Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to Market Maker Risk Parameters, 6951-6954 [2014-02380]

Download as PDF mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 24 / Wednesday, February 5, 2014 / Notices purchases of securities in Affiliated Underwritings are in the best interest of shareholders of the Fund. 8. Each Fund, or its respective Master Fund, will maintain and preserve permanently in an easily accessible place a written copy of the procedures described in the preceding condition, and any modifications to such procedures, and will maintain and preserve for a period of not less than six years from the end of the fiscal year in which any purchase in an Affiliated Underwriting occurred, the first two years in an easily accessible place, a written record of each purchase of securities in Affiliated Underwritings once an investment by a Fund of Funds in the securities of the Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, setting forth from whom the securities were acquired, the identity of the underwriting syndicate’s members, the terms of the purchase, and the information or materials upon which the Board’s determinations were made. 9. Before investing in a Fund in excess of the limit in section 12(d)(1)(A), a Fund of Funds and the Trust will execute a FOF Participation Agreement stating without limitation that their respective boards of directors or trustees and their investment advisers, or trustee and Sponsor, as applicable, understand the terms and conditions of the order, and agree to fulfill their responsibilities under the order. At the time of its investment in Shares of a Fund in excess of the limit in section 12(d)(1)(A)(i), a Fund of Funds will notify the Fund of the investment. At such time, the Fund of Funds will also transmit to the Fund a list of the names of each Fund of Funds Affiliate and Underwriting Affiliate. The Fund of Funds will notify the Fund of any changes to the list of the names as soon as reasonably practicable after a change occurs. The Fund and the Fund of Funds will maintain and preserve a copy of the order, the FOF Participation Agreement, and the list with any updated information for the duration of the investment and for a period of not less than six years thereafter, the first two years in an easily accessible place. 10. Before approving any advisory contract under section 15 of the Act, the board of directors or trustees of each Investing Management Company including a majority of the disinterested directors or trustees, will find that the advisory fees charged under such contract are based on services provided that will be in addition to, rather than duplicative of, the services provided under the advisory contract(s) of any Fund, or its respective Master Fund, in which the Investing Management VerDate Mar<15>2010 16:50 Feb 04, 2014 Jkt 232001 Company may invest. These findings and their basis will be fully recorded in the minute books of the appropriate Investing Management Company. 11. Any sales charges and/or service fees charged with respect to shares of a Fund of Funds will not exceed the limits applicable to a fund of funds as set forth in NASD Conduct Rule 2830. 12. No Fund, or its respective Master Fund, will acquire securities of an investment company or company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained in section 12(d)(1)(A) of the Act, except to the extent (i) the Fund, or its respective Master Fund, acquires securities of another investment company pursuant to exemptive relief from the Commission permitting the Fund, or its respective Master Fund, to acquire securities of one or more investment companies for short-term cash management purposes or (ii) the Fund acquires securities of the Master Fund pursuant to the Master-Feeder Relief. For the Commission, by the Division of Investment Management, under delegated authority. Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–02383 Filed 2–4–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION FEDERAL REGISTER CITATION OF PREVIOUS ANNOUNCEMENT: [79 FR 6244, February 3, 2014]. STATUS: Open Meeting. PLACE: 100 F Street NW., Washington, DC. DATE AND TIME OF PREVIOUSLY ANNOUNCED MEETING: February 5, 2014 at 3:00 p.m. Deletion of an Item. The following item will not be considered during the Commission’s Open Meeting on February 5, 2014 at 3:00 p.m.: CHANGE IN THE MEETING: The Commission will consider whether to adopt rules revising the disclosure, reporting, and offering process for asset-backed securities. The revisions would require assetbacked issuers to provide enhanced disclosures including information for certain asset classes about each asset in the underlying pool in a standardized, tagged format and revise the shelf offering process and eligibility criteria for asset-backed securities. At times, changes in Commission priorities require alterations in the Frm 00071 Fmt 4703 Sfmt 4703 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: February 3, 2014. Elizabeth M. Murphy, Secretary. [FR Doc. 2014–02600 Filed 2–3–14; 4:15 pm] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meeting FEDERAL REGISTER CITATION OF PREVIOUS ANNOUNCEMENT: 79 FR 6243 (February 3, 2014). Closed Meeting. 