Self-Regulatory Organizations; International Securities Exchange, LLC; Order Granting Approval of Proposed Rule Change To Address Order Handling Under the Options Order Protection and Locked/Crossed Market Plan, the Authority of the Exchange To Cancel Orders When a Technical or Systems Issue Occurs, and To Describe the Operation of Linkage Handler Error Accounts, 24273-24276 [2013-09625]

Download as PDF Federal Register / Vol. 78, No. 79 / Wednesday, April 24, 2013 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from members or other interested parties. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act 11 and subparagraph (f)(2) of Rule 19b–4 thereunder,12 because it establishes a due, fee, or other charge imposed by ISE. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: tkelley on DSK3SPTVN1PROD with NOTICES 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–ISE–2013–32 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–ISE–2013–32. 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 11 15 12 17 U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). VerDate Mar<15>2010 18:05 Apr 23, 2013 post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such 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–ISE– 2013–32, and should be submitted on or before May 15, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–09653 Filed 4–23–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–69396; File No. SR–ISE– 2013–18] Self-Regulatory Organizations; International Securities Exchange, LLC; Order Granting Approval of Proposed Rule Change To Address Order Handling Under the Options Order Protection and Locked/Crossed Market Plan, the Authority of the Exchange To Cancel Orders When a Technical or Systems Issue Occurs, and To Describe the Operation of Linkage Handler Error Accounts April 18, 2013. I. Introduction On March 7, 2013, the International Securities Exchange, LLC (‘‘Exchange’’ or ‘‘ISE’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 13 17 Jkt 229001 PO 00000 CFR 200.30–3(a)(12). Frm 00124 Fmt 4703 Sfmt 4703 24273 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to address: (i) Order handling under the Options Order Protection and Locked/Crossed Market Plan; (ii) the authority of the Exchange to cancel orders (or release routingrelated orders) when a technical or systems issue occurs; and (iii) describe the operation of Linkage Handler (defined below) error account(s), which may be used to liquidate unmatched executions that may occur in the provision of the Exchange’s routing service. The proposed rule change was published for comment in the Federal Register on March 18, 2013.3 The Commission received no comment letters regarding the proposed rule change. This order approves the proposed rule change. II. Description of the Proposal New Supplementary Material .02 to ISE Rule 1901 (Order Protection) and New ISE Rule 1903 (Order Routing to Other Exchanges) In its proposal, the Exchange states that, under the Options Order Protection and Locked/Crossed Market Plan (‘‘Plan’’),4 it cannot execute orders at a price that is inferior to the national best bid or offer (‘‘NBBO’’), nor can ISE place an order on its book that would cause the Exchange best bid or offer to lock or cross another exchange’s quote.5 The Exchange states that, in compliance with this requirement, incoming orders are not automatically executed at a price inferior to another exchange’s protected bid or protected offer, nor placed on the limit order book if they would lock or cross an away market. ‘‘Non-Customer Orders’’ (orders for the account of a broker or dealer) 6 are rejected in these 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 69114 (March 12, 2013), 78 FR 16733 (March 18, 2013) (SR–ISE–2013–18) (‘‘Notice’’). 4 The Commission notes that the Plan is a national market system plan proposed by the options exchanges and approved by the Commission. See Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009) (File No. 4–546). ISE is a participant in the Plan. Among other things, the Plan requires each participant in the Plan to adopt rules that are reasonably designed to prevent trade-throughs and establish, maintain and enforce written rules that require its members to reasonably avoid displaying locked and crossed markets. See Sections 5 and 6 of the Plan. 5 See Notice, 78 FR at 16733; see also, ISE Rules 1901 and 1902. The Commission notes that ISE Rules 1901 and 1902 were designed to implement certain of the Plan’s requirements with respect to trade-throughs and locked and crossed markets. See Securities Exchange Act Release No. 60559 (August 21, 2009), 74 FR 44425 (August 28, 2009) (SR–ISE– 2009–27). 6 ISE Rule 100(a)(28). 2 17 E:\FR\FM\24APN1.SGM 24APN1 24274 Federal Register / Vol. 78, No. 79 / Wednesday, April 24, 2013 / Notices circumstances, while ‘‘Public Customer Orders’’ (orders for the account of a person that is not a broker-dealer) 7 are handled by the Primary Market Maker.8 Currently, Primary Market Makers 9 have the responsibility of either executing the Public Customer Order at a price that at least matches the NBBO or obtaining better prices from the away market(s) by sending one or more intermarket sweep orders (‘‘ISOs’’) on the Public Customer’s behalf.10 The Exchange proposes to amend its rules to remove the requirement that Primary Market Makers handle Public Customer Orders in the circumstances described above,11 and to instead provide a centralized process for sending ISOs to other exchanges on behalf of Public Customer Orders. The Exchange proposes that it will contract with one or more unaffiliated brokers to route orders to other exchanges when necessary to comply with the linkage rules (‘‘Linkage Handlers’’). Specifically, in circumstances where marketable Public Customer Orders are received when the ISE is not at the NBBO or orders are received that would lock or cross another market, they will be exposed to ISE members for up to one second.12 Under the proposed rules if, after a Public Customer Order is exposed, such order cannot be executed in full on the Exchange at the thencurrent NBBO or better and is marketable, the lesser of the full displayed size of the Protected Bid(s) or Protected Offer(s) that are priced better than the ISE’s quote or the balance of the order will be sent to the Linkage Handler, and any additional balance of the order that is not marketable against the then-current NBBO will be placed on the ISE book.13 The Exchange proposes to adopt new ISE Rule 1903 (Order Routing to Other Exchanges), which would govern the Exchange’s process for routing ISOs to 7 ISE Rule 100(a)(39). Rule 714(a). 9 In addition to the obligations for market makers generally, a ‘‘Primary Market Maker’’ has certain responsibilities for options classes to which it is appointed as a Primary Market Maker. See ISE Rule 803(c). 