the process described in the current proposed rule change is that, instead of rejecting an execution report back to the away exchange, an execution report received after the TPH’s order is released would be considered an error and subject to the Exchange Error Account procedures discussed below. The Exchange views having this ability to release orders that are queued waiting for a responsive execution/cancel report for a corresponding order from an away exchange as an important risk management feature. Because the markets are highly automated, the Exchange would normally expect to receive a response to an order routed through the routing service within milliseconds after it is sent. If a response is not received in a timely manner, it generally is an indication of a system problem with the other exchange, the routing broker(s) or the Exchange. In addition, especially in fast-moving markets like the options market, the Exchange believes allowing for the release of a TPH’s related original order due to an untimely response will provide an opportunity for the transmittal of responses while also allowing the Exchange’s TPHs to address and execute orders pending on the Exchange in a timely manner. The Exchange believes this contributes to the Exchange’s ability to maintain fair and orderly markets. 14 It is possible that attempts to cancel the routed orders may not succeed. If the Exchange receives an execution report on the order that had been routed to an away exchange, then the unmatched execution would be considered an ‘‘error position’’ under proposed Rule 6.47. 15 It is possible that attempts to cancel the routed orders may not succeed. If the Exchange receives an execution report on the order that had been routed to an away exchange, then the unmatched execution would be considered an ‘‘error position’’ under proposed Rule 6.47. VerDate Mar<15>2010 16:24 Nov 23, 2012 Jkt 229001 in the name of the routing broker, one or more accounts for the purpose of liquidating unmatched trade positions that may occur in connection with the away exchange routing service provided under Rule 6.36 (‘‘error positions’’).16 In addition, the Exchange may also maintain, in the name of the Exchange, one or more Exchange Error Accounts for the purpose of liquidating error positions in the circumstances described below. Paragraph (a) of the proposed rule would provide that errors to which the rule would apply include any action or omission by the Exchange, a routing broker, or another exchange to which an Exchange order has been routed, either of which result in an unmatched trade position due to the execution of an original or corresponding order that is subject to the away market routing service and for which there is no corresponding order to pair with the execution (each a ‘‘routing error’’). Such routing errors would include, without limitation, positions resulting from determinations by the Exchange to cancel or release an order pursuant to proposed Rule 6.47 (as described above). Paragraph (b) of the proposed rule would provide that, generally, each routing broker will utilize its own error account to liquidate error positions. However, in certain circumstances, the Exchange may utilize an Exchange Error Account. In particular, in instances where the routing broker is unable to utilize its own error account (e.g., due to a technical, systems or other issue that prevents the routing broker from doing so) or where the an error is due to a technical or systems issue at the Exchange, the Exchange may (but would not be required to) determine it is appropriate to utilize an Exchange Error Account. In making such a determination to utilize an Exchange Error Account, the Exchange would consider whether is has sufficient time, information and capabilities considering the market circumstances to determine that an error is due to such circumstances and whether the Exchange can address the error. The Exchange believes it is reasonable and appropriate to address routing errors through the error account of a routing broker in the manner proposed because, among other reasons, it is the 16 The Exchange notes that, in connection with providing routing services, routing brokers currently may utilize their own error accounts to liquidate error positions. The Exchange believes it is reasonable and not inappropriate to address routing errors through the error account of a routing broker because, among other reasons, it is the executing broker associated with these transactions. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 executing broker associated with these transactions. The Exchange also believes that having the flexibility to determine to utilize an Exchange Error Account in the limited circumstances described above allows for administrative convenience and contributes to the Exchange’s ability to maintain a fair and orderly market.17 From a TPH perspective, there would be no impact resulting from the decision to use an Exchange Error Account or the routing broker’s error account to liquidate the error position in these circumstances. By definition, an error position in an Exchange Error Account would only include unmatched trades due to a routing error. In that regard, paragraph (c) of the proposed rule would provide that the Exchange shall not accept any positions in an Exchange Error Account from an account of a Trading Permit Holder or permit any Trading Permit Holder to transfer any positions from the Trading Permit Holder’s account to an Exchange Error Account.18 To the extent a routing broker utilizes its own account to liquidate error positions, paragraph (d) of the proposed rule provides that the routing broker shall liquidate the error positions as soon as practicable. The routing broker could determine to liquidate the position itself or have a third party broker-dealer liquidate the position on the routing broker’s behalf. Paragraph (d) also provides that the routing broker establish and enforce policies and procedures reasonably designed to (i) adequately restrict the flow confidential and proprietary information associated with the liquidation of the error position 17 The Exchange notes that any profit/loss from liquidating the error positions would belong to the Exchange (when an Exchange Error Account is utilized) or the routing broker (when the routing broker’s error account is utilized). However, all or any portion of such profits/losses may be subject to certain contractual obligations pursuant to the routing service agreement between the Exchange and the routing broker (e.g., used to offset certain contractual obligations). 18 The Exchange may address error positions under the proposed rule that are caused by the errors noted above, but the Exchange may not accept from a TPH positions that are delivered to the TPH through the clearance and settlement process, even if those positions may have been the result of an error. This would not apply, however, to situations like the one described below in which the Exchange incurred a position to settle a TPH purchase, as the TPH did not yet have a position in its account as a result of the purchase at the time of the Exchange’s action, i.e., the Exchange’s action was necessary for the purchase to settle into the TPH’s account. Moreover, to the extent a TPH receives positions in connection with an error or other technical or systems issue, the TPH may seek to rely on other Exchange Rules such as Rule 6.42, Exchange Liability, if it experiences a loss. For example, Rule 6.42 provides TPHs with the ability to file claims for negligent acts or omissions of Exchange employees or for the failure of its systems or facilities. E:\FR\FM\26NON1.SGM 26NON1 Federal Register / Vol. 77, No. 227 / Monday, November 26, 2012 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES in accordance with Rule 6.36,19 and (ii) prevent the use of information associated with other orders subject to the routing services when making determinations regarding the liquidation of error positions. In addition, paragraph (d) provides that the routing broker shall make and keep records associated with the liquidation of such routing broker error positions and shall maintain such records in accordance with Rule 17a–4 under the Act.20 Paragraph (e) of the proposed rule would provide that, to the extent an Exchange Error Account is utilized to liquidate error positions, the Exchange shall liquidate the error positions as soon as practicable. In liquidating error positions in an Exchange Error Account, the Exchange shall provide complete time and price discretion for the trading to liquidate error positions in an Exchange Error Account to a third-party broker-dealer and shall not attempt to exercise any influence or control over the timing or methods of such trading.21 Such a third-party broker-dealer may include a routing broker not affiliated with the Exchange. Paragraph (e) would also provide that the Exchange shall establish and enforce policies and procedures reasonably designed to adequately restrict the flow of confidential and proprietary information between the Exchange and the third-party broker-dealer associated with the liquidation of the error positions. Finally, paragraph (e) would provide that the Exchange shall make and keep records to document all determinations to treat positions as error positions under the rule (whether or not an Exchange Error Account is utilized to liquidate such error positions), as well as records associated with the liquidation of Exchange Error Account error positions through a third-party broker-dealer, and shall maintain such 19 Rule 6.36(b) provides that the Exchange shall establish and maintain procedures and internal controls reasonably designed to adequately restrict the flow of confidential and proprietary information between the Exchange and the routing broker, and any other entity, including any affiliate of the routing broker, and, if the routing broker or any of its affiliates engages in any other business activities other than providing routing services to the Exchange, between the segment of the routing broker or affiliate that provides the other business activities and the segment of the routing broker that provides the routing services. 