100 F Street NE., Washington, STATUS: PLACE: DC. DATE AND TIME OF PREVIOUSLY ANNOUNCED MEETING: Thursday, February 6, 2014. Cancellation of Meeting. The Closed Meeting scheduled for Thursday, February 6, 2014 at 2:00 p.m. has been cancelled. For further information please contact the Office of the Secretary at (202) 551– 5400. CHANGE IN THE MEETING: Dated: January 31, 2014. Elizabeth M. Murphy, Secretary. [FR Doc. 2014–02508 Filed 2–3–14; 4:15 pm] BILLING CODE 8011–01–P Sunshine Act Meeting PO 00000 6951 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71446; File No. SR–ISE– 2014–04] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to Market Maker Risk Parameters January 30, 2014. 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 January 17, 2014, the International Securities Exchange, LLC (the ‘‘Exchange’’ or the ‘‘ISE’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which items have been prepared by the Exchange. 1 15 2 17 E:\FR\FM\05FEN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 05FEN1 6952 Federal Register / Vol. 79, No. 24 / Wednesday, February 5, 2014 / Notices 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 its rules to mitigate market maker risk by adopting an Exchange-provided risk management functionality. The text of the proposed rule change is available on the Exchange’s Internet Web site at https://www.ise.com, at the principal office of the Exchange, 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 self-regulatory organization has prepared summaries, set forth in Sections A, B and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change mstockstill on DSK4VPTVN1PROD with NOTICES 1. Purpose Pursuant to ISE Rules 722 and 804, the Exchange automatically removes a market maker’s quotes in all series of an options class when certain parameter settings are triggered. Specifically, there are currently four parameters that can be set by market makers on a class-by-class basis. These parameters are available for market maker quotes in single options series and for market maker quotes in complex instruments on the complex order book. Market makers establish a time frame during which the system calculates: (1) The number of contracts executed by the market maker in an options class; (2) the percentage of the total size of the market maker’s quotes in the class that has been executed; (3) the absolute value of the net between contracts bought and contracts sold in an options class, and (4) the absolute value of the net between (a) calls purchased plus puts sold, and (b) calls sold plus puts purchased. The market maker establishes limits for each of these four parameters, and when the limits are exceeded within the VerDate Mar<15>2010 16:50 Feb 04, 2014 Jkt 232001 prescribed time frame, the market maker’s quotes in that class are removed or curtailed. It is mandatory for market makers to enter values into all four of the quotation risk management parameters for all options classes in which it enters quotes.3 The Exchange now proposes to enhance its risk management offering to further strengthen risk management for market maker quotes. While the parameters described in the preceding paragraph are set on a class-by-class basis, the Exchange now proposes to adopt functionality that will allow market makers to manage their risk across the entire market. Specifically, the Exchange proposes to adopt functionality to allow market maker quotes to be removed from the trading system if a specified number of curtailment events occur across the ISE market. If the specified number of curtailment events is exceeded within the prescribed time period, the market maker’s quotes in all classes in which it quotes will automatically be removed from the trading system. As proposed, market makers must request the Exchange to set the proposed market wide parameter to govern its trading activity. Once this parameter is set, the trading system will count the number of times a market