10 See Notice, 78 FR at 16734; and ISE Rule 803(c)(2). 11 The Exchange proposes to eliminate Rule 803(c)(1)–(3) and Supplementary Material .02 to Rule 803, which addresses Primary Market Makers’ obligations in handling Public Customer Orders. 12 The current process for exposure is being moved from Supplementary Material .02 to Rule 803 to Supplementary Material .02 to Rule 1901. 13 See Proposed Supplementary Material .02 to ISE Rule 1901. Any additional balance of the order will be executed on the ISE if it is marketable. Any additional balance of the order that is not marketable against the then-current NBBO will be placed on the ISE book. tkelley on DSK3SPTVN1PROD with NOTICES 8 ISE VerDate Mar<15>2010 18:05 Apr 23, 2013 Jkt 229001 other markets. As discussed above, the Exchange intends to contract with one or more Linkage Handlers that are not affiliated with the Exchange to route ISOs to other exchanges. The Exchange represents that any such contract will restrict the use of any confidential and proprietary information that the Linkage Handler receives to legitimate business purposes necessary for routing orders at the direction of the Exchange.14 Routing services would be available to ISE members only and are optional. Members that do not want orders routed can use the ‘‘Do Not Route’’ designation to avoid routing.15 Also, ISE is not approved to be a designated examining authority.16 New ISE Rule 1903 also provides that: (1) 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 Linkage Handler, and any other entity, including any affiliate of the Linkage Handler, and, if the Linkage Handler or any of its affiliates engages in any other business activities other than providing routing services to the Exchange, between the segment of the Linkage Handler or affiliate that provides the other business activities and the segment of the Linkage Handler that provides the routing services; (2) the Exchange will provide its routing services in compliance with the provisions of the Act and the rules thereunder, including, but not limited to, the requirements in Section 6(b)(4) and (5) of the Act that the rules of a national securities exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its Members and other persons using its facilities, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers; (3) the Exchange will determine the logic that provides when, how, and where orders are routed away to other 14 See Notice, 78 FR at 16734. id. 16 See Notice, 78 FR at 16734 n.14. The Commission notes that, therefore, ISE is not the designated examining authority for any Linkage Handlers. See also, email from Laura Clare, Assistant General Counsel, ISE, to Theodore S. Venuti, Senior Special Counsel (confirming (i) that neither the Exchange nor any of its affiliates is approved to be a designated examining authority and therefore, neither the Exchange nor any of its affiliates may be a designated examining authority for any of the Linkage Handlers, as defined in .03 of the Supplementary Material to Rule 1901; and (ii) to become a designated examining authority, the Exchange would need Commission approval and would also need to amend its rules governing linkage handling). 15 See PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 exchanges; 17 (4) the Linkage Handler will receive routing instructions from the Exchange, to route orders to other exchanges and report such executions back to the Exchange and the Linkage Handler cannot change the terms of an order or the routing instructions, nor does the Linkage Handler have any discretion about where to route an order; and (5) any bid or offer entered on the Exchange routed to another exchange via a Linkage Handler that results in an execution shall be binding on the Member that entered such bid/ offer.18 New ISE Rule 1904 (Order Cancellation/ Release) The Exchange is also proposing to adopt Rule 1904 (Order Cancellation/ Release) which, the Exchange states, is designed to address the Exchange’s authority to cancel orders (or release routing-related orders) when a technical or systems issue occurs. The Exchange states that paragraph (a) of Proposed Rule 1904 is designed to 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,19 the Linkage Handler, or another exchange to which an Exchange order has been routed. Paragraph (a) also provides that a Linkage Handler may only cancel orders being routed to another exchange 17 The Exchange notes that this provision would not prohibit a Linkage Handler from complying with its obligations under Rule 15c3–5 under the Act. See Notice, 78 FR at 16734 n.15. 18 Proposed Supplementary Material .01 to Rule 1903 states that the rule does not prohibit a Linkage Handler from designating a preferred market-maker (or equivalent market participant) at the other exchange to which an outbound ISO is being routed. The Exchange states that this proposed provision has no impact on customer orders, and does not disadvantage customers in any way. See Notice, 78 FR at 16734–35. The Exchange will still be making the sole determination as to which exchange an order will be routed, as well as when and how the order will be routed. See id. Proposed Supplementary Material .02 to Rule 1903 is designed to address how the Exchange will handle orders in the event that there are no operable Linkage Handlers to provide routing services. In such circumstance, the Exchange will cancel orders that, if processed by the Exchange, would violate Rules 1901 (prohibition on tradethroughs) or 1902 (prohibition on locked and crossed markets). See id. at 16735. 19 The Exchange states that the authority to cancel orders to maintain fair and orderly markets under proposed Rule 1904 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 1905 (discussed below) would apply to original and corresponding orders that are subject to the Exchange routing service. See Notice, 78 FR at 16735. E:\FR\FM\24APN1.SGM 24APN1 Federal Register / Vol. 78, No. 79 / Wednesday, April 24, 2013 / Notices based on the Exchange’s standing or specific instructions or as otherwise provided in the Exchange rules.20 In addition, paragraph (a) provides that the Exchange shall provide notice of the cancelation of the Members’ original order to affected Members as soon as practicable. Paragraph (b) of Proposed Rule 1904 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 issue occurs at the Exchange, a Linkage Handler, or another exchange to which an order has been routed. Proposed Rule 1905 (Routing Service Error Accounts) tkelley on DSK3SPTVN1PROD with NOTICES New ISE Rule 1905 provides that each Linkage Handler shall maintain, in the name of the Linkage Handler, one or more accounts for the purpose of liquidating unmatched trade positions that may occur in connection with the routing service provided under new ISE Rule 1903 (‘‘error positions’’). Paragraph (a) of the rule provides that errors to which the rule applies include any action or omission by the Exchange, a Linkage Handler, or another exchange to which an Exchange order has been routed, that results in an unmatched trade position due to the execution of an 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’’); and that such routing errors would include, without limitation, positions resulting from determinations by the Exchange to cancel or release an order pursuant to new ISE Rule 1904. 