Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Amending C2 Rules Governing Letters of Guarantee and Authorization, 24456-24458 [2013-09766]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 80 (Thursday, April 25, 2013)]
[Notices]
[Pages 24456-24458]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-09766]



[[Page 24456]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69420; File No. SR-C2-2013-018]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Amending C2 Rules Governing Letters of Guarantee and Authorization

April 19, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on April 11, 2013, 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, II and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See also Securities Exchange Act Release No. 68879 (February 
8, 2013), 78 FR 11249 (February 15, 2013) (CBOE-2012-124) (order 
approving a proposed rule change to amend various CBOE rules 
governing letters of guarantee and authorization).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend C2 rules governing letters of 
guarantee and authorization. The text of the proposed rule change is 
available on the Exchange's Web site (https://www.c2exchange.com/Legal/) 
and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    Permit Holders that have trading functions on the Exchange, are 
required to submit a letter of guarantee or authorization \4\ for that 
Permit Holder's trading activities on the Exchange from a Clearing 
Participant.\5\ The purpose of this proposal is to amend various 
Exchange rules governing letters of guarantee and authorization to:
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    \4\ A letter of guarantee is typically provided to C2 by a 
Clearing Participant guaranteeing any trades made by one of its TPH 
customers, e.g., a Market-Maker. The Commission notes that ``TPH'' 
refers to ``Trading Permit Holder,'' which is defined in CBOE Bylaws 
Article I, Section 1.1(f) (the term ``Trading Permit Holder'' means 
any ``individual, corporation, partnership, limited liability 
company or other entity authorized by the Rules that holds a Trading 
Permit* * *'').
    \5\ C2 Rule 1.1 defines ``Clearing Participant'' as a ``Permit 
Holder that has been admitted to membership in the Clearing 
Corporation pursuant to the provisions of the Rules of the Clearing 
Corporation.''
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     Give the Exchange the ability to prevent access to its 
marketplace if a Permit Holder does not have an effective letter of 
guarantee or authorization on file with the Exchange;
     Provide that any written revocation of a letter of 
guarantee or authorization will be given effect as quickly as the 
Exchange can process it;
     Give the Exchange the ability to take any action necessary 
to give effect to actions by the Clearing Corporation,\6\ such as 
restricting the activities of a Clearing Participant or suspending a 
Clearing Participant; and
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    \6\ The Options Clearing Corporation (``OCC'') is currently the 
only Clearing Corporation of C2.
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     Automatically terminate the trading permit(s) and Permit 
Holder status of a Permit Holder if the Permit Holder does not have a 
required letter of guarantee or authorization in place for ninety 
consecutive days.
    The changes proposed in this filing are intended to clarify and 
codify existing and well-established principles regarding activities 
permitted by Clearing Participants. While elementary, the Exchanges 
believes that it is important to specifically provide in its rules that 
a Permit Holder must have a valid letter of guarantee or authorization 
in order to engage in trading activities and, if one is not in place, 
the Exchange is permitted to prevent connectivity and access to the 
Exchange by that Permit Holder. Similarly, the definition of a Clearing 
Participant requires that a Permit Holder be admitted to membership in 
the OCC.\7\ If the OCC restricts the activities of a Clearing 
Participant or terminates a Clearing Participant's membership in the 
OCC, that Permit Holder no longer meets the definition of a ``Clearing 
Participant.'' As a result, the Exchange believes it is appropriate to 
codify its ability to take action, as necessary, to give effect to any 
restriction or suspension issued by the OCC. Finally, the Exchange is 
proposing to provide that if a Permit Holder does not have a required 
letter of guarantee or authorization in place for ninety consecutive 
days, the Permit Holder's status and trading permit(s) will 
automatically terminate (in addition to previous action by the Exchange 
not to allow the Permit Holder to have access and connectivity to the 
Exchange without a required guarantee which would occur following the 
revocation of a guarantee). If a Permit Holder no longer has a valid 
letter of guarantee and authorization, that Permit Holder presents risk 
to the marketplace and the Exchange believes it is appropriate to 
terminate trading, access and connectivity and then Permit Holder 
status in this situation.
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    \7\ See C2 Rule 1.1.
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    The Exchange is proposing to amend C2 Rule 3.10 so that it will 
govern letters of guarantee and authorization (currently Rule 3.10 is 
limited to letters of guarantee). The Exchange is proposing to add new 
paragraphs (b) through (g) to Rule 3.10 to expressly provide the 
Exchange with remedial powers in the event the OCC restricts or 
suspends a Clearing Participant. The Exchange is also proposing to add 
new paragraph (h) to Rule 3.10 to govern the termination of Permit 
Holder status when a Permit Holder is without a required letter of 
guarantee or authorization for a ninety consecutive day period.
    First, the Exchange is proposing to provide that a Permit Holder 
may not engage in any trading activities on the Exchange if an 
effective letter of guarantee or authorization required to engage in 
those activities is not on file with the Exchange. If a Permit Holder 
does not have an effective letter of guarantee or authorization on file 
with the Exchange, the Exchange will be permitted to prevent access and 
connectivity to the Exchange by that Permit Holder.
    Second, the Exchange is proposing to provide that letters of 
guarantee and authorization filed with the Exchange will remain in 
effect until a written notice of revocation has been filed with the 
Permit Holder Department and the revocation becomes effective or the 
letter of guarantee or authorization otherwise becomes invalid pursuant 
to Exchange rules. A written notice of