20 17 CFR 240.17a–4. 21 This provision is not intended to preclude the Exchange from providing the third-party broker with standing instructions with respect to the manner in which it should handle all error account transactions. For example, the Exchange might instruct the broker to treat all orders as ‘‘not held’’ and to attempt to minimize any market impact on the price of the option being traded. VerDate Mar<15>2010 16:24 Nov 23, 2012 Jkt 229001 records in accordance with Rule 17a–1 under the Act.22 Examples of such error positions due to a routing error may include, without limitation, the following: Example 4: Error positions may result from routed orders that the Exchange or a routing broker attempts to cancel but that are executed before the other exchange receives the cancellation message or that are executed because the other exchange is unable to process the cancellation message. Using the situation described in Example 1 above, assume the Exchange seeks to release the initial orders being held by the Exchange because it is not receiving timely execution or cancellation reports from another exchange. In such a situation, although the Exchange would attempt to direct the routing broker to cancel the routed corresponding orders, the routing broker may still receive executions from the other exchange after connectivity is restored, which would not then be allocated to TPHs because of the earlier decision to release the affected initial orders. Instead, the routing broker would post the positions into its account and resolve the positions in the manner described above. Alternatively, if the routing broker is unable to resolve the positions (or if the error position is due to a system or technical issue on the Exchange), the Exchange may determine to post the positions into an Exchange Error Account and resolve the positions in the manner described above. Example 5: Error positions may result from an order processing issue at another exchange. For instance, if another exchange experienced a systems problem that affects its order processing, it may transmit back a message purporting to cancel a routed order, but then subsequently submit an execution of that same order for clearance and settlement. In such a situation, the Exchange would not then allocate the execution to the TPH because of the earlier cancellation message from the other exchange. Instead, the routing broker would post the positions into its account and resolve the positions in the manner described above. Alternatively, if the routing broker is unable to resolve the positions, the Exchange may determine to post the positions into an Exchange Error Account and resolve the positions in the manner described above. Example 6: Error positions may result if a routing broker receives an execution report from another exchange but does not receive clearing instructions for the execution from the other exchange. For instance, assume that a TPH sends the Exchange an order to buy 10 ABC option contracts, which causes the routing broker to send an order to another exchange that is subsequently executed, cleared and closed out by that other exchange, and the execution is ultimately communicated back to the TPH. On the next trading day (T+1), if the other exchange does not providing clearing instructions for that execution, the Exchange/routing broker would still be responsible for settling that TPH’s purchase and therefore would be left 22 17 PO 00000 CFR 240.17a–1. Frm 00088 Fmt 4703 Sfmt 4703 70499 with open positions.23 Instead, the routing broker would post the positions into its account and resolve the positions in the manner described above. Alternatively, if the routing broker is unable to resolve the positions, the Exchange may determine to post the positions into an Exchange Error Account and resolve the positions in the manner described above. Example 7: Error positions may result from a technical or systems issue that causes orders to be executed in the name of a routing broker in connection with its routing services function that are not related to any corresponding initial orders of TPHs. As a result, the Exchange would not be able to assign any positions resulting from such an issue to TPHs. Instead, the routing broker would post the positions into its account and resolve the positions in the manner described above. Alternatively, if the routing broker is unable to resolve the positions, the Exchange may determine to post the positions into an Exchange Error Account and resolve the positions in the manner described above.24 In each of the circumstances described above, the Exchange and its routing broker may not learn about an error position until T+1. For instance, the Exchange and its routing broker may not learn about an error position until either (i) during the clearing process when a routing destination has submitted to The Options Clearing Corporation (‘‘OCC’’) a transaction for clearance and settlement for which the Exchange/routing broker never received an execution confirmation, or (ii) when another exchange does not recognize a transaction submitted by a routing broker to OCC for clearance and settlement. Moreover, the affected TPHs’ trade may not be nullified absent express authority under Exchange Rules.25 As such, the Exchange believes that use of a routing broker error account (or an Exchange Error Account, as applicable) to liquidate the error positions that may occur in these circumstances is reasonable and appropriate in these circumstances. 2. Statutory Basis The proposed rule change is consistent with Section 6(b) of the Act 26 in general and furthers the objectives of Section 6(b)(5) of the Act 27 in particular, which requires that the rules of an exchange be designed to promote 23 To the extent that a loss is incurred in covering the position, the routing broker (on behalf of the Exchange or itself) may submit a reimbursement claim to that other exchange. 24 To the extent such positions are not related to the routing broker’s function as an Exchange routing broker (i.e., originating with the Exchange), the Exchange would not post such positions to an Exchange Error Account. The routing broker would resolve the error positions itself. 25 See, e.g., Rule 6.15, Obvious Error and Catastrophic Errors. 26 15 U.S.C. 78f(b). 27 15 U.S.C. 78f(b)(5). E:\FR\FM\26NON1.SGM 26NON1 70500 Federal Register / Vol. 77, No. 227 / Monday, November 26, 2012 / Notices just and equitable principles of trade, to prevent fraudulent and manipulative acts, to remove impediments to and to perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Exchange believes that this proposed rule change is in keeping with those principles since the Exchange’s ability to cancel and release orders during a technical or systems issue and to maintain an Exchange Error Account facilitates the smooth and efficient operation of the market. Specifically, the Exchange believes that allowing the Exchange to cancel and release orders during a technical or systems issue (and permitting its routing brokers to cancel orders pursuant to standing or specific instructions or as otherwise permitted under Exchange Rules) would allow the Exchange to maintain fair and orderly markets. Moreover, the Exchange believes that allowing a routing broker to assume error positions in its own account(s) to liquidate those positions (or allowing the Exchange to assume error positions in an Exchange Error Account to liquidate those positions in instances where a routing broker is unable to do so or where the routing error is due to a technical or systems issue at the Exchange) subject to the conditions set forth in proposed Rule 6.37 would be the least disruptive means to address these errors. Overall, the proposed new rule is designed to ensure full trade certainty to market participants and to avoid disrupting the clearance and settlement process. The proposed new rule is also designed to provide a consistent methodology for handling error positions in a manner that does not discriminate among TPHs. The proposed new rule is also consistent with Section 6 of the Act insofar as it would require the Exchange (and its routing brokers, as applicable) to establish controls to restrict the flow of any confidential information associated with the liquidation of error positions. mstockstill on DSK4VPTVN1PROD with NOTICES B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. 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. VerDate Mar<15>2010 16:24 Nov 23, 2012 Jkt 229001 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Electronic Comments • 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–C2–2012–038 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–C2–2012–038. 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, on business days between the hours of 10 a.m. and 3 p.m., Frm 00089 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.28 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–28592 Filed 11–23–12; 8:45 am] 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: PO 00000 located at 100 F Street NE., Washington, DC 20549–1090. Copies of the filing will also be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–C2– 2012–038 and should be submitted on or before December 17, 2012. BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68257; File No. SR–BATS– 2012–044] Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of Proposed Rule Change To Amend BATS Rule 14.11, Entitled ‘‘Other Securities,’’ and To List and Trade Shares of Certain ProShares Products November 19, 2012. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on November 5, 2012, BATS Exchange, Inc. (‘‘Exchange’’ or ‘‘BATS’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been substantially 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 amend Rule 14.11, entitled ‘‘Other Securities,’’ to adopt new criteria for certain securities to be listed on the Exchange as Trust Issued Receipts (‘‘TIRs’’), as well as to list and trade shares of the following: ProShares Managed Futures Strategy; ProShares Commodity Managed Futures Strategy; and ProShares Financial Managed Futures 28 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\26NON1.SGM 26NON1