20 The Exchange states that, in addition to being unaffiliated with the Exchange, the Linkage Handlers are 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 Linkage Handler receives the routing instructions from the Exchange to route orders to other exchanges and to report executions back to the Exchange. The Linkage Handler cannot change the terms of an order or the routing instructions, nor does the Linkage Handler have any discretion about where to route an order. See proposed Rule 1903(c), (d) and (e). Under paragraph (a) to proposed Rule 1904, 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 Linkage Handler would be permitted to initiate a cancelation of an order(s) pursuant to the Exchange’s standing or specific instructions or as otherwise provided in Exchange Rules (e.g., the Exchange’s standing instruction might provide, among other things, that the Linkage Handler could initiate the cancelation of orders if the Linkage Handler is experiencing technical or systems issues routing orders to an away exchange). See Notice, 78 FR at 16735 n.20. VerDate Mar<15>2010 18:05 Apr 23, 2013 Jkt 229001 Paragraph (b) of the rule provides that error positions will be liquidated in a Linkage Handler’s error account. Paragraph (c) of new ISE Rule 1905 requires that a Linkage Handler utilizing its error account to liquidate error positions shall liquidate the positions as soon as practicable. The Linkage Handler could determine to liquidate the position itself or have a third-party broker-dealer liquidate the position on the Linkage Handler’s behalf. Paragraph (c)(i) provides that the routing broker shall establish and enforce policies and procedures reasonably designed to (1) adequately restrict the flow of confidential and proprietary information associated with the liquidation of the error position in accordance with Rule 1903 and (2) 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 (c)(ii) provides that the Linkage Handler shall make and keep records associated with the liquidation of such error positions and shall maintain such records in accordance with Rule 17a–4 under the Act.21 Finally, paragraph (d) provides that the Exchange shall make and keep records to document all determinations to treat positions as error positions under the rule, and shall maintain such records in accordance with Rule 17a–1 under the Act.22 III. Discussion and Commission’s Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of Section 6(b) of the Act 23 and the rules and regulations thereunder applicable to a national securities exchange.24 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,25 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to 21 17 CFR 240.17a–4. Because a Linkage Handler will be performing an Exchange function on a contractual basis and at the direction of the Exchange, the Exchange also proposes to exclude Linkage Handlers from the limits on compensation in ISE Rule 705(d). Instead, the Exchange states that such liability matters will be handled on a contractual basis as they are with other vendors or services to the Exchange. See Notice, 78 FR at 16737. 22 17 CFR 240.17a–1. 23 15 U.S.C. 78f(b). 24 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 25 15 U.S.C. 78f(b)(5). PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 24275 promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The Commission also believes the proposed rule change is consistent with Section 11A(a)(1)(C) of the Act 26 in that it seeks to assure economically efficient execution of securities transactions. The Commission finds that ISE’s proposed rules governing the routing of orders are consistent with the Act. As described above, the Exchange would contract with one or more Linkage Handlers that are not affiliated with the Exchange to route ISOs to other markets.27 Further, the routing of orders would be optional; 28 and the Exchange would be responsible for routing decisions and would retain control of the routing logic.29 None of ISE or its affiliates is approved to be a designated examining authority, and therefore, neither the Exchange, nor any affiliate of the Exchange,30 may be the designated examining authority for a Linkage Handler absent Commission approval and amendment of ISE’s rules governing the routing of orders by its Linkage Handlers.31 The Commission also notes that the rule contemplates procedures and internal controls designed to protect confidential and proprietary information, which should help ensure that the Linkage Handlers do not misuse routing information obtained from the Exchange. In addition, the Exchange would provide its routing services in compliance with the Act and the rules thereunder, including but not limited to, the requirements in Sections 6(b)(4) and (5) of the Act 32 that the rules of a national securities exchange provide for the equitable allocation of reasonable dues, fees, and other charges among Exchange members and other persons using the Exchange’s facilities, and not be designed to permit unfair discrimination between customers, 26 15 U.S.C. 78k–1(a)(1)(C). Commission notes that Linkage Handlers would be required to comply with Rule 15c3–5 under the Act. See supra note 17. 28 Members may choose to avoid routing by using the Do Not Route designation. See supra note 15 and accompanying text. 29 See proposed ISE Rule 1903(d) and (e). 30 See supra note 16 and accompanying text. 31 See id. 32 15 U.S.C. 78f(b)(4) and (5). 