[[Page 24457]]

revocation will become effective as soon as the Exchange is able to 
process the revocation. A revocation will in no way relieve a Clearing 
Participant of responsibility for transactions guaranteed prior to the 
effectiveness of the revocation.
    Third, the Exchange is proposing to provide that if the OCC 
restricts the activities of a Clearing Participant or suspends a 
Clearing Participant as a Clearing Member of the OCC, the Exchange will 
be permitted to take action as necessary to give effect to the 
restriction or suspension. For example, if the OCC restricts 
transactions cleared by a Clearing Participant to ``closing only'' 
transactions, the Exchange will be similarly able to restrict 
transactions on the Exchange for clearance by that Clearing Participant 
as a Clearing Member of the OCC to ``closing only'' transactions. 
Similarly, if the OCC suspends a Clearing Participant, the Exchange 
will be similarly able to prevent access and connectivity to the 
Exchange by the suspended Clearing Participant.
    Fourth, the Exchange is proposing to provide that if a Clearing 
Participant's status as a Clearing Member of the OCC is terminated or 
if a Clearing Participant's status as a C2 Permit Holder is terminated, 
all letters of guarantee and authorization on file with the Exchange 
from that Clearing Participant will no longer be valid effective as 
soon as the Exchange is able to process the invalidation of these 
letters of guarantee and authorization.
    Fifth, the Exchange is proposing to provide that if a Clearing 
Participant has been suspended as a Clearing Member of the OCC or as a 
C2 Permit Holder, all existing letters of guarantee and authorization 
from that Clearing Participant will be invalid during the period of the 
suspension effective as soon as the Exchange is able to process the 
invalidation of those letters of guarantee and authorization.
    Sixth, the Exchange is proposing to provide that the invalidation 
of a letter of guarantee or authorization will in no way relieve the 
Clearing Participant that issued the letter of guarantee or 
authorization of responsibility from transactions guaranteed prior to 
the effectiveness of the invalidation.
    Seventh, the Exchange is proposing to provide that if a Permit 
Holder does not have a required letter of guarantee or authorization 
for period of ninety consecutive days, the Permit Holder's trading 
permit(s) and status as a Permit Holder shall automatically be 
terminated.
    A revocation of a letter of guarantee or authorization will not 
occur immediately upon receipt of the revocation by the Permit Holder 
Department because it takes time for the Exchange to process and 
effectuate the revocation. For example, there are changes that must be 
input into the Exchange's systems in order to systematize and 
effectuate a revocation. Also Exchange staff may be occupied with other 
matters when a revocation is received and may not immediately be able 
to process the revocation. Accordingly, the revocation and invalidation 
of letters of guarantee and authorization under proposed Rules 3.10(c) 
and 3.10(f) shall become effective as soon as the Exchange is able to 
process the revocation or invalidation. The Exchange will endeavor to 
process revocations and invalidations in a timely manner under the 
circumstances but makes no guarantees in this respect.
    If a Permit Holder has a letter of guarantee or authorization that 
is revoked or invalidated, that Permit Holder's orders and quotes will 
be rejected after the revocation or invalidation after the revocation 
or invalidation becomes effective unless and until the Trading Permit 
has another effective letter of guarantee or authorization in place and 
on file with the Exchange. This means that a Trading Permit without an 
effective letter of guarantee or authorization will not be able to 
continue to trade on the Exchange.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\8\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \9\ requirements that the rules of an 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 facilitation 
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. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \10\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ Id.
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    In particular, expressly permitting the Exchange to take action as 
needed to give effect to a restriction or suspension issued by the OCC 
will protect the integrity of the Exchange's marketplace by limiting 
trading to only those Permit Holders with effective and unrestricted 
letters of guarantee and authorization. A key purpose for having 
Clearing Participants is to reduce the risk of market participants 
failing to honor executed trades. By requiring that Permit Holders have 
an effective and unrestricted letters of guarantee, the Exchange is 
advancing this purpose. Additionally, the Exchange believes that the 
proposed rule change is designed to remove impediments to and to 
perfect the mechanism for a free and open market and a national market 
system, and, in general, to protect investors and the public interest 
in that it will allow the Exchange to take actions to give effect to 
restrictions or suspensions issued by the OCC. The ability to take 
action is designed to prevent the execution of trades on the Exchange 
which may not be able to be ultimately cleared and settled if access to 
the Exchange's marketplace is not restricted in tandem with a 
restriction or suspension issued by the OCC. Also, preventing access 
and connectivity to the Exchange by a Permit Holder if that Permit 
Holder's Clearing Participant revokes the Permit Holder's letter of 
guarantee or authorization is beneficial to the marketplace and serves 
to protect investors since it prevents trading by a Permit Holder 
without a financial guarantee for that trading. If a Permit Holder no 
longer has a valid letter of guarantee or authorization, that Permit 
Holder presents risk to the marketplace and the Exchange believes it is 
appropriate to prevent access and connectivity to the Exchange by that 
Permit Holder in this situation. The Exchange also believes that having 
the ability to terminate the Permit Holder status and trading permit(s) 
of a Permit Holder that does not have a required letter of guarantee or 
authorization for ninety consecutive days is desirable since it allows 
the Exchange to appropriately manage and control access to its 
marketplace by limiting access only to those with a financial guarantee 
which thereby serves to protect investors by ensuring that 
counterparties to trades have such a guarantee.