maker’s pre-set curtailment, as specified in Rule 804(g) (for regular orders) and Rule 722, Supplementary Material .04 (for complex orders), has been triggered. Once the specified number of curtailment events has been reached, the trading system will remove all of the market maker’s quotes in all classes in which it makes a market thereby reducing the risk to the market maker in the event the market maker is suffering from a systems issue or due to the occurrence of unusual or unexpected market activity. Any quotes sent by the market maker after the proposed market wide parameter has been triggered will be rejected until such time that the market maker notifies the Exchange that it is ready to come out of its curtailment. In the interests of maintaining fair and orderly markets, the Exchange believes it is important that market makers communicate their readiness to the Exchange in a non-automated manner, such as by email or telephone. Once notified by the market maker, the Exchange will reactivate the market maker’s quotes and the market maker will once again be active in the options classes in which it makes markets. 3 See Securities Exchange Act Release No. 70132 (August 7, 2013), 78 FR 49311 (August 13, 2013) (SR–ISE–2013–38). PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 As an example, suppose market maker ABCD, who makes a market in 50 options classes on the Exchange, sets the proposed market wide parameter so that it is triggered at 25 curtailment events within a 20 second time period. On a given trading day, if market maker ABCD is curtailed, within the prescribed time period, 25 times across all 50 options classes in which it makes a market then all of market maker ABCD’s quotes on ISE in all 50 options classes will be removed from the trading system. The 25 curtailment events can occur in just one class or any number of classes in which market maker ABCD makes a market on the Exchange. While the proposed risk management functionality is a useful feature that serves an important risk management purpose, it operates consistent with the firm quote obligations of a broker-dealer pursuant to Rule 602 of Regulation NMS. Specifically, any marketable orders or quotes that are executable against a market maker’s quotes that are received prior to the time this functionality is engaged will be automatically executed at the price up to the market maker’s size, regardless of whether such execution results in executions in excess of the market maker’s pre-set parameters. The proposed market wide parameter is meant to provide market makers with protection from the risk of multiple executions across multiple series of an option or across multiple options. The risk to market makers is not limited to a single series in an option or even to all series in an option; market makers that quote in multiple series of multiple options have significant exposure, requiring them to offset or hedge their overall positions. The proposed functionality will be useful for market makers, who are required to continuously quote in assigned options classes. Quoting across many series in an option or multiple options creates the possibility of executions that can create large, unintended principal positions that could expose market makers to unnecessary risk. The proposed functionality is intended to assist Exchange market makers in managing their market risk, and providing deep and liquid markets for the benefit to all investors. While entering values into the proposed market wide parameter will be mandatory, the Exchange notes that market makers who prefer to use their own risk-management systems can set values that assure the Exchangeprovided parameter will not be E:\FR\FM\05FEN1.SGM 05FEN1 Federal Register / Vol. 79, No. 24 / Wednesday, February 5, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES triggered.4 Accordingly, the proposal does not require members to manage their risk using the Exchange-provided tools. The Exchange expects to implement the proposed functionality in January 2014. The Exchange will provide at least two weeks’ notice to members via an Exchange circular prior to implementing the proposed functionality to allow members the opportunity to perform any system changes. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 5 in general, and furthers the objectives of Section 6(b)(5) of the Act 6 in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism for a free and open market and a national market system, and, in general, to protect investors and the public interest. The Exchange believes the proposed rule change enhances its risk management offering to further strengthen risk management for market maker quotes. The proposed market wide parameter is appropriate and reasonable because it offers functionality for market makers to manage their risk. The proposed market wide parameter will protect market makers from inadvertent exposure to excessive risk and thereby allow market makers to quote aggressively which removes impediments to a free and open market and benefits all Exchange members. The Exchange believes that requiring market makers to set values into the proposed risk parameter provided by the Exchange will not be unreasonably burdensome, as all ISE market makers currently utilize the Exchange’s risk management functionality. Moreover, the Exchange is proposing this rule change at the request of its market makers to further reduce their risk in the event the market maker is suffering from a systems issue or due to the occurrence of unusual or unexpected market activity. As discussed above, the proposed market wide parameter will protect market makers from inadvertent exposure to excessive risk. Reducing such risk will enable market makers to enter quotations without any fear of inadvertent exposure to excessive risk, which in turn will benefit investors 4 For example, a market maker could set the value for the total number of curtailment events across the market at a high number so as not to trigger the Exchange-provided parameter. 5 15 U.S.C. 78f(b). 6 15 U.S.C. 78f(b)(5). VerDate Mar<15>2010 16:50 Feb 04, 2014 Jkt 232001 6953 through increased liquidity for the execution of their orders. Such increased liquidity benefits investors because they receive better prices and because it lowers volatility in the options market. The Exchange notes a similar functionality is offered by the BATS Exchange, Inc. (‘‘BATS’’).7 The Risk Monitor Mechanism provides BATS participants, and particularly market makers, protection from the risk of multiple executions across multiple series of an option or across multiple options. The Risk Monitor Mechanism uses a counting program that users may configure to govern trading. The counting program counts executions, contract volume and notional value, within a specified time period established by a user and on an absolute basis for each trading day. The BATS trading system engages the Risk Monitor Mechanism when the counting program has determined that a user’s trading has triggered a setting whereby the Risk Monitor Mechanism then automatically removes the user’s orders in all series of a particular option or in all series of all options until the counting program has been reset. interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days after the date of the filing, or such shorter time as the Commission may designate, it has become effective pursuant to 19(b)(3)(A) of the Act 8 and Rule 19b–4(f)(6) 9 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 shall institute proceedings to determine whether the proposed rule should be approved or disapproved. B. Self-Regulatory Organization’s Statement on Burden on Competition The proposed rule change does not impose any burden on competition. The proposed rule change is meant to protect ISE market makers from inadvertent exposure to excessive risk. Accordingly, the proposed rule change will have no impact on competition. Market makers who prefer to use their own risk-management systems can enter out-of-range values so that the Exchange-provided parameters will not be triggered. Accordingly, the proposal does not require members to manage their risk using an Exchange-provided tool. Electronic Comments 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 Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public 7 See BATS Rules, Chapter XXI, Rule 21.16, Risk Monitor Mechanism. PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 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: • 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 No. SR–ISE– 2014–04 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–ISE–2014–04. 