27 The E:\FR\FM\24APN1.SGM 24APN1 24276 Federal Register / Vol. 78, No. 79 / Wednesday, April 24, 2013 / Notices brokers, or dealers.33 The Commission notes that such rules governing the routing of orders by Linkage Handlers should help ISE comply with its responsibility under the Plan.34 The Commission recognizes that technical or systems issues may occur, and believes that new ISE Rule 1904, in allowing ISE to cancel or release orders affected by technical or systems issues, should provide a reasonably efficient means for ISE to handle such orders, and appears reasonably designed to permit ISE to maintain fair and orderly markets.35 The Commission also believes that allowing the Exchange to resolve error positions through the use of error accounts maintained by each Linkage Handler pursuant to the procedures set forth in the rule, and as described above, is consistent with the Act.36 The Commission notes that the rule establishes criteria for determining which positions are error positions to which the rule applies, and the procedures for the handling of such positions. In particular, the Commission notes that Proposed ISE Rule 1905 only applies to error positions that result from the Linkage Handler’s routing service, and that such positions shall be liquidated by the Linkage Handler, as applicable, as soon as practicable.37 In this regard, the Commission believes that the new rule appears reasonably designed to further just and equitable principles of trade and the protection of investors and the public interest, and to help prevent unfair discrimination, in that it should help assure the handling of error positions will be based on clear and objective criteria, and that the resolution of those positions will occur promptly through a transparent process. The Commission is also concerned about the potential for misuse of confidential and proprietary 33 See proposed ISE Rule 1903(c). supra note 4. 35 The Commission notes that ISE states that it believes that allowing the Exchange to cancel or release orders under such circumstances would allow the Exchange to maintain fair and orderly markets, and that new ISE Rule 1905 is designed ensure full trade certainty for market participants and avoid disrupting the clearance and settlement process. See Notice, 78 FR at 16737. The Commission also notes that ISE states that a decision to cancel or release orders due to a technical or systems issue is not equivalent to the Exchange declaring self-help against another exchange pursuant to ISE Rule 1905. See 17 CFR 242.611(b). See also Notice, 78 FR at 16735 n.21. 36 The Commission notes that ISE states that it believes that it is reasonable and appropriate to address routing errors through the error account of a Linkage Handler in the manner proposed because, among other reasons, the Linkage Handler is the executing broker associated with such transactions. See Notice, 78 FR at 16736. 37 See ISE Rule 1905(c). tkelley on DSK3SPTVN1PROD with NOTICES 34 See VerDate Mar<15>2010 18:05 Apr 23, 2013 Jkt 229001 information. The Commission notes that Linkage Handlers will be required to establish and enforce policies and procedures reasonably designed to (1) adequately restrict the flow of confidential and proprietary information associated with the liquidation of the error positions, and (2) prevent the use of information associated with other orders subject to the routing services when making determinations regarding the liquidation of error positions.38 The Commission believes that these requirements should help mitigate the Commission’s concerns. In particular, the Commission believes that these requirements should help assure that none of ISE, its Linkage Handlers, or any third-party brokerdealer is able to misuse confidential or proprietary information obtained in connection with the liquidation of error positions for its own benefit. The Commission also notes that each Linkage Handler would be required to make and keep records associated with the liquidation of error positions 39 and ISE would be required to make and keep records to document all determinations to treat positions as error positions under this Rule.40 Finally, the Commission notes that the proposed procedures for routing orders, canceling orders and the handling of error positions are similar to procedures the Commission has approved for other exchanges.41 IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,42 that the proposed rule change (SR–ISE–2013–18) be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.43 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–09625 Filed 4–23–13; 8:45 am] BILLING CODE 8011–01–P 38 See ISE Rule 1905(c)(i). ISE Rule 1905(c)(ii). 40 See ISE Rule 1905(d). The Commission notes that the Exchange will transition options classes from the current process to the new proposed process using Linkage Handlers over a period of time and will notify its members via information circular as products are transitioned. 41 See, e.g., Securities Exchange Act Release Nos. 68583 (January 4, 2013), 78 FR 2302 (January 10, 2013) (SR–C2–2012–038); 68584 (January 4, 2013), 78 FR 2304 (January 10, 2013) (SR–CBOE–2012– 109); 68585 (January 4, 2013), 78 FR 2308 (January 10, 2013) (SR–CBOE–2012–108); and 60551 (August 20, 2009), 74 FR 43196 (August 26, 2009) (SR– CBOE–2009–040). 42 15 U.S.C. 78s(b)(2). 43 17 CFR 200.30–3(a)(12). 39 See PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–69397; File No. SR– NYSEArca–2013–18] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To List and Trade Fourteen Series of the iShares Trust Under NYSE Arca Equities Rule 8.600 April 18, 2013. I. Introduction On February 14, 2013, NYSE Arca, Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares (‘‘Shares’’) of fourteen series of the iShares Trust (‘‘Trust’’). The proposed rule change was published for comment in the Federal Register on March 6, 2013.3 The Commission received no comments on the proposal. On April 2, 2013, the Exchange filed Amendment No. 1 to the proposed rule change.4 This order grants approval of the proposed rule change, as modified by Amendment No. 1 thereto. II. Description of the Proposed Rule Change The Exchange proposes to list and trade the Shares of the iShares Australian Dollar Cash Rate Fund; iShares British Pound Cash Rate Fund; iShares Canadian Dollar Cash Rate 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 69008 (February 28, 2013), 78 FR 14600 (‘‘Notice’’). 4 In Amendment No. 1, the Exchange clarified that the variable rate demand notes that may be purchased by the Funds (as defined herein) would be backed by a letter of credit from a highly rated bank or financial institution that meets certain credit standards and that the Funds would purchase such variable rate demand notes with hard one or seven-day put options. In addition, the Exchange clarified that the net asset value (‘‘NAV’’) for the iShares New Zealand Dollar Cash Rate Fund would be determined on each business day as of the value date roll-over in New Zealand, which would ordinarily be 7:00 a.m., New Zealand time (which would be 1:00 p.m., 2:00 p.m., or 3:00 p.m. Eastern Time or ‘‘E.T.’’ the prior day, depending on daylight savings time). The Exchange further clarified that fair value determinations would be made in accordance with the requirements of the Investment Company Act of 1940 (‘‘1940 Act’’). Finally, the Exchange made a number of technical changes to the proposed rule change. Because the changes made by the Exchange in Amendment No. 1 do not materially alter the substance of the proposed rule change and do not raise any novel or unique regulatory issues, Amendment No. 1 is not subject to notice and comment. 2 17 E:\FR\FM\24APN1.SGM 24APN1