Agencies

[Federal Register Volume 77, Number 227 (Monday, November 26, 2012)]
[Notices]
[Pages 70496-70500]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28592]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68260; File No. SR-C2-2012-038]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Proposed Rule Change To Address Authority To Cancel Orders 
When a Technical or Systems Issue Occurs and To Describe the Operation 
of Routing Service Error Accounts

November 19, 2012.
    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 November 8, 2012, the C2 Options Exchange, Incorporated 
(the ``Exchange'' or ``C2'') 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend its rules to (i) address the 
authority of the Exchange to cancel orders (or release routing-related 
orders) when a technical or systems issue occurs; and (ii) describe the 
operation of an Exchange error account(s) and routing broker error 
account(s), which may be used to liquidate unmatched executions that 
may occur in the provision of the Exchange's routing service. The text 
of the rule proposal is available on the Exchange's Web site (https://www.c2exchange.com/Legal/RuleFilings.aspx), 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 self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    The purpose of the proposed rule change is to adopt new Rule 6.47 
to address the authority of the Exchange to cancel orders (or release 
routing-related orders) when a technical or systems issue occurs and to 
adopt new Rule 6.37 \4\ to describe the operation of an Exchange error 
account(s) (``Exchange Error Account(s)'') and routing broker error 
account(s), which may be used to liquidate unmatched executions that 
may occur in the provision of the Exchange's routing service.
---------------------------------------------------------------------------