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 8 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 9 17 E:\FR\FM\05FEN1.SGM 05FEN1 6954 Federal Register / Vol. 79, No. 24 / Wednesday, February 5, 2014 / Notices 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– 2014–04 and should be submitted by February 26, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–02380 Filed 2–4–14; 8:45 am] SECURITIES AND EXCHANGE COMMISSION 1. Purpose [Release No. 34–71445; File No. SR–EDGX– 2014–01] Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Chapter IX of Its Rulebook January 30, 2014. mstockstill on DSK4VPTVN1PROD with NOTICES 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 January 16, 2014, EDGX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGX’’) 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 Chapter IX of its rulebook to incorporate CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 16:50 Feb 04, 2014 Background and General Description of Proposed Rule Change On July 30, 2007, the National Association of Securities Dealers, Inc. (‘‘NASD’’), the New York Stock Exchange LLC, and NYSE Regulation, Inc. (‘‘NYSER’’) consolidated their member firm regulation operations into a combined organization, FINRA, and entered into a plan to allocate to FINRA regulatory responsibility for common rules and common members (‘‘17d–2 Agreement’’).3 The 17d–2 Agreement was entered into in accordance with the requirements of Rule 17d–2 of the Commission,4 which permits selfregulatory organizations (‘‘SROs’’) to allocate regulatory responsibilities with respect to common members and common rules. On January 5, 2010, the Exchange and FINRA entered into a Regulatory Services Agreement (‘‘RSA’’), whereby FINRA was retained to perform certain regulatory services on behalf of the Exchange for non-common rules. On May 13, 2013, the Exchange and FINRA amended the RSA and retained FINRA to perform market surveillance functions as of July 2013. Accordingly, since Exchange launch in 3 See Securities Exchange Act Release No. 56148 (July 26, 2007), 72 FR 42146 (Aug. 1, 2007). 4 17 CFR 240.17d–2. 1 15 VerDate Mar<15>2010 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 BILLING CODE 8011–01–P 10 17 certain rules of the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) and the NASDAQ Stock Market LLC (‘‘NASDAQ’’) relating to arbitration and mediation, in addition to making certain non-substantive changes. The text of the proposed rule change is available on the Exchange’s Internet Web site at www.directedge.com, at the Exchange’s principal office, and at the Public Reference Room of the Commission. Jkt 232001 PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 July 2010, FINRA has been performing all arbitration, mediation, and other dispute resolution services, as may be needed from time to time, on behalf of EDGX. To facilitate FINRA’s performance of these functions under the RSA and to further harmonize the rules of FINRA and the Exchange generally, the Exchange is proposing to conform the text of its rules governing arbitration and mediation (Chapter IX) to the FINRA Code of Arbitration Procedure for Customer Disputes (12000 Series), FINRA Code of Arbitration Procedure for Industry Disputes (13000 Series) and the FINRA Code of Mediation (14000 Series). The Exchange proposes to make the following changes to its current rules in Chapter IX of its rulebook. Proposed Amendments to Current Rules The Exchange proposes to amend current Rule 9.1 (Code of Arbitration) to make the rule substantially similar to NASDAQ Rule 10100.5 The Exchange proposes to replace the reference to NASD Code of Arbitration with FINRA Code of Arbitration,6 clarify the meaning of ‘‘Exchange arbitrations,’’ 7 and add a sentence stating that Members must comply with FINRA arbitration rules as if they were rules of the Exchange. The Exchange proposes to replace current Rule 9.2 (Jurisdiction) with amended Rule 9.2 (Matters Eligible for Submission), which is substantially similar to FINRA Rule 10101 and NASDAQ Rule 10101.8 Amended Rule 9.2 will state that the Exchange adopts the FINRA Code of Arbitration for any dispute, claim or controversy arising out of or in connection with the business of any Member, or arising out of the employment or termination of employment of associated person(s) with any Member: Between or among Members; between or among Members and associated persons; and between or among Members or associated persons and public customers, or others, except for any type of dispute, claim, or controversy that is not permitted to be arbitrated under the FINRA Code of Procedure. The Exchange proposes to amend current Rule 9.3 (Predispute Arbitration 5 See NASDAQ Rule 10100. FINRA Rule 12000 Series (Code of Arbitration Procedure for Customer Disputes); FINRA Rule 13000 (Code of Arbitration Procedure for Industry Disputes. 7 They would be defined as ‘‘every claim, dispute or controversy arising out of or in connection with matters eligible for submission under Rule 9.2.’’ 8 See FINRA Rules 10101 and NASDAQ Rule 10101. 6 See E:\FR\FM\05FEN1.SGM 05FEN1