Agencies

[Federal Register Volume 78, Number 79 (Wednesday, April 24, 2013)]
[Notices]
[Pages 24273-24276]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-09625]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69396; File No. SR-ISE-2013-18]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Granting Approval of Proposed Rule Change To Address Order 
Handling Under the Options Order Protection and Locked/Crossed Market 
Plan, the Authority of the Exchange To Cancel Orders When a Technical 
or Systems Issue Occurs, and To Describe the Operation of Linkage 
Handler Error Accounts

April 18, 2013.

I. Introduction

    On March 7, 2013, the International Securities Exchange, LLC 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to address: (i) Order handling 
under the Options Order Protection and Locked/Crossed Market Plan; (ii) 
the authority of the Exchange to cancel orders (or release routing-
related orders) when a technical or systems issue occurs; and (iii) 
describe the operation of Linkage Handler (defined below) error 
account(s), which may be used to liquidate unmatched executions that 
may occur in the provision of the Exchange's routing service. The 
proposed rule change was published for comment in the Federal Register 
on March 18, 2013.\3\ The Commission received no comment letters 
regarding the proposed rule change. This order approves the proposed 
rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 69114 (March 12, 2013), 
78 FR 16733 (March 18, 2013) (SR-ISE-2013-18) (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

New Supplementary Material .02 to ISE Rule 1901 (Order Protection) and 
New ISE Rule 1903 (Order Routing to Other Exchanges)

    In its proposal, the Exchange states that, under the Options Order 
Protection and Locked/Crossed Market Plan (``Plan''),\4\ it cannot 
execute orders at a price that is inferior to the national best bid or 
offer (``NBBO''), nor can ISE place an order on its book that would 
cause the Exchange best bid or offer to lock or cross another 
exchange's quote.\5\ The Exchange states that, in compliance with this 
requirement, incoming orders are not automatically executed at a price 
inferior to another exchange's protected bid or protected offer, nor 
placed on the limit order book if they would lock or cross an away 
market. ``Non-Customer Orders'' (orders for the account of a broker or 
dealer) \6\ are rejected in these

[[Page 24274]]

circumstances, while ``Public Customer Orders'' (orders for the account 
of a person that is not a broker-dealer) \7\ are handled by the Primary 
Market Maker.\8\ Currently, Primary Market Makers \9\ have the 
responsibility of either executing the Public Customer Order at a price 
that at least matches the NBBO or obtaining better prices from the away 
market(s) by sending one or more intermarket sweep orders (``ISOs'') on 
the Public Customer's behalf.\10\ The Exchange proposes to amend its 
rules to remove the requirement that Primary Market Makers handle 
Public Customer Orders in the circumstances described above,\11\ and to 
instead provide a centralized process for sending ISOs to other 
exchanges on behalf of Public Customer Orders. The Exchange proposes 
that it will contract with one or more unaffiliated brokers to route 
orders to other exchanges when necessary to comply with the linkage 
rules (``Linkage Handlers''). Specifically, in circumstances where 
marketable Public Customer Orders are received when the ISE is not at 
the NBBO or orders are received that would lock or cross another 
market, they will be exposed to ISE members for up to one second.\12\ 
Under the proposed rules if, after a Public Customer Order is exposed, 
such order cannot be executed in full on the Exchange at the then-
current NBBO or better and is marketable, the lesser of the full 
displayed size of the Protected Bid(s) or Protected Offer(s) that are 
priced better than the ISE's quote or the balance of the order will be 
sent to the Linkage Handler, and any additional balance of the order 
that is not marketable against the then-current NBBO will be placed on 
the ISE book.\13\
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    \4\ The Commission notes that the Plan is a national market 
system plan proposed by the options exchanges and approved by the 
Commission. See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009) (File No. 4-546). ISE is a 
participant in the Plan. Among other things, the Plan requires each 
participant in the Plan to adopt rules that are reasonably designed 
to prevent trade-throughs and establish, maintain and enforce 
written rules that require its members to reasonably avoid 
displaying locked and crossed markets. See Sections 5 and 6 of the 
Plan.
    \5\ See Notice, 78 FR at 16733; see also, ISE Rules 1901 and 
1902. The Commission notes that ISE Rules 1901 and 1902 were 
designed to implement certain of the Plan's requirements with 
respect to trade-throughs and locked and crossed markets. See 
Securities Exchange Act Release No. 60559 (August 21, 2009), 74 FR 
44425 (August 28, 2009) (SR-ISE-2009-27).
    \6\ ISE Rule 100(a)(28).
    \7\ ISE Rule 100(a)(39).
    \8\ ISE Rule 714(a).
    \9\ In addition to the obligations for market makers generally, 
a ``Primary Market Maker'' has certain responsibilities for options 
classes to which it is appointed as a Primary Market Maker. See ISE 
Rule 803(c).
    \10\ See Notice, 78 FR at 16734; and ISE Rule 803(c)(2).
    \11\ The Exchange proposes to eliminate Rule 803(c)(1)-(3) and 
Supplementary Material .02 to Rule 803, which addresses Primary 
Market Makers' obligations in handling Public Customer Orders.
    \12\ The current process for exposure is being moved from 
Supplementary Material .02 to Rule 803 to Supplementary Material .02 
to Rule 1901.
    \13\ See Proposed Supplementary Material .02 to ISE Rule 1901. 
Any additional balance of the order will be executed on the ISE if 
it is marketable. Any additional balance of the order that is not 
marketable against the then-current NBBO will be placed on the ISE 
book.
---------------------------------------------------------------------------