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    The Exchange believes the proposed rule change is also consistent 
with the Section 6(b)(7) \11\ requirements that the rules of an 
exchange provide a fair procedure for the denial of membership to any 
person seeking membership therein and the prohibition or limitation by 
an exchange of any person with respect to access to services offered by 
the exchange.
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    \11\ 15 U.S.C. 78f(b)(7).
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    Specifically, with respect to the proposed automatic termination 
provision when a Permit Holder does not have a required letter of 
guarantee or authorization for ninety consecutive days, the Exchange 
believes that that provision establishes a fair procedure because it 
strikes the appropriate balance between giving a deficient Permit 
Holder an adequate amount of time to cure the deficiency of not having 
a required letter of guarantee or authorization and allowing the 
Exchange to appropriately limit access to its marketplace only to those 
Permit Holders with a financial guarantee. Furthermore, the automatic 
termination provision does not prohibit or limit a previously 
terminated Permit Holder from seeking to gain access again to the 
Exchange by applying to become a Permit Holder subsequent to the 
termination if the Permit Holder is able to again acquire the required 
letter of guarantee and authorization.

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

    C2 does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange does not believes 
the proposed rule change will pose any burden on intramarket 
competition because it is applied to all TPHs equally as all will have 
the same requirements with respect to letters of guarantee. 
Additionally, the Exchange does not believe the proposed rule change 
will pose any burden on intermarket competition because the proposed 
rule change merely allows the Exchange to clarify and codify existing 
and well-established principles regarding activities permitted by 
Clearing Participants. Therefore, there would be no further impact on 
intermarket competition.

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 
proposed rule change.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. Impose any significant burden on competition; and
    C. Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate,

it has become effective pursuant to Section 19(b)(3)(A) of the Act \12\ 
and Rule 19b-4(f)(6) \13\ thereunder. 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 will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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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-C2-2013-018 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-C2-2013-018. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-C2-2013-018 and should be 
submitted on or before May 16, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-09766 Filed 4-24-13; 8:45 am]
BILLING CODE 8011-01-P