    \4\ In conjunction with adopting new Rule 6.37, the Exchange is 
proposing to renumber existing Rule 6.37, Reporting of Trade 
Information, to Rule 6.38.
---------------------------------------------------------------------------

    By way of background, C2 operates a system of trading that allows 
automatic executions to occur electronically. As part of this 
infrastructure, C2 also automatically routes orders to other exchanges 
under certain circumstances. These routing services are provided in 
conjunction with one or more routing brokers that are not affiliated 
with the Exchange.\5\ Mechanically, when the Exchange receives an order 
from a Trading Permit Holder (``TPH'') that is held in the Exchange 
system and determines to route an order to another exchange, the 
Exchange provides the routing broker with a corresponding order and 
instructions to route the order to another exchange(s). The routing 
broker then sends the corresponding order to the other exchange.\6\
---------------------------------------------------------------------------

    \5\ See, e.g., Rule 6.36, Order Routing to Other Exchanges.
    \6\ Generally, the routing brokers route the orders directly to 
other exchanges. However, it is possible that a routing broker may 
route orders to another exchange through a third-party broker-
dealer. In those cases, the third-party broker-dealer would route 
the orders to the other exchange in its name, and any executions 
would be submitted for clearance and settlement in the name of the 
routing broker so that any resulting positions are delivered to the 
routing broker upon settlement. As described above, normally the 
routing broker would then coordinate with the Exchange to arrange 
for any resulting securities positions to be delivered to the TPH 
that submitted the corresponding order to the Exchange. If error 
positions (as defined in proposed Rule 6.37) result in connection 
with the routing broker's use of a third-party broker-dealer for 
outbound routing, and those positions are delivered to the routing 
broker through the clearance and settlement process, those positions 
would be permitted to be resolved in accordance with proposed Rule 
6.37. If the third-party broker-dealer received error positions and 
the positions were not delivered to the routing broker through the 
clearance and settlement process, then the third-party broker-dealer 
would resolve the position itself, and those positions would not be 
permitted to be resolved as set forth in proposed Rule 6.37.

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[[Page 70497]]

    In the normal course, the routing broker reports an execution or 
cancellation of the routed order back to the Exchange. Routed orders 
that are executed at another exchange are submitted for clearance and 
settlement in the name of the routing broker. The routing broker then 
coordinates with the Exchange to arrange for any resulting securities 
positions to be delivered to the TPH that submitted the original order 
to the Exchange (i.e., upon receipt of a filled execution report for 
the routed order, the Exchange system pairs the execution against the 
TPH's original order being held in the Exchange system and reports the 
pairing for clearance and settlement purposes by submitting a non-tape, 
clearing only transaction).
    From time to time, the Exchange encounters situations in which it 
becomes necessary to cancel orders (or release routing-related orders) 
and resolve error positions that result from errors of the Exchange, 
routing brokers, or another exchange.\7\
---------------------------------------------------------------------------

    \7\ The examples described in this filing are not intended to be 
exclusive. Proposed Rule 6.47 would provide general authority for 
the Exchange to cancel orders (or release routing-related orders) in 
order to maintain fair and orderly markets when technical or systems 
issues are occurring, and proposed Rule 6.37 also would set forth 
the manner in which error positions (which may occur in the 
provision of the Exchange's routing service) may be handled by the 
Exchange. The proposed rule change is not limited to addressing 
order cancellation (release) or error positions resulting only from 
the specific examples described in this filing.
---------------------------------------------------------------------------

Proposed Rule 6.47 (Order Cancellation/Release)
    The Exchange proposes to adopt new C2 Rule 6.47 to address the 
authority of the Exchange to cancel orders when a technical or systems 
issue occurs. Specifically, paragraph (a) of the proposed rule would 
expressly authorize the Exchange to cancel orders as it deems to be 
necessary to maintain fair and orderly markets if a technical or 
systems issue occurs at the Exchange,\8\ the routing broker, or another 
exchange to which an Exchange order has been routed. Paragraph (a) 
would also provide that a routing broker may only cancel orders being 
routed to another exchange based on the Exchange's standing or specific 
instructions or as otherwise provided in the Exchange Rules.\9\ 
Paragraph (a) would also provide that the Exchange shall provide notice 
of the cancellation to affected Trading Permit Holders as soon as 
practicable.
---------------------------------------------------------------------------

    \8\ To confirm, the authority to cancel orders to maintain fair 
and orderly markets under proposed Rule 6.47 would apply to any 
technical or systems issue at the Exchange and would include any 
orders at the Exchange (i.e., the authority to cancel orders would 
apply to any orders that are subject to the Exchange's routing 
service and any orders that are not subject to the Exchange's 
routing service). By comparison, the routing service error account 
provisions under proposed Rule 6.37 (discussed below) would apply 
only to original and corresponding orders that are subject to the 
Exchange routing service.
    \9\ As discussed above, the Exchange uses non-affiliated routing 
brokers to provide the routing services. These routing brokers are 
also not facilities of the Exchange. For all routing services, the 
Exchange determines the logic that provides when, how and where 
orders are routed away to other exchanges. The routing broker 
receives the routing instructions from the Exchange to route orders 
to other exchanges and to report executions back to the Exchange. 
The routing broker cannot change the terms of an order or the 
routing instructions, nor does the routing broker have any 
discretion about where to route an order. See Rule 6.36(c), (e) and 
(f). Under paragraph (a) to proposed Rule 6.47, the decision to take 
action with respect to orders affected by a technical or systems 
issue shall be made by the Exchange. Depending on where those orders 
are located, a routing broker would be permitted to initiate a 
cancellation of an order(s) pursuant to the Exchange's standing or 
specific instructions or as otherwise provided in the Exchange Rules 
(e.g., the Exchange's standing instructions might provide, among 
other things, that the routing broker could initiate the 
cancellation of orders if the routing broker is experiencing 
technical or systems issues routing orders to an away exchange).
---------------------------------------------------------------------------