    The Exchange proposes to adopt new ISE Rule 1903 (Order Routing to 
Other Exchanges), which would govern the Exchange's process for routing 
ISOs to other markets. As discussed above, the Exchange intends to 
contract with one or more Linkage Handlers that are not affiliated with 
the Exchange to route ISOs to other exchanges. The Exchange represents 
that any such contract will restrict the use of any confidential and 
proprietary information that the Linkage Handler receives to legitimate 
business purposes necessary for routing orders at the direction of the 
Exchange.\14\ Routing services would be available to ISE members only 
and are optional. Members that do not want orders routed can use the 
``Do Not Route'' designation to avoid routing.\15\ Also, ISE is not 
approved to be a designated examining authority.\16\
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    \14\ See Notice, 78 FR at 16734.
    \15\ See id.
    \16\ See Notice, 78 FR at 16734 n.14. The Commission notes that, 
therefore, ISE is not the designated examining authority for any 
Linkage Handlers. See also, email from Laura Clare, Assistant 
General Counsel, ISE, to Theodore S. Venuti, Senior Special Counsel 
(confirming (i) that neither the Exchange nor any of its affiliates 
is approved to be a designated examining authority and therefore, 
neither the Exchange nor any of its affiliates may be a designated 
examining authority for any of the Linkage Handlers, as defined in 
.03 of the Supplementary Material to Rule 1901; and (ii) to become a 
designated examining authority, the Exchange would need Commission 
approval and would also need to amend its rules governing linkage 
handling).
---------------------------------------------------------------------------

    New ISE Rule 1903 also provides that: (1) 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 Linkage Handler, 
and any other entity, including any affiliate of the Linkage Handler, 
and, if the Linkage Handler or any of its affiliates engages in any 
other business activities other than providing routing services to the 
Exchange, between the segment of the Linkage Handler or affiliate that 
provides the other business activities and the segment of the Linkage 
Handler that provides the routing services; (2) the Exchange will 
provide its routing services in compliance with the provisions of the 
Act and the rules thereunder, including, but not limited to, the 
requirements in Section 6(b)(4) and (5) of the Act that the rules of a 
national securities exchange provide for the equitable allocation of 
reasonable dues, fees, and other charges among its Members and other 
persons using its facilities, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers; (3) the 
Exchange will determine the logic that provides when, how, and where 
orders are routed away to other exchanges; \17\ (4) the Linkage Handler 
will receive routing instructions from the Exchange, to route orders to 
other exchanges and report such executions back to the Exchange and the 
Linkage Handler cannot change the terms of an order or the routing 
instructions, nor does the Linkage Handler have any discretion about 
where to route an order; and (5) any bid or offer entered on the 
Exchange routed to another exchange via a Linkage Handler that results 
in an execution shall be binding on the Member that entered such bid/
offer.\18\
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    \17\ The Exchange notes that this provision would not prohibit a 
Linkage Handler from complying with its obligations under Rule 15c3-
5 under the Act. See Notice, 78 FR at 16734 n.15.
    \18\ Proposed Supplementary Material .01 to Rule 1903 states 
that the rule does not prohibit a Linkage Handler from designating a 
preferred market-maker (or equivalent market participant) at the 
other exchange to which an outbound ISO is being routed. The 
Exchange states that this proposed provision has no impact on 
customer orders, and does not disadvantage customers in any way. See 
Notice, 78 FR at 16734-35. The Exchange will still be making the 
sole determination as to which exchange an order will be routed, as 
well as when and how the order will be routed. See id.
    Proposed Supplementary Material .02 to Rule 1903 is designed to 
address how the Exchange will handle orders in the event that there 
are no operable Linkage Handlers to provide routing services. In 
such circumstance, the Exchange will cancel orders that, if 
processed by the Exchange, would violate Rules 1901 (prohibition on 
trade-throughs) or 1902 (prohibition on locked and crossed markets). 
See id. at 16735.
---------------------------------------------------------------------------

New ISE Rule 1904 (Order Cancellation/Release)

    The Exchange is also proposing to adopt Rule 1904 (Order 
Cancellation/Release) which, the Exchange states, is designed to 
address the Exchange's authority to cancel orders (or release routing-
related orders) when a technical or systems issue occurs. The Exchange 
states that paragraph (a) of Proposed Rule 1904 is designed to 
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,\19\ the Linkage Handler, or another exchange to 
which an Exchange order has been routed. Paragraph (a) also provides 
that a Linkage Handler may only cancel orders being routed to another 
exchange