Agencies

[Federal Register Volume 79, Number 24 (Wednesday, February 5, 2014)]
[Notices]
[Pages 6951-6954]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-02380]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71446; File No. SR-ISE-2014-04]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Related to Market Maker Risk Parameters

January 30, 2014.
    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 January 17, 2014, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which items have been prepared by 
the Exchange.

[[Page 6952]]

The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to amend its rules to mitigate market maker 
risk by adopting an Exchange-provided risk management functionality.
    The text of the proposed rule change is available on the Exchange's 
Internet Web site at https://www.ise.com, at the principal office of the 
Exchange, 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 self-regulatory organization has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

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

1. Purpose
    Pursuant to ISE Rules 722 and 804, the Exchange automatically 
removes a market maker's quotes in all series of an options class when 
certain parameter settings are triggered. Specifically, there are 
currently four parameters that can be set by market makers on a class-
by-class basis. These parameters are available for market maker quotes 
in single options series and for market maker quotes in complex 
instruments on the complex order book. Market makers establish a time 
frame during which the system calculates: (1) The number of contracts 
executed by the market maker in an options class; (2) the percentage of 
the total size of the market maker's quotes in the class that has been 
executed; (3) the absolute value of the net between contracts bought 
and contracts sold in an options class, and (4) the absolute value of 
the net between (a) calls purchased plus puts sold, and (b) calls sold 
plus puts purchased. The market maker establishes limits for each of 
these four parameters, and when the limits are exceeded within the 
prescribed time frame, the market maker's quotes in that class are 
removed or curtailed. It is mandatory for market makers to enter values 
into all four of the quotation risk management parameters for all 
options classes in which it enters quotes.\3\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 70132 (August 7, 
2013), 78 FR 49311 (August 13, 2013) (SR-ISE-2013-38).
---------------------------------------------------------------------------

    The Exchange now proposes to enhance its risk management offering 
to further strengthen risk management for market maker quotes. While 
the parameters described in the preceding paragraph are set on a class-
by-class basis, the Exchange now proposes to adopt functionality that 
will allow market makers to manage their risk across the entire market. 
Specifically, the Exchange proposes to adopt functionality to allow 
market maker quotes to be removed from the trading system if a 
specified number of curtailment events occur across the ISE market. If 
the specified number of curtailment events is exceeded within the 
prescribed time period, the market maker's quotes in all classes in 
which it quotes will automatically be removed from the trading system.
    As proposed, market makers must request the Exchange to set the 
proposed market wide parameter to govern its trading activity. Once 
this parameter is set, the trading system will count the number of 
times a market maker's pre-set curtailment, as specified in Rule 804(g) 
(for regular orders) and Rule 722, Supplementary Material .04 (for 
complex orders), has been triggered. Once the specified number of 
curtailment events has been reached, the trading system will remove all 
of the market maker's quotes in all classes in which it makes a market 
thereby reducing the risk to the market maker in the event the market 
maker is suffering from a systems issue or due to the occurrence of 
unusual or unexpected market activity. Any quotes sent by the market 
maker after the proposed market wide parameter has been triggered will 
be rejected until such time that the market maker notifies the Exchange 
that it is ready to come out of its curtailment. In the interests of 
maintaining fair and orderly markets, the Exchange believes it is 
important that market makers communicate their readiness to the 
Exchange in a non-automated manner, such as by email or telephone. Once 
notified by the market maker, the Exchange will reactivate the market 
maker's quotes and the market maker will once again be active in the 
options classes in which it makes markets.
    As an example, suppose market maker ABCD, who makes a market in 50 
options classes on the Exchange, sets the proposed market wide 
parameter so that it is triggered at 25 curtailment events within a 20 
second time period. On a given trading day, if market maker ABCD is 
curtailed, within the prescribed time period, 25 times across all 50 
options classes in which it makes a market then all of market maker 
ABCD's quotes on ISE in all 50 options classes will be removed from the 
trading system. The 25 curtailment events can occur in just one class 
or any number of classes in which market maker ABCD makes a market on 
the Exchange.
    While the proposed risk management functionality is a useful 
feature that serves an important risk management purpose, it operates 
consistent with the firm quote obligations of a broker-dealer pursuant 
to Rule 602 of Regulation NMS. Specifically, any marketable orders or 
quotes that are executable against a market maker's quotes that are 
received prior to the time this functionality is engaged will be 
automatically executed at the price up to the market maker's size, 
regardless of whether such execution results in executions in excess of 
the market maker's pre-set parameters.
    The proposed market wide parameter is meant to provide market 
makers with protection from the risk of multiple executions across 
multiple series of an option or across multiple options. The risk to 
market makers is not limited to a single series in an option or even to 
all series in an option; market makers that quote in multiple series of 
multiple options have significant exposure, requiring them to offset or 
hedge their overall positions. The proposed functionality will be 
useful for market makers, who are required to continuously quote in 
assigned options classes. Quoting across many series in an option or 
multiple options creates the possibility of executions that can create 
large, unintended principal positions that could expose market makers 
to unnecessary risk. The proposed functionality is intended to assist 
Exchange market makers in managing their market risk, and providing 
deep and liquid markets for the benefit to all investors.
    While entering values into the proposed market wide parameter will 
be mandatory, the Exchange notes that market makers who prefer to use 
their own risk-management systems can set values that assure the 
Exchange-provided parameter will not be