    Paragraph (b) of the proposed rule provides that the Exchange may 
also determine to release orders being held on the Exchange awaiting an 
away exchange execution as it deems to be necessary to maintain fair 
and orderly markets if a technical or systems issues occurs at the 
Exchange, a routing broker, or another exchange to which an order has 
been routed (the process for ``releasing'' orders is illustrated in 
more detail below). Paragraph (c) of the proposed rule would provide 
that, for purposes of Rule 6.47, technical or system issues would 
include, without limitation, instances where the Exchange has not 
received confirmation of an execution (or cancellation) on another 
exchange from a routing broker within a response time interval 
designated by the Exchange, which interval may not be less than three 
(3) seconds.\10\
---------------------------------------------------------------------------

    \10\ A determination by the Exchange to cancel or release orders 
may not cause the Exchange to declare self-help against the other 
exchange pursuant Section E of the C2 Rules (which cross-reference 
paragraph (b)(1) of Chicago Board Options Exchange, Incorporated 
(``CBOE'') Rule 6.81, Order Protection). If the Exchange determines 
to cancel or release orders, as applicable, under proposed Rule 6.47 
but does not declare self-help against that other exchange, the 
Exchange would continue to be subject to the trade-through 
requirements in Rule 6.81 with respect to that exchange.
---------------------------------------------------------------------------

    The examples set forth below describe some of the circumstances in 
which the Exchange may decide to cancel (or release) orders.

    Example 1:  If a routing broker or another exchange experiences 
a technical or systems issue that results in the Exchange or routing 
broker not receiving responses to immediate-or-cancel (``IOC'') 
orders sent to the other exchange, and that issue is not resolved in 
a timely manner, then the Exchange may seek to cancel the routed 
orders affected by the issue.\11\ For instance, if a routing broker 
experiences a connectivity issue affecting the manner in which it 
sends and receives order messages to or from another exchange, it 
may be unable to receive timely execution or cancellation reports 
from the other exchange, and Exchange may consequently seek to 
cancel the affected routed orders (e.g., by calling the routing 
broker and instructing the routing broker to attempt to cancel the 
orders) or perhaps the routing broker may initiate the cancellation 
of the affected routed orders pursuant to a standing or specific 
instruction from the Exchange. In these circumstances, the Exchange 
would also attempt to release the initial orders submitted by 
TPHs.\12\
---------------------------------------------------------------------------

    \11\ In a normal situation (i.e., one in which a technical or 
systems issue does not exist), the Exchange should receive an 
immediate response back from the routing broker reporting any 
executions or cancellations from the other exchange, and would then 
pass the resulting fill or cancellation onto the TPH. If, after 
submitting an order for which a corresponding order has been routed 
to another exchange, a TPH sends an instruction to cancel the 
original order, the cancellation is held by the Exchange until a 
response is received from the routing broker on the corresponding 
order. For instance, if the other exchange executes the 
corresponding order, the execution would be passed onto the TPH and 
the cancellation instruction on the TPH's original order would be 
disregarded.
    \12\ Once an initial order is released, any cancellation that a 
TPH submitted to the Exchange on the initial order during such a 
situation would be honored. If a TPH did not submit a cancellation 
to the Exchange, however, that initial order would remain ``live'' 
and thus be eligible for execution or posting on the Exchange, and 
the Exchange would not treat any execution of the initial order or 
any subsequent routed order related to that initial order as an 
error (unless, of course, the order was itself subject to another 
technical or systems issue or any away exchange processing exceeded 
the applicable response time interval).
---------------------------------------------------------------------------

    Example 2:  If the Exchange does not receive confirmation of an 
execution (or cancellation) of an IOC order sent to another exchange 
from a routing broker within a designated response time interval of 
three (3) seconds, then an automated system feature will release the 
initial order being held by the Exchange.\13\ The Exchange would 
also

[[Page 70498]]

attempt to cancel the routed order in these circumstances.\14\
---------------------------------------------------------------------------