[[Page 24275]]

based on the Exchange's standing or specific instructions or as 
otherwise provided in the Exchange rules.\20\ In addition, paragraph 
(a) provides that the Exchange shall provide notice of the cancelation 
of the Members' original order to affected Members as soon as 
practicable.
---------------------------------------------------------------------------

    \19\ The Exchange states that the authority to cancel orders to 
maintain fair and orderly markets under proposed Rule 1904 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 1905 (discussed below) 
would apply to original and corresponding orders that are subject to 
the Exchange routing service. See Notice, 78 FR at 16735.
    \20\ The Exchange states that, in addition to being unaffiliated 
with the Exchange, the Linkage Handlers are 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 Linkage Handler receives the routing 
instructions from the Exchange to route orders to other exchanges 
and to report executions back to the Exchange. The Linkage Handler 
cannot change the terms of an order or the routing instructions, nor 
does the Linkage Handler have any discretion about where to route an 
order. See proposed Rule 1903(c), (d) and (e). Under paragraph (a) 
to proposed Rule 1904, 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 Linkage 
Handler would be permitted to initiate a cancelation of an order(s) 
pursuant to the Exchange's standing or specific instructions or as 
otherwise provided in Exchange Rules (e.g., the Exchange's standing 
instruction might provide, among other things, that the Linkage 
Handler could initiate the cancelation of orders if the Linkage 
Handler is experiencing technical or systems issues routing orders 
to an away exchange). See Notice, 78 FR at 16735 n.20.
---------------------------------------------------------------------------

    Paragraph (b) of Proposed Rule 1904 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 issue occurs at the 
Exchange, a Linkage Handler, or another exchange to which an order has 
been routed.

Proposed Rule 1905 (Routing Service Error Accounts)

    New ISE Rule 1905 provides that each Linkage Handler shall 
maintain, in the name of the Linkage Handler, one or more accounts for 
the purpose of liquidating unmatched trade positions that may occur in 
connection with the routing service provided under new ISE Rule 1903 
(``error positions'').
    Paragraph (a) of the rule provides that errors to which the rule 
applies include any action or omission by the Exchange, a Linkage 
Handler, or another exchange to which an Exchange order has been 
routed, that results in an unmatched trade position due to the 
execution of an 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''); and that such routing errors 
would include, without limitation, positions resulting from 
determinations by the Exchange to cancel or release an order pursuant 
to new ISE Rule 1904.
    Paragraph (b) of the rule provides that error positions will be 
liquidated in a Linkage Handler's error account. Paragraph (c) of new 
ISE Rule 1905 requires that a Linkage Handler utilizing its error 
account to liquidate error positions shall liquidate the positions as 
soon as practicable. The Linkage Handler could determine to liquidate 
the position itself or have a third-party broker-dealer liquidate the 
position on the Linkage Handler's behalf. Paragraph (c)(i) provides 
that the routing broker shall establish and enforce policies and 
procedures reasonably designed to (1) adequately restrict the flow of 
confidential and proprietary information associated with the 
liquidation of the error position in accordance with Rule 1903 and (2) 
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 (c)(ii) provides 
that the Linkage Handler shall make and keep records associated with 
the liquidation of such error positions and shall maintain such records 
in accordance with Rule 17a-4 under the Act.\21\
---------------------------------------------------------------------------

    \21\ 17 CFR 240.17a-4. Because a Linkage Handler will be 
performing an Exchange function on a contractual basis and at the 
direction of the Exchange, the Exchange also proposes to exclude 
Linkage Handlers from the limits on compensation in ISE Rule 705(d). 
Instead, the Exchange states that such liability matters will be 
handled on a contractual basis as they are with other vendors or 
services to the Exchange. See Notice, 78 FR at 16737.
---------------------------------------------------------------------------

    Finally, paragraph (d) provides that the Exchange shall make and 
keep records to document all determinations to treat positions as error 
positions under the rule, and shall maintain such records in accordance 
with Rule 17a-1 under the Act.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 240.17a-1.
---------------------------------------------------------------------------

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6(b) of the Act 
\23\ and the rules and regulations thereunder applicable to a national 
securities exchange.\24\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\25\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest; and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. The Commission also believes 
the proposed rule change is consistent with Section 11A(a)(1)(C) of the 
Act \26\ in that it seeks to assure economically efficient execution of 
securities transactions.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f(b).
    \24\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \25\ 15 U.S.C. 78f(b)(5).
    \26\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------

    The Commission finds that ISE's proposed rules governing the 
routing of orders are consistent with the Act. As described above, the 
Exchange would contract with one or more Linkage Handlers that are not 
affiliated with the Exchange to route ISOs to other markets.\27\ 
Further, the routing of orders would be optional; \28\ and the Exchange 
would be responsible for routing decisions and would retain control of 
the routing logic.\29\ None of ISE or its affiliates is approved to be 
a designated examining authority, and therefore, neither the Exchange, 
nor any affiliate of the Exchange,\30\ may be the designated examining 
authority for a Linkage Handler absent Commission approval and 
amendment of ISE's rules governing the routing of orders by its Linkage 
Handlers.\31\ The Commission also notes that the rule contemplates 
procedures and internal controls designed to protect confidential and 
proprietary information, which should help ensure that the Linkage 
Handlers do not misuse routing information obtained from the Exchange. 
In addition, the Exchange would provide its routing services in 
compliance with the Act and the rules thereunder, including but not 
limited to, the requirements in Sections 6(b)(4) and (5) of the Act 
\32\ that the rules of a national securities exchange provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
Exchange members and other persons using the Exchange's facilities, and 
not be designed to permit unfair discrimination between customers,