[[Page 6953]]

triggered.\4\ Accordingly, the proposal does not require members to 
manage their risk using the Exchange-provided tools. The Exchange 
expects to implement the proposed functionality in January 2014. The 
Exchange will provide at least two weeks' notice to members via an 
Exchange circular prior to implementing the proposed functionality to 
allow members the opportunity to perform any system changes.
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    \4\ For example, a market maker could set the value for the 
total number of curtailment events across the market at a high 
number so as not to trigger the Exchange-provided parameter.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act'') \5\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act \6\ 
in particular, in that it is designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
for a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change enhances its risk 
management offering to further strengthen risk management for market 
maker quotes. The proposed market wide parameter is appropriate and 
reasonable because it offers functionality for market makers to manage 
their risk. The proposed market wide parameter will protect market 
makers from inadvertent exposure to excessive risk and thereby allow 
market makers to quote aggressively which removes impediments to a free 
and open market and benefits all Exchange members.
    The Exchange believes that requiring market makers to set values 
into the proposed risk parameter provided by the Exchange will not be 
unreasonably burdensome, as all ISE market makers currently utilize the 
Exchange's risk management functionality. Moreover, the Exchange is 
proposing this rule change at the request of its market makers to 
further reduce their risk in the event the market maker is suffering 
from a systems issue or due to the occurrence of unusual or unexpected 
market activity. As discussed above, the proposed market wide parameter 
will protect market makers from inadvertent exposure to excessive risk. 
Reducing such risk will enable market makers to enter quotations 
without any fear of inadvertent exposure to excessive risk, which in 
turn will benefit investors through increased liquidity for the 
execution of their orders. Such increased liquidity benefits investors 
because they receive better prices and because it lowers volatility in 
the options market. The Exchange notes a similar functionality is 
offered by the BATS Exchange, Inc. (``BATS'').\7\ The Risk Monitor 
Mechanism provides BATS participants, and particularly market makers, 
protection from the risk of multiple executions across multiple series 
of an option or across multiple options. The Risk Monitor Mechanism 
uses a counting program that users may configure to govern trading. The 
counting program counts executions, contract volume and notional value, 
within a specified time period established by a user and on an absolute 
basis for each trading day. The BATS trading system engages the Risk 
Monitor Mechanism when the counting program has determined that a 
user's trading has triggered a setting whereby the Risk Monitor 
Mechanism then automatically removes the user's orders in all series of 
a particular option or in all series of all options until the counting 
program has been reset.
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    \7\ See BATS Rules, Chapter XXI, Rule 21.16, Risk Monitor 
Mechanism.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition. 
The proposed rule change is meant to protect ISE market makers from 
inadvertent exposure to excessive risk. Accordingly, the proposed rule 
change will have no impact on competition. Market makers who prefer to 
use their own risk-management systems can enter out-of-range values so 
that the Exchange-provided parameters will not be triggered. 
Accordingly, the proposal does not require members to manage their risk 
using an Exchange-provided tool.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \8\ and Rule 19b-4(f)(6) \9\ 
thereunder.
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    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:

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 No. SR-ISE-2014-04 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2014-04. 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

[[Page 6954]]

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-2014-04 and should be 
submitted by February 26, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02380 Filed 2-4-14; 8:45 am]
BILLING CODE 8011-01-P
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