    \13\ This routing risk management feature would serve as one 
means for the Exchange to efficiently determine if there is a 
technical or system issue occurring. The feature, and the system 
functionality used to operate the feature, is generally modeled 
after a process that was utilized under the former Options 
Intermarket Linkage Plan (the ``Old Linkage Plan''). Under the Old 
Linkage Plan, an eligible market maker that sent a ``principal 
acting as agent order'' (referred to as a ``P/A Order'') through the 
linkage and who did not receive a reply from the away exchange 
within 30 seconds was able to reject any response received 
thereafter purporting to report a total or partial execution of that 
order. Over time, the time frame in which an away exchange was 
required to respond was ultimately reduced to 3 seconds. See, e.g., 
Securities Exchange Act Release Nos. 43086 (July 28, 2000), 65 FR 
48023 (August 4, 2000)(order approving Options Intermarket Linkage 
Plan submitted by the American Stock Exchange LLC, Chicago Board 
Options Exchange, Inc., and International Securities Exchange LLC) 
and 57238 (January 30, 2008), 73 FR 6748 (February 5, 2008)(order 
approving joint amendment no. 25 to the Plan for the Purpose of 
Creating and Operating an Intermarket Option Linkage Relating to 
Response Time for Certain Orders Sent Through the Linkage). The Old 
Linkage Plan was replaced by the Options Order Protection and 
Locked/Crossed Markets Plan (the ``Distributive Options Linkage 
Plan'') in 2009. See Securities Exchange Act Release No. 60405 (July 
30, 2009), 74 FR 39362 (August 6, 2009)(order approving the National 
Market System Plan relating to Options Order Protection and Locked/
Crossed Markets submitted by the Chicago Board Options Exchange, 
Incorporated, International Securities Exchange, LLC, The NASDAQ 
Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE 
Amex LLC, and NYSE Arca, Inc.). Although there is no longer a 
similar provision for P/A Orders and away exchange response times 
under the Distributive Options Linkage Plan, the Exchange has system 
functionality that tracks response times for orders routed to away 
exchanges. The primary distinction between the process under the Old 
Linkage Plan and the process described in the current proposed rule 
change is that, instead of rejecting an execution report back to the 
away exchange, an execution report received after the TPH's order is 
released would be considered an error and subject to the Exchange 
Error Account procedures discussed below. The Exchange views having 
this ability to release orders that are queued waiting for a 
responsive execution/cancel report for a corresponding order from an 
away exchange as an important risk management feature. Because the 
markets are highly automated, the Exchange would normally expect to 
receive a response to an order routed through the routing service 
within milliseconds after it is sent. If a response is not received 
in a timely manner, it generally is an indication of a system 
problem with the other exchange, the routing broker(s) or the 
Exchange. In addition, especially in fast-moving markets like the 
options market, the Exchange believes allowing for the release of a 
TPH's related original order due to an untimely response will 
provide an opportunity for the transmittal of responses while also 
allowing the Exchange's TPHs to address and execute orders pending 
on the Exchange in a timely manner. The Exchange believes this 
contributes to the Exchange's ability to maintain fair and orderly 
markets.
    \14\ It is possible that attempts to cancel the routed orders 
may not succeed. If the Exchange receives an execution report on the 
order that had been routed to an away exchange, then the unmatched 
execution would be considered an ``error position'' under proposed 
Rule 6.47.
---------------------------------------------------------------------------

    Example 3: If the Exchange experiences a systems issue, the 
Exchange may take steps to cancel and/or release all outstanding 
orders affected by the issue (which orders may include orders that 
may or may not be subject to routing services). The Exchange would 
also attempt to cancel any routed orders related to the TPHs' 
initial orders, if applicable, in these circumstances.\15\
---------------------------------------------------------------------------

    \15\ It is possible that attempts to cancel the routed orders 
may not succeed. If the Exchange receives an execution report on the 
order that had been routed to an away exchange, then the unmatched 
execution would be considered an ``error position'' under proposed 
Rule 6.47.
---------------------------------------------------------------------------

Proposed Rule 6.37 (Routing Service Error Accounts)
    Proposed Rule 6.37 would provide that each routing broker shall 
maintain, in the name of the routing broker, one or more accounts for 
the purpose of liquidating unmatched trade positions that may occur in 
connection with the away exchange routing service provided under Rule 
6.36 (``error positions'').\16\ In addition, the Exchange may also 
maintain, in the name of the Exchange, one or more Exchange Error 
Accounts for the purpose of liquidating error positions in the 
circumstances described below.
---------------------------------------------------------------------------

    \16\ The Exchange notes that, in connection with providing 
routing services, routing brokers currently may utilize their own 
error accounts to liquidate error positions. The Exchange believes 
it is reasonable and not inappropriate to address routing errors 
through the error account of a routing broker because, among other 
reasons, it is the executing broker associated with these 
transactions.
---------------------------------------------------------------------------

    Paragraph (a) of the proposed rule would provide that errors to 
which the rule would apply include any action or omission by the 
Exchange, a routing broker, or another exchange to which an Exchange 
order has been routed, either of which result in an unmatched trade 
position due to the execution of an original or corresponding order 
that is subject to the away market routing service and for which there 
is no corresponding order to pair with the execution (each a ``routing 
error''). Such routing errors would include, without limitation, 
positions resulting from determinations by the Exchange to cancel or 
release an order pursuant to proposed Rule 6.47 (as described above).
    Paragraph (b) of the proposed rule would provide that, generally, 
each routing broker will utilize its own error account to liquidate 
error positions. However, in certain circumstances, the Exchange may 
utilize an Exchange Error Account. In particular, in instances where 
the routing broker is unable to utilize its own error account (e.g., 
due to a technical, systems or other issue that prevents the routing 
broker from doing so) or where the an error is due to a technical or 
systems issue at the Exchange, the Exchange may (but would not be 
required to) determine it is appropriate to utilize an Exchange Error 
Account. In making such a determination to utilize an Exchange Error 
Account, the Exchange would consider whether is has sufficient time, 
information and capabilities considering the market circumstances to 
determine that an error is due to such circumstances and whether the 
Exchange can address the error.
    The Exchange believes it is reasonable and appropriate to address 
routing errors through the error account of a routing broker in the 
manner proposed because, among other reasons, it is the executing 
broker associated with these transactions. The Exchange also believes 
that having the flexibility to determine to utilize an Exchange Error 
Account in the limited circumstances described above allows for 
administrative convenience and contributes to the Exchange's ability to 
maintain a fair and orderly market.\17\ From a TPH perspective, there 
would be no impact resulting from the decision to use an Exchange Error 
Account or the routing broker's error account to liquidate the error 
position in these circumstances.
---------------------------------------------------------------------------