[[Page 24276]]

brokers, or dealers.\33\ The Commission notes that such rules governing 
the routing of orders by Linkage Handlers should help ISE comply with 
its responsibility under the Plan.\34\
---------------------------------------------------------------------------

    \27\ The Commission notes that Linkage Handlers would be 
required to comply with Rule 15c3-5 under the Act. See supra note 
17.
    \28\ Members may choose to avoid routing by using the Do Not 
Route designation. See supra note 15 and accompanying text.
    \29\ See proposed ISE Rule 1903(d) and (e).
    \30\ See supra note 16 and accompanying text.
    \31\ See id.
    \32\ 15 U.S.C. 78f(b)(4) and (5).
    \33\ See proposed ISE Rule 1903(c).
    \34\ See supra note 4.
---------------------------------------------------------------------------

    The Commission recognizes that technical or systems issues may 
occur, and believes that new ISE Rule 1904, in allowing ISE to cancel 
or release orders affected by technical or systems issues, should 
provide a reasonably efficient means for ISE to handle such orders, and 
appears reasonably designed to permit ISE to maintain fair and orderly 
markets.\35\
---------------------------------------------------------------------------

    \35\ The Commission notes that ISE states that it believes that 
allowing the Exchange to cancel or release orders under such 
circumstances would allow the Exchange to maintain fair and orderly 
markets, and that new ISE Rule 1905 is designed ensure full trade 
certainty for market participants and avoid disrupting the clearance 
and settlement process. See Notice, 78 FR at 16737. The Commission 
also notes that ISE states that a decision to cancel or release 
orders due to a technical or systems issue is not equivalent to the 
Exchange declaring self-help against another exchange pursuant to 
ISE Rule 1905. See 17 CFR 242.611(b). See also Notice, 78 FR at 
16735 n.21.
---------------------------------------------------------------------------

    The Commission also believes that allowing the Exchange to resolve 
error positions through the use of error accounts maintained by each 
Linkage Handler pursuant to the procedures set forth in the rule, and 
as described above, is consistent with the Act.\36\ The Commission 
notes that the rule establishes criteria for determining which 
positions are error positions to which the rule applies, and the 
procedures for the handling of such positions. In particular, the 
Commission notes that Proposed ISE Rule 1905 only applies to error 
positions that result from the Linkage Handler's routing service, and 
that such positions shall be liquidated by the Linkage Handler, as 
applicable, as soon as practicable.\37\ In this regard, the Commission 
believes that the new rule appears reasonably designed to further just 
and equitable principles of trade and the protection of investors and 
the public interest, and to help prevent unfair discrimination, in that 
it should help assure the handling of error positions will be based on 
clear and objective criteria, and that the resolution of those 
positions will occur promptly through a transparent process.
---------------------------------------------------------------------------

    \36\ The Commission notes that ISE states that it believes that 
it is reasonable and appropriate to address routing errors through 
the error account of a Linkage Handler in the manner proposed 
because, among other reasons, the Linkage Handler is the executing 
broker associated with such transactions. See Notice, 78 FR at 
16736.
    \37\ See ISE Rule 1905(c).
---------------------------------------------------------------------------

    The Commission is also concerned about the potential for misuse of 
confidential and proprietary information. The Commission notes that 
Linkage Handlers will be required to establish and enforce policies and 
procedures reasonably designed to (1) adequately restrict the flow of 
confidential and proprietary information associated with the 
liquidation of the error positions, and (2) prevent the use of 
information associated with other orders subject to the routing 
services when making determinations regarding the liquidation of error 
positions.\38\ The Commission believes that these requirements should 
help mitigate the Commission's concerns. In particular, the Commission 
believes that these requirements should help assure that none of ISE, 
its Linkage Handlers, or any third-party broker-dealer is able to 
misuse confidential or proprietary information obtained in connection 
with the liquidation of error positions for its own benefit. The 
Commission also notes that each Linkage Handler would be required to 
make and keep records associated with the liquidation of error 
positions \39\ and ISE would be required to make and keep records to 
document all determinations to treat positions as error positions under 
this Rule.\40\
---------------------------------------------------------------------------

    \38\ See ISE Rule 1905(c)(i).
    \39\ See ISE Rule 1905(c)(ii).
    \40\ See ISE Rule 1905(d). The Commission notes that the 
Exchange will transition options classes from the current process to 
the new proposed process using Linkage Handlers over a period of 
time and will notify its members via information circular as 
products are transitioned.
---------------------------------------------------------------------------

    Finally, the Commission notes that the proposed procedures for 
routing orders, canceling orders and the handling of error positions 
are similar to procedures the Commission has approved for other 
exchanges.\41\
---------------------------------------------------------------------------

    \41\ See, e.g., Securities Exchange Act Release Nos. 68583 
(January 4, 2013), 78 FR 2302 (January 10, 2013) (SR-C2-2012-038); 
68584 (January 4, 2013), 78 FR 2304 (January 10, 2013) (SR-CBOE-
2012-109); 68585 (January 4, 2013), 78 FR 2308 (January 10, 2013) 
(SR-CBOE-2012-108); and 60551 (August 20, 2009), 74 FR 43196 (August 
26, 2009) (SR-CBOE-2009-040).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\42\ that the proposed rule change (SR-ISE-2013-18) be, and it 
hereby is, approved.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
---------------------------------------------------------------------------

    \43\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-09625 Filed 4-23-13; 8:45 am]
BILLING CODE 8011-01-P
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