    \17\ The Exchange notes that any profit/loss from liquidating 
the error positions would belong to the Exchange (when an Exchange 
Error Account is utilized) or the routing broker (when the routing 
broker's error account is utilized). However, all or any portion of 
such profits/losses may be subject to certain contractual 
obligations pursuant to the routing service agreement between the 
Exchange and the routing broker (e.g., used to offset certain 
contractual obligations).
---------------------------------------------------------------------------

    By definition, an error position in an Exchange Error Account would 
only include unmatched trades due to a routing error. In that regard, 
paragraph (c) of the proposed rule would provide that the Exchange 
shall not accept any positions in an Exchange Error Account from an 
account of a Trading Permit Holder or permit any Trading Permit Holder 
to transfer any positions from the Trading Permit Holder's account to 
an Exchange Error Account.\18\
---------------------------------------------------------------------------

    \18\ The Exchange may address error positions under the proposed 
rule that are caused by the errors noted above, but the Exchange may 
not accept from a TPH positions that are delivered to the TPH 
through the clearance and settlement process, even if those 
positions may have been the result of an error. This would not 
apply, however, to situations like the one described below in which 
the Exchange incurred a position to settle a TPH purchase, as the 
TPH did not yet have a position in its account as a result of the 
purchase at the time of the Exchange's action, i.e., the Exchange's 
action was necessary for the purchase to settle into the TPH's 
account. Moreover, to the extent a TPH receives positions in 
connection with an error or other technical or systems issue, the 
TPH may seek to rely on other Exchange Rules such as Rule 6.42, 
Exchange Liability, if it experiences a loss. For example, Rule 6.42 
provides TPHs with the ability to file claims for negligent acts or 
omissions of Exchange employees or for the failure of its systems or 
facilities.
---------------------------------------------------------------------------

    To the extent a routing broker utilizes its own account to 
liquidate error positions, paragraph (d) of the proposed rule provides 
that the routing broker shall liquidate the error positions as soon as 
practicable. The routing broker could determine to liquidate the 
position itself or have a third party broker-dealer liquidate the 
position on the routing broker's behalf. Paragraph (d) also provides 
that the routing broker establish and enforce policies and procedures 
reasonably designed to (i) adequately restrict the flow confidential 
and proprietary information associated with the liquidation of the 
error position

[[Page 70499]]

in accordance with Rule 6.36,\19\ and (ii) prevent the use of 
information associated with other orders subject to the routing 
services when making determinations regarding the liquidation of error 
positions. In addition, paragraph (d) provides that the routing broker 
shall make and keep records associated with the liquidation of such 
routing broker error positions and shall maintain such records in 
accordance with Rule 17a-4 under the Act.\20\
---------------------------------------------------------------------------

    \19\ Rule 6.36(b) provides that the Exchange shall establish and 
maintain procedures and internal controls reasonably designed to 
adequately restrict the flow of confidential and proprietary 
information between the Exchange and the routing broker, and any 
other entity, including any affiliate of the routing broker, and, if 
the routing broker or any of its affiliates engages in any other 
business activities other than providing routing services to the 
Exchange, between the segment of the routing broker or affiliate 
that provides the other business activities and the segment of the 
routing broker that provides the routing services.
    \20\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

    Paragraph (e) of the proposed rule would provide that, to the 
extent an Exchange Error Account is utilized to liquidate error 
positions, the Exchange shall liquidate the error positions as soon as 
practicable. In liquidating error positions in an Exchange Error 
Account, the Exchange shall provide complete time and price discretion 
for the trading to liquidate error positions in an Exchange Error 
Account to a third-party broker-dealer and shall not attempt to 
exercise any influence or control over the timing or methods of such 
trading.\21\ Such a third-party broker-dealer may include a routing 
broker not affiliated with the Exchange. Paragraph (e) would also 
provide that the Exchange shall establish and enforce policies and 
procedures reasonably designed to adequately restrict the flow of 
confidential and proprietary information between the Exchange and the 
third-party broker-dealer associated with the liquidation of the error 
positions. Finally, paragraph (e) would provide that the Exchange shall 
make and keep records to document all determinations to treat positions 
as error positions under the rule (whether or not an Exchange Error 
Account is utilized to liquidate such error positions), as well as 
records associated with the liquidation of Exchange Error Account error 
positions through a third-party broker-dealer, and shall maintain such 
records in accordance with Rule 17a-1 under the Act.\22\
---------------------------------------------------------------------------

    \21\ This provision is not intended to preclude the Exchange 
from providing the third-party broker with standing instructions 
with respect to the manner in which it should handle all error 
account transactions. For example, the Exchange might instruct the 
broker to treat all orders as ``not held'' and to attempt to 
minimize any market impact on the price of the option being traded.
    \22\ 17 CFR 240.17a-1.
---------------------------------------------------------------------------

    Examples of such error positions due to a routing error may 
include, without limitation, the following:

    Example 4: Error positions may result from routed orders that 
the Exchange or a routing broker attempts to cancel but that are 
executed before the other exchange receives the cancellation message 
or that are executed because the other exchange is unable to process 
the cancellation message. Using the situation described in Example 1 
above, assume the Exchange seeks to release the initial orders being 
held by the Exchange because it is not receiving timely execution or 
cancellation reports from another exchange. In such a situation, 
although the Exchange would attempt to direct the routing broker to 
cancel the routed corresponding orders, the routing broker may still 
receive executions from the other exchange after connectivity is 
restored, which would not then be allocated to TPHs because of the 
earlier decision to release the affected initial orders. Instead, 
the routing broker would post the positions into its account and 
resolve the positions in the manner described above. Alternatively, 
if the routing broker is unable to resolve the positions (or if the 
error position is due to a system or technical issue on the 
Exchange), the Exchange may determine to post the positions into an 
Exchange Error Account and resolve the positions in the manner 
described above.
    Example 5: Error positions may result from an order processing 
issue at another exchange. For instance, if another exchange 
experienced a systems problem that affects its order processing, it 
may transmit back a message purporting to cancel a routed order, but 
then subsequently submit an execution of that same order for 
clearance and settlement. In such a situation, the Exchange would 
not then allocate the execution to the TPH because of the earlier 
cancellation message from the other exchange. Instead, the routing 
broker would post the positions into its account and resolve the 
positions in the manner described above. Alternatively, if the 
routing broker is unable to resolve the positions, the Exchange may 
determine to post the positions into an Exchange Error Account and 
resolve the positions in the manner described above.
    Example 6: Error positions may result if a routing broker 
receives an execution report from another exchange but does not 
receive clearing instructions for the execution from the other 
exchange. For instance, assume that a TPH sends the Exchange an 
order to buy 10 ABC option contracts, which causes the routing 
broker to send an order to another exchange that is subsequently 
executed, cleared and closed out by that other exchange, and the 
execution is ultimately communicated back to the TPH. On the next 
trading day (T+1), if the other exchange does not providing clearing 
instructions for that execution, the Exchange/routing broker would 
still be responsible for settling that TPH's purchase and therefore 
would be left with open positions.\23\ Instead, the routing broker 
would post the positions into its account and resolve the positions 
in the manner described above. Alternatively, if the routing broker 
is unable to resolve the positions, the Exchange may determine to 
post the positions into an Exchange Error Account and resolve the 
positions in the manner described above.
---------------------------------------------------------------------------

    \23\ To the extent that a loss is incurred in covering the 
position, the routing broker (on behalf of the Exchange or itself) 
may submit a reimbursement claim to that other exchange.
---------------------------------------------------------------------------

    Example 7: Error positions may result from a technical or 
systems issue that causes orders to be executed in the name of a 
routing broker in connection with its routing services function that 
are not related to any corresponding initial orders of TPHs. As a 
result, the Exchange would not be able to assign any positions 
resulting from such an issue to TPHs. Instead, the routing broker 
would post the positions into its account and resolve the positions 
in the manner described above. Alternatively, if the routing broker 
is unable to resolve the positions, the Exchange may determine to 
post the positions into an Exchange Error Account and resolve the 
positions in the manner described above.\24\
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    \24\ To the extent such positions are not related to the routing 
broker's function as an Exchange routing broker (i.e., originating 
with the Exchange), the Exchange would not post such positions to an 
Exchange Error Account. The routing broker would resolve the error 
positions itself.
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    In each of the circumstances described above, the Exchange and its 
routing broker may not learn about an error position until T+1. For 
instance, the Exchange and its routing broker may not learn about an 
error position until either (i) during the clearing process when a 
routing destination has submitted to The Options Clearing Corporation 
(``OCC'') a transaction for clearance and settlement for which the 
Exchange/routing broker never received an execution confirmation, or 
(ii) when another exchange does not recognize a transaction submitted 
by a routing broker to OCC for clearance and settlement. Moreover, the 
affected TPHs' trade may not be nullified absent express authority 
under Exchange Rules.\25\ As such, the Exchange believes that use of a 
routing broker error account (or an Exchange Error Account, as 
applicable) to liquidate the error positions that may occur in these 
circumstances is reasonable and appropriate in these circumstances.
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    \25\ See, e.g., Rule 6.15, Obvious Error and Catastrophic 
Errors.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\26\ in general and furthers the objectives of Section 6(b)(5) of the 
Act \27\ in particular, which requires that the rules of an exchange be 
designed to promote

[[Page 70500]]

just and equitable principles of trade, to prevent fraudulent and 
manipulative acts, to remove impediments to and to perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. The Exchange 
believes that this proposed rule change is in keeping with those 
principles since the Exchange's ability to cancel and release orders 
during a technical or systems issue and to maintain an Exchange Error 
Account facilitates the smooth and efficient operation of the market. 
Specifically, the Exchange believes that allowing the Exchange to 
cancel and release orders during a technical or systems issue (and 
permitting its routing brokers to cancel orders pursuant to standing or 
specific instructions or as otherwise permitted under Exchange Rules) 
would allow the Exchange to maintain fair and orderly markets. 
Moreover, the Exchange believes that allowing a routing broker to 
assume error positions in its own account(s) to liquidate those 
positions (or allowing the Exchange to assume error positions in an 
Exchange Error Account to liquidate those positions in instances where 
a routing broker is unable to do so or where the routing error is due 
to a technical or systems issue at the Exchange) subject to the 
conditions set forth in proposed Rule 6.37 would be the least 
disruptive means to address these errors. Overall, the proposed new 
rule is designed to ensure full trade certainty to market participants 
and to avoid disrupting the clearance and settlement process. The 
proposed new rule is also designed to provide a consistent methodology 
for handling error positions in a manner that does not discriminate 
among TPHs. The proposed new rule is also consistent with Section 6 of 
the Act insofar as it would require the Exchange (and its routing 
brokers, as applicable) to establish controls to restrict the flow of 
any confidential information associated with the liquidation of error 
positions.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-C2-2012-038 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-C2-2012-038. 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, on business days 
between the hours of 10 a.m. and 3 p.m., located at 100 F Street NE., 
Washington, DC 20549-1090. Copies of the filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-C2-2012-038 and should be 
submitted on or before December 17, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-28592 Filed 11-23-12; 8:45 am]
BILLING CODE 8011-01-P
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